2015-0618211E5 Subsections 88(1.1) and 88(1.2)

Principal Issues: Can the losses of a subsidiary be deducted by its parent corporation in the same year that the subsidiary gets dissolved?

Position: Yes.

Reasons: In accordance with subsections 88(1.1) and 88(1.2)

Author: Verlinden, Nicole
Section: 88(1.1) and 88(1.2)

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                                                                                                          2015-061821
                                                                                                          Nicki Verlinden
                                                                                                          (416) 973-2228

February 17, 2016

Dear XXXXXXXXXX,

This letter is a reply to your email enquiry dated November 10, 2015. You asked whether losses may be used by a parent corporation in the year commencing after the commencement of the winding-up of its subsidiary, where the legal dissolution of the subsidiary takes place in that same year.

All statutory references herein are to the Income Tax Act (“Act”) unless otherwise stated.

Our Comments

This technical interpretation provides general comments about the provisions of the Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by the CRA in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Where a Canadian corporation has been wound up, subsection 88(1.1) applies in certain circumstances to permit the parent corporation to deduct the losses of its subsidiary in computing its taxable income for any taxation year beginning after the commencement of the subsidiary’s winding-up.  Where a Canadian corporation has commenced winding-up after March 31, 1977, subsection 88(1.2) applies in certain circumstances to permit the parent corporation to deduct the net capital losses of its subsidiary in computing its taxable income for any taxation year beginning after the commencement of the subsidiary’s winding-up.

In your scenario, the subsidiary corporation has been legally dissolved in the year that the parent seeks to deduct its subsidiary’s losses, therefore it has been wound up for purposes of applying subsections 88(1.1) and 88(1.2).  Consequently, the losses of the subsidiary may be deducted by the parent in the year commencing after the commencement of the winding-up of the subsidiary, provided the other conditions of those subsections have been met.

Paragraph 29 of IT-302R3 – Losses of a Corporation – The Effect that Acquisitions of Control, Amalgamations, and Windings-up Have on Their Deductibility – After January 15, 1987, states “the commencement of winding-up is evidenced by a resolution of shareholders authorizing or requiring that the corporation be wound-up.”

The following example demonstrates when the subsidiary’s losses become available to the parent, pursuant to subsections 88(1.1) and 88(1.2), by applying dates to your particular scenario.

A wholly-owned subsidiary has losses for its taxation years ending on June 30, 2013 and June 30, 2014. Its parent, which has a December 31 year end, seeks to deduct those losses as soon as possible. The subsidiary commenced its winding-up on June 15, 2014, and it formally dissolved on October 22, 2015. The parent may deduct the subsidiary’s June 30, 2013 and June 30, 2014 losses in its December 31, 2015 year end, which is the same year in which the dissolution of the subsidiary occurred.

We trust that these comments will be of assistance.

Yours truly,

Stephane Prud’homme
Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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