2020-0852071I7 Clarification of views noted in 2019-0793481I7

Principal Issues: Whether a future liquidation of BCo into DCo would result in ACo's previously suspended capital loss becoming available.

Position: Possibly.

Reasons: The loss would become available pursuant to subparagraph 40(3.4)(b)(i) provided that subparagraph 95(2)(e)(v) does not apply.

Author: Patel, Komal
Section: 40(3.3), 40(3.4), 40(3.5), 95(2)(e)

                                                                           July 29, 2020

XXXXXXXXXX                                                   HEADQUARTERS
International Large Business Case Manager     Income Tax Rulings
XXXXXXXXXX                                                    Directorate
                                                                            K. Patel
                                                                            (416) 973-2418

                                                                            2020-085207

Re: XXXXXXXXXX (“ACo”)

We are writing to clarify the Income Tax Rulings Directorate’s views on the application of subparagraph 40(3.4)(b)(i) of the Income Tax Act (the “Act”) to a liquidation of BCo into DCo as described in 2019-0793481I7. Please refer to documents 2019-0793481I7 and 2017-0735771I7 for the complete facts, defined terms and relevant entities discussed therein.

In document 2017-0735771I7 it was noted that ACo incurred a suspended loss (“the Suspended Loss”) on the disposition of shares of CCo (a controlled foreign affiliate or “CFA” of ACo) to BCo (a CFA of ACo). The Suspended Loss was deemed to be nil pursuant to subsection 40(3.4) since BCo was affiliated with ACo.  At the time CCo was transferred to BCo, CCo held the shares of FCo, another CFA of ACo. The decline in value of the FCo shares was the underlying reason ACo realized a loss on the transfer of the CCo shares to BCo.  XXXXXXXXXX after the transfer, CCo was liquidated into BCo.  It was noted in 2017-0735771I7 that the tax-deferred liquidation of CCo into BCo would not result in the Suspended Loss becoming available, as such liquidation would fall within the ambit of “merger” in subparagraph 40(3.5)(c)(i). Accordingly, in 2017-0735771I7 it was concluded that BCo would be deemed to own the shares of CCo as long as BCo and ACo are affiliated.

In XXXXXXXXXX ACo transferred the BCo shares to DCo (a CFA of ACo).  Shortly after this transfer, BCo sold XXXXXXXXXX FCo shares to arm’s length parties.

In 2019-0793481I7 the issue under review was whether a liquidation of BCo into DCo would result in the Suspended Loss becoming available to ACo under paragraph 40(3.4)(b). It was concluded in 2019-0793481I7 that pursuant to subparagraph 40(3.4)(b)(i), the Suspended Loss would be deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.

We would like to clarify that the conclusion noted in 2019-0793481I7 would only be applicable to the extent that subparagraph 95(2)(e)(v) of the Act does not otherwise apply to a liquidation of BCo. If the liquidation of BCo is a liquidation to which paragraph 95(2)(e) applies, and that liquidation is a “designated liquidation and dissolution” as defined in subsection 95(1), the Suspended Loss would not become available due to the application of sub-clause 95(2)(e)(v)(A)(III). More specifically, under that sub-clause DCo will be deemed to be the same corporation as, and a continuation of, BCo for the purposes of applying paragraph 40(3.5)(c) in respect of any share that was deemed under that paragraph to be owned, at any time before the liquidation and dissolution, by BCo. Accordingly, DCo would take the place of BCo and would be deemed to own the shares of CCo as long as DCo is affiliated with ACo.

Yours truly,

Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2020

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2020