What is the cost (and amount incurred as an expense) for intellectual property with an unlimited life acquired by a corporation resident in Canada as a result of a return of capital from a wholly-owned foreign affiliate?
CRA first noted that property contributed for no consideration to a corporation by its shareholder, or received by a Canadian corporate shareholder from its wholly-owned foreign affiliate on a return of capital (or other upstream transfer), generally will have a cost to the transferee equal to the property’s fair market value. CRA then stated:
We see no reason to apply different reasoning in respect of the determination as to whether the shareholder has “made or incurred” an “outlay or expense” for the purpose of the ECE definition… . Thus… a Canadian corporate shareholder that receives such [ECP] property from its wholly-owned foreign affiliate on a return of capital should be considered to have “made or incurred” an “outlay or expense” in an amount equal to the FMV of the property at the time of the distribution.
…[W]e understand that there is no gain realized by the foreign affiliate on the disposition. Thus, it is not necessary for us to consider whether Variable A.1 [in the CEC definition] can apply in these circumstances.