Principal Issues: Whether the character of a property acquired by a parent corporation on the winding-up of a wholly-owned subsidiary remains the same to the parent corporation after the winding-up?
Position: Question of fact. General comments provided.
Reasons: Wording of the Act.
XXXXXXXXXX 2005-015732
R. Gagnon
October 27, 2006
Dear Sir,
Subject: Nature of the proceeds from the sale of customers
This is in response to your fax of November 4, 2005, in which you asked us about the tax treatment of acquisitions by a taxable Canadian corporation within the meaning of subsection 89(1) (the "parent corporation"), on a regular basis, of all of the shares of certain taxable Canadian corporations (the "target corporations"), the winding-up of the target corporations into the parent corporation, and partial or complete sales of the client base of the target corporations by the parent corporation to third parties.
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
Our Comments
It appears to us that the situations described in your letter may be actual situations involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received the appropriate tax treatment. We can, however, offer the following general comments which may not be fully applicable to the situation submitted.
Where a parent corporation acquires all of the issued and outstanding shares of the capital stock of a target corporation and the target corporation is wound up into the parent corporation shortly thereafter on a subsection 88(1) wind-up, the CRA generally considers that eligible capital property (as defined in section 54) owned by the target corporation retains its character to the parent corporation at the time of transfer to the parent corporation. Consequently, in such a situation, the cost of a property that is eligible capital property to the target corporation which is transferred to the parent corporation in the course of the winding-up is generally the "cost amount" (as defined in subsection 248(1)) of the property to the target corporation by virtue of the application of subparagraphs 88(1)(c)(ii) and 88(1)(a)(iii).
There is no provision in subsection 88(1) that the nature or character of eligible capital property of the subsidiary is automatically preserved for the parent.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, is not binding on the CRA with respect to any particular factual situation.
If you wish to have more certainty about the tax consequences of proposed transactions in particular circumstances, we invite you to submit a request for an advance income tax ruling.
We apologize for the delay in responding to your request.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch