Principal Issues: Application of subsection 88(1.1) to non-capital losses incurred by a subsidiary where that corporation was wound-up.
Position: See response.
Reasons: The law.
2005-014459
XXXXXXXXXX Michael Cooke
January 10, 2006
Dear XXXXXXXXXX:
Re: Subsection 88(1.1)
This is in response to your letter dated July 25, 2005, wherein you requested our opinion on the application of the above-noted provision of the Income Tax Act ("the Act").
Briefly the assumed facts are as follows:
Two unrelated taxable Canadian corporations ("Xco" and "Yco") rendered similar services within the meaning of subparagraph 88(1.1)(e)(ii). Xco had a December 31 taxation year-end and Yco had a June 30 taxation year-end. On January 1, 2002, Xco acquired all the shares of Yco such that pursuant to subsection 249(4), Yco was deemed to have a taxation year ending on December 31, 2001.
Yco incurred non-capital losses from carrying on its business for its taxation years ending December 31, 2001, December 31, 2002 and December 31, 2003. Xco commenced proceedings to wind-up Yco under subsection 88(1) during Xco's 2003 taxation year and Yco was formally dissolved on January 31, 2004.
Your View:
As a result of the winding-up of Yco, it is your view that, pursuant to subsection 88(1.1), the unused non-capital losses of Yco would expire in the hands of Xco as follows:
Year Yco Incurred Loss
Date of Expiry For Xco
December 31, 2001
December 31, 2008
December 31, 2002
December 31, 2009
December 31, 2003
December 31, 2010
You ask us to confirm whether or not the above is correct.
Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 (IC-70-6R5) dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's views must be made to your local Tax Services Office.
Notwithstanding the above, we are able to offer the following comments.
The non-capital loss incurred by Yco in its taxation year ending immediately prior to the acquisition of control of Yco by Xco (i.e. December 31, 2001) is subject to the "loss streaming rules" in subsection 111(5) and paragraph 88(1.1)(e) of the Act and it remains a question of fact as to whether all the conditions of the loss streaming rules will have been met in a particular situation.
However, subject to the application of the loss streaming rules in your situation, provided the unused non-capital losses of Yco would have been deductible by Yco for any taxation year beginning after the commencement of the winding-up of Yco (assuming Yco had such a taxation year) such non-capital losses would expire in Xco's taxation year as described above. This also assumes that Xco's December 31 taxation year-end does not otherwise change as a result of some other event.
Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R5.
Yours truly,
David Palamar
Manager
Corporate Reorganization Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch