An Iceland “Sameignarfelag” (viewed by CRA as a partnership), which had been serving as a Finco to foreign affiliates in a Canadian multinational group was wound up into its non-resident partners (NR1 and NR2, wholly-owned by Canco2). Since the partnership interests were not excluded property at the time of their disposition on the winding-up, their ACB was to be computed in Canadian dollars under Reg. 5908(10) which, in turn, meant that NR1 and NR2 realized a capital loss for FAPI purposes on the partnership wind-up.
The principal former partner was NR1. Canco2 transferred NR1 to the non-resident subsidiary (NR3) of its Canadian sister (Canco1 – which, like Canco2, was wholly-owned by the Canadian parent of this multinational group). NR1 was then wound-up into NR3.
CRA accepted that under Reg. 5903(5)(b), which deems the parent foreign affiliate on a designated liquidation and dissolution under s. 95(2)(e) to be the same corporation as and a continuation of the dissolved foreign affiliate for specified purposes, NR1 would be able for FAPI purposes to carry forward the loss of NR1, but that NR3 was precluded from carrying back that loss to prior taxation years. In this regard, the Directorate stated:
[S]ubject to meeting the other requirements of section 5903, as a result of the application of paragraph 5903(5)(b), the FAPL of [NR1] for its pre-dissolution taxation years will be available to reduce the amount of [NR3]’s FAPI for its post-dissolution taxation years. It would also be possible for [NR3] to apply a FAPL for a post-dissolution taxation year to a pre-dissolution taxation year.
However … the deeming rule does not permit the use of a FAPL of a dissolved subsidiary for a pre-dissolution taxation year to reduce the FAPI of a parent for one of its pre-dissolution years … . The calculation of FAPI is done on an affiliate-by-affiliate basis. The FAPL of an affiliate for a taxation year may only be used to reduce the amount of that affiliate’s FAPI for another taxation year. Netting the amount of FAPL for a year of one affiliate against the FAPI of another affiliate is not permitted. Permitting the use of the subsidiary’s FAPL against the FAPI of the parent for a pre-dissolution taxation year goes against this principle.