CCo was a non-resident private unlimited company and holding company whose ordinary shares were held by ACo (a Canadian-resident corporation that was wholly-owned by BCo, a Canadian-resident public company) and by another private unlimited company (DCo) that was an indirect subsidiary of BCo. As a result of a sale of its business carried on through various foreign affiliates, the only asset of CCo was a receivable from another CFA of BCo. ACo realized a capital loss that was suspended under s. 40(3.4)(a) when it disposed of all of its shares of CCo to BCo as a dividend in kind.
BCo then transferred a portion all of its shares of CCo to a newly-formed corporation (FCo). Following the payment of an “interim dividend” by CCo to FCo and BCo, CCo was wound-up into its three shareholders (BCo, FCo and DCo).
The Directorate essentially followed the analysis in 2017-0735771I7 and 2018-0745501C6 to conclude that ACo’s capital loss was de-suspended when CCo was liquidated into its shareholders – with this turning on the propositions that such liquidation satisfied the two requirements in order for s. 40(3.5)(c)(i) to apply: the liquidation (a.k.a., winding-up) was not a "merger" of the loss corporation (CCo) with another corporation (BCo, FCo and DCo); and such "merger" resulting in the formation of a corporation (BCo, FCo and DCo).
The chief additional issue was that there were three rather than one shareholder of the wound-up corporation. In this regard, the Directorate referred to s. 33(2) of the Interpretation Act ("Words in the singular include the plural”) and s. 3(1) ("unless a contrary intention appears"), and stated:
Accordingly, subparagraph 40(3.5)(c)(i) may also be read in a manner that accommodates the formation of more than one corporation … .
[S]ince a corporation may wind-up into more than one shareholder corporation, an interpretation of subparagraph 40(3.5)(c)(i) that accommodates such transaction is appropriate.
After stating that:
It appears that Parliament wanted to ensure that, pursuant to the deemed continuity rules, a suspended loss does not become available where the transferred corporation is subsequently wound up on a tax deferred basis.
the Directorate went on to note that for s. 40(3.5)(c) purposes CCo’s wind-up:
should be afforded the same treatment as a tax deferred wind up (i.e., a windup of CCo into a Canadian company on a tax deferred basis). This is supported by the fact that a tax deferred wind-up generally represents a deferral of Canadian income tax on any accrued gain and a wind-up of a corporation outside of Canada results in no Canadian income tax.