Parentco elected (in reliance on s. 50(1)(b)(iii)) under s. 50(1) respecting its shares of one of a wholly-owned subsidiary ("Lossco") with non-capital loses but no assets or liabilities. It subsequently sold its Lossco shares to a profitable wholly-owned subsidiary ("Profitco") for nominal cash consideration, with Lossco then being wound-up into Profitco under s. 88(1) so that Profitco could then access Lossco's non-capital losses pursuant to s. 88(1.1).
In doubting the satisfaction of the s. 50(1)(b)(iii) conditions, the Directorate stated:
The dictionary definition of "insolvent" is as follows "One who is unable to pay his debts". Thus … a corporation with no assets or liabilities at the end of a taxation year (or a corporation with no liabilities at that time) cannot generally be considered insolvent for the purposes of subparagraph 50(1)(b)(iii). In addition, a corporation in a loss-making position or without adequate financing is not necessarily an insolvent corporation. This could be the case where persons controlling a loss-making corporation, or other entities in the same corporate group, intend to provide in some way for the payment of the creditors of the loss-making corporation [citing Jacques St-Onge Inc. v. The Queen, 2001 DTC 487 (T.C.C.)]
The condition set out in clause 50(1)(b)(iii)(C) is that the FMV of the shares subject to the subsection 50(1) election must be nil. … [T]he valuation of those shares should normally take into account accumulated tax losses that may eventually be deductible in calculating a corporation's taxable income, as stated in question 5 of the 1992 APFF Conference Roundtable.