Principal Issues: Proper application of subsection 88(1.1) - no acquisition of control.
Position: See response.
Reasons: The law.
XXXXXXXXXX 2004-006495
Michael Cooke
November 1, 2004
Dear XXXXXXXXXX:
Re: Subsection 88(1.1)
This is in response to your letter dated February 27, 2004, wherein you requested our opinion on the application of the above noted provision of the Income Tax Act ("the Act"). Specifically, the issue in your letter pertains to the deductibility by a parent corporation ("P") of non-capital losses incurred by its subsidiary wholly-owned corporation ("S") after S is wound-up into P under subsection 88(1).
In your letter you indicate that S has a November 30 taxation year end while P's taxation year ends on October 31. On October 29, 2003, S commenced the process of winding-up into P and on February 15, 2004, a formal certificate of dissolution was issued which resulted in S having a final taxation year ending on that day. You also indicate that for S's taxation year ending November 30, 1997, S incurred a non-capital loss (the "1997 Loss") that S never deducted and, absent any restructuring, such 1997 Loss would not otherwise expire until the end of S's November 30, 2004 taxation year pursuant to paragraph 111(1)(a). It is assumed that P has always controlled S.
Your View:
As a result of the winding-up of S, you note that the 1997 Loss would be deemed to be a non-capital loss of P for its taxation year ending October 31, 1998 (i.e. being the taxation year of P in which S's 1997 loss year ended) pursuant to paragraph 88(1.1)(c). Accordingly, pursuant to paragraph 111(1)(a), the 1997 Loss would normally expire at the end of P's October 31, 2005 taxation year. However, because of the limit in paragraph 88(1.1)(b), you indicate that P would only be allowed to deduct the 1997 Loss in its taxation year ended October 31, 2004, since this would be the last taxation year in which the 1997 Loss would be deductible by S assuming it had a taxation year ending February 15, 2004.
You ask us to confirm whether or not your views are 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 do not agree with your interpretation of paragraph 88(1.1)(b) as described above. Specifically, the 1997 Loss of S would have been deductible by it for its first taxation year beginning after the commencement of the winding-up (i.e. December 1, 2003 to February 15, 2004) and as such the criteria of paragraph 88(1.1)(b) have been met. Accordingly, pursuant to 88(1.1)(c), since the 1997 Loss will be deemed to be a non-capital loss of P for its taxation year ending October 31, 1998, such loss would expire at the end of P's October 31, 2005 taxation year, assuming P's taxation year 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,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch