Background
The Taxpayer, a Canadian-resident corporation, wholly-owns CFA1 and CFA2, each of which carries on an active business in Foreign Country. In order to combine CFA1 and CFA2 on a foreign rollover basis without losing loss-carryforwards of CFA1:
- The Taxpayer will transfer all the shares of CFA2 to CFA1 in exchange for CFA2 shares with an equivalent FMV.
- CFA2 will distribute a dividend to CFA1 equal to its retained earnings, which will remain unpaid to the extent of insufficient cash.
- CFA2 will transfer its entire business to CFA1 by transferring all of its capital and non-capital property (which have a net accrued gain) and assigning substantially all of its liabilities (including any unpaid dividend liability, if any), excepting any assets and liabilities that cannot be transferred (e.g., tax refunds and/or taxes payable) at book value in exchange for a CFA1 promissory note (the “CFA1 Note”) equal to the book value of the assets transferred minus the amount assumed liabilities (the “Proposed Business Transfer”).
- Pursuant to a shareholders’ resolution, CFA2 will then be liquidated into CFA1 and will distribute its remaining assets to CFA1 and assign any residual liability to CFA1. As a result of the distribution of the CFA1 Note to CFA1, which will result in the CFA1 Note being extinguished.
Rulings
No amount of revenue, income or profit will be required to be added to the earnings of CFA2, pursuant to Reg. 5907(2)(f) in respect of the Proposed Business Transfer of CFA2’s non-capital property. In its summary, CRA stated:
Since the transfer of the non-capital assets is done on a rollover basis under the relevant foreign income tax law, the conditions of paragraph 5907(2)(f) are not met.
Reg. 5907(5.1) will apply to the disposition by CFA2 of its capital property to CFA1 pursuant to the Proposed Business Transfer (with the summary stating):
No gain or loss is recognized on the transfer of the capital assets under the relevant foreign income tax law, and the other conditions … in subsection 5907(5.1) … are met.