In order to wind-up CFA2 into CFA1 (which is directly held by Canco), CFA2 will first distribute its retained earnings and then sell its assets at their book value (i.e., for less than their FMV) in exchange for a promissory note of CFA1 and the assumption of liabilities, with that note then being extinguished as a result of its assignment to CFA1 on the formal liquidation of CFA2. The asset transfers by CFA2 to CFA1 will occur on a rollover basis under the foreign tax law.
CRA ruled that Reg. 5907(5.1) will apply to the disposition by CFA2 of its capital property to CFA1 pursuant to the Proposed Business Transfer. In its summary, CRA stated:
No gain or loss is recognized on the transfer of the capital assets under the relevant foreign income tax law, and the other conditions provided in subsection 5907(5.1) of the Regulations are met.