ACo, a Canadian public corporation, held the shares of three controlled foreign affiliates (CCo, DCo and BCo directly. Shares (that were excluded property) of a fourth CFA (FCo) with an accrued loss were held by CCo directly and by DCo through its subsidiary, ECo.
- ECo transferred all of its shares of FCo to BCo in exchange for Class B common shares of BCo, having an equivalent fair market value, that tracked ECo’s indirect interest in FCo.
- ACo transferred all its shares of CCo to BCo as a contribution of capital, thereby generating a suspended loss as per s. 40(3.4) (the “Suspended Loss”).
- CCo was liquidated into BCo in a designated liquidation and dissolution (“DLAD”) occurring on a rollover basis under s. 95(2)(e), so that BCo acquired all of CCo’s Class B shares of FCo. 2017-0735771I7 concluded that the liquidation of CCo into BCo did not result in the Suspended Loss becoming available, as such liquidation was a “merger” under s. 40(3.5)(c)(i) – so that BCo was deemed to own the shares of CCo as long as BCo and ACo were affiliated and the presumption that the Suspended Loss was deemed to be nil applied over that period.
- Subsequently to the transactions considered in 2017-0735771I7, ACo transferred its shares of BCo to DCo for consideration including shares of the capital stock of DCo pursuant to subsection 85.1(3) of the Act.
- BCo disposed of Class B shares of FCo to arm’s length parties through open market trades.
Would a liquidation of BCo into DCo result in the Suspended Loss becoming available to ACo under paragraph 40(3.4)(b) as a result of the liquidation of BCo? CRA responded:
… BCo is deemed to own the shares of CCo while it is affiliated with ACo (i.e., the transferor).
Upon the completion of the liquidation of BCo, it would no longer be affiliated with ACo.
… Pursuant to subparagraph 40(3.4)(b)(i), the Suspended Loss will be deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.