PRINCIPAL ISSUES: When are the CDA components of a subsidiary wound-up into its parent corporation pursuant to subsection 88(1) included in the parent corporation’s CDA?
POSITION: The parent corporation is deemed to be the same and the continuation of the subsidiary for the purposes of computing its CDA. Thus the parent corporation will take into account the subsidiary’s CDA components when the subsidiary is wound-up pursuant to section 88(1) for the purposes of computing its CDA at a particular time. The CRA’s long standing position as when a corporation is wound-up for the purposes of subsections 88(1) and (2) is described in the IT-126R2 [archived].
REASONS: In accordance with the law.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2019
2019 APFF CONFERENCE
Question 6
The winding-up of a taxable Canadian corporation described in subsection 88(1) provides for a transfer of tax balances from a subsidiary to the parent.
Pursuant to paragraph 88(1)(e.2), which refers to paragraph 87(2)(z.1) with the necessary modifications, the "capital dividend account" ("CDA") of the parent corporation must take into account the subsidiary's CDA amounts.
For example, Holdco holds all of the shares of Opco. Holdco and Opco have never paid a capital dividend and have an amount of $100,000 for Holdco and $500,000 for Opco, respectively, under paragraph (a) of the definition of CDA in subsection 89(1).
Holdco's year-end is December 31 and Opco's year-end is June 30. On March 31, 2018, a resolution to make a winding-up distribution of assets was adopted by the directors of Opco such that all of Opco's assets and liabilities were distributed to Holdco. On April 15, 2019, Opco was dissolved for corporate law purposes.
Question to the CRA
For the purpose of calculating Holdco's CDA, will Opco's CDA balances be included:
- following the winding-up of Opco on March 31, 2018;
- following Opco's year-end on June 30, 2018;
- following Holdco's year-end on December 31, 2018; or
- following Opco's dissolution on April 15, 2019?
CRA Response
In a situation such as the one presented, we understand that subsection 88(1) applies to the winding-up of Opco into Holdco because Opco is a "taxable Canadian corporation", as that term is defined in subsection 89(1), and immediately before the winding-up, Holdco (another "taxable Canadian corporation") held 100% of the issued shares of each class of the capital stock of Opco.
Paragraph 88(1)(e.2) reads as follows:
Winding-up
88 (1) Where a taxable Canadian corporation (in this subsection referred to as the “subsidiary”) has been wound up after May 6, 1974 and not less than 90% of the issued shares of each class of the capital stock of the subsidiary were, immediately before the winding-up, owned by another taxable Canadian corporation (in this subsection referred to as the “parent”) and all of the shares of the subsidiary that were not owned by the parent immediately before the winding-up were owned at that time by persons with whom the parent was dealing at arm’s length, notwithstanding any other provision of this Act other than subsection 69(11), the following rules apply:
[...]
(e.2) paragraphs 87(2)(c), (d.1), (e.1), (e.3), (e.42), (g) to (l), (l.21) to (u), (x), (z.1), (z.2), (aa), (cc), (ll), (nn), (pp), (rr) and (tt) to (ww), subsection 87(6) and, subject to section 78, subsection 87(7) apply to the winding-up as if the references in those provisions to
(i) “amalgamation” were read as “winding-up”,
(ii) “predecessor corporation” were read as “subsidiary”,
(iii) “new corporation” were read as “parent”,[...]
Paragraph 87(2)(z.1), as amended by paragraph 88(1)(e.2), reads as follows:
Capital dividend account
(z.1) for the purposes of computing the capital dividend account of the new corporation, it shall be deemed to be the same corporation as, and a continuation of, each predecessor corporation, other than a predecessor corporation to which subsection 83(2.1) would, if a dividend were paid immediately before the amalgamation and an election were made under subsection 83(2) in respect of the full amount of that dividend, apply to deem any portion of the dividend to be paid by the predecessor corporation as a taxable dividend;
It follows from paragraph 87(2)(z.1) (as modified by paragraph 88(1)(e.2)) that in calculating the amount of a parent's CDA, the parent corporation is deemed to be the same corporation as, and a continuation of, its subsidiary. Thus, when the subsidiary has been wound-up pursuant to subsection 88(1), the parent corporation must take into account each element making up the CDA of the wound-up subsidiary at that time, assuming that subsection 83(2.1) would not apply to the subsidiary.
The term "winding-up" is not defined in the Income Tax Act. The CRA's general position on that term is set out in Interpretation Bulletin IT-126R25 (footnote 1).
CRA states in Interpretation Bulletin No. IT-126R26 (footnote 2) that it considers a corporation to have been wound-up for the purposes of subsections 88(1) and 88(2) in the following situations:
(a) where it has followed the procedures for winding-up and dissolution provided by the appropriate federal or provincial companies act or winding-up act, or
(b) where it has carried out a winding-up, other than by means of the statutory procedures contemplated in (a) above, and has been dissolved under the provisions of its incorporating statute.
At paragraph 5 of Interpretation Bulletin IT-126R2 (footnote 3), the CRA states that it considers that where the formal dissolution of a corporation is not complete but there is substantial evidence that the corporation will be dissolved within a short period of time, for the purpose of subsections 88(1) and (2) the corporation is considered to have been wound up. The CRA also states that where a corporation is not dissolved in a particular year because of the existence of outstanding litigation the CRA will accept that subsection 88(1) or 88(2) applies in that year if all conditions listed in Interpretation Bulletin No. IT-126R2 (footnote 4) are satisfied.
In calculating its CDA, Holdco will have to take into account each element that made up Opco's CDA when it was wound-up within the meaning of "have been wound up", as stated by the CRA in Interpretation Bulletin IT-126R2 (footnote 5).
The determination of when a corporation is wound up for the purposes of subsections 88(1) and 88(2) requires consideration of all facts and circumstances relevant to a particular situation. In view of the fact that there is very little information in this statement, we are limited to providing the general comments above. It should be noted that the year-end date of Opco or Holdco is not relevant in determining when Holdco takes into account Opco's CDA components in the calculation of its CDA.
Nathalie Aubin
(514) 496-5984
October 11, 2019
2019-081265
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-126R2 (Archived), “Meaning of 'Winding up', March 20, 1995.
2 Id.
3 Id.
4 Id.
5 Id.