A Canadian corporation (ACo) realized a suspended loss when it contributed its shares (i.e., in a drop-down to which s. 85.1(3) did not apply) of a controlled foreign affiliate (CCo) to another CFA (BCo), and then CCo was then liquidated under s. 95(2)(e) into BCo. In 2017-0735771I7, Headquarters considered that such loss was suspended on the basis that, for purposes of s. 40(3.5)(c)(i), Bco was a corporation “formed” on the “merger” of CCo with BCo – with the result that BCo was deemed to continue to own the shares of CCo with which it was affiliated, notwithstanding that CCo had, in fact, ceased to exist.
Headquarters was subsequently asked in 2019-0793481I7 to consider the consequences of ACo dropping its shares of Bco under s. 85.1(3) into another ACo CFA (DCo) followed by a sale by BCo of its subsidiary (Fco - whose decline in value had caused the decline in value of its own shares) to an arm’s length purchaser, and then by the wind-up of BCo into DCo and into another CFA (ECo) through which DCo had held part of its intrest in BCo. Headquarters concluded that this resulted in the loss being de-suspended, stating that “[u]pon the completion of the liquidation of BCo, it would no longer be affiliated with ACo,” so that the suspended loss was deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.
Headquarters, in this Interpretation, clarified that such winding-up of BCo could be a “designated liquidation and dissolution” described in s. 95(2)(e) – in which event, s. 95(2)(e)(v)(A)(III) would deem DCo to be a continuation of BCo for s. 40(3.5)(c) purposes respecting shares that were deemed under that paragraph to be owned by BCo before the DLAD (i.e., respecting its deemed continued ownership of the CCo shares) – so that the loss on the CCo shares continued to be suspended.