Dear Sirs:
Re: Subsection 88(1) of the Income Tax Act (the "Act")
This is in reply to your letter of July 25, 1991 in which you requested for our opinion regarding the application of subsection 88(1) of the Act and certain other provisions of the Act to the following situation.
24(1)
Parentco wishes to wind-up Subco into itself pursuant to subsection 88(1) of the Act and as part of the wind-up the shares of Parentco formerly hold by Subco will be cancelled.
You ask the following questions relating to the above situation:
1. Will Parentco be deemed to have received a dividend from itself on the cancellation of its shares formerly held by Subco pursuant to subsection 84(3) of the Act?
2. Will Parentco be deemed to have realized a capital gain on the cancellation of its shares formerly held by Subco?
Our comments
To the extent that the above facts represent proposed transactions, your enquiry should be the subject of a request for an advance income tax ruling. Although we cannot make direct comments on your situation, we will provide the following general comments on your questions in the order that you raised them.
For the purposes of subsection 88(1)(a) of the Act any shares of Parentco that will be acquired by Parentco on the winding-up of Subco will be property of Subco that is distributed to Parentco on the winding-up of Subco. Consequently, subparagraph 88(1)(a)(iii) of the Act will apply to deem that the shares of Parentco to have been disposed of by Subco for proceeds equal to the cost amount of such shares to Subco immediately before the winding-up. Parentco will not have paid any amount to Subco on the acquisition or cancellation by Parentco of its shares held by Subco. Therefore, there is no amount to which subsection 84(3) of the Act would apply. In addition subsection 84(2) of the Act will not apply by virtue of paragraph 88(1)(d.1) of the Act to the winding-up of Subco.
As there is no disposition of any of its property, Parentco will not have realized a capital gain from the cancellation of its own shares held by Subco.
The comments expressed are not advance income tax rulings and are not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch