5-902889
Dear Sirs:
Re: Paragraph 88(1)(d) of the Income Tax Act (the "Act")
This is in reply to your letter dated October 16, 1990, whereby you requested a technical interpretation regarding the application of paragraph 88(1)(d) of the Act in the following hypothetical situation.
A newly incorporated company ("Acquisitionco") acquires, from a person with whom it deals at arm's length, all the shares of a company ("Targetco"). Targetco has a wholly-owned subsidiary ("Subco 1"). Subco 1 has a wholly-owned subsidiary ("Subco 2").
Acquisitionco then winds up Targetco. The shares of Subco 1 which would be distributed to Acquisitionco in the course of the winding-up would be eligible for an increase in their cost to Acquisitionco under paragraphs 88(1)(c) and (d) of the Act provided that they constituted capital property of Targetco at the time Acquisitionco last acquired control of that corporation.
The winding-up of Targetco would then be followed by a winding-up of Subco 1. As a result of this winding-up, the shares of Subco 2 would be distributed to Acquisitionco. Subco 2 would then be wound up into Acquisitionco.
1. Acquisition of Control
You requested our opinion as to whether the provisions of paragraph 88(1)(d) of the Act are applicable to the shares of Subco 2 on the winding-up of Subco 1.
You are of the view that, based on the decisions of the courts in Vineland Quarries and Crushed Stone Limited v. M.N.R. 67 DTC 5283 (SCC) and Yarmouth Industrial Leasing Limited v. Her Majesty The Queen 85 DTC 5401 (FCTD), the provisions of paragraph 88(1)(d) of the Act would be applicable to the shares of Subco 2 upon the winding-up of Subco 1 into Acquisitionco subsequent to the winding-up of Targetco, since Acquisitionco acquired control of Subco 1 at the same time it acquired control of Targetco.
Our Comments
We are of the opinion that the acquisition of control of a parent corporation results in a simultaneous acquisition of control of the subsidiaries of the parent corporation. In the aforementioned hypothetical situation, Acquisitionco would thus have acquired control of Subco 1 and Subco 2, for the purposes of paragraph 88(1)(d), upon the acquisition of control of Targetco.
2. Subparagraph 88(1)(d)(i.1) of the Act
You requested our opinion as to whether, with respect to the winding-up of Subco 1 into Acquisitionco, the provisions of subparagraph 88(1)(d)(i.1) of the Act would apply to taxable dividends paid by Subco 1 to Targetco prior to the acquisition of the shares of Targetco by Acquisitionco, so as to reduce the amount that could otherwise be added to the cost to Acquisitionco of the shares of Subco 2.
You also requested our opinion as to whether, with respect to the winding-up of Subco 2 into Acquisitionco, the provisions of subparagraph 88(1)(d)(i.1) would apply to taxable dividends paid by Subco 2 to Subco 1 prior to the acquisition of the shares of Targetco by Acquisitionco, so as to reduce the amount that could otherwise be added to the cost to Acquisitionco of property of Subco 2 that is eligible for the paragraph 88(1)(d) "bump".
Subparagraph 88(1)(d)(i.1) applies to certain dividends in respect of a share of the subsidiary received by the parent or by a corporation with which the parent was not dealing at arm's length.
The closing words of paragraph 88(1)(d) ("the post-amble deeming provision") provide as follows:
"and for the purposes of this paragraph, where a parent corporation has been incorporated or otherwise formed after the time any other corporation (other than a corporation acquired by it from a person with whom it was dealing at arm's length) with which it did not deal at arm's length at any time prior to the winding-up was incorporated or otherwise formed, the parent corporation shall be deemed to have been in existence from the time of formation of the other corporation and to have been not dealing at arm's length with the other corporation from that time;"
It is our view that the arm's length test in subparagraph 88(1)(d)(i.1) is applied at the time that the dividend was received. Accordingly, in your hypothetical situation, dividends paid by Subco 1 to Targetco prior to acquisition of the shares of Targetco by Acquisitionco would not be dividends described in subparagraph 88(1)(d)(i.1) with respect to a winding-up of Subco 1 into Acquisitionco, since Targetco and Acquisitionco would have dealt at arm's length at the time that such dividends were received. Similarly, dividends paid by Subco 2 to Subco 1 prior to the acquisition of the shares of Targetco by Acquisitionco would not be dividends described in subparagraph 88(1)(d)(i.1) with respect to a winding-up of Subco 2 into Acquisitionco, since Subco 1 and Acquisitionco would have dealt at arm's length at the time that such dividends were received.
Furthermore, the analysis above is not affected by the post-amble deeming provision since it applies only to "any other corporation (other than a corporation acquired by [the parent] from a person with whom it was dealing at arm's length)". The parenthetical words in the postamble deeming provision are not clear; but in our view it would be consistent with the policy of paragraph 88(1)(d) to interpret those words as exempting from the application of the post-amble deeming provision a corporation the control of which was acquired by the parent from a person with whom it was dealing at arm's length. Accordingly, the post-amble deeming provision would not apply to either Targetco or Subco 1, since control of each of those corporations was acquired by Acquisitionco from a person with whom it dealt at arm's length.
The foregoing response is an opinion provided in accordance with the practice described in paragraph 21 of Information Circular 70-6R2 and is not binding on the Department.
Yours truly,
for Director Reorganizations and Non-Resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch