| 19(1) | File No. 5-8679 |
| A.A. Cameron | |
| (613) 957-2115 |
October 12, 1989
Dear Sirs:
Re: Subsection 88(1) of the Income Tax Act (the "Act")
We are writing in response to your letter of September 11, 1989 in order to expand on the matter addressed in our letter of August 18, 1989.
The situation you have raised involves a wholly-owned subsidiary having liabilities owing to third parties, with which it deals at arm's length for the purposes of the Act, in amounts in excess of the cost base of its assets when it is wound up into its parent company pursuant to subsection 88(1) of the Act.
You have asked us to assume that the subsidiary has the following balance sheet immediately before the commencement of the wind-up:
| Land - ACB | $100 | Third Party Liabilities | $600 |
| (Fair Market Value $600) | Deficit | (500) | |
| $100 | $100 |
It is also assumed that the subsidiary is wound up with the parent corporation assuming the third party liabilities and paying them off in the normal course of carrying on the subsidiary's business.
You have asked whether it is our opinion that on the winding-up of the subsidiary the assumption of the third party liabilities causes the realization of the accrued gain of $500 on the land.
Alternatively, you have asked whether the assumption of the liabilities is part of the winding-up so that subsection 87(7) (as made applicable by paragraph 88(1)(e.2)) applies to treat the third party liabilities as if they had always been those of the parent corporation.
Where a corporation has been wound up in a situation to which the provisions of subsection 88(1) of the Act apply, the provisions of paragraph 88(1)(e.2) thereof will operate (subject to section 78) such that the provisions of 87(7) of the Act will apply upon the winding-up. In the above example the provisions of subsection 87(7) of the Act will operate with regard to a third party debt of the subsidiary provided that the debt was outstanding immediately before the winding-up, became a debt of the parent on the winding-up, and the amount payable by the parent on the maturity of the debt is the same as the amount that would have been payable by the subsidiary on its maturity.
Subject to the provisions of subsection 69(11) of the Act, in your example the land of the subsidiary which is distributed to the parent on the winding-up will be deemed to have been disposed of by the subsidiary for proceeds of $100, as determined pursuant to paragraph 88(1)(a) of the Act (assuming the land did not constitute a Canadian resource property or a foreign resource property for the purposes of the Act).
As explained in paragraph 24 of Information Circular 70-6R any written or verbal opinions are not rulings and are not binding upon Revenue Canada, Taxation in respect of any taxpayers.
Yours truly,
for Director Reorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch