XXXX K.H. Major (613) 995-1787
June 25, 1984
Dear XXXX
Re: Dissolution of a Foreign Affiliate
This is in reply to your letter of May 16, 1984 in which you requested our views on the application of subsection 5907(9) of the Income Tax Regulations (the Regulations) in the following circumstances:
A. Assume that a foreign affiliate ("FA") is a U.S. corporation which carries on an active business in the United States. FA is wholly owned by a corporation resident in Canada ("Parent").
B. FA desires to cease operations. Accordingly FA adopts a one year plan of liquidation whereby all of its assets will be sold and the net proceeds distributed to Parent. The assets consist primarily of inventory which is held for resale. The assets do not .include the shares of any other foreign affiliate of Parent.
C. Assume further that FA has a December 31st year end. A plan of liquidation is adopted on November 30, 1985, the assets are sold at various dates between November 30, 1985 and March 30, 1986 and the net proceeds from all sales distributed to Parent on April 15, 1986. Thereafter formal dissolution documents are prepared and filed with the appropriate state agencies to dissolve FA.
We concur with your view that the exempt surplus created of the sale of all the assets will be available for purposes of the distribution to the Parent on April 15, 1986. With respect to sales occurring prior to January 1, 1986, the exempt surplus created will be added to the exempt surplus pot when the year end occurs on December 31, 1985. Provided all or substantially all of the property owned by FA immediately before the distribution to the Parent on April 15, 1986 is distributed to the Parent at that time, subsection 5907(9) of the Regulations (both as presently worded and as worded in the November 4, 1982 draft regulations) will apply to deem a year end to have ended immediately prior to the distribution of the property. Therefore the exempt surplus created on sales on or after January 1, 1986 and before April 15, 1986 will also be available.
In addition, in our view a distribution of all or substantially all of the property owned by a foreign affiliate to its shareholders after the particular foreign affiliate has adopted a plan of liquidation and before formal dissolution documents are prepared, takes place in the course of the dissolution for the purposes of subsection 5907(9) of the Regulations.
We trust that this information will be of assistance to you.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch