Principal Issues: Will the CRA provide administrative relief in circumstances where the partnership interest or foreign affiliate shares are disposed of as part of an internal reorganization that, absent subsections 92(4) through (6), would occur on a tax-deferred basis?
Position: No administrative relief is available.
Reasons: Wording of the Act. Subsections 92(4) through (6) ensure that there is a tax consequence to extracting pre-acquisition surplus from foreign affiliates held through a partnership.
IFA Roundtable, May 2014 Question 5
Question 5: ACB of Shares of FAs Relief for Internal Reorganization
When a partnership in which a Canadian corporation (Canco) is a member receives a pre-acquisition surplus dividend from a foreign affiliate (FA), there is no immediate reduction to the ACB of the shares of the FA. Rather, the amount is treated as (i) additional proceeds of disposition for Canco under subsection 92(4) when Canco disposes of the partnership interest or (ii) a deemed gain for Canco under subsection 92(5) and (6) when the partnership disposes of the FA shares.
Subsections 92(4), (5) and (6) are quite restrictive and may prevent Canadian taxpayers that have received pre-acquisition surplus dividends through a partnership from being able to reorganize their group structure on a tax-deferred basis.
Will the CRA provide administrative relief in circumstances where the partnership interest or FA shares are disposed of as part of an internal reorganization that, absent subsections 92(4), (5) and (6), would occur on a tax-deferred basis? For instance, will the CRA provide administrative relief where the partnership interest is transferred to a new Canadian subsidiary under subsection 85(1) or where the FA shares are transferred to a new FA Holdco under subsection 85.1(3)?
CRA Response
Generally, subsections 92(4) through (6) are relevant in circumstances where the shares of a foreign corporation are held by either a corporation resident in Canada, or a foreign affiliate of a corporation resident in Canada, indirectly through a partnership. More specifically, subsection 92(4) may apply to increase the proceeds of disposition to a corporation resident in Canada, or to a foreign affiliate of a corporation resident in Canada, resulting from the disposition of an interest in the partnership of which it was a member. Alternatively, subsection 92(5) may apply to deem a gain to a corporation resident in Canada, or to a foreign affiliate of a corporation resident in Canada, that was a member of the partnership at the end of the fiscal period of the partnership in which that partnership disposed of its shares of the foreign corporation. In general, the amount of the increase to the proceeds of disposition under subsection 92(4) and the amount of the deemed gain determined under subsection 92(6), for purposes of subsection 92(5), are both calculated in relation to the amount of dividends from the pre-acquisition surplus of the foreign corporation that was held through the partnership.
In either circumstance, the application of these provisions results from a disposition of property, being the disposition of an interest in the partnership for purposes of subsection 92(4), or the disposition by the partnership of its shares of a foreign corporation for purposes of subsections 92(5) and (6).
The CRA does recognize that, in certain circumstances, a disposition of property may occur for purposes of the Income Tax Act as part of an internal reorganization within a corporate group, and that the application of subsections 92(4) through (6) may result from such a disposition. For instance, in Document 2012-043373, the Income Tax Rulings Directorate recently considered the application of subsection 92(5) where the shares of a foreign corporation were transferred pursuant to subsections 85(1) and (2) by a partnership, of which a corporation resident in Canada was a member, to a wholly-owned subsidiary corporation created by that partnership. In that internal interpretation, Rulings confirmed that the relevant amounts for purposes of subsection 85(1)(a), namely the jointly elected amount, the proceeds of disposition to the partnership, and the adjusted cost base to the subsidiary corporation, were not affected by a subsection 92(5) deemed gain that was realized by a corporate member of the partnership as a result of the disposition of shares by the partnership.
In response to your question, we have taken this opportunity to consult with officials within the Compliance Programs Branch, and we confirm that there is no administrative relief available in the circumstances that you have described.
Denise Basso
2014-052675