Principal Issues: Whether the CDA of a corporation should be adjusted to take into account the fact that its net capital losses for a taxation year ending before its acquisition of control are not deductible in computing its taxable income for a taxation year ending after the acquisition of control?
Position: No.
Reasons: The law.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 8
Impact of an acquisition of control on the capital dividend account
Mr. A and Mr. B, two unrelated individuals, each hold 50% of the common shares of a holding corporation (Holdco). The FMV of Holdco's shares is valued at $1 million, being the total value of its only asset, being cash.
Holdco is a Canadian-controlled private corporation whose capital dividend account ("CDA") balance is currently nil. Holdco has net capital losses carryforwards of $200,000. These net capital losses result in the paragraph (a) amount in the calculation of Holdco’s CDA balance being currently nil.
In January 2012, Mr. A purchased Mr. B's shares of Holdco resulting in an acquisition of control of Holdco by Mr. A. By virtue of paragraph 111(4)(a), Holdco cannot deduct its net capital losses of $200,000 in computing its taxable income for the taxation year ending after the acquisition of its control.
Should the calculation of Holdco’s CDA be adjusted considering that its net capital losses became non-deductible from that point on, and if so, on what basis?
CRA Response
First, we are of the view that the acquisition of shares of the capital stock of a corporation whose only asset is cash as in the particular situation could be part of a surplus stripping scheme in respect of which subsection 245(2) could be invoked.
With respect to your question, we are of the view that the fact that Holdco's net capital losses are not deductible in computing its taxable income for a taxation year ending after the acquisition of control, by virtue of paragraph 111(4)(a), has no impact on the calculation of the CDA of Holdco. In fact, the calculation of a corporation's CDA is a cumulative calculation and no particular adjustment is provided for in a situation similar to the one you submitted to us.
In addition, in the particular situation, we find that, given the nature of its assets, Holdco cannot avail itself of the mechanism provided for in paragraph 111(4)(e) that could have allowed it to realize taxable capital gains to offset net capital losses that would otherwise disappear as a result of the acquisition of control, which would have allowed it, as well, to adjust its CDA accordingly.
Marc LeBlond
(613) 957-2108
2012-045416