Wuswig – Tax Court of Canada finds that avoiding s. 93(2) through continuing a US sub to Canada before realizing a capital loss on its shares abused s. 93(2)'s rationale

Wuswig, a CBCA corporation, wholly owned a U.S. holding company (“Southridge Holdings”), whose shares had an accrued capital loss that was exceeded by the total of exempt dividends previously received by Wuswig on those shares. That accrued capital loss was realized pursuant to transactions under which:

• Southridge Holdings was merged into a newly incorporated Delaware subsidiary of Wuswig, with the surviving entity being continued into Canada pursuant to s. 128.1.;
• The continued corporation then issued preferred shares to a Wuswig shareholder so that it ceased to be a wholly-owned subsidiary of Wuswig; and
• The continued corporation then was wound up into Wuswig pursuant to ss. 69(5) and s. 88(2), with ss. 93(2) and (2.01) not denying recognition of the loss because the continued corporation had ceased to be a foreign affiliate of Wuswig.

Ouimet J concluded that this capital loss recognition “frustrated and defeated the underlying rationale” of ss. 93(2) and (2.01), which were “meant to limit the realization of a capital loss on shares of a foreign affiliate of a Canadian taxpayer when the latter has received tax-free dividends from the foreign affiliate” i.e., the series “allowed Wuswig to extract corporate value on a tax-free basis by the payment of tax-free dividends” without those dividends being “subtracted from the capital loss realized.”

Wuswig pleaded that a similar result could have been achieved with clearly non-abusive transactions, namely, Wuswig using dividends received from Southridge Holdings, less 5% withholding tax, to make loans to the underlying U.S. operating subsidiary, with a capital loss later being claimed under s. 50(1) when that debtor became insolvent. However, Ouimet J found that this alternative did not satisfy two of the tests in 3295940 for considering an alternative transaction for abuse-analysis purposes, namely, these alternative transaction did not have a high degree of commercial and economic similarity to the transactions under review, and would not have generated tax consequences approximately as favourable as the transactions under review (because the loans made by Wuswig to the operating subsidiary and, thus, the s. 50(1) loss, would have been an estimated 15% lower).

Neal Armstrong. Summaries of Wuswig Inc. v. The King, 2025 TCC 147 under s. 245(4) and s. 152(1.11).