CRA rules on using capital losses to step up a depreciable asset through a drop-down and wind-up transaction

CRA ruled on a transaction for Canco to utilize its net capital loss carryforwards to step up the capital cost of a Class 14.1 depreciable asset (a government licence initially granted before 1972 regarding the business carried on by it).

It would transfer that licence along with some ancillary immovable property to a wholly owned Canadian subsidiary with nominal assets (Subco) at an s. 85(1) agreed amount that, in the case of the license, and leaving aside an adjustment for the V-day value of the licence, had regard to the lesser of its FMV and Canco's capital loss balance. The 1/2 step-up rule in s. 13(7)(e) was acknowledged to apply. Subco would lease the assets back to Canco for at least two weeks, after which Subco would be wound up into Canco under s. 88(1) and dissolved.

Neal Armstrong. Summary of 2023 Ruling 2023-0974281R3 under s. 111(1)(b).