28 February 2007 External T.I. 2006-0181631E5 - Paragraph 87(2)(j.91) Proposed Amendment

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Does the proposed amendment to paragraph 87(2)(j.91) of the Act, change the position of the CRA with respect to the utilization of unused surtax credits by a parent corporation following a winding-up of a subsidiary, that was set out in advance income tax ruling #2001-0064973?

Position: Yes, if paragraph 87(2)(j.91) of the Act is amended as proposed, the position in the advance tax ruling will not apply in respect of windings-up that begin after December 20, 2002.

Reasons: The words of amended paragraph 87(2)(j.91) of the Act, as proposed.

XXXXXXXXXX 							2006-018163
								Alison Campbell
February 28, 2007

Dear XXXXXXXXXX:

Re: Proposed Amendment to Paragraph 87(2)(j.91) of the Income Tax Act (the "Act")

We are writing in reply to your letter of April 13, 2006 in which you requested our views on a proposed amendment to paragraph 87(2)(j.91) of the Act. In particular, you are seeking our views on the impact of the proposed amendment on the ability of a parent corporation to obtain a recovery of Part I.3 or Part VI taxes paid in a year prior to the winding up of a subsidiary corporation, in circumstances such that subsection 88(1) of the Act is applicable, by carrying back unused surtax credits realized by that subsidiary prior to the winding up to taxation years of the parent corporation that ended prior to the winding up.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency (CRA).

Paragraph 87(1)(j.91) of the Act applies to the winding up of a subsidiary corporation into a parent corporation in circumstances that satisfy subsection 88(1) of the Act, by virtue of paragraph 88(1)(e.2) of the Act. Paragraph 88(1)(e.2) of the Act, also provides rules for interpreting paragraph 87(1)(j.91) of the Act in a winding up situation and in particular, provides that the terms "amalgamation", "predecessor corporation", and "new corporation" as used in paragraph 87(1)(j.91) of the Act be read as "winding up", "subsidiary" and "parent" respectively.

Paragraph 87(1)(j.91) of the Act as currently enacted and as it applies to a winding up situation that falls within the provisions of subsection 88(1) of the Act, reads:

Part I.3 and Part VI tax - for the purpose of determining the amount deductible under subsection 181.1(4) or 190.1(3) by the" parent" for any taxation year, the "parent" is deemed to be the same corporation as, and a continuation of, each subsidiary, except that this paragraph does not affect the determination of the fiscal period of any corporation or the tax payable by any subsidiary.

As noted in advance income tax ruling #2001-0064973, it was our view that paragraph 87(2)(j.91) of the Act did not preclude a parent corporation from recovering Part I.3 and/or Part VI taxes paid by it in a taxation year that ended before the winding up, by carrying back to its taxation years prior to the winding up, unused surtax credits realized by a subsidiary corporation in taxation years prior to the winding up.

The proposed amended paragraph 87(2)(j.91) of the Act, as it would read in the context of a winding up to which subsection 88(1) of the Act applies, is as follows:

Part I.3 and Part VI tax - for the purpose of determining the amount deductible under subsection 181.1(4) or 190.1(3) by the "parent" for any taxation year, the "parent" is deemed to be the same corporation as, and a continuation of, each "subsidiary", except that this paragraph does not affect the determination of the fiscal period of any corporation or the tax payable by any corporation for any taxation year that ends before the "winding up"; (emphasis added)

If enacted as proposed, it is our view that the phrase "except that this paragraph does not affect the determination of the fiscal period of any corporation or the tax payable by any corporation for any taxation year that ends before the amalgamation", will preclude the parent corporation from recovering Part I.3 and/or Part VI taxes paid in taxation years that ended prior to the winding up, by carrying back unused surtax credits that were realized by the subsidiary in taxation years of the subsidiary that ended before the winding up. We note that the coming into force provision provides that the amended paragraph 87(2)(j.91) of the Act, when enacted, will be effective for windings up that begin after December 20, 2002.

We trust these comments will be of assistance.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch