Subsection 61.3(1)
Administrative Policy
2 December 2025 CTF Roundtable, Q.1
In Year 1, a corporation resident in Canada ("Parentco") made a $1,000 interest-free loan to its wholly owned Canadian subsidiary ("Subco") and, in that year, Subco incurred a $1,000 non-capital loss.
For Year 2, Subco (which had become inactive) claimed the non-capital loss by implementing a loss consolidation arrangement with Parentco.
In Year 3, Parentco forgave the Subco loan and, immediately after such settlement, Subco was wound up into Parentco under s. 88(1), so that Parentco received all the property of Subco, having a nominal cost amount and FMV. Parentco claimed a capital loss of $1,000 on the loan settlement and Subco claimed the insolvency deduction under s. 61.3(1) to fully offset its inclusion under s. 80(13).
CRA indicated that it had refused to provide a favourable ruling for similar transactions. It noted that Subco benefited not only from a gain on the forgiveness of the loan but also from expenses and deductions related to the Subco loan, which generated the non-capital losses; and that this was contrary to the scheme of s. 80, as established in Lecavalier. Furthermore, two losses were being claimed regarding the same investment.
It considered this view to be consistent with Example 23 of IC88-2, Supp. 1 (respecting a corporation transferring all its assets to a wholly-owned subsidiary at stepped-up s. 85 agreed amounts so as to use its losses and so that its realization of a forgiven amount would apply to the Subco shares’ ACB rather than to more valuable tax attributes temporarily parked in Subco - followed by its amalgamation with Subco).
Regarding the Q.1 situation, CRA did not indicate whether the appropriate remedy would be to deny (i) the application of s. 61.3(1) to Subco, so that it would have an s. 80(13) tax liability that would flow through to Parentco on the wind-up (under s. 160 or otherwise), (ii) deny the interest deductions to Parentco under the loss consolidation arrangement or (iii) deny the capital loss to Parentco.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | abuse to generate two losses out of the same investment | 298 |
19 March 2003 External T.I. 2002-0171825 F - DEDUCTION POUR INSOLVABILITE LIQUIDATION
A corporation with no assets and a debt owing to its sole shareholder as its only liability has that debt forgiven (resulting in an income inclusion under s. 80(13)), then is wound up. In finding that such winding up does not cause the loss of the s. 61.3 deduction, CCRA stated:
[T[he mere fact that a corporation with no assets is wound-up or dissolved will not affect the amount of the deduction that the corporation will be able to claim pursuant to subsection 61.3(1) in the taxation year in which an amount is included in income pursuant to paragraph 12(1)(z.3) and subsection 80(13).
Paragraph 61.3(1)(b)
Administrative Policy
7 November 2001 External T.I. 2001-0103805 F - SENS D'ACTIFS
A corporation in financial difficulty that no longer has any tangible property but has a balance of non-capital losses and undeducted scientific research and experimental development expenditures. Because of a debt settlement, s. 80(13) applies. In its financial statements, a future income tax asset is recognized since the parent corporation, following the winding-up of the corporation, will be able to apply such losses and credits in computing its taxable income.
In finding that the future income tax asset is included in the “assets” of the corporation for purposes of s. 61.3(1)(b), CCRA first referred to dictionary definitions of “assets” including an accounting definition referring to:
A component of the balance sheet that describes the economic resources over which the entity has control as a result of past transactions or events, and which are expected to provide future economic benefits.
CCRA then stated:
[S]ubject to subsection 248(24), we are of the view that a future income tax asset presented on the balance sheet of a corporation in accordance with the recommendations of the CICA Handbook constitutes an asset for the purpose of computing Variable B for the purposes of paragraph 61.3(1)(b).
Subsection 61.3(3) - Anti-avoidance
Administrative Policy
19 December 2013 External T.I. 2012-0468851E5 F - Deduction for Insolvency
Mco has a wholly-owned subsidiary (Aco) which is in financial difficulty, is not an insurance corporation, bank or credit union, does not have any attributes to grind under ss. 80(3) to (5), or (7) to (12), and whose sole liability is the Debt owing to a bank which it is willing to settle for cents on the dollar.
In Scenario 1, Aco uses funds lent by Mco to settle the Debt, so that there is an income inclusion under s. 80(13). In Scenario 2, Mco instead uses the same sum to purchase the Debt, so that the debt parking rule in s. 80.01(8) applies. Did CRA agree that Scenario 2 produced a better result under s. 61.3(1), as there was a larger deduction (under C of the formula) for the full amount of the Debt?
CRA first noted that the underlying premise was "questionable," as under GAAP the amount of the Debt after its acquisition by Mco might be written down. Furthermore, s. 61.3(3) might be applied (TaxInterpretations translation):
In Scenario 2, Aco apparently becomes the debtor of Mco in the 12-month period preceding the end of the taxation year, by reason of the acquisition by Mco of the original debt due to the Bank by Aco. It is also possible to claim ... that one of the reasons for Aco becoming indebted to Mco was to increase the amount which Aco had the right to deduct under subsection 61.3(1)... . In such a situation, the CRA could seek to apply subsection 61.3(3) to deny the claimed deduction for insolvency.