Tax II Chapter 12
Spring 2013
Notes
Chapter Twelve Lecture Notes
Liquidations
David Christian
Spring Term 2013
Thorsteinssons LLP
UBC Faculty of Law
______________________________________________________________________________
Notes
A good place to start from is where you are.
Charles Wolf
1.
Take John and Sam again, before the merger. Change the facts. Sam had
his company buy the real estate in a subsidiary ($25k cash, $100k bank
debt). Assume no CCA has been taken in the Subco.
Sam
KDL
FMV $350k
ACB $25k
PUC $25k
Bank
$100k
Loan
Subco
(NCL)
Other
Business Assets
FMV $250k
Tax Cost
$165k
Real
Estate
Real Estate
FMV
ACB
Land
$400k
$75k
Building
$50k
$50k
Subco
Total
$450k
$125k
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UCC
Loan
$50k
$50k
($100k)
2.
KDL has operated at a loss (first few years). As noted, no CCA has been
taken in Subco. Sam is tired of operating Subco, and wants to wind-up
Subco into KDL.
3.
Corporate law. Voluntary or court ordered. Voluntary: commence the
wind-up (transfer assets), then dissolve the company (terminate its
existence at the Corporate Registry in Victoria). Here: the land and
building are transferred to KDL on the “wind-up” of Subco.
4.
What is the tax result? Read s.88(1)(a) and (b).

Notice s.88(1): taxable Canadian corporation, not less than 90%
shares of each Class are owned by another taxable Canadian
corporation (“Parent”), and any minority shareholders owned by
persons “at arm’s length” with that Parent. If these pre-conditions
are met, special rules apply (below).
5.
Subsection 88(2) applies to all other wind-ups of a taxable Canadian
corporation. It is a “fair market value realization event”: in other words,
fully taxable. Read s.69(5). The company is deemed to sell its property at
fair market value. The shareholder(s) have fair market value proceeds of
disposition. The rules in s.84(2) will apply (recall the deemed dividend
rules). Special rules in s.88(2) ensure the CDA of the company can be
used for the deemed dividend on a s.88(2) wind-up.
6.
Subsection 88(1) is generally a roll-over transaction, but not always.
What is disposed of? By which party? What is acquired? Take the
example above.
7.
Subco’s proceeds of disposition. Read s.88(1)(a)(iii): the “cost amount”
of the property transferred to KDL. (the Parent) is deemed to be its
proceeds of disposition. “Cost amount” is defined in s.248(1).

“depreciable property”: pro rata portion of UCC of the whole
Class (read: UCC of the Class).
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
“capital property”: ACB.

“inventory”: the cost (value for tax in s.10 is cost).

“eligible capital property”: pro rata portion of 4/3rd of the
cumulative eligible capital account.
The result is that Subco has no gain, or loss, arising when its land and
building are transferred to the Parent on the wind-up.
8.
KDL (the Parent) disposes of its shares of Subco. Read s.88(1)(b). Its
proceeds are the greater of:


9.
10.
an amount that is the lesser of:

the tax PUC of the shares, and

the total “cost amounts” of Subco’s property (s.88(1)(d)(i)),
and
the ACB of shares:
Apply this to KDL: the greater of: (i) (lesser of $25k and $125k), and (ii)
($25k) = $25k.

Notice: the Parent can have a capital gain: This can happen where
the Parent purchased the Subco shares at a low cost. The Subco
shares could have high tax PUC, and Subco could have high tax
cost amount in its assets. No gain here on our facts.

Note the deemed dividend rules in s.84 do not apply on a s.88(1)
wind-up (s.88(1)(d.1)).
The Parent’s tax cost of the Subco property acquired by it on the wind-up?
Read s.88(1)(c):
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11.

The general rule: the tax cost is equal to the proceeds of
disposition to Subco, being the tax cost amounts of the property
(s.88(1)(c)).1

Plus, you add a possible “bump amount” = an amount to be added
to Parent’s tax cost of Subco property acquired on the wind-up
(discussed below).

Apply this to KDL. The ACB of the land, and the UCC of the
building, become the tax cost to KDL.
There is a flow-through of certain other accounts, similar to what we saw
for amalgamations (CDA, RDTOH, etc.).

12.
Assume Subco had losses. We examine the use of corporate losses
in a later chapter.
Continuity rules: paragraph 88(1)(e.2) applies a number of the
amalgamation rules in subsection 87(2) to windings-up, with the necessary
changes in language. This avoids having to repeat rules that give identical
results.
The Bump
13.
Consider the s.88(1)(d) bump. Purpose: the Parent may have previously
bought Subco at a time when the fair market value of Subco’s capital
property may have exceeded its tax cost. The “bump” preserves the ACB
in the share purchase price to a limited extent.
14.
Take John and Sam again – but change the facts. John wants to buy-out
Sam.
1
Notice the recapture continuity rule in s.88(1)(f).
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Sam
John
FMV $600k
ACB $100k
PUC $100k
KDL
John’s Drugs
Business
Assets
Real
Estate
Call it the
Pandosy St.
Property
15.
Land
Building
FMV $300k
ACB $75k
UCC
-
FMV $50k
ACB $50k
UCC $50k
FMV $250k
Tax Cost $165k

John now wants to buy Sam out for $600k. He does not need or
want to keep Sam’s real estate. Sam will only sell shares of KDL
(QSBC share capital gains exemption in Chapter 13). He will not
cause KDL to sell its assets. John’s Drugs can borrow $600k. John
does not have the money personally. But the bank expects John’s
Drugs to sell Sam’s real estate to pay down the loan by $300k after
John’s Drugs has acquired it.

Thus, the proposal is for John’s Drugs to buy shares of KDL for
$600k. John’s Drugs will wind-up KDL. John’s Drugs will then
sell the Pandosy St. property for $300k. What are the tax
consequences of this to John’s Drugs?
First step: John’s Drugs buys Sam’s KDL shares for $600k cash:
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John
Sam
Bank
$600k
John’s Drugs
Sale
FMV $600k
ACB $600k (purchase price paid)
PUC $100k
KDL
Business
Assets
Land
The Pandosy
St. Property

16.
FMV $300k
ACB $75k
UCC
-
FMV $250k
Tax Cost $165k
Building
FMV $50k
ACB $50k
UCC $50k
John now wants to sell the Pandosy St. property. Look at the
accrued gain ($225k) on the land. This cannot be sold without tax,
right? But John’s Drugs paid $600k for the shares. Part of this
purchase cost represents the indirect cost of buying the land
($300k). How does John’s Drugs get credit for that purchase cost?
John’s Drugs winds-up KDL. No gain arises in KDL. (s.88(1)(a)). No
gain arises to John’s Drugs (s.88(1)(b)). What about John’s Drugs’ tax
cost of the property received on wind-up?
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John
Bank
debt
$600k
John’s Drugs
Land
Building
FMV $300k
ACB ?
Business
Assets
FMV $250k
Tax Cost $165k
FMV $50k
UCC $50k

We know the ACB of land to KDL is $75k. If this becomes John’s
Drugs’ cost, then the land cannot be sold without tax, right?

Read s.88(1)(c) as before: PLUS an amount determined under
s.88(1)(d) in respect of “capital property” of Subco other than
“ineligible property”.

“capital property” here includes the land and assume, for the
moment, it is not “ineligible” property.

What is the “amount” under s.88(1)(d)?

Paragraph 88(1)(d) “amount” is such portion of the amount, if any,
by which the total in s.88(1)(b)(ii) (i.e., the ACB of the Parent’s
shares of Subco – here, the ACB of John’s Drugs’ shares of KDL:
$600k) exceeds the total of: (i) and (i.1).

(i) and (i.1) represent: (i) Subco’s total tax cost amount of all its
properties less its debt, and (i.1) dividends previously paid to
Parent.

in this case, the tax cost amounts of KDL assets are $165k + $50k
+ $75k. KDL has no debts and assume no dividends were paid to
Parent. Thus, the total of (i) and (i.1) is $290k.
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17.

Thus, the s.88(1)(d) bump is the amount that Parent’s ACB of the
Subco shares ($600k) exceeds $290k, or $310k. Notice what this
number reflects: the gain in Subco’s assets before the wind-up.

Also read s.88(1)(d)(ii): in no case can you bump the Parent’s cost
of any particular property up to more than the fair market value of
that property at the time of acquisition of control of the Subco by
Parent. In our case, the land’s fair market value was $300k.
So, work this through. What is John’s Drugs’ (Parent) cost of the land
acquired on wind-up of KDL (Subco)?

s.88(1)(c): the basic amount is $75k (Subco’s tax cost).

PLUS:

the “88(1)(d) bump” amount: such portion of $310k, up to the fair
market value of the land at the time Parent acquired control of
Subco.

That is, you can only “bump” Parent’s tax cost of the land by
$225k from its s.88(1)(c) cost of $75k – up to the $300k FMV of
the land.

Thus, John’s Drugs’ total cost of the land, after the wind-up, is
$75k “plus” $225k (designated in tax return as the s.88(1)(d)
bump): $300k total tax cost after the wind-up.
18.
John’s Drugs then sells the land for $300k. No gain arises. Sells the
building ($50k) with the land, no recapture or gain on our facts. John’s
Drugs uses the $350k proceeds to pay back the bank loan to that extent.
19.
Recall the “s.88(1)(d) bump” gives credit for the ACB in shares to the
extent it reflects the underlying gain in capital property of the Subco –
provided that property is not “ineligible property”.
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20.
What is “ineligible property”? Read s.88(1)(c): the definition is buried in
the mid-amble:


21.
Focus on s.88(1)(c)(iii): “depreciable property”, i.e., you cannot
“bump” depreciable property.
ss.88(1)(c)(iv) to (vi), other types of “ineligible” property
(important, beyond the scope of this course).
Why the exclusion for depreciable property?
depreciable.
Share cost is not
Vertical Amalgamations
22.
Consider:
Shareholder
Parent
100%
Subco
23.

They simply amalgamate, rather than wind-up Subco into Parent.

Most corporate statutes allow this - no new shares are issued in
Parent to the shareholder.
Is this an “amalgamation”? Read s.87(1)(c): “all shareholders of a
predecessor receive shares of the new corporation because of the merger”.

Has this condition been met? No. The shareholder of the Parent
does not receive any new shares.

However, these are deemed to be shares of the new amalgamated
corporation received by the shareholder (s.87(1.1)). Thus, a
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vertical amalgamation qualifies for the roll-over rules in s.87.
Note that a horizontal amalgamation of corporations owned by
individuals will not qualify, an historical anomaly that is due to the
form of the amalgamation rules in the CBCA.
24.
An old problem: if you did an amalgamation and not a wind-up, you
could not access the s.88(1)(d) bump, if you had excess ACB on the
Parent’s shares and had qualifying capital property in Subco.

This was fixed: read s.87(11).

The cost of capital property to Amalco is the cost that would have
been available to Parent if s.88(1) had applied (i.e., liquidation)
instead. So the bump is available for a vertical amalgamation, by
reason of s.87(11).
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