In 2012-0461741E5 (released last week), the Rulings Directorate applied s. 88(1)(d)(ii) to restrict a Canadian parent company’s (Canco’s) ability to increase the tax cost of capital property Canco received on the liquidation of its Canadian subsidiary (Target). The situation involved the following.
- Target owned shares of a public company (Pubco) when Canco acquired Target. At that time, the Pubco shares had an inherent gain, reflected in the price paid by Canco for the shares of Target.
- Target later acquired additional Pubco shares at a price greater than Target’s historical tax cost of its Pubco shares.
- Canco liquidated Target and sought to increase (bump) the tax cost of the Pubco shares in Canco’s hands to the maximum extent possible under the rules in s. 88(1)(d). (The latter can become quite complex in many cases.)
Rulings confirmed that as a result of the cost-averaging rule in s. 47, Target’s tax cost of each Pubco share was higher immediately before the liquidation than Target’s historical tax cost of each Pubco share (when Target was acquired). Accordingly, under s. 88(1)(d)(ii), the bump was limited to the difference between (1) the value of the Pubco shares when Target was acquired and (2) the tax cost of those Pubco shares immediately before the liquidation. More specifically, the amount in (2) was the greater of the tax cost of the Pubco shares when Canco acquired Target and the tax cost of the Pubco shares immediately before the liquidation. There is no ambiguity in s. 88(1)(d)(ii); the provision must simply be applied.