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Federal Tax - Corporate Wind-Up. Canada v. Quebecor Inc.
In Canada v. Quebecor Inc. (Fed CA, 2025) the Federal Court of Appeal dismisses a Crown appeal, this brought against a ruling where "the Crown, as representative of the Minister, had failed to discharge its burden of establishing that the transactions in question were abusive".
Here the court considers statutory law "applicable to the winding-up of Canadian business corporations", here in an income tax context:B. Scheme applicable to the winding-up of Canadian corporations
[7] The scheme for winding-up Canadian corporations actually comprises two sub-schemes: that governed by subsection 88(1) [SS: ITA] and that to which subsection 88(1) does not apply.
(1) Tax-free winding-up sub-scheme governed by subsection 88(1)
[8] Subsection 88(1) applies when three conditions are met: (1) a subsidiary has been wound up; (2) before the winding-up, not less than 90% of the issued shares of each class of the capital stock of the subsidiary were owned by another taxable Canadian corporation—the "“parent”"; and (3) all of the shares of the subsidiary that were not owned by the parent were owned by persons with whom the parent was dealing at arm’s length.
[9] When these three conditions are met, the winding-up is "“tax free”" for both the subsidiary and the parent. Metaphorically speaking, the subsidiary disappears and the parent takes its place. This happens because property distributed to the parent is deemed to have been disposed of by the subsidiary for proceeds of disposition equal to the cost amount to the subsidiary of that property, and this cost has become the cost to the parent of the property: paragraphs 88(1)(a) and (c). Accordingly, there is neither gain nor loss for the subsidiary. Moreover, the shares in the subsidiary that the parent owned are generally deemed to have been disposed of at cost, with the consequence that there is neither gain nor loss for the parent: paragraph 88(1)(b).
(2) Taxable winding-up sub-scheme not governed by subsection 88(1)
[10] When subsection 88(1) does not apply, the winding-up is governed by several provisions of the Act and produces tax consequences. These reasons will refer to this winding-up as a "“taxable winding-up”".
[11] In such situations, the wound-up corporation is deemed to have disposed of its property for proceeds equal to its fair market value: paragraph 69(5)(a). It therefore realizes a capital gain or capital loss depending on the relationship between the fair market value and the cost of the property it distributes to its shareholders. The shareholders to whom the wound-up corporation distributes its property are deemed to have acquired the property at its fair market value: paragraph 69(5)(b).
[12] An important fact: If the wound-up corporation is affiliated to the shareholder or shareholders to whom it distributes its property and this distribution gives rise to a capital loss, the stop-loss rule in subsection 40(3.4) discussed above does not apply: paragraph 69(5)(d). The wound-up corporation can therefore deduct the loss from the amount of a capital gain realized during its last taxation year or during the three taxation years preceding, even if the property remains in the affiliated group: subparagraph 3(b)(ii) and paragraph 111(1)(b).
[13] As for shareholders who owned shares in a corporation that undergoes a taxable winding‑up, they are deemed to have received a dividend equal to the amount by which the value of the funds or property distributed to them exceeds the amount of the paid-up capital of their shares, the paid-up capital generally corresponding to the amount paid when the shares were issued: subsections 84(2) and 89(1).
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