By: Eric Lockwood
Two posts back, I discussed some of the implications the August proposals would have for share-for-share rollover transactions and in the last post I discussed the proposed changes to certain of the rules governing offshore liquidations of foreign affiliates.
Today’s topic is a significant change to the “relevant cost base” (RCB) definition.
Under the August proposal, the relevant cost base definition is a key component of every offshore foreign affiliate reorganization provision: subsection 88(3), paragraphs 95(2)(c), (d), (d.1) and (e). Broadly, and subject to a number of details I am glossing over, the RCB is the amount at which a property is considered disposed of and/or acquired under these reorganization provisions. For example, in a share-for-share transaction governed under paragraph 95(2)(c), shares of the transferred affiliate are deemed to be disposed of by the transferor and acquired by the transferee at RCB.
Historically, the RCB has been the adjusted cost base (ACB) of a property or such greater amount as a taxpayer elects up to the property’s fair market value. The August proposals will change the RCB definition in a number of ways, but the wrinkle I wish to discuss is this: in determining the RCB a taxpayer must now take into account amounts that would be carved out under paragraph 95(2)(f.1), i.e., “built-in” gains or losses that accrued before the entity that holds the transferred property became a foreign affiliate.
Consider a share-for share example again. Suppose Canco acquired FA twenty years ago at a time it held FA2. In 2011, FA transfers the shares of FA2 to FA3 solely for shares of FA3. In order to determine the amount at which the shares of FA2 are considered transferred (i.e., the RCB), Canco must determine what FA’s gain or loss would be on the FA2 shares if they were disposed of at fair market value and then determine how much of that gain or loss accrued before Canco acquired FA. RCB is increased to the extent of carved out gains and decreased for carved out losses.
That’s asking a lot.
For a simple share-for-share transaction, taxpayers are going to need an estimate of the current fair market value of the transferred shares and the fair market value and ACB back when the affiliate that holds the transferred property became a foreign affiliate. These new requirements also apply to mergers and liquidations. And they also apply to any property, not just capital property.
Questions? Thoughts? Leave a comment below.