Tax implications liquidating corporation
To prevent such injustices, the federal government introduced the concept of rollovers to the , provisions which allow taxpayers in controlled situations to dispose of property without recognizing any immediate gain or loss from the disposition.Instead, the property is rolled over at its cost amount to the transferee, and the gain or loss deferred until the property is subsequently resold in an unprotected transaction.
Since the parent typically transfers property to the baby upon its creation, the parent would generally expect that upon its dissolution the subsidiary would be allowed to transfer its remaining property back to the parent without significant tax implications.considers the commencement of these procedures to occur with the passing of a special shareholders' resolution to that effect.Therefore, the 90 percent threshold test should be applied immediately prior to the passing of such a resolution.Such a result may be both punitive and unjust, however, particularly in circumstances where the transferor and the transferee are effectively the same party, as in the example of when a sole proprietor creates a corporation and subsequently transfers his/her assets to it.In such an instance, since the change in business structure would merely constitute a legal rather than a fundamental economic change in ownership, a deemed disposition which created serious tax consequences would be inappropriate.Based on this interpretation of the timing issue, however, it is conceivable that a parent corporation could own 90 percent of a subsidiary's shares immediately prior to the commencement of the winding-up, and then reduce its level of ownership below 90%, without disqualifying itself from the application of subsection 88(1).
This is an important element since it effectively means that individual shareholders will not be able to trigger subsection 88(1) by combining their shareholdings together in order to reach the 90 percent threshold.
On the other hand, if it does have property or liabilities, then it may be dissolved by special resolution of the shareholders of each of its classes of issued shares, so long as it discharges its liabilities prior to dissolution.
The special shareholders' resolution required above must usually be approved by two-thirds of the shareholders of a particular class, and must resolve that: the company be dissolved, its liabilities and obligations settled, and its property distributed to its shareholders.
Yet, regardless of differences in motivation and mechanics, corporate reorganizations are almost always characterized by a transfer of property between taxpayers, a transfer which is generally caught by the deemed disposition rule of the This principle holds that where a taxpayer disposes of property to a person with whom he or she does not deal at arm's length, the taxpayer is deemed to have received proceeds of disposition equal to the fair market value of the property.
Therefore, the application of the deemed disposition rule to a reorganization of business affairs has the potential to generate taxable gains.
Regardless of the exact route taken by a corporation to achieve voluntary dissolution, once the prescribed procedure has been completed, including the filing of articles of dissolution with the Director, the Director is obligated to send to it a certificate of dissolution.