Tax implications liquidating corporation

A dissolution can be achieved in various fashions, including voluntarily, involuntarily, and by means of court order.

However, because of the unique complications involved in applying subsection 88(1) to involuntary or court order dissolutions, this paper will generally assume that the subsidiary is being wound up under the voluntary dissolution provisions of the provides for voluntary dissolution in three sets of circumstances.

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Section 211 of the is a more complex provision which provides that either the directors or the shareholders may submit at their annual meeting a proposal for the voluntary liquidation and dissolution of the corporation.

Once the proposal is approved by a special resolution of the shareholders of each class of shares, a statement of intent to dissolve the corporation is sent to the Director of the Corporations Branch.

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.

One of the most significant forms of corporate reorganization safeguarded by these rollovers is the "winding-up" or liquidation of a subsidiary corporation into its parent company.

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.

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.

The following analysis of the tax implications of subsection 88(1) is organized into seven parts: eligibility for rollover, general rules, shares of the subsidiary, property of the subsidiary, liabilities of the subsidiary, losses of the subsidiary, and minority shareholders.

All the corporation's assets and liabilities must have been distributed or assumed by the shareholders, excluding those that cannot be transferred as a result of the litigation.

As well, the outstanding litigation must be the only reason for the delay in obtaining a formal dissolution.

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.

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