ARCHIVED - Meaning of "Winding-up"

What the "Archived Content" notice means for interpretation bulletins

NO: IT-126R2

DATE: March 20, 1995

SUBJECT: INCOME TAX ACT
Meaning of "Winding-up"

REFERENCE: Subsections 84(2) and 88(1) (also sections 66.6 and 66.7, subsection 88(2) and the definition of "disposition" in section 54)

Application

This Bulletin replaces and cancels Interpretation Bulletin IT-126R dated February 3, 1975.

Summary

"Winding-up" is used in connection with the winding-up of a business and the winding-up of a corporation's existence. While a business that a corporation conducts may be wound up without affecting the corporation's existence, the winding-up of a corporation brings to an end both the existence of the corporation and that of its business. Subsection 84(2) applies on either the winding-up of a business or the winding-up of a corporation while subsections 88(1) or (2) only apply where the appropriate corporate procedures are followed to bring a corporation's existence to an end. However, it is not necessary for the corporation to have been dissolved before the end of a year to have subsection 88(1) or (2) apply in the year.

Discussion and Interpretation

1. In the Act the term "winding-up" is used to refer to both the winding-up of a corporation's business (see 2 below) and the winding-up of the corporation itself, that is, dissolution (see 3 to 5 below).

2. Subsection 84(2) applies to the distribution by, or appropriation of funds or property of, a corporation resident in Canada to, or for the benefit of, its shareholders where any positive steps are taken towards the winding-up, discontinuance or reorganization of its business. Thus circumstances falling short of the dissolution of a corporation may result in the application of the subsection. However, since the business of a corporation depends upon its corporate existence, where any positive step is taken toward the formal dissolution of the corporation, it is considered to be winding-up or discontinuing its business as well. Pursuant to paragraph 88(1)(d.1), subsection 84(2) does not apply where the rules provided in subsection 88(1) apply; however, subsection 84(2) will generally apply on the winding-up of a corporation that is subject to the provisions of subsection 88(2).

3. Subsection 88(1) applies where a "taxable Canadian corporation", as defined in subsection 89(1), has been wound up. Among the conditions for the application of subsection 88(1) is that at least 90% of the issued shares of each class of the capital stock of the corporation are owned by a taxable Canadian corporation immediately before the winding-up. Subsection 88(2) applies where a "Canadian corporation", as defined in subsection 89(1), has been wound up and the provisions of subsection 88(1) are not applicable. For the purposes of these subsections, a corporation is considered to have been "wound up"

(a) where it has followed the procedures for winding-up and dissolution provided by the appropriate federal or provincial companies act or winding-up act, or

(b) where it has carried out a winding-up, other than by means of the statutory procedures contemplated in (a) above, and has been dissolved under the provisions of its incorporating statute.

For additional information on subsections 88(1) and (2), see the current versions of IT-488, Winding-up of 90%-Owned Taxable Canadian Corporations and IT-149, Winding-up Dividend, respectively. For comments on the situation where there has been an unintentional winding-up of a corporation, see the current version of IT-444, Corporations - Involuntary Dissolutions.

4. Generally, the dissolution of a corporation is authorized by the applicable federal or provincial statute only where it can be shown that

(a) the debts, obligations or liabilities of the corporation have been extinguished or provided for, or the creditors have given consent to the dissolution and

(b) after the interests of all creditors have been satisfied, all remaining property of the corporation has been distributed among its shareholders.

5. Where the formal dissolution of a corporation is not complete but there is substantial evidence that the corporation will be dissolved within a short period of time, for the purpose of subsections 88(1) and (2) the corporation is considered to have been wound up. Evidence confirming the proposed dissolution would generally require proof that the requirements for dissolution, as outlined in 4 above, have been met. Where a corporation is not dissolved in a particular year because of the existence of outstanding litigation the Department will accept that subsection 88(1) or 88(2) applies in that year where:

(a) all of the corporation's assets and liabilities (other than its rights and obligations under the outstanding lawsuits that cannot be transferred without prejudice to the corporation) have been distributed to or assumed by the corporation's shareholders;

(b) the sole reason for the delay in obtaining the formal dissolution is the existence of the outstanding litigation;

(c) the corporation does not own or acquire any property or carry on any activity or undertaking (other than such activity as may be required to pursue the litigation) after the distribution of assets and before the formal dissolution; and

(d) the corporation is formally dissolved within a reasonable time following the resolution of the outstanding litigation.

6. Section 66.6 and several of the subsections in section 66.7 describe the acquisition of resource properties by "purchase, amalgamation, merger, winding-up or otherwise". "Winding-up" in this context means the winding-up of the corporation (as discussed in 3 to 5 above) rather than the winding-up of the business of the corporation (as discussed in 2 above).

7. Pursuant to paragraph 88(1)(a), proceeds of disposition of property other than Canadian or foreign resource property are determined at the point in time "immediately before the winding-up". However, the actual distribution of such properties may take place at various times throughout the winding-up period. To minimize the problems that could ensue from the difference in timing, "immediately before the winding-up" for a particular disposition will be considered to mean immediately before that particular disposition.

8. The phrase "on the winding-up", as used in subsection 88(1) for a corporation or in subsection 84(2) for a corporation's business, means that period of time during which the winding-up takes place. In the case of the winding-up of a corporation the period ends at dissolution. The phrase "in the course of winding-up" in subsection 88(2) refers to the same period of time.

9. Pursuant to subparagraph (b)(i) of the definition of "disposition" in section 54, there is a disposition of the shares of a corporation when the shares are cancelled. It is the Department's position that in the case of a corporation being wound up, the shares are cancelled when the certificate of dissolution is issued. In addition, even though the formal dissolution of a corporation has not occurred, the Department will consider that there is a disposition of the shares when subsection 88(1) or (2) applies to the corporation in the circumstances described in 5 above.

If you have any comments regarding the matters discussed in this bulletin, please send them to:

Director, Technical Publications Division
Policy and Legislation Branch
Revenue Canada
875 Heron Road
Ottawa ON K1A 0L8

Explanation of Changes for Interpretation Bulletin IT-126R2 Meaning of "Winding-up"

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.

Overview

This bulletin describes what is meant by "winding-up" in the context of subsections 84(2), 88(1) and (2). Subsection 84(2) applies on either the winding-up of a business of a corporation or the winding-up of a corporation while subsections 88(1) and (2) apply where the appropriate corporate procedures are followed to terminate a corporation's existence.

Legislative and Other Changes

No 2 has been modified to note that paragraph 88(1)(d.1) provides the legislative authority for the statement that subsection 84(2) does not apply where subsection 88(1) applies and to comment that subsection 84(2) generally applies where subsection 88(2) applies on the winding-up of a corporation.

No 3 has been modified to describe subsections 88(1) and (2) separately and to note where additional information can be found on subsections in other bulletins.

No 5 has been expanded to describe a situation where the Department will accept that subsection 88(1) or (2) will apply notwithstanding that the corporation's existence was not terminated in the year.

No 6 has been added to describe that the references to winding-up in sections 66.6 and 66.7 are references to the winding-up of the corporation's existence.

No 7 (former No 6) has been revised to observe that the distribution of property may take place at various times during the winding-up period and to relate that to the determination of proceeds of disposition.

No 9 has been added to comment on situations when the Department accepts that there has been a disposition of the shares of a corporation that is being wound up.

The former No 4(c) has been deleted as the federal and most of the provincial corporations acts permit the dissolution of a corporation notwithstanding that it is involved in legal proceedings.

Throughout the bulletin we have changed some of the wording to improve clarity.