I am currently in the process of preparing the final tax return for an operating company that is closing down. The operating company, wholly owned by the parent company, received funds from the parent company to support its operations.
Unfortunately, the business did not perform well, resulting in losses. While the operating company has repaid whatever balance it could to the parent company, a significant portion of that amount remains outstanding. Operating company is now resolved and need to file final tax return.
The amount received from the parent company was categorized as a non-current liability in the operating company’s books and reported under account “3262 - Due to corporate shareholder(s) / due to parent company” on the GIFI balance sheet for the last two years’ tax returns.
I am seeking guidance on the appropriate treatment of this outstanding amount for the final tax return, both on the company’s books and on the GIFI balance sheet.
Do I need to bring the balance of non-current liability account to zero and add it to gains, and then use prior year losses to offset against that gain.
or
That amount can stay in non-current liability account on the books and in “3262 - Due to corporate shareholder(s) / due to parent company” on GIFI - balance sheet for final tax return?
If the losses are significant and could be beneficial to the parent company in future perhaps a subsection 87(1.1) short form vertical amalgamation could be of some value. It would get rid of those nasty loan receivable / loan payable balances to boot.
For anyone who is interested, this is how I handled it, please feel free to provide a feedback if you think the approach can be further refined or has any issue.
I created a shareholder contribution account, which is an equity account. Then a journal entry was made to bring the balance of non-current liability account down to zero and increase the balance of shareholder account with same amount.
On final tax return GIFI will be updated to reflect this by removing the unpaid amount from “3262 - Due to corporate shareholder(s) / due to parent company” and reporting it on “3540 Contributed and other surplus”.
The reasoning behind this move is, even though the initial transaction was classified as a loan on both companies’ books, it can be reclassified as a capital contribution during the finalization process.
Just thinking out loud, but if the parent company handles this as a business investment loss, wouldn’t they lose a claim on half of the loss by virtue of paragraph 38(c)?
As I indicated in my first post a vertical amalgamation between the two corporations will get rid of the inter-company loans while preserving the loss carry-forwards for use by the parent company. A short form amalgamation is not overly complex but will require Articles of Amalgamation to be filed. Whether it is worth it or not depends on the value of the losses and the likelihood of them being used by the parent company.
Can this be filled even though operating company is now closed?
I am reading in to it further and looks like parent company cannot even claim it as business loss since both parent and operating company are dealing at non-arms length. So treating this loss as “Business Investment Loss” may not be entirely accurate.
Please take a look at section “Disposition of debt owed by a non-arm’s-length corporation” 1.14 on this link.
I am looking at P/L statement of parent company for current year and “Business Investment Loss” shows up under operating expense with full amount. This amount was classified as Non-current Asset under account name “Loan to Operating Company” and then a manual journal entry is made to bring down the balance of this account to zero and a corresponding entry is made in account “Business Investment Loss” which is an expense account. This entry is made by CPA accountant of Parent company and I am in doubt about this entry being correct.
As long as the operating company has not been dissolved (ie Articles of Dissolution) then as far as CRA is concerned the corporation still exists. It can even file inactive year ends until formally dissolved.
There is a difference between accounting entries on the financial statements and the T2 return. Losses on disposal of assets get added back as income on the T2 Schedule 1 and the allowable portion of those losses is deducted on schedule 1.
If the accountant prepared the financial statements of the parent but you are preparing the T2 return for that parent perhaps he punted the issue over to you …
Operating company is actually dissolved now and Article of Dissolution is in place. Looks like that vertical amalgamation is no longer an option?
Actually accountant handles the financial statement and tax return both for parent company.
I have been handling it for operating company myself and planned to take accountant’s services if business venture worked out. Which it did not in the end.
I did contact my accountant for consultation about operating company and I hope he helps me with it and clarifies some things for me. I am just worried he would say you been taking care of it on your own, now deal with it. I have been with him for over 10 years now and I am counting on him to not tell me that, but the fear is always there. Hence I am brain storming here.
Thanks for your responses it gave me a lot to think about.
Are you saying this in reference to entries done by accountant?
In entire honesty I initially thought money given by parent to child will get added to income on final tax return for child and will get added as bad debt expense for parent. But it seems to be getting a lot more complicated, with that ABIL, and BIL getting involved.
In the end money can’t just disappear it had to be counted as expense/loss somewhere.
my accountant is telling me to book a journal entry clearing out this balance in non-current liability to the account named “Other Revenue”. Meaning it will get added to income of operating company in the end. I could use previous years losses to balance it out so there will be no tax to pay at operating company.
Is what he suggested a right approach for operating company?
I asked my accountant about treating this loss as business investment loss at holding company. He says
“Yes, that was the idea, but I was only focused on the accounting treatment.
We will deal with the tax treatment when filing the corporate taxes later this year.”
I am not quite sure what he meant by it.
I wonder can’t parent company claim this amount simply as bad debt expense?
Since you’re dissolving the subsidiary, the parent will infact expense the debt … that is the point of offsetting the intercompany with revenue recognition. Section 80 doesn’t apply here, as this isn’t an interest bearing commercial obligation, and you have non-arms length parties involved all else given. Simply write it down on one end, and recognize it on the other.
You’re at the point where it’s too late to scheme anything further. The accountant is right, and it’s a worry for another time come tax time. Just move forward with the dissolution as such, don’t overthink it. At the end of the day, you aren’t handling the parent, so if I were you, I would wash my hands of this and move on.
Will this not apply?
This deems the debt to be extinguished for nil proceeds on wind up of sub, and permits no income inclusion, and escapes the application of debt forgiveness.
As far as my understanding goes here, @ppap is not performing a wind-up of OPCO, regardless of the dissolution that was filed. Where form T2027 is required, you would have subjectivity to Subsections 80(3) - (10), where a commercial obligation is involved, and the debt is subsequently transferred by way of a distribution of property. If this was the case, the applications of Section 80 on the intercompany debt to PARENTCO would be the correct treatment, and you would elect to settle the debt just prior to your wind-up entries and avoid the applications altogether. However, this is simply a dissolution of the subsidiary, whereby both sides are washing it out to close their books.
In all practicality, the only times I’ve ever had subjectivity to Section 80 is when a company has a web of subsidiaries that borrow money from the PARENTCO, such as a mortgage investment corp, or there’s a prescribed loan from a HOLDCO beneficiary to a trust where the share structure is interconnected… that or the company is large enough to report under ASPE, where it transacts in these types of arrangements… all higher level stuff. Regardless, a commercial interest bearing obligation was involved one way or another.
