We want to wind up a dormant foreign subsidiary — what comes first?
Find out what is inside it before anyone drafts the steps. A liquidation moves assets, and the reliefs that make it painless are conditional: they depend on the ownership, on the form the transaction takes, and sometimes on an election being filed. Two things have to be mapped before the first step. The surplus pools of the company being wound up, and the adjusted cost base of its shares. Those decide whether the liquidation is neutral or produces an inclusion. Settle as well what is to be paid out before dissolution, and in what order, because once the company has ceased to exist the records behind those figures become far harder to obtain.
The merger is tax-free in the other country — is it tax-free here?
Not necessarily, and that is the usual reason these transactions go wrong. Each country decides for itself whether a step is a realisation. A merger, a share exchange or a liquidation can be entirely neutral where it happens and still meet rules here that look at the same step differently. The relief on this side is not automatic either. It is conditional, and in some cases elective, which means somebody has to do something within a time limit. Confirm the treatment of every step here before the lawyers in the other country fix the completion date.
What happens to surplus when two foreign affiliates merge?
It moves, and how it moves is often the real point of the exercise. A reorganisation rearranges ownership, but it also rearranges the pools attached to each company, and those pools determine how future distributions are treated. A merger can combine pools of different character; a liquidation can push them upward. Groups usually plan these transactions on the ownership diagram alone and discover the surplus consequences afterwards. Mapping the pools before the steps costs a fraction of what it costs to work out what happened to them once the companies involved no longer exist.
Is the relief automatic or do we have to elect for it?
It varies by transaction, which is why the question has to be asked for each step rather than once for the plan as a whole. Some reliefs apply by operation of the rules wherever the conditions are met. Others are elective and need a filing, usually with a deadline tied to the transaction or to a return. A missed election is a bad failure mode, because the transaction has already happened and cannot be redone to suit. The practical answer is to prepare the list of required filings alongside the step plan rather than after completion.
Why does cost base matter when no money changes hands?
Because a reorganisation can be a disposition even where nothing is paid for anything. Where the rules treat a step as a realisation, the amount brought into income is measured against the adjusted cost base of what was given up. If that base has never been tracked — and in groups holding affiliates for many years it often has not — the calculation cannot be done, and the default outcomes are rarely the favourable ones. The base also carries forward into whatever replaces the shares, so an error at this step follows the group into every later transaction.
Can we change the order of the steps after completion?
Rarely, and never simply by agreeing to. Once the steps have happened, the consequences attach to what actually occurred, in the order it occurred. Some elections can still be made late, sometimes at a cost, but an election cannot rewrite a transaction. This is why the sequencing work is done first: which entity is liquidated before which, whether a distribution comes before or after a share exchange, and where in the sequence each election falls. The same set of surviving entities can be reached by orders of steps that produce quite different outcomes.
What is a PFIC, and why do Canadian mutual funds cause trouble for US persons?
A passive foreign investment company is a non-US company that is mostly passive by income or by assets — which describes almost every Canadian mutual fund and ETF. For a US owner the default regime taxes distributions and gains punitively with an interest charge for the years the value built up. Two elections fix it, and both need annual information the fund may not produce for you. Holding the same exposure through US-domiciled funds usually avoids the problem entirely. See PFICs and Canadian mutual funds.
What is a permanent establishment, and how easily do we create one?
A taxable presence in another country under the treaty — typically a fixed place of business such as an office, branch, factory or workshop, or a dependent agent habitually concluding contracts on your behalf. Some treaties add a services test measured in days. Purely preparatory or auxiliary activity is excluded, but that carve-out is narrower than it sounds: one senior employee working from home in the other country, with authority, has been enough. See business profits and permanent establishment.
