12 August 1994 External T.I. 9415495 - AMALGAMATION/WIND-UP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

    					5-941549
XXXXXXXXXX				Tim Bryant

August 12, 1994

Dear XXXXXXXXXX:

Re: Request for Technical Interpretation

We are writing in response to your letter of June 6, 1994 in which you have requested a technical interpretation of the income tax consequences of a winding-up under subsection 88(1) and an amalgamation under subsection 87(1) in circumstances where a subsidiary owns shares in its parent corporation.

The assumed facts in your hypothetical situation are as follows:

1.Subco is a wholly-owned subsidiary of Parentco.

2.Subco owns 25% of the shares of Parentco. Such ownership of shares is permitted under the applicable corporate law.

3.Parentco and Subco are Canadian-controlled private corporations.

Transaction A

Subco is wound up into Parentco and, as a result, the shares of Parentco owned by Subco are delivered to Parentco and they are cancelled.

It is your view that subsection 88(1) applies to the wind up such that

paragraph 88(1)(a) will deem the shares of Parentco owned by Subco to have been disposed of by Subco for proceeds equal to their cost amount. In addition, it is your view that, pursuant to subsection 84(3), Parentco will be deemed to have paid a dividend to Subco equal to the amount that the deemed proceeds of the Parentco shares, as determined under paragraph 88(1)(a), exceeds the paid-up capital of those shares.

Transaction B

Instead of winding up Subco, Parentco and Subco are amalgamated under subsection 87(1).

It is your view that there will be no deemed disposition or deemed dividend as a result of the cancellation of the shares of Parentco owned by Subco on the amalgamation.

Our Comments

Transaction A

We agree that the shares of Parentco owned by Subco that are delivered to Parentco on the winding-up will be deemed to have been disposed of by Subco, under paragraph 88(1)(a), for their cost amount to Subco. If the shares constitute capital property to Subco, such cost amount would be their adjusted cost base to Subco.

Subsection 84(3) applies where a corporation resident in Canada has redeemed, acquired or cancelled any shares of its capital stock. Under this provision, the corporation is deemed to have paid a dividend equal to the amount by which the amount paid by the corporation on the redemption, acquisition or cancellation of the shares exceeds the paid-up capital of those shares. In this case, Parentco has not paid any amount to Subco on the cancellation of its shares and therefore there is no amount to which subsection 84(3) would apply.

Transaction B

If, under the relevant corporate law, the shares of Parentco owned by Subco are indeed cancelled by Parentco on the amalgamation1, the shares would be considered to have been disposed of by Subco by virtue of clause 54(c)(ii)(A). Subsection 84(9) provides that where a shareholder of a corporation has disposed of a share of the capital stock of the corporation as a result of the cancellation of the share by the corporation, the shareholder is deemed to have disposed of the share to the corporation. Since the shares of Parentco are cancelled for no proceeds and Subco and Parentco are not at arm's length, paragraph 69(1)(b) would ordinarily then apply to deem Subco to have received proceeds of disposition for the Parentco shares equal to their fair market value.

However, notwithstanding the above, paragraph 42 of IT-474R provides that where one predecessor corporation holds shares of another predecessor corporation, the cancellation of those shares on the amalgamation will not give rise to a gain or loss in the hands of the former corporation.

We also agree that there will be no deemed dividend, under subsection 84(3), as no amount has been paid by Parentco on the cancellation of its shares held by Subco.

The foregoing comments are given in accordance with the practice of providing non-binding opinions referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch

¹ For example, subsection 272(3) of the B.C. Company Act states, "Where shares of one of the amalgamating companies are held by, or on behalf of, another of the amalgamating companies, the amalgamation agreement shall provide for the cancellation of those shares without any repayment of capital in respect of them, and no provision shall be made in the amalgamation agreement for the exchange of those shares."

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