23 June 1999 External T.I. 9909265 - SUBSECTION 87(11) DESIGNATION - WHEN FILED87(11)

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.

Principal Issues: when designation made under subsection 87(11) and paragraph 88(1)(d) should be filed

Position: in return of amalgamated entity for its first taxation year

Reasons: intent as indicated in coming-into-force provisions

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Attention: XXXXXXXXXX

June 23, 1999

Dear Sirs:

Re: Subsection 87(11) of the Income Tax Act (the "Act")

This is in reply to your letter of March 25, 1999 in which you requested a technical interpretation concerning the timing of a designation made pursuant to subsection 87(11) and paragraph 88(1)(d) of the Act in the case of a vertical amalgamation.

You believe that there are two possible interpretations with regard to this issue:

• that the designation must be made in the return of the “parent” predecessor corporation for the taxation year ending upon the amalgamation; or
• that the designation must be made by the amalgamated entity in its return for its first taxation year.

Our comments

Paragraph 87(11)(b) provides that where there has been an amalgamation of a corporation (i.e. the "parent") and one or more of its subsidiary wholly-owned corporations (i.e. the "subsidiary"), "the cost to the new corporation of each capital property of the subsidiary acquired on the amalgamation is deemed to be the amount that would have been the cost to the parent of the property if the property had been distributed at that time to the parent on a winding-up of the subsidiary and subsections 88(1) and (1.7) had applied to the winding-up."

In this regard, paragraph 88(1)(d) provides that an amount must be “designated by the parent ...... in its return of income under this Part for its taxation year in which the subsidiary was so wound up”. In the context of a vertical amalgamation the timing of the designation is not clearly specified; however, we believe that it should be made by the amalgamated entity in its tax return for its first taxation year. That the legislator intended this result is evidenced by the coming-into-force provisions for subsection 87(11) which are set out in subsection 117(26) of S.C. 1998, c. 19 which provide that “...for the purpose of paragraph 87(11)(b) of the Act, as enacted by subsection (13), any designation by a new corporation of an amount under paragraph 88(1)(d) of the Act that is filed with the Minister of National Revenue before the end of the third month after the month in which this Act is assented to is deemed to have been made by the new corporation in its return of income under Part I of the Act for its first taxation year.”.

We trust you will find our comments helpful.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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