Example 5

In 2013, X Corp. fails to collect tax levied under the Tobacco Tax Act of Ontario. Interest and penalties are imposed under subsections 18.1(1) and 19(2) of that Act, respectively.

The penalty imposed under subsection 19(2)…cannot be deducted.

…[T]he interest is not precluded from deduction by paragraph 18(1)(t). Such interest may be deducted where it was made or incurred by X Corp. for the purpose of gaining or producing income from the business or property and otherwise meets the requirements for deduction under the Act.

The 87(4) exception can be illustrated by the following example.

A parent owns all of the shares of Pco, which have an aggregate adjusted cost base and fair market value of $100 and $1000, respectively. Child owns all of the shares of Cco, which have an aggregate adjusted cost base and fair market value of $500 and $1000, respectively. Pco and Cco amalgamate to form Aco, the shares of which have an aggregate fair market value of $2000. On the amalgamation, the parent is issued 50 shares of Aco with an aggregate fair market value of $500 and the child is issued 150 shares of Aco with an aggregate fair market value of $1500, such that there has been a shift of value of $500 from the parent to the child. Under paragraph 87(4)(c), the parent will be deemed to have disposed of the Pco shares for $600, being their aggregate adjusted cost base plus the gift portion of $500. Under paragraph 87(4)(e), the Aco shares received by the parent on the amalgamation will be deemed to have an aggregate adjusted cost base of $100… .

1.77

Where one predecessor corporation holds shares of another predecessor corporation, the cancellation of those shares on the amalgamation will not normally give rise to a gain or loss in the hands of the shareholder corporation.