The s. 248(1) – “disposition” – para. (n) exemption for upstream non-resident mergers is narrower than the s. 87(8) rollover

Where there is a merger of two foreign corporations whose shares are taxable Canadian property (because of an underlying Canadian real estate or resource sub), s. 87(8) may provide rollover treatment – but there still could be a share disposition giving rise to s. 116 filing and withholding requirements unless the para. (n) exception to “disposition” applies.

Para. (n) only applies to a vertical (not horizontal) merger, and might not apply to a survivor-style (absorption) merger, given that subpara. (n)(i) requires that there be a merger to “form” one corporate entity. However, the ruling practice of CRA, before the introduction of s. 87(8.2) to treat absorptive mergers as qualifying foreign mergers to form new corporations, may suggest that this is not a problem.

A non-resident shareholder group may not want the s. 87(8) rollover (or para. (n) exception) to apply to a merger, in order that losses can be used to step up basis However, it may not be clear that electing to not have s. 87(8) apply will accomplish this result given that “the Act does not have a provision to determine the tax cost of assets disposed by a merged company in the event that section 87 does not apply.” A step-up presumably would occur under general principles where the existence of a corporation holding the assets in question is terminated under an absorptive merger.

Neal Armstrong. Summaries of Gordon Zittlau, “Corporate Reorganizations Involving Taxable Canadian Property – Foreign Merger Considerations,” International Tax Planning (Federated Press), Vol. XX, No. 3, 2015, p. 1407 under s. 248(1) – “disposition” – para. (n), and s. 87(8).