Contrary intent re pluralization of words (p. 398)
The CRA claimed [in 2017-073715117] that subparagraph 40(3.5)(c)(i) can apply to a winding up of a corporation with multiple shareholders… A contrary intention [for purposes of ss. 33(2) and 3(1) of the Interpretation Act] need not be clear or unambiguous, or expressly stated in the words of the provision, as long as it can be discerned from a textual, contextual, and purposive analysis of the provisions. [fn 43: See Canada (Wheat Board) v. Canada (Attorney General), 2007 FC 807; aff'd [2008] FCJ no. 392 (CA); Bank of Montreal v. Gratton, 1987 CanLII 2436 (BCCA); and Sheldon Inwentash and Lynn Factor Charitable Foundation v. Canada, 2012 FCA 136. among others.]
Interpretation of "merger or combination" (pp. 391, 394, 396)
The CRA's interpretation of subparagraph 40(3.5)(c)(i) [in 2017-073715117] is based heavily on its interpretation of certain words in the provision—in particular, that the words "merger or combination" can include a winding up, and that "the corporation formed" on a merger combination can--refer to a shareholder of a woundup corporation. …
[A]ll three Terms—"winding up, '' “dissolution," and "liquidation"—are generally understood to refer to the same process, through which a corporation transfers its assets and ceases to exist….
[I]n the French version of subparagraph 40(3.5)(c)(i), the words "fusion" and “combinaison" are used in place of "merger" and "combination." In Quebec corporate law, the term "fusion" appears to be used as the French equivalent of the English word “amalgamation. … [I]t suggests that the word "merger" in subparagraph 40(3.5)(c)(i) (and, by extension, the word "fusion" as it was used by the court in Black & Decker) more appropriately refers to amalgamations (and similar foreign reorganizations), rather than having the broader connotations suggested by the CRA.
Interpretation of "formed" (pp. 396 – 398)
[T]he word “formed” appears to refer to a corporation that comes into existence as a result of the merger or combination, such as a corporation formed on an amalgamation. … [T]he Tax Court of Canada appears to have interpreted the word “formation" in a similar manner in … 1591141 Alberta …, 2014 TCC 2 . …
[E]ven if a winding up … could be considered a "merger" or a "combination" under a broad operational definition of those terms, it could not be a merger or combination described in subparagraph 40(3.5)(c)(i) because it does not result in the formation of a corporation… .
The CRA claimed [in 2017-073715117] that subparagraph 40(3.5)(c)(i) can apply to a winding up of a corporation with multiple shareholders… .
[A] transaction that resulted in the formation of multiple entities would not be a merger or combination; it would be closer to a spinoff or division transaction (such as the transactions described in section 86.1 and subsection 15(1.5)). The Interpretation Act [s. 33(2)] cannot alter the fundamental meshing of subparagraph 40(3.5)(c)(i) and the words used in this provision.
Context to merger or combination concept (pp. 399 – 402)
[T]he CRA noted that certain provisions in the Act that refer to mergers or combinations expressly exclude transactions that involve the distribution of property upon the winding up of a corporation. These provisions include … subsections 87(1) and (8.1) … as well as…subsection 87(8.2)… .
… The exclusion of windups in the "amalgamation" and "foreign merger" definitions does not mean that every winding up would otherwise be considered a merger or combination….
[A]bsorptive mergers…involve elements of both amalgamations and windups. …
[A] plan of arrangement may be used to achieve a result similar to an absorptive merger… .
[T]he word "unification" is not used in the French version of paragraph 40(3.5)(c). This suggests that the word “merger" in subparagraph 40(3.5)(c)(i) is intended to refer to amalgamations (and possibly to similar foreign transactions), or at least that the word "merger" is used somewhat interchangeably with "amalgamation" in this context, rather than having a broader meaning.
… [S]ubsection 90(6.11)…indicates that windups and mergers are distinct types of corporate reorganizations… .
Likely limitation of merger concept to amalgamations or near equivalents (pp. 403-404)
[I]f [CRA’s] interpretation were correct, subparagraph 40(3.5)(c)(i) would apply to all of the transactions described in subparagraphs 40(3.5)(c)(ii) and (iii)… .
… The CRA’s interpretation would therefore render subparagraphs 40(3.5)(c)(ii) and (iii) redundant… .
… Interpreting subparagraph 40(3.5)(c)(i) in its statutory context therefore indicates that the provision applies to Canadian amalgamations and similar foreign reorganizations, in which two or more companies merge to form a single corporate entity (such as foreign mergers described in subsection 87(8.1).) …
[T]here is a simpler explanation for the explicit exclusion of transactions described in paragraph 40(3.5)(b): these transactions include amalgamations and foreign mergers. For example, if subsection 40(3.4) applies to a disposition of shares of a particular corporation, and those shares are subsequently exchanged for new shares on an amalgamation of the particular corporation, subsection 87(4) may apply to the share exchange. In these circumstances, paragraph 40(3.5)(b) will deem the new shares to be identical to the old shares. But for the exclusion of paragraph 40(3.5)(b) transactions in subparagraph 40(3.5)(c)(i), this provision would also apply (to deem the corporation formed on the amalgamation to own the old shares while it is affiliated with the transferor). The exclusion therefore plays a clear role in the overall context of the stop-loss rules: it prevents two different continuity rules from applying to the same amalgamation (or foreign merger), producing different (and potentially conflicting) results. It does not mean that subparagraph 40(3.5)(c)(i) would otherwise apply to all share exchanges.
Explanatory Notes (pp. 405-406)
Paragraph 49(3.5)(c) was amended to take on its current form in 2013… .
[T]he technical notes do not explain why the word “combination” was added to subparagraph 40(3.5)(c)(i). … [T]his change may have been intended to address foreign reorganizations that are similar to Canadian amalgamations. There is no indication that subparagraph 40(3.5)(c)(i) was meant to address windups. … .
Example of uncertainties generated by CRA approach (pp. 387-388, 408)
BB Inc. a corporation resident in Canada…is the sole shareholder of BB Stars and BB Stripes, both of which are corporations resident in the United States…
BB Inc. and BB Stripes are equal (50 percent) shareholders of BB Freedom…also a corporation resident in the United States…
BB Inc. transfers its 50 percent interest in BB Freedom to BB Stars…BB Inc. has a loss on the transfer, which is suspended by subsection 40(3.4).
BB Freedom files articles of dissolution and makes liquidating distributions to both BB Stars and BB Stripes.
Although the liquidation and dissolution or BB freedom appears subparagraph 40(3.5)(c)(iii) would not apply, because the transferor (BB Inc.) is not a foreign affiliate. Many practitioners have believed for some time that in this scenario the suspended loss on the BB Freedom shares would be released upon BB Freedom's winding up, because a winding up of this type is not described in subparagraph 40(3.5)(c)(ii) or (iii). However, the CRA has challenged this widely held belief….
[I]f the CRA's interpretation of subparagraph 40(3.5)(c)(i) were correct, the winding up of BB Freedom would not release the suspended loss on its shares. BB Stars and BB Stripes would be deemed to own the shares of BB Freedom while they remained affiliated with BB Inc. If BB Inc. subsequently sold BB Stripes to a non-affiliated person, it is not clear how this would affect the suspended loss. When commenting on a winding up of a corporation with multiple shareholders, the CRA stated that subparagraph 40(3.5)(c)(i) would deem each shareholder to own its respective interest in the shares of the wound-up corporation. The CRA might therefore consider BB Stripes to own 50 percent of the BB Freedom shares, suggesting that the BB Stripes sale could release 50 percent of the suspended loss. However, there does not seem to be support for such an approach in the words of the provision.
Consider the alternative scenario depicted in figure 2. In this example, BB Stripes is always owned by a non-affiliated person (rather than BB Inc.). The winding up of BB Freedom would not be a DLAD and would therefore be taxable under the foreign affiliate rules. However, if the CRA's interpretation of subparagraph 40(3.5)(c)(i) were correct, it appears that the provision could still apply in these circumstances. It is not clear whether this winding up would release 50 percent-of the loss (since the 50 percent shareholder of BB Freedom would be a non-affiliated person) or whether the full loss would remain suspended.
These difficulties result from attempting to stretch the application of subparagraph 40(3.5)(c)(i) beyond its intended scope.
Policy driver behind CRA position (p. 410)
[T]he CRA’s interpretation of subparagraph 40(3.5(c)(i) appears to be driven by a policy goal that suspended losses should not be released as a result of a winding up that is not subject to Canadian tax (either because the winding up qualifies for Canadian tax deferral or because the parties to the winding up are outside the reach of the Canadian tax system). However, this policy objective seems to be inconsistent with the scope of the existing rules … .
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