CRA indicates that the payment of damages, for breach of reps, by the parent following a triangular amalgamation would not preclude satisfaction of s. 87(4) or (1)

We have provided a summary of the Roundtable held today (online) at the Canadian Tax Foundation Annual Conference.

Q.1 dealt with a triangular amalgamation under which a subsidiary of Parent amalgamated with Target and the Target shareholders received shares of Parent. S. 87(4) requires that such shares be the only consideration received by the Target shareholders “on the amalgamation.”

CRA noted that any payments made by Parent to the Target shareholders for any breaches of representations or warranties would normally be made well after the amalgamation, and would not be viewed as consideration for shares paid on the amalgamation, so that s. 87(4) could still be satisfied– and it also would not be problematic if the compensation was paid by Parent in the form of issuing additional shares. Post-amalgamation damages payments also would not be problematic regarding satisfaction of the condition in s. 87(1)(a).

Suppose that, to address a potential indemnity payment going in the other direction, some of the Parent shares issuable to the Target shareholders are placed in escrow. If no claim arises during the stipulated period, the shares are released from escrow. If an indemnity claim is made by Parent, Parent repurchases shares, having a value equaling the claim amount, for $1 and cancels them, with only the balance of the shares, if any, being released from escrow.

CRA indicated that it would consider the amount paid for the repurchased shares for s. 84(3) purposes to be the claim amount, so that a deemed dividend could arise.

Neal Armstrong. Summaries of 25 November 2021 CTF Roundtable, Q.1 under s. 87(4) and s. 84(3).