CRA confirms that shares issued to a Canadian parent in consideration for it issuing shares on a Delaware merger had a cost equal to such shares’ FMV
The acquisition of a non-resident target (Target) by a Canadian corporation (Opco) and its Canadian parent (Parent) entailed:
- Parent forming two new stacked non-resident subsidiaries (Merger Sub1 holding Merger Sub2);
- Merger Sub2 being merged into Target with Target being the survivor, with the shareholders of Target having their shares converted into shares issued by Parent and cash paid by Merger Sub1 (which it had borrowed from Opco) and with Merger Sub1 becoming the parent of Target; and
- Merger Sub2 then immediately being merged into Merger Sub1 with Merger Sub1 as the survivor.
In order that Parent could get basis for having issued the share consideration, it was stated in a funding agreement to have issued such shares in consideration for the issuance to it by Merger Sub1 of common shares of Merger Sub1 – and CRA ruled that indeed those shares issued to Parent had a cost to it equal to the FMV of the shares issued by it in turn to the Target shareholders plus any related costs incurred by it.
CRA also ruled that on the first merger, Merger Sub1 disposed of its shares of Merger Sub2 for those shares’ FMV.
CRA further ruled that on the immediately subsequent contribution by Parent of its shares of Merger Sub1 to Opco, it did not realize gain, and Opco had full cost for those shares pursuant to s. 53(1)(c) – and Opco also was able to increase the PUC of its shares in reliance on s. 84(1)(b) in an amount equal to the FMV of those contributed shares.