CRA rules on absorptive foreign mergers

After giving effect to some preliminary transactions, a U.S. corporation which was a qualifying person for purposes of the Canada-US Treaty (the “Treaty”) wholly-owned four stacked corporations in Country 1. The “bottom” Country 1 corporation, in turn, wholly-owned a resident of Canada (Canco). The shares of Canco and of the above Country 1 corporations were taxable Canadian property (TCP).

The proposed transactions include:

1. The US corporation will contribute its shares of a Country 1 corporation to a newly-formed wholly-owned US corporation (Taxpayer 6), which is a qualifying person.
2. Three downstream absorptive mergers of Country 1 corporations will occur.
3. In addition, there will be an upstream merger of a Country 1 corporation which is a subsidiary of one of the above Country 1 corporations but whose shares are not TCP (because it is not “above” the Canco) into its Country 1 parent as the survivor.

Where there is a downstream absorptive merger under the Country 1 corporate law of a parent into its wholly-owned subsidiary: the subsidiary as the surviving entity does not dispose of its assets or liabilities (other than amounts owing between it and the parent); all of the assets and liabilities of the parent (other than such intercompany amounts and the shares of the subsidiary) are transferred to the subsidiary; the shares in both parent and subsidiary are cancelled; and the subsidiary allocates new shares to the current shareholder(s) of the parent.

An upstream absorptive merger is similar (in reverse) except that the shares of the subsidiary are cancelled and the current shareholder(s) of the parent continue to hold their shares of the parent.

CRA ruled that the disposition in 1 above will be exempted under Art. XIII(4) of the Treaty (presumably, because the transferred TCP was not shares of a company resident in Canada).

CRA gave rulings based on the mergers qualifying as absorptive mergers under s. 87(8.2) (so that the s. 87(4) rollover, and the para. (n) of “disposition” exclusion, applied). For instance, on each downstream merger, the shareholder of the parent will dispose of its shares of the parent for their ACB and will have an ACB for its shares of the surviving subsidiary for the same amount, and the parent will be deemed by para. (n) not to have disposed of its shares of the subsidiary.

Neal Armstrong. Summaries of 2023 Ruling 2022-0958521R3 under s. 87(8.2) and Treaties – Income Tax Conventions – Art. 13.