Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
(1) What are the steps of a "fusion par absorption" effected under France's Commercial Company Law and Civil Code?
(2) Does the absorbing company terminate because of the "fusion par absorption"?
(3) Should the absorbing company be recognized as a partnership for Canadian tax purposes?
(4) How should a "fusion par absorption" be treated for Canadian tax purposes?
(5) Can goodwill arise on a "fusion par absorption"?
(6) Could subsection 95(6) of the ITA apply in this case?
PositionS:
(1) The French Commercial Company Law (FCCL) and Civil Code (CC) provide that (i) the assets and liabilities of the absorbed company are transferred to the absorbing company (ii) the owners of the absorbed company receive an ownership stake in the absorbing company (shares or a partnership interest) and (iii) the absorbed entity is immediately the wound up.
(2) The absorbing company did not cease to exist.
(3) Yes
(4) Should be treated as if the absorbed company received consideration on the transfer of its assets and liabilities in the form of a partnership interest in the transferee absorbing company immediately followed by the winding up of the absorbed entity.
(5) Yes
(6) No
Reasons:
(1) FCCL article 371 and CC article 1844-4
(2) FCCL article 371 and since the owners of the absorbed company become stake holders of the absorbing company.
(3) The partnership agreement is prima facie evidence of the existence of a partnership. No other information was provided to ascertain or dispute this finding.
(4) Consistent with the finding in Exchequer Court decision in Emily L. Merritt., 2 DTC 513
(5) A "société" has a separate legal personality under CC 1842 of the French CC therefore it can acquire property (such as goodwill).
(6) The Canadian shareholders did not avoid paying income tax because of the French absorbed company's foreign affiliate status.
February 9, 2001
Toronto West Tax Services Office Headquarters
Tax Avoidance Section Reorganizations and
Section 445-1-1 Resources Division
Marc LeBlond
Attention: Noele Blair (613) 946-3261
2000 - 002464
XXXXXXXXXX
XXXXXXXXXX Transactions - "Fusion par absorption"
We are writing in reply to your memorandum of May 5, 2000, wherein you asked a number of questions about the income tax and commercial laws of France, as well as the Canadian Income Tax Act (R.S.C. 1985, 5th Supp., c. 1, as amended) (herein the "Act") as they relate to a number of transactions involving the entities mentioned above and their Canadian owners. We apologize for the delay in our response.
Briefly, the transactions involve the transfer, by a US parent, of its shares of a French loss corporation to a Canadian subsidiary. This is followed by an amalgamation under French law of the French loss corporation with a French partnership held by related Canadian corporations. As a result of the French amalgamation, called a "fusion par absorption", the amalgamated loss corporation is absorbed and disappears, its assets remaining in the French partnership which continues. The shareholder of the amalgamated corporation receives, as a consequence of the amalgamation, a partnership interest in lieu of his shares in the amalgamated corporation.
You are concerned that these transactions are causing the erosion of the Canadian tax base of partners of the French partnership who are XXXXXXXXXX by giving them access to the operating losses of the French loss corporation (or société anonyme as it is called in France, namely XXXXXXXXXX which until then had been directly owned by XXXXXXXXXX.
We understand that you would like answers to your questions before making a decision on the application of the General Anti-Avoidance Provision of the Act.
The relevant facts as we understand them are as follows:
XXXXXXXXXX.
TSO Questions
A - How should the reduction of XXXXXXXXXX capital, prior to the "fusion par absorption" (See fact 3), be treated for Canadian tax purposes ? Should the capital reduction be considered to reduce the ACB of the partnership interests or as a loan payable to the partners?
B - What are the steps of a "fusion par absorption" under France's commercial law?
C - Does XXXXXXXXXX terminate because of the "fusion par absorption"?
D - Should XXXXXXXXXX be recognized as a partnership for Canadian tax purposes?
E - What are the tax consequences of a "fusion par absorption" under France's income tax law (Code Général des impôts)?
F - How should a "fusion par absorption" be treated for Canadian tax purposes?
G - Can goodwill arise on a "fusion par absorption"? If yes, can the Canadian partners recognize the goodwill value as an eligible capital expenditure as defined under subsection 14(5) of the Act and claim deductions for the related cumulative eligible capital, as defined under subsection 14(5) of the Act, pursuant to paragraph 20(1)(b) of the Act?
H - Could subsection 95(6) of the Act apply to the disposition of the XXXXXXXXXX shares by XXXXXXXXXX on the dissolution of XXXXXXXXXX caused by the "fusion par absorption"?
A - How should the reduction of XXXXXXXXXX capital, prior to the "fusion par absorption", be treated for Canadian tax purposes ? Should the capital reduction be considered to reduce the ACB of the partnership interests of the partners or as a loan payable to the partners?
Paragraph 53(2)(c) of the Act provides for the amounts that reduce the adjusted cost base (ACB) to a taxpayer of a partnership interest. The most common deductions to the ACB of a partnership interest are the following:
53(2) Amounts to be deducted - In computing the adjusted cost base to a taxpayer of property at any time, there shall be deducted such of the following amounts in respect of the property as are applicable:
(c) where the property is an interest in a partnership,
(i) an amount in respect of each fiscal period of the partnership ending after 1971 and before that time, equal to the total of amounts each of which is the taxpayer's share (other than a share under an agreement referred to in subsection 96(1.1)) of any loss of the partnership from any source for that fiscal period, computed as if this Act were read without reference to ...
(v) any amount received by the taxpayer after 1971 and before that time as, on account or in lieu of payment of, or in satisfaction of, a distribution of the taxpayer's share (other than a share under an agreement referred to in subsection 96(1.1)) of the partnership profits or partnership capital,
In the present case, the capital of the partnership was reduced by an accounting entry where the capital account was debited and the offsetting credit was to an account called "Partners' Paid in Capital" (See fact 3). We understand that this had no economic impact on the partners' partnership interests and was done for accounting presentation purposes.
If our understanding is correct and the partners did not receive any amount of the reduction, within the meaning of sub-paragraphs 53(2)(c)(i) or (v) of the Act, the reduction does not represent a deduction in the computation of the ACB of their partnership interest. For the same reason, the amount of the reduction should not be considered as a loan from the partners.
B - What are the steps of a "fusion par absorption" under France's commercial law?
Further to our discussion on this question (Blair / LeBlond), we understand that the purpose of this inquiry is to determine if the "fusion par absorption" is legally complete and effective under the laws of France.
We have examined the French law to determine the legal effect of the fusion and have the following comments.
The French statute, "Loi no 66-537 du 24 juillet 1966 sur les sociétés commerciales" (herein the "French - Commercial Company Law") provides for the "fusion par absorption" under Titre 1er - Règles de fonctionnement des diverses sociétés commerciales - Chapitre VI - Dispositions communes aux diverses sociétés commerciales dotées de personnalité morale - Section IV - Fusion et scission - 1er - Dispositions générales - , at articles 371 and 372:
Art. 371 (L. no 88-17, 5 janv. 1988, art. 1er). - Une ou plusieurs sociétés peuvent, par voie de fusion, transmettre leur patrimoine à une société existante ou une nouvelle société qu'elles constituent. ...
Les associés des sociétés qui transmettent leur patrimoine dans le cadre des opérations mentionnées aux trois alinéas précédents reçoivent des parts ou des actions de la ou des sociétés bénéficiaires et, éventuellement, une soulte en espèces dont le montant ne peut dépasser 10 p. 100 de la valeur nominale des parts ou des actions attribuées.
Art. 372. Les opérations visées à l'article précédent peuvent être réalisées entre des sociétés de forme différente.
(OUR TRANSLATION) Art. 371 (Law No. 88-17 of Jan. 5, 1988) One or more companies may, by way of fusion, transmit their patrimony to an existing company or a new company created by them. ...
The members of companies which transmit their patrimony within the framework of the operations mentioned in the three preceding paragraphs receive the shares (parts) or stocks (actions) of the beneficiary company or companies and, ultimately, a payment in kind (soulte en espèces) whose amount may not exceed 10% of the nominal value of the shares or stocks allocated.
Art. 372 The operations mentioned in the preceding article may take place between companies of different types.
The French Civil Code also provides for the "fusion par absorption" under Titre IX - De la société - Chapitre I - Dispositions générales (Loi no 78-9 du 4 janvier 1978), at article 1844-4:
Une société, même en liquidation, peut être absorbée par une autre société ou participer à la constitution d'une société nouvelle, par voie de fusion. ...
Ces opérations peuvent intervenir entre des sociétés de forme différente.
(OUR TRANSLATION) A "société", even under wind-up, may be absorbed by another
"société" or participate in the creation of a new "société", by way of fusion. ...
These transactions can take place between "sociétés" of different forms
In the book, "Code des Sociétés 1999",1 the author describes the steps of a "fusion par absorption", provided under article 371 of the French - Commercial Company Law as follows, at page 276:
1) Notion de fusion et opposabilité.
a) Il y a fusion lorsque deux sociétés se réunissent pour n'en former qu'une, soit par création d'une société nouvelle, soit par absorption ; les éléments caractéristiques de la fusion sont la transmission de l'ensemble des éléments d'actif et de passif de la société absorbée à la société absorbante, la dissolution de la société absorbée et l'échange de droits sociaux, à savoir que les associés de la société absorbée deviennent associés de la société absorbante avec attribution des parts dans la mesure où il y a un actif net au niveau de la société absorbée; s'il n'y a plus d'actif net, mais au contraire une situation négative, les conditions de la fusion ne sont pas remplies (CA Versailles, 24 juin 1993: Bull. Joly 1993, S 295, p. 1013, note P. Le Cannu).
(OUR TRANSLATION) 1) Notion of Merger and Setting Up Against Third Person
a) There is a merger when two companies unite to form only one, either by the creation of a new company or by absorption; the characteristic elements of a merger are the transfer of all assets and liabilities of the absorbed company, the dissolution of the absorbed company and the exchange of interests, meaning the partners of the absorbed company become partners of the absorbing company with the allocation of interests provided the absorbed company has net assets; if there is no net assets, on the contrary the situation is negative, the conditions of a fusion are not met ...
In order for these provisions to apply in this case, each of XXXXXXXXXX must be a "société" (company). Generally, the acronyms S.N.C. and S.A. stand for "société en nom collectif" and "société anonyme", respectively.
The French Civil Code describes what a "société" is under Titre IX - De la Société, Chapitre I - Dispositions générales, at article 1832 (Loi no 85-697 du 11 juillet 1985, art. 1er):
La société est instituée par deux ou plusieurs personnes qui conviennent par un contrat d'affecter à une entreprise commune des biens ou leur industrie en vue de partager le bénéfice ou de profiter de l'économie qui pourra en résulter. ... Les associés s'engagent à contribuer aux pertes.
(OUR TRANSLATION) A "société" is formed by two or more persons whom agree by contract to assign to a common enterprise properties or their activity with a view to share the benefit or to enjoy the saving that could result.
Generally, a "société en nom collectif" is a société as defined under the French Civil Code. However, a "société anonyme" is another form of société that is constituted according to the
French - Commercial Company Law. This law provides under Titre 1er - Règles de fonctionnement des diverses sociétés commerciales - Chapitre IV - Sociétés par actions - Section II - Constitution des sociétés anonymes, at article 73:
La société anonyme est la société dont le capital est divisé en actions et qui est constituée entre des associés qui ne supportent les pertes qu'à concurrence de leurs apports.
(OUR TRANSLATION) The corporation is a company whose capital is divided into shares and which is created among shareholders who are liable for losses only to the extent of their contribution.
In our opinion, the quote (reproduced below) from Ernst & Young's International Business Series entitled Doing Business in France on page 9 of your referral describes correctly the main steps of a "fusion par absorption" provided by the French - Commercial Company Law at article 371.
Effect of Mergers
Under French law a merger results in the following:
- The acquired company is dissolved without being liquidated.
- All the assets and liabilities of the acquired company are transferred to the acquiring company. The acquiring company must continue the contracts of all employees.
- Each shareholder of the acquired company exchanges its shares for the newly issued shares of the acquiring company. The exchange ratio is based on the fair market value of the shares of the acquired company and the acquiring company. If the acquiring company holds 100% of the shares, no exchange ratio has to be computed and a simplified procedure applies.
In this case, the terms of the amalgamation agreement of XXXXXXXXXX and of the amendments of XXXXXXXXXX (see fact 4) appear to meet the steps of a "fusion par absorption" provided under article 371 of the French - Commercial Company Law.
C - Does XXXXXXXXXX terminate because of the "fusion par absorption"
In this "fusion par absorption", the société en nom collectif, XXXXXXXXXX, does not cease to exist because it is the absorbing entity.
In our opinion, article 371 of the French - Commercial Company Law (cited above) implies that the absorbing entity does not cease to exist. The author of the "Code des Sociétés 1999" agrees with this view that one of the characteristics of a "fusion par absorption" is that the owners of the société being absorbed become owners of the absorbing entity.
D - Should XXXXXXXXXX be recognized as a partnership for Canadian tax purposes?
We understand that XXXXXXXXXX would not be entitled to claim the losses of XXXXXXXXXX if it was considered to be a corporation instead of a general partnership for Canadian tax purposes.
Nevertheless, it is our view that a société en nom collectif created under the laws of France is a partnership for the purposes of the Act whether or not it elects to be taxed as a corporation for the purposes of French income tax law (see Technical Interpretation E 59718). Please note that in 1989 the Income Tax Rulings Directorate gave a favorable advance income tax ruling to XXXXXXXXXX on this issue as it pertained then to the formation of XXXXXXXXXX (E 32726).
The Agency's position as to what constitutes a corporation is in Interpretation Bulletin IT-343R, at paragraph 2:
A corporation is an entity created by law having a legal personality and existence separate and distinct from the personality and existence of those who caused its creation or those who own it. A corporation possesses its own capacity to acquire rights and to assume liabilities, and any rights acquired or liabilities assumed by it are not the rights or liabilities of those who control or own it. As long as an entity has such separate identity and existence, the Department will consider such entity to be a corporation even though under some circumstances or for some purposes the law may ignore some facet of its separate existence or identity.
According to article 1832 of the French Civil Code (quoted previously), a société en nom collectif is created by contract. However, although the société en nom collectif does have a legal personality separate and distinct from those who own it pursuant to article 1842 of the French Civil Code, the société en nom collectif does not have an existence separate and distinct from those who own it because the partners are indefinitely and solidarily liable for the debts of the société en nom collectif pursuant to the French - Commercial Company Law, at article 10:
Les associées en nom collectif ont tous la qualité de commerçant et répondent indéfiniment et solidairement des dettes sociales.
(OUR TRANSLATION) The partners in a collective name all have the quality of a merchant and are indefinitely and solidarily liable for the debts of the collectivity.
In the case of the XXXXXXXXXX partnership (formerly the XXXXXXXXXX partnership), a contract exists in the form of articles of association which state, at article 1:
(OUR TRANSLATION) A société en nom collectif is formed ..., to be governed by the laws applicable to sociétés en nom collectif and the present articles of Association.
The courts have said that a partnership is not proven merely by producing a document called a partnership agreement (See C.R.I. v. Williamson, (1928) 14 T.C. 335 at 340) and that to determine the existence of a partnership regard must be paid to the true contract and intention of the parties (See Northern Sales (1963) Limited v. MNR, 73 DTC 5200, at page 5205).
Furthermore, in Lois Hollinger v. MNR, 73 DTC 5003, Judge Noël, at page 5009, stated the following with respect to partnerships:
A partnership, and this applies to the civil law and the common law, is essentially a contractual relationship between two or more persons. ... There must be a business carried on and, ... Each partner usually contributes either property, skill or labour but this is not essential and ... There must be some arrangement for division of profits and usually an arrangement for the sharing of losses...
In this case, the partnership agreement (the articles of association) is prima facie evidence that the above criteria are met. Therefore, unless other information exists to substantiate that this agreement does not represent the true intention of the parties, XXXXXXXXXX must be considered a société en collectif.
E - What are the tax consequences of a "fusion par absorption" under France's income tax law (Code Général des impôts)?
As agreed in our telephone conversation of December 1, 2000 (Blair / LeBlond), we are not responding to this question as it is not essential to the resolution of your case.
F - How should a "fusion par absorption" be treated for Canadian tax purposes?
Your referral included a copy of a letter, dated April 20, 2000, to Mrs. Joan Carl of your office, from XXXXXXXXXX, which opined on how the "fusion par absorption" should be viewed for Canadian tax purposes.
On page 2 of his letter, XXXXXXXXXX gave his view as follows:
XXXXXXXXXX.
We agree with this view.
In the XXXXXXXXXX case, the terms of the amalgamation agreement (see fact 4) comply with the steps of a "fusion par absorption" under French - Commercial Company Law (see B above): (1) the transfer of the assets and liabilities of the absorbed company to the absorbing company (2) the owners exchange their interest in the absorbed company for interests in the absorbing company and, (3) the absorbed company is dissolved.
The first step of the "fusion par absorption" described by XXXXXXXXXX agrees with the French - Commercial Company Law and what actually happened. This transaction must be viewed as such for Canadian tax purposes.
Steps two and three are a departure from what is generally expected when a person sells property to another. Normally, the person who sells receives the consideration for the property sold.
XXXXXXXXXX suggests that steps two and three should be viewed as XXXXXXXXXX receiving the consideration, the partnership interest in XXXXXXXXXX, followed by the immediate liquidation of XXXXXXXXXX and the distribution of the XXXXXXXXXX partnership interest to XXXXXXXXXX.
We share his view which is not inconsistent with Canadian case law. In the case M.N. R. v. Emily L. Merritt, 2 DTC 513 (Exch. Court), 2 DTC 561 (SCC), a company acquired all the assets and assumed the liabilities of another company as a going concern under a contract providing that as consideration for the assets acquired, the purchaser should allot shares and/or pay cash to each shareholder of the vendor. Judge Kerwin of the Supreme Court, for the majority, agreed with the Exchequer Court that the shareholder's receipt should be viewed as a distribution by the vendor, at page 562:
It was first contended on behalf of the respondent that, within the meaning of subsection 1 of section 19 of the Income War Tax Act (predecessor to subsection 84(2)) as above enacted, there was no distribution of the property of the Loan Company and no winding up, discontinuance or reorganization of its business. The learned President decided against this contention and on that point I agreed with his statement of facts and with his conclusions and having nothing to add. (insertion added)
G - Can goodwill arise on the "fusion par absorption"? If yes, can the partners of the XXXXXXXXXX partnership recognize the goodwill value as an eligible capital expenditure as defined under subsection 14(5) of the Act and claim deductions for the related cumulative eligible capital, as defined under subsection 14(5) of the Act, pursuant to paragraph 20(1)(b) of the Act?
The Agency's position on the meaning of goodwill is stated as follows in Interpretation Bulletin IT-143R2:
5 - The Courts have referred to several definitions of goodwill, two of which are:
(a) "Goodwill is the whole advantage, whatever it may be, of the reputation and connection of the firm which may have been built up by years of honest work or gained by lavish expenditures of money".
(b) It is "the privilege, granted by the seller of a business to the purchaser, of trading as his recognized successor; the possession of a ready-formed "connection" of customers, considered as an element in the saleable value of a business, additional to the value of the plant, stock-in-trade, book debts, etc.".
6 - Goodwill cannot be divorced from the business itself. It follows the business, and may be sold with the business, but it cannot be sold separately. Generally, goodwill arises as a recognizable asset only when a business is acquired at a price in excess of the value, as a going concern, of its net assets.
The French - Commercial Company Law provides that it is the contract between the parties that determines the terms of the "fusion", at article 372-1:
372-1 (L. no 88-17, 5 janv. 1988, art. 2). - La fusion ou la scission entraîne la dissolution sans liquidation des sociétés qui disparaissent et la transmission universelle de leur patrimoine aux sociétés bénéficiaires, dans l'état où il se trouve à la date de réalisation définitive de l'opération. Elle entraîne simultanément l'acquisition, par les associés des sociétés qui disparaissent, de la qualité d'associés des sociétés bénéficiaires, dans les conditions déterminées par le contrat de fusion ou de scission.
(OUR TRANSLATION) 372-1 (Law No. 88-17 of Jan. 5, 1988, art. 2) The fusion or the scission bring about the dissolution without the wind- up of the companies that disappear and the universal transmittal of their patrimony to the beneficiary companies in their state on the day the transaction is definitely realized. It also brings about the simultaneous acquisition, by the partners of the disappearing companies, of partner status of the beneficiary companies, according to the terms set out in the fusion or scission contract.
Therefore, the terms of the contract will determine whether there is a disposition and acquisition of property and if goodwill is involved.
In this case the contract provides, in compliance with article 372-1 of the French - Commercial Company Law, that the absorbed company transfers its assets and liabilities to the absorbing company. The legal effect of the transfer is that property has been disposed of and acquired by the absorbed company and the absorbing partnership, respectively.
Judge Jackett in, Compagnie Immobilière BCN Limitée v. H.M.Q., 76 DTC 6153, speaking for the Federal Court of Appeal, said that the meaning of the expression "disposed of" in Regulation 1100(2) at p. 6155:
. . . Regardless of whether the expression "disposed of" would have been given some other sense if the English version were read alone, in my view, when the two versions are read together, "disposed of" must be read in the sole relevant sense that that expression has in common with the French word "aliénés". In my view, this sense would include any transfer, by way of sale, gift or otherwise, of legal title, to some other person but would not include the bringing about of the destruction or extinguishment of the property.
Furthermore, there are clear indications in the terms of the "fusion par absorption" agreement that the goodwill related to XXXXXXXXXX business was transferred to XXXXXXXXXX.
The terms of the agreement specified that assets and liabilities were transferred at their "valeur vénale" (monetary value). The total transfer value of the assets was XXXXXXXXXX compared to a net book value of XXXXXXXXXX. In addition, the transferred assets included assets described as "Autres immobilisations incorporelles" (other intangibles). The transfer value of these assets (XXXXXXXXXX) exceeded their net book value ( XXXXXXXXXX) by XXXXXXXXXX (see fact 4).
In our opinion, we should accept that the assets of XXXXXXXXXX were acquired by the partnership in accordance with the terms of the agreement. The fusion by absorption under French law does not seem to be comparable to the amalgamations of corporations under Canadian law where there is a continuation of the merged entities, and where the courts have held no acquisition to have taken place.2
Here, the merging corporation disappears, and an existing partnership (XXXXXXXXXX) acquires the assets. In the book, "Code des Sociétés 1999",3 the author opines that one of the consequences of acquiring a separate legal personality ("personalité morale") under article 1842 of the French Civil Code a "société" can own property (have a "patrimoine distinct").
We understand that the appraised XXXXXXXXXX goodwill amount of XXXXXXXXXX. XXXXXXXXXX was used as the transfer value in the "fusion par absorption" agreement (see fact 4). This suggest that XXXXXXXXXX acquired goodwill (eligible capital property) of that amount from XXXXXXXXXX.
However, you indicate that the XXXXXXXXXX goodwill was not reflected as an asset on XXXXXXXXXX balance sheet for accounting purposes and that the amount of XXXXXXXXXX F was debited to the account "Partners' Paid in Capital" (see fact 4). Generally, we would expect that the purchased goodwill would be reflected on the purchaser's balance sheet as an asset and be considered as an "eligible capital expenditure", as defined at subsection 14(5), which would be included in computing the amount of the "cumulative eligible capital", as defined at subsection 14(5), for the purpose of the deduction under paragraph 20(1)(b) of the Act. We fail to see the basis in fact and in law for this unusual accounting treatment and encourage you to obtain an explanation for it.
Furthermore, if our understanding is correct, XXXXXXXXXX included the XXXXXXXXXX goodwill amount of $ XXXXXXXXXX in computing the amount of their "cumulative eligible capital" for the purpose of the deduction under paragraph 20(1)(b) of the Act (see fact 5). Generally, we would expect that the deduction under paragraph 20(1)(b) would be computed at the partnership level, pursuant to subsection 96(1), and the partners would be allocated a share of the partnership's income or loss (net of the paragraph 20(1)(b) deduction) in accordance with the terms of the partnership agreement. Unfortunately, we are unable to comment whether XXXXXXXXXX can claim the deduction under paragraph 20(1)(b) without additional information explaining the basis in fact and in law for their position.
H - Could subsection 95(6) of the Act apply to the disposition of the XXXXXXXXXX shares by XXXXXXXXXX on the dissolution of XXXXXXXXXX caused by the "fusion par absorption"?
In your memorandum, you suggested that paragraph 95(6)(b) of the Act might apply. This provision states in part the following:
95(6) Where rights or shares issued, acquired or disposed of to avoid tax - For the purposes of this subdivision (other than section 90),
(a)...; and
(b) where a person or partnership acquires or disposes of shares of the capital stock of a corporation, either directly or indirectly, and it can reasonably be considered that the principal purpose for the acquisition or disposition of the shares is to permit a person to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under this Act, those shares shall be deemed not to have been acquired or disposed of, as the case may be, and where the shares were unissued by the corporation immediately prior to the acquisition, those shares shall be deemed not to have been issued.
The opening words of subsection 95(6), "For the purposes of this subdivision" (sections 90 to 95), mention that the subsection applies for the purposes of subdivision i. This does not prevent its application to provisions of the Act not in subdivision i of Division B of Part I of the Act (For example, section 122.3) (see Technical Interpretation E 9903126). However, the opening words of subsection 95(6) limit its application to situations where the foreign affiliate status of a company is relevant. In effect, subsection 95(6) results in modifying a company's status to that of a foreign affiliate or from a foreign affiliate to that of a non foreign affiliate where shares are acquired, issued or disposed of for the principal purpose of enabling a person, generally a Canadian corporate shareholder, to avoid, reduce or defer tax that would otherwise be payable under the Act. The Finance technical notes of February 1995 on subsection 95(6) illustrate this point in example 16.
We understand that it could be argued that the principal purpose for XXXXXXXXXX indirectly acquiring the shares of XXXXXXXXXX from its ultimate US parent was to access the operating losses of XXXXXXXXXX and reduce the income tax that it would have had to pay otherwise under the Act. This can be inferred from the result of the transactions and the fact that the "fusion par absorption" of XXXXXXXXXX which gave XXXXXXXXXX access to the losses appears to have been planned by its ultimate US parent before XXXXXXXXXX acquired the shares of XXXXXXXXXX However, XXXXXXXXXX did not avoid paying income tax because of XXXXXXXXXX foreign affiliate status. It did so because of the "fusion par absorption" of XXXXXXXXXX. Therefore, subsection 95(6) of the Act does not apply in this case. For the same reason, subsection 95(6) of the Act does not apply to XXXXXXXXXX disposition of the shares of XXXXXXXXXX on its wind-up.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613)994-2898. A copy will be sent to you for delivery to the client.
We trust that our comments will be of assistance.
Alain Godin
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
ENDNOTES
1 F. Pasqualini, Code des Sociétés 1999 (Paris, Litec, 5ième édition), p. 276.
2 In the Federal Court of Appeal decision, Her Majesty the Queen v. Pan Ocean Oil Ltd., 94 DTC 6412, at page 6416:
The underlined passages make it clear, in my view, that the provisions of paragraph 87(2)(a) are applicable only to the amalgamated company's computation of income under Division B (including the "deductions to which it may be entitled") and, where necessary as a consequence thereof, to its computations of taxable income (Division C) and of tax (Division E). That is what this Court held in Guaranty Properties and the decision in that case should be limited to that holding. In particular, it should not be read as denying that the amalgamated corporation is to be deemed to be a new corporation for all purposes relating to the computation of its income.
The quoted passages from Palmer-McLellan, supra, which I have emphasized above, also make it plain, in my view, that the deemed "new" company, which, for tax purposes, came into being upon the amalgamation, did not "acquire" the property of the amalgamating companies which were merged into it; rather, such property "simply became" the property of the new company upon amalgamation. Indeed, if it were otherwise the remaining paragraphs of subsection 87(2) would have little purpose; for the most part they deal in detail with such parts of the property, assets and liabilities of the amalgamating companies which shall be deemed, for tax purposes, to have become part of the property, assets and liabilities of the new company and with the tax consequences thereof. Those provisions would be quite unnecessary if the Act were to regard the amalgamated company as being "new" solely for the purposes of establishing its first taxation year.
3 F. Pasqualini, Code des Sociétés 1999 (Paris, Litec, 5ième édition), p.12.
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