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: Foreign Mergers - 87(8.1) applicable.

Position: Yes.

Reasons: Technical requirements met.

XXXXXXXXXX 2000-002624
D. A. Palamar
Attention: XXXXXXXXXX

August 25, 2000

Dear Sirs:

Re: Foreign Mergers

We are writing in response to your facsimiles of May 15 and 19, 2000 concerning foreign mergers.

Background

Broadly, this request concerns the manner in which a Canadian corporation (Canco) would acquire all of the issued and outstanding shares of a target foreign corporation (Target). Specifically, the shareholders of Target would relinquish their shares in Target and receive shares of Canco. The objective of Canco is to become the sole shareholder of Target.

A technique for effecting this result has involved the incorporation by Canco of a limited purpose corporation in the jurisdiction in which Target resides (in this example, the United States) followed by a merger under U.S. law which, by operation of law, would cause the shareholders of Target to receive shares of Canco upon ceasing to be shareholders of Target.

One of the reasons why this technique is efficient is that it allows Canco to acquire all of the issued and outstanding shares of Target relatively quickly without needing, in advance of completing the acquisition, to satisfy a variety of disclosure and related requirements typically attendant on a more straightforward take-over bid in which shares of Canco would be currency.

Recent changes to United States securities laws will allow Canco to launch a share-for-share exchange take-over bid to acquire the shares of Target without needing to comply, in advance, with the disclosure and related requirements under United States securities law that have made such a transaction less attractive in contrast with an acquisition by merger. If an acquisition is possible in this more straightforward manner, there are a variety of corporate and securities law benefits and transactional efficiencies available.

Transaction Structure

The following corporate structure is assumed.

Canco is a Canadian corporation that owns all of the issued and outstanding shares of at least one United States corporation that carries on an active business in the United States.

Canco will launch a share-for-share exchange take-over bid to acquire the shares of Target, a U.S. corporation. Pursuant to the bid, the shareholders of Target (likely, for the most part, non-residents of Canada) will exchange their Target shares for shares of Canco. In the absence of an election under subsection 85(1) of the Income Tax Act (the "Act") (which normally would not be effected for any shareholders other than, possibly, Canadian resident shareholders of Target), this exchange would not occur on a tax-deferred basis for purposes of the Act.

It is expected, as is typical, that not all of the shareholders of Target will tender their shares into the bid for various reasons. Nevertheless, Canco wishes to implement an arrangement by which it can "squeeze out" the remaining shareholders of Target and cause them to acquire Canco shares.

To effect this result, immediately following completion of the bid, or as soon after that time as is possible taking into account corporate and securities regulatory requirements, Canco will cause a U.S. merger to be undertaken pursuant to which the remaining shareholders of Target would acquire shares of Canco. There are two possibilities:

Scenario A

If, upon the completion of the bid, Canco had acquired 90% or more of the issued and
outstanding shares of Target, Canco would cause Target to be combined with either its
original United States subsidiary, or a limited purpose subsidiary that it would create for purposes of completing the combination. Upon the merger (which could be either a "reverse subsidiary merger" - where the Target survives, or a "forward merger" - where the original or new subsidiary of Canco survives) under United States law, Canco would continue as the shareholder of the combined or merged corporation and the remaining Target shareholders would receive shares, directly, of Canco. Typically, in this situation a "reverse subsidiary" merger, in which the new subsidiary of Canco merges into Target would be undertaken.

Scenario B

Alternatively, and in any event if Canco acquired less than 90% of the issued and outstanding shares of Target but nevertheless wished to complete the acquisition, Canco would cause a limited purpose subsidiary to be created, that would combine with Target under a merger as described in Scenario A. Upon that merger, the remaining Target shareholders would receive shares of the merged United States entity exchangeable, either under their terms or through collateral agreements, immediately following the merger for shares of Canco, and Canco would cause that exchange to be consumated.

Interpretations Requested

In the case of an acquisition which is completed according to Scenario A, you request our confirmation that the combination of Target and the subsidiary of Canco will constitute a "foreign merger" as defined in subsection 87(8.1) of the Act. You request our further confirmation that the shares of the Target owned by Canco immediately before the merger (acquired in the bid) would not be regarded as other than capital property to Canco simply because of the determination to effect the merger and that, as a result, subsection 87(4) of the Act would, other things considered, apply in respect of Canco's shareholdings in both its original (or newly created) United States subsidiary corporation and Target.

In the event that the technique for completing the acquisition described in Scenario B is employed, you request our confirmation that the merger according to which the Target shareholders receive exchangeable shares of the merged corporation would constitute a "foreign merger" as defined in subsection 87(8.1) of the Act, and that such a holding of shares would not, in the circumstances, be considered not to constitute capital property merely because of the intended and expected exchange of those shares for shares of Canco.

Our Views

With respect to Scenario A, it is our view that that the merger of Target and a U.S. subsidiary of Canco would qualify as a foreign merger within the meaning of subsection 87(8.1) of the Act. It is also our view that the shares of Target owned by Canco immediately before the merger would not be regarded as other than capital property to Canco simply because of the determination to effect the merger.

With respect to Scenario B, it is our view that the merger of Target and a U.S. subsidiary of Canco would ordinarily qualify as a foreign merger within the meaning of subsection 87(8.1) of the Act and that the general anti-avoidance rule would generally not have application to such a transaction. It is also our view that the shares of Target owned by Canco immediately before the merger would not be regarded as other than capital property to Canco simply because of the determination to effect the merger.

Similarly, the exchangeable shares acquired by the Target shareholders would not be regarded as other than capital property to them simply because of the fact that those shares will be exchanged for shares of Canco.

The foregoing comments are provided in accordance with the guidelines set out in Paragraph 22 of Information Circular IC-70-GR3 dated December 30, 1996 and are not binding on the Agency.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch