18 April 2002 External T.I. 2000-0055125 - Foreign merger or share-for-share exchange

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Will subsection 85.1(5) apply to a foreign merger by absorption if the conditions in 87(8.1) can't be met?

Position: No.

Reasons: We would not consider the surviving corporation to be "another corporation" within the meaning of subsection 85.1(5).

XXXXXXXXXX 		2000-005512
S. E. Thomson

April 18, 2002

Dear XXXXXXXXXX:

Re: Application of subsection 85.1(5)

This is in reply to a letter sent to us on November 3, 2000 from XXXXXXXXXX of your office, and a subsequent letter sent to us from you on February 6, 2002. We apologize for the delay in responding to your letters.

In your letters, you outline a common situation where a U.S. resident corporation ("Purchaseco") wishes to acquire another U.S. resident corporation ("Targetco"). To effect the acquisition, Purchaseco incorporates a wholly-owned subsidiary ("Subco"), which merges with Targetco under Delaware law. As a result of the merger, Targetco survives as "Newco". The shares of Targetco and Subco are cancelled, and new shares of Newco are issued to the shareholders of Targetco and Subco. Instead of shares of Newco, the shareholders of Targetco may receive cash for their shares of Targetco. Some of the shareholders of Targetco are residents of Canada.

In many cases, a substantial number of Targetco shareholders will choose cash, and therefore, the transaction will not meet the conditions in paragraph 87(8.1)(c) of the Income Tax Act (the "Act"). You question whether the Canadian shareholders would be entitled to the rollover provided in subsection 85.1(5) of the Act.

You refer to our document E9811305 in which we said that in a foreign merger by absorption, the surviving corporation would be considered the "new foreign corporation" referred to in paragraph 87(8.1)(c), and that the shares of the predecessor foreign corporations "are exchanged for or have become" shares of the new foreign corporation. You ask us, given our position in E9811305, if we also would consider that the shares of the surviving corporation (Newco) are issued in exchange for shares of "another corporation" (Targetco) so that subsection 85.1(5) of the Act would apply.

Although you have asked for our technical interpretation on a hypothetical situation, it appears that your request involves a transaction or series of transactions contemplated by specific taxpayers. In order to obtain confirmation as you have requested, your request should be resubmitted as a request for an advance income tax ruling. Although we cannot comment directly on your situation, we can offer the following general comments on the relevant provisions of the Act. Please note that these comments are not binding on the Canada Customs and Revenue Agency.

The provisions of subsection 87(8.1) provide that where, pursuant to a merger or combination, two or more predecessor corporations continue in the form of one corporate entity, that corporate entity is referred to as the "new foreign corporation" within that section. However, where, under corporate law, one of the predecessor corporations survives the merger or combination (as is the case here), such surviving corporation will be referred to as a "new foreign corporation" for the purposes of applying section 87, but will remain the same corporation for the purpose of applying any other provision of the Act.

In order for subsection 85.1(5) to apply, the conditions in that subsection would have to be met. That is, a foreign corporation must issue its shares to a vendor in exchange for shares of "another corporation" that were capital property of the vendor. In the scenario you describe, we would not consider that the new shares of Targetco would be shares of "another corporation" within the meaning of subsection 85.1(5) of the Act. Accordingly, it is our view that subsection 85.1(5) of the Act does not apply to a disposition of the cancelled shares of Targetco by the holders thereof in consideration for new shares of that corporation. Moreover, since Targetco does not acquire the shares of Subco in the transaction you have described, it is our view that subsection 85.1(5) does not apply to the disposition of the shares of Subco by Purchaseco. It would appear, however, that the provisions of subsection 51(1) of the Act may have application to the disposition of the Targetco shares.

Note, however, that the applicability of subsections 85.1(5) and/or 87(8.1) to a transaction could only be confirmed in the context of an advance income tax ruling where we have had the chance to examine the relevant corporate documents. Similarly, we would have to examine the corporate documents to determine if subsection 51(1) of the Act might apply to the shareholders of Targetco.

We trust that we have been of some assistance.

Yours truly,

Olli Laurikainen
for Director
International and Trusts Division
Income Tax Rulings Directorate