21 November 2001 External T.I. 2001-0098885 - Cancellation of Shares on Foreign Mergers

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: Whether the administrative position outlined in paragraph 42 of Interpretation Bulletin IT-474R applies to foreign mergers.

Position: No.

Reasons: The administrative position outlined in paragraph 42 of Interpretation Bulletin IT-474R is restricted to amalgamations which satisfy the requirements of subsection 87(1) of the Income Tax Act.

XXXXXXXXXX 							2001-009888
								Éric Allard-Pouliot
November 21, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Cancellation of Shares on Foreign Merger

This is in reply to your facsimile of August 29, 2001, in which you requested our opinion regarding the above-noted subject. More particularly, you requested that we confirm that the administrative position outlined in paragraph 42 of Interpretation Bulletin IT-474R also applies with respect to the cancellation of a predecessor corporation's shares on a foreign merger.

In your letter, you refer to a situation where a corporation resident in Canada ("Canco") owns all the outstanding shares of a non-resident corporation ("Parentco"), which itself owns all the outstanding shares of another non-resident corporation ("Subco"). Subco owns all the outstanding shares of a third non-resident corporation ("Subco 2"). Under foreign corporate law, Parentco and Subco 2 are merged into Subco, with Subco continuing as the survivor corporation. Under the foreign corporate law, the shares of Subco held by Parentco and the shares of Subco 2 held by Subco are cancelled for no consideration.

In light of these facts, you require our opinion as to whether the administrative position outlined in paragraph 42 of Interpretation Bulletin IT-474R would apply with respect to the shares of Subco and Subco 2 cancelled on the merger.

The particular circumstances in your letter on which you have asked for our views appear to refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments which may be of assistance to you.

Paragraph 42 of Interpretation Bulletin IT-474R provides that "[W]here one predecessor corporation holds shares of another predecessor corporation, the cancellation of those shares on the amalgamation will not give rise to a gain or loss in the hands of the former corporation." However, as explained in paragraph 1 of Interpretation Bulletin IT-474R and in the answer we provided to question 26 of the 1992 Round Table, the administrative position outlined in paragraph 42 of Interpretation Bulletin IT-474R is restricted to amalgamations which satisfy the requirements of subsection 87(1) of the Income Tax Act (the "Act"). Therefore, this position does not apply with respect to amalgamations which do not satisfy the requirements of subsection 87(1) of the Act, such as the merger of Parentco and Subco 2 into Subco.

Regarding the merger of Parentco and Subco 2 into Subco, you mention that pursuant to the foreign corporate law the shares of Subco held by Parentco and the shares of Subco 2 held by Subco would be cancelled for no consideration. Since this merger does not meet the requirements of subsection 87(1) of the Act, the shares of Subco held by Parentco and the shares of Subco 2 held by Subco would be considered, for the purposes of the Act, to have been disposed of by Parentco and Subco, respectively, by virtue of paragraph (b)(i) of the definition of "disposition" in subsection 248(1). In this regard, paragraph 84(9) of the Act provides that where a shareholder of a corporation has disposed of a share of the capital stock of the corporation as a result of the cancellation of the share by the corporation, the shareholder is deemed to have disposed of the share to the corporation. Since the shares of Subco and Subco 2 are cancelled for no consideration and Subco and Parentco, as well as Subco 2 and Subco, are not dealing at arm's length, paragraph 69(1)(b) of the Act would generally apply to deem Parentco and Subco to have received proceeds of disposition for the shares of Subco and Subco 2, respectively, equal to the fair market value of these shares.

However, paragraphs 95(2)(d) and (d.1) of the Act might apply to the merger of Parentco and Subco 2 into Subco. The information provided in your request is not sufficient to allow us to reach a conclusion in this regard. To do so, all the facts surrounding the merger and the corporations which are parties to it would have to be known.

The above comments are an expression of opinion only and are not binding on the Canada Customs and Revenue Agency, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.

Yours truly,

Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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