1 November 2002 External T.I. 2001-0104355 - Dispn. of Shares - Vertical SF Amalg.

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 shareholders of parent corporation dispose of such shares on a vertical short-form amalgamation under subsection 177(1) of the OBCA

Position: Yes

Reasons: Subparagraph (b)(iii) of the definition of "disposition"

XXXXXXXXXX 2001-010435
Gwen Watson
November 1, 2002

Dear XXXXXXXXXX:

Re: Disposition of Shares on Short-Form Vertical Amalgamation

We are writing in reply to your letter of October 3, 2001 wherein you requested a technical interpretation on whether the shareholders of a parent corporation will be considered to have disposed of their shares, for the purposes of the Income Tax Act (Canada) (the "Act"), on a short-form vertical amalgamation of the parent and a wholly-owned subsidiary under subsection 177(1) of the Business Corporations Act (Ontario) (the "OBCA").

It is your view that the shareholders of the parent will not be considered to have disposed of their shares for the following reasons:

1. subparagraph (b)(iii) of the definition of "disposition" in subsection 248(1) provides that there will be a disposition of a share where the share is converted because of an amalgamation or merger;

2. subsection 177(1) of the OBCA provides that no securities may be issued in connection with the amalgamation of a holding corporation and its subsidiary and this subsection does not specially provide for a conversion of the parent's shares into shares of the amalgamated entity ("Amalco"); and

3. subsection 87(1.1), which applies to deem the outstanding shares of the parent to be shares of Amalco received by the shareholder by virtue of the merger, is only applicable for the purposes of paragraph 87(1)(c) and the Income Tax Application Rules to ensure that the merger is a qualifying amalgamation, and does not apply for the purposes of the Act.

Our Comments

Although subsection 177(1) of the OBCA provides that no securities may be issued in connection with the amalgamation and this subsection does not specially provide for a conversion of the parent's shares into shares of Amalco, the result is that the shareholders of the parent corporation are shareholders of Amalco after the amalgamation. It is generally accepted that under most Canadian corporate law statutes, including the OBCA, on an amalgamation, no new corporation is created and the predecessor corporations are not extinguished. Rather, Amalco is a fusion and continuation of the predecessor corporations. See for instance paragraph 179(a) of the OBCA, The Queen v. Black & Decker Manufacturing Co. Ltd., [1975] 1 S.C.R. 411, Witco Chemical Co. Canada Ltd. v. Oakville (Town), [1975] 1 S.C.R. 273 and The Queen v. Pan Ocean Oil Ltd. 94 DTC 6412 (FCA) (leave to appeal to the SCC refused November 17, 1994).

Since the shareholders of the parent corporation become shareholders of Amalco as a matter of law, and Amalco is not the same entity as the parent corporation, we are of the view that the shares of the parent are converted into shares of Amalco because of the short-form vertical amalgamation for the purposes of subparagraph (b)(iii) of the definition of "disposition" in subsection 248(1).

We believe that this position is consistent with the following definitions of "convert". For instance, Black's Law Dictionary (1999) defines a conversion as "...the act of changing from one form to another; the process of being exchanged." The Canadian Oxford Dictionary (2001) defines convert as "...change (moneys, stocks, units in which a quantity is expressed, etc.) into others of a different kind."

We agree that subsection 87(1.1) only applies for the purposes of determining whether an amalgamation is a qualifying amalgamation under subsection 87(1), however, based on the foregoing analysis, it is not necessary to resort to this provision for the purposes of determining whether there has been a disposition of the shares of the parent corporation.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R5.

Yours truly,

Mark Symes
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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