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: Availability of 87(11) bump through successive amalgamations.
Position: Yes
Reasons: Continuation rule in subsection 88(4))
XXXXXXXXXX 2002-013071
December 18, 2002
Dear XXXXXXXXXX:
Re: Technical Interpretation - Subsection 88(4)
This is in reply to your letter of June 10, 2002 in which you requested our interpretation with respect to the application of subsection 88(4) of the Income Tax Act (Canada) ("the Act") and of certain provisions of subsection 88(1) of the Act to two hypothetical situations.
Background
? "TCC" is a taxable Canadian corporation.
? "Parent" is a taxable Canadian corporation and wholly-owned subsidiary of TCC.
? "Target" is a taxable Canadian corporation.
? "Subco1" is a taxable Canadian corporation and wholly-owned subsidiary of Target.
? "Subco2" is a taxable Canadian corporation and wholly-owned subsidiary of Subco1.
? Subco2 owns two types of non-depreciable capital properties, referred to herein as the "Keep Assets" and the "Sell Assets".
? TCC and Parent make an offer to acquire Target shares for common shares of TCC. More than two-thirds, but less than 90% of the Target shareholders accept the offer.
? Some of the tendered Target shares are acquired by TCC and some are acquired by Parent. (In the case of Target shares acquired by Parent, Parent issues its shares to TCC in exchange for the issuance by TCC of TCC shares to Parent, which TCC shares are then given by Parent as consideration for the Target shares acquired by it.)
? TCC transfers the Target shares that it acquires to Parent in exchange for shares of Parent.
? In order to acquire the remaining shares of Target held by the minority shareholders, Parent incorporates a wholly-owned subsidiary ("Newco") and transfers its Target shares to Newco in exchange for Newco shares.
Alternative One
? Newco, Subco1, Subco2, and Target amalgamate to form NewTarget. On the amalgamation, Parent receives NewTarget common shares and the minority shareholders of Target receive redeemable preferred shares of NewTarget.
? The redeemable preferred shares of NewTarget are redeemed.
? Parent and NewTarget amalgamate to form NewTarget2.
You wish to confirm that, for the purpose of applying paragraph 87(11)(b) of the Act to determine the cost of the Keep Assets and the Sell Assets to NewTarget2, (i) the TCC shares acquired by former Target shareholders will be "specified property" under subparagraph 88(1)(c.4)(iii) of the Act, and (ii) NewTarget will be considered to be the same corporation as, and a continuation of, Subco2 for the purpose of applying paragraphs 88(1)(c) and (d) of the Act and, in particular, for the purpose of determining whether the Keep Assets and the Sell Assets were capital property owned by NewTarget at the time that Parent last acquired control of NewTarget.
With respect to the first issue, it is your view that, because of the operation of subsection 88(4), NewTarget will be considered to be the same corporation as, and a continuation of, Target for the purpose of the reference to "subsidiary" in subparagraph 88(1)(c.4)(iii). Consequently, the TCC shares acquired by former Target shareholders will be "specified property".
With respect to the second issue, it is your view that, because of the operation of subsection 88(4), NewTarget will be considered to be the same corporation as, and a continuation of, Subco2 for the purpose of determining whether the Keep Assets and the Sell Assets were capital property owned by NewTarget at the time that Parent last acquired control of NewTarget.
The shares of TCC are deemed by subparagraph 88(1)(c.3)(i) to be property acquired in substitution for property distributed to the parent on the winding-up; therefore, the bump will be denied unless the TCC shares are determined to be "specified property" under paragraph 88(1)(c.4).
Subparagraph 88(1)(c.4)(iii) provides that "specified property" includes a share of a taxable Canadian corporation received as consideration for the acquisition of a share of the subsidiary by the taxable Canadian corporation or by the parent where the parent was a specified subsidiary corporation of the taxable Canadian corporation immediately before the acquisition.
In this hypothetical situation, the parent is Parent and the subsidiary is NewTarget. In applying the tests in subparagraph 88(1)(c.4)(iii), the TCC shares were not received as consideration for the acquisition of shares of NewTarget (subsidiary) by TCC or Parent (which are, respectively, the taxable Canadian corporation and the parent referred to in subparagraph 88(1)(c.4)(iii)). However, pursuant to paragraph 88(4)(b), NewTarget is deemed to be the same corporation as, and a continuation of, each of its predecessor corporations (Newco, Target, Subco1, and Subco2). It is our view that when interpreting subsection 88(4) in a particular situation, the corporation formed as a result of an amalgamation is deemed to be the same corporation as, and a continuation of, the predecessor relevant to that situation, having regard to all the circumstances including the provision to which subsection 88(4) is being applied.
Therefore, in the above hypothetical situation, we would apply subsection 88(4) such that the TCC shares issued to the former Target shareholders would be considered to be received as consideration for the acquisition of shares of the subsidiary, NewTarget, (because NewTarget is deemed to be the same corporation as, and a continuation of, Target) by TCC and Parent (which are, respectively, the taxable Canadian corporation and the parent referred to in subparagraph 88(1)(c.4)(iii)).
It is our view that subsection 88(4) will apply to deem NewTarget to be the same corporation as, and a continuation of, Subco2 when considering whether NewTarget (the subsidiary) owned the Keep Assets and the Sell Assets when control of NewTarget was last acquired and when considering when control of NewTarget (the subsidiary) was last acquired by Parent. In this context, Subco2 is the relevant predecessor, for the purpose of applying paragraph 88(4)(b), because Subco2 owned the property in question at the time that control was last acquired.
Alternative Two
? Newco and Target amalgamate to form NewTarget. On the amalgamation, Parent receives NewTarget common shares and the minority shareholders of Target receive redeemable preferred shares of NewTarget.
? The redeemable preferred shares of NewTarget are redeemed for cash consideration.
? NewTarget, Subco1, and Subco2 amalgamate to form NewTarget2.
? Parent and NewTarget2 amalgamate to form NewTarget3.
You wish to confirm that, for the purpose of applying paragraph 87(11)(b) to determine the cost of the Keep Assets and the Sell Assets to NewTarget3, (i) the TCC shares acquired by former Target shareholders will be "specified property" under subparagraph 88(1)(c.4)(iii), and (ii) NewTarget2 will be considered to be the same corporation as and a continuation of, Subco2 for the purpose of applying paragraphs 88(1)(c) and (d) and, in particular, in determining whether the Keep Assets and the Sell Assets were capital property owned by NewTarget2 at the time that Parent last acquired control of NewTarget2.
With respect to the first issue, it is your view that, because of the operation of subsection 88(4), NewTarget2 will be considered to be the same corporation as, and a continuation of, Target for the purpose of the reference to "subsidiary" in subparagraph 88(1)(c.4)(iii). Consequently, the TCC shares acquired by former Target shareholders will be "specified property".
With respect to the second issue, it is your view that, because of the operation of subsection 88(4), NewTarget2 will be considered to be the same corporation as, and a continuation of, Subco2 for the purpose of determining whether the Keep Assets and the Sell Assets were capital property owned by NewTarget2 at the time Parent last acquired control of NewTarget2.
We agree with your views on the same basis as set out in our comments with respect to Alternative One.
The above comments represent our general view with respect to the subject matter and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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