5 March 2003 External T.I. 2002-0151465 - Amalgamation Expenses

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: (1) Whether amalgamation expenses incurred by Pubco1 and Pubco2 will constitute eligible capital expenditures, and (2) whether the cost of issuing shares incurred by Amalco will be deductible under paragraph 20(1)(e)

Position: (1) Question of fact, and (2) generally yes, provided the shares of Amalco are "issued"

Reasons: The law

XXXXXXXXXX 2002-015146
Gwen Watson
March 5, 2003

Dear XXXXXXXXXX:

Re: Amalgamation Expenses

This is in reply to your letter of June 28, 2002, wherein you requested our views regarding the tax treatment, under the Income Tax Act (Canada) (the "Act"), of certain fees incurred in connection with the amalgamation of two public corporations.

In your hypothetical scenario, Pubco1 and Pubco2 entered into a merger agreement under the terms of which they will amalgamate to form Amalco, which will be governed by subsection 87(1) of the Act. Pursuant to the merger agreement, Amalco will issue shares of its capital stock to the shareholders of Pubco1 and Pubco2 in exchange for their shares of each corporation. Each of Pubco1 and Pubco2 incurs the following expenses:

1. Fees paid to lawyers and accountants for due diligence, advice on the implications of the merger and advice on structuring the acquisition; and

2. Fees paid to investment bankers for commission, finders' fees, deal structuring advice and negotiation assistance.

In addition, Amalco incurs costs relating to the issuance of its shares to the former shareholders of Pubco1 and Pubco2.

In your view, the costs incurred by Pubco1 and Pubco2 would be eligible capital expenditures to them in accordance with the position outlined in paragraph 14 of Interpretation Bulletin IT-143R3 Meaning of Eligible Capital Expenditure, dated August 29, 2002, and deductible under paragraph 20(1)(b). In addition, you believe that the expenses incurred by Amalco would be deductible pursuant to paragraph 20(1)(e).

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Our Comments

Eligible Capital Expenditures

As outlined in paragraph 2 of Interpretation Bulletin IT-143R3, an eligible capital expenditure, as defined in subsection 14(5) of the Act, generally includes an outlay or expense made or incurred by a taxpayer:

(a) in respect of a business;

(b) as a result of a transaction occurring after 1971;

(c) on account of capital; and

(d) for the purpose of gaining or producing income from the business (whether or not income from the business was actually produced by such outlay or expense).

In paragraph 14 of Interpretation Bulletin IT-143R3, the Canada Customs and Revenue Agency (the "CCRA") states that incorporation or similar expenses incurred in connection with the setting up of a new corporation or an amalgamation of two or more corporations will be eligible capital expenditures if they meet the requirements set out in subsection 14(5) and paragraph 2 of Interpretation Bulletin IT-143R3.

Normally, the CCRA would view the expenses incurred by Pubco1 and Pubco2 as being on account of capital and therefore non-deductible in computing business income by virtue of paragraph 18(1)(b). These expenses will only be eligible capital expenditures if they are in respect of a business and for the purposes of gaining or producing income from the business, both of which involve questions of fact that can only be determined by a review of all the surrounding facts and circumstances.

Paragraph 20(1)(e)

Expenses of issuing shares are normally regarded as being on account of capital. In our view, Amalco would be only be entitled to a deduction under paragraph 20(1)(e) if its shares are actually "issued" to the former shareholders of Pubco1 and Pubco2, and further, the deduction may only be in respect of expenses incurred in the course of such issuance. Paragraph 16 of Interpretation Bulletin IT-341R3 Expenses of Issuing or Selling Shares dated November 29, 1995 provides some examples of the types of expenses that are deductible under paragraph 20(1)(e).

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, and are not binding on the CCRA.

Yours truly,

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