10 April 2003 External T.I. 2002-0169775 - Foreign Merger

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: Does Bco, a Japanese company, dispose of its assets, including its shares of Cco (a "taxable Canadian corporation" in the oil & gas business in Canada), if Bco merges with Aco (another Japanese company that is Bco's parent) and the corporate law in Japan is of a "continuation type", as described in The Queen v. Black and Decker Manu Co., [1975] 1 S.C.R. 411.

Position: No, generally.

Reasons: Generally, there is no disposition of assets by a predecessor corporation upon a merger if the applicable corporate law is of a "continuation type", unless there is a factual disposition of the assets, or a "disposition" of the assets pursuant to subsection 248(1) of the Act. However, there can be a disposition of shares in the predecessor corporations at the shareholder level.

XXXXXXXXXX 2002-016977
Gilles L. Gosselin
Attention: XXXXXXXXXX

April 10, 2003

Dear Sirs/Mesdames:

Re: Foreign Merger

We are writing in response to your request for a technical interpretation dated October 18, 2002 in respect of the tax consequences of a Japanese merger.

Cco is a "taxable Canadian corporation", as defined in subsection 248(1) of the Income Tax Act (Canada)(the Act), that carries on in Canada the business of exploring for and producing petroleum and natural gas. The shares of Cco are not listed on a prescribed stock exchange. Bco, a corporation incorporated and resident in Japan, owns all of the issued and outstanding shares of Cco. Aco, a corporation incorporated and resident in Japan, owns all of the issued and outstanding shares of Bco. The fair market value of the shares of Cco is in excess of their adjusted cost base. Aco and Bco will merge to form Amalco pursuant to the provisions of the Commercial Code of Japan (the Japanese Merger).

You would like to know whether, for the purposes of the Act, we consider Bco to have disposed of its property, including the shares of Cco, as a result of the Japanese Merger.

The particular situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not our practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

You refer to question 26 of the 1992 Canadian Tax Conference, which states:

Question 26 Non-Qualifying Amalgamations

What is the department's view of the tax implications of an amalgamation that does not qualify under section 87 of the Act? Is such an amalgamation treated as causing a disposition of the shares of each predecessor corporation by its shareholders but not as a disposition of the assets and liabilities of each predecessor corporation?

Department's Position

At the predecessor corporation level, the Canadian income tax treatment of an amalgamation that does not qualify under section 87 of the Act will be determined substantially by the legal consequences flowing from the corporate law under which the predecessor corporations are amalgamated. Where the applicable corporate law provides that the predecessor corporations involved in the amalgamation cease to exist and that a new corporation is formed on the amalgamation, the predecessor corporations generally will be considered to have disposed of any property held immediately before the amalgamation. Where, however, the applicable corporate law is of a "continuation type" as described in the Supreme Court of Canada decision in The Queen v. Black and Decker Manu. Co. Limited, 29 the predecessor corporations generally will not be considered to have disposed of any assets held immediately before the amalgamation.

At the shareholder level, the shareholders of each predecessor corporation, including other predecessor corporations, generally will be considered to have disposed of their shares in each predecessor corporation for capital gains purposes. Specifically, the position outlined in paragraph 42 of Interpretation Bulletin IT-474R30 is restricted, as described in paragraph 1 of that bulletin, to amalgamations that satisfy the requirements of subsection 87(1).

We continue to be of the view that where a merger occurs and the relevant corporate law is of a "continuation type", the predecessor corporations generally will not be considered to have disposed of any assets held immediately before the merger (The Queen v. Black and Decker Manu Co., [1975] 1 S.C.R. 411).

Accordingly, in our view, upon the Japanese Merger, Bco will generally not be considered to dispose of any assets, including the shares of Cco, if the applicable corporate law in Japan is of a "continuation type", unless there is a factual disposition, or a "disposition" pursuant to the definition in subsection 248(1) of the Act, of any assets by Bco, including its shares of Cco. You have provided an English translation of a portion of the Commercial Code of Japan. However, we cannot comment on whether the excerpt provided is the applicable corporate law nor whether the law is of a "continuation type" because it is not our practice to interpret the commercial law of another country.

Nevertheless, we stress that there can be a disposition of the shares in the predecessor corporations at the shareholder level on an amalgamation, as noted in the second paragraph of the response to question 26 noted above. Thus, there may be a disposition of the shares in Aco and Bco by their respective shareholders as a result of the Japanese Merger, depending upon the facts. We also note that the shares of Aco and Bco may be taxable Canadian property ("TCP"), as defined in subsection 248(1) of the Act, again depending upon the facts. If there is a disposition of the shares of Aco and Bco and they are TCP, then the Canada - Japan Convention (the "Convention)" will not provide any relief because: (a) paragraph 4 of Article 13 of the Convention states that gains derived by a resident of Japan from the alienation of any property (other than that referred to in paragraphs 1 to 3, which do not apply) which arise in Canada may be taxed in Canada; and (b) section 6.3 of Income Tax Conventions Interpretation Act states that gains derived from the disposition of TCP are deemed to arise in Canada.

However, we note that the Department of Finance, in the December 2002 Legislative Proposals and Explanatory Notes Relating to Income Tax, has proposed amending the definition of "disposition" in subsection 248(1) of the Act by adding paragraph (n) to exclude certain dispositions of shares which are the result of foreign mergers, and this proposed amendment may apply to the Japanese Merger depending upon the particular situation. In addition, if the Japanese Merger meets the definition of "foreign merger" in subsection 87(8.1) of the Act, rollover treatment pursuant to subsection 87(8) may be available.

Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R5 and are not binding on the Canada Customs and Revenue Agency. We hope they are of assistance.

Yours truly,

Jane Stalker
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch