17 February 2011 External T.I. 2010-0388081E5 - Clarification STEP Roundtable Q3 - Deemed Year End

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.

Principal Issues: At the STEP Conference Roundtable, the following question was posed: It is possible for control of a corporation to be acquired and for an amalgamation of the acquired corporation with one or more corporations to occur on the same day. Both the acquisition of control and the amalgamation results in a year end being triggered and a new taxation year. If no subsection 256(9) election is filed and the applicable amalgamation documents are silent as to the effective time of the amalgamation, would both the deemed year end resulting from the acquisition of control and the deemed year end resulting from the amalgamation occur at the same time being the commencement of the day on which these transactions occur? Clarification of our response was requested vis-à-vis the CRA's position as set out in paragraphs 10 and 11 of IT-474R2.

Position: Clarification provided.

Reasons: In accordance with the Act and our previous positions.

XXXXXXXXXX
									2010-038808
									S. Snell
									(613) 946-3261
February 17, 2011

Dear XXXXXXXXXX :

RE: Clarification in respect of our response to Question 3 of the 2010 Society of Trust and Estate Practitioners ("STEP") Conference Round table

We are writing in response to your query whereby you have requested clarification in respect of our response to Question 3 of the 2010 STEP Roundtable in light of our positions in paragraphs 10 and 11 of IT-474R2 "Amalgamations of Canadian Corporations" ("IT-474R2"), dated January 8, 2008.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Income Tax Act.

2010 STEP Roundtable Question 3 and CRA Response

At the 2010 STEP Roundtable, the Canada Revenue Agency ("CRA") was asked the following:

Question 3

It is possible for control of a corporation to be acquired and for an amalgamation of the acquired corporation with one or more corporations to occur on the same day. Both the acquisition of control and the amalgamation results in a year end being triggered and a new taxation year commencing. If no subsection 256(9) election is filed and the applicable amalgamation documents are silent as to the effective time of the amalgamation, would both the deemed year end resulting from the acquisition of control and the deemed year end resulting from the amalgamation occur at the same time being the commencement of the day on which these transactions occur?

Our response to the query was as follows:

CRA Comments

This question is similar to one posed at the 2007 APFF Roundtable. At that time we were asked to consider a similar question in relation to the amalgamation of a Pubco with a Holdco to form Amalco, where the three persons who were shareholders of Holdco will control Amalco as the shareholders of Pubco will receive non-voting shares when the corporations amalgamate. We stated that:

This amalgamation would technically generate two deemed taxation year-ends for Pubco. On the one hand, for purposes of the ITA, the taxation year of Pubco would be deemed to have ended immediately before the amalgamation of Pubco and Holdco pursuant to paragraph 87(2)(a) of the ITA. On the other hand, the group of three persons originally shareholders of Holdco would be deemed to have acquired, immediately before the amalgamation, control of Pubco pursuant to subparagraph 256(7)(b)(ii) of the ITA. Consequently, and in accordance with paragraph 249(4)(a) of the ITA (subject to paragraph 249(4)(c) of the ITA), the taxation year of Pubco that would, but for paragraph 249(4)(a) of the ITA, have included the time of the deemed acquisition of control pursuant to subparagraph 256(7)(b)(ii) of the ITA, would be deemed to have ended immediately before that time. In other words, the deemed acquisition of control of Pubco resulting from the amalgamation would technically generate a deemed taxation year-end with respect to Pubco immediately before the time that is immediately before the amalgamation.

This opinion is set out in Rulings document F2007-0243341C6, issued on October 5, 2007.

Issue and CRA Response

You are seeking confirmation as to whether or not our positions in paragraphs 10 and 11 of IT-474R2 are still applicable in light of the foregoing question and CRA response.

In general, paragraph 10 specifies the effective date of amalgamation under particular circumstances, while paragraph 11 specifies the effective deemed year end of a target corporation in the situation where an acquisition of control of the target occurs, followed by an amalgamation of the target with its acquirer, or with a corporation related to the acquirer corporation.

Paragraph 10 states that the effective date of amalgamation is governed by corporate law and is generally the date of issuance of letters patent or the date shown or set forth in the certificate of amalgamation, as the case may be. Furthermore, the time of the
amalgamation is generally the earliest moment on that date in the absence of a particular time specified in the certificate of amalgamation.

Paragraph 11 states that the CRA will accept that the target will have only one deemed year end as the result of an acquisition of control of a target corporation and its subsequent amalgamation on the same date with the corporation that acquired control of it or with a corporation related to the acquirer, provided that there is no election under subsection 256(9) in respect of the acquisition of control and provided that no time is specified in the certificate of amalgamation.

The foregoing positions have been reiterated in various CRA published documents including, more recently, in our response to Question 4 of the 2002 Association de planification fiscale et financière du Québec ("APFF") Roundtable on Federal Taxation, Technical Interpretation 2002-0156725(F), and in Technical Interpretation 2004-0105481E5. (footnote 1)

While it generally continues to be our position that a target will only have one deemed year end in circumstances where an acquisition of control of a target corporation is followed on the same date by the amalgamation of said target with its acquirer and certain conditions are met, we have addressed various situations where our position will vary depending on the particular circumstances.

For instance, in our response to Question 7 of the 2004 APFF Technical Interpretation 2004-0086741, we addressed the circumstance where an amalgamation occurs as part of a same day series of transactions in which one of the predecessor corporations carried out particular transactions on the day of, but prior to, the amalgamation and the articles of amalgamation do not provide the time of day for the amalgamation. We opined that the time of the amalgamation will not be the earliest time of the day of the amalgamation as provided in paragraph 10 of IT-474R2 (formerly paragraph 9 of IT-474R) and, instead, would be the time of the amalgamation as specified in the arrangement insofar as the series of transactions occurs logically. Consequently, in accordance with paragraph 87(2)(a), the taxation year of a predecessor corporation that would otherwise have ended after the amalgamation shall be deemed to have ended immediately before the amalgamation such that any transactions carried out by the predecessor corporation before the amalgamation would be reported by the predecessor corporation in its return of income for the taxation year deemed to have ended immediately before the amalgamation.

This position was recently discussed in our response to Question 18 of the 2010 APFF Roundtable on Federal Taxation, wherein we were asked whether our position that a target would only have one deemed year end in circumstances where an acquisition of control is followed on the same dated by an amalgamation would be limited to situations described in paragraph 11 of IT-474R2 and Technical Interpretation 2004-0105481. If our position would not be limited as previously described, we were asked to describe the situations where a corporation, for which control was acquired and which corporation carried out transactions on the day of the amalgamation, would have one year end. In our response, we opined that, in general, the CRA would apply the position described in paragraph 11 of IT-474R2 where the acquisition of control and the amalgamation of a predecessor corporation would be the only transactions outside of the normal course of business occurring on the day of the amalgamation. In this respect, we would consider transactions outside the normal course of business as all transactions described, for example, in a closing agenda or other document which would describe the logical order of transactions that must occur in order to carry out the amalgamation of a predecessor corporation. Furthermore, in our view, it would appear to be appropriate generally that the transactions which are legally effected by the predecessor corporation should be reported by that same predecessor corporation for tax purposes, rather than by the amalgamated entity.

Finally, as discussed in Technical Interpretation F2007-0243341C6 and reiterated in Question 3 at the 2010 STEP Conference, in the situation where an amalgamation of a public corporation ("Pubco") with a private corporation ("Holdco") occurs to form Amalco and the three persons who were shareholders of Holdco would acquire control of Amalco, the amalgamation would technically generate two deemed taxation year ends for Pubco. As previously stated, on the one hand, for purposes of the ITA, the taxation year of Pubco would be deemed to have ended immediately before the amalgamation of Pubco and Holdco pursuant to paragraph 87(2)(a) of the ITA. On the other hand, the group of three persons originally shareholders of Holdco would be deemed to have acquired, immediately before the amalgamation, control of Pubco pursuant to subparagraph 256(7)(b)(ii) of the ITA. Consequently, and in accordance with paragraph 249(4)(a) of the ITA (subject to paragraph 249(4)(c) of the ITA), the taxation year of Pubco that would, but for paragraph 249(4)(a) of the ITA, have included the time of the deemed acquisition of control pursuant to subparagraph 256(7)(b)(ii) of the ITA, would be deemed to have ended immediately before that time. In other words, the deemed acquisition of control of Pubco resulting from the amalgamation would technically generate a deemed taxation year end with respect to Pubco immediately before the time that is immediately before the amalgamation. The situation described in Technical Interpretation 2007-0243341C6, where a deemed acquisition of control of Pubco results from the amalgamation and the application of paragraph 256(7)(b), is different from the situation described in Paragraph 11 of IT-474R2, where the acquisition of control of the target corporation results from the acquisition of target by its parent corporation and is followed by an amalgamation of the target with its acquirer.

The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained
in the original document are shown below instead:

1 See also Question 39 of the CRA Round Table at the 1990 Canadian Tax Foundation Annual Conference; 9321140(F); 9317770(F); 9304925(E); 9830603(E); E 9800973(E); 2000-0036913(E); 2009-0338731R3.