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: Whether, in the context of the particular hypothetical situation, subsections 87(11) and 88(1) of the Income Tax Act (the "Act") would apply to each of Subco 1 and Subco 2 for purposes of determining the proceeds of disposition to Amalco for the shares of the capital stock of each subsidiary and for the purposes of determining the cost to Amalco of each capital property of Subco 1 and Subco 2 acquired on the amalgamation, including any "bump amount" calculated under paragraphs 88(1)(c) and (d)?
Position: Clarifications provided.
Reasons: In accordance with the Act and our previous positions.
XXXXXXXXXX
2011-042807
S. Snell
(613) 946-3261
December 9, 2011
Dear XXXXXXXXXX :
RE: Potential Application of Subsections 87(11) and 88(1) in the Context of a Vertical Amalgamation of a Parent and Two Subsidiary Wholly-Owned Corporations
We are writing in response to your query in which you request our comments in respect of the potential application of subsections 87(11) and 88(1) Income Tax Act (the "Act") in the circumstance where a corporation amalgamates vertically with two other corporations, all of which are taxable Canadian corporations, to form a new corporation whereby the shares of the capital stock of the parent corporation shall be the shares of the capital stock of the new corporation.
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Act.
1) Facts and Assumptions
Our understanding of the facts and assumptions is as follows:
1. A corporation ("Parent") acquires all of the issued and outstanding shares of the capital stock of two corporations ("Subco 1" and "Subco 2") in an arm's length transaction.
2. Each of Parent, Subco 1 and Subco 2 is a "taxable Canadian corporation" pursuant to the definition in subsection 89(1).
3. Each of Subco 1 and Subco 2 is a "subsidiary wholly-owned corporation" pursuant to the definition in subsection 248(1).
4. Parent will amalgamate with each of Subco 1 and Subco 2 separately under the provisions of subsection 87(1) to form a new corporation ("Amalco"). The terms of the amalgamation call for the cancellation of all of the issued and outstanding shares of the capital stock of Subco 1 and Subco 2 respectively, such that the shares of the capital stock of Parent will be considered to be the shares of the capital stock of Amalco.
2) Your Question
You have considered the following provisions in the context of your query:
A qualifying amalgamation for the purposes of subsection 87(1), means a merger of two or more corporations each of which was, immediately before the merger, a taxable Canadian corporation (each of which corporation is referred to in section 87 as a "predecessor corporation") to form one corporate entity (in section 87 referred to as a "new corporation") in such a manner that:
(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger becomes property of the new corporation by virtue of the merger,
(b) all of the liabilities (except amounts payable to a predecessor corporation) of the predecessor corporations immediately before the merger become liabilities of the new corporation by virtue of the merger, and
(c) all of the shareholders (except any predecessor corporation) who owned shares of the capital stock of any predecessor corporation immediately before the merger, receives shares of the capital stock of the new corporation because of the merger, otherwise than as a result of the acquisition of property of one corporation by another corporation, pursuant to the purchase of that property by the other corporation or as a result of the distribution of that property to the other corporation on the winding-up of the corporation.
Paragraph 87(1.1) provides, inter alia, that for the purposes of paragraph 87(1)(c), where there is a merger of a corporation and one or more of its subsidiary wholly-owned corporations, any shares of the capital stock of the predecessor corporation owned by a shareholder (except any predecessor corporation) immediately before the merger that were not cancelled on the merger shall be deemed to be shares of the capital stock of the new corporation received by the shareholder by virtue of the merger as consideration for the disposition of the shares of the capital stock of the predecessor corporations.
Paragraph 87(11)(a) provides where at any time there is an amalgamation of a corporation (in subsection 87(11) referred to as the "parent") and one or more other corporations (each of which in subsection 87(11) is referred to as the "subsidiary") each of which is a subsidiary wholly-owned corporation of the parent, the shares of the subsidiary are deemed to have been disposed of by the parent immediately before the amalgamation for proceeds equal to the proceeds that would be determined under paragraph 88(1)(b) if subsections 88(1) and 88(1.7) applied, with any modifications that the circumstances require, to the amalgamation.
Similarly, where subsection 87(11) applies, paragraph 87(11)(b) provides in the context of an amalgamation as described above, that the cost to the new corporation of each capital property of the subsidiary acquired on the amalgamation is deemed to be the amount that would have been the cost to the parent of the property if the property had been distributed at that time to the parent on a winding-up of the subsidiary and subsections 88(1) and (1.7) had applied to the winding-up.
Subsection 248(1) provides that a "subsidiary wholly-owned corporation" means a corporation all the issued share capital of which (except directors' qualifying shares) belongs to the corporation to which it is subsidiary.
You have requested our comments, in the context of the hypothetical situation and the provisions described above, with respect to whether or not subsections 87(11) and 88(1) would apply to each of Subco 1 and Subco 2 to determine the proceeds of disposition to Amalco for the shares of the capital stock of each subsidiary and to determine the cost to Amalco of each capital property of Subco 1 and Subco 2 acquired on the amalgamation, including any applicable "bump amount" calculated under paragraphs 88(1)(c) and (d).
3) Our Comments
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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. However, we offer the following general comments.
Where the provisions of subsections 87(1) and (1.1) would apply in the context of a vertical amalgamation as described in the preamble of subsection 87(11) and provided Subco 1 and Subco 2 would each be subsidiary wholly-owned corporations of Parent at the time of the amalgamation in accordance with subsection 248(1), the provisions of paragraphs 87(11)(a) and (b) would apply. More specifically, the shares of the capital stock of each of Subco 1 and Subco 2 would be deemed to have been disposed of by Parent immediately before the amalgamation for proceeds equal to the proceeds that would be determined under paragraph 88(1)(b) if subsections 88(1) and (1.7) would apply to the amalgamation (with any modifications that the circumstances would require).
Furthermore, the cost to Amalco of each capital property of Subco 1 and Subco 2 acquired on the amalgamation would be deemed to be the amount that would have been the cost to the Parent of the property if the property would have been distributed at that time to the Parent on a winding-up of each of Subco 1 and Subco 2 and subsection 88(1) and (1.7) would apply to the winding-up. In other words, to determine the cost to Amalco of the distributed property and the amount, if any, of the increase (the "bump amount") in respect of each such property to Amalco, it would be necessary to determine the amount which, under similar circumstances, would have been available under paragraphs 88(1)(c) and (d) if each of Subco 1 and Subco 2 would have instead been wound-up into Parent.
Consequently, Amalco may be able to increase the cost amount of certain non-depreciable capital property that it would acquire from Subco 1 and Subco 2 on the amalgamation in accordance with subsections 88(1)(c) and (d), provided that, among other things, such property is not otherwise an "ineligible property" as defined in subparagraphs 88(1)(c)(iii) to (vi).
In addition, we note that the extended definition of subsidiary wholly-owned corporation as contained in subsection 87(1.4), which generally applies notwithstanding subsection 248(1), would be limited in its application to the purposes of subsections 87(1.1), (1.2), (1.4) and (2.11) and it specifically would not apply for the purposes of subsection 87(11).
Finally, it should be noted that our comments are limited to the interpretation of the potential application of subsections 87(11) and 88(1) in the context of the scenario described above and that a review of all the relevant facts and circumstances would be required to confirm the availability of a bump of the tax cost of property pursuant to paragraphs 88(1)(c) and (d) in a particular situation. Consequently, nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or made any determination in respect of the availability of the bump in a particular situation.
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 Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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