Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: In a particular situation, Aco holds all of the issued and outstanding shares of the capital stock of Bco. Both corporations are TCCs and CCPCs. On January 1, 20X0 Aco becomes indebted to Bco in the amount of US$1,000,000. On January 1, 20X0, the US dollar is at par with the Canadian dollar. On January 1, 20X5, control of Aco (and of Bco) is acquired. No election is made under subsection 256(9) with respect of the acquisition of control. The exchange rate in effect immediately before the acquisition of control is US$1 = CAN$1.10. On the same day, Aco and Bco are amalgamated to form Amalco. No specific time of amalgamation is shown on the certificate of amalgamation. Whether Aco’s deemed loss, pursuant to subsection 111(12), impacts the computation of the cost amount of the debt, for Aco, for the purposes of subsection 80.01(3).
Position: No.
Reasons: In the particular situation, the debt is deemed to have been settled immediately before the time that is immediately before the amalgamation by a payment made by the debtor and received by the creditor of an amount equal to the creditor’s cost amount. As such, there is no tax consequence for both Aco and Bco. However, as the debt would not have been outstanding immediately before the amalgamation (which is also immediately before the acquisition of control), subsection 111(12) is not applicable in the particular situation.
XXXXXXXXXX 2014-054494
J. Lafrenière
(613) 670-9013
August 2, 2016
Subject: Request for technical interpretation - Subsections 111(12) and 80.01(3)
Dear Madam,
This is in response to your e-mail of August 27, 2014, asking for clarification regarding the application of subsections 111(12) and 80.01(3) of the Income Tax Act (hereinafter, the "Act") in respect of a particular hypothetical situation (hereinafter, the "Situation"). We apologize for the delay in responding to your request.
Unless otherwise stated, all statutory references to a statutory section or a provision in this letter are to a section of the Act or to one if its provisions.
This technical interpretation provides general comments on the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations of April 22, 2016.
A. The Situation
A corporation (hereinafter "Aco") holds all of the issued and outstanding shares in the capital stock of another corporation (hereinafter "Bco"). We have assumed that Aco and Bco, at all relevant times and for all purposes of the Act, are taxable Canadian corporations and Canadian-controlled private corporations.
Aco is indebted to Bco in the amount of US$1,000,000 (hereinafter, the "Debt"). The Debt bears interest and was issued by Aco on January 1, 20X0 while the US dollar was at par with the Canadian dollar.
We have assumed that the Debt is a capital property to Bco and is of capital nature to Aco. Thus, any foreign exchange gain or loss, as the case may be, on repayment of the Debt by Aco, would be of a capital nature to it.
We have also assumed that Debt is a "commercial obligation" as defined in subsections 80(1) and 80.01(1).
On January 1, 20X5, the control of Aco, and indirectly that of Bco, was acquired. We have assumed that the election under subsection 256(9) was not made.
The exchange rate, effective immediately prior to the acquisition of control of Aco and Bco, for the conversion of US dollars into Canadian dollars was 1.10. You are of the view that, as at that time, the fair market value ("FMV") of the Debt to Aco was CDN$1,100,000, therefore, there would be an unrealized loss of CDN$100,000 on Aco's debt relating exclusively to the fluctuation of the value of the US dollar relative to the Canadian dollar.
Also on January 1, 20X5, Aco and Bco amalgamated to form Amalco. We have assumed that subsection 87(1) applied to the amalgamation.
We also have assumed that the time of the amalgamation was not stated in the amalgamation agreement or in the certificate of amalgamation.
We understand that, as a result of the amalgamation, the same person, namely Amalco, was creditor and debtor, and thus the Debt would have been extinguished by operation of law [“confusion”] under section 1683 of the Civil Code of Québec.
You state that subsection 111(12) provides that, for the purposes of subsection 111(4), the unrealized loss on the Debt related to the change in the exchange rate is deemed to be realized at the time immediately before the acquisition of the control of Aco and Bco. Accordingly, you are of the view that Aco at that time realized a capital loss of CDN$100,000 on the Debt.
You add that, because of the amalgamation of Aco with Bco, the Debt would be deemed to be settled by virtue of paragraph 80.01(3). You are also of the view that the settled amount would be deemed by virtue of paragraph 80(2)(k) to be the principal amount of the Debt on the day of the amalgamation multiplied by the exchange rate at the time the Debt was issued.
In your view, since there is no provision in the Act to alter the calculation of the cost amount of the Debt as a result of the loss deemed to have been realized by virtue of subsection 111(12), subsection 80.01(3) would have no tax impact in this case.
However, you add that if the amalgamation of Aco with Bco had not occurred on the same day as the acquisition of control, subsection 39(2) could apply to determine an exchange gain or loss related to fluctuations in the value of the US dollar relative to the Canadian dollar between the time of acquisition of control and that of the amalgamation.
C. Your question
You wish confirmation as to whether a loss deemed to be realized as a result of the application of subsection 111(12) would have an impact on the calculation of the cost amount of the Debt for Aco for the purposes of subsection 80.01(3).
Subsection 249(4) states, inter alia, that if at any time a taxpayer is subject to a loss restriction event (footnote 1), the taxpayer's taxation year is deemed to end immediately before that time and a new taxation year is deemed to begin at that time.
With respect to the Situation, since the election under subsection 256(9) was not made, the acquisition of control of Aco and Bco was deemed to have occurred at the beginning of January 1, 20X5.
In addition, paragraph 87(2)(a) provides that the corporate entity formed as a result of an amalgamation is deemed to be a new corporation the first taxation year of which is deemed to have commenced at the time of the amalgamation, and a taxation year of a predecessor corporation that would otherwise have ended after the amalgamation is deemed to have ended immediately before the amalgamation.
Paragraph 1.15 of Income Tax Folio S4-F7-C1 - Amalgamations of Canadian Corporations, states that the time of the amalgamation is generally the earliest moment on the date of amalgamation in the absence of a particular time specified in the certificate of amalgamation.
Based on our assumption that the time of the amalgamation would not be stated in the amalgamation agreement or in the certificate of amalgamation, the amalgamation of Aco with Bco would be deemed to have occurred at the earliest moment on January 1, 20X5, that is, at the same time as the acquisition of control of Aco and Bco.
Given that the acquisition of control of Aco and Bco and the amalgamation of these corporations would have taken place on the same day, and that such transactions would be the only ones effected on that day, other than those occurring in the ordinary course of their respective businesses, it is our view that Aco and Bco would each have only one taxation year-end, which would be deemed to occur immediately before January 1, 20X5.
In addition, subsection 111(12) states, inter alia, that for the purposes of subsection 111(4), if at any time a corporation that owes a foreign currency debt in respect of which the taxpayer would have had, if the foreign currency debt had been repaid at that time, a capital loss or gain, the taxpayer is deemed to own at the time that is immediately before that time a property (hereinafter, the “Notional Property”), the adjusted cost base (hereinafter “ACB”) and FMV of which are determined under paragraphs 111(12)(a) and (b), respectively.
In the context of subsection 111(4), "at any time" in subsection 111(12) refers to the time when a taxpayer is subject to a loss restriction event. Accordingly, the "measurement time" in subsection 111(12) is immediately before the loss restriction event. Thus, with respect to the Situation, the "measurement time," with respect to Aco, is immediately before the acquisition of its control, that is, immediately before January 1, 20X5 (hereinafter, the “Calculation Time").
For its part, subsection 80.01(3), inter alia, provides that a commercial obligation settled on the amalgamation of a debtor corporation and a creditor corporation is deemed to have been settled immediately before the time that is immediately before the amalgamation by a payment made by the debtor corporation and received by the creditor corporation of an amount equal to the cost amount of the commercial obligation to the creditor corporation.
Where a commercial obligation constitutes a capital property to the creditor, the cost amount is its ACB to the creditor in accordance with paragraph (b) of the definition of "cost amount" in subsection 248(1) and the definition of ACB in section 54.
Thus, the ACB to Bco of the Debt is US$1,000,000. However, paragraph 261(2)(a) provides that, subject to section 261, the currency to be used is the Canadian dollar. In addition, paragraph 261(2)(b) provides that, subject to certain exceptions, any amount taken into account in, inter alia, computing the income of a taxpayer that is expressed in a foreign currency must be converted to an amount expressed in Canadian currency using the relevant spot rate for the day on which the particular amount arose. The Debt arose on January 1, 20X0 when the US dollar was at parity with the Canadian dollar. As a result, the ACB to Bco of the Debt is CDN$1,000,000.
In light of the foregoing, the payment, deemed by virtue of subsection 80.01(3) to be made, immediately before the time immediately before the amalgamation, by Aco to Bco, would have no tax impact under the Act on Bco . The payment deemed to have been made by Aco to Bco (i.e., CDN$1,000,000) would be equal to the ACB to Bco of the Debt (i.e., CDN$1,000,000).
From the point of view of Aco, the debtor corporation, it is necessary to determine whether the deemed payment under subsection 80.01(3) is a "forgiven amount" within the meaning of that expression’s definition in subsection 80(1).
Under this definition, the "forgiven amount" in the context of the Situation would be equal to the excess of the lesser of the amount for which the obligation was issued and the principal amount of the obligation (i.e., US$1,000,000 in both instances) over the amount of the deemed payment made by Aco to Bco by virtue of subsection 80.01(3) (i.e., US$1,000,000).
Paragraph 80(2)(k), which applies for purpose of section 80, provides that where a debt is denominated in a foreign currency, the forgiven amount at any time in respect of the obligation is determined with reference to the relative value of that currency and Canadian currency at the time the obligation was issued. Thus, paragraph 80(2)(k) disregards any fluctuation in the value of a foreign currency relative to Canadian currency subsequent to the issuance of the debt.
Given that upon issuance of the Debt, the US dollar was at parity with the Canadian dollar, the deemed payment made by Aco to Bco by virtue of subsection 80.01(3) would not be a forgiven amount, since the principal of the Debt (CDN$1,000,000) would be equal to the deemed amount paid in settlement of the principal amount of the Debt (CDN$1,000,000).
For its part, subsection 39(2) applies to any fluctuation, after 1971, in the value of a foreign currency relative to the Canadian currency that results in a gain or loss. In paragraph 13(c) of Interpretation Bulletin IT-95R - Foreign Exchange Gains and Losses, December 16, 1980, the Canada Revenue Agency considers subsection 39(2) to apply at the time of repayment of part or all of a capital debt obligation.
In determining the foreign exchange gain or loss in the context of the Situation, it is necessary to measure the amount of the Debt which is deemed to be settled by virtue of subsection 80.01(3), expressed in Canadian currency, and the principal amount of the Debt in Canadian currency at the exchange rate in effect on the date it was incurred. The difference between the two amounts would be the gain or loss referred to in subsection 39(2).
From Aco's perspective, the principal amount of the Debt (i.e., CDN$1,000,000) would be the same as the amount of Debt deemed to have been settled under subsection 80.01(3) (namely, CDN$1,000,000). Consequently, the payment deemed to be made by Aco by virtue of subsection 80.01(3) would not give rise to a gain or loss for Aco under subsection 39(2).
That being said, it should be noted that under subsection 80.01(3), the Debt is deemed to have been settled immediately before the time immediately before the amalgamation.
In the context of the Situation, the acquisition of control of Aco and Bco occurred at the same time as the amalgamation of those two corporations for the purposes of the Act. Thus, under subsection 80.01(3), the Debt would be deemed to have been settled immediately before the Calculation Time. As Aco would no longer be indebted to Bco at the Calculation Time, it could not be able the owner of the Notional Property for the purposes of subsection 111(12) and, consequently, Aco's unrealized loss in respect of the Debt would not exist anymore at that time.
We trust that these comments will be of assistance.
Stéphane Charette, CPA, CMA, MBA
Manager
Reorganization 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 Subsection 251.2(2) states, inter alia, that for the purposes of the Act, a corporation is at any time subject to a loss restriction event if at that time control of the corporation is acquired by a person or group of persons.
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