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: Joint election under proposed paragraph 87(8.4)(e) and its interaction with section 116.
Position: See responses below.
Reasons: Administrative position.
2017 CTF Annual Conference
Question 14 - Section 116 procedures for tax-deferred dispositions on foreign mergers
The Department of Finance released draft legislation on September 16, 2016 (subsections 87(8.4) and (8.5)) to provide a mechanism for deferral of recognition of gains and losses from dispositions of shares of Canadian resident corporations caused by certain foreign mergers. This deferral would be available provided such shares are “taxable Canadian property” and do not constitute “treaty-protected property”.
Subsequently, on October 25, 2017 the Department of Finance released revised legislative proposals, followed on October 27 by Bill C-63 (“Bill C-63”), which expanded the scope of the tax-deferral mechanism of subsections 87(8.4) and (8.5) to also include joint elections made in connection with dispositions of certain taxable Canadian property (that is not treaty-protected property) that are interests in partnerships and interests in trusts. The revised wording in subsections 87(8.4) and (8.5) of Bill C-63 also contains details concerning the joint election mechanism, which had not been outlined in the original September 16, 2016 proposals. The draft proposals of subsections 87(8.4) and (8.5) in Bill C-63 apply to foreign mergers that occur after September 15, 2016.
The questions posed to the CRA for this Roundtable were based on the September 16, 2016 draft legislation. We have adapted our responses as appropriate to incorporate the amended proposals contained in Bill C-63.
Part A of Question 14:
One of the conditions in proposed subsection 87(8.4) is that the new corporation and disposing predecessor foreign corporation must make a joint election in accordance with prescribed rules. For foreign mergers occurring after September 15, 2016, will the CRA accept elections for the tax-deferred treatment of dispositions under proposed subsection 87(8.5) prior to enactment of the legislation?
CRA’s Response to Part A:
The revised wording in draft paragraph 87(8.4)(e) of Bill C-63 no longer states that the joint election is to be made in accordance with prescribed rules. Rather the revised wording indicates that the joint election is to be made in writing and filed within certain specified timeframes.
It has been the CRA’s longstanding practice to generally ask taxpayers to file on the basis of proposed legislation. Consequently, for foreign mergers occurring after September 15, 2016 but prior to the enactment of proposed subsections 87(8.4) and 87(8.5), the CRA would accept elections properly made pursuant to proposed paragraph 87(8.4)(e). However, we would also note that the coming into force provisions for subsections 87(8.4) and (8.5) in Bill C-63 state that a joint election made pursuant to paragraph 87(8.4)(e) will be deemed to have been filed on a timely basis if it is filed on or before the day that is six months after the day on which draft proposals of subsections 87(8.4) and (8.5) in Bill C-63 receive Royal Assent.
Part B of Question 14:
Can the CRA provide guidance on the manner of, and form for, making the joint election in proposed paragraph 87(8.4)(e)?
CRA’s Response to Part B:
Bill C-63 states that the joint election is to be made in writing. In the CRA’s view, it would be acceptable that this election in writing be made in the form of a letter.
As stated in Bill C-63, the joint election is to be filed on or before the filing-due date of the disposing predecessor foreign corporation (or the date that would be its filing-due date if subsection (8.5) did not apply to provide for a tax-deferred disposition) for the taxation year that includes the time of the disposition.
Part C of Question 14:
Will the CRA extend its position to exempt dispositions of shares from section 116 notification procedures in paragraph 1.82 of Income Tax Folio S4-F7-C1, “Amalgamations of Canadian Corporations”, to dispositions of shares in respect of which an election is made under proposed paragraph 87(8.4)(e)?
CRA’s Response to Part C:
The CRA is not prepared at this time to extend the narrow administrative concession to the new proposed legislative measures in subsections 87(8.4) and (8.5). Therefore, where a foreign merger results in a disposition of taxable Canadian property by a predecessor foreign corporation, the taxpayer should comply with the requirements in section 116.
Part D of Question 14:
If the CRA is not prepared to extend the position, can the CRA provide guidance on how it will review notifications for dispositions of shares submitted prior to the enactment of the proposed legislation? Specifically, would the CRA be prepared to issue clearance certificates in respect of a disposition of shares on the basis that the proceeds of disposition of the shares will be equal to their adjusted cost base to the disposing predecessor foreign corporation?
CRA’s Response to Part D:
For foreign mergers occurring after September 15, 2016 but prior to the enactment of the proposed subsections 87(8.4) and (8.5), the CRA would generally be prepared to issue certificates of compliance on the basis that the proceeds of disposition for the shares disposed of on the merger are equal to their adjusted cost base to the disposing predecessor foreign corporation, provided an otherwise valid joint election under proposed paragraph 87(8.4)(e) is made in respect of the disposition.
Pursuant to the October 25, 2017 proposals and Bill C-63, this position would also apply to joint elections filed in respect of partnership and trust interests.
Part E of Question 14:
Given that the proceeds of disposition of the shares will be deemed to be equal to the adjusted cost base of the shares to the disposing predecessor foreign corporation, will the CRA require that the notification include the valuation of the shares in order to issue a section 116 clearance certificate?
CRA’s Response to Part E:
For dispositions of shares in respect of which a valid joint election is made pursuant to proposed paragraph 87(8.4)(e) the CRA would generally not require that documentation be initially filed with the section 116 notification to support the fair market value of the shares on the date of the transaction in order to issue a certificate of compliance under section 116. The CRA would, however, require documentation to support the adjusted cost base of the shares to the disposing predecessor foreign corporation.
Pursuant to the October 25, 2017 draft proposals and Bill C-63, the above response would also apply for section 116 purposes in connection with valid joint elections that are filed in connection with partnership and trust interests.
November 21, 2017
Response prepared in collaboration with:
International Waivers and Dispositions Section
Domestic Compliance Programs Branch
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