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.
Dear XXX
This is in reply to your letter dated March 4, 1981 concerning the applicability of Article VIII of the Canada-U.S. Tax Convention (the Convention) in circumstances involving a merger of two non-resident corporations.
Two non-resident corporations, NR1 and NR2, are proposing to merge to form a new non-resident corporation, NR3. NR1 owns the shares of a Canadian corporation, CANCO 2. Another Canadian corporation, CANCO 1, owns shares in NR1. By virtue of the merger, the shares of CANCO 2 and shares of NR3 will be transferred by CANCO1 in exchange for the shares of NR1 held by CANCO 1. We understand that pursuant to the corporate law of the jurisdiction in which the merger is taking place, the merger results in a dis-position by NR1 and NR2 of their assets to NR3.
It is our opinion that a capital gain by NR1 on the disposition of its shares of CANCO 2 results from an exchange within the meaning of Article VIII and is, therefore, exempt from Canadian tax provided that the other requirements of the Article VIII are satisfied.
We would like to point out that if NR1 is a controlled foreign affiliate of CANCO 1, the provisions of subsection 91(1) of the Income Tax Act may apply in computing the income of CANCO 1 as a result of the disposition by NR1 of its shares in CANCO 2. In addition, CANCO 1 may also have a capital gain as a result of the disposition of its shares in NR1. The proceeds of disposition to CANCO 1 would be equal to the aggregate fair market value of the NR3 shares and the CANCO 2 shares received in exchange for -the NR1 shares.
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© Her Majesty the Queen in Right of Canada, 1981
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© Sa Majesté la Reine du Chef du Canada, 1981
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