26 June 1989 Income Tax Severed Letter 7-3564 - Canadian tax consequences of merger of subsidiary corporation with its parent where both are resident in the United States and both carry on oil and gas operations in Canada through a branch

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.

This is in response to your memorandum of January 6, 1989 and further to our meeting of May 25, 1989. You have inquired about the Canadian tax consequences of the merger of a subsidiary corporation with its parent where both are resident in the United States and both carry on oil and gas operations in Canada through a branch.

Since sections 87 and 88 of the Income Tax Act (the "Act") only have application where an amalgamation or a wind-up involves taxable Canadian corporations, the tax consequences of this type of merger will be determined with the assistance of the corporate law of the jurisdiction in which the merging corporations are resident. It is our understanding that under the Model Business Corporations Act of the United States ("MBCA"), which is worded similar to the language of the corporate laws of the individual states, one of the merging corporations will survive while the others will lose their separate legal existence. The assets of those which cease to exist (the "disappearing corporations") will be caused to have been transferred to the surviving corporation by the operation of law.

In our view the taxation year of a disappearing corporation will end at the point in time when its legal existence or separate legal existence ceases. Since the corporation will also be considered to have carried on business and to have owned its assets up to the point in time when its separate legal existence ceases, it is our view that the disposition of assets, discontinuance of business and the year end will all be considered to have occurred simultaneously.

Part XIV Tax

Since the fiscal year end and the discontinuance of business will be considered to have occurred simultaneously, we would be unable to support the position that the disappearing corporation would not at the end of the year, be carrying on business in Canada for the purposes of paragraph 219(1)(h) of the Act. Accordingly, it is our view that a corporation may deduct an allowance as determined under section 808 of the Regulations to the Act (the "Regulations"), in determining its Part XIV tax liability for its final taxation year. However, the definition of the phrase "qualified investment in property in Canada at the end of the year" as set out in subsection 808(2) of the Regulations will not include depreciable property or cumulative eligible capital, because the definition requires those assets to be on hand immediately after the end of the year. Accordingly, the amount of the claim available to a disappearing corporation under paragraph 219(1)(h) of the Act may not be as large as that which would be available under normal circumstances. However, it may be appropriate for the Minister to provide concessions in this area where the Minister and the taxpayers enter into an agreement under section 115.1 of the Act.

Capital Cost Allowance

As the year end and the disposition of assets occur simultaneously, it is also our view that the assets would be on hand at year end for the purposes of paragraph 1100(1)(a) of the Regulations. Accordingly, it would appear that a prorated CCA claim in respect of those assets would be available to the disappearing corporation under paragraph 20(1)(a) of the Act in its final taxation year.

Subsection 66.7(7) of the Act

In our view the deductions referred to in section 66.7 of the Act in respect of a disappearing corporation's Canadian exploration and development expense pools will be available to the acquiring company because it appears to meet the condition set out in paragraph 66.7(7)(b) of the Act.

Tax Liability of the Surviving Corporation

It our understanding that U.S. corporate law does not address the concept of tax history. In order to protect its tax position the Department should take the position that the tax histories of the disappearing corporations flow through to the surviving corporation on the merger. Accordingly, for the purposes of Part XIV tax for instance, the surviving corporation would, in the first taxation year ending after the merger, be required to add back under paragraph 219(1)(b) of the Act an amount equal to the aggregate of the claims under paragraph 219(1)(h) of the Act made by the surviving corporation and all of the disappearing corporations in the year prior to the merger. In addition, in the case of U.S. corporations, the claims made against the $500,000 cumulative Part XIV tax exemption referred to in Article X(6) of the Convention by the disappearing corporations would continue to affect the total claim available to the surviving corporation.

Where the Minister and the taxpayers have entered into an agreement under section 115.1 of the Act, the taxpayers are granted a deferral of gains occurring on the transfer of assets in exchange for the taxpayers' agreement to certain terms and conditions. Accordingly, the Department's tax position may be better protected where issues relating to the tax histories of the disappearing corporations are incorporated into the terms and conditions of the agreement. Prescribed treaty provisions such as Article XIII(e) of the Convention clearly give the Minister the right to attach such terms and conditions.

Article XIII(8) of the Convention and Section 115.1 of the Act

XXX

Subsection 7400(2) of the Regulations

Taxpayers who may qualify for relief under section 115.1 of the Act may wish to elect as provided under paragraph 115.1(b) of the Act in advance of the taxation years affected. However, the wording of paragraph 7400(2)(b) of the Regulations permits an election to be filed only after the day that the Minister mails to the vendor a notice of assessment for the taxation year of the vendor in which it disposed of the property. Accordingly, your Division may also wish to bring this matter to the attention of the Current Amendments Division. It is suggested a valid election can be filed at any time before the end of the period presently mentioned in section 7400 of the Regulations.

Subsection 227(10) of the Act

XXX. We have attached an advance ruling request made by XXX. Since the request is for a section 115.1 deferral, it is best dealt with your Division. In this regard we have advised XXX by telephone that we are transferring the file to you.