3 July 1991 External T.I. 9031735 F - Non-qualifying Amalgamation

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.

5-903173

Dear Sirs:

Re:   Subsection 84(3) - Non-Qualifying Amalgamation

This letter is in response to your letter to Mr. Ted Fitz-Clarke of the Vancouver District Office, dated October 31, 1990, where you described the following hypothetical situation:

1.        A Ltd. and B Ltd. are both British Columbia corporations.

2.        A Ltd. is the parent corporation of B Ltd.

3.        Mr. Smith owns all of the outstanding shares of A Ltd.

4.        A Ltd. and B Ltd. will amalgamate to form AB Ltd.

You then proceeded to discuss the income tax consequences to Mr. Smith of two variations of the amalgamation of A Ltd. and B Ltd. to form AB Ltd.  In the first variation, Mr. Smith will hold only share consideration in AB Ltd. after the amalgamation.  In the second variation, Mr. Smith will hold both share consideration in AB Ltd. and non-share consideration in the form of cash or debt of AB Ltd. after the amalgamation.  In the second variation, Mr. Smith would attempt to claim a capital gains deduction if any capital gain was realized on the disposition of his A Ltd. shares.  In both variations, the total fair market value of the share and non-share consideration (if any) received by Mr. Smith on the amalgamation will be equal to the fair market value of the A Ltd. shares held before the amalgamation.  You then requested our comments and, in particular, our view of the application of Guaranty Properties Ltd. v. The Queen 90 DTC 6363 (F.C.A.) to the second variation.

Comments

With respect to the first variation, it is our position that paragraphs

87(4)(a) and 87(4)(b) generally will apply to a shareholder of an amalgamating corporation who holds shares in the amalgamating corporation as capital property and receives only shares in the amalgamated corporation on the amalgamation.  In addition, it is our position that subsection 84(3) generally will not apply to deem the amalgamating corporation to have paid and the shareholder of the amalgamating corporation to have received a dividend upon an amalgamation where the shareholder of the amalgamating corporation receives only shares of the amalgamated corporation.  This position is described in paragraph 52 of IT-474R which provides that the provisions of section 84 will not apply to deem a dividend to have been paid or received by virtue of an amalgamation to which section 87 is applicable.

On this basis, we agree with you that paragraphs 87(4)(a) and 87(4)(b) likely will apply to Mr. Smith where Mr. Smith held his A Ltd. shares as capital property and received only AB Ltd. shares on the amalgamation of A Ltd. and B Ltd.  In addition, subsection 84(3) likely will not apply to deem A Ltd. to have paid and Mr. Smith to have received a dividend upon the amalgamation of A Ltd. and B Ltd. in respect of the AB Ltd. shares received by Mr. Smith upon the amalgamation.

With respect to the second variation, subsection 87(4) will not be applicable to a shareholder of an amalgamating corporation who receives consideration other than shares of the amalgamated corporation on the amalgamation of the amalgamating corporations. In addition, we are again of the view expressed in paragraph 52 of IT-474R that section 84 will not apply to an amalgamation to which section 87 is applicable.  As a result, it is our position that subsection 84(3) generally will not apply to deem an amalgamating corporation to have paid and a shareholder of an amalgamating corporation to have received a dividend even where the shareholder has received both share consideration in the amalgamated corporation and non-share consideration from the amalgamated corporation.  On this basis, a shareholder of an amalgamating corporation who held shares in the amalgamating corporation as capital property generally will be considered to realize a capital gain or loss on the disposition of these shares in accordance with the provisions of subdivision c.

As a result, we agree with you that subsection 87 (4) will not be applicable where Mr. Smith received consideration other than shares of AB Ltd. upon the amalgamation of A Ltd. and B Ltd.  In addition, we are of the view, subject to the comments concerning subsection 245(2) below, that subsection 84(3) likely will not be applicable to deem A Ltd. to have paid and Mr. Smith to have received a dividend and that the provisions of subdivision c likely would be applicable to cause Mr. Smith to realize either a capital gain or loss on the disposition of his A Ltd. shares.

While you did not request our comments concerning subsection 245(2) we feel that they may be appropriate in the circumstances described by the second variation. Subsection 245(2) is applicable, where a transaction is an avoidance transaction, to redetermine the tax consequences to a person to deny any tax benefit that arises from the transaction or any series of transactions that includes the transaction.  In the second variation, avoidance of the dividend provisions of section 82 and, in particular, section 84 and utilization of the capital gains deduction in section 110.6 would be considered tax benefits within the meaning of subsection 245(1) if these provisions otherwise would have been applicable.  Further, the amalgamation of A Ltd. and B Ltd. in the circumstances described in the second variation would be an avoidance transaction within the meaning of subsection 245(3) if the primary purpose of the amalgamation was to enable Mr. Smith to obtain the tax benefits previously mentioned.  As a result, subsection 245(2) may apply to the amalgamation of A Ltd. and B Ltd. (and any related transactions) unless the amalgamation (and any related transactions) may not reasonably be considered to result directly or indirectly in a misuse of any of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole (subsection 245(4)).  The Act contains several provisions designed to prevent the conversion of dividend or other income into proceeds of disposition.  In particular, section 84.1 describes the circumstances in which consideration received by an individual on the disposition of shares of a corporation should be considered to have been received as a dividend.  In this regard, paragraph 25 of Information Circular 88-2 states that:

"Provisions, such as those mentioned above [including section 84.1], indicate the circumstances in which amounts received by a shareholder of a corporation from the corporation on a disposition of shares or other property are to be accounted for as a dividend. If as a result of a series of transactions a shareholder realizes a capital gain on the disposition of property and a transaction in the series is an avoidance transaction, subsection 245(2) will be applied to the transaction if it is determined that the series of transactions was carried out to thwart the purpose of the provision in question".

In our view, it is clearly possible for the amalgamation described in the second variation to be considered to have been carried out to avoid the application of section 84.1.  If Mr. Smith had transferred his A Ltd. shares to a holding corporation in exchange for share and non-share consideration from the holding corporation, section 84.1 of the Act would have applied.  On this basis, it is our view that subsection 245(2) may be applicable to redetermine the tax consequences of the second variation.

With respect to the application of the Guaranty Properties Ltd. v. The Queen decision to the second variation, we began reviewing all relevant positions affected by the decision after leave to appeal the decision to the Supreme Court of Canada was denied.  As a result, we will not be in a position to comment until the review process is complete.

The comments contained in this letter are only expressions of opinion and are not binding on Revenue Canada, Taxation in accordance with the procedures set out in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.

We hope the above will be of some assistance.

Yours truly,

for DirectorReorganizations and Non-Residents DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

cc. J.C. Fitz-Clarke