11 May 1994 External T.I. 9130715 - TRANSFER OF PROPERTY RE 74.4(2) 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

913071
XXXXXXXXXX M.P. Sarazin

Attention: XXXXXXXXXX

May 11, 1994

Dear Sirs:

Re: Subsection 74.4(2) of the Income Tax Act - Transfer of Property

This is in reply to your letter dated October 28, 1991 wherein you requested our general comments regarding the application of subsection 74.4(2) of the Income Tax Act to the following situation. We apologize for the delay in responding to your letter. The delay resulted from our having to wait for a recent court decision on whether for the purposes of the Income Tax Act property is transferred to a corporation formed as a result of an amalgamation and our review of the decision's impact on the Department's interpretation of various provisions of the Act.

1. Father, a Canadian resident, is the sole officer, director and shareholder of A Co., a Canadian-controlled private corporation. A Co. does not qualify as a small business corporation, within the meaning set out under subsection 248(1) of the Act.

2. A family trust (the "Trust") for the benefit of Father's infant children is the sole shareholder of B Co., a Canadian corporation. B Co. does not qualify as a small business corporation. Father and Mother are the sole trustees of the Trust and the only two directors of B Co.

3. The Trust was initially funded with a loan from Father but the loan was repaid before 1988, in circumstances such that subsection 74.1(3) of the Act did not apply, so that subsection 74.1(2) of the Act also did not apply.

4. A Co. and B Co. amalgamate to form Amalco. On the amalgamation, Father and the Trust each receive shares of Amalco based upon the relative fair market value of their shares of A Co. and B Co., respectively.

You would like to know whether or not Father would be regarded as having transferred property either directly or indirectly to Amalco. In particular, you ask if Father would be regarded as having either transferred his shares of A Co. to Amalco or transferred the property owned by A Co. indirectly to Amalco.

Opinions

It appears that the interpretation you seek relates to specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with respect to specific transactions which are contemplated, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments in response to your letter.

Unless otherwise stated, all references to a statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

Whether or not subsection 84(9) of the Act will apply to any particular amalgamation can only be determined following a review of all relevant facts relating to that amalgamation. This would include a review of the relevant corporate law governing the amalgamation, the amalgamation agreement and any resolutions necessary to implement the amalgamation. However, if, as a result of an amalgamation, shares of a predecessor corporation were cancelled by the predecessor and new shares were issued, then the provisions of subsection 84(9) of the Act would result in a disposition of a share of the capital stock of the predecessor corporation to that corporation, and this would be considered to be a "transfer of property" to Amalco for the purposes of sections 74.4 and 74.5 of the Act, since Amalco is deemed by paragraph 87(2)(j.7) of the Act to be the same corporation as, and a continuation of, each predecessor corporation for the purposes of those sections. If this were the case in the situation described in your letter, we would regard Father as having transferred his shares of A Co. to Amalco, since Amalco and A Co. would be one and the same person by virtue of paragraph 87(2)(j.7) of the Act. We would not regard Father as having transferred the property of A Co. indirectly to Amalco.

In any case where subsection 84(9) of the Act does not apply as a result of the conversion of shares on an amalgamation, it would be necessary to determine whether the amalgamation constitutes an avoidance transaction within the meaning assigned by subsection 245(3) of the Act. If so, the Department would have to review the facts to determine whether the amalgamation has been undertaken in an attempt to avoid the application of subsection 74.4(2) of the Act and could therefore be considered to result in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole for the purposes of subsection 245(2) of the Act.

We trust that our comments will be of assistance and once again we apologize for the delay in responding to your enquiry.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch