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.
921458
24(1) A. Seidel
(613) 957-2120
Attention: 19(1)
August 25, 1992
Dear Sirs:
This is in reply to your letter dated May 6, 1992 with respect to the application of subsection 87(4) of the Income Tax Act (the "Act") to a "vertical short-form" amalgamation. All references to statutes herein are references to the Act unless otherwise indicated.
You state that subsection 184(1) of the Canada Business Corporations Act (the "CBCA") provides that a holding corporation ("Parent") and one or more of its wholly-owned subsidiary corporations ("Subsidiary") may amalgamate and continue as one corporation ("Amalco") if certain requirements are met including that "no securities shall be issued by the amalgamated corporation in connection with the amalgamation." Therefore, a shareholder of Parent continues to hold the same shares subsequent to the amalgamation.
It is your view that subsection 87(4) does not apply to such a vertical short-form amalgamation for the following reasons:
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- (1) Paragraph 54(c) defines "disposition" for the purposes of subdivision "c" of the Act. This definition includes any transaction or event by which a share owned by a taxpayer is "converted" by virtue of an amalgamation. This definition would appear to clearly apply to a shareholder where an amalgamation occurs under the CBCA other than under section 184 of the CBCA as subsection 182(1) of the CBCA clearly provides for the amalgamation agreement to set out the manner in which shares are to be "converted". However, it appears that no such "conversion" is contemplated or occurs where the amalgamation is governed by subsection 184(1) of the CBCA.
- (2) Subsection 87(1) defines "amalgamation" for the purposes of section 87, including subsection 87(4). A vertical short-form amalgamation does not appear to be contemplated by subsection 87(1) since no new shares are issued and paragraph 87(1)(c) requires that "all shareholders (except any predecessor corporations) receive shares of the amalgamated corporation."
- (3) Subsection 87(1.1) was added to the Act applicable to mergers occurring after December 14, 1975 to ensure that such amalgamations would qualify as amalgamations for purposes of section 87. Subsection 87(1.1) deems shares of a predecessor corporation to be shares of the amalgamated corporation received as consideration for the disposition of shares of the predecessor corporation. However, subsection 87(1.1) only applies for purposes of subsection 87(1), the definition of amalgamation, and for purposes of the Income Tax Application Rules (the "ITAR's"). Subsection 87(1.1) does not otherwise deem a shareholder to have received new shares, to have disposed of old shares, or to have the old shares "converted" to new shares. The effect of subsection 87(1.1) is simply to ensure that all the aspects of section 87 which apply to predecessor corporations and amalgamated corporations will apply in the case of vertical short-form amalgamations.
Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information
You, therefore, conclude that subsection 87(4) does not apply in the circumstances of a vertical short-form amalgamation and, accordingly, conclude that the adjusted cost base of any share of Parent held by a shareholder immediately after the amalgamation will be equal to the adjusted cost base of the share immediately prior to the amalgamation and paragraph 87(4)(b) will not apply to re- allocate the adjusted cost base where a shareholder holds more than one class of shares of the Parent.
The Department's views with respect to the application of subsection 87(1) and subsection 87(4) to a short-form amalgamation are discussed in paragraphs 4, 6 and 48 of Interpretation Bulletin IT-474R. Paragraph 4 of IT-474R states that in those jurisdictions where a Parent and a Subsidiary are permitted to amalgamate with no shares being issued by Amalco, the requirement in paragraph 87(1)(c) that all of the shareholders of the predecessor corporations immediately before the merger receive shares of the capital stock of Amalco by virtue of the merger is deemed to be met by virtue of subsection 87(1.1) for short-form amalgamations occurring after December 14, 1975. Paragraph 48 of IT-474R states that a merger which qualifies as an amalgamation under subsection 87(1) by virtue of subsection 87(1.1) qualifies as an amalgamation for all of section 87.
Although corporate law may provide that the shares of Parent are not cancelled and that no new shares shall be issued by the amalgamated corporation, the shareholders of Parent are now shareholders of Amalco. Accordingly, we believe the shares of Parent are converted to shares of Amalco for purposes of clause 54(c)(ii)(C) and that subsection 87(4) will be applicable to vertical short-form amalgamations.
As stated in paragraph 40 of Interpretation Bulletin IT- 474R, it is the Department's position not to apply paragraph 87(4)(b) to reallocate the adjusted cost base of the shares of Amalco where the amalgamation agreement provides that the preferred and common shares of the predecessor corporations are to be converted into preferred and common shares, respectively, of Amalco. In a short-form amalgamation there is a conversion of the shares of Parent into the shares of Amalco but the conversion takes place under specific corporate legislation rather than by an amalgamation agreement. The corporate legislation requires shares of particular predecessor corporations to be cancelled and shares of other predecessor corporations to remain in existence.
Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information
In the situation where shares are converted in a short-form amalgamation under specific corporate legislation rather than under an amalgamation agreement, it is the Department's general position not to apply paragraph 87(4)(b) to reallocate the adjusted cost base of the shares of Amalco.
These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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