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.
5-932176 XXXXXXXXXX
Attention: XXXXXXXXXX
December 10, 1993
Dear Sirs:
RE: Subsection 87(4) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter of July 26, 1993 wherein you requested our comments on subsection 87(4) of the Act in the following hypothetical situations.
Situation 1
1. ABCo is owned equally by individuals A and B who hold the shares of ABCo as capital property. ABCo is a taxable Canadian corporation ("TCC"). The terms "capital property" and "TCC", as used here and subsequently, have the meanings assigned by paragraphs 54(b) and 89(1)(i) of the Act, respectively.
2. XYCo is owned equally by individuals X and Y who hold the shares of XYCo as capital property. XYCo is a TCC.
3. ABCo and XYCo amalgamate under the relevant corporate laws to form Amalco.
4. In exchange for their shares of ABCo, A and B receive only shares of Amalco.
5. In exchange for their shares of XYCo, X receives only shares of Amalco and Y receives a nominal amount of shares of Amalco and non-share consideration.
Your Comments
It is your view that:
A. The amalgamation would meet the requirement under paragraph 87(1)(c) of the Act because all of the shareholders of the predecessor corporations, including Y, have received shares of the new corporation, Amalco.
B. A, B and X will be subject to the provisions of subsection 87(4) of the Act.
C. Y would not be subject to the provisions of subsection 87(4) of the Act and, pursuant to clause 54(c)(ii)(C) of the Act, would be considered to have disposed of the shares of XYCo. The provisions of section 84.1 would not apply to this transaction.
Our Comments:
It is assumed that A, B, X, Y, ABCo and XYCo deal at arm's length with each other and that ABCo and XYCo are subject to the provisions of the Canada Business Corporations Act. It is our view that:
A. The provisions of paragraph 87(1)(c) of the Act will apply since all of the shareholders of the predecessor corporations have received shares of the new corporation, Amalco. However, where the non-share consideration received by Y consists of property of one of the predecessors, it may be that the requirement in paragraph 87(1)(a) of the Act would not be satisfied. This determination would depend on the circumstances of a particular amalgamation.
B. Assuming all the requirements of subsection 87(1) of the Act were satisfied, subsection 87(4) of the Act will apply to A, B and X since they held their shares of a predecessor corporation as capital property and received only shares of Amalco on the amalgamation of ABCo and XYCo.
C. The provisions of subsection 87(4) of the Act will not apply to Y since Y received consideration other than shares of Amalco. Y will be considered to have disposed of the shares of XYCo on the amalgamation pursuant to clause 54(c)(ii)(C) of the Act. The provisions of subdivision c of the Act will apply to cause Y to realize either a capital gain or loss on the disposition of the XYCo shares. The provisions of section 84.1 of the Act would not apply to this transaction since Y would not have disposed of the XYCo shares to another corporation with which Y does not deal at arm's length.
D. The provisions of paragraph 256(7)(b) of the Act may apply to deem control of ABCo or XYCo to have been acquired if there is a group of persons which controls Amalco and did not control ABCo or XYCo.
Situation 2
1. Assume the same facts as stated in paragraphs 1 and 2 of situation 1 above.
2. In order to have the provisions of subsection 87(4) of the Act apply to some of Y's XYCo shares and to realize a capital gain on the balance of Y's XYCo shares, Y incorporates a holding company, Holdco. Y then transfers the balance of XYCO shares to Holdco in exchange for common shares of Holdco.
3. ABCo and XYCo amalgamate under the relevant corporate laws to form Amalco.
4. In exchange for their shares of ABCo, A and B receive only shares of Amalco.
5. In exchange for their shares of XYCo, X and Holdco receive only shares of Amalco and Y receives a nominal amount of shares of Amalco and non-share consideration.
Your Comments
It is your view that:
A. The shares of XYCo held by Holdco would be subject to subsection 87(4) of the Act on the amalgamation.
B. Y would realize a capital gain or loss on the disposition of the XYCo shares on the amalgamation.
You have also asked for our comments on whether Revenue Canada would apply the provisions of subsection 245(2) of the Act as a result of the use of Holdco in this situation.
Our Comments:
A. For the reasons described in paragraph B of Our Comments to situation 1 above, paragraphs 87(4)(a) and 87(4)(b) of the Act will apply on the conversion of the shares of XYCo held by Holdco into shares of Amalco, provided that all of the requirements of subsection 87(1) of the Act were satisfied.
B. For the reasons described in paragraph C of Our Comments to Situation 1 above, Y will realize either a capital gain or loss on the disposition of the XYCo shares.
C. For the reasons described in paragraph D of Our Comments to Situation 1 above, a group of persons may be deemed to have acquired control of ABCo and XYCo.
D. The use of Holdco in this situation would not ordinarily result in the application of subsection 245(2) of the Act. However, we are unable to comment on whether the provisions of subsection 245(2) of the Act would be applicable in respect of other aspects of this situation or Situation 1 because such a determination depends on the facts and circumstances of a particular situation. For example, if Mr. Y does not deal at arm's length with Amalco in these situations, the structuring of the transactions such that Mr. Y effectively receives surplus of XYCo as proceeds of disposition rather than as a dividend could be considered to result in an abuse having regard to the provisions of the Act, in particular section 84.1 of the Act.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1993
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