30 November 1994 Internal T.I. 9429010 - AMALGAMATION - LOSS CARRYBACK

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.

1994 Canadian Tax Conference

Subsection 87(2.11)

Subsection 87(2.11) of the Act applies in the case of an amalgamation of a parent company and one or more of its "subsidiary wholly-owned corporations." The provision deems the amalgamated corporation to be the same corporation as, and a continuation of, the parent corporation for the purposes of applying section 111 and Part IV in respect of such parent corporation. It therefore permits a corporation formed through a vertical amalgamation to apply its post-amalgamation losses against the pre-amalgamation income of its predecessor parent corporation.

We understand that the purpose of new subsection 87(2.11) was to put vertical amalgamations on a more-or-less equal footing with subsection 88(1) wind-ups with respect to the ability to carry back post-merger losses to offset taxable income of the parent or, in the case of an amalgamation, the predecessor parent. Where a subsidiary has been wound up into its parent, any losses that occur after the wind-up can generally be carried back to reduce the taxable income of the parent for taxation years that end before the wind-up.

The application of subsection 87(2.11) does not allow losses of a wholly-owned subsidiary company ("Subco") to be applied against the taxable income of its parent ("Parentco") for taxation years of Parentco prior to the amalgamation. This is so because:

1.The corporation formed as a result of the amalgamation ("Amalco") is deemed to be a new corporation under paragraph 87(2)(a) and consequently, absent subsections 87(2.1) and (2.11), the losses of Subco are not available to Amalco, as Subco and Amalco are distinct entities for income tax purposes.

2.Under subsection 87(2.11), Amalco is deemed to be the same corporation as Parentco for the purposes of applying section 111 in respect of Parentco (i.e. carryback of losses to Parentco).

3.Subsection 87(2.1) deems Amalco to be the same corporation as Subco for the purpose of determining the new corporation's losses, but, as expressly provided in paragraph 87(2.1)(e), not for the purpose of determining the taxable income of any predecessor corporation.

4.Consequently, the losses of Amalco include the losses of Subco pursuant to subsection 87(2.1) for the purposes of computing Amalco's taxable income, but do not include the losses of Subco for the purpose of any carry-back of losses. Therefore, Subco's losses cannot be deducted by Parentco by using subsection 87(2.11).

This interpretation would be consistent with the treatment of such losses under subsection 88(1.1) in a winding-up situation. Subsection 88(1.1) generally deems the subsidiary's losses to be losses of the same type to the parent for the taxation year of the parent in which the subsidiary's loss year ended but only for the purpose of computing the taxable income of the parent for any taxation year commencing after the commencement of the winding-up.

Tim Bryant
November 30, 1994
942901