21 March 1997 External T.I. 9706705 - VERTICAL AMALGAMATION - COST BUMP

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.

Principal Issues:

how the Department will interpret proposed subsection 87(11)

Position:

to determine amount of bump under 87(11) it will be necessary to determine the bump that would have been available under similar circumstances if a winding-up under 88(1) had been done

Reasons:

see 87(11)(b)

970670
XXXXXXXXXX T. Harris
(613) 957-2114

Attention: XXXXXXXXXX

March 21, 1997

Dear Sirs:

Re: Proposed Subsection 87(11)

We are writing in response to your facsimile of March 11, 1997 wherein you requested our views concerning the interpretation of proposed subsection 87(11) of the Income Tax Act (the "Act") which is found in subsection 42(11) of Bill C-69 which received First Reading in the House of Commons on December 2, 1996.

You have asked us to consider the following situation:

A taxable Canadian corporation ("Canco") acquires 100% of the issued and outstanding shares of another taxable Canadian corporation ("Targetco") from an arm's length vendor ("Vendor"). The consideration paid to Vendor includes cash and treasury shares of Canco. A vertical amalgamation of Canco and Targetco is then undertaken. Following the amalgamation, certain capital property of Targetco which is acquired by Amalco on the amalgamation is transferred to a related corporation ("Sisterco").

In the context of a winding-up, you have indicated that Canco would be entitled to bump the cost of any eligible property of Targetco since the shares of Canco issued to the vendor as consideration for the Targetco shares would not be substituted property within the meaning of proposed paragraph 88(1)(c.3) by virtue of the exception for parent company shares found in subparagraph 88(1)(c.3)(i). Furthermore, the subsequent sale of property to Sisterco would not affect Canco's entitlement to bump the cost of capital property since Sisterco would be a specified person for the purposes of subclause 88(1)(c)(vi)(B)(I) of the Act.

In the context of a vertical amalgamation to which proposed subsection 87(11) is applicable, you are concerned that paragraph 87(2)(a) deems an amalgamated corporation to be a new corporation for purposes of the Act and that there is no provision that specifically deems the amalgamated corporation to be a continuation of its predecessors for the purposes of subparagraph 88(1)(c)(vi), paragraph 88(1)(c.2) and proposed paragraph 88(1)(c.3), such that Amalco would not be entitled to a bump pursuant to proposed subsection 87(11). Your concern is based on the premise that, for the purposes of proposed paragraph 88(1)(c.3), the shares of Amalco which are acquired by Vendor on the amalgamation will be wholly or partly attributable to the bumped property and since Amalco is a new corporation these shares will not qualify for the exception for parent company shares paid as consideration for the shares of the subsidiary. Similarly, if Amalco sold "bumped" assets previously owned by Targetco to Sisterco, Sisterco would not qualify as a specified person for the purposes of subclause 88(1)(c)(vi)(B)(I) of the Act, as Sisterco would not be related to Canco following the amalgamation (i.e. since Amalco is a new corporation it follows that Canco has ceased to exist following the amalgamation except to the extent that Amalco is deemed for specific purposes of the Act to be a continuation of its predecessors).

In view of your understanding that the legislative intent of proposed subsection 87(11) was to put a vertical amalgamation of a parent corporation and its wholly-owned subsidiary on an equal footing with a winding-up of the subsidiary into the parent, you believe that the denial of the bump to Amalco in respect of eligible property of Targetco would not be consistent with tax policy. You have, therefore, requested our views with respect to the interpretation of proposed subsection 87(11) in the circumstances described above.

Our Comments

Proposed paragraph 87(11)(b) provides that where there has been an amalgamation of a corporation (i.e. the "parent") and one or more of its subsidiary wholly-owned corporations (i.e. the "subsidiary"), "the cost to the new corporation of each capital property of the subsidiary acquired on the amalgamation is deemed to be the amount that would have been the cost to the parent of the property if the property had been distributed at that time to the parent on a winding-up of the subsidiary and subsections 88(1) and (1.7) had applied to the winding-up."

It is our interpretation that for the purposes, inter alia, of applying subparagraph 88(1)(c)(vi), paragraph 88(1)(c.2) and proposed paragraph 88(1)(c.3) in determining the amount of any bump which would be available to the amalgamated corporation it would be necessary to determine the amount of the bump which, under similar circumstances, would have been available under paragraphs 88(1)(c) and (d) if the subsidiary had been wound-up into the parent. Consequently, where any shares of the parent which were issued to the vendor as consideration for the shares of the subsidiary would not have constituted substituted property within the meaning of proposed paragraph 88(1)(c.3) in the context of a winding-up, the conversion of such shares into, or the exchange of such shares for, similar shares of the amalgamated corporation should not, in and by itself, cause the shares of the amalgamated corporation to be substituted property. However, if the shares of the parent acquired by the vendor are converted into shares of the amalgamated corporation in circumstances where the fair market value of such shares may be considered to be determinable primarily by reference to the fair market value of a particular property, or to any proceeds from the disposition of a particular property, such shares of the amalgamated corporation will be considered to have been acquired in substitution for the particular property pursuant to proposed paragraph 88(1)(c.3).

Similarly, where "bumped" property is sold by the amalgamated corporation to a related person, the sale of such property to the related person would not affect the amalgamated corporation's entitlement to bump the cost of the property where the transferee would be a specified person for the purposes of subclause 88(1)(c)(vi)(B)(I) of the Act if, instead of amalgamating, the subsidiary had been wound-up into the parent.

We trust these comments will be of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch