21 November 1997 External T.I. 9727985 - COST BASIS - FOREIGN TRIANGULAR 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.

Principal Issues:

Cost basis of shares of foreign corporation (Targetco) held by a Canadian parent as a result of a triangular amalgamation of non-resident corporations, where merger shares of the Canadian parent have been contributed to a predecessor corporation as part of the amalgamation.

Position:

The Targetco shares have an adjusted cost basis equal to the fair market value of the shares of the target corporation acquired through this particular triangular amalgamation.

Reasons:

While there may be a concern in other scenarios (both domestic and foreign) that the basis has not been increased, this scenario can be distinguished because of the way the transactions are carried out.

J. Stalker
XXXXXXXXXX 972798

Attention: XXXXXXXXXX

November 21, 1997

Dear Sirs:

Re: Particular Triangular Amalgamation involving Foreign Corporations

We are writing in response to your question in respect of the adjusted cost basis of the shares of a foreign corporation held by a parent Canadian corporation ("Canco") as the result of a particular hypothetical triangular amalgamation involving foreign corporations.

You have presented the following hypothetical scenario.

Canco, a corporation incorporated in Canada, wishes to acquire an existing arm's length U.S. resident and incorporated corporation ("Targetco") which has a fair market value of $X. Canco incorporates a new transitory merger corporation ("Mergeco"), which is resident and incorporated in the U.S., and receives 100 shares of Mergeco for nominal consideration, say $100.

Canco contributes the appropriate number of its own shares (the "Canco Shares"), which have a fair market value of $X, to Mergeco. Mergeco is merged into Targetco, and Targetco continues as the surviving corporation. The shareholders of Targetco surrender all their shares of Targetco in exchange for the Canco Shares. The shares of the capital stock of Mergeco held by Canco are converted into shares of Targetco. The steps outlined in this paragraph are deemed to occur simultaneously for the purposes of the amalgamation agreement.

In our view, the adjusted cost basis of the shares of Targetco held by Canco after the amalgamation would be equal to $X as a result of the above transactions.

This opinion is confined to the scenario described above. As you know, there are often a number of methods of accomplishing the same result and the income tax consequences may vary depending upon the method utilized in any particular case.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

Yours truly,

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