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:
Whether 87(2.11) applies to 2 hypothetical situations.
Position:
It applies in Situation 1 but only to reduce the taxable income of ACo
It does not apply in Situation 2
Reasons:
In Situation 1, BCo and CCo are subsidiary wholly-owned corporations and 87(2.11) will apply. However, Amalco is deemed to be the same corporation and a continuation of ACo only. Therefore only the taxable income of ACo can be used to offset the non-capital losses of Amalco 1.
Situation 2 contemplates an amalgamation which is not strictly a vertical amalgamation. Consequently, 87(2.11) will not apply.
This position is consistent with the narrower wording in subsection 87(11) and results in a vertical amalgamation being treated in a similar manner to a winding-up.
XXXXXXXXXX 980272
F. Francis
Attention: XXXXXXXXXX
November 20, 1998
Dear Sirs:
Re: Subsection 87(2.11) of the Income Tax Act (the "Act") (all statutory references in this letter are to the Act)
This is in reply to your letter of January 30, 1998, wherein you requested a technical interpretation of the application of subsection 87(2.11) to the following hypothetical situations:
Situation 1
1. ACo, a Canadian corporation, owned all the shares of BCo, a Canadian corporation.
2. BCo owned all the shares of CCo which is also a Canadian corporation.
3. ACo, BCo and CCo have amalgamated to form Amalco I. The amalgamation is an amalgamation for the purposes of section 87.
4. In the taxation year preceding the amalgamation, ACo and BCo had taxable incomes of $100 and $50, respectively.
5. In the first taxation year of Amalco 1, Amalco 1 had non-capital losses of $125.
It is your view that Amalco 1 may carry back the $125 of non-capital losses to reduce the taxable income of either ACo or BCo.
Situation 2
1. XCo, a Canadian corporation, and YCo, a Canadian corporation, were both controlled by the same person or group of persons.
2. XCo had a wholly-owned subsidiary, SubCo 1, which is a Canadian corporation.
3. YCo had a wholly-owned subsidiary, Subco 2, which is a Canadian corporation.
4. XCo, YCo, SubCo 1 and SubCo 2 have amalgamated to form Amalco 2. This amalgamation is an amalgamation for the purposes of section 87.
5. In the taxation year preceding the amalgamation, XCo and YCo had taxable incomes of $200 and $50, respectively.
6. In the first taxation year of Amalco 2, Amalco 2 had non-capital losses of $170.
It is your view that Amalco 2 may carry back the $170 of non-capital losses to reduce the taxable income of either XCo and/or YCo.
Situation 1
In our view, subsection 87(2.11) will apply to the amalgamation described in Situation 1 since BCo and CCo qualify as subsidiary wholly-owned corporations of ACo pursuant to the definition in subsection 87(1.4). However, subsection 87(2.11) deems the amalgamated corporation to be the same corporation as, and a continuation of, the parent corporation for the purposes of applying, inter alia, section 111 in respect of such parent corporation. Consequently, subsection 87(2.11) would apply to permit the non-capital losses of Amalco 1 to reduce the taxable income of ACo only.
Situation 2
It is our position that subsection 87(2.11) is restricted to vertical amalgamations whereunder a particular corporation amalgamates with one or more other corporations each of which is a subsidiary wholly-owned corporation of the particular corporation.
Consequently, in our view, subsection 87(2.11) would not apply to the amalgamation described in situation 2 since this amalgamation involves the amalgamation of two sister corporations and their subsidiary wholly-owned corporations.
We trust our comments will be of assistance to you. However, as noted in paragraph 22 of Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996, our comments are not binding on the Department.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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