17 September 1998 External T.I. 9816915 - ACQUISITION OF CONTROL ON 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: In an amalgamation, can acquisition of control be avoided pursuant to paragraph 256(7)(a) and (b) of the Act in three specific situations described in the letter.

Position: Specific to each fact situation.

Reasons: See description of fact situations in the technical interpretation.

							981691
XXXXXXXXXX 						T. Lanzer
(613) 957-2129
Attention:	XXXXXXXXXX 

September 17, 1998

Dear Sirs:

Re: Acquisition of control on amalgamation

We are writing in response to your letter of June 24, 1998 wherein you requested our opinion as to whether, in an amalgamation, an acquisition of control could be avoided pursuant to paragraph 256(7)(a) and (b) of the Income Tax Act ("the Act").

In your situation:

Mr. A and Mr. B are unrelated persons. Each of them owns a wholly owned holding corporation. Each of these holding corporations owns 50% of C Co., which in turn owns 100% of X Co. X Co. has substantial non-capital losses carried forward from carrying on a business.

Mrs. A and Mrs. B are unrelated persons. Each of them owns a wholly owned holding corporation. Each of these holding corporations owns approximately 45% of D Co., which in turn owns 100% of Y Co. The remaining 10% of D Co. is owned by an unrelated employee of Y Co. Assume that Mrs. A and Mrs. B act as a group to control D Co. and Y Co.

Mr. A, Mr. B, Mrs. A and Mrs. B would like to amalgamate X Co. and Y Co. to form Amalco and have Amalco use the non-capital losses of X Co. As a result of the relative values of X Co. and Y Co., D Co. would acquire the majority of the shares of Amalco.

There are three issues to be determined:

1. If de jure control of Amalco rests with the group composed of Mr. A, Mr. B, Mrs. A and Mrs. B., would paragraph 256(7)(b) be effective to ensure that there was no acquisition of control of X Co., the loss company?

2. Alternatively, if Mrs. A and Mrs. B, through D Co., control Amalco, would 256(7)(b) prevent an acquisition of control from occurring?

3. If the amalgamation of X Co. and Y Co. described above results in an acquisition of control of X Co., would paragraph 256(7)(a) prevent an acquisition of control of X Co. if Mr. A sells the shares of his holding company to Mrs. A and Mr. B sells the shares of his holding company to Mrs. B. Upon completion of these transactions assume that Mrs. A and Mrs. B are the group of persons that control both X Co. and Y Co. X Co. and Y Co. would then be amalgamated.

Our Comments

Your first two situations refer to paragraph 256(7)(b). This paragraph provides that control of a corporation is considered not to have been acquired solely because of an amalgamation unless it is deemed to have been acquired by either subparagraph 256(7)(b)(ii) or (iii).

Subparagraph 256(7)(b)(ii) acts to prevent a deemed acquisition of control in certain internal reorganizations of corporate groups. In general, where there has been an amalgamation of two or more corporations to form a new corporation, and where the person or group of persons who control the new corporation did not control a predecessor corporation, that person or group is treated as having acquired control of that predecessor, and of any corporation it controlled before the amalgamation. An exception provides that a deemed acquisition of control will not arise if the person or group of persons would not have acquired control of the predecessor if the person or group had acquired all the shares of the predecessor before the amalgamation. In order to qualify for this exception, there can be no acquisition of control pursuant to clauses 256(7)(a)(i)(A) through (D). However, as further elaborated in our comments on situation 3 below, only clauses 256(7)(a)(i)(A) and (B) are relevant to situations 1 and 2.

1. In your first situation, the group of persons that controls Amalco (i.e., Mr. A, Mr. B, Mrs. A and Mrs. B) did not control X Co. (i.e., Mr. A and Mr. B controlled X Co. through C Co.) before the amalgamation, therefore the group that controls Amalco will be deemed to have acquired control of X Co. before the amalgamation pursuant to subparagraph 256(7)(b)(ii). A deemed acquisition of control will not be avoided under the exception in subparagraph 256(7)(b)(ii) because neither clause 256(7)(a)(i)(A) nor (B) would prevent an acquisition of control of the predecessor corporation (i.e., X Co.) by the group of persons that control Amalco if they had acquired all the shares of X Co. from C Co. immediately before the amalgamation.

If Mr. A, Mr. B, Mrs. A and Mrs. B had hypothetically acquired all the shares of X Co. before the amalgamation, an acquisition of control would not be avoided under clause 256(7)(a)(i)(A) because Mr. A, Mr. B, Mrs. A and Mrs. B would not have acquired the shares of X Co. from a person (i.e., C Co.) to whom they were related immediately before the amalgamation. In the same hypothetical circumstances, an acquisition of control would also not be avoided under clause 256(7)(a)(i)(B) because the shares of X Co. would not have been acquired by a group of persons (i.e., Mr. A, Mr. B, Mrs. A and Mrs. B) that were related to X Co. before the amalgamation.

2. Our comments on your second situation are similar to the first. Since the group of persons that controls Amalco (i.e., Mrs. A and Mrs. B through D Co.) did not control X Co. (i.e., Mr. A and Mr. B controlled X Co. through C Co.) before the amalgamation, the group that controls Amalco will be deemed to have acquired control of X Co. before the amalgamation pursuant to subparagraph 256(7)(b)(ii). A deemed acquisition of control will not be avoided under the exception in subparagraph 256(7)(b)(ii) because neither clause 256(7)(a)(i)(A) nor (B) would prevent an acquisition of control of the predecessor corporation (i.e., X Co.) by the group of persons that control Amalco if they had acquired all the shares of X Co. from C Co. immediately before the amalgamation.

If Mrs. A and Mrs. B had hypothetically acquired all the shares of X Co. before the amalgamation, an acquisition of control would not be avoided under clause 256(7)(a)(i)(A) because Mrs. A and Mrs. B would not have acquired the shares of X Co. from a person (i.e., C Co.) to whom they were related immediately before the amalgamation. In the same hypothetical circumstances, an acquisition of control would also not be avoided under clause 256(7)(a)(i)(B) because the shares of X Co. would not have been acquired by a group of persons (i.e., Mrs. A and Mrs. B) that were related to X Co. before the amalgamation.

Since control is deemed to have been acquired under subparagraph 256(7)(b)(ii), it is not necessary to further consider subparagraph 256(7)(b)(iii). However, it could be noted that since situation 1 and 2 both satisfy clause 256(7)(b)(iii)(A), there would be no deemed acquisition of control pursuant to subparagraph 256(7)(b)(iii). In both cases, the predecessor corporation (i.e., X Co.) is related to each other predecessor corporation (i.e., Y Co.) before the amalgamation pursuant to subparagraph 251(2)(c)(vi).

Your third situation refers to paragraph 256(7)(a). This paragraph provides that control of a particular corporation will not be considered to have been acquired either (i) through the acquisition of shares of any corporation if the acquisition meets any one of four tests, or (ii) in certain situations involving the redemption or cancellation of shares of the particular corporation or of a corporation controlling it. Since your third situation does not disclose a share redemption or cancellation, we are assuming that subparagraph 256(7)(a)(ii) does not apply. With respect to the four tests in subparagraph 256(7)(a)(i), we are also assuming that clauses 256(7)(a)(i)(C) and (D) do not apply since your third situation does not disclose the involvement of an estate. Therefore, only clauses 256(7)(a)(i)(A) and (B) are relevant.

Clause 256(7)(a)(i)(A) provides that control will not be considered to have been acquired because of the acquisition of shares of any corporation by a particular person who acquired the shares from a person to whom he was related immediately before that time. Clause 256(7)(a)(i)(B) provides that control will not be considered to have been acquired because of the acquisition of shares of any corporation by a particular person who was related to the particular corporation immediately before that time.

3. In the third situation, Mr. A sells the shares of his holding company to Mrs. A and Mr. B sells the shares of his holding company to Mrs. B. Since Mrs. A and Mrs. B are related to Mr. A and Mr. B, respectively, by marriage, then pursuant to clause 256(7)(a)(i)(A) Mrs. A and Mrs. B will not be considered to have acquired control of X Co. by acquiring the shares of the Holdcos owned by their respective husbands.

Clause 256(7)(a)(i)(B) will not have the same effect. Although X Co. is controlled by a group of persons (i.e., Mr. A and Mr. B), they are not members of a related group as defined by subsection 251(4). Consequently, Mr. A and Mr. B are not related to X Co. pursuant to subparagraph 251(2)(b)(ii), and therefore Mrs. A and Mrs. B are also not related to X Co. pursuant to subparagraph 251(2)(b)(iii). Since Mrs. A and Mrs. B are not related to X Co. immediately before acquiring the shares of their respective husbands' Holdcos, clause 256(7)(a)(i)(B) will not apply to prevent an acquisition of control of X Co.

In accordance with paragraph 22 of Information Circular 70-6R3, the opinions expressed in this letter are not income tax rulings and are, therefore, not binding on the Department.

Yours truly,

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