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:
1. Whether a disposition occurs when the issuer of shares held by a financial institution as mark-to-market property amalgamates with another corporation.
2. Whether dividends received on shares of the predecessor corporation (“old shares”) prior to amalgamation should be taken into account in the application of the stop-loss rule in subsection 112(5.2) to a subsequent disposition of shares of the amalgamated corporation (“new shares”).
Position:
1. It is our view that an amalgamation to which subsection 87(1) applies will result in a disposition of shares held by the financial institution as mark-to-market property for income tax purposes.
2. Given our position in 1) above, there is no requirement to take into account dividends received on the old shares in the application of the stop-loss rule to a disposition of the new shares.
Reasons:
1. In our view, the shares of the amalgamated corporation are fundamentally different from the shares of the predecessor corporations.
2. In the case of mark-to-market property, there is no specific rule to treat the old shares as being the same as the new shares. Therefore, when applying subsection 112(5.2) to a disposition of the new shares, only dividends received on the new shares are to be taken into account.
December 17, 1998
TORONTO NORTH TSO HEADQUARTERS
Industry Specialist Services J. Leigh
(613) 952-1505
Attention: D.W. Mitchell
Banking Specialist
982228
Stop-Loss Rule - Mark-to-Market and Income Property
This is in reply to your memorandum of August 27, 1998 and your e-mail of December 2, 1998, concerning the application of the stop-loss rule in subsection 112(5.2) of the Income Tax Act (the “Act”) to shares held by a financial institution as mark-to-market property where dividends are received prior to an amalgamation of the issuer of the shares. You advise that a similar issue exists in the case of shares held on income account.
To illustrate your concerns, you have provided the following fact situation:
- The taxpayer (“FIco”) is a “financial institution” within the meaning of subsection 142.2(1) of the Act.
- FIco owns shares of a corporation (“Xco”). The shares of Xco are “mark-to-market property” of FIco within the meaning of subsection 142.2(1) of the Act.
- Xco amalgamates with another corporation (“Yco”) to form “XYco”. The previous holders of shares in the predecessor corporations receive shares in XYco.
- Significant dividends are received on the shares of Xco prior to amalgamation.
- Subsequent to amalgamation, the value of the XYco shares changes.
You have asked for our views on whether there is a disposition of Xco shares by FIco as a result of the amalgamation of Xco and Yco and whether subsection 112(5.1) of the Act would apply if FIco held the Xco shares for less than 365 days before amalgamation. You have also asked for confirmation that the dividends received on the shares of Xco prior to amalgamation are not to be considered in the application of the stop-loss rule in subsection 112(5.2) of the Act to a subsequent disposition of XYco shares.
Disposition of shares on amalgamation
Pursuant to subparagraph (b)(iii) of the definition of “disposition” in section 54 of the Act, the conversion of a share owned by a taxpayer by virtue of an amalgamation or merger constitutes a disposition. However, since this definition is applicable for the purposes of subdivision c of the Act, it does not apply to non-capital property. Nevertheless, in the case of shares held as mark-to-market property or on income account, it is our view that an amalgamation to which subsection 87(1) of the Act applies will result in a disposition of the shares. In our opinion, the shares received on amalgamation (i.e., XYco shares) are fundamentally different from the shares of the predecessor corporations (i.e., Xco or Yco shares). Accordingly, in the situation described, FIco is considered to have disposed of the Xco shares on the amalgamation of Xco and Yco for proceeds equal to the fair market value of the XYco shares received with the result that any gain or loss on the disposition is to be reported by FIco. To the extent that subsection 112(5.2) of the Act is applicable to the disposition, any dividends received on the Xco shares before amalgamation would have to be taken into account in determining the adjusted proceeds under subsection 112(5.2) of the Act.
If FIco held the Xco shares for less than 365 days before amalgamation, it is our view that subsection 112(5.1) of the Act will apply to provide that subsection 112(5.2) of the Act is applicable to the disposition of Xco shares. Similarly, if FIco holds the XYco shares acquired on amalgamation for less than 365 days, we are of the view that subsection 112(5.1) of the Act will apply to provide that subsection 112(5.2) of the Act is applicable to the disposition of the XYco shares. Even if subsection 112(5.1) of the Act is not applicable, we note that subsection 112(5.2) of the Act may still apply to the disposition by virtue of subsection 112(5) of the Act.
Subsection 112(5.2)
Your analysis indicates that when applying the stop-loss rule in subsection 112(5.2) of the Act to a disposition of XYco shares by FIco, the dividends received by FIco on the Xco shares prior to amalgamation are not to be considered. You note that subsection 112(7) of the Act provides a deeming rule which ensures that dividends received prior to amalgamation on shares that are capital property will be taken into account in determining the loss on the disposition of the shares of the amalgamated corporation for tax purposes. Accordingly, you question whether it would be appropriate to extend the rule in subsection 112(7) of the Act to shares held as mark-to-market property or on income account.
We agree with you that, in the absence of a rule similar to the one in subsection 112(7) of the Act in respect of capital property, the dividends received on Xco shares prior to amalgamation are not to be considered in determining the adjusted proceeds under subsection 112(5.2) of the Act on a disposition of XYco shares by FIco. As you have noted, depending on the facts, this may lead to different results than if subsection 112(7) of the Act had applied to such shares.
We have confirmed with the Department of Finance that our interpretation is consistent with policy intent. It appears that the rule in subsection 112(7) of the Act was not extended to shares held as mark-to-market property because they would be disposed of as a result of the amalgamation for proceeds equal to the fair market value of the consideration received. In contrast, if the Xco shares had been capital property to the investor, subsection 87(4) of the Act would have applied to provide a rollover on the amalgamation of Xco and Yco. In such circumstances, the tax policy, as evidenced by subsection 112(7) of the Act, is to treat the old shares as being the same as the new shares for the purposes of the stop-loss rules. With regard to shares held on income account, we believe that the same rationale applies for not extending the rule in subsection 112(7) of the Act to such shares.
We hope that our comments are of assistance.
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and Interpretations Directorate
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