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 amalgamation results in acquisition of control
Position: yes
Reasons: exceptions in 256(7)(b)(ii) are not applicable
XXXXXXXXXX 983175
T. Harris
Attention: XXXXXXXXXX
February 9, 1999
Dear Sirs:
Re: Acquisition of Control on an Amalgamation
This is in reply to your letter of November 26, 1998 in which you requested our interpretation of paragraph 256(7)(b) of the Income Tax Act (the "Act") to the hypothetical situation described below.
Aco is a taxable Canadian corporation. Each of Mr. X and Mr. Y owns 50% of the voting shares of Aco. Bco is also a taxable Canadian corporation, the voting shares of which are owned 60% by Mr. X and 40% by Mr. Y.
Aco and Bco will amalgamate to form Amalco. Each of Mr. X and Mr. Y will own 50% of the voting shares of Amalco.
Subparagraph 256(7)(b)(i) 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) provides, in general, that 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 controls 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 controlled by the predecessor immediately 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 immediately before the amalgamation.
Subparagraph 256(7)(b)(iii) deems control of a predecessor corporation to have been acquired by a (hypothetical) person or group of persons unless one of the conditions in clauses 256(7)(b)(iii)(A) to (C) is satisfied. Specifically, clause 256(7)(b)(iii)(B) deems control of a predecessor corporation to have been acquired unless if one person had acquired all of the shares of the new corporation received by the shareholders of the predecessor corporation on the merger in consideration for their shares of the predecessor corporation, that person would have acquired control of the new corporation.
With respect to Aco in the situation described above, the group of persons that controls Amalco (i.e., Mr. X and Mr. Y) is the same group that controlled Aco immediately before the amalgamation, therefore the group that controls Amalco will not be deemed to have acquired control of Aco before the amalgamation pursuant to subparagraph 256(7)(b)(ii). Also, since clause 256(7)(b)(iii)(B) is satisfied, there would not be any deemed acquisition of control of Aco pursuant to subparagraph 256(7)(b)(iii).
With respect to Bco, the group of persons that controls Amalco (i.e., Mr. X and Mr. Y) is not the same group that controlled Bco immediately before the amalgamation (i.e., Bco was controlled by Mr. X alone). Therefore the group that controls Amalco will be deemed to have acquired control of Bco immediately before the amalgamation pursuant to subparagraph 256(7)(b)(ii) unless the group of persons (i.e., Mr. X and Mr. Y) would not have acquired control of Bco if they had acquired all of the shares of Bco immediately before the merger. In this respect, if Mr. X and Mr. Y had hypothetically acquired all the shares of Bco immediately before the amalgamation, an acquisition of control would not be avoided under clause 256(7)(a)(i)(A) because Mr. Y would have acquired some of his shares of Bco from a person (i.e., Mr. X) to whom he was not 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 control of Bco would not have been acquired solely because of the acquisition of shares of Bco by a particular person that was related to Bco immediately before the amalgamation. In this case, control of Bco is acquired by two persons (Mr. X and Mr. Y) one of whom was not related to Bco.
We trust that our comments are of assistance to you.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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