11 June 1990 Income Tax Severed Letter ACC9531 - Technical Review of Corporate Reorganization Course

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.

D.R. Snider                             FROM    Specialty Rulings
Section Chief                             DE      Directorate
Advanced Audit and Investigations               P. Diguer
Training Programs Section                       (613) 957-2123
Centre for Career Development

Attention:  D. Sturtevant                       FILE
                                             DOSSIER     900282

SUBJECT: 0BJET: Technical review of corporate reorganization

            course material - Lesson 7 - Amalgamations

We are writing in reply to your memorandum of April 3, 1990 wherein you requested that we conduct a technical review of the participant package regarding the above referenced course material.

We have reviewed the draft version of the course material and offer the following comments:

1. Page 4.2, paragraph 4, line 2, we suggest that the words "of a particular class to which the takeover bid relates" be added after the words " of the holders of the shares" and that the word "affected" be deleted from this sentence.

This suggested revision properly reflects the requirements of 5. 206(2) of the CBCA.

2. Page 4.2, paragraph 4, line 4, we suggest that the words "other shares of that class" be added after the words "provisions to acquire the". This suggested revision properly reflects the requirements of 5. 206(2) of the CBCA.

3. Page 4.2, paragraph 5, line 2, we suggest that the words " of the shareholders of each amalgamating corporation" be added after the words "a special resolution". This suggested revision reflects the requirements of S.l83(5) of the CBCA.

4. Page 5.4, paragraph 4.2.1. In order to adequately understand the particulars of non-qualifying amalgamations, the participant must, in our view, first understand the "rules of the game" with respect to qualifying amalgamations. In light of the above, we suggest, for ease of comprehension on the part of the participants, that the order of presentation of the topics be reversed. As such, the presentation of "Qualifying amalgamations" would be followed, not preceded as is presently the case, by the presentation of "Non qualifying amalgamations".

5. Page 5.5, paragraph 2 last line, we suggest that the words "they may not be interested in an offside amalgamation" be deleted and the words "any such capital gain realized by the shareholders would, generally, be taxable under the Act" be substituted therefor. This revision explains more accurately, the tax consequences to the shareholders.

6.     Page 5.6, paragraph 1, last line, we suggest that the      
       words "and deems it to be a new corporation for purposes   
       of the    Act", be added after the words "as a result of   
       the amalgamation.  This revision acknowledges that without 
      the deeming provision rule as provided in paragraph 87(2)   
    (a) of the Act, there may not be a new corporation.

7. Page 5.6, paragraph 6, line 3, we suggest that the word "must" should be replaced with the word "may" as this more accurately indicates that the request suggested in this sentence is not obligatory but rather, it is an option available to the taxpayer. We also suggest that the words "Corporate Rulings" should be replaced with "Rulings Directorate" as this is the correct name assigned that particular Directorate.

8. Page 5.8, paragraph 4, line 8, we suggest that the word "market" be deleted. The CBCA uses the term "fair value" and Jurisprudence on this matter suggests that fair value may be something different than fair market value depending on the circumstances.

9. Page 6.1, paragraph 3, line 5, we suggest that the cross reference to p. 5.2 should be replaced with 5.1.

10. Page 6.3, paragraph 2, line 1, we suggest that this sentence be deleted and that "the following sentence be inserted "The CBCA ceases to apply to the corporation on the date shown in the certificate for discontinuance". The relevant date is the date as shown on the certificate and not the date of receipt.

11. Page 7.4, last paragraph. This particular paragraph briefly explores the paragraph 88(1) (d) "bump" available to a parent corporation under certain circumstances on the wind-up of a subsidiary's non-depreciable capital property. This "bump" is clearly not available on an amalgamation and, as such, we believe that it should be clearly indicated that it is the 88(l) provisions that are being discussed. In addition, we would suggest the inclusion of a specific reference to the provisions of 88(l)(d) in this paragraph.

12. Page 7.6, paragraph 4, line 5 and paragraph 5, line 4, we suggest that the words "and as consideration for the disposition of its shares of the predecessor corporation" be added after the words "virtue of the merger".

l3. Page 7.8, paragraph 6, line 2, we suggest that the words "Canadian resident" be deleted. The subsections in question apply to any taxpayers.

14. Page 8.3, paragraph 4, line 8, we suggest the words "at that time" should be added after the words "of the UCC of that class".

I5. Pages 8.4, and 8.5 under the heading "Regulations" discuss various provisions of the Income Tax Regulations (the "Regulations"). The draft legislation containing numerous revisions to the CCA rules were promulgated on December 14, 1989. As such, we suggest that the above mentioned commentary should be revised to reflect this fact.

16. Page 8.8, last paragraph, we suggest that the words "as subsection 100(2.1) deems the proceeds of disposition to equal the adjusted cost base and not the fair market value to the predecessor corporation of the interest in the partnership" should be added after the words "in s. 87(2)(e.l) for related parties".

17. Page 8.9, paragraph 5, line 2, the reference should be to paragraph "20(l)(b)" not "20(l)(h)".

18. Page 8.13, paragraph 5, line 2, we suggest that the words "the fact" should be replaced with the words "de facto" in reference to the concept of control.

19. Page 9.4, last paragraph, refers the participant to an article by C.R. Hiseler on the subject of corporate control.

While this is an informative and useful article, we suggest that, a cave at should be inserted to the effect that the opinions and views expressed in the article may not reflect current Department policies and practices and as such, certain Departmental publications such as, IT-64R2 , IT-302R2 etc., should be reviewed in this regard.

20. Page 10.2, paragraph 3, line 4, we suggest that the word "shareholders" should be replaced with "shares" as you are referring to different classes of shares.

21. Page 10.2, paragraph 3, line 4 and 5, suggest that in general, we do not view the shifting of paid-up capital between different classes of shares of the amalgamated corporation as a result of the formula in 87(3) as being offensive with the caveat that offensive transactions may be treated differently. As the target audience is for the most part, audit staff, we suggest that it would be useful to provide examples of offensive transactions in order to better equip them for the task at hand. Examples of offensive transactions could incolude;

a) One class of common shares of Opco with a high PVC being held solely by individuals whereas a second class of shares of Opco with a low PVC being held solely by a particular corporation. This would enable the particular corporation to acquire the shares with a low paid-up capital and any subsequent dividend could potentially flow through to it from Opco tax free given the deduction available under subsection 112(1).

b) A non-resident shareholder acquiring common shares of a particular class of Opco with a high paid-up capital whereas residents acquire common shares of another particular class of Qpco thereby enabling the non-resident to reduce future Canadian tax liabilities on the shares by realizing higher capital gains which, in general, are exempt under various tax treaties, thereby circumventing the provisions of subsections 84(3) and 212(2).

22. Page 10.2, paragraph 4, line 10, we suggest that the word "per" should be added after the words "the paid-up capital".

23. Page 10.2, paragraph 5, line 2, we suggest that the words "as contemplated in subsection 248(6)" after the words "or even series".

24. Page 11.2, paragraph 3, the term "cash in lieu ..." should be replaced by "non-share consideration with a value of $200 or less, in lieu...".

25. Page 11.2, paragraph 6,line 2, we believe that the reference should be to paragraph "87(4) (a)" not "84(4) (a)".

26. Page 11.2, paragraph 7, the cost of the new shares to a particular shareholder will be equal to his proceeds of disposition computed under 87(4) (a) for his old shares.

27. Page 12, paragraph 1, line 1, we suggest that the words "options to acquire" should be added after the words "that are exchanged for". The text, in it's current form suggests that options of a predecessor may be exchanged for shares of the new corporation, whereas the provisions of 87(5) of the Act require that options be exchanged for option.

28. Page 13.1, last paragraph, line 1, we suggest that the reference "87(7)" should be added after the words "that the wording in paragraph".

29. Page 13.1, last paragraph, line 4, we suggest that the words "set out in 5.248(1) (c) (iii)" be substituted by "set out in paragraph (c)(iii) of the definition of "income bond" found in subsection 248(1)".

30. Page 13.2, last paragraph, we suggest that the words, "with respect to Company A" should be added after the words "appears simply to be non-deductible". This addition clearly indicates to the participants that Company A is the subject of this discussion.

31. Page 14.2, last paragraph, line 4, we suggest that the following be added after the words "to introduce de facto control.": "Control" is an undefined term for purposes of the Act. It is the Department's view, as outlined in paragraph 13 of IT-64R2 , that the word "control" generally means the right of control that rests in ownership of such number of shares as to give a majority of the voting power in the corporation. This view is consistent with the reasoning adopted by the courts in the case of Buckerfield's Ltd. et al v. NNR ( 64 DTC 5301) (EX. CT) affirmed by ( 67 DTC 5035) (SCC). In applying the provisions of subsection 87(9), it is this test of "control" that must first be considered". The words commencitig with "Therefore, as a general rule..." and ending with "set out in the Buckerfield' s case" should be deleted.

32. Page Ex/3, paragraph 1, line 5, we suggest that the words"A Ltd. B Ltd. and C Ltd. are each taxable Canadian corporations." should be added after the words "to the of his holdings in B Ltd.". This information is essential in determining whether the provisions of 87(l) apply to the particular problem at hand.

33. Page AN/4.1, paragraph 3, line 1, we suggest that the words "of all the shares" should be added after the word "PVC" and the words "87(9)(b)(i)" should be added after the words "otherwise determined". This more accurately relates the suggested solution to the relevant provision of the Act.

34. Page AN/4.l, paragraph 3, line 2, we suggest that the words "all shares of the" should be added after the words "PVC of" and the words "immediately before the merger" should be added after the words "and predecessor". This more accurately relates the suggested solution to the relevant provision of the Act.

35. Page AN/4.l, paragraph 3, line 4, we suggest that the words "computed in accordance with the provisions of paragraph 87(3) (a) of the Act," should be added after the words "therefore PVC of BC Ltd.'s shares". As the problem requests the participant to "show all references to the ITA", it would be appropriate to include the specific reference as requested.

36. Page 15.2, on the Reading List the reference should be to

IT-474R .

Enclosed herewith is a copy of pages 4.1 to 7.8 inclusive of the course material which suggest further revisions, for whatever action you consider appropriate.

We have not been provided with the Instructor's Lesson Plan or other teaching aids for this segment of the course and, therefore, offer no comments on these materials.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

                        DOCUMENT DISCLOSED PURSUANT TO
                        THE ACCESS TO INFORMATION ACT