1 May 1989 Income Tax Severed Letter RCT 5-1243

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.

This is in reply to your letter of February 22, 1989 concerning a three-cornered amalgamation which is subject to the provisions of subsection 87(9) of the Income Tax Act (the Act)

The following example illustrates our interpretation of paragraph 87(9)(c) of the Act.

Assumptions

• 1. A corporation (the Parent corporation) is proposing to acquire another corporation (the Target corporation).
• 2. The Target corporation has no liabilities, has a fair market value of $1,000,000, has no money on hand and the aggregate cost amount of its assets is equal to $500,000. The issued and outstanding shares capital of the Target corporation consists of 1,000,000 common shares.
• 3. A new corporation (Newco) will be incorporated. The Parent corporation will subscribe or 10 common shares of the capital stock of Newco for $10 cash. The Parent Corporation will be the sole shareholder of Newco.
• 4. Newco and the Target corporation will amalgamate to form Amalco.
5. By virtue of the amalgamation.
• a) the shareholders of the Target Corporation will receive one common share of the capital stock of the Parent corporation for each common share they presently own in the Target corporation; and
• b) the shareholder of Newco (the Parent corporation) will receive one common share of the capital stock of Amalco for each common share its owns in Newco.
• 6. In these circumstances the 10 Amalco common shares to be received by the Parent corporation would have a cost of $500,010 computed as follows:

Cost of Newco share 87(9)(c)(i)                                    10
    $10 Cash + cost amount of other assets      $500,010
    ACT of Newco share - 87(9)(c)(ii)(A)(11)          10      500.000
                                                             $500,010

Since the Parent corporation will own all of the issued shares of the capital stock of Amalco, the fairmarket value of the 10 Amalco common shares to be issued to the Parent corporation will be equal to $1,000,010. Therefore it is clear that the 10 Amalco common shares are not merely issued to the Parent corporation as consideration for the 10 shares it owned in Newco but that the 10 Amalco common shares are also issued as consideration for the issue of common shares by the Parent corporation as described in 5(a) above (otherwise the Parent corporation would be receiving shares of Amalco having a value of $1,000,010 in exchange for shares of Newco having a value of $10).

If Amalco had issued 1,000,010 common shares to the Parent corporation instead of 10, the cost of the 1,000,010 shares would still have been equal to $500,010 as described into above. Instead of owning 10 shares having a cost of $500,010 and a value of $1,000,010, the Parent corporation would simply own 1,000,010, shares having the same cost of $500,010 and the same value of $1,000,010.

The fact that the amalgamation agreement provides separately for the issuance of a) one Amalco common share for each Newco share (10 shares in total); and b) one Amalco common share for each share to be issued by the Parent as described in 5(a) above (1,000,000 shares in total) is irrelevant in our view for the purpose of computing the cost of 1,000,010 Amalco common share to be issued to the Parent corporation.

We have forwarded a copy of your letter to our Current Amendments Division for whatever action they may consider necessary.

We thank you for the interest you have taken in this matter.