Taxable Canadian property rules may be engaged by upstream merger (pp. 1407-8)
This article will examine the Canadian tax implications of a merger between two or more non-resident corporation, the shares of which are taxable Canadian property. ...
Although subsection 87(8) can provide a tax-deferred rollover of the shares of a non-resident corporation, a disposition would still occur. With the disposition, significant filing and withholding obligations under subsection 116 may also arise.
Foreign merger exemption in s. 248(1) – disposition – (n) avoids s. 116 application (p. 1409)
[T]he foreign merger exemption deems that no disposition has occurred, and an acquisition may still exist… .
[S]ubsection 116(5) should not apply in the context of a merger that qualifies under the foreign merger exception because the foreign merger exception should prevent a purchaser from coming into existence. Purchaser is defined for purposes of section 116 as the person to whom the non-resident has disposed of the property. Thus, the application of the foreign merger exception should prevent a "purchaser" from existing because the absence of a disposition should negate the possibility of a purchaser for purposes of subsection 116. Arguably, even the diminished requirement to report dispositions of treaty-exempt property does not exist if the foreign merger exemption applies.
Foreign merger exemption in para. (n) only applies if vertical [non-absorptive] merger (p. 1409)
[T]he exception applies only in respect of a foreign merger between a non-resident corporation and its non-resident shareholder. In many instances, the corporate group may wish to use a horizontal amalgamation.
[A]bsorptive mergers may not satisfy the conditions required for this exception. Subparagraph (n)(i) of the disposition definition requires that the merger must "form one corporate entity"…[and] a new corporation is not formed.
S. 87(8.2) does not cure issue with absorptive merger (but favourable older rulings) (pp. 1410-1)
Subsection 87(8.2) applies for the purposes of the definition of subsection 87(8.1)… . [B]ecause the foreign merger exception requires the merging corporations form one corporate entity separate from and in addition to the requirement that the merger be a foreign merger, the provisions of subsection 87(8.2) may not apply to remedy any deficiency that might exist in respect of an absorptive merger.
[T]he CRA has indicated in past rulings that absorptive mergers qualified as foreign mergers. The rulings in which this view was provided were in respect of foreign mergers that occurred prior to the introduction of subsection 87(8.2).
Where there is a merger of two foreign corporations whose shares are taxable Canadian property (because of an underlying Canadian real estate or resource sub), s. 87(8) may provide rollover treatment – but there still could be a share disposition giving rise to s. 116 filing and withholding requirements unless the para. (n) exception to “disposition” applies. The first part of the article noted that para. (n) only applies to a vertical (not horizontal) merger, and might not apply to a survivor-style (absorption) merger, given that subpara. (n)(i) requires that there be a merger to “form” one corporate entity. However, the ruling practice of CRA (before the introduction of s. 87(8.2) to treat absorptive mergers as qualifying foreign mergers to form new corporations) may suggest that this is not a problem.
Potentially uncertain inside basis bump if election for s. 87(8) non-application (p. 1410)
In some circumstances, inbound investors may want to increase the adjusted cost base for Canadian purposes of the shares of their non-resident holding companies. For example, a multinational organization that has significant unrealized capital gains in their Canadian investments may wish to trigger a disposition of the Canadian holding companies, assuming that the disposition would be sheltered from Canadian tax while still increasing the adjusted cost base of the shares. ...
It should be possible to avoid the application of the foreign merger rollover by electing in the taxpayer's return for subsection 87(8) not to apply. However, the Act does not have a provision to determine the tax cost of assets disposed by a merged company in the event that section 87 does not apply. ...
Where a merger results in a continuation of the merged corporations, the legal principles expressed in…Black & Decker [[1975] 1. S.C.R. 411]…may deem the amalgamated corporation to inherit the tax attributes of the property acquired from the historical tax costs of the predecessor corporations... .Presumably, in any merger that terminates the existence of one or more of the predecessor corporations (as...in many absorptive mergers), this result may be less likely... .
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