22 December 2010 External T.I. 2010-0387601E5 - Post-Amalgamation Foreign Exchange Gains

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.

Principal Issues: Whether an amalgamated corporation will, for the purposes of subsections 40(10) and 40(11) of the ITA, be considered to have realized a gain that was deemed under subsections 111(4) and 111(12) to have been realized by a predecessor corporation.

Position: Yes

Reasons: Paragraph 87(7)(d) of the ITA applies such that the amalgamated company is considered to be the corporation that realized a gain under subsections 111(4) and 111(12).

XXXXXXXXXX
									Trevor McGowan
									2010-038760
									(613) 952-8500

December 22, 2010

Dear XXXXXXXXXX :

Re: Post-Amalgamation Foreign Exchange Gains

We are writing in response to your letter of November 18, 2010, wherein you requested our views on whether an amalgamated corporation will, for the purposes of subsections 40(10) and 40(11) of the Income Tax Act (Canada) (the "Act") be considered to be a continuation of a predecessor corporation that elected to recognize a gain pursuant to subsections 111(4) and 111(12) of the Act.

You have asked us to assume the following fact situation:

1. There is an acquisition of control of a corporation (the "First Corporation").

2. The First Corporation elects under subsections 111(4) and 111(12) of the Act with respect to an accrued foreign exchange gain related to a debt issued in a foreign currency by the First Corporation.

3. The First Corporation is subsequently amalgamated with another corporation in a transaction which qualifies as an amalgamation within the meaning of subsection 87(1) of the Act.

4. The corporation resulting from the amalgamation ("Amalco") subsequently repays the debt issued by the First Corporation.

You have asked us to confirm that in such circumstances Amalco will, for the purposes of subsections 40(10) and 40(11) be considered to have realized the gain that was deemed under subsections 111(4) and 111(12) of the Act to have been realized by the First Corporation.

You expressed a concern that if a different conclusion were to be reached, Amalco would face double taxation as it would have already realized a gain through the election mechanism and would be required to recognize the same gain a second time at the time of repayment.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Subsection 40(11) applies to the corporation that realized a capital gain or loss because of subsection 111(12). Paragraph 87(2)(a) deems Amalco to be a new corporation for the purposes of the Act. Subsection 87(7) of the Act essentially provides that where has been an amalgamation of two or more corporations and a debt of a predecessor corporation is assumed by the amalgamated entity, the provisions of the Act shall apply as if the new corporation had incurred or issued the debt.

Dow Chemical Canada Inc. v. The Queen (2007 DTC 1701; [2008] 3 CTC 2376 (TCC); rev'd 2008 DTC 6544; 2008 FCA 231) considered the interpretation of subsection 87(7), although in the context of paragraph 78(1)(a). In general terms, paragraph 78(1)(a) provides an income inclusion where a non-arm's length outlay or expense remains owing after two taxation years. The income inclusion happens in the third taxation year following the taxation year in which the expense was incurred.

The Federal Court of Appeal held in Dow Chemical that:

There can be no doubt about the object and purpose of section 87. A common thread throughout this provision is the continuation of the rights and obligations of the predecessor corporations to the "new corporation". With respect to any debt or other obligation incurred or issued by a predecessor, paragraph 87(7)(d) provides that the Act is to be applied "as if" the obligation had been incurred or issued by the "new corporation".

The Federal Court of Appeal gave an expansive reading to the words "as if" in paragraph 87(7)(d) and held that the non-arm's length relationship that existed when the debt was issued should be imputed to the amalgamated entity. It also held that:

where an amalgamation occurs, paragraph 87(7)(d) places the "new corporation" in the shoes of its predecessor insofar as the expense incurred by its predecessor is concerned so that for purposes of determining the tax treatment of this expense, [the predecessor's] two last taxation years are to be viewed "as if" they were Amalco's.

By imputing the two short taxation years to the amalgamated entity, the court attributes to the amalgamated entity the events that occurred since the debt was issued so that the "amalgamated corporation stands in the shoes of its predecessor insofar as previously incurred debts are concerned as of the time when they were incurred."

It is reasonable to conclude that paragraph 87(7)(d) should apply such that Amalco is considered to be the corporation that realized a gain or loss in respect of the foreign currency debt because of subsection 111(12) for the purposes of subsection 40(11). That result achieves the objective of allowing for previous gains and losses to follow a debt.

Summary

We confirm that an amalgamated corporation will, for the purposes of subsections 40(10) and 40(11) of the Act, be considered to have realized the gain that was deemed to be realized by a predecessor corporation pursuant to subsections 111(4) and 111(12) of the Act.

We trust that our comments are of some assistance.

Yours truly,

Yves Moreno
Manager
Corporate Reorganizations Section I
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch