Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: In the given fact situation, where Parentco, a holding company, and its wholly-owned subsidiary, Subco, amalgamate, whether the CRA would allow, pursuant to paragraph 10 of IT-474R, Subco not to apply 87(2)(a) so that it does not have a deemed year end?
Position: No.
Reasons: The purpose of the comments in paragraph 10 of IT-474R is not to suggest that we will not apply 87(2)(a) in certain cases, but that, where the fact that a predecessor corporation is continued by the amalgamated entity causes problems in applying the Act, we will consider and try to solve them.
2004-009410
XXXXXXXXXX Mr. LeBlond
(613) 946-3261
November 23, 2004
Dear Sir,
Subject: Application for a deemed year-end exemption
This is in response to your fax of September 8, 2004 and our telephone conversations (Mr. Bisson / XXXXXXXXXX) in which you asked whether XXXXXXXXXX Corporation is permitted to not apply paragraph 87(2)(a) of the Income Tax Act in the situation described below because of paragraph 10 of Interpretation Bulletin IT-474R - Amalgamations of Canadian Corporations (issued March 14, 1986) ("IT-474R").
Unless otherwise indicated, all statutory references below are to the provisions of the Income Tax Act (the "Act").
For the purposes hereof, the names of the taxpayers are replaced by the following names:
o XXXXXXXXXX.
Parentco
o XXXXXXXXXX.
Subco
The Situation
- Parentco is a holding corporation. Subco is a wholly-owned subsidiary of Parentco. Parentco's only significant asset is its investment in the shares of the capital stock of Subco.
- Parentco and Subco are "taxable Canadian corporations" as defined in subsection 89(1).
- Subco carries on a business. Subco has a "fiscal period" as defined in subsection 249.1(1) ending on April 30.
- Parentco and Subco amalgamated on December 1, 2003. The combination of Parentco and Subco constituted an amalgamation within the meaning of section 87(1). The corporation resulting from the amalgamation is Amalco. The certificate of amalgamation provided that the date of amalgamation was December 1, 2003. We have assumed that the certificate of amalgamation did not specify a particular time on that day.
- The purpose of the merger was to eliminate Parentco so that Subco could obtain equity financing directly from private investors to continue its expansion.
Your Request and Reasons
You asked whether Subco is permitted to not apply paragraph 87(2)(a) in the circumstances, i.e., that Subco would be permitted to not have a year-end of November 30, 2003, and to retain its usual April 30 taxation year-end, thus, to act as if Subco's 2004 taxation year had begun on May 1, 2003 and ended on April 30, 2004 despite the December 1, 2003 amalgamation.
In your view, your request could be accepted because of the following comments in paragraph 10 of IT-474R:
10. Notwithstanding corporate law which in most jurisdictions provides that the corporate entity formed as a result of an amalgamation is a continuation of the predecessor corporations rather than a new corporation, paragraph 87(2)(a) states that such entity is deemed to be a new corporation for the purposes of the Act. A number of the points discussed below arise from this deeming provision. Where the provisions of paragraph 87(2)(a) produce unintended consequences which are unfavourable to the taxpayer, the Corporate Rulings Directorate of the Department is prepared on a case by case basis to consider whether relief is appropriate.
[Our emphasis]
In summary, you are of the view that it is appropriate for the CRA to grant Subco permission not to apply paragraph 87(2)(a) for the following reasons:
(i) Parentco and Subco merged for business reasons.
(ii) At the date of the amalgamation, Subco was not aware that one of the tax implications of the amalgamation was that its taxation year that would otherwise have ended after the amalgamation (i.e. the taxation year ending April 30, 2004) was deemed to have ended immediately before the amalgamation (i.e. November 30, 2003), by virtue of paragraph 87(2)(a)
(iii) If Subco was required to have a deemed taxation year end of November 30, 2003, Subco would incur additional costs for (1) the preparation of financial statements for the fiscal period from May 1, 2003 to November 30, 2003, and (2) the preparation and filing of (a) an additional (T2) income tax return, (b) a second Form T661 - Scientific Research and Experimental Development (SR&ED) Expenditures Claim carried on in Canada, and (c) an additional technical report.
(iv) Furthermore, Subco would not be able to deliver unqualified financial statements for the period from December 1, 2003 to April 30, 2004 to its new creditor (XXXXXXXXXX) and its new shareholder (XXXXXXXXXX) due to the absence of a physical inventory count as of November 30, 2003.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of our Directorate not to issue written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received the appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments which may not apply in full to the situation you have submitted to us.
We cannot agree with your request to allow Subco not to comply with section 87(2)(a). Our position is based on the following observations.
The comments in paragraph 10 of IT-474R are not intended to suggest that paragraph 87(2)(a) would not be applied in some cases, but rather that the fact that a predecessor corporation is continued by the amalgamated corporation may give rise to problems of application of the Act resulting in unintended tax consequences, which we are prepared to consider and resolve.
For example, we have previously allowed an amalgamated corporation to make the subsection 20(24) election, even though technically it could only be made by the predecessor corporation, since it was the predecessor corporation, and not the amalgamated corporation, that had included in its income for a taxation year an amount in respect of undelivered goods or services pursuant to paragraph 12(1)(a).
In conclusion, we are of the view that Subco must comply with the provisions of section 87(2)(a) in this case and the guidance directions in paragraph 10 of IT-474R are not intended to allow an exception in this regard.
Best regards,
Maurice Bisson CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2004
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2004
Email this Content