CRA confirms that the s. 87(2)(g.6) and s. 125.7(4.1) continuity rules can be read together

In January 2018, ParentCo acquired all the shares of TargetCo which, until the spin-off described below carried on a single business (the “TargetCo Business”) in Canada. On December 31, 2019, the TargetCo Business was spun-off to a “Newco” subsidiary of ParentCo using conventional s. 55(3)(a) spin-off mechanics, and on January 1, 2020, ParentCo and Newco amalgamated as described in s. 87(1) to form Amalco.

CRA confirmed that the continuity rules in ss. 125.7(4.1) and (4.2) can be applied in conjunction with the continuity rule in s. 87(2)(g.6) (deeming Amalco to be a successor of its predecessors for s. 125.7 purposes provided that one of the main purposes of the amalgamation was not to generate a CEWS or CERS payment). Accordingly, in respect of a particular qualifying period of Amalco, "pursuant to subsection 125.7(4.2) Amalco would be able to include in calculating its qualifying revenue for its prior reference period, the amount of the qualifying revenue of TargetCo for the prior reference period that is reasonably attributable to the TargetCo Business Assets,” given that, by assumption (and as described in greater detail in the letter), the main purpose test and the requirements stipulated in s. 125.7(4.1) in respect of a particular qualifying period would be satisfied.

Neal Armstrong. Summary of 12 April 2021 External T.I. 2020-0863701E5 under s. 125.7(4.1).