10 March 1982 Income Tax Severed Letter 96-1834 F

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.

RE: Foreign Mergers

Where a corporation (resident or non-resident) is wound-up, all its assets are deemed to have been disposed of at FMV under 69(5) except where 89(1) is applicable i.e. except where the dissolving corporation is a taxable Canadian corporation 90% owned by another taxable Canadian corporation.

For example, subsection 69(5) would apply

a) to a taxable Canadian corporation less than 90% of which is owned by another taxable Canadian corporation,

b) to a Canadian corporation winding-up into a non-resident corporation; or

c) to any non-resident corporation owning Canadian assets (such as Canadian resource property and taxable Canadian property) even where such a corporation is 90% owned by a Canadian i.e. notwithstanding the fact that a roll over is available to such a Canadian shareholder under the new provisions of 95(2)(e.1).

Where for example a foreign subsidiary is merged into its foreign parent, the net result is almost the same (economically) as if the subsidiary had been wound-up into its parent. (In both cases the subsidiary disappears and the parent survives.)

However, the Canadian tax consequences would only be the same where the assets of the predecessor corporations are disposed of as a result of the merger under foreign corporate law. (There would be no Canadian tax payable where the merger does not result in a disposition of assets under corporate law.)

Where non-resident corporations having Canadian assets are merged, it could be argued that the predecessor corporations did not dispose of such assets at the time of the merger. However, at the time the Canadian assets are subsequently disposed of by Mergeco, a strong argument could be made that there was in fact a disposition and an acquisition at FMV at the time of the merger but unfortunately the year of the merger could be statute barred at the time the Canadian assets are disposed of by Mergeco.

This is a very serious problem and in the past, conflicting opinions were provided to us by foreign lawyers. For example, the opinion of a foreign lawyer could be that there is a disposition where the creation of exempt surplus is desired (e.g. where the client is a foreign affiliate owning foreign resource property or capital property not subject to 95(2)(d.1) and used in a business). On the other hand, as a result of an identical merger, the opinion of a foreign lawyer could be exactly the opposite (i.e. he could conclude that there is no disposition) if his client is a non-resident corporation owning Canadian assets which would be subject to Canadian taxation. Of course in the latter situation a foreign lawyer could also come to the conclusion that there is a disposition if for example the Canadian assets are shares in a Canadian corporation which are exempted by treaty such as Article VIII of the Canada-U.S. convention.

In order to clarify the situation the Act should be amended to cover situations where 87(1) is not applicable and to deem a disposition not to occur or to occur (at ACB or a greater amount not exceeding FMV) depending on the objectives pursued by the Department of Finance.

Examples of situations creating problems

a) In the Province of Quèbec a merger which does not meet the requirements of 87(1) would result in a disposition and acquisition of assets at FMV by the predecessor corporations and by the amalgamated corporation respectively.

b) New subsection 87(8) provides for a rollover on shares of the capital stock of non-resident corporations (whether foreign affiliates or not) owned by Canadians. However, any Canadian assets owned by the predecessor corporations would be disposed of at FMV where the merger results in a disposition under corporate law.

c) New paragraph 95(2)(d) provides for a rollover on shares of the capital stock of non-resident corporations (whether foreign affiliates or not) owned by a foreign affiliate of a Canadian. New paragraph 95(2)(d.1) provides for a rollover of capital property of the predecessor corporations for the purposes of subdivision "i" of the Act. However, any Canadian assets (including capital property) owned by the predecessor corporations would be disposed of at FMV where the merger results in a disposition under corporate law.

d) There are no provisions in the Act covering the situation where non-resident corporations owned by non-resident persons (other than foreign affiliates of Canadians) are merged. Therefore, any Canadian assets owned by the predecessor corporations would be disposed of at FMV where the merger results in a disposition under corporate law.

e) Any U.S. corporation after having been continued in Colorado or Wyoming can be merged into an Alberta corporation to form a corporate entity which is deemed to have been incorporated in Canada by virtue of subsection 156.1(14) of the Alberta Companies Act and which therefore is a Canadian corporation within the meaning of paragraph 89(1)(a) of the Act. Presumably such a merger would result in a disposition of assets by the predecessor corporations and if so the ACB of Canadian assets to Mergeco would be bumped-up to FMV whether or not the gains are taxed at the time of the merger.

Similarly an Alberta corporation could be merged into a Colorado or Wyoming corporation but in these circumstances there would be a disposition at FMV under section 88.1 of the Act.