Subsection 87(1) - Amalgamations
Cases
Envision Credit Union v. Canada, 2013 DTC 5144 [at 6275], 2013 SCC 48, [2013] 3 S.C.R. 191
The taxpayer ("Envision") was formed on the amalgamation under the Credit Union Incorporation Act (B.C.) (the "CUIA") of two credit unions. S. 23(b) thereof provided that "the amalgamated credit union is seized of and holds and possesses all the property ... and is subject to all the debts ... of each amalgamating credit union."
The taxpayer sought to avoid having this qualify as an amalgamation described in s. 87(1) of the Act (which required that all property of the predecessors, other than intercompany shares or debts, become property of the amalgamated corporation). To this end, a beneficial interest in some "surplus" real estate was conveyed to a numbered corporation subsidiary at the exact stipulated time for the amalgamation in the amalgamation agreement.
Rothstein J found that s. 23(b) of the CIUA, which should not be overriden by the amalgamation agreement in light of the obvious intent that amalgamated corporations would be responsible for their predecessors' liabilities, caused the amalgamated corporation (Envision - viewed, at para. 48, as a "successor") to be seized of its predecessors' properties, including the surplus properties, at the moment of the amalgamation. As to the resulting effect on the sale agreement for the surplus properties (para. 46):
At the moment of amalgamation, the predecessors ... no longer had separate legal personalities capable of fulfilling the terms of the sale agreements. While they were continued under the CUIA, they continued inside Envision. ... So, despite the fact that the agreements listed [them] as the vendors, at the moment of the amalgamation, the vendor was Envision.
Conversely, the premise of the taxpayer's argument, that there could be a conveyance of the assets of the predecessors (Delata and First Heritage) to Envision, was incorrect, as (para. 50, concurred in by Cromwell J at para. 60):
At the moment Envision was created, the predecessors ceased to have any independent legal existence, so there were not two parties capable of engaging in a conveyance. In this case, there was no point in time when Delta, First Heritage and Envision existed as separate legal entities such that Delta and First Heritage could convey their property to Envision.
In rejecting a "tracing" approach of the Court of Appeal which, in effect, treated the shares of the numbered company as representing the surplus properties, Rothstein J enunciated (at para. 57) the "basic rule of company law that shareholders do not own the assets of the company."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Illegality | lawful interpretation preferred | 282 |
| Tax Topics - General Concepts - Separate Existence | shareholders do not own the corporation's assets | 135 |
Guaranty Properties Ltd. v. The Queen, 87 DTC 5124, [1987] 1 CTC 242 (FCTD), rev'd 90 DTC 6363 (FCA)
A corporation ("Dixie") amalgamated in 1978 to form Forest Glenn, and Forest Glenn amalgamated in 1980 to form Guaranty Properties. A notice of reassessment which the Minister sent in 1981 in the name of Forest Glenn rather than Guaranty Properties in respect of the 1976 taxation year of Dixie was a nullity. "Pursuant to paragraph 87(1)(b) all of the liabilities of the predecessor corporation, Forest Glenn, immediately before the merger became liabilities of the new corporation, Guaranty Properties, by virtue of the merger. Therefore, after November 28, 1980 liability could no longer be affixed to Forest Glenn for the reassessment of Dixie's 1976 taxation year."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(8) | curative provisions cannot correct a fundamental substantive error | 58 |
Allendale Mutual Insurance Co. v. The Queen, 73 DTC 5382, [1973] CTC 494 (FCTD)
Three insurance corporations were merged pursuant to a special Rhode Island statute, which provided that the three predecessors were "made and consolidated into" the taxpayer and that the corporate existence of the predecessors was "consolidated into and continued in [the taxpayer] which shall be deemed to be the same corporation as each of the" predecessors. Cattanach J. found that the effect of the statute was to create the taxpayer as a new corporation, with the result that there was a qualifying merger under s. 85I(1) of the pre-1972 Act. S."85I(1) does not contemplate that the predecessor corporations must be extinguished ... the paramount factor is that a new entity must emerge."
It was held that the requirement that the shareholders of the predecessors and the taxpayer be the same was met where there were no shareholders of the predecessors or of the taxpayer.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder | 23 |
See Also
University Health Network v. The Queen, [2000] PTR 4181 (Ont S Ct J)
The amalgamation of two incorporated hospitals did not cause them to lose their tax-exempt status under the Retail Sales Tax Act notwithstanding that the act of amalgamation did not specifically state such exemption and instead merely indicated that the amalgamated corporation possessed all the property, rights, privileges and franchises and was subject to all liabilities, contracts, disabilities and debts of the amalgamating corporations.
National Bank of Canada v. B.C. (1990), 48 BCLR (2d) 485 (BCSC)
The Bank Act was found to contemplate that the amalgamation of two banks gave rise to the emergence or creation of a new entity in light inter alia to the reference in the Bank Act to the "creation" of the amalgamated entity. Accordingly, an amalgamated bank did not have an instalment base for purposes of the Corporation Tax Act (B.C.).
Loeb Inc. v. Cooper, Cooper and Cooper (1991), 5 OR (3d) 259 (Ont. Ct. G.D.)
The amalgamation under the provisions of the Canada Business Corporations Act of a tenant did not result in an assignment of the lease. Henry J. accepted (p. 270) the submission:
"that an amalgamation under these provisions does not extinguish the existence of any of the amalgamating corporations or create any new corporation. Instead, all the amalgamating corporations are continued as one corporation."
The Great Western Railway Co. v. Commissioners of Inland Revenue, [1894] 1 Q.B. 507 (C.A.)
The Great Western Railway Act, 1892 (U.K.) provided that the undertakings of two other railway companies should be amalgamated with and form part of the undertaking of the Great Western Railway Company, with the amalgamated companies to be dissolved as from the date of the amalgamation. Before finding that this transaction entailed "a conveyance on sale" of the assets of the two dissolved companies for stamp tax purposes, Kay L.J. stated (p. 514):
"It is said that the true effect of this arrangement was that there was a combination of the two companies; the difficulty that suggests itself at once is, how there can be a combination of two companies one of which is dissolved?"
Administrative Policy
25 November 2021 CTF Roundtable Q. 1, 2021-0911841C6 - Indemnities and subsection 87(4)
There has been a triangular amalgamation under which a subsidiary of Parent amalgamated with Target and the Target shareholders received shares of Parent. S. 87(4) requires that such shares be the only consideration received by the Target shareholders “on the amalgamation.” Is this condition satisfied where, following the amalgamation, Parent makes payments to the Target shareholders as a result of breach of representations?
Before answering this question, CRA referred first to the tests in s. 87(1) and indicated that it would presume that such payment was made quite some time after the amalgamation, so that this payment therefore would not be normally be made on the amalgamation or be part of the amalgamation. Therefore, the 87(1)(a) condition would be met – all property of the predecessor corporation becomes property of the new corporation by virtue of the amalgamation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) | payment of damages, for breach of reps, by the parent following a triangular amalgamation would not preclude satisfaction of s. 87(4) | 242 |
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) | when escrowed shares are cancelled as compensation for breach of representations of the shareholders, the payment for s. 84(3) purpose is those shares’ FMV | 136 |
2017 Ruling 2016-0643931R3 - PUC reinstatement on emigration
A non-resident partnership (Partnership 1) and its non-resident co-investors wished to acquire a Canadian public-company target (Target), whose only significant assets were non-resident subsidiaries (Subcos 1 and 2), and then eliminate this sandwich structure through the distribution of the Subcos to them. Accordingly, they capitalized a Canadian Buyco (Parent), which acquired the shares of Target under a Plan of Arrangement.
Parent then amalgamated with Target and the Subco shares were bumped under s. 88(1)(d). A disposition on the amalgamation under the local tax regime for the Subcos was avoided by not effecting a conventional amalgamation. Instead, the amalgamation was specified under the Plan of Arrangement to entail the continued existence of Target. The s. 88(1)(d) bump ruling effectively treated this as a good s. 87(11) amalgamation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 5905 - Subsection 5905(5.4) | bump of non-resident subsidiaries reduced by applicable surplus balances | 635 |
| Tax Topics - Income Tax Act - Section 219.1 - Subsection 219.1(4) | post-acquisition sandwich structure exited through using the s. 88(1)(d) bump in combination with a continuance outside Canada | 372 |
2015 Ruling 2015-0564981R3 - "cross-statute" amalgamation
As part of a Plan of Arrangement for the spin-off by an agricultural cooperative corporation (“ACC”) of one of its two businesses under a Plan of Arrangement, the ACC will be amalgamated with a subsidiary corporation (“Subco”) which was incorporated under a different statute, with Amalco being considered to be formed under that same other statute. CRA ruled that this amalgamation will be considered to be a s. 87(1) amalgamation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 135.1 - Subsection 135.1(1) - Allowable Disposition | deemeed withdrawal from predecessor of Amalco under Plan of Arrangement | 618 |
S4-F7-C1 - Amalgamations of Canadian Corporations
1.4 In Envision Credit Union v. R., 2013 SCC 48, 2013 DTC 5144 (SCC), the Supreme Court of Canada held that it was not possible for the predecessors to structure an amalgamation that did not meet the condition in [s. 87(1)(a)] because the governing provincial statute stipulated that on an amalgamation the amalgamated company "is seized of and holds and possesses all the property, rights and interests" of the predecessors.
1.5 An amalgamation will not be disqualified under [s. 87(1)(c)] solely because certain shareholders of a predecessor corporation receive consideration that is not shares of the new corporation, such as cash, by virtue of exercising the statutory right available in certain jurisdictions to dissent to the amalgamation. Further, subsection 84(3) will not otherwise apply to deem a shareholder of a predecessor corporation to have received a dividend where the shareholder exercises its statutory dissent rights in respect of the amalgamation and receives payment for its shares from the new corporation. ...
1.6 Regarding the condition described in ¶1.1(c), the CRA will not ordinarily apply subsection 245(2) to an amalgamation that is undertaken to squeeze out minority shareholders whereby the redeemable preferred shares received by the minority shareholders are redeemed shortly after the amalgamation (see paragraph 28 of Information Circular 88-2, General Anti-Avoidance Rule – Section 245 of the Income Tax Act).
1.35 Where one predecessor corporation has a leasehold interest in a property owned by a second predecessor corporation, the application of section 87 to the amalgamation will only be accepted where subsection 13(5.1) is applied concurrently as if the new corporation is the same corporation as, and a continuation of, the first mentioned predecessor corporation. ...
2012 Ruling 2010-0355941R3 - reverse subsidiary merger - 87(1) & 87(11)
Under a BC plan of arrangement, a BC corporation ("SubcoTarget") is merged with its wholly-owned BC subsidiary ("Target") to form "Amalco" with the same effect as if they had amalgamated under section 269 of the Business Corporations Act (BC), except that the legal existence of Target does not cease and it survives the merger, Subco ceases to exist and the property of Subco (other than its shares of Target, which are cancelled) become the property of Target. Target and Subco are continued as one company. The parent of Subco ("Acquireco") receives one Amalco common share for each of its Subco common shares.
The purpose of having Target survive the merger under the plan of arrangement was to allow for an exchange of Target shares for shares of Acquireco to qualify as a reorganization for US income tax purposes for US shareholders of Target, although at the end of the day the Target shareholders received cash consideration from Acquireco instead.
Rulings that the merger will be considered an amalgamation (within the meaning of s. 87(1)) in the context of s. 87(11) ; and that pursuant to s. 87(2)(a), Amalco will be considered to have acquired each capital property of Target within the meaning of s. 87(11)(b).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(11) | survivor style amalgamation on Code reverse triangular merger | 209 |
2006 Ruling 2006-0178571R3 - Purchase of Target and Bump
Parent-group losses
/FIRPTA. Parent (a.k.a, Target and, following the merger below, Mergeco) is a CBCA public company. It and various direct Canadian subsidiaries (Opco 4 and Opco 2), as well as subsidiaries of Opco 4 (Opco 5C and Opco 7C) have non-capital or net capital losses). Opco 4 also has indirect US subsidiaries which may be relevant to the FIRPT issue referred to below.
Survivor merger
Under the first CBCA plan of arrangement, Parent, Opco2 and Opco4, and subsidiaries of Opco4 will merge with the same effect "as if the parties were amalgamated under section 184 and 186 of the CBCA, except that the separate legal existence of the Parent will not cease and the Parent will survive the Merger." This "approximates a merger of a parent corporation and its subsidiaries as could be effected under U.S. corporate statutes and this type of U.S. merger transaction is the basis for the short-form amalgamation provisions in the CBCA."
Drop-down to LPs for bump purposes
Mergeco then transfer various business assets to subsidiary limited partnerships utilizing the s. 97(2) election.
Funding of Bidco
An existing indirect non-resident shareholder of Mergeco (Shareholder 2) and a private international firm, an LLC, with no previous connection to the structure (Shareholder 1) jointly fund Bidco (a Canadian Newco), with Bidco also borrowing money, and Bidco will acquire convertible senior notes of Mergeco.
Acquisition of Mergeco by Shareholder 1 and 2 group
Under the second plan of arrangement:
- Bidco will transfer the convertible senior notes to Mergeco for cancellation
- The shareholder rights plan for Megeco will be cancelled
- The outstanding Mergeco options will be cash-surrendered to Mergeco
- Mergeco shares of dissenters will be transferred to Bidco for their fair value
- At the same time, all other Mergeco shares will be transferred to Bidco for cash consideration – except that Mergeco shares held by affiliates of Shareholder 2 will be transferred to Buyco 1 (a joint newly-formed 50/50 subsidiary of Shareholder 1 and 2) in consideration for shares of Buyco 1
- All the shares of Bidco held by the Shareholder 1 and 2 groups will be transferred to Buyco 1 in consideration for shares of Buyco 1, so that Buyco 1 is owned equally by the two groups
- The Mergeco shares held by Buyco 1 will be transferred to Buyco 2 (an affiliate of Shareholder 1) for shares of Buyco 2
- Mergeco will elect to cease to be a public corporation (and also elect under s. 256(9) in its tax return)
- Buyco 2 will transfer the shares of Mergeco to Bidco for shares of Bidco.
S. 88(1)(d) bump
Following the continuance of Bidco under the CBCA, Bidco and Mergeco will amalgamate in a vertical short form amalgamation to continue as Amalco.
Amalco will make a bump designation under s. 88(1)(d).
Purposes
The stated purposes include "(ii) to avoid any US FIRPTA…issue that could arise from the combination of the Parent and of the Subsidiaries, (iii) to consolidate, before the Effective Time [of the 2nd plan of arrangement], the Losses of the various Canadian entities into two corporations…."
Rulings
Ruling that s. 87 will apply to the merger pursuant to the 1st plan of arrangement; and s. 88(1)(d) bump ruling.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) | 64 |
3 December 2003 External T.I. 2003-0046015 - Amalgamation and Sub. 97(2) Election
Where a predecessor corporation made a transfer to a partnership described in s. 97(2), the amalgamated corporation can file the s. 97(2) election in respect of the transfer.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) | election filed by Amalco | 28 |
10 April 2003 External T.I. 2002-0169775 - Foreign Merger
Where a Japanese parent merges with his Japanese subsidiary which, in turn, holds shares of a Canadian company, the Japanese subsidiary will not be considered to have disposed of its assets, including the shares of the Canadian company, if the applicable corporate law in Japan is of a "continuation type". However, there may be a disposition of the share in the Japanese parent and subsidiary by the respective shareholders as a result of the merger before taking into account the possible effect of the addition of paragraph (n) to the definition of disposition.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | 95 |
2 February 2000 External T.I. 2000-0003385 - NON-QUALIFYING AMALGAMATIONS
The tax accounts of predecessor corporations do not flow through to the merged corporation in a non-qualifying amalgamation.
30 November 1996 Ruling 9724053 - AMALGAMATION, DISSENT
An amalgamation under which a shareholder of one of the predecessors would be entitled to receive redeemable preferred shares which would be redeemed for cash shortly after the amalgamation, unless it dissented in which case it would receive a cash payment for its shares of the predecessor in accordance with section 190 of the CBCA, would qualify as an amalgamation irrespective whether or not the shareholder exercised its statutory rights of dissent.
12 August 1994 External T.I. 9415495 - AMALGAMATION/WIND-UP
Although, on the amalgamation of a wholly-owned subsidiary with its parent where the subsidiary also owns shares of the parent, s. 69(1)(b) would ordinarily apply to deem the subsidiary to have received proceeds of disposition for the shares of the parent equal to their fair market value, para. 42 of IT-474R provides that where one predecessor corporation holds shares of another predecessor corporation, the cancellation of those shares on the amalgamation will not give rise to a gain or loss in the hands of the former corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) | 42 | |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) | 68 |
92 C.R. - Q.26
Where an amalgamation does not qualify under s. 87 and, under the governing corporate law, the amalgamated corporation is considered to be a continuation of its predecessors, the predecessor corporations generally will not be considered to have disposed of any assets held immediately before the amalgamation. However, shareholders of each predecessor generally will be considered to have disposed of their shares for capital gains purposes.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | 64 |
91 C.R. - Q.22
Where a shareholder of a predecessor corporation, who is entitled to only a fraction of a share of the amalgamated corporation, or who dissents to the amalgamation, receives cash, s. 87 will apply to the amalgamation.
89 C.P.T.J. - Q. 14
Because there is no provision like s. 87(1.2) deeming an amalgamated corporation to be a continuation of each predecessor, where a corporation has issued flow-through shares and amalgamates with another corporation prior to incurring the expenditures, the amalgamated corporation will not be able to renounce expenditures incurred subsequent to the amalgamation, unless the amalgamation was described in s. 87(1.1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66.3 - Subsection 66.3(1) | 39 |
89 C.P.T.J. - Q15
Because Deltona indicates that an amalgamated corporation is incorporated on the amalgamation, a corporation that currently is disqualified as a JEC due to having once had more than 10 shareholders can be cleansed by an amalgamation.
IT-474R "Amalgamations of Canadian Corporations"
Articles
Henry Chong, "Surviving North of the Border: Structuring a Statutory Merger in Canada to Qualify as a U.S. Tax-Free Reorganization", Tax Management International Journal, 2012, p. 611
Respecting 2006-0178571R3, he states that the CRA position
appears to be based on the view that the reference in s. 87(2)(a) to "new corporation" referred to the amalgamated corporation, whether it was a continuation of the amalgamating corporation or, in the case of the ruling, a survivor….
Under this approach, s. 87(2)(a) deems a "new" corporation to exist for at least some Canadian tax purposes, regardless of its status under the corporate law. Based on the tax fiction that there is a "new" corporation, all of the assets and liabilities of the predecessor corporation can be said to have "become" the assets of the "new" corporation for tax purposes even if, for non-tax purposes, each corporation arguably continues into the merged corporation and accordingly continues to own or be liable for its assets and liabilities throughout. Based on [this ruling], this fiction would seem to apply equally where one of the corporations survives and continues to own its assets. The survivor would be deemed to be a "new" corporation….
Re 2010-0355941R3, it appears to produce "a reasonable result as there is nothing in the s. 87(2)(a) analysis that would be limited to cases where the parent is the survivor."
Stephen S. Ruby, "Recent Transactions of Interest", 2007 Conference Report (Toronto: Canadian Tax Foundation, 2008), 3:1-41, at 3:13-17
Discussion of the Chesapeake Gold Corporation acquisition of American Gold Capital entailing a "survivor style" merger.
Firoz Ahmad, "Amalgamation Versus Winding-Up Revisited", Canadian Current Tax, Vol. 15, No. 4, January 2005, p. 33.
Richards, "Amalgamations", The Taxation of Corporate Reorganizations, 1996 Canadian Tax Journal, Vol. 44, No. 1, p. 241.
Vesely, "Takeover Bids: Selected Tax, Corporate and Securities Law Considerations", 1991 Conference Report, c. 11.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 85 - Subsection 85(1.1) | 0 |
Schwartz, "Statutory Amalgamations, Arrangements and Continuations: Tax and Corporate Law Considerations", 1991 Conference Report, c. 9.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(9) | 0 |
Williamson, "Checklists: Corporate Reorganizations, Amalgamations (Section 87), and Wind-ups (Subsection 88(1))", 1987 Conference Report, c. 29.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) | 0 |
Paragraph 87(1)(a)
Administrative Policy
14 April 2021 External T.I. 2018-0785921E5 F - alinéa 87(1)a)
2017-0696821E5 F described two individuals, Mr. A and Mr. B, who wholly-owned two corporations of equal value (A Inc. and B Inc.) and who, on the corporations’ amalgamation, received equal numbers of shares of Amalco, but also received an equal amount of cash from Amalco. CRA indicated that the payout of the cash (pursuant to the Amalgamation Agreement) would comply with s. 87(1)(c) (i.e., the predecessor shareholders received shares of Amalco), but went on to indicate that the cash payout prevented there from being a rollover at the shareholder level that otherwise would have been available under s. 87(4).
CRA now stated:
[I]n light of Envision Credit Union v. Canada, 2013 SCC 48, the condition in paragraph 87(1)(a) would generally be met in the hypothetical situation presented in the Interpretation.
15 September 2017 External T.I. 2017-0696821E5 F - Amalgamation
Two individuals, Mr. A and Mr. B wholly-own two corporations of equal value (A Inc. and B Inc.), which amalgamate. On the amalgamation, the two individuals, in addition to receiving equal numbers of shares of Amalco, also received an equal amount of cash from Amalco.
In appearing to accept that the cash did not preclude qualification of the amalgamation under s. 87(1), CRA stated:
Generally, the condition in paragraph 87(1)(c) would be satisfied in the circumstances of the hypothetical situation because all shareholders who owned shares of the capital stock of a predecessor corporation immediately before the amalgamation received shares of the capital stock of the corporation resulting from the amalgamation. Thus, in the event that the other conditions set out in subsection 87(1), including paragraph 87(1)(a), were also satisfied, the amalgamation of Corporation A and Corporation B could qualify as an amalgamation for the purposes of the provisions of section 87.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) | receipt of cash on amalgamation precluded rollover | 206 |
Subsection 87(1.1) - Shares deemed to have been received by virtue of merger
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.9 … Subsection 87(1.1) deems the shares that are not cancelled on a short-form vertical or horizontal amalgamation to be shares of the new corporation. As a result, the condition in [s. 87(1)(c)] will be met in respect of these amalgamations. A merger that is a qualifying amalgamation by virtue of subsection 87(1.1) qualifies as an amalgamation for all purposes of section 87, including subsection 87(4)… .
Subsection 87(1.2) - New corporation continuation of a predecessor
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.56 In the case of an amalgamation to which subsection 87(1.2) does not apply, any undeducted balance in a predecessor corporation's resource expense pools (successored resource expenses) will only be deductible where the amalgamated corporation has filed the election (Form T2010) described in paragraph 66.7(7)(c). The amount of any successored resource expenses that the amalgamated corporation may deduct will be determined under the successor rules in subsections 66.7(1) to (5) and will generally be limited to specified resource income from the resource property acquired from the particular predecessor corporation.
Subsection 87(2) - Rules applicable
Paragraph 87(2)(a) - Taxation year
Cases
CGU Holdings Canada Ltd. v. Canada, 2009 DTC 5685, 2009 FCA 20
Noël, J.A. rejected a submission of the taxpayer that s. 87(2)(a) deemed an amalgamation of three corporations (one of which was an NRO) to be a new corporation only for purposes of the computation of its income (Division B) and taxable income (Division C). He stated (at para. 40):
The observation [in Pan Ocean] that an amalgamated corporation is "only" a new corporation for the purposes of computing income under Division B and where necessary as a consequence thereof, to Division C and E is obiter.
Accordingly, the amalgamated corporation also was a new corporation for purposes of the NRO rules contained in Division F.
The Queen v. Pan Ocean Oil Ltd., 94 DTC 6412, [1994] 2 CTC 143 (FCA)
The taxpayer was the result of a 1974 amalgamation of two Alberta corporations, one of which was a second successor corporation for purposes of s. 29(29) of the ITARs respecting exploration and drilling expenses made prior to 1972. Hugessen J.A. held that because the taxpayer was a new corporation for income-computation purposes and was not the second successor corporation, there was no provision of the Act permitting it to deduct oil and gas exploration expenses incurred by other taxpayers. With respect to the effect of the reasons of MacGuigan J.A. in the Guaranty Properties case, he indicated (at p. 6416) that they only established that "the provisions of paragraph 87(2)(a) are applicable only to the amalgamated company's computation of income under Division B (including the 'deductions to which it may be entitled') and, where necessary as a consequence thereof, to its computations of taxable income (Division C) and of tax (Division E)", and that the decision "should not be read as denying that the amalgamated corporation is to be deemed to be a new corporation for all purposes relating to the computation of its income".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Application Rules - Subsection 29(29) | 145 |
The Queen v. Guaranty Properties Ltd., 90 DTC 6363, [1990] 2 CTC 94 (FCA)
Following the amalgamation of the two predecessor corporations of the taxpayer under the laws of Ontario, the Minister issued a reassessment and then a notice of confirmation in the name of a predecessor corporation. In rejecting a submission by the taxpayer's counsel that the implication of s. 87(2)(a) was that the predecessor corporation had ceased to exist by virtue of the amalgamation (with the result that the reassessments were invalid) MacGuigan, J.A. stated (p. 6363):
"The principal effect of paragraph 87(2)(a) is that, for income tax purposes, the amalgamated corporation is deemed to be a new taxpayer with a fresh taxation year as of the date of amalgamation. In sum, nothing in the paragraph evinces an intention on the part of Parliament to deem that the amalgamating taxpayer ceases to exist, much less than it should be relieved of liability for its own income taxes prior to the date of amalgamation. That the paragraph, indeed the entire section, deals with the computation of income is also an inference to be drawn from the fact that it falls under Division B of Part I of the Act which deals with the computation of income, as opposed to [Division] A, which is concerned with liability for tax."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) | amalgamation did not extinguish predecessors for assessment purposes | 50 |
See Also
CGU Holdings Canada Ltd. v. The Queen, 2008 DTC 3347, 2008 TCC 167, aff'd 2009 FCA 20
The taxpayer was formed on the amalgamation of three predecessors, only one of which was a non-resident-owned investment corporation ("NRO"). Subsection 134.1(1) permitted a corporation that had been an NRO in its preceding taxation year to make an election. After referring (at para. 29) to the corporate law that "a predecessor remains in existence", Hershfield J. went on to find (at para. 33) that as s. 134.1 did not deal with the calculation of income or taxable income (as specified in s. 87(2)(a)), the case law was clear that the predecessor NRO had not ceased to exist by virtue of the amalgamation, so that the taxpayer, as a continuation of the NRO predecessor, could make the election in s. 134.1(1).
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
New corporation
1.13 Under the corporate law in most jurisdictions, the corporate entity formed as a result of an amalgamation is a continuation of the predecessor corporations and the predecessor corporations do not cease to exist upon an amalgamation. However, in the case of a qualifying amalgamation, paragraph 87(2)(a) deems the amalgamated corporation to be a new corporation for the purposes of the Act.
Tax year-end
1.14 Paragraph 87(2)(a) deems the first tax year of the amalgamated corporation to commence at the time of the amalgamation and the tax years of the predecessor corporations to terminate immediately before the amalgamation. Since paragraph 87(2)(a) also deems the amalgamated corporation to be a new corporation for purposes of the Act, the amalgamated corporation can select a new fiscal period (and thus tax year-end – see paragraph 249(1)(a)). Under paragraph 249.1(1)(a), a fiscal period of a corporation can be up to 53 weeks.
Effective date of amalgamation
1.15 … If the effective date of amalgamation is December 31, the first tax year of the new corporation will commence at the earliest moment on December 31, and the tax years of the predecessor corporations will end at midnight on December 30.
1.16 In certain situations, however, the CRA will consider an amalgamation to occur at a particular time on the amalgamation date even though no time is specified in the certificate of amalgamation. For example, if there is a series of transactions occurring on the same day, which is followed by an amalgamation on that same day for which no time is specified, the amalgamation will be considered to occur at the time specified in the arrangement insofar as the series occurs logically. Consequently, transactions that occur sequentially on the same day but prior to the amalgamation will be reported by the predecessor corporation in the tax year that is deemed to have ended immediately before the amalgamation.
1.17 …Where the duration of…short tax years of the predecessor corporations would be a matter of days, for instance where the normal tax year-ends are December 31 and the amalgamation takes place on January 2, and where there would be adverse implications in having short tax years, consideration should be given to requesting the Minister's concurrence to extend such year-ends… .
Acquisition of control followed by an amalgamation
1.19 If the acquisition of control of the target corporation and its subsequent amalgamation occur on the same day, and those transactions are the only transactions occurring on that day that are outside the normal course of the target corporation's business, the CRA will accept that the target corporation will have only one deemed year-end provided that:
(a) no election under subsection 256(9) is made in respect of the acquisition of control; and
(b) no time is specified in the certificate of amalgamation.
…Generally, a transaction would be considered to occur outside the normal course of business if, for example, the transaction is described in a closing agenda or other document describing the sequential order of transactions which must occur in order to carry out the amalgamation of the predecessor corporations.
1.20 Where a corporation amalgamates with a target corporation in the form of a horizontal amalgamation such that the former shareholders of the corporation acquire control of the new corporation, subparagraph 256(7)(b)(ii) will deem control of the target corporation to have been acquired immediately before the horizontal amalgamation. By virtue of subsection 249(4), the target corporation will be deemed to have a year-end immediately before the acquisition of control, being the time that is immediately before the time that is immediately before the horizontal amalgamation. Consequently, the horizontal amalgamation will result in two deemed year-ends for the target corporation: one under paragraph 87(2)(a) (being the time that is immediately before the horizontal amalgamation), and one under subparagraph 256(7)(b)(ii) and subsection 249(4). …
Multiple amalgamations
1.21 [A] short-form horizontal amalgamation of Corporation B with Corporation C is implemented to form Corporation BC. Then Corporation BC is amalgamated with Corporation A in a short-form vertical amalgamation to form Corporation ABC.
In such a situation, Corporation B and Corporation C will each be deemed by paragraph 87(2)(a) to have a tax year-end immediately before they amalgamate. Similarly, new Corporation BC will be deemed by paragraph 87(2)(a) to have a tax year-end immediately before its amalgamation with Corporation A.
15 April 2014 External T.I. 2014-0527231E5 F - Acquisition of control and amalgamation
A plan of arrangement provides for the following transactions to occur on 18 January 20X1 and in the indicated order but without a particular hour for each transaction being specified:
- Sale of some assets of the corporation.
- Roll of its shares.
- Acquisition of its control (with no s. 256(9) election being made).
- Amalgamation with the acquirer.
In addition to noting that s. 249(4)(a) deemed there to be a taxation year end immediately before the commencement of January 18, CRA stated (TaxInterpretations translation):
Where a corporation does not carry out other transactions outside the normal course of its business on the day of the amalgamation and the certificate of amalgamation does not contain a reference to a time on the day of the amalgamation, we generally consider that the amalgamation occurs at the beginning of the day and there is a taxation year end immediately before that time, or at the end of the previous day.
On the other hand, our position is different where a plan of arrangement or a closing agenda provides that several transactions outside the normal course of business occur during the day of an amalgamation in addition to an acquisition of control and the amalgamation. If the transactions are effected in a logical sequence during the day, the Canada Revenue Agency will consider that the amalgamation occurs at the time established by the logical order of the transactions. ...
The time of such taxation year end [from the amalgamation] thus could not be before the effective time of the transactions occurring before the amalgamation (taking the into account the logical order of the transactions).
...Therefore, the corporation must account for the tax consequences respecting the asset sale and share rollover transactions (which occurred before the acquisition of control and the amalgamation), in the taxation year of the corporation terminating immediately before the amalgamation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 249 - Subsection 249(4) | key corporate transactions moments before acquisition of control and amalgamation result in such transactions falling in a stub year | 261 |
26 March 2013 External T.I. 2014-0523251E5 F - Acquisition of control and amalgamation
Following a sale of assets of a corporation and a rollover of its shares on 18 January 20X1, an acquisition of control of the corporation occurs at 18:00 hours and it then is amalgamated with the acquirer. The plan of arrangement or closing agenda, as the case may be, does not specify particular times at which these transactions occur and the corporation elects under s. 256(9) for the acquisition of control to occur at 18:00 hours. Will multiple year ends occur as a result and, if so, in which taxation year will the preliminary transactions be considered to occur?
CRA stated (TaxInterpretations translation):
Where a corporation does not carry out other transactions outside the normal course of its business on the day of the amalgamation and the certificate of amalgamation does not contain a reference to a time on the day of the amalgamation, we generally consider that the amalgamation occurs at the beginning of the day… .
On the other hand … where a plan of arrangement or a closing agenda provides that several transactions outside the normal course of business occur during the day of an amalgamation in addition to an acquisition of control and the amalgamation [and].the transactions are effected in a logical sequence during the day, [CRA] will consider that the amalgamation occurs at the time established by the logical order of the transactions. [Here] this time is after the effective time of the acquisition of control.
[B]y reason of the subsection 256(9) election, a deemed taxation year end occurs … at the time immediately before 18:00 … . The corporation must take into account the taxation consequences of the asset sale and the rollover transaction… that occurred … in the corporation’s taxation year that terminated immediately before the effective time of the acquisition of control. …
Furthermore, given that the amalgamation occurs after all the January 18, 20X1 transactions, including the acquisition of control … at 18:00 hours, the second taxation year of the corporation terminates immediately before the amalgamation by virtue of paragraph 87(2)(a). …
The corporation would therefore technically have two taxation years that would be deemed to end during January 18, 20X1. The second … would be very short.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 249 - Subsection 249(4) | double taxation year ends where transactions occur on the closing date before acquisition and amalgamation | 366 |
17 February 2011 External T.I. 2010-0388081E5 - Clarification STEP Roundtable Q3 - Deemed Year End
On the amalgamation of public corporation ("Pubco") and a private corporation ("Holdco") to form Amalco, the three shareholders of Holdco acquire control of Amalco. In finding that this gave rise to two taxation year ends of Pubco, CRA stated:
[O]n the one hand…the taxation year of Pubco would be deemed to have ended immediately before the amalgamation of Pubco and Holdco pursuant to paragraph 87(2)(a)… . On the other hand, the group of three persons originally shareholders of Holdco would be deemed to have acquired, immediately before the amalgamation, control of Pubco pursuant to subparagraph 256(7)(b)(ii) of the ITA. Consequently, and in accordance with paragraph 249(4)(a)…the taxation year of Pubco…would be deemed to have ended immediately before that time. In other words, the deemed acquisition of control of Pubco resulting from the amalgamation would technically generate a deemed taxation year end with respect to Pubco immediately before the time that is immediately before the amalgamation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 249 - Subsection 249(4) | 2010 STEP Roundtable Q. 3 clarification - no double acquisition | 74 |
| Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) | double year ends where acquisition of control under s. 256(7)(b)(ii) | 162 |
8 October 2010 Roundtable, 2010-0373201C6 F - Change of Control and Amalgamation
Is the CRA's position, that a predecessor corporation whose control was acquired on the same day will have only one year end, solely limited to the situations described IT-474R2, para. 11 and 2004-0105481? If not, when will a predecessor corporation, whose control was acquired on the same day, and that carries out or is involved in transactions on the day of the amalgamation, have only one year end?
CRA responded:
In general, the CRA applies the administrative position described in paragraph 11 of Interpretation Bulletin IT-474R2, only where the acquisition of control and the amalgamation are the only transactions occurring outside the ordinary course of business of the predecessor corporations that are carried out on the day of the amalgamation. In that regard, we consider, as being outside the ordinary course of a corporation's business, any transaction described, for example, in a closing agenda for the date of closing or in any other document describing a logical order in which transactions must be carried out in anticipation of the amalgamation of a predecessor corporation.
It appears to us more appropriate in general that legal transactions by the predecessor corporations be reported by the same predecessors rather than by the amalgamated corporation.
23 November 2004 External T.I. 2004-0094101E5 F - IT-474R Administrative Relief
The taxpayer referenced the statement in IT-474R, para. 10 that “[w]here the provisions of paragraph 87(2)(a) produce unintended consequences … the Corporate Rulings Directorate … is prepared on a case by case basis to consider whether relief is appropriate,” and requested relief on the basis that the short taxation year (which had not been anticipated) resulting from an amalgamation produced an additional administrative burden. CRA responded:
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 … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(24) | amalgamated corporation can make s. 20(24) election | 136 |
28 April 2004 Internal T.I. 2004-0067561I7 F - Impôt de la partie I.3
In connection with the taxpayer’s reference to the statement in IT-474, para. 10 that “[w]here the provisions of paragraph 87(2)(a) produce unintended consequences which are unfavourable to the taxpayer, the Corporate Rulings Directorate … is prepared on a case by case basis to consider whether relief is appropriate,” the Directorate indicated that no such relief was available respecting an acceleration of Part I.3 tax resulting from an amalgamation.
1993 Internal T.I. 7-920752
The Rulings Directorate no longer is providing relief where taxpayers suffer unpredictable and unfavourable consequences pursuant to s. 87(2)(a).
3 July 1991 T.I. (Tax Window, No. 5, p. 13, ¶1334)
RC's assessing policies with respect to amalgamations are under review because of the decision in the Guaranty Properties case.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) | 13 |
12 December 1989 T.I. (May 1990 Access Letter, ¶1221)
Although an amalgamated corporation is a new corporation for the purposes of computing income and tax otherwise payable, s. 87(2)(a) is not relevant in determining entitlement to VCT credits under section 8.3 of the Income Tax Act (B.C.).
Articles
MacDonald, "Amalgamations Following Guaranty Properties Limited", 1991 Canadian Tax Journal, p. 1399.
Paragraph 87(2)(b) - Inventory
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.27 …The new corporation will generally be expected to follow the inventory valuation method adopted by its predecessor corporations for the purposes of computing its income. Where, however, the new corporation can establish that another valuation method which is sanctioned by subsection 10(1) provides a truer picture of the new corporation's income, the new corporation may adopt such valuation method.
5 March 1992 T.I. (Tax Window, No. 17, p. 21, ¶1785)
Where two or more corporations amalgamate, the cost amount of the inventory of a predecessor corporation is its value determined for the purpose of computing its income for the taxation year which ended immediately before the amalgamation.
27 February 1991 Memorandum (Tax Window, Prelim. No. 3, p. 24, ¶1113)
An amalgamated corporation must use the same inventory valuation method as its predecessors. Where an amalgamated corporation has two predecessors with homogeneous inventories and different valuation methods, the amalgamated corporation will be justified in changing its method of valuing inventory in order to avoid distortion in the calculation of profit for accounting purposes.
Paragraph 87(2)(c) - Method adopted for computing income
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.98 In the case of an amalgamation or merger, there may not technically be a disposition of property from a predecessor corporation to the new corporation. Accordingly, subsection 69(13) deems the property of a predecessor corporation to have been disposed of immediately before the amalgamation or merger at its cost amount for the purposes of determining whether subsection 69(11) applies to the amalgamation or merger. The expression affiliated person is defined in subsection 251.1(1) except that, for the purposes of subsection 69(11), the affiliated person rules are to be read without the extended definition of control found in subsection 256(5.1). In other words, only de jure control is considered.
Paragraph 87(2)(d) - Depreciable property
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.30 …[T]he capital cost to the new corporation of depreciable property of a prescribed class acquired by it on the amalgamation will equal the cost amount, immediately before the amalgamation, to a predecessor corporation of each property included in that class by the new corporation. Cost amount of a depreciable property of a prescribed class is defined in subsection 248(1) and is generally the UCC of the class allocable to the particular property (on a pro rata basis, based on the capital cost of the particular property as a fraction of the capital cost of all properties in the class). The amount to be added by clause 87(2)(d)(ii)(A) is net of any deduction taken by the predecessor corporation under paragraph 20(1)(a) in computing its income for the tax year ending immediately before the amalgamation.
Paragraph 87(2)(e.1) - Partnership interest
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.42 Where the new corporation is not related to the predecessor corporation, subsection 100(2.1)… requires the predecessor corporation to recognize a gain on the disposition of any partnership interest which had a negative adjusted cost base immediately before the amalgamation. The rule in subsection 100(2.1) will apply even where the amalgamation is not a qualifying amalgamation for the purposes of section 87.
Paragraph 87(2)(g)
Administrative Policy
24 October 2017 Internal T.I. 2017-0719531I7 - Section 22 election and carrying on a business
Immediately after its formation, Amalco dropped the business of a predecessor down to a partnership under s. 97(2) – except that it used the s. 22 election for the transferred trade receivables. The Directorate found that as a technical matter the s. 22 election was not available – effectively because s. 87(2)(g), which deemed Amalco to be a continuation of the predecessor for purposes of the ss. 20(1)(l) and (p) reserve provisions, did not go further to deem the Amalco receivables to have been includible in its income.
However, the Directorate nonetheless concluded that the s. 22 election was valid as denying the election “runs against the legislative scheme of section 87.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 22 - Subsection 22(1) | s. 22 election was available to an Amalco despite its receivables not being deemed to have been includible in its income | 372 |
Paragraph 87(2)(g.5)
Administrative Policy
Frequently asked questions - Canada emergency wage subsidy (CEWS) CRA Webpage 24 September 2021
6-4. Can a corporation formed on the amalgamation of two or more predecessor corporations, or where one corporation is wound up into another, qualify for the wage subsidy?
…[T]he new corporation will use the combined qualifying revenue of the predecessor corporations to calculate its qualifying revenue for each relevant reference period in a particular claim period to determine if it has experienced the required reduction in revenue to qualify for the wage subsidy for that claim period. In the case of a subsidiary corporation that is wound up into its parent on a tax-deferred basis in accordance with subsection 88(1) of the Act, the parent’s qualifying revenue will be combined with its subsidiary’s qualifying revenue for each relevant reference period in a particular claim period to determine if it has the required reduction in revenue for a particular claim period.
However, in either of these situations, the wage subsidy will be denied if it is reasonable to consider that one of the main purposes for the amalgamation (or the wind-up) was to qualify for the wage subsidy or to increase the amount of the wage subsidy.
Paragraph 87(2)(g.6)
Administrative Policy
12 April 2021 External T.I. 2020-0863701E5 - CEWS - Asset Sale Followed by Amalgamation
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 125.7 - Subsection 125.7(4.1) | s. 87(2)(g.6) and s. 125.7(4.1) continuity rules can be read together | 302 |
Paragraph 87(2)(l.3)
Administrative Policy
S3-F3-C1 - Replacement Property
Preservation of ss. 13 and 44 replacement property rollover
1.49 Paragraph 87(2)(l.3) prevents the deferral rules in sections 13 and 44 from being lost in a situation where, before a section 87 amalgamation occurs, property of a predecessor corporation:
- has been unlawfully taken, lost, destroyed or taken under statutory authority, or
- was a former business property of the predecessor corporation.
Very generally, paragraph 87(2)(l.3) does this by deeming that the new corporation is the same corporation as, and is a continuation of, the predecessor corporation.
Paragraph 87(2)(o) - Expiration of options previously granted
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.46 Where a corporation has granted an option (other than an option to acquire its shares, bonds or debentures), subsection 49(1) deems the corporation to have disposed of a property with an adjusted cost base of nil. However, if such an option is exercised in a subsequent tax year, subsections 49(3), (3.1) and (4) generally permit the corporation to move the recognition of the consideration for granting the option from the year of the option grant to the year in which the option is exercised. Where a predecessor corporation has granted such an option and that option is exercised following an amalgamation, there is no provision in the Act which allows the consideration for granting the option to be moved from the year of grant (for the predecessor corporation) to the year of exercise (for the new corporation). …
Paragraph 87(2)(q) - Registered plans
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.67 Pursuant to paragraph 87(2)(q), the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation for the purposes of sections 147, 147.1 and 147.2 and any regulations made under subsection 147.1(18). Therefore, in determining whether the new corporation can make an individual pension plan contribution in respect of services rendered by one of its employees to a predecessor corporation, subparagraph 8503(3)(a)(i) of the Regulations will apply following a qualifying amalgamation to include the period throughout which the employee of the new corporation was employed by, and received remuneration from, the predecessor corporation.
Paragraph 87(2)(s)
Subparagraph 87(2)(s)(ii)
Administrative Policy
25 February 2019 External T.I. 2019-0793911E5 F - Triangular amalgamation and section 135.1
Respecting a query on the application of ss. 135.1(2) and (7) to a triangular amalgamation referred to in s. 87(9), CRA stated:
[T]he reference to the term new corporation in paragraph 87(2)(s) refers to the corporation resulting from the amalgamation. Consequently … paragraph 87(2)(s) is inapplicable in the case of a triangular amalgamation referred to in subsection 87(9) where the shareholders of the predecessor corporations receive in exchange shares of the parent corporation.
… Since … subsection 135.1(10) [thus] cannot have application … on the redemption, acquisition or cancellation of a tax-deferred share of an agricultural cooperative in a triangular amalgamation referred to in subsection 87(9) … for the purpose of subsection 135.1(2), the holder will be required to include the proceeds of disposition of the tax-deferred share that the holder disposed of in the year. In addition, provided all applicable conditions are satisfied, the withholding tax referred to in subsection 135.1(7) must be withheld.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 135.1 - Subsection 135.1(2) | potential s. 131.1(2) income inclusion on triangular amalgamation | 118 |
Paragraph 87(2)(z.1)
Administrative Policy
11 October 2019 APFF Roundtable Q. 6, 2019-0812651C6 F - CDA and wind-up of a subsidiary
Holdco, which has a calendar taxation year-end, commences the winding-up of its wholly-owned subsidiary (Opco – which has a June 30 taxation year-end) on March 31, 2018 with an authorizing resolution, and the Opco assets and liabilities are distributed and assumed on that date. Opco is dissolved on April 15, 2019. When does the capital dividend account (CDA) of Opco get added to the CDA of Holdco? CRA responded:
[In] IT-126R2, the CRA states that it considers that where the formal dissolution of a corporation is not complete but there is substantial evidence that the corporation will be dissolved within a short period of time, for the purpose of subsections 88(1) and (2) the corporation is considered to have been wound up. …
… The determination of when a corporation is wound up for the purposes of subsections 88(1) and 88(2) requires consideration of all facts and circumstances relevant to a particular situation. In view of the fact that there is very little information in this statement, we are limited to providing the general comments above. It should be noted that the year-end date of Opco or Holdco is not relevant in determining when Holdco takes into account Opco's CDA components in the calculation of its CDA.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) | IT-126R2 applied re tiiming of addition of the wound-up subsidiary’s CDA | 117 |
S3-F2-C1 - Capital Dividends
Calculation of Amalco's CDA
1.80 ...Corporation A:
- realized a capital gain of $100,000 in its 2005 tax year, of which the non-taxable portion, $50,000, was added to its CDA; and
- as a result of the disposition of an eligible capital property in its 2012 tax year, included the amount of $25,000 in its income pursuant to paragraph 14(1)(b) and added that amount to its CDA.
Corporation B:
- realized a capital loss of $150,000 in its 2010 tax year, of which the non-deductible portion is $75,000; and
- as a result of the receipt of life insurance proceeds in its 2011 tax year, added the amount of $40,000 to its CDA. ...
Component 1 = NIL (because Component 1 cannot be a negative amount)...
Component 3 = $25,000...
Component 4 = $40,000...
Component 1 + Component 3 + Component 4 = $65,000
In the first tax year after amalgamation, Amalco realizes a capital gain of $90,000, the non-taxable portion of which is $45,000. ... $25,000 of the non-taxable portion of the capital gain must first be applied to extinguish the notional negative balance of the capital gain component of the CDA of Amalco (Component 1 of the CDA) before the remaining $20,000 can be applied to increase the CDA balance of Amalco. ...
9 October 2015 APFF Roundtable Q. 6, 2015-0595551C6 F - Capital Dividend Account
If Holdco (a CCPC) has realized $1M in allowable capital losses on its public company portfolio, its subsidiary (Opco) has realized a $1M taxable capital gain from the sale of its operating business, and Opco then pays a capital dividend of $1M to Holdco, Holdco will have a resulting positive capital dividend account balance of $1M, as para. (a) of the CDA definition (respecting the non-taxable portion or non-deductible portion of capital gains or losses) will not reduce the positive CDA balance arising under para. (b) of the CDA definition from the receipt of the dividend – so that Holdco can then pay a capital dividend of $1M to its individual shareholder. However, if this dividend is not paid, the ability to do so will disappear if Holdco then amalgamates with Opco, as this will cause the CDA balance to go down to nil. More particulars would be required to assess any potential application of GAAR to the dividend payment.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account | capital loss does not eliminate positive CDA contribution of capital dividend received | 145 |
29 June 2009 External T.I. 2008-0296371E5 F - Capital dividends
An estate owns all the shares of Corporation A, which has a capital dividend account (CDA) and refundable dividend tax on hand account (RDTOH) but owns no assets. The estate sells its shares to Corporation X, which has assets but not CDA or RDTOH - following which Corporation A and Corporation X amalgamate, with the amalgamating corporation paying a capital dividend to Corporation X. One of the main purposes of these transactions was to allow Corporation X to benefit from Corporation A's CDA and RDTOH
In discussing whether s. 83(2.1) would apply in the context of there having been an amalgamation, CRA first stated:
[P]aragraph 87(2)(z.1) provides a special rule where subsection 83(2.1) would apply to a predecessor corporation if a dividend were paid by it immediately before the amalgamation and an election under subsection 83(2) were made in respect of the full amount of that dividend. Where a portion of the dividend would be deemed to be a taxable dividend paid by the predecessor corporation under subsection 83(2.1), the CDA of the predecessor corporation is not transferred to the amalgamated corporation.
CRA noted that it would thus be necessary to determine whether all or substantially all of Corporation A's CDA, immediately before the payment of such a dividend, could reasonably be considered to consist of amounts not described in paras. (a) to (e) of subsection 83(2.4). In particular, there was insufficient information to determine if any part of the CDA of Corporation A represented an amount of CDA realized by a corporation before it became related to Corporation X.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 129 - Subsection 129(1.2) | s. 87(2)(aa) would apply to eliminate RDTOH of predecessor given the absence of an s. 83(2.4) equivalent to exempt the predecessor’s notional dividend | 203 |
| Tax Topics - Income Tax Act - Section 83 - Subsection 83(2.1) | s. 83(2.1) would apply to acquisition and amalgamation with shell corp. with CDA unless s. 83(2.4) exceptions applied | 255 |
29 May 2007 Internal T.I. 2007-0223381I7 F - Capital Dividend Account
A subsidiary (Bco) that was wound-up under s. 88(1) into Aco had a positive balance in para. (c.2) of the capital dividend account definition due to the realization by it of an eligible capital amount. The TSO suggested that, following the wind-up, Aco should not have an addition under para. (c.2) because Aco itself had never realized an eligible capital amount. In rejecting this interpretation, the Directorate stated:
It follows from paragraph 87(2)(z.1) (as modified by paragraph 88(1)(e.2)) that, in calculating the amount of a parent's CDA after the winding-up of its subsidiary, the parent must take into account the various amounts that make up the wound-up subsidiary's CDA.
Paragraph 87(2)(ii) - Public corporation
Administrative Policy
2015 Ruling 2015-0577141R3 - Election to cease to be a public corporation
Under a Plan of Arrangement, the Canadian public target ("Pubco") was to be amalgamated with Bidco. The applicable rules did not permit the shares of Pubco to be delisted until three days after the effective date of the Plan of Arrangement.
CRA ruled that Amalco will cease to be a public corporation when it files an election, following the delisting, to cease to be a public corporation. See summary under s. 89(1) – public corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Public Corporation | closely-held Amalco can elect following the delisting of shares of a public predecessor | 276 |
Articles
Joint Committee, "Definition of 'Public Corporation'", 4 March 2019 Joint Committee Submission
- Even if a heretofore public corporation has made a good election under (c)(i) of the s. 89(1) definition of public corporation to cease to be a public corporation, it will continue to be a public corporation under para. (a) of the definition at that time if its shares are still listed.
- Accordingly, the Joint Committee has submitted that para. (a) should be amended by adding a proviso that the corporation nonetheless will not be considered to be a public corporation under para. (a) if it ceased to be a public corporation under para. (c) because of a valid election or designation.
- By way of background, 2017-0723771C6 indicated that where Acquisitionco acquired all the shares of Targetco, a public corporation, and immediately amalgamated with it, Amalco could potentially make an election on behalf of Targetco under (c)(i) of the public corporation definition for Targetco not to be a public corporation so that Amalco was not deemed to be a public corporation under s. 87(2)(ii).
- This response was problematic because this election could not be made by Amalco until the Targetco shares were delisted, which might take several days to occur, and because CRA needed to accept that the fact that the Targetco shares no longer existed did not preclude the making of this election (as to which it was prepared to rule on a case-by-case basis rather than giving any blanket assurances).
- CRA recently declined to give a Technical Interpretation that if, shortly before the amalgamation of Targetco with Acquisitionco, Acquisitionco held all the Targetco shares and the Stock Exchange had been notified to delist the shares, the Targetco shares would not be considered to be listed for purposes of paragraph (a) of the definition of public corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Public Corporation - Paragraph (a) | shares of Target are considered to be listed up until the completion of the delisting process | 251 |
Subsection 87(2.1) - Non-capital losses, etc., of predecessor corporations
Administrative Policy
2020 Ruling 2019-0819871R3 - Loss Consolidation Involving Canadian Branch
Background
- Canco1, which carries on the Profitco Business in Canada is wholly-owned by Foreignco2 which, in turn, is wholly-owned by Foreignco1, a public company that is the group’s ultimate parent.
- USco1, which is wholly-owned by US Parent, carries on its business (the “USco1 Business”) only in Canada through permanent establishments (the “USco1 Canadian Branch”). The USco1 Business has an NCL carry forward balance, which arose in a particular province.
- US Parent, which is wholly-owned by Foreignco1, also wholly-owns UScorp2, which carries on business solely in the US.
Proposed transactions
- US Parent will contribute all the shares of USco1 to UScorp2. (This step will “ensure that US Parent’s status as a holding company for … net worth … tax is not jeopardized by the completion of the Proposed Transactions. Such status could otherwise be jeopardized if US Parent were to own the shares of USco1 after it becomes a ULC.”)
- USco1 will continue its existence out of XX and continue its existence into XX. (“It was determined that the company could not be directly continued from XXXXXXXXXX to a Canadian jurisdiction.”)
- USco1 will then continue its existence out of XX and continue its existence as a ULC under a provincial Act, so that it becomes resident in Canada for purposes of the Act and ceases to be a resident of the US under Article IV of the Treaty. USco1 will so be continued first as a ULC rather than a regular corporation for US tax reasons.)
- UScorp2 will sell all of the shares of USco1 to Foreignco2 (so as to avoid split ownership of Amalco) for fair market value consideration.
- USco1 will amend its articles to change from a ULC to a regular business corporation.
- USco1 will continue out of that province and into the Canadian federal jurisdiction to be governed under the CBCA.
- Canco1 and USco1 will amalgamate, with Foreignco2 being deemed by s. 87(1.1) to have received shares of the capital stock of Amalco by virtue of the amalgamation for purposes of s. 87(1). The USco1 Business will continue to be carried on by Amalco, for profit or with a reasonable expectation of profit throughout any taxation year in which the USco1 NCLs will be used to offset the income generated by the combined Canadian businesses.
Rulings
Including that USco1 will continue to be the same corporation following the two continuances and that, in light inter alia of s. 87(2.1), the NCLs of USco1 will be available to be utilized by Amalco.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | US corp is same corporation after its continuance to Canada | 164 |
20 June 2016 External T.I. 2016-0651951E5 F - Amalgamation - non-capital loss of new corporation
The loss, sustained in the year after the amalgamation, of the corporation formed by the amalgamation of two sister corporations cannot be carried back to reduce the taxable income of either predecessor corporation in light especially of s. 87(2.1)(e).
S4-F7-C1 - Amalgamations of Canadian Corporations
1.54 Where...where a subsidiary's losses have been carried forward to the parent under the provisions of subsections 88(1.1), (1.2) or (1.3), these losses can be carried forward to the new corporation on a subsequent amalgamation pursuant to section 87 involving the parent.
26 October 2006 External T.I. 2006-0170341E5 F - Subsections 87(2.1) and 87(2.11)
Canco, and it wholly-owned subsidiary, Subco1 amalgamated on November 1, 2003, so that their calendar taxation years terminated early on October 31, 2003. The first taxation year of the new corporation (“Amalco1”) ended on December 31, 2003.
Canco and Subco1 each had a non-capital loss (a "Loss") in their taxation year ended October 31, 2003, as did Amalco1, and a wholly-owned subsidiary of Amalco1 (“Subco2”) for their taxation years ended December 31, 2003.
Amalco1 and Subco2 will amalgamate on January 1, 2007 to form Amalco2.
Does s. 87(2.11) take precedence over the application of ss. 87(2.1) in this situation; and would the proposed amalgamation result in Subco2's non-capital loss for its 2003 taxation year being aged by two (rather than one) taxation years in the 2003 calendar year? CRA responded:
It appears to us that the question of whether or not subsection 87(2.11) overrides the application of subsection 87(2.1) is irrelevant for the purposes of determining how the Losses of the corporations in the situation described above might be used. The purpose of subsection 87(2.1) is to allow the transfer of the Predecessor Corporations' Losses to the new corporation (the corporation resulting from the amalgamation of the Predecessor Corporations), i.e. the loss carry-forward. One of the purposes of subsection 87(2.11) is to allow a parent corporation that is amalgamated with a wholly owned subsidiary to use losses realized by the new corporation, i.e. the carrying back of losses.
In our view, subsection 87(2.11) would not be relevant to Amalco2's use of Subco2's Loss incurred in its taxation year ended December 31, 2003. …
In the situation described above, the effect of subsection 87(2.1) would be that the Subco2 Loss incurred in its taxation year that ended on December 31, 2003, would become a Amalco2 Loss for the same taxation year. The Subco2 Loss would not be aged by two taxation years in the 2003 calendar year.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11) | purposes of s. 87(2.11) is to allow parent to use losses realized by the new corporation (so as to carry back) | 230 |
17 June 2003 External T.I. 2002-0178255 - FORGIVENESS OF DEBT DEBT AFTER AOC+AMALG
The non-capital losses of a subsidiary which amalgamates with its parent would be available to be applied against a forgiven amount arising on the forgiveness of a commercial debt obligation incurred by the subsidiary before the amalgamation. In particular, s. 87(2.1)(a) would apply to the application of s. 80(3): even though s. 80(3) is in Division B, not Division D, and s. 87(2.1)(a) applies for Division D and not Division B purposes, s. 80(3) applies for the purpose of computing Amalco's taxable income in Division D including a determination of Amalco's non-capital losses.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 80 - Subsection 80(3) | 92 |
Subsection 87(2.11) - Vertical amalgamations
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.52 …[T]he new corporation formed on a qualifying vertical amalgamation can apply its post-amalgamation losses against the pre-amalgamation income of the predecessor parent corporation. Subsection 87(2.11) does not, however, permit losses of the predecessor subsidiary wholly-owned corporation to be applied against the taxable income of the predecessor parent corporation for any tax year prior to the amalgamation. It also does not permit the post-amalgamation losses of the new corporation to be applied against the taxable income of the predecessor subsidiary wholly-owned corporation for any tax year prior to the amalgamation. Effectively, following a qualifying vertical amalgamation, subsection 87(2.11) permits the parent corporation to be treated in substantially the same manner as if the subsidiary wholly-owned corporation had been wound up under subsection 88(1) into the parent corporation.
1.53 Subsection 87(2.11) may be applied to successive amalgamations of a parent corporation to allow the losses incurred by the new corporation to be carried back to offset the taxable income of the original predecessor parent corporation.
2011 Ruling 2011-0411821R3 - Interest deductibility and loss carry backs
a limited partnership ("BForLP") owns substantially all of the membership interests in a (presumably Netherlands) holding cooperative which owns all the shares of a non-resident corporation ("BForHoldco") which holds all of the shares of a taxable Canadian corporation ("BCo") which holds a majority of the voting common shares (Class B shares) of another taxable Canadian corporation ("Opco") with the balance of the common shares (Class A shares) and preferred shares being owned by a taxable Canadian corporation ("ACo") with which BCo deals at arm's length.
BForLP uses the proceeds of a daylight loan to make an interest-bearing loan (the "Sub Debt") to BCo, with BCo using the lent money to distribute paid-up capital (used by BCo for an income-producing purpose) to BForHoldco, and so on up the chain so that BForLP can fund the repayment of its daylight loan. BForHoldco then transfers its B shares to Opco in consideration for the issue of shares of a new class of common shares of Opco (with this "tuck-under" transaction not being ruled on), Aco effects a simultaneous s. 86 exchange of its shares in Opco (so as to preclude the tuck-under transaction giving rise to an acquisition of control of Opco by Aco), and BCo and Opco then amalgamate by way of a vertical short-form amalgamation.
Ruling that s. 87(2.11) will apply to the amalgamation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | cross-border downstream loan to distribute cross-border PUC | 234 |
26 October 2006 External T.I. 2006-0170341E5 F - Subsections 87(2.1) and 87(2.11)
Canco, and it wholly-owned subsidiary, Subco1 amalgamated on November 1, 2003, so that their calendar taxation years terminated early on October 31, 2003. The first taxation year of the new corporation (“Amalco1”) ended on December 31, 2003.
Canco and Subco1 each had a non-capital loss (a "Loss") in their taxation year ended October 31, 2003, as did Amalco1, and a wholly-owned subsidiary of Amalco1 (“Subco2”) for their taxation years ended December 31, 2003.
Amalco1 and Subco2 will amalgamate on January 1, 2007 to form Amalco2.
Does s. 87(2.11) take precedence over the application of ss. 87(2.1) in this situation? CRA responded:
It appears to us that the question of whether or not subsection 87(2.11) overrides the application of subsection 87(2.1) is irrelevant for the purposes of determining how the Losses of the corporations in the situation described above might be used. The purpose of subsection 87(2.1) is to allow the transfer of the Predecessor Corporations' Losses to the new corporation (the corporation resulting from the amalgamation of the Predecessor Corporations), i.e. the loss carry-forward. One of the purposes of subsection 87(2.11) is to allow a parent corporation that is amalgamated with a wholly owned subsidiary to use losses realized by the new corporation, i.e. the carrying back of losses.
In our view, subsection 87(2.11) would not be relevant to Amalco2's use of Subco2's Loss incurred in its taxation year ended December 31, 2003. …
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1) | s. 87(2.11) does not affect the aging of previously-incurred losses and is relevant to carry-backs by the Amalco | 309 |
22 June 1999 9833526 - VERTICAL AMALGAMATION, GOVERNMENT ASSISTANCE
Following a vertical amalgamation, the amalgamated corporation would not be able to carry back ITCs generated by it to reduce Part I tax of the subsidiary.
94 C.P.T.J. - Q.14
S.87(2.11) does not permit the carry-back of non-capital losses of a predecessor subsidiary corporation for utilization by the predecessor parent corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 66.1 - Subsection 66.1(6) - Canadian exploration expense - Paragraph (d) | 81 |
Income Tax Regulation News, Release No. 3, 30 January, 1995 under "Subsection 87 (2.11)"
S.87(2.11) does not allow losses of a wholly-owned subsidiary corporation to be applied against the taxable income of its parent for taxation years of the parent prior to the amalgamation.
25 February 1993 T.I. (Tax Window, No. 30, p. 19, ¶2468)
S.87(2.11) permits an amalgamated corporation to carry back its non-capital losses to the predecessor parent corporation, but not to the predecessor wholly-owned subsidiary.
1992 A.P.F.F. Annual Conference Q.3 (January - February 1993 Access Letter, p. 51)
The purpose of s. 87(2.11) is to make the consequences of a vertical amalgamation similar to those for a winding-up.
Articles
Stan Shadrin, Manu Kakkar, David Carolin, "Application of Part IV Tax to Amalgamations of Companies Owned by Trusts with Corporate Beneficiaries", Tax for the Owner-Manager, Vol. 22, No. 1, January 2022, p. 1
CRA position on year-end timing of s. 104(19) dividend (p. 1)
- Per 2012-0465131E5, 2016-0647621E5 and 2018-0757591I7, a dividend received and paid by a trust in a taxation year of the trust is considered to have been received by the beneficiary at the end of that year, so that the dividend payer and a corporate beneficiary need to be connected at that time in order for Part IV tax not to apply.
Example (p.1)
- Suppose that on November 30, 2020, Opco 1 (owned, like Opco 2, by a resident trust) pays a dividend to the trust, which immediately distributes the funds to Benco, which is a corporate beneficiary whose shareholder (Mr. X, also a trust beneficiary) is the trustee. The next day (on December 1) Opco 1 and Opco 2 amalgamate to form Amalco.
Absence of a continuity rule for horizontal amalgamations may engage Part IV tax for family dividends paid through a family trust (p. 2)
- Given that Benco has no direct ownership of Opco 1, so that the 10% ownership test in s. 186(4)(b) cannot be satisfied, whether the dividend deemed under s. 104(19) to be received by Benco on December 31 is subject to Part IV tax, turns on whether, pursuant to s. 186(2), Opco 1 was controlled by Benco (and they thus were connected). However, given that on December 31 (which is the date on which the connected status needs to be determined, according to the above CRA position), Opco 1 no longer existed, Benco and Opco 1 would appear to not be connected on that date.
- Under s. 87(2.11), the new corporation is deemed to be a continuation of the predecessor parent for the purposes of applying Part IV “in respect of” that particular corporation. This may suggest that the corporate beneficiary receiving the dividend from the predecessor receives Part IV tax relief. However, the phrase “applying . . . Part IV . . . in respect of the particular corporation” in subsection 87(2.11) might not extend to the corporate beneficiary of the trust.
- Either way, s. 87(2.11) applies only to vertical amalgamations, and not to the amalgamation of the two sisters held by the trust. Thus, given that Opco 1 and Benco are not connected on December 31, the dividend paid by Opco 1 to the trust prior to amalgamation and then allocated by the trust to Benco is subject to Part IV tax.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 186 - Subsection 186(2) | 270 |
Subsection 87(3) - Computation of paid-up capital
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.87 Although subsection 87(3) limits the aggregate paid-up capital of the issued shares of the new corporation, there is no specific provision which sets out how this aggregate paid-up capital is to be allocated to the issued shares of the new corporation. Where the streaming of paid-up capital to a specific class of shares of the new corporation has been done in order to accomplish a form of surplus strip, consideration will be given to the application of the general anti-avoidance rule in section 245. In addition, a transaction or series of transactions structured to avoid the cancellation of the paid-up capital of shares held by one predecessor corporation in another predecessor corporation will be subject to the application of the general anti-avoidance rule. In Copthorne Holdings Ltd. v. R., 2011 SCC 63, 2012 DTC 5007(SCC), the general anti-avoidance rule applied to a series of transactions whereby a parent and a subsidiary corporation were converted into sister corporations for the purposes of preventing the cancellation of the paid-up capital of the parent's shares in the subsidiary which would have occurred on a vertical amalgamation of the corporations.
80 C.R. - Q.29
RC may not object to the shifting of paid-up capital on an amalgamation if it is satisfied that the shifting is not primarily for the benefit of certain shareholders and the potential tax recovery will not have changed significantly.
Articles
Tetreault, "The Application of Subsection 87(3) in an Amalgamation Squeeze-out", Canadian Current Tax, November 1988, p. 41
The CBCA would appear to have provided less flexibility than the OBCA in avoiding a grind under s. 87(3) on an amalgamation squeeze-out.
Subsection 87(3.1) - Election for non-application of subsection (3)
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.88 When a new corporation has more than one class of shares, a proportional reduction of paid-up capital under subsection 87(3) may, in certain circumstances, result in an unintended shifting of paid-up capital between the classes of shares. Consequently, subsection 87(3.1) permits the new corporation to elect not to have the provisions of subsection 87(3) apply where both of the following conditions are satisfied:
(a) all of the issued shares of each class of shares (other than a class of shares all of the issued shares of which were cancelled on the amalgamation) of each predecessor corporation are converted into a separate class of shares of the new corporation; and
(b) after the amalgamation, the number of shareholders of each class, their proportionate ownership of each class, the number of issued shares of each class, the issued capital of each class for corporate law purposes and the terms and conditions of each class of shares of the new corporation are identical to those that existed for the particular class of shares of the predecessor corporation which were converted into that separate class of shares of the new corporation.
1.89 If the conditions in … (a) and (b) are satisfied and the new corporation elects in its return of income for its first tax year to have subsection 87(3.1) apply, each class of shares of the new corporation issued on the amalgamation will be deemed to be the same class as, and a continuation of, each class of shares of the predecessor corporation converted on the amalgamation for the purposes of computing their paid-up capital. Consequently, any paid-up capital reduction that applied to the specific class of shares of the predecessor corporation would flow through to the particular class of shares of the new corporation.
1.90 In the case of a short-form vertical or horizontal amalgamation, the CRA considers that the shares of the predecessor corporation which are not cancelled on the amalgamation have been converted into shares of the new corporation for the purposes of subsection 87(3.1).
Subsection 87(4) - Shares of predecessor corporation
Cases
Husky Oil Limited v. Canada, 2010 DTC 5089 [at 6887], 2010 FCA 125
In order to accomplish a sale of a subsidiary of the taxpayer on a tax-deferred basis for a purchase price of $15.5 million payable in 25 years' time without interest, the subsidiary was amalgamated with a subsidiary of the purchaser, and the taxpayer received preferred shares which would be redeemable for $15.5 million in 15 years' time. In finding that the "gift portion" rule in s. 87(4) did not apply to deny rollover treatment to the taxpayer, Sharlow, J.A. noted that, as the purchaser dealt at arm's length with the taxpayer, there was no person related to the taxpayer who stood to benefit from the alleged shift in value to the purchaser resulting from the amalgamation, and stated (at para. 58) that this rule was:
"intended to deter a taxpayer from using the device of a corporate amalgamation to shift part or all of the value of a predecessor corporation to the amalgamated corporation if, but only if, a person related to the taxpayer has a direct or indirect interest in the amalgamated corporation that will be enhanced by the shift in value."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Onus | 88 | |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(4) | 190 | |
| Tax Topics - Statutory Interpretation - Specific v. General Provisions | avoidance of two statutory deeming rules creating two different statutory fictions | 190 |
Administrative Policy
25 November 2021 CTF Roundtable Q. 1, 2021-0911841C6 - Indemnities and subsection 87(4)
There has been a triangular amalgamation under which a subsidiary of Parent amalgamated with Target and the Target shareholders received shares of Parent. S. 87(4) requires that such shares be the only consideration received by the Target shareholders “on the amalgamation.” Is this condition satisfied where, following the amalgamation, Parent makes payments to the Target shareholders as a result of breach of representations?
Before answering this question, CRA referred first to the tests in s. 87(1) and indicated that it would presume that such payment was made quite some time after the amalgamation, so that this payment therefore would not be normally be made on the amalgamation or be part of the amalgamation. Therefore, the 87(1)(a) condition would be met – all property of the predecessor corporation becomes property of the new corporation by virtue of the amalgamation.
Now turning to s. 87(4), it indicated that the question of whether Parent could benefit from the application of 87(4) is only relevant when Parent owns shares of a predecessor corporation that has an ACB lower than fair market value. The approach was similar to the previous scenario. The payment made quite some time after the amalgamation, regarding bona fide representations and warranties, would not normally be thought of as consideration received for the disposition of shares of a predecessor corporation. It also would not be problematic if the compensation was paid by Parent in the form of issuing additional shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) | damages paid for breach of rep following an amalgamation did not breach s. 87(1)(a) | 144 |
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) | when escrowed shares are cancelled as compensation for breach of representations of the shareholders, the payment for s. 84(3) purpose is those shares’ FMV | 136 |
15 September 2017 External T.I. 2017-0696821E5 F - Amalgamation
Two individuals, Mr. A and Mr. B wholly-own two corporations of equal value (A Inc. and B Inc.), which amalgamate. On the amalgamation, the two individuals, in addition to receiving equal numbers of shares of Amalco, also received an equal amount of cash from Amalco.
After appearing to accept that the cash did not preclude qualification of the amalgamation under s. 87(1), CRA went on to explain that the cash precluded a rollover at the shareholder level, stating:
Mr. A and Mr. B could not … benefit from the rollover … because as consideration for the disposition of the shares they held in the predecessor corporations, they received, in addition to the shares of the capital stock of Amalco, consideration other than shares due to the amalgamation. … Subparagraph (b)(iii) of the definition of "disposition" in subsection 248(1) provides that a disposition of any property includes any transaction or event by which a share is converted because of an amalgamation or merger. Mr. A and Mr. B would therefore be deemed to have disposed of their shares in the capital stock of the predecessor corporations at the fair market value of such shares … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) - Paragraph 87(1)(a) | receipt of cash on amalgamation did not preclude qualification under s. 87(1) [per Envision, 2013 SCC 48?] | 163 |
15 August 2018 Internal T.I. 2018-0749931I7 - Subsections 87(1), (1.1) and (4)
CRA confirmed the continuing correctness of the statement in S4-F7-C1, Amalgamations of Canadian Corporations, para. 1.74 that:
Where shares of a predecessor corporation are cancelled for no consideration pursuant to a short-form horizontal amalgamation, the adjusted cost base of such cancelled shares to the shareholder will be added to the cost of the common shares of the new corporation which are deemed to have been received by the shareholder on the amalgamation under subsection 87(1.1).
and noted that this position was based on #F9830205, dated May 18, 1999.
8 July 2015 External T.I. 2014-0550641E5 - Absorptive merger-exchange of shares
Canco held all the shares of FA1 with an ACB and FMV of $100, and $200, respectively, and all the shares of FA2 with an ACB and FMV of $100. FA1 and FA2 merge in an absorptive merger (described in the s. 87(8.2) preamble and in ss. 87(8.1)(a) and (b)) under which FA1 continues as the “surviving corporation,” the existing shares of FA1 held by Canco become shares of the “merged” FA1, FA2 ceases to exist and its shares are cancelled. Does Canco’s ACB of its shares of “merged” FA1 include Canco’s ACB of its “old” FA2 shares? CRA responded:
[T]he shares of FA2 are not exchanged for, and do not become, shares of “merged” FA1. Under paragraph 87(8.2)(f), for the purposes of the definition “foreign merger” in subsection 87(8.1) [such shares]… “are deemed to be exchanged by the shareholders of each such predecessor corporation for shares of the survivor corporation as a consequence of the merger or combination.”
…Reading the words of subsection 87(8.2)…harmoniously with the scheme of the Act…and the intention of Parliament…Canco would be deemed to have received shares of “merged” FA1 for shares of “old” FA2 for purposes of subsection 87(4). As such, immediately after the merger, Canco’s cost of its shares of merged FA1 should be $200.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(8.2) | s. 87(8.2)(f) relief for absorptive mergers (where no shares are issued) also indirectly extends to operation of s. 87(4) | 121 |
S4-F7-C1 - Amalgamations of Canadian Corporations
1.69 For greater certainty, the rollover under subsection 87(4) is not available to shareholders whose shares of a predecessor corporation are converted into shares of the amalgamated corporation on a non-qualifying amalgamation… .
1.70 The rollover provided for in subsection 87(4) will not be denied solely because a shareholder of a predecessor corporation receives cash or other consideration in lieu of fractional shares of the new corporation. … However, this choice is not available if the total amount or value of any non-share consideration received exceeds $200.
1.72 The allocation of cost described in [s. 87(4)(b)] may cause a shift of adjusted cost base from one class of shares of a predecessor corporation to a different class of shares of the new corporation… .
1.73 However, the CRA will not apply paragraph 87(4)(b) to reallocate the adjusted cost base of the shares of the new corporation if:
(a) the amalgamation agreement provides that the preferred and common shares of the predecessor corporation are to be converted into preferred and common shares, respectively, of the new corporation, or
(b) for a short-form amalgamation, the issued shares of one of the predecessor corporations become shares of the new corporation under the relevant corporate legislation. …
1.75 In situations where an amalgamation is used to shift all or part of the value of a shareholder's predecessor corporation shares to a person related to the shareholder whose interest in the new corporation will be enhanced by the shift in value, the rollover provided in subsection 87(4) will be denied in respect of that shareholder.
Example 5
The 87(4) exception can be illustrated by the following example.
A parent owns all of the shares of Pco, which have an aggregate adjusted cost base and fair market value of $100 and $1000, respectively. Child owns all of the shares of Cco, which have an aggregate adjusted cost base and fair market value of $500 and $1000, respectively. Pco and Cco amalgamate to form Aco, the shares of which have an aggregate fair market value of $2000. On the amalgamation, the parent is issued 50 shares of Aco with an aggregate fair market value of $500 and the child is issued 150 shares of Aco with an aggregate fair market value of $1500, such that there has been a shift of value of $500 from the parent to the child. Under paragraph 87(4)(c), the parent will be deemed to have disposed of the Pco shares for $600, being their aggregate adjusted cost base plus the gift portion of $500. Under paragraph 87(4)(e), the Aco shares received by the parent on the amalgamation will be deemed to have an aggregate adjusted cost base of $100… .
1.77
Where one predecessor corporation holds shares of another predecessor corporation, the cancellation of those shares on the amalgamation will not normally give rise to a gain or loss in the hands of the shareholder corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(t) | 83 |
2002 Ruling 2002-0177163 - Subsection 87(4) - S/H Rights Plan
Rights under a shareholder rights plan of Parent received by shareholders of Target on a triangular amalgamation of Target, a subsidiary of Parent and Parent would not constitute "consideration" for purposes of s. 87(4) given that the rights were of little or no value and given that:
"The Amalgamation Agreement will provide that the shares of Parent and Amalco ... will be the sole consideration for the exchange. It will not be a condition to the amalgamation that the Plan be in effect at the time of the amalgamation; instead, Parent will reserve the right to terminate the Plan in accordance with its terms before the amalgamation."
23 February 1999 External T.I. 9832225 - AMALGAMATION, IT-474R
The policy in IT-474R, para. 40 (respecting the maintenance of ACB when preferred and common shares of a predecessor are converted into preferred and common shares of the amalgamated corporation) will also generally apply where the amalgamation agreement provides for the conversion of numerous classes of preferred and common shares of the predecessor into numerous classes of preferred and common shares of Amalco.
Handbook on Securities Transactions, 94-110(E)
No reporting is required if, during an amalgamation, a shareholder receives cash or some other consideration totalling $200 or less, instead of a fractional interest in shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 201 - Subsection 201(6) | 0 |
92 C.R. - Q.32
Where a corporation whose shares are owned by an individual amalgamates with a loss company whose shares are held by, and whose loan capital is owed to, a related individual, it is likely that ss.87(4)(c) to (e) will apply in respect of the amalgamation, in which case RC will not seek to apply s. 15(1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | 72 |
25 August 1992, T.I. 921458 (April 1993 Access Letter, p. 144, C82-113)
The position in IT-474R, that s. 87(4) will not be applied where an amalgamation agreement provides that the preferred and common shares of a predecessor corporation are to be converted to preferred shares and common shares of the amalgamated corporation, will also prevail in the case of a short-form amalgamation even though in such instance the conversion takes place pursuant to the governing corporate legislation rather than pursuant to an amalgamation agreement.
Subsection 87(4.3) - Exchanged rights
See Also
Envision Credit Union v. The Queen, 2010 DTC 1399 [at 4585], 2010 TCC 576, aff'd 2012 DTC 5055 [at 6842], 2011 FCA 321, aff'd 2013 DTC 5144 [at 6275], 2013 SCC 48
Webb, J. found, in obiter dicta (at para. 89), that an amalgamated corporation resulting from an amalgamation that was not described in s. 87(1) was required to include in its preferred rate amount calculation the preferred rate amount balances of its predecessors, given that it was a continuation of them.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - E | 100 | |
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(a) - Subparagraph 152(4)(a)(i) | incorrect position was thoughtfully taken | 63 |
| Tax Topics - Statutory Interpretation - Redundancy/reading in words | 50 |
Subsection 87(4.4)
Paragraph 87(4.4)(d)
Subparagraph 87(4.4)(d)(i)
Articles
Gregory M. Johnson, Wesley R. Novotny, "An Update on Flow-through Shares in the Energy Sector", 2016 Conference Report (Canadian Tax Foundation),12:1-39
Issues under s. 87(4.4)(d)(i) if further disposition by 1st purchaser or where dissent on amalgamation (pp. 12:19-20)
Subsection 87(4.4) applies where:
- there is an amalgamation of two PBCs or a PBC and a company that has never carried on business (for example, a shell corporation);
- a FTS (or a qualifying right) was issued by the predecessor PBC; and
- the new corporation (that is, amalco) issues a new share to the FTS holder (or to any subsequent holder that acquired the FTS) that is substantially the same as the FTS (or amalco is obliged to issue a qualifying FTS). …
…[Scenario #3] The FTS holder disposes of its FTS to purchaser 1, who then sells to purchaser 2. This arguably satisfies the conditions of subparagraph 87(4.4)(d)(i), although it is unclear whether the parenthetical in the provision specifically contemplates more than one disposition.
…[Scenario #4] The FTS holder acquires the FTS after the amalgamation agreement has been entered into, and the FTS holder decides to dissent from the amalgamation and receives a cash payment in consideration for the FTS. In this case, the requirement in subparagraph 87(4.4)(d)(i) has not been met and the dissent right also creates a prescribed-share issue because the FTS subscriber can get the FTS consideration back. This would clearly be a problem with respect to regulations 6202.1(1)(b) and (d).
Subsection 87(7) - Idem [Adjusted cost base]
Cases
Canada v. Dow Chemical Canada Inc., 2008 DTC 6544, 2008 FCA 231
The taxpayer ("Amalco") was formed on the amalgamation of two corporations, one of which ("UCCI") had previously incurred interest-bearing indebtedness to a financing affiliate within the Union Carbide group of companies and the other of which ("DCCI") was a Canadian subsidiary within the Dow group of companies that dealt at arm's length with UCCI and the financing affiliate up to the time of acquisition of control of that group by the Dow group of companies. The interest in question was incurred in the 2000 taxation year of UCCI, the next taxation year of UCCI ended in 2001 with the acquisition of its control by the Dow group, and its next taxation year ended in 2001 with its amalgamation.
In finding that s. 78(1) applied to Amalco, Noël, J.A. rejected [at para. 31] the submission of the taxpayer "that Amalco should be viewed as having incurred the obligation back in 2000, but without regard to the non-arm's length relationship that prevailed at that time" after having noted [at para. 30] that under s. 87(7)(d) "an amalgamated corporation stands in the shoes of its predecessor insofar as previously incurred debts are concerned as of the time when they were incurred".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 78 - Subsection 78(1) | 197 |
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.58 Since paragraph 87(7)(d) provides that the provisions of the Act apply as if the new corporation had incurred or issued the debt at the time it was incurred or issued by the predecessor corporation, subsection 78(1) may apply to the new corporation in respect of unpaid interest on a debt that is inherited by it from a predecessor corporation [citing R. v. Dow Chemical Canada Inc., 2008 FCA 231, 2008 DTC 6544 (FCA).]…
1.59 Where control of a corporation is acquired and that corporation makes a designation under paragraph 111(4)(e) to realize an accrued foreign exchange gain on a foreign currency denominated debt that arises because of the application of subsection 111(12), the new corporation formed on a subsequent qualifying amalgamation of that corporation would, under paragraph 87(7)(d) and for the purposes of subsections 40(10) and (11), be considered to be the corporation that realized the gain in respect of the foreign currency denominated debt under paragraph 111(4)(e) and subsection 111(12). As a result, no double taxation of the same gain would arise when the new corporation actually repays the debt.
Articles
Kim Maguire, Jeffrey Shafer, "Trends in Buy/Sell Transactions", draft 2021 Conference Report
Application of s. 87(7) to earnout payments (p. 6)
- S. 87(7) (which also applies to s. 88(1) wind-ups by virtue of s. 88(1)(e.2)) has the effect of deeming Amalco, as successor to the purchaser, as having incurred an earnout obligation of the latter (citing Dow Chemical).
Subsection 87(8) - Foreign merger
Administrative Policy
15 September 2017 External T.I. 2017-0709331E5 - Vertical absorptive foreign merger
Three wholly-owned stacked subsidiaries of Canco (FA1 holding FA2 holding FA3) effect a foreign merger under which FA2 and FA3 simultaneously merge into FA1, with FA1 as the survivor. FA2 and FA3 simultaneously cease to exist on the merger, resulting in the shares of FA2 and FA3 being cancelled.
CRA indicated that para. (n) of the s. 248(1) “disposition” definition (“Paragraph N”) would not deem there to be no disposition of the FA2 shares on the merger, given the requirement in s. (iii)(B) of Paragraph N that “the disposing corporation [FA1] receives no consideration for the share [of FA2] other than property that was, immediately before the merger, owned by the issuing corporation [FA2] and that, on the merger, becomes property of the new corporation [FA1].” CRA stated:
[T]he shares of FA2 and FA3 would be cancelled simultaneously and, thus, FA1 would simultaneously receive property of both FA2 and FA3 on the Merger. [Thus] the property of FA3 would be received by FA1 as consideration for the shares of FA2. Since the property of FA3 would not be owned by FA2 immediately before the Merger, Paragraph N would not apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (n) | a simultaneous absorptive merger of FA3 (held by FA2) and FA2 (held by FA1) into FA1 would result in a disposition of the FA2 shares | 281 |
16 October 2009 Internal T.I. 2009-0337721I7 F - Perte lors de fusion étrangère
Holdco, received shares of the foreign merged corporation in replacement of its shares of a public American company. After filing a return in which it did not report the transaction, it filed an amended return reporting a capital loss on its shares of the American company (whose FMV had been lower than their ACB). The Directorate noted that if Holdco had elected in its return to not have s. 87(8) apply, it would have realized a capital loss, given that s. 87(4) would thereby not apply, the s. 93(2) rule would not apply as the American company was not a foreign affiliate and the superficial and suspended loss rules in ss. 40(2)(g)(i) and 40(3.4) would not apply given that the replacement shares were not identical property.
The Directorate indicated that, since in its initial return, Holdco had not calculated a gain or loss on the shares, it should be considered to not have made such election in that return. However, the claiming of a capital loss in the amended return represented either an election for s. 87(8) to not apply, or reflected a view that the merger did not qualify as a foreign merger. CRA would accept such an election in the amended return since it was filed before the time of the initial assessment or the time for objecting to such assessment.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(b) | s. 40(3.4) not applicable to foreign triangular merger to which s. 87(8) was elected not to apply | 59 |
Articles
Gordon Zittlau, "Corporate Reorganizations Involving Taxable Canadian Property – Foreign Merger Considerations", International Tax Planning (Federated Press), Vol. XX, No. 3, 2015, p. 1407
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... .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (n) | 388 |
Mark, Thon-That, "Cross-Border Reorganizations", International Tax Seminar, IFA, 19 May 1999, c. 6.
R. Ian Crosbie, "Canadian Income Tax Issues Relating to Cross-Border Share Exchange Transactions", 1997 Corporate Management Tax Conference Report, c. 12.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 85.1 - Subsection 85.1(3) | 0 |
Schwartz, "Tax-Free Reorganizations of Foreign Affiliates", 1984 Canadian Tax Journal, November-December 1984, p. 1039.
Subsection 87(8.1)
Administrative Policy
2016 Ruling 2015-0617351R3 - payments under a German profit transfer agrmt “PTA"
The proposed transactions describe the merger of one German CFA (FA4) with another sister German CFA (FA3), with FA3 as the survivor. The merger is described as a "foreign merger" under s. 87(8.1), but CRA was not asked to rule on this point.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 90 - Subsection 90(2) | double PTA transferring profits from German grandchild to German parent CFA | 516 |
2 June 2003 External T.I. 2003-0013315 - Foreign merger, fractional shares
The position on receipt of cash in lieu of fractional shares on an amalgamation that is intended to be governed by s. 87(1), as described in paragraphs 38(b) and 39 of IT-474R, also applies to a foreign merger, as defined in s. 87(8.1).
25 August 2000 External T.I. 2000-0026245 - Foreign Mergers - 87(8.1)
Confirmation that there was a qualifying "foreign merger" where Canco launches a share-for-share exchange takeover bid to acquire shares of Target (a U.S. corporation) and, following completion of the bid, it carries out one of various described types of mergers with Target, including (in the situation where it has acquired more than 90% of the outstanding shares of Target) causing a new U.S. subsidiary of Canco to be merged into Target with the remaining Target shareholders receiving shares of Canco.
2000 Ruling 2000-002395
A vertical merger between a US corporation with a Canadian branch business ("Absorbco") and its US parent ("Subco 3") under which Absorbco survives the merger, the US parent of Subco 3 exchanges its shares of Subco 3 for shares of Absorbco, and the shares of Subco 3 are cancelled, would qualify as a foreign merger. Accordingly, unless the non-resident parent of Subco 3 elects otherwise, ss.87(a) and 87(4) will apply to the non-resident parent.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | 136 |
28 February 2000 External T.I. 1999-001436
A foreign triangular merger qualified as a foreign merger notwithstanding that shareholders of the target would receive shares both of the merged company and the acquisition company.
14 December 1998 External T.I. 9811305 - FOREIGN MERGER
Where Subco A, Subco B and Parentco are all resident in the U.S. with Subco A being a wholly-owned subsidiary of Parentco, Parentco holding less than 10% of the shares of Subco B and the remainder of Subco B's shares being held by Canco, a merger of Subco A with Subco B as a result of which Subco A is the surviving corporation, with Parentco not receiving any shares of Subco A in exchange for its Subco B shares and Canco receiving shares of the amalgamated corporation in exchange for its shares of Subco B, would be a qualifying foreign merger.
Robert D'Aurelio, "International Issues
A Revenue Canada Perspective," 1990 C.R., p. 44: 13:
...it is the department's view, after giving consideration to the intention of subsections 87(8) and (8.1), that the "new foreign corporation" referred to in those subsections would include the surviving entity of an absorptive merger in the United States. This is a situation in which, on the effective date, every disappearing corporation that is a party to the merger is absorbed by the surviving corporation, and the surviving corporation automatically becomes owner of all real and personal property and becomes subject to all liabilities, actual or contingent, of each disappearing corporation. Such a reorganization will qualify as a "foreign merger" if all or substantially all of the shares of the capital stock of the disappearing corporation and the surviving corporation (except any such shares owned by any of those corporations) are exchanged for or become shares of the capital stock of the surviving corporation (that is, the "new foreign corporation").
84 C.R. - Q.50
Where one or more predecessor corporations continue in the form of one corporate entity, that corporate entity is considered to be a new foreign corporation.
Subsection 87(8.2) - Absorptive mergers
See Also
La Mancha Group International B.V. v Commissioner of Taxation, [2020] FCA 1799
It was proposed that the applicant (“LMGI”), which was a Netherlands private limited company that was wholly-owned by a Luxembourg public limited company, be merged into its sister company (“LMA”), which was a Luxembourg private limited liability company. The merger was to occur in accordance with the Dutch and Luxembourg cross-border merger laws and the EU Consolidated Company Law Directive. Accordingly, there would be a transfer of the assets and liabilities of LMGI by universal succession of title to LMA as the surviving company and LMGI, as the disappearing company, would cease to exist. LMGI had been assessed for $90 million in Australian capital gains tax and interest on its sale of shares of an Australian company (it had filed objections on the basis that there was no such liability) and had sold the balance of the shares in years for which it had not yet filed returns.
The merger agreement stipulated a condition precedent that the Federal Court confirm that LMA as legal successor would be able to exercise all objection or appeal rights in the current or future proceedings. Before providing such declaration, Davies J stated, based on the expert testimony (at para. 17):
Under European law, Luxembourg law and Dutch law, pursuant to the principle of universal succession … all liabilities of LMGI to tax, including under foreign law (that is, the relevant Australian tax acts), will transfer to LMA by operation of law pursuant to the principle of universal succession upon completion of the merger, as will the rights and obligations of LMGI in respect of such tax liabilities … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 165 - Subsection 165(1) | an absorptive merger of a Dutch into a Lux company rendered the Lux survivor as the “taxpayer” for continuing or launching objections | 582 |
Administrative Policy
8 July 2015 External T.I. 2014-0550641E5 - Absorptive merger-exchange of shares
In the case of an absorptive merger of FA2 into FA1 (as the survivor) where FA2 ceases to exist and its shares are cancelled, s. 87(8.2)(f) deems the cancelled shares to have been exchanged by the Canadian shareholder (Canco) for purposes of the foreign merger definition in s. 87(8.1), so that the requirement in s. 87(8.1)(c) of that definition - that there be such a share exchange - is satisfied. CRA concluded that the deemed exchange rule in s. 87(8.2)(f) also applies for purposes of the application of s. 87(4) to a foreign merger so that the ACB of the cancelled shares of FA2 is deemed to be added to the cost to Canco of its shares of the survivor (FA1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) | s. 87(8.2)(f) relief for absorptive mergers (where no shares are issued) also indirectly extends to operation of s. 87(4) | 219 |
4 March 2013 Internal T.I. 2012-0449371I7 - Downstream absorptive merger
In 2006, a wholly-owned CFA (FA1) of Canco merged with a wholly-owned subsidiary (FA2) of FA1, with FA2 as the surviving corporation under the corporate law of the foreign jurisdiction (i.e., a downstream merger).
In accordance with the corporate law of that foreign jurisdiction, the shares of FA2 held by FA1 were distributed to Canco and the shares of FA1 were cancelled; all the property held by FA1 immediately before the merger was transferred to FA2 at the time of the merger; and FA1 ceased to exist after the merger.
CRA noted that draft s. 87(8.2) applied to both upstream and downstream mergers, and that there was no implication in the parenthetical exclusion in s. 87(8.1)(c) that the shares of FA2 be cancelled on the merger rather than being distributed to Canco.
As "Canco did receive consideration for its disposition of the shares of FA1 in the form of the FA2 shares it received," s. 87(4)(a) applied to the disposition by Canco of its FA1 shares (assuming that Canco did not elect to have s. 87(8) not apply), rather than draft para. (n) of the definition in s. 248(1) of disposition applying to deem Canco to have not disposed of its shares of FA1. However, draft para. (n) applied so tht FA1 did not realize gain (or loss) on its shares of FA2.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (n) | 132 |
Subsection 87(8.3)
Articles
Edward A. Heakes, "Another Wave of Foreign Affiliate Proposals", International Tax Planning, Volume XVIII, No. 4, 2013, p. 1275
Avoidance of s. 85.1(4) eliminated (p. 1276)
It is currently arguably possible to avoid this limitation [in s. 85.1(4) by utilizing a triangular merger structure and relying on the tax-deferred treatment under the foreign merger rules contained in section 87, rather than on subsection 85.1(3). The July 12 Proposals would add a new restriction to the foreign merger rules to deny tax-deferred treatment of the shareholder where the shares of the merged company are excluded property and the shares or substituted property are sold to an arm's length person (or to a partnership that has an arm's length person as a member) as part of the same series of transactions….
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property | 76 | |
| Tax Topics - Income Tax Act - Section 91 - Subsection 91(1.2) | 84 |
Subsection 87(8.4)
Articles
Joint Committee, "Technical Amendments Package of September 16, 2016", Submission letter of 15 November 2016
Only extends to shares of Cancos
Ss. 87(8.4) and (8.5) in the 16 September 2016 draft legislation provide a tax deferral only for shares of taxable Canadian corporations and, thus, do not extend to shares of a non-resident corporation or of a partnership or trust which are TCP.
Subsection 87(8.5)
Administrative Policy
21 November 2017 CTF Roundtable Q. 14, 2017-0724241C6 - Section 116 procedures for tax-deferred dispositions on foreign mergers
For foreign mergers occurring after September 15, 2016, will CRA accept elections of the new corporation and disposing predecessor foreign corporation for the tax deferred treatment of dispositions under proposed s. 87(8.5) prior to enactment of the legislation?
CRA responded that its longstanding position is to encourage the taxpayers to file under the proposed legislation so that, for foreign mergers prior to the enactment of Bill C-63, it would accept joint written elections. Whatever information taxpayers think would be required to justify such a transaction should be provided.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 116 - Subsection 116(1) | s. 87(8.5) election with evidence of ACB will be accepted as basis for certificate | 294 |
Subsection 87(9) - Rules applicable in respect of certain mergers
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.12 … In general terms, this [s. 87(9)(c)(ii)] additional amount is equal to the amount by which the tax cost of the assets (less liabilities) of the new corporation immediately after the amalgamation (as described in subclause 87(9)(c)(ii)(A)(I)) exceeds the total of the adjusted cost bases to the parent of the shares of the predecessor corporations owned by it immediately before the amalgamation (referred to in this paragraph as the excess). The parent may choose how the excess is to be allocated to the different classes of shares owned by the parent in the new corporation. In making this allocation, the amount of the excess designated in respect of a particular class of shares cannot exceed the amount, if any, by which the fair market value of the shares of the particular class issued on the amalgamation exceeds the cost of those shares to the parent as otherwise determined. In addition, the aggregate of amounts designated in respect of all classes of shares cannot exceed the amount of the excess. The excess may be added to the adjusted cost base of the shares owned by the parent only if the parent makes a designation in respect of those shares for the tax year in which the amalgamation occurred in its return of income for that year.
5 February 1993 T.I. (Tax Window, No. 29, p.18, ¶2434)
The cost amount of Canadian resource properties for purposes of s. 87(9)(c) is nil irrespective whether or not there are undeducted resource pools.
24 June 1991 T.I. (Tax Window, No. 4, p. 7, ¶1315)
Discussion of reorganization in which the "bump" is unavailable because after the amalgamation the parent does not own all the shares of the amalgamated corporation.
Articles
Schwartz, "Statutory Amalgamations, Arrangements and Continuations: Tax and Corporate Law Considerations", 1991 Conference Report, c. 9.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) | 0 |
Richler, "Triangular Amalgamations", March/April 1985 Canadian Tax Journal, p. 374
RC has been willing to accommodate transactions whereby option holders and debenture holders of a predecessor corporation in effect receive options or debentures of the parent on a rollover basis, but it has been unwilling to accede to arguments that the "new shares" referred to in s. 87(9)(c) refer only to the shares of Amalco received by the parent in exchange for its previous shareholding in a predecessor.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) | 29 |
Paragraph 87(9)(a.4)
Administrative Policy
3 December 2019 CTF Roundtable Q. 13, 2019-0824491C6 - Triangular Amalgamation
In Scenario 1, Subco, which is a wholly-owned subsidiary of Parentco, amalgamates with Targetco (like Subco and Parentco, a taxable Canadian corporation) to form Amalco under s. 87(9), with the former shareholders of Targetco receiving shares of Parentco, and Parentco receiving shares of Amalco. Ss. 87(9)(a.4) and (c) apply so that the cost of the shares of Amalco held by Parentco are not derived from the value of the consideration given.
Scenario 2 is the same, except for the presence of Midco, which wholly-owns Subco and is wholly-owned by Parentco, so that on the amalgamation of Subco and Targetco, the former shareholders of Targetco receive shares of Parentco, Parentco receives additional shares of Midco (having an FMV equaling the FMV of the shares of Parentco issued to the former shareholders of Targetco and to compensate it for such issuance), and Midco receives compensatory shares of Amalco.
Can CRA confirm the position in February 1991-110 and February 1991-108, that the compensatory shares so issued to Parentco have an FMV tax basis?
CRA indicated that in Scenario 1, the shares received by Parentco from Amalco are subject to the application of ss. 87(9)(a.4) and (c), so that the cost of the shares of Amalco held by Parentco will not be derived from the value of the consideration given (that is the shares issued by Parentco to acquire the shares of Amalco) to the former shareholders of Targetco.
In Scenario 2 involving the insertion of a Midco, the shares of Amalco that are received by Midco are subject to the application of ss. 87(9)(a.4) and (c), but the shares of Midco received by Parentco are not technically subject to those limits. However, if an amalgamation is subject to the application of s. 87(9), and is structured in a manner to frustrate the application of ss. 87(9)(a.4) and (c), it will potentially be subject to the application of GAAR.
Therefore, on a prospective basis (or for amalgamations implemented before March 31, 2020 as part of a series of transactions or an arrangement that was substantially advanced, as evidenced in writing, before December 3, 2019) taxpayers should not rely on documents 1991-110 and 1991-108 without considering the potential application of GAAR.
In its oral comments, CRA queried whether giving FMV tax basis to Parentco for the shares issued by Midco, which would be in excess of the basis described in ss. 87(9)(a.4) and (c), would be in accordance with the scheme of such provisions, and the scheme of the Act’s rollover provisions in general.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | GAAR may apply to the use of a “Midco” to step up the tax basis of a target investment on a triangular amalgamation | 205 |
19 February 1991 External T.I. 903669 1991-110 - Amalgamation
Corporation A owns 100% of corporation B. Corporation B and the public own 66% and 34% of corporation C, respectively. For various reasons, corporations B and C cannot amalgamate. Corporation B transfers all of its shares of corporation C to a newly-incorporated subsidiary (D) under s. 85(1). Upon the amalgamation of corporations C and D to form Amalco, corporation B receives all the shares of Amalco and the public receives shares of corporation A. As consideration for corporation A issuing shares to the public, corporation A issues additional shares to corporation A. CRA stated:
We have previously taken the position that both the shares of a controlling corporation and its controlling corporation are parent shares (rulings 3-2991 and 3-2480).
It has been our policy that any compensatory issuance of shares by the amalgamated company to the parent corporation in a subsection 87(9) amalgamation will be subject to paragraph 87(9)(c) in order to deny the fair market value cost basis of that issuance. In the situation provided, the compensatory issuance by corporation B to corporation A will be at fair market value. This basis was considered acceptable since the basis increase reflects the increase in value of corporation B's interest in Amalco.
Conclusion
The provisions of subsection 87(9) would be applicable to the amalgamation except for paragraph (c) thereof in respect of the issuance of shares of corporation B to corporation A.
Subsection 87(10) - Share deemed listed
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.79 In certain amalgamations, the shares of a predecessor corporation which were listed on a designated stock exchange may be temporarily exchanged for shares of the new corporation which are not listed on a designated stock exchange. Subsection 87(10) deems such temporary shares to have been listed on a designated stock exchange provided that the new corporation is a public corporation and the temporary share is redeemed, acquired or cancelled within 60 days following the amalgamation. This deemed listing of the temporary shares of the new corporation is applicable for the purposes of determining whether such share is taxable Canadian property and excluded property for the purposes of section 116 and a qualified investment for certain registered plans
Subsection 87(11) - Vertical amalgamations
Administrative Policy
S4-F7-C1 - Amalgamations of Canadian Corporations
1.78 On an amalgamation described in [s. 87(11)], a capital gain may arise for the parent. Specifically,… if the paid-up capital of the subsidiary's shares exceeds their adjusted cost base to the parent immediately before the amalgamation, the parent will realize a capital gain by virtue of paragraph 87(11)(a).
2012 Ruling 2010-0355941R3 - reverse subsidiary merger - 87(1) & 87(11)
Under a BC plan of arrangement, a BC corporation ("SubcoTarget") is merged with its wholly-owned BC subsidiary ("Target") to form "Amalco" with the same effect as if they had amalgamated under section 269 of the Business Corporations Act (BC), except that the legal existence of Target does not cease and it survives the merger, Subco ceases to exist and the property of Subco (other than its shares of Target, which are cancelled) become the property of Target. Target and Subco are continued as one company. The parent of Subco ("Acquireco") receives one Amalco common share for each of its Subco common shares.
The purpose of having Target survive the merger under the plan of arrangement was to allow for an exchange of Target shares for shares of Acquireco to qualify as a reorganization for US income tax purposes for US shareholders of Target, although at the end of the day the Target shareholders received cash consideration from Acquireco instead.
Rulings that the merger will be considered an amalgamation (within the meaning of s. 87(1)) in the context of s. 87(11) ; and that pursuant to s. 87(2)(a), Amalco will be considered to have acquired each capital property of Target within the meaning of s. 87(11)(b).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) | reverse triangular "E" merger - survivor style amalgamation | 209 |
9 December 2011 External T.I. 2011-0428071E5 - Clarifications of Application of 87(11)
general discussion of application of s 88(1)(d) to situation in which Parent has two successive vertical amalgamations with its wholly-owned subsidiaries, Subco 1 and Subco 2.
21 March 1997 External T.I. 9706705 - VERTICAL AMALGAMATION - COST BUMP
Confirmation that the rules in s. 88(1)(c.3) apply on a vertical amalgamation.
6 February 1997 External T.I. 9701005 - 87(11) BUMP WHERE ASSETS ALREADY DISTRIBUTED?
Where in connection with the winding-up of a subsidiary, the subsidiary has already distributed its property to its parent and it is then decided to amalgamate the subsidiary and parent rather than complete the winding-up, the property will not be eligible for the bump under s. 87(11) because it was not transferred "on" the amalgamation.