Section 271 - Amalgamations

Two registrants (Corporations A and B) amalgamate to form AmalCo, which immediately thereafter sells all its assets to a registered third party. In finding that no s. 167 election could be made for this sale, CRA indicated that the supplier (AmalCo) did not satisfy the s. 167 requirement that it have “established” the business (this was done by its predecessors, who were deemed separate persons) and by assumption it also did not satisfy the requirement that it have “carried on” the business.

Corporation A is assessed for its failure to have charged GST/HST on inter-corporate supplies of management services to Corporation B, which was owned by the same individual. If they thereafter amalgamate pursuant to s. 271, can Amalco claim the input tax credits that Corporation B would be entitled to, so that Amalco’s liability is reduced to only the interest and penalty? CRA responded:

In accordance with section 271, for the purposes of applying the GST/HST provisions in respect of property or a service acquired, imported or brought into a participating province by a predecessor, the new successor corporation is considered to be the same corporation as and a continuation of each of the predecessors.

Assuming that a predecessor met the conditions for claiming input tax credits (ITCs) (other than having the documentary evidence) in respect of tax that became payable or was paid without having become payable, and subsequently the documentation is obtained, the predecessor (or after amalgamation, the new successor) may claim that ITC in its net tax calculation for another reporting period, subject to the four or two year time limitation under subsection 225(4) of the ETA.

… Where the predecessor (the supplier) did not provide the documentary evidence to the other predecessor prior to the amalgamation, the new successor could provide the necessary documentation thereby allowing the new successor to claim the ITC effectively reducing their liability to any applicable interest and penalty.

As a result of the merger of USCo1 into USCo2 with USCo2 as the survivor (“MergeCo”), all of the assets of the Canadian branch business of USCo1 are transferred to USCo2. Would ETA s. 271 deem such transfer not to be a supply? CRA responded:

We have advised previously that section 271 of the ETA applies to “statutory amalgamations”, meaning that the procedures for amalgamating follow amalgamation rules set out in a Canadian or provincial statute under which the corporation is incorporated. Generally, where an amalgamation occurs under a statute, the amalgamating corporations are continued as one corporation, with the new successor corporation being regarded as a continuation of the predecessor corporations. …

Where pursuant to the state, provincial or federal laws under which the entities are incorporated, the predecessors are continued as one corporation with the new successor being a continuation of the predecessors (otherwise than as a result of a purchase or distribution of property described above), it appears that section 271 would apply.

Shares of Newco, which was incorporated solely for the purposes of purchasing all of the business assets of a supplier, are sold to a third party purchaser and Newco is immediately amalgamated with the purchaser after the asset transfer. In confirming that the s. 167 election would not be available for the business acquisition by Newco if it did not carry on a business before its amalgamation, CRA stated:

Under section 271, an Amalco is deemed for GST/HST purposes to be a separate person from each of its predecessors, except as otherwise provided under the ETA. … There is no provision deeming a predecessor (in this case, Newco) to acquire the characteristics of its successor Amalco. In other words, Newco's ability to register cannot be based on the proposed actions of a corporation, i.e., Amalco, that does not exist at the time Newco needs to be a registrant so it can make the section 167 election.

In confirming that a s. 167 election is not available where an operating company ("Opco") is amalgamated with another corporation, and the amalgamated corporation immediately sells all of the assets, CRA stated:

One of the conditions for making an election under subsection 167(1) is for the supplier to be supplying a business or part of a business that was established or carried on by the supplier or that was established or carried on by another person and acquired by the supplier. Since a predecessor corporation (in this case, Opco) is the entity that established or carried on the business, the Amalco cannot be considered to have done so, since it is deemed to be a separate person for GST/HST purposes. Moreover, the Amalco did not acquire the business from its predecessor (Opco) since paragraph 271(c) deems the transfer of property from Opco to Amalco not to be a supply for GST/HST purposes.

In a corporate reorganization involving a GST registrant that is engaged exclusively in commercial activities, assets are first transferred to a NewCo who immediately thereafter is amalgamated with another corporation ("SuccessorCorp") who will use the assets exclusively in a commercial activity. After noting the CRA position that NewCo may not be eligible to register or clqim ITCs, the question asked whether SuccessorCorp would be entitled to claim ITCs for GST that was payable by NewCo. CRA responded:

It appears that NewCo will not be engaged in commercial activity as defined in subsection 123(1) of the ETA. As a result, SuccessorCorp would not be eligible to claim ITCs with respect to the property that NewCo acquired unless SuccessorCorp is using the property in commercial activity and a change-in-use provision applies. For example, if all other conditions of the provisions are met, SuccessorCorp may be eligible to claim ITCs on the change of use of capital personal property under subsection 199(3) and of capital real property under subsection 206(2) based on the basic tax content of the property.

•If two or more corporations amalgamate, the successor company is a new entity and is considered to be a person separate and distinct from each of its predecessor corporations. The registrations of the predecessor corporations would normally be cancelled. The newly amalgamated corporation (i.e., the successor company) may have to apply to be registered. When the successor company registers, it may either retain the registration number (BN) of one of the predecessor corporations, or take a new BN.

Where two corporations amalgamate, their registrations should be cancelled and the amalgamated corporation may have to apply to be registered.