Principal Issues: Whether the non-capital loss of a corporate entity formed as a result of the amalgamation of two sister corporations can reduce the taxable income of a predecessor corporation.
Position: No.
Reasons: Wording of subsections 87(2) and 87(2.1) (especially paragraph 87(2.1)(e)).
XXXXXXXXXX 2016-065195
Sylvie Labarre, CPA, CA
June 20, 2016
Dear Madam,
Subject: Loss carryforwards following an amalgamation
This is in response to your letter of June 7, 2016 in which you asked whether a non-capital loss incurred by a corporation resulting from the amalgamation of two predecessor corporations may be carried back to decrease the taxable income one of the predecessor corporations.
Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act (hereinafter the "Act").
Facts
Mrs A was the owner of all the shares in the capital stock of two corporations (hereinafter the "predecessor corporations"). The two corporations amalgamated. Pursuant to subsection 256(7), the control of the corporation is deemed not to have been acquired solely because of the amalgamation. The corporation resulting from the amalgamation (hereinafter the "new corporation") continues to operate the same business as the two predecessor corporations. The new corporation has incurred a loss in the first taxation year following the amalgamation.
Question
You wish to know whether the non-capital loss sustained by the new corporation could be applied to reduce the taxable income of one of the predecessor corporations during the three years preceding the amalgamation.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation, as the case may be. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
As stated in paragraph 87(2)(a), the entity resulting from the amalgamation is deemed to be a new corporation.
Subsection 87(2.1) provides that the new corporation shall be deemed to be the same corporation as, and a continuation of, each predecessor corporation for the following purposes only:
a) determining the new corporation’s capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss, as the case may be, for any taxation year, and
b) determining the extent to which subsections 111(3) to (5.4) and paragraph 149(10)(c) apply to restrict the deductibility by the new corporation of any non-capital loss, net capital loss, restricted farm loss, farm loss or limited partnership loss, as the case may be.
However, according to subsection 87(2.1), the fact that the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation shall in no respect affect the determination inter alia of the taxable income of, or the tax payable under the Act by, any predecessor corporation (paragraph 87(2.1)(e)).
The deeming rule in subsection 87(2.1) was not enacted for the purpose of carrying back a non- loss of the new corporation to reduce the taxable income of a predecessor corporation. In addition, paragraph 87(2.1)(e) clearly prohibits such reduction of taxable income and tax payable of a predecessor corporation that would occur if such non-capital loss carryback of the new corporation were permitted.
In this regard, paragraph 1.47 of Folio S4-F7-C1, Amalgamations of Canadian Corporations, states the following:
"... Subsection 87(2.1) generally does not allow losses incurred by the new corporation to be carried back and applied against the taxable income of any predecessor corporation, nor does it affect the determination of the fiscal periods or incomes of the new corporation or any predecessor corporation. ... "
However, if the amalgamation took place between a parent corporation and one of its subsidiaries, different rules would apply. Such is not the case in this situation.
Subsection 87(2.1) applies whether or not there is acquisition of control. In a situation where there was an acquisition of control, additional rules regarding the reduction of taxable income of the new corporation through the carrying forward of a non-capital loss of a predecessor corporation would apply. This is explained in paragraph 1.48 of the Folio S4-F7-C1, Amalgamations of Canadian Corporations. However, there is no reason to consider these additional rules in this situation.
In conclusion, in this situation, it is not possible for the loss sustained by the new corporation in its first taxation year to reduce taxable income of one of the predecessor corporation during the three years preceding the amalgamation.
We trust that our comments will be of assistance.
Stéphane Charette, CPA, CMA, MBA
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch