Principal Issues: Is it CRA`s view that a target corporation will have only one taxation year end as a result of the acquisition of control of target and its subsequent amalgamation only in the situations described in paragraph 11 of Interpretation Bulletin IT-474R2 and in the technical interpretation 2004-0105481?
Position: Generally, the CRA applies the administrative position described in paragraph 11 of Interpretation Bulletin IT-474R2 only when the only non ordinary course transactions of the predecessor corporations the day of the amalgamation are the acquisition of control and the amalgamation.
Reasons: Wording of the Act and prior positions.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 18
Amalgamation of corporations
When corporations are amalgamated, it is common for transactions involving the predecessor corporations to be carried out on the day of the amalgamation. To that end, the CRA issued two technical interpretations with different conclusions about the end of the deemed taxation year of the predecessor corporations.
In paragraph 10 of Interpretation Bulletin IT-474R2 (footnote 1), the CRA states that the time of the amalgamation of corporations occurs at the earliest moment of the date indicated on the certificate of amalgamation unless a particular time is specified on the certificate of amalgamation in which case, the amalgamation would take place at that precise time of the day.
In paragraph 11 of the same Bulletin (footnote 2), the CRA describes the following situation: after an acquisition of control of a target corporation, the target corporation is amalgamated with the corporation that acquired control of it or with a corporation related to the controller. Provided that the acquisition of control and the amalgamation occur on the same date and that no election under subsection 256(9) is made in and no time is specified in the certificate of amalgamation, the CRA will accept that the target will have only one deemed year end as a result of the acquisition of control of target and its subsequent amalgamation.
The conclusion described in paragraph 11 of IT-474R2 was repeated in Technical Interpretation 2004-0105481 (footnote 3). In that Interpretation, the facts were that after an acquisition of control of a target corporation, the controlling corporation transferred the shares of the target corporation to its wholly-owned subsidiary, and on the same day the target corporation and the subsidiary were amalgamated. The CRA's conclusion was that provided that no election under subsection 256(9) was made and that no time was specified on the certificate of amalgamation, the target corporation would only have one deemed year end.
However, in technical interpretation 2004-0086741 (footnote 4), the situation was as follows: an amalgamation of two corporations took place and transactions (rollover, share redemption, return of paid-up capital) were carried out by one of the amalgamating corporations on the day of the amalgamation, but according to the legal documents supporting the transactions, before the time of the amalgamation. The amalgamation certificate did not indicate any particular time as being that of the amalgamation. In that situation, the position of the CRA was that the time of the amalgamation was that provided for in the arrangement to the extent that the series of transactions occurred in a logical order. The CRA based its position on paragraph 87(2)(a) which provides that the taxation year of a predecessor corporation, which would have ended after the amalgamation, is deemed to have ended immediately before the amalgamation. Thus, the predecessor corporation that carried out transactions before the time of the amalgamation must account for them in its taxation year deemed to have ended immediately before the amalgamation.
The position described in Technical Interpretation 2004-0086741 is difficult to reconcile with that described in Technical Interpretation 2004-0105481. In the latter, there must have been an arrangement in which transactions proceeded in a logical order. In fact, three transactions occurred in the following order: (i) a corporation acquired control of the target corporation, (ii) the corporation transferred the shares of the target corporation to a subsidiary and (iii) the target corporation and the subsidiary amalgamated. Yet, despite the order of that series of transactions, the CRA concluded that the target corporation would only have one deemed year end.
Questions to the CRA
a) 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 in paragraph 11 of the Interpretation Bulletin IT-474R2 and in Technical Interpretation 2004-0105481?
b) If not, can the CRA describe situations in which a predecessor corporation, whose control was acquired on the same day, that carries out or is involved in transactions on the day of the amalgamation, would have only one year end?
CRA Response
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.
Marc LeBlond
(613) 957-2108
October 8, 2010
2010-037320.
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Canada Revenue Agency, Interpretation Bulletin IT-474R2, January 8, 2008, par. 10.
2 Id, par. 11.
3 Canada Revenue Agency, Technical Interpretation no 2004-0105481.
4 Canada Revenue Agency, Technical Interpretation no 2004-0086741.