Principal Issues: [TaxInterpretations translation] Where shares of a foreign corporation are exchanged for shares of a foreign corporation on a merger and the adjusted cost base of the shares of the first corporation is less than the value of the shares received on the merger, can the capital loss be recognized?
Position: If the merger is not a foreign merger under subsection 87(8.1) of the Act or if the taxpayer elects not to avail itself of subsection 87(8) of the Act in the taxpayer's return of income for the taxation year of the merger, there will be a capital loss. This capital loss would not be deemed to be nil under paragraph 40(2)(g) or subsection 40(3.4) of the Act.
Reasons: The shares received on the merger are not identical properties for the purposes of the definition of superficial loss in section 54 of the Act and for the purposes of subsections 40(3.3) and 40(3.4) of the Act because of the deeming provisions of subsection 40(3.5) does not apply because section 87 does not apply if the merger is not a foreign merger within the meaning of subsection 87(8.1) or if the taxpayer has elected not to have subsection 87(8) apply in the taxpayer's return of income for the taxation year of the merger.
October 16, 2009
XXXXXXXXXX XXXXXXXXXX Tax Services Office Income Tax Rulings Directorate Sylvie Labarre
2009-033772
Capital loss following a merger of foreign corporations
This is in response to your fax dated August 20, 2009, in which you asked us whether a taxpayer realized a capital loss as a result of a merger of foreign corporations.
Facts
- XXXXXXXXXX Corporation ("Holdco") holds XXXXXXXXXX shares in the capital stock of the American public corporation XXXXXXXXXX
- Holdco's fiscal period-end is XXXXXXXXXX.
- Holdco is a Canadian controlled private corporation.
- Holdco filed an income tax return for the fiscal period of XXXXXXXXXX on XXXXXXXXXX.
- On XXXXXXXXXX merged with XXXXXXXXXX and Holdco received XXXXXXXXXX shares of XXXXXXXXXX for each share of XXXXXXXXXX.
- Holdco still holds the shares of XXXXXXXXXX following the merger.
- In the document provided by XXXXXXXXXX, it is stated: "XXXXXXXXXXXXXX".
- On XXXXXXXXXX, Holdco filed an amended return claiming a capital loss of $XXXXXXXXXX corresponding to the above-mentioned result.
Question
You wish to know if the capital loss calculated by Holdco in its amended return can be recognized.
Our Comments
The first question that must be asked in this situation is whether the merger between XXXXXXXXXX and XXXXXXXXXX is a foreign merger, as defined in subsection 87(8.1) of the Income Tax Act (the "Act"). If this is the case, subsection 87(8) may apply unless Holdco elects not to avail itself of subsection 87(8) in its income return for the taxation year of the merger.
If it is a foreign merger, as defined in subsection 87(8.1), and if Holdco does not elect to rely on subsection 87(8) in its income return, the rules in subsection 87(4) will apply to Holdco in accordance with subsection 87(8).
Under subsection 87(4), Holdco is deemed to have disposed of the XXXXXXXXXX shares for proceeds equal to the adjusted cost base of such shares immediately before the merger and Holdco is deemed to have acquired the new XXXXXXXX shares at a cost equal to the adjusted cost base of the XXXXXXXXXX shares. Consequently, there would be no capital loss.
On the other hand, if Holdco elects not to rely on subsection 87(8) in its income return for the taxation year of the merger, subsection 87(4) would not apply. Based on the information you provided, the value of the XXXXXXXXXX shares received in exchange for the XXXXXXXXX shares is less than the adjusted cost base of the XXXXXXXXXX shares which would result in a capital loss.
For the purposes hereof, we have assumed that XXXXXXXXXX is not a foreign affiliate of Holdco so that subsection 93(2) does not apply.
It would then be necessary to determine whether the loss is deemed to be nil under a provision of the Act. Paragraph 40(2)(g) deems a superficial loss to be nil. The term "superficial loss" is defined in section 54. It is our view that, for the purposes of this definition, a share of the capital stock of XXXXXXXXXX is not a property identical to a share of the capital stock of XXXXXXXXXX. Consequently, paragraph 40(2)(g) would not apply.
Furthermore, consideration should be given to whether the conditions in subsection 40(3.3) are satisfied because, if so, subsection 40(3.4) would apply to deem the loss to be nil. Subsection 40(3.5) sets out the presumptions that apply for the purposes of subsections 40(3.3) and 40(3.4). One of these presumptions is that a share of the capital stock of a corporation that is acquired in exchange for another share in a transaction to which, inter alia, section 87 applies is deemed to be a property that is identical to the other share.
In this regard, we are of the view that this presumption in subsection 40(3.5) will not apply and that the shares of the capital stock of XXXXXXXXXX will not be identical property to the shares of the capital stock of XXXXXXXXXX if the merger is not a foreign merger under the criteria in subsection 87(8.1) or if Holdco elects not to rely on subsection 87(8) in its income return for the taxation year of the merger. In such a case, the conditions of subsection 40(3.3) would not be satisfied so that the loss would not be deemed to be nil under subsection 40(3.4).
Since Holdco did not calculate the capital loss when it filed its income tax return for the year of the merger, we have assumed that Holdco did not elect to avail itself of subsection 87(8) in its original return and that the merger was a foreign merger in accordance with the conditions in subsection 87(8.1). On the other hand, the amended return indicates that either Holdco elected not to avail itself of subsection 87(8) or that the taxpayer determined that the merger was not a foreign merger under subsection 87(8.1). If Holdco filed an amended return to elect not to have subsection 87(8) apply, the question is whether we will accept this election as it was made after the original return was filed and whether we will accept the amended return. In this situation, we would accept such an election and amended return since they were made either before the original return was assessed or before the end of the period for filing a notice of objection to such a notice.
For your information, should your client request a copy of this memorandum, you may provide them with a severed copy using the Privacy Act criteria, which does not remove client identity, which you may request from Ms. Jackie Page at (819) 994-2898. The copy that has been severed according to the Privacy Act criteria will then be sent to you so that you can deliver it to your client.
We hope that these comments are of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Alain Godin, Manager
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.