Principal Issues: Can a public corporation (Targetco) make a valid election (Election) not to be a public corporation under subparagraph (c)(i) of the public corporation definition in subsection 89((1) at a time when all of its listed shares (on a designated stock exchange in Canada) are acquired by a private corporation (Acquisitionco), such that, following the acquisition, the new corporation (Amalco) formed on a vertical amalgamation of Acquisitionco and Targetco would not be considered to be a public corporation?
Position: Amalco would be deemed to be a public corporation by virtue of paragraph 87(2)(ii).
Reasons: This is because Targetco would still be a public corporation under paragraph (a) of the public corporation definition immediately before the Amalgamation, even though at that time Targetco would be excluded from being a public corporation under subparagraph (c)(i) of the public corporation definition. However, the CRA has taken the position in the past in certain situations involving vertical amalgamations (see for example document nos. 2015-0577141R3 and 2008-0268961R3) that the fact that shares of a public corporation no longer exist at the time of making an Election would not preclude the insider requirement (prescribed in subsection 4800(2) of the Income Tax Regulations) from being met. Accordingly, in those types of situations, where Amalco makes an election after the time that Targetco shares are delisted, Amalco will not be considered to be a public corporation.
2017 CTF Annual Conference
CRA Roundtable
Question 12: Election not to be a public corporation
Under paragraph (c) of the definition of “public corporation” in subsection 89(1) of the Income Tax Act (Act), a Canadian resident corporation that was considered to be a public corporation because its shares were previously listed on a designated stock exchange in Canada is considered to continue to be a “public corporation” unless, after the time it last became a public corporation, either it elects not to be a public corporation (under subparagraph (c)(i) of the public corporation definition) or the Minister designates it not to be a public corporation (under subparagraph (c)(ii) of the public corporation definition).
A corporation that intends to elect not to be a public corporation must meet the prescribed conditions in subsection 4800(2) of the Income Tax Regulations (Regulations). One of these conditions is that insiders of the corporation must hold more than 90% of the issued shares of each class of shares that were previously listed (under subparagraph 4800(2)(a)(i) of the Regulations) or designated (under subparagraph 4800(2)(a)(ii) of the Regulations) (Insider Requirement).
In a situation where a private corporation (Acquisitionco) acquires all of the shares of a publicly-listed target corporation (Targetco), the designated stock exchange often takes several days to formally delist the purchased shares.
Prior to the formal delisting of its shares, can Targetco make a valid election (Election) not to be a public corporation under subparagraph (c)(i) of the public corporation definition at a time when Acquisitionco owns 100% of Targetco so that when Acquisitionco and Targetco vertically amalgamate (Amalgamation) to form a new corporation (Amalco), Amalco would not be considered to be a public corporation?
CRA Response
If Targetco is still a public corporation immediately before the Amalgamation, by virtue of paragraph 87(2)(ii), Amalco will be deemed to be a public corporation.
Assuming that Targetco met the prescribed conditions in subparagraph (c)(i) of the public corporation definition by making an Election before the Amalgamation and, therefore, would be excluded from being a public corporation under subparagraph (c)(i) of the public corporation definition, Targetco would still be a public corporation, by virtue of paragraph (a) of the public corporation definition, as long as a class of Targetco shares were still listed on a designated stock exchange in Canada.
The reason for Targetco making an Election before the Amalgamation is to meet the Insider Requirement before its shares are cancelled.
However, the CRA has taken the position in the past in certain situations involving vertical amalgamations (see for example document nos. 2015-0577141R3 and 2008-0268961R3) that the fact that shares of a public corporation no longer exist at the time of making an Election would not preclude the Insider Requirement from being met. Accordingly, in those types of situations, where Amalco makes an election after the time that Targetco shares are delisted, Amalco will not be considered to be a public corporation.
The CRA will continue to rule, on a case by case basis, whether the prescribed conditions in subparagraph (c)(i) of the public corporation definition and in subsection 4800(2) of the Regulations will be met, in a situation where shares of a public corporation no longer exist, after a review of all the relevant facts and circumstances.
Daniel Wong
2017-072377
November 21, 2017