Principal Issues: What is the tax treatment of the receipt of non-share consideration by a shareholder on an amalgamation?
Position: Subject to the application of subsection 245(2), non-share consideration received on an amalgamation is treated as proceeds of disposition.
Reasons: Prior positions.
XXXXXXXXXX 2017-069682 M. Séguin September 15, 2017
Dear Sir,
Subject: Technical interpretation request respecting subsections 87(1) and 87(4)
This is in response to your letter of March 15, 2017 in which you requested our opinion with respect to subsections 87(1) and 87(4) of the Income Tax Act (the "Act") with regard to a particular hypothetical situation.
Unless otherwise stated, all statutory references are to provisions of the Act.
This technical interpretation provides general comments on the legislative provisions of the Act. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. Our Directorate only confirms the tax treatment of particular transactions 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.
Particular Situation
1. Mr. A held 100 Class A shares in the capital stock of Corporation A with a paid-up capital and adjusted cost base of $100. Those shares constituted capital property to Mr. A.
2. Mr. B held 100 Class A shares in the capital stock of Corporation B with a paid-up capital and adjusted cost base of $100. Those shares constituted capital assets to Mr. B.
3. Corporation A and Corporation B were taxable Canadian corporations.
4. The two corporations amalgamated to form Amalco.
5. The Amalgamation Agreement provided that in consideration for the shares held in Corporation A and Corporation B, Mr. A and Mr. B each received from Amalco a cash amount of $100,000 and 100 Class A shares of the capital stock of Amalco.
Your Questions
You wish the comments of the Canada Revenue Agency (the "CRA") as to whether the condition in paragraph 87(1)(c) would be satisfied in the circumstances of your situation. In addition, you asked whether subsection 87(4) would apply at the shareholder level of the predecessor corporations. In the event that subsection 87(4) does not apply, you wish to know what would be the tax treatment of the non-equity consideration received by the shareholders of the predecessor corporations.
Our Comments
For purposes of our comments, we have assumed that immediately before the amalgamation, the Class A shares of the capital stock of Corporation A and the Class A shares of the capital stock of Corporation B had the same market value.
Generally, the condition in paragraph 87(1)(c) would be satisfied in the circumstances of the hypothetical situation because all shareholders who owned shares of the capital stock of a predecessor corporation immediately before the amalgamation received shares of the capital stock of the corporation resulting from the amalgamation. Thus, in the event that the other conditions set out in subsection 87(1), including paragraph 87(1)(a), were also satisfied, the amalgamation of Corporation A and Corporation B could qualify as an amalgamation for the purposes of the provisions of section 87.
For their part, Mr. A and Mr. B could not in the hypothetical situation benefit from the rollover provisions of subsection 87(4), because as consideration for the disposition of the shares they held in the predecessor corporations, they received, in addition to the shares of the capital stock of Amalco, consideration other than shares due to the amalgamation. Consequently, at least one of the conditions in the preamble to subsection 87(4) is not satisfied. Subparagraph (b)(iii) of the definition of "disposition" in subsection 248(1) provides that a disposition of any property includes any transaction or event by which a share is converted because of an amalgamation or merger. Mr. A and Mr. B would therefore be deemed to have disposed of their shares in the capital stock of the predecessor corporations at the fair market value of such shares and the consideration received for those shares would consist of the shares of the capital stock of Amalco and the non-share consideration received by the shareholder. As a general rule, this would result in a capital gain or loss.
However, a review of all the facts and circumstances of the series of transactions should be conducted to determine whether other tax consequences may result. In addition, if the purpose of the series of transactions was to circumvent the application of one of the sections of the Act or to use any of its provisions to frustrate its object and spirit, the CRA may consider invoking those provisions or ultimately applying the general anti-avoidance rule in subsection 245(2).
Best regards,
Urszula Chalupa, LL.B, M. Fisc.
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch