In Scenario 1, Subco, which is a wholly-owned subsidiary of Parentco, amalgamates with Targetco (like Subco and Parentco, a taxable Canadian corporation) to form Amalco under s. 87(9), with the former shareholders of Targetco receiving shares of Parentco, and Parentco receiving shares of Amalco. Ss. 87(9)(a.4) and (c) apply so that the cost of the shares of Amalco held by Parentco are not derived from the value of the consideration given.
Scenario 2 is the same, except for the presence of Midco, which wholly-owns Subco and is wholly-owned by Parentco, so that on the amalgamation of Subco and Targetco, the former shareholders of Targetco receive shares of Parentco, Parentco receives additional shares of Midco (having an FMV equaling the FMV of the shares of Parentco issued to the former shareholders of Targetco and to compensate it for such issuance), and Midco receives compensatory shares of Amalco.
Can CRA confirm the position in February 1991-110 and February 1991-108, that the compensatory shares so issued to Parentco have an FMV tax basis?
CRA indicated that in Scenario 1, the shares received by Parentco from Amalco are subject to the application of ss. 87(9)(a.4) and (c), so that the cost of the shares of Amalco held by Parentco will not be derived from the value of the consideration given (that is the shares issued by Parentco to acquire the shares of Amalco) to the former shareholders of Targetco.
In Scenario 2 involving the insertion of a Midco, the shares of Amalco that are received by Midco are subject to the application of ss. 87(9)(a.4) and (c), but the shares of Midco received by Parentco are not technically subject to those limits. However, if an amalgamation is subject to the application of s. 87(9), and is structured in a manner to frustrate the application of ss. 87(9)(a.4) and (c), it will potentially be subject to the application of GAAR.
Therefore, on a prospective basis (or for amalgamations implemented before March 31, 2020 as part of a series of transactions or an arrangement that was substantially advanced, as evidenced in writing, before December 3, 2019) taxpayers should not rely on documents 1991-110 and 1991-108 without considering the potential application of GAAR.
In its oral comments, CRA queried whether giving FMV tax basis to Parentco for the shares issued by Midco, which would be in excess of the basis described in ss. 87(9)(a.4) and (c), would be in accordance with the scheme of such provisions, and the scheme of the Act’s rollover provisions in general.