[This document may also be cited as February 1991-108 and February 1991-110]
Dear Sirs:
Re: Subsection 87(9) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter of December 14, 1990 wherein you requested our comments on whether subsection 87(9) of the Act applied in the following situation.
1. Corporation A owns all of the issued and outstanding common shares of corporation B.
2. Corporation B and the public own sixty-six and thirty-four percent of the issued and outstanding common shares of corporation C, respectively.
3. Corporations B and C wish to amalgamate but are unable to do so because of various financial, legal and other considerations.
4. As a result, corporation B incorporates a subsidiary corporation, D.
5. Corporation B transfers all of its common shares of corporation C to corporation D utilizing the provisions of subsection 85(1) of the Act.
6. Corporations C and D amalgamate under the relevant corporate law to form Amalco. Upon the amalgamation, corporation B receives all the common shares of Amalco and the public receive common shares of corporation A.
7. As consideration for corporation A issuing its common shares to the public on the above amalgamation, corporation B issues additional common shares to corporation A.
8. Corporations A, B, C, D and Amalco are each a taxable Canadian corporation within the meaning of paragraph 89(1)(i) of the Act.
Comments
It is our view that the provisions of subsection 87(9) of the Act will apply in respect of the above amalgamation, except paragraph (c) thereof will not apply to the shares of corporation B issued to corporation A.
The comments expressed are not advance income tax rulings and are not considered binding on the Department, in respect of any taxpayer, in accordance with paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
Statement of Principal Issues
Opinion Letter 903669 24(1) D. Yuen
Situation
Corporation A owns 100% of corporation B. Corporation B and the public own 66% and 34% of corporation C, respectively. For various reasons, corporations B and C cannot amalgamate. Corporation B incorporates a subsidiary corporation, D. Corporation B transfers all of its shares of corporation C to corporation D utilizing the provisions of subsection 85(1). Upon the amalgamation of corporations C and D to form Amalco, corporation B receives all the shares of Amalco and the public receives shares of corporation A. As consideration for corporation A issuing shares to the public, corporation A issues additional shares to corporation A.
Issue
Do the provisions of subsection 87(9) apply in this situation?
Analysis
We have previously taken the position that both the shares of a controlling corporation and its controlling corporation are parent shares (rulings 3-2991 and 3-2480).
It has been our policy that any compensatory issuance of shares by the amalgamated company to the parent corporation in a subsection 87(9) amalgamation will be subject to paragraph 87(9)(c) in-order to deny the fair market value cost basis of that issuance. In the situation provided, the compensatory issuance by corporation B to corporation A will be at fair market value. This basis was considered acceptable since the basis increase reflects the increase in value of corporation B's interest in Amalco.
Conclusion
The provisions of subsection 87(9) would be applicable to the amalgamation except for paragraph (c) thereof in respect of the issuance of shares of corporation B to corporation A.