| 5-8011 | |
| M.F. Symes | |
| 613-957-2110 | |
| 19(1) |
May 31, 1989
Dear Sirs:
Re: 24(1) Paragraph 55(3)(b) of the Income Tax Act (Canada) (the"Act")
This is in reply to your letter of April 19, 1989, in which you requested our views concerning the meaning of the words "...where, in contemplation of and before the transfer, property has become property of the particular corporation ..." in the midamble of paragraph 55(3)(b) of the Act (referred to herein as "the Midamble Prohibition)".
You advised that as a result of the takeover of 24(1) the Director of the Bureau of Competition Policy or the ompetition Tribunal may, pursuant to the Competition Act (Canada), require that 24(1) or its subsidiaries divest of certain assets. You advised that 24(1) may wish to effect at least some of these divestitures in the course of reorganizations described in paragraph 55(3)(b) of the Act (referred to herein as "thePurchase Butterflies").
You requested our views as to whether the Midamble Prohibition would apply to the following types of acquisitions:
(1) acquisitions that occur before a Purchase Butterfly is, in your view, contemplated, i.e.:
(a) acquisitions that occur before a final order is made by the Competition Tribunal, or before a formal decision by the Management Committee of 24(1) to comply with such an order by divesting of assets by way of a Purchase Butterfly;
or
(b) acquisitions that occur before a decision by 24(1) Management Committee to concur with a proposal to transfer particular assets by way of a Purchase Butterfly.
(2) acquisitions that are made in the ordinary course of business;
(3) acquisitions that are not made in the ordinary course of business, but that are not made for a purpose related to a Purchase Butterfly; and
(4) acquisitions that are not intended to achieve a material tax benefit as a result of a Purchase Butterfly.
Our comments concerning each of these types of acquisitions are as follows:
(1) (a) The Midamble Prohibition could apply in respect of acquisitions made before a final order is made by the Competition Tribunal. The fact that an acquisition is made before such time would generally be relevant in determining whether the acquisition was made in contemplation of a Purchase Butterfly, however it would not be conclusive.
(b) The Midamble Prohibition could apply in respect of acquisitions made before a formal decision by the Management Committee 24(1) to transfer particular assets by way of a Purchase Butterfly. In our view an acquisition could be considered to be in contemplation of a Purchase Butterfly, even though the particular assets to be transferred or the identity of the purchaser had not been determined at the time of the acquisitions.
(2) We agree that acquisitions made in the ordinary course of business would not be considered to be in contemplation of a Purchase Butterfly. However, whether or not a particular acquisition is made in the ordinary course of 24(1) business would be a question of fact which would depend upon the circumstances of each acquisition.
(3) Whether or not acquisitions that are not made in the ordinary course of 24(1) business are made in contemplation of a Purchase Butterfly would depend upon the circumstance of each acquisition. We disagree with your suggestion that an acquisition of an asset that is not itself transferred on a Purchase Butterfly could not be considered to be made in contemplation of such Purchase Butterfly. For example, if an asset were acquired to enable 24(1) to transfer another asset on a Purchase Butterfly, the acquisition could be considered to have been made in contemplation of the Purchase Butterfly.
(4) We disagree with your suggestion that an acquisition that does not achieve a material tax benefit cannot be considered to have been made in contemplation of a Purchase Butterfly. The fact that an acquisition does not achieve a material tax benefit would generally be relevant in determining whether the acquisition was made in contemplation of a butterfly, however it would not be conclusive.
It is not our view that an acquisition will necessarily be considered to have occurred in contemplation of a subsequent butterfly reorganization merely because it is intended, at the time of the acquisition, to carry out the butterfly reorganization; instead, we consider that there must be some casual connection between the acquisition and the later reorganization. In other words, where it can be established that an acquisition would have been made regardless of whether a butterfly reorganization would subsequently be undertaken, the acquisition would not normally be considered to have been made in contemplation of the butterfly reorganization. A knowledge of all of the circumstances of an acquisition and subsequent reorganization would therefor be required before we could attempt to form an opinion as to whether a particular acquisition was undertaken in contemplation of a later reorganization.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch