| 19(1) | File No. 5-9195 |
| A.A. Cameron | |
| (613) 957-2115 |
March 8, 1990
Dear Sirs:
Re: Subsection 88(4) of the Income Tax Act (the "Act")
We are writing in response to your letter of November 24, 1989 in which you requested a technical interpretation concerning the following hypothetical situation:
- The shares of a Canadian public corporation ("Target") are widely held.
- A private corporation incorporated in Canada ("Holdings") holds a small minority interest in Target and deals at arm's length with Target for the purposes of the Act.
- Target has a wholly-owned subsidiary company ("Subco I") which in turn has a wholly-owned U.S. subsidiary company ("Subco II").
- Holdings plans to incorporate in Canada a wholly-owned subsidiary company ("Acquisition") and would inject cash into Acquisition in return for common shares thereof.
- Acquisition and Target would amalgamate pursuant to the provisions of section 87 of the Act to form Amalco. The public shareholders of Target will receive non-voting, redeemable, preferred shares of Amalco in exchange for their shares of Target. Holdings will receive all the common shares of Amalco in exchange for its common shares in Acquisition.
- Amalco will redeem the preferred shares held by the public shareholders using the funds previously injected by Holdings with the result that the only outstanding shares of the company will be the common shares held by Holdings.
- Amalco would then be wound up pursuant to the provisions of section 88 of the Act.
- Immediately thereafter, Subco I would be wound up into Holdings pursuant to the provisions of section 88 of the Act.
You have asked for our interpretation of the provisions of subsection 88(4) of the Act in the context of this situation and whether or not the cost of the shares of Subco I and Subco II can be "bumped up" under the provisions of paragraph 88(1)(d) of the Act on the respective liquidations of Amalco and Subco I.
In our opinion, the provisions of subsection 88(4) of the Act will deem Holdco not to have acquired control of Amalco for the paragraphs 88(1)(c) and (d). Therefore the cost of the shares of Subco I and Subco II could not be "bumped up" under the provisions of paragraph 88(1)(d) of the Act on the respective liquidations of Amalco and Subco I. We understand that this may not be the intended result in this situation, and are aware that this matter has been brought to the attention of the Department of Finance.
You have also requested whether in our opinion it would be possible to effect an acquisition of control of Amalco by making the preferred shares voting so that, upon the subsequent redemption of such shares, Holdings would acquire control of Amalco at that time.
This result may be possible, but would depend on the facts of the particular situation.
The above comments are an expression of opinion and, as explained in paragraph 24 of Information Circular 70-6R, dated December 18, 1978, are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch