Dear Sirs:
Re: Subsections 249(4), 256(9) and paragraph 87(2)(a) of the Income Tax Act (Canada) (the "Act") and subsections 1100(2.2) and 1102(14) of the Income Tax Regulations ("ITR")
We are writing in response to your letter of October 15, 1990 wherein you requested our comments on the application of the above provisions in the following situations:
Situation 1
Facts
1. Pco owns all of the issued and outstanding shares of Subco.
2. Aco deals at arm's length with Pco.
3. Aco will acquire all of the issued and outstanding shares of Pco at 1:00 P.M. on day 1.
4. Pco will file an election under subsection 256(9) of the Act whereupon that subsection would not apply and control of Pco would be considered to have been acquired at 1:00 P.M. on day 1.
5. Pco's taxation year will be deemed to have ended immediately prior to 1:00 P.M. on day 1 by virtue of paragraph 249(4)(a) of the Act.
6. Aco and Pco will amalgamate to form Amalco at 1:00 P.M. on day 1. The certificate and articles of amalgamation will specify that the time of amalgamation will be 1:00 P.M. on day 1.
7. Pco's taxation year will be deemed to have ended immediately prior to 1:00 P.M. on day 1 by virtue of paragraph 87(2)(a) of the Act.
Opinions requested
1. In the above situation, will there be one or two year ends for the purposes of the Act.
2. If Pco had not elected under subsection 256(9) of the Act and the certificate and articles of amalgamation did not specify the time at which the amalgamation occurred, would the reply to the above request be different?
Comments
l. We question whether the share acquisition can legally occur at the same time as the amalgamation. Consequently, we cannot respond to your first query. However, if the time of the amalgamation was specified to be 1:01 p.m. on day 1, it is our view that there would be two year ends.
2. If the time of amalgamation is not specified in the certificate or articles of amalgamation, the time of amalgamation will be the earliest moment on day 1, as explained in paragraph 9 of Interpretation Bulletin IT-474R issued by Revenue Canada, Taxation on March 14, 1986 ("IT-474R"). As this is the same time that Aco is deemed by subsection 256(9) of the Act to have acquired control of Pco, Pco will have only one year end as a result of the acquisition of control and the amalgamation.
Situation 2
Facts
1. Pco owns all of the issued and outstanding shares of Subco.
2. Pco and Subco each have a fiscal year end of December 31.
3. Pco and Subco will amalgamate to form Amalco on January 1. The certificate and articles of amalgamation will specify January 1 as the date of amalgamation.
Opinion requested
As a result of the amalgamation, will there be one or two year ends for the purpose of the Act?
Comment
Our position is as described in paragraph 9 of IT-474R, the predecessor corporations will have taxation years ending at midnight on December 31.
Situation 3
Facts
1. Pco owns all of the issued and outstanding shares of Subco.
2. Aco deals at arm's length with Pco.
3. On day 1, Pco will transfer depreciable property of a prescribed class to Subco (the "transfer") utilizing the provisions of subsection 85(1) of the Act. Pco and Subco will elect to transfer the assets at the least of the amounts specified in subparagraphs 85(1)(e)(i) to 85(1)(e)(iii) of the Act. Pco will receive common shares of Subco as consideration for the assets transferred.
4. On day 1, immediately after the transfer described above, Aco will acquire all of the issued and outstanding shares of Subco from Pco.
Opinions requested
1. If the election under subsection 256(9) of the Act is filed, control is deemed to be acquired at the commencement of day 1 by virtue of subsection 256(9) of the Act. Therefore, subsection 256(9) of the Act will deem Aco to have acquired control prior to the transfer.
2. In the absence of an election being filed under subsection 256(9) of the Act, that subsection will deem control of Subco to have been acquired by Aco prior to the transfer and Aco and Subco will be related to each other pursuant to subparagraph 251(2)(b)(i) of the Act. As Pco will continue to control Subco, Pco will also be related to Subco pursuant to subparagraph 251(2)(b)(i) of the Act. Since Pco will not be dealing at arm's length with Subco at the time of the transfer, paragraph 13(7)(e) of the Act and subsections 1100(2.2) and 1102(14) of the ITR will be applicable in respect of the transfer.
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