| 24(1) | 900537 |
| L.A. McCarron-McGuire | |
| (613) 957-2092 | |
| EACC9358 | |
| Attention: 19(1) |
August 1, 1990
Dear Sirs:
Re: Subsection 87(1) of the Income Tax Act ("the Act") Request for Technical Interpretation
This is in response to your letter of April 25, 1990 in which you requested our views on whether subsection 87(1) would apply to the amalgamation of Holdco and Subco in the hypothetical situation described below:
1. Holdco is a party to a contract (the "Contract") under which it is entitled Co a payment from Subco if a certain event (the "Event") happens.
2. There exists no receivable from Subco until the happening of the Event.
3. Holdco and Subco plan to amalgamate to form Amalco prior to the happening of the Event.
4. The amalgamation of Holdco and Subco will cause the Contract to be discharged because the rights and obligations under the Contract will have become vested in the same person, Amalco.
Our Comments
The issue in such a situation is whether all of the property of the predecessor corporations immediately before the merger would become property of Amalco by virtue of the merger, as required by paragraph 87(1)(a) of the Act.
It is our view that the requirements of paragraph 87(1)(a) of the Act would ordinarily be satisfied in such a situation, notwithstanding that the contract would be discharged as a result of the amalgamation.
The above comments reflect our position only with respect to the potential application of subsection 87(1) of the Act and should not be interpreted as implying that any other provision of the Act would or would not apply to any actual transactions similar to those described herein.
The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 24 of Information Circular 70-6R dated December 18, 1978 and are not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch
900537ISSUE AND RESOLUTION
Issue
Will all of the property of the predecessor corporations immediately before the merger become property of the new corporation by virtue of the merger, as required by paragraph 87(1)(a) when a contract between the predecessor corporations is discharged because the rights and obligations under the contract have vested in the same person (the new corporation)?
Discussion
Paragraph 5 of Interpretation Bulletin 474R indicates that it is the Department's position that the requirements of paragraph 87(1)(a) are satisfied in the case of a leasehold interest or a right or option to acquire shares, as noted in (a) and (b) of paragraph 5 of that bulletin.
Is it the Department's position that this treatment should be afforded only to these types of properties? From a review of the research file on IT 474, dating back to 1978, it appears that the Department felt that technically the provisions of paragraph 87(1)(a) were not met because the merged corporation would not have acquired the property. The result of adhering to this specific technical interpretation would have been mergers that did not qualify as an amalgamation for purposes of the Act.
In a memo to reviewers, dated August 22, 1979, R.M. Richler of Publications Division discussed "qualifying amalgamations:
"Section 87(l)(a) was amended to insure that an amalgamation would not be disqualified because of inter-company receivables, payables or shareholdings. Paragraphs 5 and 6 list other examples where an amalgamation might technically be disqualified though this would probably be unintended. The Department has responded in favour of the taxpayer in respect of the examples listed in paragraph 5." (emphasis mine)
In his review of draft IT 474, C.C. Hoard indicates in his notes, dated late (October or November ) 1979:
re: paragraph 5 of the IT
"Could we expand on the reasoning for the position taken...? It is not so much a case of one interest terminating as it is of two or more interests in the same property merging or reuniting as a result of the amalgamation." and
"Do, we have any support for the positions taken in 5(b) and 5(c)? If not, could we make paragraph 4 more general, i.e., refer to an interest or right (including a contingent right) in property of another predecessor corporation, or an option to acquire property of another predecessor corporation, which interest, right, or option will terminate or be reunited with the property on amalgamation. We could then use as examples your leasehold or royalty interest and option to acquire shares. I am reluctant to use construction holdbacks as an example, since that can lead to problems with the reporting of revenue and capital cost of the constructed property." (I think preamble in paragraph 5 was originally numbered as 5(a) and what is currently 5(a) and 5(b) are what the reviewer refers to when speaking of 5(b) and 5(c))
re: paragraph 14
I would feel that there would be a merging or reuniting of separate interests in the same property, i.e., the merging of the leasehold interest and the freehold interest in the same property. Thus, 87 would seem to me to apply...." (emphasis added)
The draftsman of the IT in question referred to the first review note above regarding paragraph 5 as follows:
"4(c) dropped as I couldn't think of other examples on point probably made by 4(a) and (b) and by implication, 10"
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Resolution
We will advise the taxpayer that the requirements of paragraph 87(1)(a) will have been met in the present situation.
Lois A. McCarron-McGuire