G.C. Boehmer (613) 957-2120
May 2, 1986
Re: Subsections 78(3) and 87(7) of the Income Tax Act (the "Act")
This is in reply to your letter of February 4, 1986 wherein you requested certain technical interpretations with respect to the above referenced provisions of the Act.
Your letter appears to deal with an actual fact situation. If this is the case, your request should be the subject of an advance income tax ruling. The guidelines under which advance income tax rulings are issued and the procedures for applying for advance rulings are set out in Information Circular 70-6R issued December 18, 1978 by the Department of National Revenue. We are, however, prepared to offer the following comments which, as explained in Information Circular 70-6R, do not constitute advance income tax rulings and which are not binding on the Department.
Our understanding of the facts in your example is as follows:
1. Two corporations (the "predecessor corporations") that are taxable Canadian corporations within the meaning of paragraph 89(l)(i) of the Act and that are wholly-owned by a corporation resident in the U.S. are merged in a manner which constitutes an amalgamation as defined in subsection 87(1) of the Act.
2. The taxation year of each of the predecessor corporations ends on December 31. The amalgamation occurs at the end of February.
3. Each predecessor corporation incurred certain deductible expenses, as referred to in subsection 78(3) of the Act, in its taxation year ending December 31, 1985 that were unpaid at the end of that taxation year. (The amounts owing in respect of the deductible expenses are hereinafter referred to as the "Deductible Amounts".)
4. As a result of the proposed amalgamation, the Deductible Amounts will become obligations and liabilities of the amalgamated corporation. The Deductible Amounts will be settled by payment to the employees during the first taxation year of the amalgamated corporation.
In our opinion, subsection 87(7) of the Act will apply to the obligations and liabilities of the predecessor corporations that become the obligations and liabilities of the amalgamated corporation. In particular, paragraph 87(7)(d) of the Act provides that the provisions of the Act shall apply as if the amalgamated corporation had incurred or issued the debts or obligations at the time they were incurred or issued by a predecessor corporation.
Pursuant to paragraph 87(2)(a) of the Act, the taxation year of each predecessor corporation will be deemed to have ended immediately before the amalgamation and the taxation year of the amalgamated corporation will be deemed to have commenced at the time of the amalgamation. Accordingly, if the Deductible Amounts remain unpaid at the time of the amalgamation, the amalgamated corporation will be required to include an amount equal to the Deductible Amounts in its income in its first taxation year pursuant to paragraph 78(3)(a) of the Act unless an agreement in prescribed form is filed by the debtor and the amalgamated corporation pursuant to paragraph 78(3)(b) of the Act. It would be necessary to file such an agreement on or before the day on which the amalgamated corporation is required to file its return of income for its first taxation year. The effect of filing such an agreement would be that the Deductible Amount would be deemed to have been paid to the debtor by the amalgamated corporation on the first day of the amalgamated corporation's first taxation year and loaned back to the Corporation pursuant to subparagraph 78(3)(b)(ii) of the Act. However, if the Deductible Amount is paid by the amalgamated corporation prior to the time at which subsection 78(3) of the Act would have become operative had the predecessor corporations not been amalgamated (i.e. December 31, 1986), the Department would be prepared to consider, on a case by case basis, whether the provisions of section 78 of the Act would apply to the amalgamated corporation and whether an election under paragraph 78(3)(b) of the Act would be required. In accordance with the statement in paragraph 10 of Interpretation Bulletin IT-474 dated March 14, 1986, the Department is prepared to consider, on a case by case basis where all the relevant facts and transactions have been disclosed, whether relief is appropriate where the provisions of paragraph 87(2)(a) of the Act produce unintended consequences which are unfavourable to the taxpayer.
We emphasize that the above comments do not constitute income tax rulings and are not binding on the Department.
Our comments are based on the Act in its present form and do not take into account any of the proposed amendments contained in the Notice of Ways and Means Motion to Amend the Income Tax Act tabled in the House of Commons by the Minister of Finance on February 26, 1986. In this regard, Clause 3 of the Notice of Ways and Means Motion provides for an amendment with respect to salary, wages and other remuneration that is unpaid 180 days after the end of an employer's fiscal period.
We trust this information will be of assistance to you.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch