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R.H. Joyce (613) 957-2092
JUN 9 1988
Dear Sirs:
Re: Change of Control and Amalgamations
This is in response to your letter of March 14, 1988 wherein you requested the Department's interpretation of the provisions of subsection 256(9) and paragraph 87(2)(a) of the Income Tax Act (the "Act"). The two following hypothetical situations were presented for our consideration.
Situation A
X Co. and Y Co. are two Canadian corporations each of which has a fiscal period which ends on December 31. Fiscal period as used here and subsequently has the meaning assigned by subsection 248(1) of the Act.
Under the terms of the purchase and sale agreement, X Co. acquired control of Y Co. at midnight on December 31, 1987. In order to ensure that the timing of acquisition of control for tax purposes coincides with the purchase and sale agreement, Y Co. must elect not to have the provisions of subsection 256(9) apply. If no such election is made, X Co. would be deemed to have acquired control of Y Co. at the commencement of December 31, 1987.
X Co. and Y Co. are amalgamated on January 1, 1988. The certificate of amalgamation specified that the first taxation year of the amalgamated company ("XY Co.") would commence at the earliest moment on January 1, 1988.
Situation B
X Co. and Y Co. are Canadian corporations each of which has a fiscal period which ends on December 31.
X Co. acquires control of Y Co. on January 1, 1988.
Y Co. does not elect not to have the provisions of subsection 256(9) of the Act apply. Therefore, pursuant to subsection 256(9) of the Act, control of Y Co. will be deemed to have been acquired at the commencement of January 1, 1988.
X Co. and Y Co. amalgamate on January 1, 1988. The certificate of amalgamation does not specify a particular time on January 1, 1988 for the amalgamation.
You have asked whether the Department, in each of the above situations, would consider Y Co. to have had only one year-end for tax purposes at midnight on December 31, 1987.
Our Comments
In Situation A, subsection 256(9) of the Act would deem control of Y Co. to have been acquired at the commencement of December 31, 1987, unless Y Co. elects not to have the provisions of the subsection apply. If such an election is made, paragraph 249(4)(a) of the Act deems the year-end of Y Co. to end immediately before midnight on December 31, 1987 the time that control has been acquired.
The amalgamation of X Co. and Y Co. takes place on January 1, 1988. By virtue of paragraph 87(2)(a) of the Act, the first taxation year of XY Co., the amalgamated company, will be deemed to have commenced at the time of the amalgamation and the taxation years of X Co. and Y Co. will be deemed to have ended immediately before the amalgamation. In this case, the time of amalgamation is specified in the certificate of amalgamation as being the earliest moment on January 1, 1988. The year-ends of both X Co. and Y Co. would be deemed by paragraph 87(2)(a) of the Act to end immediately before the earliest moment on January 1, 1988, which would be midnight on December 31, 1987.
It is our opinion, therefore, that in the hypothetical scenario described in Situation A, Y Co. would have one year-end immediately before midnight on December 31, 1987, as a result of the acquisition of control of Y Co. by X Co., and it would have another year-end at midnight on December 31, 1987 by virtue of its amalgamation with X Co.
In Situation B, since Y Co. does not elect not to have the provisions of subsection 256(9) of the Act apply, control of Y Co. will be deemed to have been acquired at the commencement of January 1, 1988. The amalgamation of X Co. and Y Co. takes place on January 1, 1988. In the absence of any specified time of amalgamation, it is the Department's view that the taxation years of X Co. and Y Co. will be deemed by paragraph 87(2)(a) to end at midnight on December 31, 1987 and the first taxation year of XY Co. will be deemed by that paragraph to commence at the earliest moment on January 1, 1988, pursuant to the comments in paragraph 9 of IT-474R .
Based on the facts described in Situation B, it is our opinion that the end of the taxation year of Y Co. deemed by paragraph 87(2)(a) to occur at midnight on December 31, 1987 will coincide with the end of the taxation year deemed by paragraph 249(4)(a) to occur at that time, and with its regular fiscal period which ends at that time. Therefore, Y Co. would have only one year-end for tax purposes, at midnight on December 31, 1987.
The opinions expressed herein are not rulings as stated in paragraph 24 of Information Circular 70-6R.
Yours truly,
Original signed by
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch