31 May 1989 Income Tax Severed Letter AC58011 - Application of Midamble Prohibition to Take-over

5-8011
                                              M.F. Symes
                                              613-957-2110
                    19(1)

May 31, 1989

Dear Sirs:

Re:                  24(1)

         Paragraph 55(3)(b) of the
         Income Tax Act (Canada) (the"Act")

This is in reply to your letter of April 19, 1989, in which you requested our views concerning the meaning of the words "...where, in contemplation of and before the transfer, property has become property of the particular corporation ..." in the midamble of paragraph 55(3)(b) of the Act (referred to herein as "the Midamble Prohibition)".

You advised that as a result of the takeover of 24(1) the Director of the Bureau of Competition Policy or the ompetition Tribunal may, pursuant to the Competition Act (Canada), require that 24(1) or its subsidiaries divest of certain assets. You advised that 24(1) may wish to effect at least some of these divestitures in the course of reorganizations described in paragraph 55(3)(b) of the Act (referred to herein as "thePurchase Butterflies").

You requested our views as to whether the Midamble Prohibition would apply to the following types of acquisitions:

     (1)  acquisitions that occur before a Purchase Butterfly is,
          in your view, contemplated, i.e.:

     (a)  acquisitions that occur before a final order is made
          by the Competition Tribunal, or before a formal
          decision by the Management Committee of     24(1) to
          comply with such an order by divesting of assets by way
          of a Purchase Butterfly;

              or

     (b)  acquisitions that occur before a decision by 24(1)
          Management Committee to concur with a proposal to
          transfer particular assets by way of a Purchase
          Butterfly.

     (2)  acquisitions that are made in the ordinary course of
          business;

     (3)  acquisitions that are not made in the ordinary course of 
          business, but that are not made for a purpose related to
            a Purchase Butterfly; and

     (4)  acquisitions that are not intended to achieve a material 
          tax benefit as a result of a Purchase Butterfly.

Our comments concerning each of these types of acquisitions are as follows:

     (1)  (a)  The Midamble Prohibition could apply in respect of
               acquisitions made before a final order is made by
               the Competition Tribunal.  The fact that an
               acquisition is made before such time would
               generally be relevant in determining whether the
               acquisition was made in contemplation of a Purchase
               Butterfly, however it would not be conclusive.

          (b)  The Midamble Prohibition could apply in respect of 
               acquisitions made before a formal decision by the  
               Management Committee      24(1)     to transfer    
               particular assets by way of a Purchase Butterfly.  
               In our view an acquisition could be considered to  
               be in contemplation of a Purchase Butterfly, even  
               though the particular assets to be transferred or  
               the identity of the purchaser had not been         
               determined at the time of the acquisitions.

     (2)  We agree that acquisitions made in the ordinary course of 
          business would not be considered to be in contemplation
          of a Purchase Butterfly.  However, whether or not a     
          particular acquisition is made in the ordinary course of 
          24(1)    business would be a question of fact which would
          depend upon the circumstances of each acquisition.

     (3)  Whether or not acquisitions that are not made in the    
          ordinary course of      24(1)     business are made in  
          contemplation of a Purchase Butterfly would depend upon
          the circumstance of each acquisition.  We disagree with
          your suggestion that an acquisition of an asset that is
          not itself transferred on a Purchase Butterfly could not
          be considered to be made in contemplation of such
          Purchase Butterfly.  For example, if an asset were
          acquired to enable      24(1)   to transfer another asset
          on a Purchase Butterfly, the acquisition could be
          considered to have  been made in contemplation of the
          Purchase Butterfly.

     (4)  We disagree with your suggestion that an acquisition that
          does not achieve a material tax benefit cannot be
          considered to have been made in contemplation of a
          Purchase Butterfly.  The fact that an acquisition does
          not achieve a material tax benefit would generally be
          relevant in determining whether the acquisition was made
          in contemplation of a butterfly, however it would not be
          conclusive.

It is not our view that an acquisition will necessarily be considered to have occurred in contemplation of a subsequent butterfly reorganization merely because it is intended, at the time of the acquisition, to carry out the butterfly reorganization; instead, we consider that there must be some casual connection between the acquisition and the later reorganization. In other words, where it can be established that an acquisition would have been made regardless of whether a butterfly reorganization would subsequently be undertaken, the acquisition would not normally be considered to have been made in contemplation of the butterfly reorganization. A knowledge of all of the circumstances of an acquisition and subsequent reorganization would therefor be required before we could attempt to form an opinion as to whether a particular acquisition was undertaken in contemplation of a later reorganization.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch