15 February 2023 External T.I. 2022-0953991E5 F - Paragraph 84.1(2)(e) and amalgamation
Principal Issues: Whether the amalgamation of the purchaser corporation and the subject corporation within the 60-month period after the transfer of the shares of the capital stock of the subject corporation to the purchaser corporation would cause the deeming rule at paragraph 84.1(2)(e) not to apply.
Position: Yes.
Reasons: According to the law. Arguably, the outcome may raise concerns in terms of tax policy and the matter was referred to the Department of Finance for consideration.
XXXXXXXXXX 2022-095399 Linda Do
February 15, 2023
Dear Sir,
Subject: Application of paragraph 84.1(2)(e)
This is further to your letter dated September 16, 2022 and received on October 27, 2022, requesting our views on the application of paragraph 84.1(2)(e) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "Act").
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
Context
In general terms, section 84.1 is an anti-surplus stripping provision that may apply where a taxpayer resident in Canada (other than a corporation) disposes of shares that are capital property of the taxpayer (the "Subject Shares") of any class of the capital stock of a corporation resident in Canada (the "Subject Corporation") to another corporation (the "Purchaser Corporation") with which the taxpayer does not deal at arm's length and, immediately after the disposition, the Subject Corporation would be connected with the Purchaser Corporation within the meaning of subsection 186(4).
It is our understanding that the purpose of the amendments to section 84.1 in Bill C-208 (footnote 1) is to facilitate intergenerational transfers of businesses by allowing such transfers to be exempt from the application of section 84.1. In this regard, new paragraph 84.1(2)(e) provides that, if the Subject Shares are qualified small business corporation shares or shares of the capital stock of a family farm or fishing corporation within the meaning of subsection 110.6(1), the taxpayer and the Purchaser Corporation are deemed to be dealing at arm’s length if the Purchaser Corporation is controlled by one or more children or grandchildren of the taxpayer who are 18 years of age or older and if the Purchaser Corporation does not dispose of the Subject Shares within 60 months of their purchase. In addition, subparagraph 84.1(2.3)(a)(i) provides that if, otherwise than by reason of death, the Purchaser Corporation disposes of the Subject Shares within 60 months of their purchase, paragraph 84.1(2)(e) is deemed never to have applied.
Your Questions
You asked whether an amalgamation of the Purchaser Corporation and the Subject Corporation, while the Subject Corporation is a subsidiary wholly-owned subsidiary (footnote 2) of the Purchaser Corporation, within the 60-month period following the acquisition by the Purchaser Corporation of the shares of the capital stock of the Subject Corporation would have the effect of making paragraph 84.1(2)(e) inapplicable. If so, you asked whether an amendment to the current legislation is contemplated to permit such an amalgamation.
Our Comments
This technical interpretation provides general comments on provisions contained in the Act and other related legislation, where applicable. It is not intended to confirm its tax treatment of any particular situation involving a particular taxpayer, but rather to assist you in determining the tax treatment. Our Directorate confirms the tax treatment of particular transactions of a particular taxpayer only in the context of a request for an advance income tax ruling made in the manner described in Information Circular 70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Pursuant to paragraph 87(11)(a), on an amalgamation of a parent and its subsidiary wholly-owned subsidiary, the parent is deemed to have disposed of the shares of its subsidiary immediately before the amalgamation for proceeds equal to the lesser of the paid-up capital in respect of those shares (or the amount determined pursuant to subparagraph 88(1)(d)(i)) and the adjusted cost base to the parent of the shares immediately before the amalgamation.
On the current wording of paragraph 84.1(2)(e), it appears to us that an amalgamation of the Purchaser Corporation and the Subject Corporation, a subsidiary wholly-owned subsidiary of the Purchaser Corporation, within 60 months of the Purchaser Corporation's purchase of the shares of the capital stock of the Subject Corporation would have the effect of rendering paragraph 84.1(2)(e) inapplicable, taking into account subparagraph 84.1(2.3)(a)(i), since there would be a deemed disposition pursuant to paragraph 87(11)(a) of the Subject Shares by the Purchaser Corporation during the relevant period.
In our view, such a result does not seem appropriate from a tax policy perspective, particularly where, for example, the amalgamated corporation would (i) remain controlled by one or more of the taxpayer's children or grandchildren over the age of eighteen and (ii) continue to carry on the business of the Subject Corporation during the 60-month period following the acquisition by the Purchaser Corporation of the shares of the capital stock of the Subject Corporation.
That said, the mandate of the Canada Revenue Agency is to administer the Act, while the responsibility for the development of tax policies and amendments to the Act rests with the Department of Finance Canada. To this end, we have brought your question to the attention of the Department of Finance Canada.
We hope you find our comments of assistance.
Best regards,
Jean Lafrenière LL. B, LL. M. Fisc.
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 Assented to on June 29, 2021 (An Act to amend the Income Tax Act (transfer of small business or family farm or fishing corporation), S.C. 2021, c. 21).
2 Within the meaning of the term "subsidiary wholly-owned corporation" as defined in subsection 248(1).