2023 Ruling 2022-0958521R3 - foreign absorptive mergers -- summary under Subsection 87(8.2)

Background

Four stacked wholly-owning US corporations (Taxpayers 1 to 4, all of them qualifying persons under the Canada-US Treaty (the “Treaty”)), wholly-owned four stacked corporations in Country 1 (Taxpayers 5, and 9 to 11), except that one share of Taxpayer 5 was held directly by Taxpayer 1 (a US public corporation). Taxpayer 11 wholly-owned Taxpayer 12, a resident of Canada. The shares of Taxpayer 12 and of the above Country 1 corporations were taxable Canadian property (TCP). The shares of Taxpayer 7 (wholly-owned by Taxpayer 5) and of Taxpayer 8 (owned by Taxpayers 7 and 5) were not TCP because they were in a different chain than that above Taxpayer 12.

Proposed transactions

1. The share of Taxpayer 5 held by Taxpayer 1 will be contributed in succession down the chain to Taxpayer 4.
2. Taxpayer 4 will contribute all the shares of Taxpayer 5 to a newly-formed wholly-owned US corporation (Taxpayer 6), which is a qualifying person.
3. Taxpayers 10 and 11 will “check the box” to be disregarded for US tax purposes.
4. Taxpayer 5 will merge into Taxpayer 9 with Taxpayer 9 as the surviving entity under Country 1 law.
5. Taxpayer 7 will merge into Taxpayer 9 (the survivor).
6. Taxpayer 9 will merge into Taxpayer 10 (the survivor).
7. Taxpayer 10 will merge into Taxpayer 11 (the survivor).
8. Taxpayer 11 will distribute all the shares of Taxpayer 8 to Taxpayer 6.

Additional Information

Where there is a downstream absorptive merger under the Country 1 corporate law of a parent into its wholly-owned subsidiary: the subsidiary as the surviving entity does not dispose of its assets or liabilities (other than amounts owing between it and the parent); all of the assets and liabilities of the parent (other than such intercompany amounts and the shares of the subsidiary) are transferred to the subsidiary; the shares in both parent and subsidiary are cancelled; and the subsidiary allocates new shares to the current shareholder(s) of the parent.

Similarly, where there instead is an upstream absorptive merger of the subsidiary into the parent: the parent as the surviving entity does not dispose of its assets or liabilities (other than amounts owing between them); all of the assets and liabilities of the subsidiary (other than such intercompany amounts) are transferred to the parent; the shares of the subsidiaries are cancelled; and the current shareholder(s) of the parent continue to hold their shares of the parent.

Rulings

The dispositions in 1 and 2 (of shares of companies not resident in Canada) are exempted under Art. XIII(4) of the Treaty.

Rulings regarding the mergers qualifying as absorptive mergers under s. 87(8.2) (so that the s. 87(4) rollover, and the para. (n) of “disposition” exclusion, apply). For instance, on each downstream merger, the shareholder of the parent will dispose of its shares of the parent for their ACB and will have an ACB for its shares of the surviving subsidiary for the same amount, and the parent will be deemed by para. (n) not to have disposed of its shares of the subsidiary.

Note: prior applications for s. 116 certificates were made. In the case of the downstream mergers, regarding the shares of the parent, the parent’s shareholder was treated as the vendor thereof and, regarding the acquisition of shares of the subsidiary, there was considered to be no vendor and the purchaser was treated as being such shareholder.