Principal Issues: Where an election was filed pursuant to former paragraph 84.1(2)(e), what would be the impact of a subsequent vertical amalgamation between the purchaser corporation and the subject corporation and how would new paragraph 87(2)(j.6) apply?
Position: Paragraph 87(2)(j.6) would be of no avail and the subsequent vertical amalgamation within 60 months would invalidate the election filed pursuant to former paragraph 84.1(2)(e), as was concluded in 2022-0953991E5.
Reasons: The Law - no change since our position reflected in 2022-0953991E5.
XXXXXXXXXX 2024-103910 Simon Lemieux
December 11, 2024
Dear Sir,
Subject: Vertical merger and application of paragraph 84.1(2)(e) in respect of a disposition of shares that occurred before January 1, 2024
This is further to your letter dated October 3, 2024, in which you requested our opinion regarding the interaction between paragraph 87(2)(j.6) of the Income Tax Act, R.S.C. (1985), c. 1, (5th Supp.) (the “Act”) and the provisions of the Act that applied to intergenerational transfers prior to 2024.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
Context
An Act to amend the Income Tax Act (transfer of a small business or a family farm or fishing corporation), assented to on June 29, 2021, added paragraph 84.1(2)(e) and subsection 84.1(2.3) to the Act (respectively “Former paragraph 84.1(2)(e)” and “Former subsection 84.1(2.3)”). Subsequently, An Act to Implement Certain Provisions of the Fall Economic Statement tabled in Parliament on November 21, 2023 and certain provisions of the Budget tabled in Parliament on March 28, 2023, assented to on June 20, 2024 (the “Implementation Act”), amended paragraph 84.1(2)(e), subsection 84.1(2.3) and paragraph 87(2)(j.6), and introduced subsections 84.1(2.31) and 84.1(2.32).
Former paragraph 84.1(2)(e) applied if the purchaser did not dispose of the shares concerned during the 60-month period following the purchase. Former subparagraph 84.1(2.3)(a)(i) provided that such a disposition caused paragraph 84.1(2)(e) to be deemed never to have applied. As we indicated in Technical Interpretation 2022-0953991E5, under such rules, an amalgamation covered by subsection 87(11) resulted in a disposition of the shares concerned and thus rendered paragraph 84.1(2)(e) inapplicable.
You stated that paragraph 87(2)(j.6) now provides for continuity on an amalgamation for the purposes of subsections 84.1(2.31) and 84.1(2.32). You noted, however, that such continuity does not appear to extend to dispositions of affected shares for which an election was made under Former paragraph 84.1(2)(e).
Your Question
You presented a scenario in which a parent sold in 2023 all the issued shares of the capital stock of a corporation in question to a purchasing corporation controlled by the parent’s child. Former paragraph 84.1(2)(e) would then have applied to the sale. You asked whether an amalgamation between the purchaser corporation and the subject corporation, which would be subject to subsection 87(11) and which would take place during the 60-month period following the sale, would prevent Former paragraph 84.1(2)(e) from applying. You suggested that there would be a legal vacuum to this effect in the Act, given the wording of paragraph 87(2)(j.6).
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Paragraph 87(2)(j.6), as amended by the Implementation Act, applies from 2024 onwards and its scope in relation to section 84.1 is limited to subsections 84.1(2.31) and 84.1(2.32). Subsections 84.1(2.31) and 84.1(2.32) apply to dispositions of shares occurring after December 31, 2023. As we indicated in Technical Interpretation 2022-0953991E5, we had brought to the attention of the Department of Finance Canada the result of our interpretation of the former rules, which in our view was more a matter of tax policy than of interpretation of the Act. Amendments to paragraphs 84.1(2)(e) and 87(2)(j.6) were subsequently proposed and enacted, and subsections 84.1(2.31) and 84.1(2.32) were added to the Act. These new rules do not provide that there is no deemed disposition on an amalgamation referred to in subsection 87(11) in respect of a choice to access Former paragraph 84.1(2)(e).
Thus, our position reflected in Technical Interpretation 2022-0953991E5 would still apply. A subsection 87(11) amalgamation between the acquiring corporation and the subject corporation within the 60-month period following the purchase of the subject shares would render the choice to access Former paragraph 84.1(2)(e) null and void.
We hope you find our comments helpful.
Best regards,
Jean Lafrenière LL. B, LL. M. Fisc.
For the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch