Principal Issues: Whether the wholly-owned subsidiary ("Subsidiary") of a parent corporation ("Parent") owned without interruption the units of a continuing mutual fund trust ("Continuing MFT") that it received ("MFT Units") in exchange for the share that it held in the capital stock of a mutual fund corporation ("MFC Share") as a result of a qualifying exchange undertaken pursuant to subsection 132.2(1) ("Qualifying Exchange") between the time Parent last acquired control of Subsidiary ("Acquisition of Control Date"), and the time Parent acquired the MFT Units ("Distribution Date") on a vertical amalgamation ("Uninterrupted Ownership Requirement").
Position: No.
Reasons: The wording of paragraph 88(1)(c) and section 132.2 does not include a continuity rule and a substituted property rule intended to expand or otherwise alter the scope of the Uninterrupted Ownership Requirement. Moreover, the context and the purpose underlying paragraph 88(1)(c) and section 132.2 do not support the view that the MFT Units are intended to be the continuation of the MFC Share such that the Subsidiary could be viewed to have owned the MFT Units without interruption between the Acquisition of Control Date and the Distribution Date.
XXXXXXXXXX
March 4, 2025
Dear Madam,
Subject: Uninterrupted ownership of a capital property by a subsidiary for the purposes of the cost increase provided for in paragraph 88(1)(c)
This letter is in response to your technical interpretation request dated March 1, 2024, in which you asked us to confirm whether the “uninterrupted ownership” condition for a capital property of a subsidiary of a parent corporation under paragraph 88(1)(c) of the Income Tax Act (the “Act”) is satisfied in the following hypothetical situation (the “Hypothetical Scenario”):
1. Aco (“Parent”) is a taxable Canadian corporation;
2. On January 1, 20X0 (the “Date of Acquisition of Control”), Parent acquired all of the issued and outstanding shares of the capital stock of Bco (“Subsidiary”) for $75,000;
3. The only property held by Subsidiary on the Date of Acquisition of Control consisted of one share of the capital stock of a Mutual Fund Corporation (“MFC”) as defined in subsection 131(8). The adjusted cost base (“ACB”) to Subsidiary of the share of the capital stock of MFC was equal to $25,000 and its fair market value (‘FMV’) was equal to $75,000;
4. Subsidiary held the share of the capital stock of MFC (the “Share”) as capital property on the Date of Acquisition of Control;
5. The MFC was managed by a fund manager (the “Fund Manager”) that did not deal or trade with Parent and Subsidiary;
6. On February 1, 20X0 (the “Qualifying Exchange Date”), the MFC was subject to a qualifying exchange under section 132.2 (the “Qualifying Exchange”) pursuant to the Fund Manager's decision to merge all of the mutual funds incorporated as corporations that it was responsible for managing with equivalent mutual funds incorporated as trusts. At no time was Subsidiary consulted by the Fund Manager in connection with that decision;
7. In connection with the Qualifying Exchange, the MFC transferred all or substantially all of the property it held prior to the Qualifying Exchange Date to a mutual fund trust (“MFT”);
8. As a result of the disposition of the Share to MFC in connection with the Qualifying Exchange, Subsidiary received two units of the MFT in exchange for the Share having a ACB, to Subsidiary, of $25,000 and a FMV of $75,000 (the “Units”);
9. On March 1, 20X0, Subsidiary was subject to a short-form vertical amalgamation with Parent pursuant to subsection 87(11) (the “Vertical Amalgamation”);
10. Immediately before the date of the Vertical Amalgamation, Subsidiary held only the Units and had no outstanding indebtedness;
11. Subsidiary did not pay any taxable dividends to Parent prior to the date of the Vertical Amalgamation that would otherwise have been deductible under section 112;
12. As a result of the Vertical Amalgamation, the Units were distributed to Parent (the “Distribution Date”);
13. Subsidiary held the Units as capital property on the Distribution Date;
14. Subsidiary did not engage in any other transactions with respect to the Share and the Units between the Acquisition of Control Date and the Distribution Date;
15. The Units did not constitute ineligible property as defined in subparagraphs 88(1)(c)(iii) to (vi) on the Distribution Date; and
16. Parent wishes to increase the cost of the MFT Units distributed to it on the Distribution Date by $50,000 pursuant to paragraphs 88(1)(c) and (d).
Question:
Did Subsidiary hold, without interruption, the two MFT Units that became property of Parent as a result of the Vertical Amalgamation between the Acquisition of Control Date and the Distribution Date (the "Uninterrupted Ownership Requirement")?
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 ("IC 70-6R12"), dated April 1, 2022. Unless otherwise indicated, all statutory references in this technical interpretation are to provisions of the Act or one of its provisions.
We first note that the wording of paragraph 88(1)(c) and the rules set out in section 132.2 do not include:
(a) any continuity rule under which the MFT is deemed to be the continuation of the MFC after the Qualifying Exchange Date (a “Continuity Rule”), and
(b) any deeming of the MFT Units to be the same property as the MFC share held by the Subsidiary prior to the Qualifying Exchange Date (a “Substituted Property Deeming Rule”)
for the purposes of bumping the cost of the MFT Units under the rules set out in subsection 88(1).
The contextual analysis of paragraph 88(1)(c) and section 132.2 also establishes significant differences in both the legal structure of a MFC and a MFT and the tax treatment applicable to such entities, which must be taken into consideration regardless of the economic reality that may have resulted from the Qualifying Exchange for the Subsidiary (footnote 1).
Finally, the legislative intent behind paragraph 88(1)(c) and the Qualifying Exchange provided for in section 132.2 does not allow for the implicit inclusion of a Continuity Rule or a Substituted Property Deeming Rule in the wording of the above provisions for the purposes of applying the Uninterrupted Ownership Requirement.
Consequently, the Parent could not technically increase the cost of the MFT Units distributed to it on the Vertical Amalgamation under the rules set out in paragraphs 88(1)(c) and (d).
We hope that our comments are helpful.
Best regards,
Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 In this regard, Shell Canada Ltd. v. Queen 99 DTC 5669 (SCC), paragraph 39, confirmed that the economic reality of a situation cannot justify a recharacterization of the true legal relationships established by the taxpayer. In the absence of an express provision to the contrary in the Act or a finding that the transaction in question is a sham; the legal relationships established by the taxpayer must therefore be respected for tax purposes.