Canco held all the shares of FA1 with an ACB and FMV of $100, and $200, respectively, and all the shares of FA2 with an ACB and FMV of $100. FA1 and FA2 merge in an absorptive merger (described in the s. 87(8.2) preamble and in ss. 87(8.1)(a) and (b)) under which FA1 continues as the “surviving corporation,” the existing shares of FA1 held by Canco become shares of the “merged” FA1, FA2 ceases to exist and its shares are cancelled. Does Canco’s ACB of its shares of “merged” FA1 include Canco’s ACB of its “old” FA2 shares? CRA responded:
[T]he shares of FA2 are not exchanged for, and do not become, shares of “merged” FA1. Under paragraph 87(8.2)(f), for the purposes of the definition “foreign merger” in subsection 87(8.1) [such shares]… “are deemed to be exchanged by the shareholders of each such predecessor corporation for shares of the survivor corporation as a consequence of the merger or combination.”
…Reading the words of subsection 87(8.2)…harmoniously with the scheme of the Act…and the intention of Parliament…Canco would be deemed to have received shares of “merged” FA1 for shares of “old” FA2 for purposes of subsection 87(4). As such, immediately after the merger, Canco’s cost of its shares of merged FA1 should be $200.