2014-0550641E5 Absorptive merger-exchange of shares

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether exchange rule in paragraph 87(8.2)(f) applies for purposes of subsections 87(4) and 87(8)

Position: Yes

Reasons: Textual, contextual and purposive reading of subsection 87(8.2)

Author: Meek, John

Section: Subsections 87(4), (8), (8.1) and (8.2)

XXXXXXXXXX                                      2014-055064
                                                              John Meek
                                                              (416) 954-6038

July 8, 2015


RE:  Interaction of subsections 87(4), (8), (8.1) and (8.2) of the Income Tax Act (the “Act”)

This letter is in response to your facsimile of October 15, 2014, wherein you asked for our views regarding the interaction of the above provisions of the Act in the context of the following hypothetical scenario.

(1)   A corporation resident in Canada (“Canco”) owns all the shares of two foreign affiliate’s - FA1 and FA2;

(2)   FA1 and FA2 are governed under the same foreign corporate law;

(3)   FA1 and FA2 merge (“the merger”) in a merger (an “absorptive merger”) described in the preamble of subsection 87(8.2) of the Act, and in a manner that the conditions set out in paragraphs (a) and (b) of subsection 87(8.1) are met;

(4)   under the merger agreement

(a)   FA1 continues as the same legal entity under foreign law and is the “surviving corporation” for the purposes of subsection 87(8.2);

(b)   Canco’s existing shares of FA1 become shares of the “merged” FA1;

(c)   FA2 ceases to exist under the relevant foreign law and its shares are cancelled; and

(d)   no additional shares of the merged FA1 are issued in “exchange” for the FA2 shares – the FA2 shares are simply cancelled; and

(5)   immediately before the merger

(a)   Canco’s adjusted cost base (“ACB”) as that term is defined in subsection 54(1) of the Act of its FA1 shares was $100 and the FMV of those shares was $200; and

(b)   Canco’s ACB of its FA2 shares was $100 and the FMV of those shares was $100.

Specifically, you requested our view whether, based on the facts set out above, Canco’s ACB of its shares of “merged” FA1 includes Canco’s ACB of its “old” FA2 shares.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  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 IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations however, we offer the following general comments, which may be of assistance to you.

(i)   Background

Where a taxpayer owns shares of a corporation resident in Canada (“Canco”) and Canco is a party to an “amalgamation”, together with one or more other taxable Canadian corporations, and the taxpayer and all other shareholders receive shares of the amalgamated company (“Newco”), subsection 87(4) provides rules as to (a) the taxpayer’s proceeds of disposition of its Canco shares, and (b) the taxpayer’s cost of its Newco shares. If Canco was actually a foreign corporation and a foreign affiliate (“FA”) of the taxpayer, and FA was a party to a “foreign merger”, subsection 87(8) provides rules that allow the rules in 87(4) to apply to that “foreign merger” in the same manner as if the foreign merger was an “amalgamation”. Subsection 87(8.1) defines a “foreign merger”. If a merger is an “absorptive merger”, subsection 87(8.2) provides reading rules for purposes of subsection 87(8.1).

The subject of this technical interpretation request is whether the reading rules in subsection 87(8.2) apply for purposes of subsection 87(8), and also by extension to subsection 87(4).

(ii)  Discussion

The underlying cause of the uncertainty for which the technical interpretation request seeks clarification is the fact that in the above facts the shares of FA2 are simply cancelled, and no additional shares of “merged” FA1 are issued in exchange for the “old” FA2 shares. The preamble in subsection 87(8) requires there to be a “foreign merger in which a taxpayer's shares or options to acquire shares of the capital stock of a corporation that was a predecessor foreign corporation immediately before the merger were exchanged for or became shares or options to acquire shares of the capital stock of the new foreign corporation or the foreign parent corporation”. 

In the above facts, the 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), “all of the shares of the capital stock of each predecessor foreign corporation (other than the survivor corporation) that were outstanding immediately before the merger or combination and that cease to exist as a consequence of the merger or combination 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”. As such, the condition in paragraph 87(8.1)(c) would be met in respect of the shares of both “old” FA1 and FA2, with the result that the merger of FA1 and FA2 as described above would be a “foreign merger”. Since all the shares of “merged” FA1 will be owned by Canco, the merger should not be a merger described in subsection 87(8.3).

In our view the merger would, for purposes of subsection 87(8), be a “foreign merger in which a taxpayer’s shares … of the capital stock of a corporation that was a predecessor corporation immediately before the merger were exchanged for or became shares … of the capital stock of the new foreign corporation” since the rules in subsection 87(8.2) apply for purposes of determining whether a particular merger is a “foreign merger” for purposes of, inter-alia, section 87. 

Subsection 87(8.2) is clearly intended to be a relieving provision.  In the Explanatory Notes issued by the Department of Finance in connection with the introduction of subsection 87(8.2), it was stated:

“New subsection 87(8.2) of the Act clarifies the circumstances in which certain foreign "absorptive mergers" will qualify as "foreign mergers" under subsection 87(8.1) of the Act. This rule is mainly designed to ensure that certain common forms of U.S. mergers qualify for the rollover provisions that are provided for in the foreign affiliate rules, as well as in other areas of the Act.

This new subsection applies in respect of mergers or combinations that occur after 1994. However, taxpayers may elect to have it apply only in respect of mergers or combinations that occur after August 19, 2011”. (italics added)

Reading the words of subsection 87(8.2) in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament, we are also of the view that in the case of an absorptive merger described in the preamble of subsection 87(8.2) (and that is not a merger described in subsection 87(8.3)), 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.

We trust our comments are of assistance.

Yours truly


Olli Laurikainen, CPA, CA
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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