2015-0614981E5 Foreign Share for share Exchange

Principal Issues: In the context of a foreign share for share exchange, where a vendor receives newly-issued shares of the purchaser and non-share consideration for each exchanged share, but the purchaser's offer does not indicate which fraction of each exchanged share is exchanged in consideration for the newly issued shares of the purchaser and which fraction of each exchanged share is exchanged for non-share consideration, can the rollover in subsection 85.1(5) still apply to the portion of the tendered shares that are exchanged solely for share consideration?

Position: No

Reasons: Where the purchaser’s offer does not clearly specify the fractional information noted in point 2 of paragraph 1.7 of the Folio, the requirements of 85.1(5) will not be met in a situation where a vendor receives newly issued shares of the purchaser and non-share consideration for each exchanged share.

Author: Patel, Komal
Section: 85.1(5), 85.1(6)

XXXXXXXXXX                                                                                                             K. Patel
                                                                                                                                     2015-061498
August 23, 2016

Dear Ms. XXXXXXXXXX:

Re:  Subsection 85.1(5) and Non-share Consideration

We are writing in response to your email dated October 1, 2015, in which you requested our views on the application of CRA’s comments detailed in point 2 of paragraph 1.7 of Folio S4-F5-C1, Share for Share Exchange (the “Folio”) (dated November 23, 2015) as well as CRA technical interpretation 2011-0392891I7 to a foreign share for share exchange. More specifically, the scenario you described involves an exchange of shares of a foreign public company (“Foreign Target”) by a Canadian partnership (“Vendor”) where the Vendor receives newly issued shares of another foreign public company (“Foreign Purchaser”) and non-share consideration for each exchanged share. We apologize for the delay in responding.

Specifically you have asked us whether a rollover under subsection 85.1(5) will be available for the portion of each Foreign Target share that was exchanged for shares of Foreign Purchaser where the purchaser’s offer does not specify which fraction of each exchanged share is exchanged in consideration for the newly issued shares of Foreign Purchaser and which fraction of each exchanged share is exchanged for non-share consideration. 

Furthermore, you have advised us that:

*     All of the conditions required for the application of subsection 85.1(5) are met except that a portion of each Foreign Target share was disposed of for cash.

The fraction of each share of Foreign Target that was disposed of for cash was not quantified in the purchaser’s offer, but the actual amount of cash received for each share tendered was.  The fraction of the total consideration that this cash represents could not be determined until the date of the exchange because the total exchange consideration was dependent upon the average trading price of Foreign Purchaser’s shares (within a fixed range) immediately before the exchange.

Unless otherwise stated, references in this letter to a subsection or subparagraph refer to the provisions of the Income Tax Act (Canada) (the “Act”).

Our Comments

This technical interpretation provides general comments about the provisions of the Act.  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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.  Nevertheless, we offer the following general comments on the Canadian tax implications, which we hope are of assistance to you.

Subsection 85.1(5) generally applies where a corporation resident in a country other than Canada (i.e., a foreign purchaser) issues shares of its capital stock to a vendor in exchange for shares of the capital stock of another corporation resident in a country other than Canada that were immediately before the exchange capital property of the vendor. Where the conditions of subsection 85.1(5) are met, a rollover is available on the disposition of the shares held by the vendor such that no gain or loss is realized on the exchange.

Subsection 85.1(6) specifies the conditions required to be met in order for subsection 85.1(5) to apply. Pursuant to paragraph 85.1(6)(c), where non-share consideration is received by the vendor, subsection 85.1(5) is generally not applicable, subject to specific exceptions. We note that in the context of the question at hand, the CRA’s interpretation of the law as it relates to the receipt of newly issued shares of the purchaser and non-share consideration for each exchanged share is outlined in point 2 of paragraph 1.7 of the Folio and reads as follows:

“Subsection 85.1(1) may apply where a vendor receives newly issued shares of the purchaser and non-share consideration for each exchanged share.  The purchaser’s offer must clearly indicate which fraction of each exchanged share is exchanged in consideration for the newly issued shares of the purchaser and which fraction of each exchanged share is exchanged for non-share consideration.  The vendor must report any gain or loss from the disposition of the fraction of each exchanged share for which non-share consideration was received.”

The Folio is written in the context of domestic share for share exchanges; however, we note that the position in point 2 of paragraph 1.7 would equally apply to a foreign share for share exchange pursuant to the comments previously provided in technical interpretation 2000-0000765. Nonetheless, where the purchaser’s offer does not clearly specify the fractional information noted in point 2 of paragraph 1.7 of the Folio, it is our view that the requirements of 85.1(5) will not be met in a situation where a vendor receives newly issued shares of the purchaser and non-share consideration for each exchanged share.

Finally, we note that you referred to CRA technical interpretation 2011-0392891I7 in your question. We note that this technical interpretation is not directly applicable to the question at hand as it contemplates a scenario involving the receipt of non-share consideration in lieu of fractional shares of the purchaser in an exchange transaction.

We trust that our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2016

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2016