2017-0734841C6 2017 TEI – Question E3

Principal Issues: Joint election under proposed paragraph 87(8.4)(e) and its interaction with section 116.

Position: See responses below.

Reasons: Administrative position.

Author: Eroff, Ina
Section: 87(8.4), (8.5), 116

TEI – CRA Liaison Meeting – December 5, 2017

Question E3 - Section 116 procedures for tax-deferred dispositions of taxable Canadian property on foreign mergers

Background

On September 16, 2016, the Department of Finance released draft legislation (proposed subsections 87(8.4) and (8.5)) to provide a mechanism for deferral of recognition of gains and losses from dispositions of shares of Canadian-resident corporations caused by certain foreign mergers, provided such shares are “taxable Canadian property” (“TCP”) and do not constitute “treaty-protected property.” In general terms, provided the conditions in proposed subsection 87(8.4) are met, a “subject share” will be deemed to have been disposed by the “disposing predecessor foreign corporation” to the “new corporation” resulting from the foreign merger for proceeds of disposition equal to the adjusted cost base of the subject share to the disposing predecessor foreign corporation immediately before the foreign merger. The new corporation will be deemed to have a cost in the subject share equal to such proceeds of disposition.

Subsequently, on October 25, 2017 the Department of Finance released revised legislative proposals, followed on October 27 by Bill C-63 (“Bill C-63”), which expanded the scope of the tax-deferral mechanism of subsections 87(8.4) and (8.5) to also include joint elections made in connection with dispositions of certain TCP (that is not treaty-protected property) that are interests in partnerships and interests in trusts.  The revised wording in subsections 87(8.4) and (8.5) of Bill C-63 also contains details concerning the joint election mechanism, which had not been outlined in the original September 16, 2016 proposals. The draft proposals of subsections 87(8.4) and (8.5) in Bill C-63 apply to foreign mergers that occur after September 15, 2016. 

The questions posed to the CRA were based on the September 16, 2016 draft legislation.  We have adapted our responses as appropriate to incorporate the amended proposals contained in Bill C-63.

Part A of Question E3: 

Under proposed subsection 87(8.4), the new corporation and the disposing predecessor foreign corporation must make a joint election in accordance with prescribed rules. For foreign mergers occurring after September 15, 2016, will the CRA accept elections for the tax-deferred treatment of dispositions under proposed subsection 87(8.5) prior to enactment of the legislation?

CRA’s Response to Part A:

The revised wording in draft paragraph 87(8.4)(e) of Bill C-63 no longer states that the joint election is to be made in accordance with prescribed rules. Rather the revised wording indicates that the joint election is to be made in writing and filed within certain specified timeframes.

It has been the CRA’s longstanding practice to generally ask taxpayers to file on the basis of proposed legislation. Consequently, for foreign mergers occurring after September 15, 2016 but prior to the enactment of proposed subsections 87(8.4) and 87(8.5), the CRA would accept elections properly made pursuant to proposed paragraph 87(8.4)(e).  However, we would also note that the coming into force provisions for subsections 87(8.4) and (8.5) in Bill C-63 state that a joint election made pursuant to paragraph 87(8.4)(e) will be deemed to have been filed on a timely basis if it is filed on or before the day that is six months after the day on which draft proposals of subsections 87(8.4) and (8.5) in Bill C-63 receive Royal Assent.

Part B of Question E3:

Please provide guidance on the manner of and form for making the joint election in proposed paragraph 87(8.4)(e). 

CRA’s Response to Part B:

Bill C-63 states that the joint election is to be made in writing.  In the CRA’s view, it would be acceptable that this election in writing be made in the form of a letter.

As stated in Bill C-63, the joint election is to be filed on or before the filing-due date of the disposing predecessor foreign corporation (or the date that would be its filing-due date if subsection (8.5) did not apply to provide for a tax-deferred disposition) for the taxation year that includes the time of the disposition.

Part C of Question E3:

A disposition of a subject share, as described in proposed subsection 87(8.4), would, in most circumstances, be subject to the provisions of section 116. Will the CRA extend its position in paragraph 1.82 of Income Tax Folio S4-F7-C1, Amalgamations of Canadian Corporations, to dispositions of subject shares for which elections will be made under proposed paragraph 87(8.4)(e)? 

CRA’s Response to Part C:

The CRA is not prepared at this time to extend the narrow administrative concession to the new proposed legislative measures in subsections 87(8.4) and (8.5). Therefore, where a foreign merger results in a disposition of TCP by a predecessor foreign corporation, the taxpayer should comply with the requirements in section 116. 

Part D of Question E3: 

If the CRA is not prepared to extend the position to exempt dispositions of subject shares from section 116 notification procedures, please provide guidance on how the CRA will review notifications for dispositions of subject shares submitted prior to the enactment of the proposed legislation. Specifically, would the CRA be prepared to issue clearance certificates in respect of a disposition of subject shares on the basis that the proceeds of disposition of the subject shares will be equal to their adjusted cost base to the disposing predecessor foreign corporation? Given that the proceeds of disposition for the subject shares will be deemed to be equal to their adjusted cost base to the disposing predecessor foreign corporation, will the CRA require a valuation of the subject shares to be submitted with the notification in order to issue clearance certificates?

CRA’s Response to Part D:

For foreign mergers occurring after September 15, 2016 but prior to the enactment of the proposed subsections 87(8.4) and (8.5), the CRA would generally be prepared to issue certificates of compliance on the basis that the proceeds of disposition for the shares disposed of on the merger are equal to their adjusted cost base to the disposing predecessor foreign corporation, provided an otherwise valid joint election under proposed paragraph 87(8.4)(e) is made in respect of the disposition.

For dispositions of shares in respect of which a valid joint election is made pursuant to proposed paragraph 87(8.4)(e) the CRA would generally not require that documentation be initially filed with the section 116 notification to support the fair market value of the shares on the date of the transaction in order to issue a certificate of compliance under section 116.  The CRA would, however, require documentation to support the adjusted cost base of the shares to the disposing predecessor foreign corporation.

Pursuant to the October 25, 2017 draft proposals and Bill C-63, the above response would also apply for section 116 purposes in connection with valid joint elections that are filed in connection with partnership and trust interests.

Ina Eroff
Ann Kippen
2017-073484
December 5, 2017

Response prepared in collaboration with:
Claudio DiRienzo
International Waivers and Dispositions Section
Domestic Compliance Programs Branch

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