2018-0749931I7 Subsections 87(1), (1.1) and (4)

Principal Issues: Whether the position described in paragraph 1.74 of the Income Tax Folio S4-F7-C1, Amalgamations of Canadian Corporations (that a shareholder's aggregate ACB of its shares of a predecessor corporation, that are cancelled for no consideration on a horizontal short-form amalgamation, will be added to the cost of the shares of the amalgamated corporation, that are deemed to have been received by the shareholder on the amalgamation pursuant to subsection 87(4)) (the “Folio Position”) is technically correct?

Position: The Folio Position is based on a technical interpretation (document #F9830205, dated May 18, 1999) and is technically correct.

Reasons: The Folio Position is consistent with the tax policy underlying subsections 87(1.1) and (4).

Author: Wong, Daniel
Section: Subsections 87(1), (1.1) and (4)

                                                                                                                        August 15, 2018

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Attention: Susan Amog-Hassall                                                                        2018-074993

Subsections 87(1.1) and (4) – horizontal short-form amalgamation

We are writing in reply to your email enquiry of March 21, 2018, which you advised us that the position described in section 5.3.2 of the Learner’s Guide (Learner’s Guide) for the course on Amalgamations and Wind-ups (TD 1008-000-L Amalgamations and Wind-Ups) was in contrast to the position described in paragraph 1.74 of the Income Tax Folio S4-F7-C1, Amalgamations of Canadian Corporations (Folio).

Section 5.3.2 of the Learner’s Guide states that:

As with the vertical amalgamation, there is no provision in the ITA to preserve the ACB of the cancelled shares when a horizontal short-form amalgamation is involved. The solution in this case may be for the amalgamation to take place pursuant to sections 182 and 183 rather than section 184 of the CBCA.

If the subsidiaries do a conventional amalgamation, their common parent will exchange all of the shares of each subsidiary for shares of the amalgamated company in which case, subsection 87(4) of the ITA will apply to the shares of every amalgamating subsidiary not just one. Subsection 87(4) provides for a rollover of the ACB of the old shares to the new issue, as we shall see later in the lesson.

However, paragraph 1.74 of the Folio states that:

Where shares of a predecessor corporation are cancelled for no consideration pursuant to a short-form horizontal amalgamation, the adjusted cost base of such cancelled shares to the shareholder will be added to the cost of the common shares of the new corporation which are deemed to have been received by the shareholder on the amalgamation under subsection 87(1.1).

Consequently, you queried whether there was any ruling or technical interpretation that was issued previously by the Income Tax Rulings Directorate on which paragraph 1.74 of the Folio relied.

Our comments

We confirm that paragraph 1.74 of the Folio is based on a technical interpretation (document #F9830205, dated May 18, 1999), and that remains the CRA’s policy.

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We trust these comments will be of assistance. If you require further information, please do not hesitate to contact Daniel Wong at 613-670-9008.

Yours truly,

David Palamar
Section Manager
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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