2019-0824491C6 2019 CTF - Q13 - Triangular Amalgamation

Principal Issues: Whether an additional corporation can be used in a triangular amalgamation to increase the cost of shares that are received by a corporation that indirectly wholly-owns the corporation resulting from the amalgamation.

Position: The use of the additional corporation to avoid the limitation on cost imposed by paragraphs 87(9)(a.4) and 87(9)(c) could be subject to the application of GAAR. The views expressed in the 1991 documents are no longer valid.

Reasons: See document.

Author: Ton-That, Marc
Section: 87(9)(a.4), 87(9)(c), 245(2)

2019 CTF Annual Conference

CRA Roundtable

Question 13: Triangular Amalgamation

Facts

1.    Mergeco and Targetco amalgamate to form Amalco, and the Former Targetco Shareholders receive shares of Parentco under subsection 87(9).
2.    In consideration for the issuance of Parentco shares to the Former Targetco Shareholders, Targetco issues its shares to Parentco having a FMV equal to the FMV of the Parentco shares issued to Former Targetco Shareholders.

In CRA documents February 1991-110 and February 1991-108, the CRA confirmed that the compensatory shares so issued by Holdco to Parentco would have a FMV tax basis.

Will the CRA confirm if this position is still applicable?

CRA Response

We understand the question is based on the following fact situation:

1.    Subco is a wholly-owned subsidiary of Parentco.
2.    Parentco owned no shares in Targetco.
3.    Subco, Targetco and Parentco are taxable Canadian corporations.
4.    Subco and Targetco amalgamate to form Amalco.
5.    The amalgamation is effected in the following manner:
a.    The former shareholders of Targetco receive shares of Parentco; and
b.    In consideration for Parentco issuing its shares to the former shareholders of Targetco, Amalco issues compensatory shares to Parentco having a FMV equal to the FMV of the shares of Parentco issued to the former shareholders of Targetco (we do not believe that it would be possible for Parentco to have a cost in the shares of Targetco immediately before the amalgamation for purposes of the application of subsection 87(4) on the basis that Parentco had issued its own shares on the amalgamation in consideration for the acquisition of shares of Targetco prior to the amalgamation because that was not the case.  Parentco has issued its shares on the amalgamation in order to acquire shares of Amalco and has not issued its shares on, or for, the acquisition of shares of Targetco.  Furthermore, if Parentco had acquired Targetco shares prior to the amalgamation from the former shareholders of Targetco, the application of rollover provisions such as subsection 85(1) or 85.1(1) would have to be considered to avoid a taxable event for the vendors.)

In the situation described above, all the shares received by Parentco from Amalco are subject to the application of paragraphs 87(9)(a.4) and 87(9)(c).  As such, the cost of the shares of Amalco held by Parentco will not be derived from the value of the consideration given, i.e., shares issued by Parentco, to acquire the shares of Amalco.

Taxpayers may try to avoid the above results by structuring the transactions as follows:
1.    Subco is a wholly-owned subsidiary of Midco.
2.    Midco is a wholly-owned subsidiary of Parentco.
3.    Parentco owned no shares in Targetco.
4.    Subco, Midco, Targetco and Parentco are taxable Canadian corporations.
5.    Subco and Targetco amalgamate to form Amalco.
6.    The amalgamation is effected in the following manner:
a.    The former shareholders of Targetco receive shares of Parentco.
b.    In consideration for Parentco issuing its shares to the former shareholders of Targetco, Midco issues compensatory shares to Parentco having a FMV equal to the FMV of the shares of Parentco issued to the former shareholders of Targetco.
c.    In consideration for Midco issuing shares to Parentco, Amalco issues compensatory shares to Midco having a FMV equal to the FMV of the shares of Midco issued to Parentco.

As discussed above, the shares of Amalco received by Midco are subject to the application of paragraphs 87(9)(a.4) and 87(9)(c) but the shares of Midco received by Parentco are not.

Where an amalgamation is subject to the application of subsection 87(9) and is structured in a manner to frustrate the application of paragraphs 87(9)(a.4) and 87(9)(c), it would potentially be subject to the application of GAAR.  If the use of Midco in this situation in order to achieve an increase in cost that would otherwise not be available on the application of paragraphs 87(9)(a.4) and 87(9)(c) had the triangular amalgamation not involved its use, it would constitute an avoidance transaction under subsection 245(3) if it was not done primarily for bona fide purposes other than to obtain the tax benefit.

On a prospective basis, taxpayers should not rely on documents February 1991-110 and February 1991-108 (also referred to as document 903669) without considering the potential application of the GAAR.  More specifically, the views expressed by the CRA in such documents will only apply to triangular amalgamations implemented before March 31, 2020 as part of a series of transactions or an arrangement that was substantially advanced, as evidenced in writing, before December 3, 2019.

Marc Ton-That
2019-082449
December 3, 2019

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