2022-0958521R3 foreign absorptive mergers

Principal Issues: 1. Does subsection 87(4) apply to each of the foreign absorptive mergers? 2. Will there be a disposition of assets for Canadian tax purposes by a surviving corporation in the foreign absorptive mergers? 3. Does the XXXXXXXXXX Treaty apply to gains, if any, realized on certain share transfers? 4. Will certain transactions be excluded from the definition of "disposition" in subsection 248(1)?

Position: 1. Yes. 2. No. 3. Yes. 4. Yes.

Reasons: 1. Each of the foreign absorptive mergers meet the conditions required for subsection 87(4) to apply. 2. The surviving corporations in each of the foreign absorptive mergers do not cease to exist under the relevant foreign law. 3. The gains, if any, realized on the share transfers are only taxable in the XXXXXXXXXX in accordance with Article XIII(4) of the XXXXXXXXXX Treaty. 4. The transactions are excluded from the definition of disposition in subsection 248(1) in accordance with paragraph (n) of that definition.

Author: XXXXXXXXXX
Section: section 54 “adjusted cost base”; paragraph 69(1)(b); subsections 87(4); 87(8); 87(8.1); 87(8.2); 248(1) “disposition”; and 248(1) “taxable Canadian property”; Article XIII of the XXXXXXXXXX Treaty.

XXXXXXXXXX                                                                       2022-095852

XXXXXXXXXX, 2023

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
       XXXXXXXXXX

We are writing in response to your request for an advance income tax ruling (“Ruling request”) dated XXXXXXXXXX, and as modified by way of your email on XXXXXXXXXX, on behalf of the above-named taxpayer. We also acknowledge the information provided in email correspondence in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the proposed transactions and/or issues involved in the Ruling request are the same as or substantially similar to transactions or issues that are:

(i) in a previously filed tax return of the taxpayer or a related person;

(ii) being considered by the CRA in connection with any such tax;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The principal office addresses, tax account numbers, and Tax Services Offices of the taxpayers involved are as follows:

XXXXXXXXXX

Unless otherwise stated, all statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”).

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

DEFINITIONS

“ACB” means adjusted cost base, as that term is defined in Section 54;

“Business” means the business of XXXXXXXXXX;

“Corporation” means a XXXXXXXXXX, or private limited company, formed under the laws of XXXXXXXXXX;

“Country 1” means the XXXXXXXXXX;

“Country 1 Treaty” means The Convention Between Canada and XXXXXXXXXX;

“Country 2” means the XXXXXXXXXX; and

“Country 2 Treaty” means The Convention Between Canada and the XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“FMV” means fair market value;

“PUC” means paid-up capital, as that term is defined in subsection 89(1);

“Taxpayer 1 Group” means a multinational group of entities, including but not limited to, corporations of which Taxpayer 1 is the parent company;

“Taxpayer 1” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX, and whose shares are listed and actively traded on the XXXXXXXXXX;

“Taxpayer 2” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX;

“Taxpayer 3” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX;

“Taxpayer 4” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX;

“Taxpayer 5” means XXXXXXXXXX, a Corporation formed under the laws of Country 1 and which was incorporated in XXXXXXXXXX;

“Taxpayer 6” means a new corporation that will be formed under the laws of XXXXXXXXXX;

“Taxpayer 7” XXXXXXXXXX, a Corporation formed under the laws of Country 1;

“Taxpayer 8” means XXXXXXXXXX, a Corporation formed under the laws of Country 1;

“Taxpayer 9” means XXXXXXXXXX, a Corporation formed under the laws of Country 1;

“Taxpayer 10” means XXXXXXXXXX, a Corporation formed under the laws of Country 1;

“Taxpayer 11” means XXXXXXXXXX, a Corporation formed under the laws of Country 1;

“Taxpayer 12” means XXXXXXXXXX, an unlimited liability corporation formed under the laws of XXXXXXXXXX;

“The Taxpayers” means collectively Taxpayer 1, Taxpayer 2, Taxpayer 3, Taxpayer 4, Taxpayer 5, and Taxpayer 6; and

“TCP” means taxable Canadian property as defined in subsection 248(1).

FACTS

1. Taxpayer 1 is the parent company of a multinational group of companies that are involved in the Business.

2. Taxpayer 1 is a non-resident of Canada for purposes of the Act, a resident of Country 2 for purposes of the Country 2 Treaty and is a “qualifying person” for purposes of the Country 2 Treaty.

3. The shares of Taxpayer 1 are widely-held and no person or group of persons controls Taxpayer 1.

4. Taxpayer 1 owns all the issued and outstanding shares of Taxpayer 2. Taxpayer 2 is, and at all relevant times was, a non-resident of Canada for purposes of the Act, a resident of Country 2 for purposes of the Country 2 Treaty, and is a “qualifying person” for purposes of the Country 2 Treaty.

5. Taxpayer 2 owns all the issued and outstanding shares of Taxpayer 3. Taxpayer 3 is, and at all relevant times was, a non-resident of Canada for purposes of the Act, a resident of Country 2 for purposes of the Country 2 Treaty, and is a “qualifying person” for purposes of the Country 2 Treaty.

6. Taxpayer 3 owns all the issued and outstanding shares of Taxpayer 4. Taxpayer 4 is, and at all relevant times was, a non-resident of Canada for purposes of the Act, a resident of Country 2 for purposes of the Country 2 Treaty, and is a “qualifying person” for purposes of the Country 2 Treaty.

7. Taxpayer 4 owns all the issued and outstanding shares of Taxpayer 5, excluding one share held directly by Taxpayer 1. Taxpayer 5 has one class of shares outstanding. Taxpayer 5 is, and at all relevant times was, a non-resident of Canada for the purposes of the Act and a resident of Country 1 for the purposes of the Country 1 Treaty.

8. Taxpayer 5 holds shares of Taxpayer 1 Group companies with operations directly or indirectly in several countries including XXXXXXXXXX. Taxpayer 5 acts as a centralized worldwide holding company for much of Taxpayer 1 Group’s Business assets and XXXXXXXXXX businesses. Taxpayer 5 has also engaged in intercompany lending to provide capital to Taxpayer 1 Group’s operations. Currently the only outstanding loan is a XXXXXXXXXX loan to Taxpayer 1. Taxpayer 5 has not made a loan to or received a loan from any Canadian entity since XXXXXXXXXX.    

9. Taxpayer 5 owns all of the issued and outstanding shares of Taxpayer 9. Taxpayer 9 has one class of shares outstanding. Taxpayer 9 is, and at all relevant times was, a non-resident of Canada for the purposes of the Act and a resident of Country 1 for purposes of the Country 1 Treaty.

10. Taxpayer 9 owns all of the issued and outstanding shares of Taxpayer 10. Taxpayer 10 has one class of shares outstanding. Taxpayer 10 is, and at all relevant times was, a non-resident of Canada for the purposes of the Act and a resident of Country 1 for purposes of the Country 1 Treaty.

11. Taxpayer 10 owns all of the issued and outstanding shares of Taxpayer 11. Taxpayer 11 has one class of shares outstanding. Taxpayer 11 is, and at all relevant times was, a non-resident of Canada for the purposes of the Act and a resident of Country 1 for purposes of the Country 1 Treaty.

12. Taxpayer 11 owns all of the issued and outstanding shares of Taxpayer 12. Taxpayer 12 is, and at all relevant times was, a resident of Canada for the purposes of the Act and a resident of Canada for purposes of the Country 2 Treaty and the Country 1 Treaty.

13. At all relevant times the central management and control of Taxpayer 5, Taxpayer 9, Taxpayer 10, Taxpayer 11, and Taxpayer 7 was exercised solely in Country 1.

14. At the time of the proposed transactions, the shares of Taxpayer 5, Taxpayer 9, Taxpayer 10, Taxpayer 11 and Taxpayer 12 constitute TCP on the basis that (i) the shares of the capital stock are not listed on a designated stock exchange, and (ii) more than 50% of the FMV of the share was derived directly or indirectly from real or immovable property situated in Canada and Canadian resource properties.

15. At all relevant times none of Taxpayer 1, Taxpayer 2, Taxpayer 3, Taxpayer 4, Taxpayer 5 or Taxpayer 6 have carried on a business in Canada.

Additional Relevant Facts

16. Taxpayer 5 owns all of the issued and outstanding shares of Taxpayer 7. Taxpayer 7 is not in the same ownership chain as Taxpayer 12 and its shares do not constitute TCP.

17. Taxpayer 5 and Taxpayer 7 own all of the issued and outstanding shares of Taxpayer 8. Taxpayer 8 is not in the same ownership chain as Taxpayer 12 and its shares do not constitute TCP.

18. Downstream absorptive merger: Under the corporate law of Country 1, where one Corporation formed under the laws of Country 1 (“Corporation1”) merges into another Corporation formed under the laws of Country 1 (“Corporation2”), and all of the shares of Corporation2 are held by Corporation1; (i) Corporation2 continues to exist as the same legal entity; (ii) Corporation2 does not dispose of its assets or liabilities (other than amounts receivable by Corporation2 from Corporation1 or owing by Corporation2 to Corporation1); (iii) all of the assets and liabilities of Corporation1 (other than amounts receivable by Corporation1 from Corporation2 or owing by Corporation1 to Corporation2 and the shares of Corporation2 held by Corporation1) are transferred to Corporation2 under a XXXXXXXXXX; (iv) the shares in Corporation1 and Corporation2 are cancelled and cease to exist; and (v) Corporation2 allocates new shares to the current shareholder(s) of Corporation1.

19. Upstream absorptive merger: Under the corporate law of Country 1, where one Corporation formed under the laws of Country 1 (“Corporation4”) merges into another Corporation formed under the laws of Country 1 (“Corporation3”), and all of the shares of Corporation4 are held by Corporation3; (i) Corporation3 continues to exist as the same legal entity; (ii) Corporation3 does not dispose of its assets or liabilities (other than amounts receivable by Corporation3 from Corporation4 or owing by Corporation3 to Corporation4 and the shares of Corporation4 held by Corporation3); (iii) all of the assets and liabilities of Corporation4 (other than amounts receivable by Corporation4 from Corporation3 or owing by Corporation4 to Corporation3) are transferred to Corporation3 under a XXXXXXXXXX; (iv) the shares of Corporation4 are cancelled and cease to exist; and (v) the current shareholder(s) of Corporation3 continue to hold their shares of Corporation3.

20. The following requests are to be made for a certificate of compliance from the CRA under section 116 (or notification on Form T2062C, Notification of an acquisition of treaty-protected property from a non-resident vendor):

a. Step 1 - the non-resident vendor is Taxpayer 1 and the purchaser is Taxpayer 2 for the disposition of one (1) common share of Taxpayer 5;

b. Step 2 - the non-resident vendor is Taxpayer 2 and the purchaser is Taxpayer 3 for the disposition of one (1) common share of Taxpayer 5;

c. Step 3 - the non-resident vendor is Taxpayer 3 and the purchaser is Taxpayer 4 for the disposition of one (1) common share of Taxpayer 5;

d. Step 4 - the non-resident vendor is Taxpayer 4 and the purchaser is Taxpayer 6 for the disposition of all issued and outstanding common shares of Taxpayer 5;

e. Step 5 - the non-resident vendor is Taxpayer 6 for the disposition of all issued and outstanding common shares of Taxpayer 5;

f. Step 5 - there is no non-resident vendor and the purchaser is Taxpayer 6 for the acquisition of all issued and outstanding common shares of Taxpayer 9;

g. Step 8 - the non-resident vendor is Taxpayer 6 for the disposition of all issued and outstanding common shares of Taxpayer 9;

h. Step 8 - there is no non-resident vendor and the purchaser is Taxpayer 6 for the acquisition of all issued and outstanding common shares of Taxpayer 10;

i. Step 9 - the non-resident vendor is Taxpayer 6 for the disposition of all issued and outstanding common shares of Taxpayer 10; and

j. Step 9 – there is no non-resident vendor and the purchaser is Taxpayer 6 for the acquisition of all issued and outstanding common shares of Taxpayer 11.

21. No elections will be filed in any of the Taxpayers’ returns of income for the taxation year in which the proposed transactions occur to not have subsection 87(8) apply.

PROPOSED TRANSACTIONS

The following proposed transactions will occur in the order presented below.

22. Step 1 - Taxpayer 1 will transfer its one share of Taxpayer 5 to Taxpayer 2 as a capital contribution (no additional shares issued).

23. Step 2 - Taxpayer 2 will transfer its one share of Taxpayer 5 to Taxpayer 3 as a capital contribution (no additional shares issued).

24. Step 3 - Taxpayer 3 will transfer its one share of Taxpayer 5 to Taxpayer 4 as a capital contribution (no additional shares issued).

25. Step 4(a) - Taxpayer 4 will establish Taxpayer 6. Taxpayer 6 will be taxable as a corporation for Country 2 tax purposes and will be a non-resident of Canada for purposes of the Act, a resident of Country 2 for purposes of the Country 2 Treaty, and a “qualifying person” for purposes of the Country 2 Treaty.

Step 4(b) - Taxpayer 4 will transfer 100% of the issued and outstanding shares of Taxpayer 5 to Taxpayer 6 as a capital contribution (no additional shares issued).

26. Step 5 - Taxpayer 5 will merge into Taxpayer 9 with Taxpayer 9 as the surviving entity under Country 1 law.

27. Step 6 - Taxpayer 10 and Taxpayer 11 will make a Country 2 “check the box” election to be treated as a disregarded entity for Country 2 tax purposes.

28. Step 7 - Taxpayer 7 will merge into Taxpayer 9 with Taxpayer 9 as the surviving entity under Country 1 law.

29. Step 8 - Taxpayer 9 will merge into Taxpayer 10 with Taxpayer 10 as the surviving entity under Country 1 law.

30. Step 9 - Taxpayer 10 will merge into Taxpayer 11 with Taxpayer 11 as the surviving entity under Country 1 law.

31. Step 10 - Taxpayer 11 will distribute 100% of the issued and outstanding shares of Taxpayer 8 to Taxpayer 6.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to permit Taxpayer 1 Group to reduce the number of corporate entities within its organizational structure. In particular, Taxpayer 1 Group is looking to eliminate four of its Country 1 legal entities in order to streamline operations, and reduce the amount of overhead costs associated with maintaining its corporate structure. Taxpayer 6 has the intended benefit of consolidating Canadian and certain other country operations under a separate Country 2 entity, distinct from Taxpayer 4’s other operations/holdings. Taxpayer 6 will essentially replace Taxpayer 5 and will ensure that the proposed transactions qualify as a tax-deferred reorganization for Country 2 tax purposes.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we confirm the following:

A. Paragraph 4 of Article XIII of the Country 2 Treaty will apply to exempt from Canadian tax the gain, if any, realized by Taxpayer 1 on the disposition of its one share of Taxpayer 5 to Taxpayer 2 as described in paragraph 22 above and Taxpayer 2’s ACB in the share of Taxpayer 5 will be equal to the FMV of the share at the time of acquisition.

B. Paragraph 4 of Article XIII of the Country 2 Treaty will apply to exempt from Canadian tax the gain, if any, realized by Taxpayer 2 on the disposition of its one share of Taxpayer 5 to Taxpayer 3 as described in paragraph 23 above and Taxpayer 3’s ACB in the share of Taxpayer 5 will be equal to the FMV of the share at the time of acquisition.

C. Paragraph 4 of Article XIII of the Country 2 Treaty will apply to exempt from Canadian tax the gain, if any, realized by Taxpayer 3 on the disposition of its one share of Taxpayer 5 to Taxpayer 4 as described in paragraph 24 above and Taxpayer 4’s ACB in the share of Taxpayer 5 will be equal to the FMV of the share at the time of acquisition.

D. Paragraph 4 of Article XIII of the Country 2 Treaty will apply to exempt from Canadian tax the gain realized by Taxpayer 4 on the disposition of all the issued and outstanding shares of Taxpayer 5 to Taxpayer 6 as described in paragraph 25 above and Taxpayer 6’s ACB in the shares of Taxpayer 5 will be equal to the FMV of the shares of Taxpayer 5 at the time of acquisition.

E. Subsection 87(4) will apply to the merger of Taxpayer 5 into Taxpayer 9 as described in paragraph 26 above and as a consequence:

a. Taxpayer 6 will have disposed of its shares in Taxpayer 5 for proceeds of disposition equal to Taxpayer 6’s ACB in its shares of Taxpayer 5;

b. Taxpayer 6’s ACB in its shares of Taxpayer 9 will be equal to its proceeds of disposition for the shares of Taxpayer 5;

c. Taxpayer 5 will not have a disposition of its shares in Taxpayer 9 pursuant to paragraph (n) of the definition of disposition in subsection 248(1); and

d. Taxpayer 9 will not be considered to have disposed of any of its assets for Canadian income tax purposes.

F. As a result of the merger of Taxpayer 7 into Taxpayer 9 as described in paragraph 28 above, Taxpayer 6 will not be considered to have disposed of its shares of Taxpayer 9 and Taxpayer 9 will not be considered to have disposed any of its assets for Canadian income tax purposes.

G. Subsection 87(4) will apply to the merger of Taxpayer 9 into Taxpayer 10 as described in paragraph 29 above and as a consequence:

a. Taxpayer 6 will have disposed of its shares in Taxpayer 9 for proceeds of disposition equal to Taxpayer 6’s ACB in its shares of Taxpayer 9;

b. Taxpayer 6’s ACB in its shares of Taxpayer 10 will be equal to its proceeds of disposition for the shares of Taxpayer 9;

c. Taxpayer 9 will not have a disposition of its shares in Taxpayer 10 pursuant to paragraph (n) of the definition of disposition in subsection 248(1); and

d. Taxpayer 10 will not be considered to have disposed of any of its assets for Canadian income tax purposes.

H. Subsection 87(4) will apply to the merger of Taxpayer 10 into Taxpayer 11 as described in paragraph 30 above and as a consequence:

a. Taxpayer 6 will have disposed of its shares in Taxpayer 10 for proceeds of disposition equal to Taxpayer 6’s ACB in its shares of Taxpayer 10;

b. Taxpayer 6’s ACB in its shares of Taxpayer 11 will be equal to its proceeds of disposition for the shares of Taxpayer 10;

c. Taxpayer 10 will not have a disposition of its shares in Taxpayer 11 pursuant to paragraph (n) of the definition of disposition in subsection 248(1); and

d. Taxpayer 11 will not be considered to have disposed of any of its assets for Canadian income tax purposes.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R12, Advance Income Tax Rulings and Technical Interpretations, and are binding on the CRA provided that the proposed transactions are completed within 6 months of the date of this letter.

COMMENTS

Except as expressly stated, nothing in this advance income tax ruling should be construed as implying that we are ruling on the laws of countries other than Canada, including the laws of Country 2 and Country 1.

For greater certainty, nothing in this letter should be construed as implying that we are ruling on any tax consequences other than those tax consequences specifically described in the rulings above and without limiting the generality of the foregoing, the CRA is not ruling on:

(a) the residence in a country for any purpose of any person referred to herein;

(b) the amount of the FMV of any property;

(c) the amount of the ACB of any property;

(d) the amount of the proceeds of disposition of any property; or

(e) the tax consequences resulting from the fluctuation in the value of a currency other than Canadian currency (including the currency of the United States of America) relative to Canadian currency.

Your truly,

for Division 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.

© His Majesty the King in Right of Canada, 2024

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 le Roi du Chef du Canada, 2024