CGA Lesson

1
CGA Lesson 4

• This lesson is about several sections that are
  very useful to the taxpayer in that they defer
  immediate tax consequences. The sections are
• Amalgamations referred to as horizontal
  amalgamations -we will see rollover of
  assets, rollover of shareholdings, favourable
  loss carry forwardsetc
• 87(1.1) Amalgamation between a Parent Co and
  its wholly owned subsidiary referred to as a
  vertical amalgamation special rule on disposition
  of subsidiary shares, potential asset bump,
  loss rules get even better
• 88(1) winding up of a subsidiary (owned 90 or gt
  by ParentCo)
• However we also examine 88(2) windups 55(2)
  both are taxable events

2
Horizontal Vs. Vertical Amalgamation
3
The spirit of the law is to defer or minimize
immediate tax consequences on the event but
there are many rules to accomplish this and they
address the following items -what happens to the
assets liabilities of each predecessor T2 -what
happens to the Tax Accounts of each (CDA,
RDTOH,etc..) -what happens to the shareholders
and their shares they owned -special rule on loss
continuity - there is concern for TAX PUC of the
new shares issued - there is a concern for
Gifting as well
Also in order for corporations to amalgamate they
must both be incorporated in the same
jurisdiction- but you may get a continuance.
4
Section 87(1) says an amalgamation is when two
or more Canadian corporations (predecessor corps)
merge to form a new corporation (Amalco). -all
property of the predecessors become property of
the new corp -all liabilities of the predecessors
becomes liabilities of the new corp -all
shareholders of the predecessors become s/hers of
the new corp if it is a short form vertical
amalgamation per s.87(1.1)then the shares of
the ParentCo can just be retained by the s/hers
and be deemed to be shares of the new Amalco
5
Assets Liabilities
S.87(2)(a) deems year-ends for the predecessor
corps immediately before the amalgamation date
and deems a new corp to be formed on the amalco
date (you can pick its year-end) -there are about
a dozen pages in the ITA detailing what happens
to the asset liabilities of the former
predecessor companies- But they all do the same
thing they state that the former tax costs of
the assets liabilities are flowed through or
picked up by the new Amalco. -this flowing
through provides for a rollover effect of the
assets from the predecessor to the Amalco. For
example a capital property like land (Acb
10,000) flows to the Amalco with the same cost.
Transfers do NOT happen at FMV.
6

• Assets Liabilities continued
• Additional examples
• -87(2)(d)depreciable property transfers over at
  its UCC balance..and historical Capital Cost
  deemed to flow through as well so as to preserve
  potential recapture on a future sale
• 80.01(3) inter-company debts get special mention-
  they are extinguished at their cost amounts- thus
  no losses
• Assets are NOT deemed disposed of so you can
  have CCA claims in the last year

Tax Accounts..flow through too
CDA, RDTOH, GRIP (with some exceptions), Reserves
all flow from the predecessor balances to the new
entity
As you can see it is mostly just a matter of
adding/arithmetic
7
Losses do they transfer over?
87(2.1) governs the flow through of the
predecessor losses to the Amalco the
acquisition of control rules apply -these rules
say that IF an acquisition of control has
occurred upon amalgamation then capital losses of
the predecessor corps cannot go forward to the
amalco and non-capital losses can only go forward
if a same or similar business is carried on by
the Amalco. The point to be made in 87(2.1) is
that (subject to the acquisition of control
rules) the predecessor corp losses are deductible
by the Amalco starting in its very first year .
The Amalco steps into the shoes of the
predecessors shoes for timing of when losses
occurred. So the Amalco has to be aware of the
original dates of loss to apply them correctly.
Remember amalgamation may have triggered a short
year for a predecessor corp. it still counts as
a full year in the application of losses rules.
8
Losses continued..

• -predecessor losses flow forward to the Amalco
• -- losses that flowed up from one predecessor to
  the Amalco cannot be applied back to the other
  predecessor corp
• losses that the Amalco itself may generate from
  its own business can never go back to the
  predecessor corps (Except in a vertical
  amalgamation (Parentco subsidiary amalgamate,
  then losses of the new Amalco itself can be
  applied back against the predecessor ParentCo
  only)
• Lesson notes examples 4-3 shows loss rules
  date with a short/ stub period stresses
  importance of the application of loss dates .
  Before March 23/2004 7 years forward up to
  Jan.2006 its 10 years.after that its 20 years
  page 9

9
PUC Rule 87(3)
-it is a simple rule .the total tax puc of the
new Amalco shares is limited to the tax puc of
the two predecessor shares -however per 87(3)
there is no puc allowed for shares of one
predecessor company that were held by another
predecessor company.. so when dealing with a
Parent CO and Subsidiary amalgamation the Puc of
the subsidiary shares is eliminated and cannot be
allocated to the Amalco shares. -a puc reduction
is applied to all shares..this might be unfair
to some so to eliminate this you may elect to
issue a different class of shares to different
predecessor s/hers. 87(3.1) but apparently there
are complexities attached which make it difficult
for taxpayers to utilize
10
Predecessor Shares
General Rule s.87(4) for horizontal
amalgamationsit says that the shares of the
predecessor companies are deemed disposed of for
proceeds equal to their ACB .and the new shares
have a cost equal to that same ACBthis is in
effect a rollover of the old shares for new
shares Special Rule -however this rule changes
in a vertical amalgamation ..the shareholders of
the Parent Co follow the same rule the shares
are exchanged for their ACB. -but the shares
that the ParentCo owns of the subsidiary are
deemed to be disposed per a formula- we will look
at this in a moment
11
Gifting Concern in s.87(4)

• -if a shareholder exchanges shares old shares for
  new shares having a FMV less than that of the FMV
  of the old shares and it is reasonable to regard
  any of the excess as an benefit amount that the
  s/her desired to confer on a related
  person..then proceeds of disposition will be
  deemed to be
• Lesser of
• -the ACB plus the gift amount OR
• Fmv of the old shares
• Plus there is no bump to the acb of the new
  shares
• See ex 4-5

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Summarizing 87(1) Amalgamations
-all assets liabilities transfer over to the
new Amalco at the predecessor tax costs - thus
no immediate tax consequences -since assets are
not deemed disposed of, CCA may be claimed in the
final year of the predecessor T2s -all Tax
Accounts like CDA , CSOH , RDTOH, reserves etc
transfer over at the same values -the
amalgamation date deems year-ends for the
predecessor T2s and the Amalco is a new
entity -losses (subject to the acquisition of
control rules) go forward -predecessor shares are
deemed disposed for their acb and the new Amalco
shares have the same acb and the same tax puc as
the old -there is a provision to discourage
gifting
13
Parent Wholly Owned Subsidiary Amalgamation
87(1.1)

• the rules for deemed year-ends, cca claims
  assets liabilities tax accounts transferring
  over to the Amalco are all the same
• We will see a new rule for the disposition of the
  shares that the Parent Co owns of the Subsidiary
  corp that could result in
• A capital gain OR
  - a
  capital loss.AND if there is a loss it will be
  denied BUT there could be a limited ability to
  BUMP the cost base of certain assets of the
  subsidiary.
• -we will see an additional rule for
  losses.allowing for any new Amalco generated
  loss to be carried back to the Parent CO
• PUC?- sub puc is eliminated ,only allowed the Puc
  of the ParentCo

14
We are talking about this situation
15
Addtional Loss Rule 87(2.11)
-first lets remember the predecessor loss carry
forward rules are the same Amalco can only
apply them forward -Why is there no concern about
the subject to the acquisition of control rules
? Because before the S/hers owned the
Parent,.. Parent owns sub now s/hers own
Amalco there has been no acquisition of control
there is really no change at all -the new
rule is that now losses that are incurred or
generated by the new Amalco can be applied back
against the predecessor PARENT CO (note
Parentco only , never the subsidiary)
16
The Rule for the Deemed Disposition of the Subs
shares. Note this section refers you to 88(1)b
We seldom see gains because 99 of the time Puc
is or lt the acb
17
Disposition of the Subsidiary Shares that were
Owned by the Parent Co s.87(11)
S/hers X,Y,Z
S/hers X, Y, Z
Parent
Amalco
Sub
A special rule exists for the deemed disposition
of the sub shares
Amalgamation date
18
What if the ACB of the subsidiary shares is
really greater than the net tax cost of the
subs assets? is this not really a Loss on my
share investment? Section 87(11)(b) addresses
this issue.
19
Example 4-6
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What does this look like? Example 4-6 continued
Amalgamate on Oct1/2007
Sept 30 year-ends
Parentco
Montfort
Sub shares cost 100,000
Amalco
Kimfort
Kimball
Subsidiary
Kimball paid a 20,000 dividend to Montfort
21
Subsidiary (Kimball) assets were before the
amalgamation
22
Example 4-6 continuednote how no loss occurs
yet the cost of the shares is gt the tax cost of
the subs assets
23
What about Possible Asset Bump? Loss carryback? .
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Winding Up a Subsidiary Owned 90 or More S.88(1)

• -winding up normally means following the
  procedures for winding up per the Corporations
  Act.giving notice to dissolve and surrender its
  charter..88(1) section applies automatically if
  both the Parent sub are Canadian corps and the
  parent owns at least 90 of the sub.and the
  other s/hers (if any) deal at arms length with
  the parent
• in the course of the wind up
• 1) all assets liabilities of the sub transfer
  to the Parent - on a tax deferred basis
• 2) The Parent has a deemed disposition of the
  shares of the subsidiary that it owns potential
  for gain and a bump on assets- it is the exact
  same rule we saw on Parent / Sub amalgamation
• 3) The Subsidiaries Losses have a special
  application rule

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Asset Disposition Rules s.88(1)
-when the assets are transferred from the Sub to
the Parent they are deemed disposed of for their
COST AMOUNT (def. 248) -this effects a
rollover of the assets from sub to Parent.but
since they are deemed disposed of they are not
on hand at year-end so no CCA claims can be made
on them in the year of transfer. -if there were
s/hers other than the ParentCo the assets go out
at FMV -there is no deemed year-end of the sub
because of its announcement to commence winding
up..it commences to wind up transfers assets
over time to the Parent and when it is finished
it will determine its own year end at that
time -inter-company debt they can elect to
extinguish it at the cost amount -tax accounts
transfer over for the same values
26
Sub Winding Up into Its ParentCo
BEFORE
AFTER
ParentCo
ParentCo
Owns its own assets plus shares in sub as an
asset
Owns its subs assets liabilities
Sub
Assets Liabilities
Sub is gone, wound up
Winds up
Transfers assets up to Parentco
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Deemed Disposition of the Subs Shares Held by the
ParentCo s.88(1)(b)
-this is the same rule as we saw for the Parent
/ Sub Amalgamation..it is exactly the same
because they refer to each others 87(11) refers
to s. 88(1)(b) for the calculation -so the
shares are deemed disposed for greater of
1) the lesser of PUC of the shares OR
cost
amount of the net assets reserves 2) acb of the
shares so no loss can occur , but a
gain could result
28
Is there a Provision to Bump certain Assets
like in the Parent/Sub amalgamation Rules YES
s. 88(1)c d

• -the provision to bump is the same exactly the
  same because again the ITA just refers each
  section to the other see 87(11)
• -if the subsidiarys shares have an ACB that
  exceeds
• The total of
• The net tax cost of the assets of the sub AND
• 2) All dividends ever received by the
  Parentco.
• Then you can bump certain non depreciable
  assets up to their FMV .BUT remember the
  date for the FMV calculation is determined by
  when the Parent last acquired control of the sub
  if the Parent always controlled then no bump
  is possible..Bump would be lost, unusable .

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Transfer of Losses in Parent-Sub Windup
S.88(1.1) (1.2)allow the subsidiaries losses
(assuming they had some ) to flow through to the
ParentCo BUT they may only be deducted by the
ParentCo.for taxation years commencing after the
commencement of the winding up of the
subsidiary Simple example Assume both Parentco
Sub have normal year-ends of Dec.31, 2007 and in
April /07 the sub commences to wind up and
finishes winding up in Sept / 07when can the
Parentco deduct any losses of the sub? Not until
the next fiscal period 2008. Parentco Jan
1/07______________________________ Dec31/07
Sub Jan 1/07 ____________________Sept./07
fully wound up

Can deduct in
2008
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Uses of
S.88(1)
Then Duncan Ltd is wound up into Alberni Ltd
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Winding Up of a Canadian Corporation S.88(2)

• This is a taxable event- in fact we are looking
  at two levels of taxation. The first is at the
  corporate level as the corp liquidates its assets
  and secondly when the available net funds are
  finally distributed to the shareholder as a
  windup dividend.
• Normally you would expect to undergo the
  following procedures
• The corp liquidates its assets at FMV- this may
  trigger gains recapture that it will have to
  pay tax on.
• The corp pays off all of its debts , including
  the tax liability from 1 above.
• Any cash or unsold assets are distributed to the
  s/her as a wind up dividend per 84(2). Assets go
  out at FMV per s.69(5).