Supreme Court Of Canada Considers Tax Regime And Common Law Principles Applicable To Statutory Amalgamations

Envision Credit Union v. R.1 ("Envision") concerned the tax consequences of an amalgamation under section 87 of the Income Tax Act (Canada) (the "Act"). Section 87 of the Act provides express rules governing the tax consequences of "qualifying" amalgamations, being amalgamations that meet certain conditions as described below. The taxpayer in Envision sought to create a "non-qualifying" amalgamation in order to avoid certain flow-through tax attribute rules under section 87 of the Act.

Section 87 Regime Applicable To Qualifying Amalgamations

There are two types of amalgamations for purposes of the Act, qualifying amalgamations and non-qualifying amalgamations. A qualifying amalgamation for purposes of section 87 of the Act consists of the merger of two or more corporations that are taxable Canadian corporations immediately before the merger to form one corporate entity ("Amalco") in a manner such that the following three conditions are met:

all of the property (except accounts receivable from any predecessor corporation or shares of any predecessor corporation) of the predecessor corporations immediately before the merger becomes property of Amalco by virtue of the merger; all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger become liabilities of Amalco by virtue of the merger; and all of the shareholders (except any predecessor corporation), who owned shares in the capital stock of any predecessor corporation immediately before the merger, receive shares of the capital stock of Amalco because of the merger. Section 87 of the Act generally provides that on a qualifying amalgamation, certain tax consequences will occur including, among others, the following: (i) Amalco is considered to be a new corporation for purposes of the Act with a first taxation year that is deemed to have commenced at the time of amalgamation, (ii) the taxation year of each predecessor is deemed to have ended immediately before the amalgamation; and (iii) certain tax attributes of the predecessor corporations flow-through to Amalco. For example, in determining the undepreciated capital cost ("UCC") of a class of assets acquired by Amalco from a predecessor corporation, an amount equal to the UCC of the assets of such class of the predecessor corporation immediately before the amalgamation must be added to the UCC of such class of assets acquired by Amalco. This rule effectively precludes capital cost allowance ("CCA") from being deducted twice in respect of the same asset, once by a predecessor corporation and again by Amalco, because any CCA claimed by a predecessor corporation prior to the amalgamation is deducted in computing the amount of UCC of the assets of a class of a predecessor.

The tax consequences of a non-qualifying amalgamation are not...