The Canada Revenue Agency ("CRA") recently confirmed that a merger of two foreign corporations may result in Canadian income tax implications, including reporting and withholding obligations under section 116 of the Income Tax Act (Canada) (the "Act").

In CRA View 2012-0457741E5, the CRA was presented with the following facts:

  • Two foreign-incorporated companies, the shares of which were owned by non-residents of Canada, were considering a plan to amalgamate under the corporate law of the foreign jurisdiction, to form a successor corporation. Prior to the amalgamation, each of the foreign companies held 1/3 of the shares of a Canadian company ("CanCo"), which owned Canadian real property and/or Canadian resource properties.  As more than 50% of the fair market value of the shares of CanCo was derived from Canadian real property and/or Canadian resource properties, the shares of CanCo would constitute taxable Canadian property to the two foreign corporate shareholders of Canco.

Subject to any available tax treaty relief, a non-resident of Canada is subject to Canadian taxation on the disposition of taxable Canadian property.  The crucial question proposed to the CRA was whether the foreign companies had disposed of taxable Canadian property, (i.e., the shares of CanCo) as a result of the foreign amalgamation.

The CRA stated that the Canadian income tax treatment of a foreign  amalgamation will be determined substantially by the legal consequences flowing from the applicable foreign corporate law under which the predecessor corporations are amalgamated. Where the applicable corporate law provides that the predecessor corporations involved in the amalgamation cease to exist, and that a new corporation is formed on the amalgamation, the predecessor corporations would generally be considered to have disposed of any property held immediately before the amalgamation.  However, where the applicable corporate law suggests a "continuation-type" amalgamation, the predecessor corporation would generally not be considered to have disposed of any assets that they held immediately before the amalgamation.

Accordingly, whenever foreign corporations that own Canadian assets or have Canadian subsidiaries are considering a foreign merger, the Canadian tax implications should be carefully considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.