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
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
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
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.
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