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 specified in the Act. Therefore, these consequences must be determined based on general provisions of the Act to the extent they are relevant and other applicable statutes and the common law.
Two British Columbia credit unions (the "Predecessors") amalgamated under the Credit Union Incorporation Act (British Columbia) (the "CUIA") to form Envision Credit Union ("ECU") on January 1, 2001. The CUIA contains various provisions governing the amalgamation of credit unions in British Columbia, including that the amalgamated credit union is a continuation of the predecessor credit unions and "seized of" and holds and possesses all of the property, rights and interest and is subject to all the debts, liabilities and obligations of the predecessor credit unions.
The Predecessors attempted to avoid the application of section 87 of the Act in order to prevent the flow-through of the UCC of the assets of the particular classes of the Predecessors to ECU. If section 87 of the Act was considered not to apply, ECU expected to be able to claim CCA based on the original cost of the assets to the Predecessors rather than on the significantly lower amount of UCC of assets of the particular classes of the Predecessors. ECU also expected that the avoidance of section 87 of the Act would result in a second tax benefit relating to its ability to reset a tax credit that is specific to credit unions.
In an attempt to realize these tax benefits, the Predecessors each transferred a beneficial interest in certain real properties that were surplus to their business needs to a recently created numbered company ("Newco") in exchange for shares of Newco at exactly the same time as the amalgamation, such that not "all of the property" of the Predecessors would be considered to have become property of ECU. ECU hoped that this would result in a non-qualifying amalgamation for purposes of section 87 because the first condition for the application of section 87 as discussed above would not be considered to have been met.
The Canada Revenue Agency assessed ECU on the basis that the disputed tax attributes should flow-through from the Predecessors to ECU. ECU appealed the decision to the Tax Court of Canada ("TCC").
Lower Courts Analysis and Decision
The TCC agreed that ECU had succeeded in creating a non-qualifying amalgamation by transferring the beneficial interest in the real properties to Newco at the time of amalgamation with the result that not all of the properties of the Predecessors had become properties of Amalco as required under section 87 of the Act. In this regard, the TCC was of the view that the Predecessors had the legal capacity to sell the surplus properties at the same time as the amalgamation, since the Predecessors' legal personalities were continued under the CUIA.
Webb J. found that, based on the relevant provisions of the CUIA, ECU could "contract out" of the rule in the CUIA that an amalgamated credit union be seized of all of the property, rights and interests of the predecessors. However, the TCC nonetheless held that the UCC flowed-through from the Predecessors to ECU based on the continuation rule in the CUIA and common law principles. The TCC relied on the principles established in the 1974 Supreme Court of Canada ("SCC") decision in R. v. Black & Decker Manufacturing Co.2 ("Black & Decker") and, in particular, on the finding that "[t]he effect of the statute [the Canada Business Corporations Act], on a proper construction, is to have the amalgamating companies continue without subtraction in the amalgamated company, with all their strengths and their weaknesses, their perfections and imperfections, and their sins, if sinners they be."3 Accordingly, the TCC held that the Predecessors were considered to continue "without subtraction" in ECU such that the Predecessors continued with the CCA that each such Predecessor had claimed under the Act.
Thus, the TCC's decision in respect of the flow-through of UCC under common law principles resulted in the same tax consequences as those under the provisions of section 87. The TCC acknowledged this, but held that such a result did not invalidate its conclusion and simply meant that this was the desired result. In its view, Parliament could not be criticized for "wanting to bring certainty to a situation where the result was uncertain."
The TCC noted that not all tax consequences of an amalgamation would be the same under section 87 of the Act and the principles established in Black & Decker. The TCC gave as an example the cost of mark-to-market property owned by predecessors which would not flow-through to the amalgamated entity under section 87. Pursuant to section 87, the cost of such properties to the amalgamated entity would be deemed to be equal to their fair market value immediately before the amalgamation. It would appear that a different result would occur under the principles established in Black & Decker. Presumably, the cost of mark-to-market property of the predecessors would flow-through to the amalgamated entity in accordance with these principles.
The Federal Court of Appeal (the "FCA") agreed with the TCC's decision that the UCC of the Predecessors flowed-through to ECU by virtue of the principles established in Black & Decker. Although this finding should have been sufficient to dismiss ECU's appeal, the FCA also considered whether the amalgamation was a qualifying amalgamation for purposes of section 87 in the event that its finding on the applicability of the principles in Black & Decker was wrong.
The FCA held that the amalgamation was a qualifying amalgamation under section 87 because all of the property that had been held by the Predecessors could be "traced directly" to the property owned by ECU, being the shares of Newco that were issued in exchange for the property transferred to Newco by the Predecessors. As a result, the FCA concluded that the UCC of the Predecessors flowed-through to ECU in accordance with the provisions of section 87 of the Act.
The FCA's comments regarding the direct tracing of the property are somewhat surprising and imply that it was willing to pierce the corporate veil in this particular situation and disregard the separate legal entities of the parties involved. The FCA's approach appears to be a departure from the general reluctance of courts to pierce the corporate veil.
ECU appealed the decision of the FCA to the SCC.
SCC Analysis and Decision
The SCC analyzed the relevant provisions of the CUIA and found that the effects of an amalgamation described in these provisions, including that the amalgamated credit union is seized of all the property, rights and interests of each amalgamating credit union, are mandatory and that it was not open to the parties to "contract out" of these provisions. The SCC rejected ECU's argument that such an interpretation would render the requirements with respect to property and liabilities in section 87 redundant because it would be impossible to fail these two conditions based on the current corporate law statutes in Canada all of which provide for continuity in respect of assets and liabilities. The FCA was of the view that: "While this may be the case now, at any time, corporate law statutes could be amended to alter those provisions. The fact that the two conditions in the ITA will always be fulfilled because of current corporate law provisions does not require a different interpretation to be given to those corporate law statutes. The ITA exists to impose tax consequences based on corporate law; it does not exist to cause those corporate laws to be interpreted differently."4
The SCC found that the agreements to transfer the surplus real estate properties to Newco were binding on ECU based on the principle from Black & Decker that "upon amalgamation each constituent company loses its separate existence but it by no means follows that it has thereby ceased to exist."5 Therefore, in its view, at the moment that ECU was formed, it was seized with the surplus real property and obligations of the Predecessors and was immediately able to transfer such property to Newco to fulfill the obligations of the Predecessors. Although not necessary in light of its analysis and conclusion on this point, the SCC confirmed in obiter that, the FCA's approach of tracing the surplus properties to the shares of Newco would have to be rejected because it is not consistent with the basic rule of company law that shareholders do not own the assets of the company.
The SCC held that the amalgamation was a qualifying amalgamation within the meaning of section 87 of the Act because it was not possible for the parties to structure an amalgamation that did not meet these conditions based on the mandatory provisions in the CUIA. By so holding, the SCC was not required to rule on what would be the tax consequences of a non-qualifying amalgamation, and it declined to do so. The tax consequences of a non-qualifying amalgamation therefore remain an open question, although the reasons offered by the TCC and the FCA as described above will provide some guidance despite not having been adopted by the SCC.
In many ways, the tax consequences arising out of the transactions at issue in Envision are not surprising. They are essentially consistent with the spirit of the Act, in that they precluded the amalgamated credit union from claiming CCA that had already been claimed by the Predecessors.
However, the SCC's decision may be broadly interpreted as effectively stating that an amalgamation can never fall outside the scope of section 87 of the Act without amendments to the current Canadian corporate statutes. Justice Cromwell, who wrote a concurring opinion in Envision but did not agree with the reasoning of the majority of the SCC, warned that the majority's decision "has the potential to give rise to significant practical problems in future cases" by potentially putting in doubt the legality of previous amalgamations that, in the case of credit unions, received appropriate regulatory approval.
Time will tell whether the benefit of increased certainty of the tax consequences of an amalgamation resulting from the SCC's decision in Envision outweighs the potential problems highlighted by Justice Cromwell in his concurring judgment.
1 2013 SCC 48.
2 (1974), 15 CCC (2d) 193.
3 Ibid., at page 422.
4 Supra note 1, at paragraph 38.
5 Supra note 2, at page 418.
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