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

Last Updated: January 28 2014
Article by Lyne M. Gaulin and Patrick Déziel

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.

Factual Background

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.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Lyne M. Gaulin
Patrick Déziel
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.