Corporate Tax Planning - Canadian Tax Foundationcorporate tax planning n 189 debate,9 the recent jurisprudence discussed below supports the proposition that they do.10 Paragraph 87(2)(a)

canadian tax journal / revue fiscale canadienne (2010) vol. 58, no 1, 187 - 207

187

Corporate Tax PlanningCo-Editors: Derek G. Alty,* Brian R. Carr,** Christopher J. Steeves,*** and Nelson Whitmore****

AMALGAMATIONS REVISITED: THE APPLICATION OF PARAGRAPH 87(2)(a)

Aimee Hass*****

Recent jurisprudence has considered some of the amalgamation provisions in the Income Tax Act, in particular paragraph 87(2)(a). This article first analyzes, by way of background, previous jurisprudence relevant to those provisions. It then examines the more recent cases, to determine whether they follow or modify the previous jurisprudence, and whether they properly state the law with respect to paragraph 87(2)(a).

KEYWORDS: AMALGAMATIONS n CORPORATE REORGANIZATIONS n INVESTMENT COMPANIES n

NON-RESIDENT

* OfDeloitte&ToucheLLP,Toronto.

** OfMoskowitz&MeredithLLP,alawfirmaffiliatedwithKPMGLLP,Toronto.

*** OfFaskenMartineauDuMoulinLLP,Toronto.

**** OfDeloitte&ToucheLLP,Calgary.

***** OfMoskowitz&MeredithLLP,alawfirmaffiliatedwithKPMGLLP(e-mail:[email protected]).

C O N T E N T S

Introduction 188Historical Jurisprudence 190

Black & Decker 190Guaranty Properties 191Pan Ocean 193

Current Jurisprudence 198Dow Chemical 199CGU Holdings 202

Conclusion 206

188 n canadian tax journal / revue fiscale canadienne (2010) vol. 58, no 1

INTRODUCTION

ThereisverylittlejurisprudenceonthecorporatereorganizationprovisionsoftheIncomeTaxAct.1Thisisprobablybecause,inmostcircumstances,thosepersonswhoplanandimplementcorporatereorganizationscarefullyreviewtheprovisionsand ensure that the transactions comply with them. However, tax practitioners,especiallythoseinthelegalcommunity,generallyprefertohavethebenefitofthecourts’ interpretationofparticularprovisionsof theAct.Thisdesire for judicialcommentaryisbasedontheknowledgethatnointerpretationofaprovisioncaneverbetrulycorrectuntilacourtapprovesit.Areviewofthejurisprudencediscussedinthisarticlemaywellconvincepractitionersthattheyshouldbecarefulwhattheywishfor,becausetheymaygetit.2

ThisarticleexaminestherecentdecisionsoftheFederalCourtofAppealinDow Chemical Canada Inc. v. The Queen3andCGU Holdings Canada Ltd. v. The Queen.4Bywayofbackground,italsodiscussestheolderFederalCourtofAppealdecisionsinThe Queen v. Guaranty Properties Limited et al.5andThe Queen v. Pan Ocean Oil Ltd.6(whichDow ChemicalandCGU Holdingsconsiderandapply),andtheearlierdecisionoftheSupremeCourtofCanadainThe Queen v. Black & Decker Manu. Co.7

The discussion focuses primarily on the interpretation of paragraph 87(2)(a),althoughitalsoreferstootherrelevantprovisionsoftheAct.

Section 87 provides detailed rules governing amalgamations.8 Although theissueofwhethertheserulesprovideacompletecodehasbeenthesubjectofsome

1 RSC1985,c.1(5thSupp.),asamended(hereinreferredtoas“theAct”).Unlessotherwisestated,statutoryreferencesinthisarticlearetotheAct.

2 Thewisdomofthiswarningwasfamouslyillustratedin“TheTaleoftheMonkey’sPaw,”byW.W.Jacobs,originallypublishedinHarper’s Monthlyin1902.

3 2008DTC6544(FCA);rev’g.2007DTC1701(TCC);leavetoappealtotheSupremeCourtofCanadadenied,December18,2008.

4 2009DTC5044(FCA);aff ’g.2008DTC3347(TCC).

5 90DTC6363(FCA);rev’g.87DTC5124(FCTD).

6 94DTC6412(FCA);rev’g.93DTC5330(FCTD);leavetoappealtotheSupremeCourtofCanadadenied,November17,1994.

7 [1975]1SCR411.

8 Thisarticleisnotintendedtobeanexhaustiveorcomprehensivereviewofallissuesrelatedtotheapplicationofsection87.Foradetaileddiscussionoftheissues,see,forexample,IanD.HeineandDionJ.Legge,“MergerBuildingBlocks:AmalgamationsandWindups,”inReport of Proceedings of the Fifty-Sixth Tax Conference,2004ConferenceReport(Toronto:CanadianTaxFoundation,2005),37:1-60;CatherineA.Brayley,“MergingCompanies:APracticalChecklistforAmalgamationsandWindups,”inReport of Proceedings of the Fifty-Second Tax Conference,2000ConferenceReport(Toronto:CanadianTaxFoundation,2001),6:1-62;GabrielleM.R.Richards,“Amalgamations,”TheTaxationofCorporateReorganizationsfeature(1996)vol.44,no.1Canadian Tax Journal241-59;AlanM.Schwartz,“StatutoryAmalgamations,Arrangements,andContinuations:TaxandCorporateLawConsiderations,”inReport of Proceedings of the

corporate tax planning n 189

debate,9 the recent jurisprudence discussed below supports the proposition thattheydo.10

Paragraph87(2)(a)providesthatwheretherehasbeenanamalgamationoftwoormorecorporationsafter1971,

forthepurposesofthisAct,thecorporateentityformedasaresultoftheamalgama-tion shall be deemed to be a new corporation the first taxation year of which shall bedeemedtohavecommencedatthetimeoftheamalgamation,andataxationyearofapredecessorcorporationthatwouldotherwisehaveendedaftertheamalgamationshallbedeemedtohaveendedimmediatelybeforetheamalgamation[emphasisadded].

Solelyonthebasisofthewordingofparagraph87(2)(a),onemightassumethatacorporationformedasaresultofanamalgamationoftwoormorepredecessorcorporationswouldbedeemedtobeanewcorporationforallpurposesoftheAct.Asdiscussedbelow,onlytheCGU Holdingscasehasappliedastricttextualreadingoftheprovision.Intheothercasesdiscussedinthisarticle,thecourtshaveadoptedadifferentinterpretation.Insomeinstances,theyhavetreatedtheamalgamatedcor-porationasanewcorporationforlimitedpurposes;inothers,theyhavetreateditasacontinuationofthepredecessorcorporations.Thecourts’inconsistencywithre-specttotheinterpretationofparagraph87(2)(a)hasledtouncertaintyastowhichattributesofthepredecessorcorporationsbecomeattributesoftheamalgamatedcorporation.

ButforthedecisionsinGuaranty PropertiesandPan Ocean,therulingsinDow ChemicalandCGU Holdingswouldbefarmoreunderstandableandoflesssignifi-cance.ThedecisionsoftheFederalCourtofAppealinthetwooldercasescreatedconfusionabouttheapplicationofparagraph87(2)(a).Theywerenotonlyincon-sistent;theyalsolackedclarity.Nevertheless,therewerenosubsequentdecisionsofthecourtthatconsideredparagraph87(2)(a),untilDow ChemicalandCGU Holdingsweredecidedsome15to20yearslater.

Asthediscussioninthisarticlewilldemonstrate,overthelast20years,thecourtshavebeenmercurialintheirinterpretationofparagraph87(2)(a).Although,inmyview,CGU Holdings,thelateststatementofthelaw,properlyinterpretstherelevantprovisionsoftheAct,theconcernisthatinthefuture,acourtfacedwithauniquefactualsituationwillagainputaglossontheprovisionsofparagraph87(2)(a) inparticular,andtheotheramalgamationprovisionsingeneral.

Forty-Third Tax Conference,1991ConferenceReport(Toronto:CanadianTaxFoundation,1992),9:1-77;andGrahamTurner,“AmalgamationsandContinuations”(1988)vol.36,no.6Canadian Tax Journal1479-99.

9 See,forexample,Turner,supranote8,at1489ff.;Schwartz,supranote8,at9:57ff.;andHeineandLegge,supranote8,at37:6-7.

10 SeeinparticularthedecisionoftheFederalCourtofAppealinCGU Holdings,discussedinfraatnotes54to59andtheaccompanyingtext.


HISTORICAL JURISPRUDENCE

Bl ack & Decker11

Ourstartingpointisaconsiderationofanon-taxcase,thedecisionoftheSupremeCourtofCanadainBlack & Decker.ThiscasedealtwiththeissueofwhetheranewcorporationwasformedasaresultofanamalgamationcarriedoutpursuanttotheprovisionsoftheCanadaCorporationsAct12(“theCCA”).Black & Deckerprovidesafoundationforthereasoninginlatertaxdecisions.

InBlack & Decker, theamalgamatedcompanywaschargedwithanumberofoffencesundertheCombinesInvestigationAct,whichtookplacepriortotheamal-gamation.Theissuebeforethecourtwaswhethertheamalgamatedcompanycouldbechargedwithoffencesofapredecessorcompany.

The relevant wording of the CCA provided that any two or more companiesmightamalgamateandcontinueasonecompany,andthattheamalgamatedcom-panypossessedalltheproperty,rights,andliabilitiesofeachoftheamalgamatingcompanies.Accordingly,theattributesofthepredecessorcompaniesflowedthroughtotheamalgamatedcompanyundertheCCA.DicksonJ,inrenderingthedecisionoftheSupremeCourtandreversingthefindingoftheOntarioCourtofAppeal,ex-plainedtherelevantsectionoftheCCAinthefollowingmanner:

[I]twouldseemthattheCourt[ofAppeal]accepted,asafirststep,thepropositionthatthe“new”company,i.e.theamalgamatedcompany,isadifferent,separateanddistinctcompany from the “old” companies, i.e. the amalgamating companies. Whether an amalgamation creates or extinguishes a corporate entity will, of course, depend upon the terms of the applicable statute,butasIreadtheAct[theCCA],inparticulars.137,andcon-siderthepurposeswhichanamalgamationisintendedtoserve,itwouldappeartomethatuponanamalgamationundertheCanada Corporations Actno“new”companyiscreatedandno“old”companyisextinguished....[I]fParliamenthadintendedthatacompanybythesimpleexpedientofamalgamatingwithanothercompanycouldfreeitselfofaccountabilityforactsincontraventionoftheCriminal CodeortheCombines Investigation ActortheIncome Tax Act,Icannotbutthinkthatotherandclearerlan-guagethanthatnowfoundintheCanada Corporations Actwouldbenecessary.13

TheSupremeCourtthereforeallowedtheappeal,onthebasisthattheoffencesofapredecessorcompanycouldflowthroughtoanamalgamatedcompany,andor-deredthecasereturnedtotheOntarioProvincialCourtforjudgmentfollowingthedecision.

Althoughtherearecommentsinthetaxcasesdiscussedbelowthatsuggestthatitisamatterofsomefundamentalprincipleoflawthatanewcorporationisnot

11 Supranote7.

12 RSC1970,c.C-32,section137.

13 Supranote7,at416-18(emphasisadded).


formedonanamalgamation,14theSupremeCourtofCanada’sdecisioninBlack & DeckerrestedontheinterpretationoftheCCA.Itdidnotpurporttoespousesomefundamentalcommon-lawprinciple. In thedecision,DicksonJ referredtocom-mentsmadebyKellyJoftheOntarioCourtofAppealinStanward Corporation v. Denison Mines Ltd.15andstated:

KellyJ.A.comparedthelanguageofs.96ofOntarioStatutes1953,c.19uponwhichtheStanwardcasewasdecided,andthatofitspredecessor,s.11ofThe Companies Act,R.S.O.1950,c.59,uponwhichRegina v. Howard Smith Paper Mills, Ltd.[(1954)4DLR(2d)161],ajudgmentofmybrotherSpence,wasdecided.Theearlierlegislationre-ferredtotheamalgamatedcorporationasthe“newcorporation”andspokeof“thecorporationsoincorporated.”Thelanguageexpressedaclearintentiontosubstituteanewcorporationintheplaceandsteadoftheamalgamatingcorporations.BythetimetheStanwardcasefelltobedecided,however,theLegislaturehadre-enactedthesectioninwordswhich,intheopinionofKellyJ.A.,withwhichIagree,indicatedanintentiontochangetheeffectofamalgamation.16

Guar ant y Properties17

InGuaranty Properties,theissuewasthevalidityofareassessmentoftaxissuedafteranamalgamationinthenameofapredecessorcorporation.InGuaranty Properties,aCanadiancompany(“Dixie”)wasreassessedbytheministerinaparticularyear.Inasubsequenttaxationyear,DixieamalgamatedwithanumberofotherCanadiancompaniestoformanewCanadiancompany(“ForestGlenn”).Someyearslater,ForestGlennamalgamatedwiththreeotherCanadiancorporationstoformGuar-antyProperties.Theminister,unawareofthelastamalgamation,senttwonoticesofreassessment inrespectofDixie toForestGlenn;however,ForestGlennhadalreadyamalgamatedintoGuarantyPropertiesandthereforenolongerexisted.

The taxpayerbrought applicationbefore theFederalCourtTrialDivision todeterminethevalidityofthereassessmentsissuedtoForestGlenn.RouleauJnotedthatthetaxpayerreliedonparagraph87(2)(a)insupportofitspositiononthebasisofthefollowingreasoning:

[B]ydeemingtheresultingcorporationformedonamalgamationasanewcorporation,theIncome Tax Actalsodeemsthatthepredecessorcorporationswhichamalgamatedtoformthenewcorporationhaveceasedtoexist.Areadingofsection87oftheActasawholemakesitclearthatparagraph2(a)establishesasageneralruleforallpurposesundertheAct,thatthe resulting corporation is a new corporation and all predecessor corpor-ations have ceased to exist.

14 SeethediscussionofthePan Oceancasebelowfollowingnote21.

15 [1966]2OR585(CA).

16 Supranote7,at419.

17 Supranote5(FCTD).


Theplaintiffsmaintainthatsection87containsanumberofotherdeemingprovi-sionswhichareexpressedtorevivethepredecessorcorporationsforspecificpurposesonlyassetoutinthoseprovisions.Therefore,unlessthecontraryisspecificallypro-videdforinsection87,thepredecessorcorporation,fortaxpurposes,ceasestoexist.18

Thetaxpayerfurtherarguedthattheonlycorporateentitythattheministercouldhave reassessed after the amalgamation into Guaranty Properties was GuarantyProperties.However,thetaxationyearatissuewasstatute-barred;itwasnotopentotheministertoreassessForestGlenninsteadofGuarantyProperties.

TheCrownarguedthatthereassessmentwasvalidonthebasisthatForestGlenndidnotceasetoexistontheamalgamationintoGuarantyProperties.Alternatively,ifForestGlennhadceasedtoexist,sendinganoticeofassessmenttoForestGlennshouldbepermittedonthebasisofcurativeprovisionsofsubsections152(3)and(8)andsection166.TheCrownreliedontheBlack & Deckerdecisioninsupportofitsposition,arguingthatthecorporatelawisclearthatapredecessorcompanydoesnotceasetoexistonamalgamation.Moreover,theCrownsubmittedthatwhiletheIncomeTaxActdeemsanewcorporationtobe formedonanamalgamation, itdoes not include a corresponding rule that deems a predecessor corporation toceasetoexist.Therefore,intheabsenceofaspecificprovisionthatdeemsapre-decessortoceasetoexist,theapplicablecorporatelawshouldapply.

RouleauJfoundinfavouroftheplaintiff,holdingthatthereassessmentswereinvalidonthebasisthattheywereissuedtothewrongtaxpayer.ThecourtdidnotexpresslyconcludeastowhetherForestGlennceasedtoexistbutheldthat,not-withstanding,theActprovidesamechanismwherebyallassetsandliabilitiesaretransferred frompredecessorcorporations to theamalgamatedcompany.There-fore,sincethenoticeofassessmentwasissuedtoForestGlennandnottoGuarantyProperties,theassessmentwasnotvalid.

AttheFederalCourtofAppeal,MacGuiganJreversedthetrialcourt’sdecision.Heheldthatparagraph87(2)(a)didnotresultintheextinguishmentofthepredeces-sorcorporations(DixieandForestGlenn);instead,theycontinuedintheformoftheamalgamated corporation, unless the specific corporate law provided otherwise.Thedeemingruleinparagraph87(2)(a)appliedonlyforthepurposeofdeterminingthepredecessor’staxationyear-end.MacGuiganJstated:

[I]t seems to me that the purpose Parliament had in mind was not to bring amalgamating corporations to an end but merely to give them a deemed year-end and the new corporation a deemed year-beginning.Thewords“shallbedeemedtobeanewcorporation”areim-mediatelyfollowedbytheclause“thefirsttaxationyearofwhichshallbedeemedtohavecommencedatthetimeoftheamalgamation.”ThissubsequentclauseIfindtobeadefiningorrestrictiverelativeclause,whichlimitsthescopeoftheantecedentprincipalclausetothecombinedconceptexpressedbythetwoclauses....Theprincipaleffectofparagraph87(2)(a)isthat,forincometaxpurposes,theamalgamatedcorporationis

18 Ibid.,at5128(emphasisinoriginal).


deemedtobeanewtaxpayerwithafreshtaxationyearasofthedateofamalgamation.Insum,nothing in the paragraph evinces an intention on the part of Parliament to deem that the amalgamating taxpayer ceased to exist, much less that it should be relieved of liability of its own income taxes prior to the date of amalgamation.19

Theconclusionthatparagraph87(2)(a)appliesonlyforthepurposeofdeterminingthetaxationyear-endofanamalgamatingcorporationdoesnotfloweasilyfromthewordingoftheprovision.Asweshallsee,thispropositionhasnowbeenimplicitlyrejectedbytheFederalCourtofAppealintheCGU Holdingscase.

Thereisprobablylittlevalueincriticizingacasethatisnowalmost20yearsold.20However,theGuaranty Propertiesdecisionappearstoberesults-oriented.Thecourtappearedlessthanenamouredwiththepossibilitythatthetaxpayercouldescapeliabilityfortaxonsuchanarrowtechnicality.Itisunfortunatethatthecourthadtodosuchviolencetotheplainmeaningofparagraph87(2)(a)toarriveatitsconclu-sion.Idonotwishtotrytorearguethecase,buttherewouldhavebeengreaterrespectfortheschemeoftheActhadthecourtheldthatanoticeofreassessmentissuedtoapredecessorcorporationwasvalidonthebasisoftheargumentadvancedbytheCrown—thatthedefectdidnotrenderthereassessmentinvalid,byvirtueofthecurativeprovisionsofsubsections152(3)and(8)andsection166.Ifthecourtcouldnotconvinceitselfofthecorrectnessofthatargument,itwouldhavebeenfarbetterforthecourttohavefoundforthetaxpayerandleftittoParliamenttofixupthereassessmentprovisionsoftheAct.

Pan Ocean21

ThePan OceandecisionsawtheFederalCourtofAppealresilefromitspositioninGuaranty Propertiesbutstillleavethelawuncertain.Pan Oceaninvolvedtheapplica-tionoftheamalgamationprovisionstowhatareknownasthesuccessorcorporationrules.22Thesuccessorcorporationrulesapplywhereataxpayer(referredtointhecurrentprovisionof theAct as “theoriginalowner”) thathas incurred resourceexpenses(exploration,development,andpropertyacquisitioncosts)transfersallorsubstantiallyallofitsresourcepropertiestoacorporation(“thesuccessor”).Insuchcircumstances,wherealltheconditionsprecedenttotheapplicationoftherulesaresatisfied,thesuccessorcandeductanyresourceexpensesoftheoriginalownerthathavenotpreviouslybeendeducted.UnderthecurrentprovisionsoftheAct,therecanbeanunlimitednumberoftransfersfromtheoriginalownertothesuccessor.23

19 Supranote5(FCA),at6368(emphasisadded).

20 SeeNancyMacDonald,“AmalgamationsFollowingGuarantyPropertiesLimited,”TheTaxationofCorporateReorganizationsfeature(1991)vol.39,no.5Canadian Tax Journal1399-1412,foracontemporaneouscriticismofthedecision.

21 Supranote6.

22 Thesuccessorcorporationrulesarecurrentlysetoutinsection66.7.

23 SeeBrianR.CarrandC.AnneCalverley,Canadian Resource Taxation(Toronto:Carswell)(looseleaf ),chapter7,forafulldiscussionofthesuccessorcorporationrules.


Thetransactions inPan OceanweregovernedbytheIncomeTaxApplicationRules(ITARs),whichcontemplatedintherelevanttaxationyears(1974and1975)that there couldbeonly two successor corporations in respectof anyparticularexpenseincurredbyaperson(referredtoas“thepredecessorcorporation”).Whereacorporationwas the thirdtransfereewithrespect toanyexpenses, itcouldnotdeducttheexpenses.24

In1971,PanOceanOilLimited(“POOL”)purchasedagroupofcompanies(“theDynamicCompanies”)thatwereengagedinoilandgasactivitiesandminingex-plorationanddevelopmentinCanada.TherewasanindirecttransferofresourcepropertiesfromtheDynamicCompaniestoPOOL,asaresultofwhichPOOLbe-cameasecondsuccessorcorporation.Incomputingitsincomefor1971and1972,POOLdeductedsomeexplorationanddrillingexpensesthathadbeenincurredbytheDynamicCompaniesbuthadnotbeenpreviouslydeducted,onthebasisthatPOOLwasconsideredasecondsuccessorcorporation.In1974,pursuanttotheAl-bertaCompaniesAct,25POOLandPanOcean(Alberta)Ltd.amalgamated,withtheamalgamated corporation retaining the name Pan Ocean Oil Limited (“PanOcean”).Followingtheamalgamation,PanOceancontinuedtodeductundeductedexplorationexpensesinrespectofwhichPOOLhadbeenasecondsuccessorcorpor-ation.Theministerdisallowedthedeductionforthe1974and1975taxationyearsonthebasisthatPanOceanwasathirdsuccessorcorporationandtheexpensesinquestionweredeductibleonlybyafirstorsecondsuccessorcorporation.

ThetaxpayerappealedtotheFederalCourtTrialDivision.PanOceanarguedthattheamalgamationofPOOLandPanOcean(Alberta)Ltd.wascarriedoutpur-suanttotheAlbertaAct,whichprovidedthatanamalgamationdoesnotresultinanewcorporationoranextinguishmentoftheamalgamatingcorporations.Instead,theresultisthattheamalgamatedcorporationisacontinuationofthepredecessorcorporations,andalltheassets,rights,andliabilitiesofthepredecessorcorpora-tionscontinue intheamalgamatedcorporation.26Accordingly, thedeductions to

24 TheissuewaswhetherPanOceanwasasecondsuccessorforthepurposesofITAR29(29)asitreadintherelevanttaxationyears.Toillustratetheapplicationoftheruleintherelevanttaxationyears,considerthefollowingseriesoftransfersandamalgamationsinvolvingfourcorporations(A,B,C,andD).CorporationAincursresourceexpensesandtransfersallitsresourcepropertiestocorporationB.ForthepurposesofITAR29(25)asitthenread,corporationAisthepredecessorcorporation,andcorporationBisthesuccessorcorporationwithrespecttocorporationA’sresourceexpenses.CorporationBthentransfersallitsresourcepropertiestocorporationC.CorporationAisthepredecessorcorporation,corporationBisthefirstsuccessorcorporationwithrespecttocorporationA’sresourceexpenses,andcorporationCisthesecondsuccessorcorporationwithrespecttothoseexpenses.CorporationCthentransfersallitsresourcepropertiestocorporationD.CorporationDisthethirdsuccessorcorporationwithrespecttocorporationA’sresourceexpenses.UnderITARs29(25)and(29)astheythenread,corporationsBandCcandeductcorporationA’sexpensesinrespectofthetransferredresourceproperties,butcorporationDcannot.

25 RSA1970,c.60(nowRSA2000,c.C-21)(hereinreferredtoas“theAlbertaAct”).

26 Section156oftheAlbertaAct.


whichPanOceanwasentitledincludedunuseddeductionsthatPOOLhadacquiredasasecondsuccessorcorporation.Sincethepredecessorcorporationwasentitledtoutilizethedeductionsasasecondsuccessorcorporation,and,onthebasisofthecorporatestatute,thepredecessorcorporationcontinuedinPanOcean,PanOceanshouldsimilarlybeentitledtothedeductions.PanOceanfurtherarguedthatoncethecorporatelawhadestablishedthatthedeductionwaspermitted,therewasnopro-visionintheIncomeTaxActthatspecificallydeniedthededuction.Inthisrespect,PanOceansubmitted,inaccordancewithGuaranty Properties,thatparagraph87(2)(a)wasnotintendedtoresultinanewcorporationforallpurposesoftheAct,butonlywithrespecttothecommencementofthecompany’staxationyearatthetimeofamalgamation.

TheCrownarguedthat,notwithstandingthattheAlbertaActprovidesthatalltheproperty,rights,privileges,liabilities,contracts,anddebtsofeachoftheamalgam-atingcorporationsbecomethoseoftheamalgamatedcorporation,theamalgamatedcorporation(the“new”corporationinparagraph87(2)(a)),isdeemedpursuanttoparagraph87(2)(c)tohaveacquiredthepropertyoftheamalgamatingcorporations.TheamalgamationthereforeresultedinanacquisitionofpropertybyPanOcean,andPanOceanbecameathirdsuccessorcorporationontheacquisition.SincetheActdoesnotpermitdeductionsofexpendituresby third successorcorporations,PanOceanwasnotentitledtothedeductions.

JeromeJallowedPanOcean’sappeal.Heheldthattheamalgamationdidnotresult inanacquisitionofpropertyandthat,onthebasisoftheAlbertaAct,therightsoftheamalgamatingcorporationsshouldcontinueintheamalgamatedcor-poration,unlesstheIncomeTaxActspecificallydeniedthededuction.Hefurtherheldthatsincetherewasnoacquisitionofpropertyontheamalgamation,thesucces-sorruleshadnoapplicationandPanOceanwasentitledtodeducttheexpenses.

ThisdecisionwasconsistentwiththeGuaranty Propertiesdecision,whichheldthatonanamalgamationanewcorporationisformedonlyforthepurposeofdeterminingtheamalgamatedcorporation’staxationyear-end.Sincethecorporation’staxationyear-endwasnotatissueinPan Ocean,thepredecessorcorporationscontinuedastheamalgamatedcorporationandwerenotconsideredanewcorporationforthepurposesofdeductingexpensesincurredbypredecessorcorporations.

TheFederalCourtofAppealreversedthisdecision.Thecourtheldthatfollow-inganamalgamation,theamalgamatedcorporationwasa“new”corporationanddidnot“acquire”thepropertyofthepredecessorcorporations;rather,theproperty“simplybecame”thepropertyofthenewamalgamatedcorporation.Theamalgam-atedcorporationwasconsideredanewcorporationfortaxpurposesnotwithstandingtheresultundertheapplicablecorporatestatute.27HugessenJnoted:

27 ThisfindingisconsistentwithmyearliercommentthattheBlack & Deckerdecisiondoesnotrestonanyfundamentalcommon-lawprinciplebutonaninterpretationoftheprovisionsoftheapplicablestatute.


[T]hereisnodoubtthatincorporatelaw,bothinAlbertaandinmostotherCanadianjurisdictions,anamalgamationdoesnotputanendtotheamalgamatingcompaniesandthelattercontinuetoexistinthenewentity....Thatisnottheendofthematter,however,forthetaxconsequencesofanamalgamationmustbedealtwithinthelightoftheapplicableprovisionsoftheIncome Tax Actandinparticularofsection87.28

Applyingsection87tothefactsinPan Ocean,thecourtfoundthatparagraph87(2)(a)wasnotintendedtoapplyonlytothedeterminationofthetimingofthetaxationyear-endofacorporation,butitwasalsonotintendedasageneralruletoapplytotheActasawhole.Instead,the“intentionwastoindicatethatthepresump-tion[ofthedeemingruleinparagraph87(2)(a)]wasonethatislimitedinscope.”29Theamalgamatedcorporationwasnottobetreatedasanewcorporationforpur-posesotherthanthecomputationofincomeandthedeterminationofdeductionsrelatingtothecomputationofincome.Accordingly,sincethesuccessorrulesrelatetothecomputationofincome,forthosepurposesPanOceanwasconsideredanewcorporationandnotacontinuationofthepredecessor,orsecondsuccessor,corpora-tion.Therefore,PanOceanwasnotentitledtoclaimanyexplorationanddevelopmentexpenses.

ThePan OceandecisionattemptedtodistinguishtheGuaranty Propertiesdecisionontheparticularfacts.HugessenJstated:

InGuaranty Properties,theCourtwasconcernedwiththevalidityofanoticeofassess-mentwhichhadbeensenttoanamalgamatingcompanyafterithadamalgamatedwithothercompanies.Thequestion,ineffect,camedowntodecidingwhetherthepresump-tion(or“deeming”)enactedbyparagraph87(2)(a)wasapplicabletoeitherDivisionAoftheActrelatingto“LiabilityforTax,”ortoDivisionI,“Returns,Assessments,PaymentandAppeals.”Thatquestionwasfullyansweredbythelastsentenceofthequotedpara-graph.I do not think that the Court intended in the earlier parts of that passage to establish a general rule that the presumption of paragraph 87(2)(a) was limited solely to the timing of the new corporation’s first taxation year; rather, the intention was to indicate that the presumption was one that is limited in scope and not applicable generally to the whole of the Income Tax Act.30

Inreachinghisdecision,HugessenJreferredtotheearliercaseofPalmer-McLellan (United) Ltd. v. MNR,31which consideredparagraph85I(2)(a), thepredecessor toparagraph87(2)(a).32

28 Supranote6(FCA),at6414-45.

29 Ibid.,at6415.

30 Ibid.(emphasisadded).

31 68DTC5304(Ex.Ct.).

32 Paragraph85I(2)(a)(RSC1952,c.148,asamended)readasfollows:

(2) Wheretherehasbeenanamalgamationoftwoormorecorporationsthefollowingrulesapply:

(a) forthepurposesofthisAct,thecorporateentityformedasaresultoftheamalgamationshallbedeemedtobeanewcorporationthefirsttaxationyearofwhich


InPalmer-McLellan,acorporation(“OldUnited”)borrowedmoneytopurchasethesharesofanothercorporation(“ShoeCompany”),andthetwocorporationsweresubsequentlyamalgamated(as“United”).Atthetimeofthedecision,theActdidnotpermitinteresttobedeductedinrespectofmoneyborrowedtoacquireshares;there-fore,priortotheamalgamation,interestontheindebtednesswasnotdeductible.However,followingtheamalgamation,theprovisionthatdisallowedthedeductionnolongerappliedsincetheinvestmentinshareshaddisappearedandtheborrowedmoneycouldbeconsideredaninvestmentinthebusiness.Thetaxpayerarguedthatsubsection85I(2)providedforanamalgamatedcorporationtobedeemedtobeanewcorporation,andthatinthiscase,priortotheamalgamation,therewasaficti-tiousacquisitionofassetsofShoeCompanybyOldUnitedthatresultedinanewcorporation.

HugessenJquotedthefollowingstatementmadebyThurlowJ,ashethenwas,inPalmer-McLellan:

AcceptingthatthestatuterequiresthattheappellantbetreatedasanewcorporationforthepurposesoftheIncome Tax Actsuchpurposes,sofarasrelevant,are,asIseeit,the measuring of its income for prescribed periods of time, including the determination of deduc-tions to which it may be entitled, and the computation of its liability for tax.Thesepurposesdonotseemtometorequireanyinferencetobemadeastohowthenewcorporationcameintopossessionofwhateverassetsithadatthecommencementofitsfictitiousexistence.ItistobetreatedasanewcorporationforthepurposesIhavementionedbut,asIseeit,itisnottobetreatedasanewcorporationforanyotherpurposesandIseeinsection85I[nowsection87]no basis for treating the assets of such a corporation as having been acquired in any other manner than that in which they were in fact acquired,thatistosay,themannerinwhichtheywereacquiredbytheamalgamatingcorporations.33

HugessenJcontinued:

The[emphasized]passagesmakeitclear,inmyview,thattheprovisionsofparagraph87(2)(a)areapplicabletotheamalgamatedcompany’scomputationofincomeunderDivisionB(includingthe“deductionstowhichitmaybeentitled”)and,whereneces-saryasaconsequencethereof,toitscomputationsoftaxableincome(DivisionC)andoftax(DivisionE).ThatiswhatthisCourtheldinGuaranty Propertiesandthedecisioninthatcaseshouldbelimitedtothatholding.In particular, it should not be read as deny-ing that the amalgamated corporation is to be deemed to be a new corporation for all purposes relating to the computation of its income.34

shallbedeemedtohavecommencedatthetimeoftheamalgamation,andataxationyearofapredecessorcorporationthatwouldotherwisehaveendedaftertheamalgamationshallbedeemedtohaveendedimmediatelybeforetheamalgamation.

33 Palmer-McLellan,supranote31,at5308,quotedinPan Ocean,supranote6(FCA),at6415(emphasisaddedbyHugessenJ).



At least twoauthorshavenoted that theoutcome inPan Ocean is surprising,sinceitseemsclearthattheFederalCourtofAppealhadexpresslyconsideredthesameissuesinGuaranty PropertiesandhaddismissedinGuaranty Propertiesthepos-itiontakenbytheCrowninPan Ocean.35Curiously,Pan OceanignoredtheexplicitpositiontakeninGuaranty Properties“that the purpose Parliament had in mind was not to bring amalgamating corporations to an end but merely to give them a deemed year-end and the new corporation a deemed year-beginning.”36Thebasisforthecourt’sexpansioninPan OceanofthedecisionreachedinGuaranty Propertiesisdifficulttounderstand.ThecourtseemedtosuggestthatwhileGuaranty Propertiesdidnotestablishageneralrule,limitingtheapplicationtothetimingofataxationyear-endmerelyimpliesthattheprovisioncannotapplyforthepurposesoftheentireAct.However,thespecificprovisionsthatwereheldtobeapplicableforthepurposesofparagraph87(2)(a)inPan Oceanseemtobeself-servingandpurposefullydeterminedonthebasisofthedesiredoutcome.There isnorationale for limitingtheapplicationofparagraph87(2)(a)totheparticulardivisions.ItwouldhavebeenmorelogicalforthecourttohavedecidedthattheprovisionshouldbereadasapplyingtothewholeActonthebasisofthewording“forthepurposesofthisAct”inparagraph87(2)(a).Indeed,inCanadian Roxy Petroleum Limited v. The Queen,theAlbertaCourtofQueen’sBench,discussingtheimplicationofPan Ocean,stated:

[I]tisnotablethattheCourt[inPan Ocean]limitedtheapplicationofs.87(2)tothecomputation of income for tax purposes even though that section begins with thewords“forthepurposesofthisAct.”37

Asdiscussedbelow,thedecisionoftheFederalCourtofAppeal inCGU Holdingsadoptedthesameposition.

CURRENT JURISPRUDENCE

SubsequenttothedecisionsinGuaranty PropertiesandPan Ocean, therewerenoFederalCourtofAppealcasesthatconsideredtheapplicationofparagraph87(2)(a)untiltherecentdecisionsofDow ChemicalandCGU Holdings.InCGU Holdings,thecourtimplicitlyrejectedthedecisioninGuaranty Properties.WhilethedecisioninCGU Holdingshasbroughtsomeclaritytotheproperinterpretationofparagraph87(2)(a), itdoes raise certain issueswith respect to theapplicationof the law incircumstancessuchasthosethatexistedinGuaranty Properties.

35 SeeJoelA.Nitikman,“CurrentCasesofInterest,”inReport of Proceedings of the Forty-Sixth Tax Conference,1994ConferenceReport(Toronto:CanadianTaxFoundation,1995),12:1-52,at12:33-34;andRichards,supranote8,at249.


37 98DTC6313,atparagraph28(Alta.QB).ThecourtinRoxyacceptedthePan Oceandecisionandlimitedtheapplicationofsubsection87(2)tothecomputationofincomefortaxpurposes.


Dow Chemic al38

Dow Chemicalprimarilyconsideredsubsections87(7)39and78(1)40oftheAct,al-thoughsomereferencewasmadetoparagraph87(2)(a),particularlyinthejudgmentoftheTaxCourtofCanada.Inthiscase,thetaxpayer,DowChemicalCanadaInc.(“AmalgamatedDCCI”)appealedadeterminationbytheministerthat,pursuanttosubsection78(1),thetaxpayermustincludeinincomeforitsDecember2001taxationyeartheamountof$30,990,628,whichwasrelatedtoaccruedbutunpaidinterestthatapredecessorcorporationhaddeductedinaprevioustaxationyear.

In1998,UnionCarbideCorporation(“UCC”),aUScorporation,loanedmoneytoarelatedparty,UnionCarbideCanadaInc.(“UCCI”).In1999,UCCassigneditsreceivabletoUnionCarbideCanadaFinanceInc.(“UCCFI”),acorporationrelatedtoeachofUCCandUCCI.IncomputingitsincomeforthetaxationyearendingDe-cember31,2000,UCCIdeductedtheamountof$30,990,627asaccruedinterestforthe2000calendaryearinrespectoftheamountowingtoUCCFI.

OnFebruary6,2001,DowChemicalCompany(“Dow”),aUScorporation,ac-quiredcontrolofUCC.OnOctober1,2001,UCCIamalgamatedwithDow’swhollyownedsubsidiary,DowChemicalCanadaInc.,pursuanttotherelevantprovisionsoftheCanadaBusinessCorporationsAct,41toformAmalgamatedDCCI.

UCCIhadtwotaxationyearsin2001—onebeginningJanuary1,2001andendingFebruary6,2001,asaresultoftheacquisitionofcontrolbyDow,42andthesecondbeginningFebruary7,2001andendingSeptember30,2001,asaresultoftheamal-gamation.43AmalgamatedDCCI’sfirsttaxationyearbeganonOctober1,2001andendedonDecember31,2001.

AsUCCIhaddonein2000,inits2001incometaxreturn,AmalgamatedDCCIreportedanetlossof$35,066,100(relatedtotheunpaidinterest)andacurrent-yearnon-capitallossof$61,604,100.Theministersubsequentlyissuedareassessment

38 Supranote3.

39 Subsection87(7)statesthatwhereadebtofapredecessorcorporationbecomesanobligationoftheamalgamatedcorporation,theActshallapplyasiftheamalgamatedcorporationhadincurredthedebtatthetimethepredecessorcorporationincurredthedebt.

40 Subsection78(1)providesthatwhereanamountinrespectofadeductibleoutlayorexpenseisowedbyataxpayertoapersonwhowasnon-arm’s-lengthatthetimetheoutlayorexpensewasincurredandtheamountisunpaidattheendofthesecondtaxationyearfollowingthetaxationyearinwhichitwasincurred,theunpaidamountistobeincludedincomputingthetaxpayer’sincomeforthethirdtaxationyearfollowingthetaxationyearinwhichtheoutlayorexpensewasincurred.

41 RSC1985,c.C-44.

42 Inaccordancewithsubsection249(4)oftheAct.

43 Thisfactistakendirectlyfromthecase.SincethefirsttaxationyearwouldhaveendedimmediatelypriortotheacquisitionofcontrolonFebruary6byvirtueofsubsection249(4),technicallythesecondtaxationyearmusthavecommencedpriortoFebruary7.Thedecisiondoesnotdependuponthetimeatwhichthesecondtaxationyearstarted.


reducing these losses and adjusting Amalgamated DCCI’s income to include thedisputedamountintheappeal.AmalgamatedDCCIrequestedthattheministerde-terminetheamountoflossesforits2001taxationyear.TheministerissuedanoticeoflossdeterminationforAmalgamatedDCCI’s2001taxationyear,reducingitsnon-capitallossto$9,381,511onthebasisthattheinterestof$30,990,628previouslyaccruedanddeductedbyUCCIhadtobeincludedinAmalgamatedDCCI’sincomeforits2001taxationyear.Thisnoticeofdeterminationwasbasedontheminister’sinterpretationofparagraph87(2)(a), thatDCCIwasconsideredacontinuationofUCCI.Therefore,theamountdeductedbyUCCIpursuanttosubsection78(1)initstaxationyearendedDecember31,2000shouldbeincludedinAmalgamatedDCCI’sincomeforits2001taxationyear.

TheTaxCourtfoundinfavourofAmalgamatedDCCIonthebasisthatsection87deemedAmalgamatedDCCI tobeanewcorporation.TheTaxCourt judgealsoconsidered the non-arm’s-length condition outlined in subsection 78(1), whichprovidesthat,fortheprovisiontoapply,anon-arm’s-lengthrelationshipmustexistatthetimetheoutlayorexpenseismadeandattheendofthesecondtaxationyearfollowingthetaxationyearinwhichtheoutlayorexpensewasincurred.Inthecaseofanamalgamation,thisconditionmustexistatthetimethedebtor-creditorrela-tionshipisestablishedandimmediatelypriortotheamalgamation.TheTaxCourtconcludedthatAmalgamatedDCCIandUCCFIwererelatedimmediatelypriortotheamalgamation.Specifically,priortotheamalgamation,UCCIandUCCFIwererelatedbecausetheywerebothcontrolledbyDow;andUCCIwasdeemedtohavebeenrelatedtoAmalgamatedDCCIundersubsection251(3.1).Undersubsection251(3),anytwocorporationsrelatedtothesamecorporationaredeemedtoberelatedtoeachother.Therefore,AmalgamatedDCCIwasrelatedtoUCCFIimmediatelybeforetheamalgamation.

However,theTaxCourtalsoconcludedthatpriortotheacquisitionofcontrolbyDow,therewasnoprovisionintheActthatwouldresultinAmalgamatedDCCIandUCCFIbeingrelated.Therefore,sincetheinterestexpensewasincurredin2000,theinitialnon-arm’s-lengthconditionwouldnotbemetundersubsection78(1).TheTaxCourtfurtherheldthatsubsection87(7),whichprovidesthattheActistobeapplied“asif ”thedebthadbeenincurredbyAmalgamatedDCCI,didnotestablishthatAmalgamatedDCCIandUCCFIwerenon-arm’s-lengthwhenthedebtwasin-curred,eventhoughitdidsupportthepositionthatthedebtincurredbyUCCIwastobeconsideredasenteredintobyAmalgamatedDCCI.

TheTaxCourtheldthatAmalgamatedDCCIandUCCIweredistinctcorpora-tions.Accordingly,whileUCCIhadtwotaxationyear-endsthatoccurredin2001,AmalgamatedDCCI’sfirsttaxationyearcouldnotbeconsideredtobeUCCI’sthirdtaxationyearforthepurposesofsubsection78(1).Therefore,UCCIdidnothaveathirdtaxationyearinwhichtheamountcouldbeincludedinincome.Accordingly,noamountofinterestshouldhavebeenincludedinAmalgamatedDCCI’sincomeforits2001taxationyear.TheTaxCourtalsoaddedthatwhilesubsection78(2)specificallyprovidesforthetreatmentofoutstandingdebtsonawindingup,thereisnoequiva-lent provision that deals with amalgamations. Further, while paragraph 87(2)(d)


woulddeemAmalgamated DCCI tohave incurred thedebtobligation that UCCIincurred,thereisnorelatedprovisionthatwouldoperatetodeemAmalgamatedDCCItobedealingnotatarm’slengthwithUCCFI,asisrequiredbysubsection78(1).Therefore,therewasnoprovisionoftheActthatincludedtheamountpreviouslydeductedbyUCCIinAmalgamatedDCCI’sincomeforits2001taxationyear.

TheCrownappealedthedecision.AttheFederalCourtofAppeal,theministermaintainedthattheinclusionoftheamountinthecomputationoftherespondent’sincomewasgovernedbysubsections78(1)and87(7)andthattheTaxCourthadfailedtocorrectlyinterprettheseprovisions.NoëlJconcludedthattheTaxCourthadmisconstruedparagraph87(7)(d)andsubsection78(1).Section87providesgen-erallythattherightsandobligationsofpredecessorcorporationscontinuetothe“newcorporation.”Paragraph87(7)(d)specificallyprovidesthatadebtorobligationofapredecessorcorporationthatwasoutstandingimmediatelybeforetheamalgamationappliesasifthenewcorporationhadincurredorissuedthedebtorotherobligationatthetimeitwasincurredbythepredecessorcorporation.NoëlJ,statedthat

basedonbothaplainandacontextualreadingofparagraph87(7)(d),anamalgamatedcorporationstandsintheshoesofitspredecessorinsofaraspreviouslyincurreddebtsareconcernedasofthetimewhentheywereincurred.

I can see no basis for the respondent’s submission that Amalco [AmalgamatedDCCI]shouldbeviewedashavingincurredtheobligationbackin2000,butwithoutregardtothenon-arm’slengthrelationshipthatprevailedatthattime....Thewords“asif ”arenotsolimited,andsuchareadingwouldfrustrateParliament’sclearlyex-pressedintentthatdeductibleexpensesthatareowingtoarelatedpartybeincludedinincomeunlesstheyarepaidwithinthesubsequenttwotaxationyears.44

TheCourtofAppealheldthatUCCIandUCCFIwerenotdealingatarm’slengthwhenthedebtobligationwasincurredsinceUCCIandUCCFIwerebothcontrolledbyUCC.Therefore,onceAmalgamatedDCCIwasplaced“intheshoes”ofUCCI,itmustfollowthatUCCFIandAmalgamatedDCCIwerenotdealingatarm’slengthwhentheobligationtopayinterestwasincurred(thatis,in2000).Inaddition,atthe endof the second taxationyear after the year inwhich the interest accrued(2001,priortotheamalgamation),anon-arm’s-lengthrelationshipexistedbetweenAmalgamatedDCCIandUCCFI.Therefore,theFederalCourtofAppealheldthattheconditionsprecedenttotheapplicationofsubsection78(1)weremetandtheinterestamountwasproperlyincludedinAmalgamatedDCCI’sincomeforitsfirsttaxationyear.

Dow Chemicalmaynotbehelpfulinprovidingadditionalguidanceontherea-soningestablished inPan Ocean fordeterminingwhethera“newcorporation” isformedforthepurposesofparagraph87(2)(a),sincethedecisiondidnotdirectlyconsiderparagraph87(2)(a).TheFederalCourtofAppealevennotedthatthePan Oceandecisionwasof“noassistancetotherespondentonthispointsincenothing

44 Supranote3(FCA),atparagraphs30and31.


turnsonthefactthatAmalco[AmalgamatedDCCI]andUCCIareotherwisedistinctcorporations.”45TheonlyreasonforrequiringAmalgamatedDCCItoincludetheinterest in income was the application of paragraph 87(2)(d), which specificallyprovidesthatdebtsincurredbypredecessorcorporationscontinuetobeowedbyamalgamatedcorporations.Therefore,althoughtheFederalCourtofAppealfol-lowedthePan Oceandecision,thecourtdidnotprovideanyclarificationastothecircumstancesinwhichanewcorporationwillbeconsideredtobeformedwhereanamalgamationoccurs.

CGU Holdings 4 6

CGU Holdingsextendsthegeneralprinciplessetout inPan Oceanandgivespara-graph 87(2)(a) a meaning that is more consistent with the plain meaning of theprovision.

InCGU Holdings,thetaxpayer,CGULtd.(“CGU”),wasacorporationformedbytheamalgamationofthreecompanies,oneofwhich(“GALtd.”)wasanon-resident-owned investment corporation47 (NRO) under the Act. Immediately before theamalgamation,GALtd.hadasubstantialrefundabletaxonhand48(RTOH)balance.Duringitsfirsttaxationyear,CGUpaidataxabledividendtoanNROshareholderandmadeanelectiontobedeemedanNROpursuanttosubsection134.1(1).

In2000,theActwasamendedtophaseoutthespecialtreatmentaffordedtoNROs.InordertoaccommodatecertaintimingissuesthatwouldresultinsomeNROsbe-ingunabletoclaimrefundabletaxondividendspaidpriortothephase-outoftheNROprovisions,section134.1wasaddedasatransitionalrule.Section134.1allowsacorporationthatwasanNROinaparticularyearbutisnotconsideredanNROinthefollowingtaxationyeartoelecttocontinuetobetreatedasanNROinthatsub-sequenttaxationyear.

Whereacorporationmeetstheconditionssetoutinsubsection134.1(1),sub-section134.1(2)deemsthecorporationtobeanNROinitsfirstnon-NROyear

forthepurposesofapplying,inrespectofdividendspaidonsharesofitscapitalstockinitsfirstnon-NROyeartoanon-residentpersonoranon-resident-ownedinvestmentcorporation, subsections 133(6) to (9) (other than the definition of “non-resident-owned investment corporation” in subsection 133(8)) and section 212 and any taxtreaty.

Subparagraph87(2)(cc)(i)providesthatwherethereisanamalgamationandthenewcorporationisconsideredtobeanNRO,theRTOHofthepredecessorcorpor-ationbecomestheRTOHoftheamalgamatedcorporation.

45 Ibid.,atparagraph36.

46 Supranote4.

47 Asdefinedinsubsection133(8).

48 Seesubsections133(8),thedefinitionof“allowablerefund,”and133(9),thedefinitionof“allowabletaxonhand.”


CGUmadeanelectionpursuanttosubsection134.1(1)andappliedforanallow-ablerefundfromtheRTOHaccountonthepaymentofthetaxabledividendpursuanttosubsection133(6).TheRTOHrefundrequestedincludedthebalanceofGALtd.’sRTOHaccount,basedonsubparagraph87(2)(cc)(i).TheministerassessedCGUanddeniedtherefundonthebasisthatCGUdidnotsatisfythecriteriasetoutintheActformakingtheelectiontobeanNRO,sinceitcouldnotbeconsideredtobeanNROwhenitwasformed.Inaddition,theministerheldthattheRTOHaccountofCGUwasnil.Accordingtotheminister,theRTOHaccountofGALtd.didnotformpartoftheRTOHaccountofCGUsincethedeemingprovisioninsection134.1didnotextendtothedefinitionofanNROundersubsection133(8),whichdeemsacorpor-ationtonotbeanNROundercertaincircumstances.

AttheTaxCourtlevel,HershfieldJheldthatCGUdidhavethestandingtomakethedeemedNROelectionbecause,whileCGUwasnotconsideredtobethesamecorporationasitspredecessors,thepredecessorcorporationscontinuedtoexistinthe amalgamated corporation.49 According to the Tax Court, paragraph 87(2)(a)appliesonlyforcertainpurposes,suchasthecomputationofincome,taxablein-come,ortax(asheldinPan Ocean),butdoesnotapplyforthepurposesofmakinganelectiontobetreatedasanNRO.Therefore,CGUwasnotdeemedtobeanewcorporationpursuanttoparagraph87(2)(a),butwasacontinuationofthepredeces-sorcorporations.Asaresult,becauseGALtd.wasconsideredtobecontinuedintheamalgamatedcorporation,andsinceGALtd.wasanNROpriortotheamalgama-tion,CGUwasentitledtomakeanelectionpursuanttosubsection134.1(1).TheTaxCourtheldthatCGUwasconsideredanNROundersubsection134.1(1),notwith-standing that thedefinition in subsection133(8) specificallyprovides thatanewcorporationformedasaresultofanamalgamationisnotanNROunlesseachofthepredecessorcorporationswasanNROpriortotheamalgamation.50Asaresultofthatexception,absentsubsection134.1(1),CGUwouldnotbeconsideredanNROforthepurposesoftheAct.

However,theTaxCourtheldthatGALtd.’sRTOHbalancedidnotformpartoftheRTOHaccountofCGUandthereforeCGU’sRTOHaccountbalancewasnil.Thisdecisionwasbasedonthe fact that theelectiontobetreatedasanNROdidnotapplyforthepurposesofparagraph87(2)(cc)butappliedonlyforthepurposesoftheprovisionsspecificallyreferredtoinsubsection134.1(2),asdescribedabove.

HershfieldJacknowledgedthenarrowscopeofparagraph87(2)(a)generally,butpointedoutthathewasboundbysuchnarrowinterpretationwhenhesaid:

ThecasesreliedonbytheAppellant[thetaxpayer]arereflectiveofthestateofthelaw.ParliamenthaswatchedhowtheCourtshave limitedtheapplicationofpara-graph87(2)(a)anddonenothingtogiveitafullerlife.TosaynowthatreadingtheAct

49 AsperBlack & Decker,supranote7.

50 Paragraph(g)ofthedefinitionof“non-resident-ownedinvestmentcorporation”insubsection133(8).


asawholeshouldsupporttheRespondent’sargumentthatthisCourtonitsowninitia-tivebreathefreshlifeintothatsectionisnotsomethingIampreparedtodoeventhoughIamoftheviewthatthelawasithasevolvedhasputlimitationsonitsapplicationthatIlikelywouldnothaveimposed.Isaythisasitseemstome,lookingattheActandRegulationsasawhole,thatthedraftersoftheamalgamationprovisionsoftheActhaveassumedthatanamalgamationgivesrisetoanewcorporationthathasnoneofthetaximpactingattributesofapredecessorunlesstheyarecontinuedbyanexpressprovisionoftheAct.ThisgivesParliamentcontroloverthecircumstancesthataffordanamalgamatedcorporationthetaxtreatmentaffordedapredecessor.Parliament,orsoitseems,wantedtohavethatcontrolinordertosay“no”totheverysituationbeforemeunlessitchosetoexpresslyprovideotherwise.However,eventhoughParliamentsawsuchcontrolslippingaway,itdidnothingtorestoreit.Perhapsthatcastsdoubtonthattheoryinthefirstplace.51

Sincehewasboundby thePan Oceandecision,Hershfield Jheld that sincesec-tion134.1doesnotdealwiththecalculationofincomeortaxableincome,whichwouldresultinafindingthatforthosepurposesCGUwasanewcorporationpursu-anttoparagraph87(2)(a),theelectionmuststand.

Withrespecttowhetherapredecessor’sRTOHaccountflowsuptoanamalgam-atedcorporation,CGUarguedthatiftheelectionundersection134.1didnotpermittheautomaticflowthroughprovidedunderparagraph87(2)(cc),theelectiontobetreatedasanNROwouldberenderedmeaningless.Thatis,itisimpossibletoapplysubsections133(6)through(9)(theNROprovisionsforwhichsection134.1applies)withoutapplyingsubparagraph87(2)(cc)(i).Inaddition,CGUarguedthatthedeem-ingprovisionsinsection134.1arebroadenoughtoallowforthetransferoftheRTOHaccount,andnothingintheNROdeemingprovisionsprecludestheapplica-tionofsubparagraph87(2)(cc)(i).

TheTaxCourtdeterminedthatCGU’sRTOHaccountbalancewasnilonthebasisthatParliamentdidnotintendforamalgamatedcompaniestomakeanelectiontobetreatedasanNROinthefirstplace.Thecourtnotedthatthereisnomentionofsubparagraph87(2)(cc)(i)insubsection134.1(2)becauseitwasnevercontemplatedthatsection134.1wouldoperateasithaswheretherequirementsforNROstatushavenotbeenmetgenerally.HershfieldJnoted:

Accordingly,anamalgamatedcorporationthathaslostitsNROstatusasaresultoftheamalgamationissimplynotdeemedbysection134.1tobeanNROforthepurposesofsection87....Thereisnobasistoexpandthescopeofthedeemingprovision,wheretodosogoeswellbeyonditsphasingoutpurposeandopensadoorthatParliamentclearlyhadintentionallyshut.52

Onthisbasis, thecourtheld that theRTOHaccountdidnotflowuptoCGUonamalgamation. The court also stressed that while CGU tried to argue that it is

51 Supranote4(TCC),atparagraph32.



merelyacontinuanceofGALtd.andthereforeanNRO,thereisnobasistosuggestthatacontinuedcorporationisthesameasthepredecessor,orthattheRTOHac-countisautomaticallytransferredonanamalgamation.Ifsuchatransferistobepermitted,itmustbeexpresslyprovidedforintheAct.HershfieldJnoted:

Therefundabletaxaccountisnotlikeland,inventory,contractualrightsorgoodwillthat areproperty transferredundercorporate lawandby theActunderparagraph87(1)(a)fromapredecessortotheamalgamatedcorporation.Thattransfermustbeprovidedforexpresslybythelegislationthatnotionallybroughtitintobeing.Thathasnotbeendone.Thelegislativeschemehereisclearlynottopermitsuchtransfer.In-deed,tothecontrary,thetransferisexpresslyprohibitedinthecircumstancesofthecaseatbar.53

Thetaxpayerappealedthedecision.AttheFederalCourtofAppeal,NoëlJre-jected the Tax Court’s position that paragraph 87(2)(a) “only applies for certainpurposes.”54Thecourtheld,contrarytotheTaxCourt,thatGALtd.’sstatusasanNROwasnotpreservedforthepurposesofmakinganelectionundersection134.1.NoëlJ,quotingthepositionoftherespondent,noted:

InreachingtheconclusionthatCGUhadthestatustomaketheelection,theTaxCourtJudgegavethedecisionofthisCourtinPan Ocean Oil Ltd.,supra,toowideareach.Inparticular,thereisnoreasontorestricttheapplicationofthenewcorporationrulesetoutinparagraph87(2)(a)tothecomputationofincomeandtaxableincome.55

NoëlJfurtherpointedout:

Theobservationthatanamalgamatedcorporationis“only”anewcorporationforthepurposeof the [sic] computing incomeunderDivision B andwherenecessary as aconsequencethereof,toDivisionsCandEisobiter.TheCourt[inPan Ocean]didnotdecide,letaloneconsiderwhetherparagraph87(2)(a)deemsanamalgamatedcorpor-ationtobeanewcorporationforthepurposeoftheNROprovisionsinDivisionF.

Considering thisquestion, it isapparent that thenewcorporationrule inpara-graph87(2)(a)whichissaidtoapply“forthepurposesofthisAct,”wouldberenderedmeaninglessinthecontextofDivisionF,ifitsapplicationwasrestricted,astheappel-lantsuggests,tothecomputationofincome(DivisionB),andwherenecessarytothecalculationoftaxationincome(DivisionC)andtax(DivisionE).56

Onthebasisofthisreasoning,thecourtheldthatCGUwasconsideredanewcor-porationforthepurposesofparagraph87(2)(a),sincetheprovisionshouldapplyforthepurposesoftheentireActandspecificallyforthepurposesofdivisionF.


54 Supranote4(FCA),atparagraph16.


56 Ibid.,atparagraphs40and41.


Therefore,CGUwasneverconsideredanNROinataxationyearpursuanttopara-graph134.1(1)(a)(sinceonlythepredecessorwasconsideredanNRO)andwasnotentitledtomakeanelectiontobetreatedasanNRO.

ThecourtofAppealinCGU Holdingsgaveaplainmeaningtotheprovisionsofparagraph87(2)(a)andprovidestheclaritythathasbeensoughtformanyyears.Inreachingitsdecision,thecourtexpresslybroadenedtheapplicationofparagraph87(2)(a) and thePan Ocean decision.While thecourt specifically considered theapplicationofparagraph87(2)(a)onlytodivisionF,thedecisioninCGU Holdingsimplicitlysuggeststhatthereisnobasisforlimitingitsapplicationtocertaindivi-sions;tothecontrary,paragraph87(2)(a)shouldapplyforthepurposesoftheentireAct,astheprovisionreads.

Thewordingofthedecisionisclearenough.However,historically,incaseswheretheFederalCourtofAppealhasconsideredparagraph87(2)(a),thecourt’sdecisionshavedistinguishedwhat appeared tobe clearholdingsofpreviouspanelsof thesamecourt.Practitionerswouldhavewelcomedaboldstatementtotheeffectthat,astheSupremeCourtofCanadastatedinShell,“Wheretheprovisionatissueisclearandunambiguous,itstermsmustsimplybeapplied,”57andthereforethecom-mentsinthejurisprudencethatlimitedtheapplicationofparagraph87(2)(a)werenolongergoodlaw.Unfortunately,thecourtinCGU Holdingswasnotthatbold.

OnedoeswonderwherethedecisioninCGU HoldingsleavesthedecisionsofPan OceanandGuaranty Properties.CGU HoldingswouldhavenoeffectonthedecisioninPan OceansincethecourtinPan Oceantreatedtheamalgamatedcorporationasanewcorporationforthepurposesoftherelevantprovisions.However,ifacourtweretogivethedecisioninCGU Holdingsitsfullscope,alitigantinthesamepositionasthetaxpayerinGuaranty PropertiesshouldbesuccessfulonthebasisofthereasoninginCGU Holdings.58ThecourtinCGU HoldingsappearedtoanticipatethisresultwhenitcommentedthatthecourtinPan OceanheldthatthedecisioninGuaranty Propertieswaslimitedtoitsownfacts.59Unfortunately,thiswasabackhandedendorsementoftheholdinginGuaranty Properties.Suchholdingisillogicalifacourtproperlyap-plies the interpretation of paragraph 87(2)(a) to the facts in Guaranty Properties.However,withoutafirmstatementfromthecourtinCGU HoldingsthatGuaranty Propertiesisnolongergoodlaw,acourtfacedwithasimilarsituationmaysaythattheissuehasbeenpreviouslyconsideredbytheFederalCourtofAppealandthatthecourthearingthecaseisboundbythatdecision.

CONCLUSION

Thejurisprudencedealingspecificallywithparagraph87(2)(a)hasnotbeenconsistentovertheyears,andreconcilingearliercaseswiththemorerecentonesisdifficult.Inreadingtheprovision,onewouldsimplyhavesurmisedthattheprovisionshould

57 Shell Canada Limited v. The Queen et al.,99DTC5669,atparagraph40(SCC).

58 TherelevantassessmentprovisionshavenotchangedsincetheGuaranty Propertiesdecision.

59 Supranote4(FCA),atparagraph39.


applygenerallyforallpurposesoftheAct.However,formanyyears,theprovisionappliedonlyforthepurposeofdeterminingthetaxationyear-endofpredecessorcorporationsonanamalgamationandforthecomputationoftaxableincome.Onlyrecentlyhastheappropriateinterpretationbeenpresented,intheCGU Holdingsde-cision.CGU Holdingshasestablishedamoregeneralprinciplefortheapplicationofparagraph87(2)(a).Despitethisclarification,itisstillunclearhowthisdecisionwillbeappliedinthefuturewhendifferentfactsarepresentedtothecourts,especiallywherethefactsaresimilartothoseinGuaranty Properties,sincetheinterpretationinCGU Holdingsmaybeinconsistentwiththereassessmentprovisions.Further,sincecourtsrenderdecisionsonlyonthebasisofthefactspresented,itremainstobeseenwhethersituationsthatinvolvedivisionsoftheActthathavenotbeenconsideredbythejurisprudencetodatewillbeanalyzedaccordingtotheinterpretationsetoutinCGU Holdings.

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Corporate Tax Planning - Canadian Tax Foundationcorporate tax planning n 189 debate,9 the recent jurisprudence discussed below supports the proposition that they do.10 Paragraph 87(2)(a)