Supreme Court Dismisses Appeal inAmalgamation Case

by Steve Suarez

Reprinted from Tax Notes Int’l, September 30, 2013, p. 1278

Volume 71, Number 14 September 30, 2013

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Supreme Court Dismisses Appeal inAmalgamation Case

The Supreme Court of Canada (SCC) on September26 dismissed the taxpayer’s appeal in Envision CreditUnion v. Canada (2013 SCC 48), a case in which twocredit union corporations (the predecessors) merged toform a single entity (Envision) under the corporatelaws of the province of British Columbia.

Envision took the position that the merger was ataxable transaction that did not constitute a ‘‘qualifyingamalgamation’’ (a tax-deferred merger of the two par-ticipating entities) under the Income Tax Act (Canada)and therefore, Envision could claim a higher amount ofcapital cost allowance (CCA), the Canadian tax versionof depreciation. All seven SCC justices hearing thecase disagreed and found in favor of the Crown.

BackgroundThe merger was undertaken for nontax reasons but

was structured with the intention of achieving the mosttax-advantageous result. Specifically, SCC Justice Mar-shall Rothstein characterized Envision’s planning as an‘‘attempt to double claim capital cost allowance and[produce] an enhanced capacity for a lower tax rate ona portion of its income.’’1 The parties agreed that thesecond tax planning objective had not been met, and assuch, the case was limited to Envision’s claim forhigher CCA.

The ITA provides that in a qualifying amalgama-tion, the tax attributes and tax history of the predeces-sor corporations flow through to the amalgamated en-tity for various tax purposes. It was this flow-throughthat Envision was attempting to prevent by structuringthe merger in such a way as to prevent it from being aqualifying amalgamation under the ITA.

To constitute a qualifying amalgamation, Envisionwould have had to acquire all of the property and as-sume all of the liabilities of the predecessor corpora-tions. Envision sought to prevent that by providing in

the amalgamation agreement between the two prede-cessor corporations that certain surplus properties be-longing to them were, simultaneously with the merger,transferred to a recently created subsidiary (619) in ex-change for shares of that subsidiary. As such, Envisionargued that it had not acquired all of the property ofits predecessors and the merger was therefore not aqualifying amalgamation. This in turn allowed Envi-sion to determine its CCA without taking into consid-eration CCA deductions previously claimed by its pre-decessors.

Lower Courts

The lower courts had also dismissed Envision’s ap-peal, but on different grounds than those stated by theSCC. The Tax Court of Canada (TCC) found that themerger that created Envision was in fact not a qualify-ing amalgamation. The sale of the property to 619 oc-curring under the amalgamation agreement had suc-cessfully prevented Envision from acquiring all of theproperty of its predecessors, the TCC concluded. How-ever, Envision’s appeal was still unsuccessful becausethe TCC determined that the result of a nonqualifyingamalgamation was the same as that produced by aqualifying amalgamation because the relevant corporatelaw provided that Envision was a continuation of itspredecessors and must therefore be considered to haveclaimed any CCA deductions taken by those predeces-sors.

The Federal Court of Appeal (FCA) also foundagainst the taxpayer, but on different grounds. TheFCA found that the amalgamation was a qualifyingamalgamation, but it did so in a way that many tax-payers found unsettling.

Essentially, the FCA found that Envision had ac-quired all of the property of its predecessors on theamalgamation, notwithstanding the fact that Envisionnever directly acquired the property that was simultane-ously transferred to 619. The transfer to 619 ‘‘merelychanged the form of the predecessors’ property thatbecame property of Envision,’’ the FCA held, addingthat because Envision owned all of the shares of 619,‘‘all of the property owned by the predecessors imme-diately before the amalgamation can thus be traced1See Envision, 2013 SCC 48, para. 2.

COUNTRYDIGEST

Reprinted from Tax Notes Int’l, September 30, 2013, p. 1278

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TAX NOTES INTERNATIONAL SEPTEMBER 30, 2013 • 1

directly to property owned by Envision after the amal-gamation.’’2 Many in the tax community were dis-tinctly uncomfortable with this reasoning because iteffectively looked through the separate existence of thesubsidiary, a view that is inconsistent with the mannerin which taxation statutes are generally interpreted inCanada.

SCCThe SCC reached the same effective result as the

lower courts, but on the basis of simpler and more sat-isfying reasoning. Rothstein noted the wording of therelevant corporate statute (the Credit Union Incorpora-tion Act, or CUIA) governing the amalgamation:

23. On and after the date of the amalgama-tion . . .

(b) the amalgamated credit union is seized of andholds and possesses all the property, rights andinterests and is subject to all the debts, liabilitiesand obligations of each amalgamating creditunion . . .

‘‘This language provides that the result of an amal-gamation under the CUIA is that the amalgamatedcredit union is the owner of all the property of its pre-decessors,’’ Rothstein held.

Moreover, contrary to the finding of the TCC, theparties could not choose to contract out of that statu-tory result in the amalgamation agreement or other-wise deviate from it under the CUIA. The only way inwhich Envision’s predecessors could have amalgamatedunder the CUIA was for Envision to have acquired allproperty owned by its predecessors, the SCC said. Al-lowing amalgamations to occur on any other basiswould undermine the statutory scheme and potentiallycause the creditors of a predecessor to lose the protec-tion they are intended to have by requiring the amal-gamated entity to acquire all property of its predeces-sors.

As such, the CUIA both required and deemed Envi-sion to own the surplus properties of its predecessors,making the amalgamation a qualifying amalgamationfor ITA purposes. By operation of law, Envision simplyinherited and immediately fulfilled the sale obligation

to 619 under the amalgamation agreement, transferringthe surplus properties to 619 in exchange for 619shares.3

While this finding was enough to dispose of the ap-peal, the SCC went on to address4 the FCA’s ‘‘ap-proach of tracing the surplus properties through theshares of 619’’ as a basis for concluding that themerger was a qualifying amalgamation. Rothstein ob-served that ‘‘it is a basic rule of company law thatshareholders do not own the assets of the company’’whose shares they own. In the absence of an explicitdeeming rule to the contrary in the ITA, Envisiontherefore could not be said to own property that was infact owned by a wholly owned subsidiary, he said.Therefore, ‘‘the tracing approach cannot be used tocause an amalgamation to [be a qualifying amalgama-tion],’’ Rothstein held.

ConclusionThe SCC’s decision is significant, not only because

it highlights the importance of carefully interpretingnontax (corporate) law to assess the tax consequencesof a transaction but also because it so clearly rejectedthe FCA’s tracing approach.

Left unaddressed, that approach could have cast sig-nificant doubt on both the general principle that Cana-dian tax law applies based on the legal results pro-duced by the taxpayer’s transactions, and indeed on theproper interpretation of taxing statutes generally.

Treating Envision as owning 619’s property orstretching the words of the ‘‘qualifying amalgamation’’provisions beyond their normal meaning to try andachieve a particular result was not appropriate, theSCC said, and it rightly rejected that approach. Theresult reverses the uncertainty produced by the lowercourt decision: a welcome result. ◆

♦ Steve Suarez, Borden Ladner Gervais LLP, Toronto

22011 FCA 321, para. 39.

3Envision, 2013 SCC 48, para. 52: ‘‘At the moment that Envi-sion was created, it was seized of the property and was immedi-ately able to transact in relation to that property. Envision wastherefore immediately able to and indeed required to fulfill theobligations of the predecessors, such as the obligation to sell thesurplus properties to 619. It follows that the agreements for thesale of the surplus properties were effective.’’

4Envision, 2013 SCC 48, paras. 57-58.

COUNTRY DIGEST Reprinted from Tax Notes Int’l, September 30, 2013, p. 1278

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2 • SEPTEMBER 30, 2013 TAX NOTES INTERNATIONAL