The Supreme Court of Canada released its decision in Envision Credit Union v. Canada, 2013 SCC 48 today concerning amalgamations and the application of section 87 of the Income Tax Act (Canada) (the “ITA”). The Court dismissed the taxpayer’s appeal, finding that the requirements of section 87 of the ITA had been satisfied, the amalgamation was a qualifying amalgamation for purposes of the ITA and the tax attributes of the predecessor corporations flowed-through to the amalgamated corporation.
In 2001, two credit unions were amalgamated pursuant to the provisions of the Credit Union Incorporation Act (British Columbia) (the “CUIA”) to form Envision Credit Union. The amalgamation was carried out for non-tax reasons, but the parties structured the amalgamation with the intention to avoid the application of section 87 of the ITA. Specifically, the intention was to fail to meet the requirement under paragraph 87(1)(a) of the ITA that all of the property of the predecessor corporations immediately before the merger becomes the property of the amalgamated corporation by virtue of the merger. To this end, the predecessor corporations transferred, at the moment of amalgamation, the beneficial interest in certain real properties to a recently created subsidiary in exchange for shares of the subsidiary. On this basis, the taxpayer took the position that the amalgamation was not a qualifying amalgamation and the provisions in section 87 of the ITA that provide for the flow-through of the predecessor corporations’ tax attributes did not apply. Rather, the taxpayer took the position that the amalgamated corporation’s preferred rate amount was reset to zero and its capital cost allowance was reset such that it could claim depreciation based on the original capital cost of the assets to the predecessor corporations.
The Tax Court of Canada dismissed the taxpayer’s appeal. The Tax Court agreed with the Taxpayer that section 87 of the ITA did not apply because the beneficial interests were transferred to the subsidiary at the exact time of the amalgamation; however, the Tax Court held that the tax accounts of the predecessor corporations nonetheless flowed through to the taxpayer because of the rules set out in the CUIA.
The Federal Court of Appeal also dismissed the taxpayer’s appeal. In contrast to the Tax Court’s decision, the Federal Court of Appeal held that section 87 of the ITA did apply on the basis that the properties owned by the predecessor corporations were able to be traced into the property owned by the amalgamated corporations by virtue of the fact that the properties were in effect converted into shares of the subsidiary.
The Supreme Court of Canada dismissed the taxpayer’s appeal for the final time. The Supreme Court agreed with the Federal Court of Appeal that section 87 of the ITA applied to the amalgamation. However, in contrast to the Federal Court of Appeal’s reasons, the Supreme Court of Canada held that requirements of section 87 of the ITA were met not because the property could be traced but by virtue of the application of subsection 23(b) of the CUIA, which provides that the amalgamated credit union is seized of all the property and liabilities of its predecessors. Since nothing in the CUIA or common law permits the predecessor corporations to contract out of any of the express statutory consequences of an amalgamation, the Court held that the amalgamated corporation was seized of the predecessor corporations’ properties at the exact moment of amalgamation.