Commentary on October 24, 2012: Notice of Ways and Means Motion Relating to Tax Matters - Acquisition of Control (subsection 256(7))

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The Income Tax Act (the “Act”) contains rules that limit the ability of corporations to utilize losses and other tax attributes following an acquisition of control.  Subsection 256(7) of the Act provides rules for determining whether control of a corporation has been acquired for these purposes.  The Notice of Ways and Means Motion includes proposed amendments to subsection 256(7) which are identical (or virtually identical) to previously announced proposals:

  1. Proposed clause 256(7)(a)(i)(E) provides that an acquisition of control of a corporation will not arise in certain circumstances where shares of the corporation are transferred by a public corporation as part of a so-called public company “spin-off” reorganization that meets the conditions provided in paragraph 55(3)(b) of the Act.  Proposed subparagraph 256(7)(a)(iii) provides that there is no acquisition of control by a related group of persons if each member of each group of persons that controls the corporation was related to the corporation immediately before the change of control.  These proposed amendments, which are meant to remedy certain anomalies in the existing acquisition of control rules, were originally introduced in draft legislation released on December 20, 2002 and would apply to an acquisition of shares after 2000.
  2. Paragraph 256(7)(e) provides that there is no acquisition of control in certain share-for-share exchanges provided certain conditions are met, including that the acquiring corporation is not controlled by a person or group of persons, the acquiring corporation acquires all of the shares of the target corporation and that the fair market value of the shares of the target corporation is not less than 95% of the fair market value of all of the assets of the acquiring corporation.  The Notice of Ways and Means Motion modifies this rule to relax the requirement that the acquiring corporation acquire all of the shares of the target corporation (by excluding certain non-voting debt-like shares) and to expand the application of paragraph 256(7)(e) in the context of a plan of arrangement.  This proposed amendment was originally introduced in draft legislation released on December 20, 2002 and would apply to an acquisition of shares that occurs after 1999.
  3. Proposed paragraphs 256(7)(c.1) provides, subject to certain exceptions, that there is an acquisition of control of a corporation that acquires a specified investment flow-through (SIFT) trust, SIFT partnership or real estate investment trust by way of a reverse takeover.  This proposed paragraph is substantively similar to paragraph 256(7)(c), which may apply in the context of a reverse takeover of one corporation by another corporation.  This proposed amendment was originally introduced in draft legislation released on August 27, 2010 and would generally apply to transactions undertaken after 4:00 p.m. ET on March 4, 2010.
  4. In connection with a “SIFT trust wind-up event,” shares of a subsidiary corporation of a SIFT trust may be distributed by the SIFT trust to another corporation (often the new public corporation). Proposed paragraph 256(7)(g) “clarifies” that an acquisition of control of the subsidiary corporation does not occur on such a distribution provided certain conditions are met.  This proposed amendment was originally introduced in draft legislation released on August 27, 2010 and would generally apply to transactions undertaken after 4:00 p.m. ET on March 4, 2010. 

 

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