In Envision Credit Union v. The Queen, the Tax Court of Canada considered whether the tax attributes of two amalgamating credit unions flowed through to the single credit union that continued on their amalgamation when the amalgamation was not subject to section 87 of the Income Tax Act (Canada). The amalgamation in question occurred under the provisions of British Columbia’s Credit Union Incorporation Act (CUIA), and was intentionally structured not to be an amalgamation as defined in subsection 87(1) by having the predecessor corporations transfer property to another corporation at the time of the amalgamation. Accordingly, in filing its tax return for its first year following the amalgamation, the taxpayer took the position that paragraph 87(2)(d) did not apply, so that the undepreciated capital cost (UCC) of each class of depreciable property it acquired on the amalgamation was equal to the original cost (rather than the UCC) to its predecessor corporations. The result was a potential capital cost allowance increase of $30.8 million. In addition, the taxpayer did not carry forward its predecessors’ preferred rate amounts for the purposes of determining its income qualifying for the small business tax rate under the credit union tax credit in section 137 of the Act. The Minister of National Revenue reassessed the taxpayer on the basis that subsection 87(1) applied to the amalgamation or, if it did not, that the predecessors’ UCC and preferred rate amount balances flowed through to the taxpayer.
On appeal, the Tax Court held that subsection 87(1) did not apply to the amalgamation because not all of the predecessors’ property became property of the amalgamated corporation as required under subsection 87(1). As a result, none of the usual rollover and continuity rules in section 87 applied to the amalgamation. Since the CUIA did not create a new corporation on the amalgamation, but provided that amalgamating credit unions continue as one credit union and that the amalgamated credit union holds and possesses all of the property of each amalgamating credit union, the Court applied the principle in The Queen v. Black & Decker Manufacturing Co. In Black & Decker, the Supreme Court of Canada concluded that the effect of legislative provisions similar to the CUIA was that the amalgamating corporations “continue without subtraction” in the amalgamated corporation. Applying that principle to the taxpayer, the Tax Court concluded that the predecessors’ UCC and preferred rate amount balances did flow through to the taxpayer on the amalgamation. The taxpayer has appealed the Tax Court’s decision to the Federal Court of Appeal.
The decision in Envision, if upheld on appeal, will reverse the CRA’s longstanding administrative position that amalgamating corporations’ tax attributes do not flow through to the continuing corporation on a non-section 87 amalgamation. It will also likely raise as many tax issues as it solves. For example, if both amalgamating corporations have different taxation year-ends and they continue without subtraction in the single continuing corporation, what is the continuing corporation’s taxation year and on what basis does it file its tax returns? To take another example, can the continuing corporation carry back a non-capital loss that it realizes in its first taxation year after the amalgamation to reduce an amalgamating corporation’s taxable income in the three years preceding the amalgamation under paragraph 111(1)(a)? While a section 87 amalgamated corporation could not do so because of paragraph 87(2.1)(e), that provision does not apply to a non-section 87 amalgamation. It is not clear that paragraph 111(1)(a), read on its own and in conjunction with Envision’s interpretation of Black & Decker, would prevent such a loss carry-back. These and many similar questions should ensure that Envision is not the last word on the tax consequences of non-section 87 amalgamations.