The Income Tax Act says a corporation is public for tax purposes when its shares are listed on a designated stock exchange. Seems simple enough, right? But in fact, this definition can be problematic in a merger and acquisition context, where public companies elect to “go private.”
The Joint Committee on Taxation of the Canadian Bar Association and the Chartered Professional Accountants of Canada laid out the problem in a submission to the Canada Revenue Agency, following up on discussions they’d had on the question last fall.
The Joint Committee says it’s a common issue in M&A “going-private” transactions, where the purchaser obtains all the shares of a target company, and a valid election is filed shortly after the acquisition for the corporation to no longer be a public corporation for tax purposes.
“Under the current definition of ‘public corporation,’ and based on our understanding of the Canada Revenue Agency’s interpretation of this provision, it appears that the corporation may nevertheless continue for several days to be a public corporation for Canadian tax purposes,” the Joint Committee wrote. “In our view, this result is anomalous and inappropriate once all of the corporation’s shares have been acquired.”
The issue arises in part because while there may be no outstanding shares of the target company available for purchase, the company formed after an amalgamation and merger will itself be deemed public if one of its predecessor corporations was public immediately before the amalgamation. And the target company will continue to be considered a public company while its shares are listed on a stock exchange even if none are available for purchase.
“A timing issue arises because Canadian stock exchanges (including the TSX) generally take several days after an acquisition to formally delist the target corporation’s shares; in particular, shares listed on the TSX normally remain listed for up to three days after an acquisition has closed. In fact, shares of a target corporation often remain listed even after the corporation has amalgamated with its sole shareholder and the shares no longer exist.”
The CRA has acknowledged the timing issue and has an administrative position allowing the new company to make an election to go private after an acquisition and merger, but the Joint Committee considers that response to be problematic as well, as it requires the newly formed company to wait until the target company’s shares are delisted before it can elect not to be a public corporation, which can cause both commercial and tax issues.
The Joint Committee would like to see the definition of public corporation amended “to ensure that a Canadian resident corporation will not be considered to be a public corporation for Canadian tax purposes where it has filed a valid election not to be a public corporation.”