On October 27, 2017, under Bill C-63, the Department of Finance released proposed amendments to the Income Tax Act (Canada) ("ITA") introducing a new elective rule allowing non-residents tax-deferred rollover treatment on dispositions of certain taxable Canadian property ("TCP") in a foreign merger. The proposed amendments under Bill C-63 are slightly broader than the amendments on foreign mergers that were first introduced by the Government on September 16, 2016 ("2016 Proposals"). The qualifying TCP that were initially covered by the 2016 Proposals were limited to shares of a taxable Canadian corporation. After consultations with the tax community, the new proposals have expanded qualifying TCP to include a share in any corporation, an interest in a partnership and an interest in a trust. This is welcome news to those foreign mergers taking place in a country which does not have a tax treaty with Canada with deferral provisions that allow for the Canadian tax implications arising on such mergers to be deferred.
Ignoring the Canadian foreign affiliate rules, the Canadian tax system has never allowed for rollover treatment on dispositions of TCP by a non-resident of Canada to another non-resident of Canada. This was even the case in scenarios involving foreign corporate reorganizations, including foreign mergers, that were completely carried out on a tax deferred basis in the foreign jurisdiction. Generally speaking, rollover treatment on dispositions of TCP by a non-resident generally only occurred in cases where the non-resident was transferring the TCP to a taxable Canadian corporation and made an election under section 85 of the ITA for rollover treatment. An exception to this arose, however, in cases where there was a special deferral provision in a tax treaty that allowed the Canada Revenue Agency ("CRA"), through the Canadian competent authority, to defer the gains in order to avoid potential double tax (see discussion below under the heading "Treaty Deferral Provisions"). However, in the absence of an agreement by the Canadian competent authority under a Treaty Deferral Provision, non-residents of Canada disposing of TCP to another non-resident entity were generally subject to tax in Canada if gains were realized on that transaction.
Current Tax Treatment of a Foreign Merger
Subject to subsections 87(4) and (8) of the ITA, the Canadian tax treatment of a foreign amalgamation or merger will be determined substantially by the legal consequences flowing from the corporate laws under which the predecessor corporations are amalgamated or merged. The CRA has had a long standing position that where the applicable corporate law provides that the predecessor corporations involved in the amalgamation or merger cease to exist and a new corporation is formed on the amalgamation or merger, the predecessor corporations, subject to an overriding provision in the ITA, generally will be considered to have disposed of any property held immediately before the amalgamation or merger. Where, however, the applicable corporate law is of a "continuation type" as described in the Supreme Court of Canada decision in The Queen v. Black and Decker Manu. Co. Limited, the predecessor corporations generally will not be considered to have disposed of any assets held immediately before the amalgamation or merger. For example, in the case of a foreign "absorptive merger" (in which one corporation ceases to exist upon merging with and into a "surviving" corporation), the non-surviving predecessor foreign corporation could be considered to dispose of its property to the surviving foreign corporation.
Upon a foreign merger where one or both of the predecessor corporations legally ceases to exist and it holds TCP, in the absence of a Treaty Deferral Provision, that non-resident entity that ceased to exist has a taxable event in Canada. In those cases where the predecessor corporation that ceased to exist received rollover treatment in its state of residence, the imposition of Canadian income tax often resulted in an incremental tax that was not credITAble or subject to immediate double tax relief in its residence jurisdiction. Non-resident entities that reside in non-treaty countries or in a treaty country that does not have a Treaty Deferral Provision, in the past, were simply left with no recourse. Attempts had been made by such non-residents to request the Canadian competent authority to provide rollover treatment in Canada under its general powers under the Mutual Agreement Procedure article of the treaty with respect to the granting of relief from potential double tax due to timing issues between the two states. However, in the absence of a specific Treaty Deferral Provision, the Canadian competent authority has never agreed to provide any form of relief by way of deferral.
Proposed New Rules for Foreign Mergers
New subsections 87(8.4) and (8.5) of the ITA will allow taxpayers to elect for dispositions of TCP, that is either a share of the capITAl stock of a corporation, an interest in a partnership or an interest in a trust, to occur on a tax-deferred (rollover) basis where the disposition results from a foreign merger that meets certain conditions. These new provisions are targeting certain underlying assets, which are TCP that are not treaty-protected property, that would otherwise be considered disposed of upon the foreign merger as a consequence of corporate law. Under subsections 87(4) and (8) of the existing rules, rollover treatment is currently provided in respect of a disposition of the shares of the actual merging foreign corporation. However, subsections 87(4) and (8) do not provide rollover treatment for the underlying assets owned by the merging foreign corporations. In brief, these new sections will apply where:
- There is a foreign merger of two or more predecessor foreign corporations that were, immediately before that time, resident in the same country and related to each other;
- The terms "foreign merger" and "predecessor foreign corporation" are defined in existing subsection 87(8.1) of ITA;
- Because of the foreign merger,
- a predecessor foreign corporation (the "disposing predecessor foreign corporation") disposes of TCP (other than treaty-protected property) that is a share (the "subject property") of a corporation resident in Canada, and interest in a partnership or an interest in a trust and
- the subject property becomes property of a corporation that is a new foreign corporation for the purposes of subsection 87(8.1);
- No shareholder (other than a predecessor corporation) that owned shares of a predecessor foreign corporation immediately before the foreign merger received consideration for the disposition of the shares on the merger, other than shares of the new corporation;
- If the subject property is a share of the capITAl stock of a corporation or an interest in a trust, the corporation or trust is not, at any time in the 24 month period ending after that time, as part of a transaction or event, or series of transactions or events including the foreign merger, subject to a loss restriction event (as defined in subsection 251.2(2) of the ITA);
- The new foreign corporation and the disposing predecessor foreign corporation jointly elect rollover treatment.
Treaty Deferral Provisions
The primary purpose of an income tax treaty is to avoid double taxation. One common cause of juridical double taxation is where there are timing differences between the income recognition rules under the tax laws of two Contracting States. The OECD Model Tax Convention on Income and on CapITAl (the "OECD Treaty Model") addresses these timing mismatches by attempting to put some obligation on Resident States to rectify the double tax by providing relief regardless of when the tax is levied by the Source State. The OECD Treaty Model does not, however, go so far as to require either a Resident State or a Source State to defer the recognition of that income at the first incidence of taxation in an attempt to coordinate both States' rules as a means of avoiding double tax. Deferral of a Contracting State's immediate right to tax would generally require a clear provision, that is, a Treaty Deferral Provision, empowering that State to defer recognition of the profit, income or gain otherwise taxable immediately under its domestic laws. Canada's network of tax treaties has incorporated several of these Treaty Deferral Provisions allowing the competent authority of each state, at its sole discretion, to defer income realized upon certain corporate reorganizations in order to avoid potential double taxation.
A Treaty Deferral Provision attempts to address the potential for double taxation in the context of a tax-free corporate (or other organization) reorganization in one State ("Resident State") when the assets, that are the subject of the corporate restructuring, are not all located within that State and the State of situs of the non-domestically located assets considers those assets to have been alienated as a result of the reorganization and taxes the profit, gain or income therefrom. In the context where Canada is the State of situs of the non-domestically located assets, upon a request received by the acquirer of such assets, the Canadian Competent Authority may enter into an agreement with the acquirer to defer the recognition of the profit, gain or income in accordance with the interaction of the Treaty Deferral Provision and section 115.1 of the ITA. Relief from double taxation would then be achieved through a deferral of taxation in Canada. The deferral, however, is not automatic and is granted at the "sole" discretion of the Competent Authority of that State.
Paragraphs 72 to 85 of Information Circular 71-17R5, Guidance on Competent Authority Assistance Under Canada's Tax Conventions ("Circular"), summarize the Canadian Competent Authority's policies regarding agreements made pursuant to the Canada-U.S. Treaty Deferral Provision (i.e. Article XIII(8) of the Canada-U.S. Treaty). These guidelines can generally be relied upon with respect to other Treaty Deferral Provisions in Canada's treaty network.
The absence of foreign merger rollover rules in the Canadian tax system has often been a major impediment, or a landmine in some cases, to foreign corporations that own TCP and are involved in, what they presumed to be, a relatively routine tax deferred corporate reorganization (e.g. merger or amalgamation) with a related entity resident in its same jurisdiction. Often the Canadian tax consequences in a foreign merger were a complete after-thought. The author, as a former manager with the Canadian competent authority, has even seen cases where the Canadian tax implications on foreign mergers, which were significant, were completely overlooked until after the merger took place. Consequently, the Bill C-63 proposed amendments, especially with its expanded description of TCPs that are eligible for the election, are welcome news and long overdue.
As there are only a limited number of Canadian tax treaties that have a Treaty Deferral Provision, and only a few of those tax treaties are with key treaty partners, the new foreign merger rollover rules will significantly expand those scenarios where foreign companies reorganizing their corporate structure under a merger will be eligible for rollover treatment in Canada. Furthermore, even though one of the most common forms of corporate reorganizations that was eligible for relief under a Treaty Deferral Provision was a foreign merger, particularly absorptive-type mergers, these provisions have not been administered by the Canadian competent authority as a simple automatic rollover provision. On the contrary, competent authority agreements under a Treaty Deferral Provision work more like a quasi rollover-suspended gain approach and are quite complex. So a non-resident entity that meets the conditions of the new foreign merger rollover rules will find this elective process, as compared to the procedural frustrations and complexity of the terms and conditions that come with the competent authority agreements under a Treaty Deferral Provision, a much simpler process. These new rules should also reduce the Canadian competent authority workload arising from Treaty Deferral Provisions which will be encouraging news for the competent authority.
 For example, on November 15, 2016, the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada wrote to the Department of Finance to recommend that the qualifying TCP in a foreign merger, which under the initial proposals, was limited to shares of a taxable Canadian corporation, be expanded to deal with a broader group of TCP, including upper-tier foreign intermediaries, interests in partnerships and interests in trusts.
 The Canadian foreign affiliate rules in the ITA include a number of share exchange rollovers that permit Canadian taxpayers to reorganize their foreign affiliates without triggering foreign accrual property income (FAPI).
 However, in light of the recent decision in Sifto Canada Corp. v. The Queen, 2017 TCC 37, and more particularly the comments made by the court in the form of obiter regarding section 115.1 of the ITA, it is not clear whether the Canadian competent authority was correct in determining that it did not have the powers to enter into rollover provisions in the absence of a specific Treaty Deferral Provision. For further information on this, please refer to the author's article entitled The Sifto Decision – Is the Minister Bound by MAP Settlements? available on the Gowling WLG website.
 OECD, Model Tax Convention on Income and on CapITAl, Condensed Version (OECD Publishing, 2014) [OECD Model].
 See OECD Treaty Model, ibid at para 32.8 of the commentary to articles 23A and 23B.
 For example, in addition to Article XIII(8) of the Canada-U.S. Income Tax Convention, see Canada's tax treaties with Estonia, (art 13, para 5), Finland (art 13, para 6), Germany (art 13, para 5), Hungary (art 13, para 5), Iceland (art 13, para 5), Korea (art 13, para 9), Latvia (art 13, para 5), Lithuania (art 13, para 5), Luxembourg (art 13, para 6), Mongolia (art 13, para 5), Netherlands (art 13, para 6), Norway (art 13, para 9), Peru (art 13, para 5), Switzerland (art 13, para 5), Tanzania (art 13, para 6), Venezuela (art 13, para 8) and Zimbabwe (art 14, para 6).
 Canada Revenue Agency, Information Circular 71-17R5, "Guidance on Competent Authority Assistance Under Canada's Tax Conventions" (1 January 2005).