FCA to Determine Tax Consequences of a Broken Amalgamation

In Envision Credit Union v. R, the Federal Court of Appeal will determine whether an amalgamated corporation inherits tax accounts pursuant to common law principles, in the absence of a specific statutory rule.

The predecessors of Envision Credit Union, two Vancouver credit unions, amalgamated under B.C. credit union legislation.  The amalgamation occurred in a way that did not meet the definition of “amalgamation” in section 87 of the Income Tax Act (a so-called broken amalgamation).  Had that definition been met, a particular tax account – the undepreciated capital cost (UCC) – of Envision would have been reduced by depreciation claimed by the predecessors.  Instead, Envision took the position that its UCC was effectively reset to the original cost of capital assets bought by its predecessors, which allowed it to claim larger deductions for depreciation in later years.

The Tax Court of Canada held that, under the common law, the amalgamating credit unions continued without subtraction, causing their UCCs to flow through to Envision.  The Court applied the seminal amalgamation case Black and Decker Manufacturing Company Ltd. v. R.

Envision will likely argue that section 87 is a complete code as to how UCCs and other tax accounts of predecessor corporations flow through or do not flow through to an amalgamated corporation.  Where section 87 does not apply, Parliament does not intend the common law to fill any perceived gap.  The transactions were not abusive because the Income Tax Act provides taxpayers with a choice, and Envision’s predecessors chose to amalgamate in a manner that was taxable (as opposed to a rollover under section 87).

In response, the Minister is expected to argue that:

  • section 87 is not a complete code and the Tax Court of Canada correctly determined that Envision inherited its predecessors’ UCCs under common law principles;
  • alternatively, the Tax Court of Canada erred in finding that the amalgamation was a broken one; and
  • if not, alternatively, the general anti-avoidance rule applies. The transactions were abusive because they enabled Envision to claim deductions for depreciation already taken by its predecessors.

Case Information

Envision Credit Union v. R

FCA Docket Number: A-479-10

Hearing Date:  October 17, 2011

amalgamation Federal Court of Appeal Income Tax Act tax account Tax Court of Canada tax deduction undepreciated capital cost



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