An amalgamation is when two or more separate corporations combine and carry forward as one single corporation, and it can have several different purposes beyond the simple acquisition of other corporations. There can be tax planning motivations, such as meeting corporate or tax objectives and minimizing tax consequences for the corporations and their shareholders. Amalgamations can also allow merging of profitable and non-profitable corporations, to simplify the structure of the business, to eliminate minority shareholders and to reduce the compliance and administration costs between related corporations.
There may be tax consequences for the amalgamation of corporations, which — for many amalgamations — falls under the Income Tax Act. Qualifying amalgamations can include a short-form, triangulated and long-form amalgamations. This article will discuss the types of amalgamations that can take place, and how these may be affected by the Income Tax Act.
Short-form amalgamation
This type of amalgamation takes place with only the approval of directors and does not require shareholders to consent to the agreement. This generally means that the amalgamation process can take place more quickly, and is named as such a ‘short-form’ amalgamation. There are two types of short-form amalgamation:
- Vertical amalgamations, which are the merging of a holding/parent corporation with one or more subsidiaries/daughter corporations, where the parent corporation owns all of the shares of the subsidiaries. The corporations to be amalgamated must be the same articles as the parent company, although they may have a different name.
- Horizontal amalgamations, which are the merging of two or more subsidiary corporations whose shares are fully owned by the holding corporation. The shares of all the corporations except one will be cancelled. The merged subsidiaries must have the same articles as the corporation that keeps their shares.
- Triangular amalgamations, which take place when the shareholders of the amalgamating subsidiaries receive shares in the holding/parent corporation.
Long-form Amalgamations
Long-form amalgamations require the approval of shareholders as opposed to being approved solely by the directors. The shareholders must approve the terms of the amalgamation agreement, amongst various other details.
Amalgamation Agreements
The terms and conditions of corporate amalgamations must specify how the shares of the amalgamated corporations will be converted. The agreement can only come into effect once it has been approved by the shareholders and the articles have been submitted to Corporations Canada. The two corporations can then continue as one, with any property and liabilities from preceding corporations being transferred over to the new corporation. Unlike long-form amalgamations, short-form amalgamations are exempt from requiring shareholder approval of the agreement under special corporate law.
Qualifying and Non-Qualifying Amalgamations Under the Income Tax Act
Under the Canadian Income Tax Act, amalgamations can come under two broad categories:
- Qualifying amalgamations, where the amalgamation meets the criteria within section 87
- Non-qualifying amalgamations, where the amalgamation does not meet the criteria with sections 87
To receive the tax attributes and deferrals provided for by the Income Tax Act, amalgamations must fall into the qualifying category. Any amalgamations that do not qualify will instead need to defer to provincial business corporations acts and common corporate law to determine the relevant tax consequences of the amalgamation.
Whether dealing with short-form, long-form or triangular amalgamations, the qualifying criteria in section 87 include:
- Two or more taxable Canadian corporations merge to form one new corporation
- All property of the antecedent corporations become the property of the new corporation after the merger takes place
- All liabilities of the antecedent corporations become the liability of the new corporation after the merger takes place
- All shareholders holding capital stock in the antecedent corporations own capital stock in the new corporation after the merger takes place
- The process is a true amalgamation, as opposed to being an acquisition by way of one corporation purchasing another corporation or the disposition of corporate assets to another corporation during a wind-up operation
To understand the implications within the Income Tax Act, it is important to distinguish between the terms laid out in subsection 87. These include antecedent (predecessor) corporations, new corporations and taxable Canadian corporations.
- Antecedent (Predecessor) Corporations: An ‘antecedent corporation’ is a term used to refer to the corporations that are undergoing the merger to form a ‘new’ corporation. Under the Income Tax Act, these need to be ‘taxable Canadian corporations.’
- Taxable Canadian Corporations: Under section 87 of the Income Tax Act, a taxable Canadian Corporation is any corporation within Canada that is not exempt from Part 1 tax within the Income Tax Act.
- New Corporations: Once two taxable Canadian antecedent corporations have merged, the corporate entity that they will continue as is referred to as the ‘new’ corporation under the Income Tax Act.
The Income Tax Act: Amalgamation Tax Implications
The Income Tax Act specifies the rules for rollovers and carry-forwards in the event of a qualifying amalgamation, including:
- Any corporate entities being deemed as new corporations, whose first taxation year begins at the date of amalgamation
- The taxation years of antecedent amalgamations ending immediately before the date of amalgamation
- Any inventory from antecedent corporations are acquired by the new entity at the start of the taxation year, equal to the inventory valuation of the antecedent
However, the new corporate entity can select a taxation year that does not correspond to that of its antecedents.
For income tax purposes, antecedent corporations do not simply ‘disappear’, with new corporations ‘appearing’. Instead, for tax purposes, the new corporation is treated as a continuation of any antecedents. Any antecedent loss carry-forwards are transferred to the new corporation and used to calculate the taxable income of the new corporation, taking into account any loss-restriction rules. Any losses of the new corporation cannot be carried backwards, except in the instance of carrying back losses to the parent corporation.
A further stipulation of the Income Tax Act is that the contributed capital (i.e., the paid-up capital) of shares of the new corporation are equal to or less than the contributed capital of the shares of the antecedent corporation immediately before the amalgamation. In the eventuality that the new corporation’s contributed capital does exceed that of its antecedent, The Income Tax Act reduces the new contributed capital to that amount of the antecedent. This is then prorated to all share classes, relative to their contributed capital.
The Income Tax Act: Amalgamation Tax Implications for Antecedent Corporations
When an amalgamation takes place, the property or liabilities of the antecedent corporation are not realized as gains or losses by the antecedent corporation. As laid out by the Income Tax Act, when a qualifying amalgamation takes place, all the property and liabilities of antecedent corporations (immediately before the merger) become the property and liability of the new corporation, and the taxation year of the antecedent corporation ends immediately before the merger.
The Income Tax Act: Shareholder Tax Implications of Amalgamations
The conversion of shares from an antecedent corporation to the new corporation during the amalgamation process is considered to be a disposition of property by shareholders, under the Income Tax Act. Under the Income Tax Act, shareholders are entitled to receive a rollover of the ACB of the antecedent shares to the new shares. What this effectively means is that the shares in the new corporation are equal to the ACB of the shares of the antecedent corporation immediately before the amalgamation. However, several conditions must be met first:
- The amalgamation must meet the criteria of a qualifying amalgamation under the Income Tax Act
- The shares are capital property
- The shareholders are receiving the new shares in an exchange for their shares in the antecedent corporation
- The amalgamation does not give rise to any ‘benefits’ for the shareholder
Key Takeaways on the Tax Benefits of Amalgamation
The amalgamation of two or more corporations can be carried out for various reasons, some of which include tax savings strategies. However, the stipulations of the Canadian Income Tax Act can be exceedingly difficult to navigate without the experience of a seasoned accountant. Reach out today to consult with an expert on the rules of a corporate amalgamation, ensuring your business and tax planning goals.