Why Amalgamate – Streamline your Corporations, their Tax Obligations, Liabilities, and Assets
An amalgamation (sometimes called a merger) is the combination of two or more corporations to form one corporation and to continue on in existence as one corporation, often referred to as the “AmalCo’” (Business Corporations Act, (Ontario) “OBCA”, s. 174).
An amalgamation is an important tool in the tax adviser’s toolbox. We can use amalgamations to simplify corporate structures, get rid of unwanted shell corporations, or permit the interest expense on debt used to acquire another corporation to be deducted in computing income from that corporation’s revenue for income tax purposes. We can also ensure that the amalgamation occurs on a tax neutral basis so that there are no adverse tax consequences from streamlining your shareholdings.
Corporate Law Aspects
The amalgamated corporation is not a new legal entity, but a continuation of the amalgamating corporations. You can conceive of this as the combination of two streams that join and continue along as a larger river. The larger river is comprised of both streams combined. The assets and liabilities of all predecessor corporations flow through to the amalgamated corporation, and the shareholders of each predecessor corporation become shareholders of the amalgamated corporation. It is therefore important to note that the continuing corporation is subject to the liabilities, and owns the property or assets of the predecessor amalgamating corporations.
An amalgamation may be “vertical” (parent and subsidiary corporations) or “horizontal” (two corporations with a common parent corporation, or two unrelated corporations).
Except in the case of a short form amalgamations, it is necessary for unrelated corporations who wish to amalgamate to enter into an amalgamation agreement, which sets out the terms and means of effecting the amalgamation. Our lawyers are well trained to prepare amalgamation agreements which must set out several key matters pursuant to s. 175(1) of the OBCA, including the basis on which the holders of shares in the amalgamating corporations will receive money or securities in AmalCo, amongst other important issues.
It should be noted that under the OBCA and CBCA, even holders of non-voting shares must vote on the amalgamation (OBCA, s. 176(3); CBCA, 3)) for it to be ratified.
Income Tax Aspects
Taxable Canadian corporations may amalgamate or merge on a tax-deferred basis under s. 87(9) of the Income Tax Act (“ITA”) without the need of filing election forms.
Unless these rollover rules in the ITA apply, there would be particular tax consequences that arise on an amalgamation of corporations. For example, the shareholders of each predecessor corporation are treated for tax purposes as having disposed of their shares of those corporations for sale proceeds equal to the fair market value of the new shares received from AmalCo. In addition, certain tax losses of the predecessor corporations may be lost (expire) on an amalgamation.
However, since Canadian corporate law treats AmalCo as a continuation of each predecessor corporation, there is no disposition of the assets or liabilities of any predecessor corporation on an amalgamation provided it is the amalgamation of two or more taxable Canadian corporations. Therefore, no tax disposition consequences will arise under the provisions of the ITA, the Land Transfer Tax Act, or Part IX of the federal Excise Tax Act in respect of the GST/HST.
Amalgamations can be a useful and flexible tool for achieving a client’s business and tax planning goals. Our team of tax and corporate lawyers can help. We have the knowledge and experience to be able to turn your mind to all of the complex issues involved in merging or amalgamating corporations. We can assist you with identifying and achieving the most tax efficient method of streamlining your holdings using the applicable provisions of the Income Tax Act. If you’re thinking about amalgamating, contact us today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
More About Jeff