SECTION 87 TAX DEFERRAL AMALGAMATION
Amalgamation - Section 87 Tax Deferral - Long-Form Amalgamation - Vertical Short-Form Amalgamation - Horizontal Short-Form Amalgamation
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
A permissible legal strategy for realizing a tax deferral is through a Section 87 Tax-Deferral Amalgamation, being a corporate merger that qualifies for a tax-deferred rollover under Section 87 of the Income Tax Act (Canada). Section 87 enables two or more taxable Canadian corporations (federally or provincially incorporated) to merge into a new corporation without triggering immediate tax consequences for the corporations or their shareholders.
The purpose of Section 87 of the Income Tax Act (Canada) is to allow for the reorganization of a business in a tax-efficient manner, which can simplify corporate structures, reduce administrative costs, or consolidate losses.
To qualify for the tax deferral under Section 87, several conditions must be met:
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Merging Corporations: The merging entities, known as "predecessor corporations," must be taxable Canadian corporations (either federally or provincially incorporated).
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Transfer of Property and Liabilities: All of the property and liabilities of the predecessor corporations must become the property and liabilities of the newly "amalgamated corporation" by virtue of the merger. Certain intercompany assets and liabilities are excepted.
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Exchange of Shares: All shareholders of the predecessor corporations must receive shares in the new amalgamated corporation as a result of the merger. There are exceptions for short-form amalgamations, such as when a parent company amalgamates with a wholly-owned subsidiary (vertical amalgamation) or when two wholly-owned subsidiaries of the same parent amalgamate (horizontal amalgamation).
If the amalgamation is properly structured and meets the conditions of Section 87 of the Income Tax Act (Canada), the following tax consequences generally apply:
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Tax Deferral: The transaction is treated as a "rollover," meaning that the assets and liabilities of the predecessor corporations are transferred to the new corporation at their tax cost. This defers any gain or loss that would otherwise be realized on the disposition of those assets.
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Shareholder Rollover: Shareholders are deemed to have disposed of their shares in the predecessor corporation for proceeds equal to their adjusted cost base (ACB), and to have acquired shares in the new corporation with the same ACB. This results in no immediate capital gain or loss for the shareholders.
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Continuity of Tax Attributes: The new corporation is generally considered a continuation of the predecessor corporations. This allows for the carry-forward of various tax attributes, such as non-capital losses, capital losses, and other accounts like the Capital Dividend Account. However, the carry-forward period for losses may be shortened by one year due to a deemed short tax year.
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Deemed Year-End: Each predecessor corporation is deemed to have a tax year-end immediately before the amalgamation. They must file a final tax return for the period from the start of their fiscal year to the day before the amalgamation. The new corporation begins its first taxation year on the date of the amalgamation.
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Capital Cost Allowance (CCA): The new corporation is deemed to acquire depreciable property at the same capital cost as the predecessor corporation. The new corporation can continue to claim CCA on these assets.
Section 87 of the Income Tax Act (Canada) applies to various types of amalgamations, including:
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Vertical Amalgamation: The merger of a parent corporation and one or more of its wholly-owned subsidiaries.
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Horizontal Amalgamation: The merger of two or more sister corporations that are wholly-owned by the same parent.
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Triangular Amalgamation: A more complex structure where the shareholders of the predecessor corporations receive shares in another corporation that controls the new amalgamated corporation, rather than shares in the new corporation itself.
While Section 87 of the Income Tax Act (Canada) provides for a tax deferral, it can be a complex area of tax law. It is crucial to meet all the specific conditions to ensure the rollover is successful and to avoid unintended tax consequences. Professional advice from a tax expert is essential when undertaking such a transaction. The rules can be intricate and may have other implications, such as for the Paid-Up Capital (PUC) of the shares of the new corporation.
For knowledgeable and experienced legal representation when undertaking an amalgamation or other corporate restructuring, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
