Section 87 Rollover—Amalgamations

Amalgamations are common in the business world. Amalgamations offer the opportunity for a group of companies to simplify their organizational structure or for independent companies to create synergies within their businesses. These amalgamations may be completed on a tax-deferred basis under section 87 of the Income Tax Act if all conditions are met.

Section 87 applies when two taxable Canadian corporations amalgamate to form a new corporation. The two most common types of amalgamations are commonly referred to as vertical and horizontal amalgamations. A vertical amalgamation occurs when a parent corporation and a wholly owned subsidiary amalgamate to form a new corporation. A horizontal amalgamation occurs when two sister corporations which are wholly owned by the same parent amalgamate to form a new wholly owned subsidiary of the parent. Triangular amalgamations may also qualify for treatment under section 87. In a triangular amalgamation, the shareholders of the predecessor corporations do not receive shares in the new corporation. Instead, they receive shares in another taxable Canadian corporation which controls the new corporation.

For an amalgamation to qualify under section 87, the new corporation must retain ownership of all assets and liabilities of the predecessor corporations, and all shareholders of the predecessor corporations must receive shares in the new corporation. These rules ensure that the new corporation is in fact a continuation of the predecessor corporations but with a different corporate structure.

Assuming the above conditions are met, section 87 will automatically apply, and an election is not required to be filed. The shareholders of the predecessor corporations are deemed to dispose of their shares for proceeds equal to their cost resulting in no gain or loss on the disposition. These shareholders are then deemed to acquire shares in the new corporation with a cost equal to the cost of their old shares. As there is no gain or loss on the disposition, the amalgamation occurs on a tax-deferred basis.

There is a deemed year-end of the predecessor corporations immediately before the amalgamation. A tax return must be filed for each corporation for the period from the start of their fiscal year until the day prior to the amalgamation. Due to the deemed year-ends, it simplifies the tax reporting requirements to amalgamate on the first day of a fiscal year to prevent any short tax years. The new corporation can select any fiscal year-end that is within 53 weeks of the amalgamation date.

As the new corporation is intended to be a continuity of the predecessor corporations, the new corporation generally retains the tax attributes of the predecessor corporations. Loss carry-forward balances remain available to be utilized by the new corporation subject to their existing carry-forward period. The carry-forward period may be shortened by one year if the amalgamation causes a short tax year to occur. Other balances, such as the capital dividend account, refundable dividend tax on hand account and general or low-rate income pools, will carry over to the new corporation as well. Depreciable property retains its tax cost for capital cost allowance purposes. Non-depreciable property, such as land, shares, or partnership units, is transferred to the new corporation at cost by default but may be eligible for a bump-up in certain situations. This bump-up in value is complex and we would be happy to advise separately.

While section 87 applies to the tax aspects of an amalgamation, there are many corporate law considerations as well that vary depending on the jurisdiction of the corporations. Consulting with a corporate lawyer is a necessary part of your planning.

Rollover transactions are greatly beneficial to business owners as they allow you to optimize your business without requiring a current outlay of cash to pay income taxes. It is imperative that you conduct proper planning to ensure all conditions are met and your transaction will qualify for tax-deferred treatment. Please contact us if you would like to discuss further.