Income Tax Folio S4-F7-C1, Amalgamations of Canadian Corporations

Series 4:  Businesses

Folio 7:  Wind-ups, Dissolutions and Amalgamations

Chapter 1:  Amalgamations of Canadian Corporations

Summary

This Chapter outlines the Canada Revenue Agency's (CRA) views on a number of issues relating to the amalgamation of two or more taxable Canadian corporations as described in subsection 87(1) (referred to in this Chapter as a qualifying amalgamation). Where a qualifying amalgamation occurs, the predecessor corporations are deemed to have a tax year-end immediately before the amalgamation. Also, paragraph 87(2)(a) deems the corporation formed on a qualifying amalgamation to be a new corporation for purposes of the Act. In general, the new corporation formed on a qualifying amalgamation is considered to be a continuation of the predecessor corporations for most purposes of the Act. In addition, the shareholders of the predecessor corporations are generally deemed to have disposed of their shares for proceeds equal to their adjusted cost base and to have acquired their shares of the new corporation at that same amount.

The CRA issues income tax folios to provide a summary of technical interpretations and positions regarding certain provisions contained in income tax law. Due to their technical nature, folios are used primarily by tax specialists and other individuals who have an interest in tax matters. While each paragraph in a chapter of a folio may relate to provisions of the law in force at the time it was written (see the Application section), the information provided is not a substitute for the law. The reader should, therefore, consider the chapter’s information in light of the relevant provisions of the law in force for the particular tax year being considered.

The CRA may have published additional guidance and detailed filing instructions on matters discussed in this Chapter. See the CRA Forms and publications webpage for this information and other topics that may be of interest.

Table of contents


Discussion and interpretation

Qualifying amalgamations

1.1 Not all amalgamations or mergers qualify for the treatment provided for under section 87. To qualify, there must be a merger of two or more taxable Canadian corporations (referred to in this Chapter as predecessor corporations) to form one corporate entity (referred to in this Chapter as the new corporation) in such a manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger becomes property of the new corporation by virtue of the merger (paragraph 87(1)(a));

(b) all of the liabilities (except amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger become liabilities of the new corporation by virtue of the merger (paragraph 87(1)(b)); and

(c) all of the shareholders (except any predecessor corporation), who owned shares of the capital stock of any predecessor corporation immediately before the merger, receive shares of the capital stock of the new corporation because of the merger (paragraph 87(1)(c)).

However, the provisions of section 87 will not apply to a corporation's acquisition of property by way of a purchase of such property from another corporation or as a result of the distribution of property to a corporation upon a winding-up of another corporation.

1.2 Subsection 87(1) only applies to an amalgamation of two or more taxable Canadian corporations. A taxable Canadian corporation is defined in subsection 89(1) and is a Canadian corporation that is not exempt from Part I tax. A Canadian corporation is defined in subsection 89(1) as a corporation that, at the relevant time, is resident in Canada and was either incorporated in Canada or resident in Canada throughout the period commencing June 18, 1971 and ending at that relevant time.

1.3 Subject to ¶1.35, the CRA accepts that the condition in ¶1.1(a) may be satisfied even if one of the properties of a predecessor corporation is:

(a) an interest, or for civil law, a right, such as a servitude, or a leasehold or royalty interest, in a property held by another predecessor corporation, which interest or right merges with that property on the amalgamation; or

(b) a right or option to acquire shares of another predecessor corporation which right or option terminates on the amalgamation.

1.4 In Envision Credit Union v. R., 2013 SCC 48, 2013 DTC 5144 (SCC), the Supreme Court of Canada held that it was not possible for the predecessors to structure an amalgamation that did not meet the condition in ¶1.1(a) because the governing provincial statute stipulated that on an amalgamation the amalgamated company “is seized of and holds and possesses all the property, rights and interests” of the predecessors.

1.5 An amalgamation will not be disqualified under 1.1(c) solely because certain shareholders of a predecessor corporation receive consideration that is not shares of the new corporation, such as cash, by virtue of exercising the statutory right available in certain jurisdictions to dissent to the amalgamation. Further, subsection 84(3) will not otherwise apply to deem a shareholder of a predecessor corporation to have received a dividend where the shareholder exercises its statutory dissent rights in respect of the amalgamation and receives payment for its shares from the new corporation. In such circumstances, the new corporation is paying the dissenting shareholder for its shares of the predecessor corporation. Therefore the new corporation has not redeemed, acquired or cancelled shares of its capital stock as required for subsection 84(3) to apply.

1.6 Regarding the condition described in ¶1.1(c), the CRA will not ordinarily apply subsection 245(2) to an amalgamation that is undertaken to squeeze out minority shareholders whereby the redeemable preferred shares received by the minority shareholders are redeemed shortly after the amalgamation (see paragraph 28 of Information Circular 88-2, General Anti-Avoidance Rule – Section 245 of the Income Tax Act).

1.7 Subsection 248(1) defines a shareholder to include a member or other person entitled to receive a dividend. Therefore, a person can be a shareholder of a corporation even if that person does not own any shares of the corporation. An example would be a policyholder of a mutual insurance corporation. The fact that such a shareholder does not receive any shares of the new corporation because of the amalgamation will not cause the requirement described in ¶1.1(c) not to have been met.

Short-form amalgamations

1.8 For the purposes of this Chapter (other than ¶1.36 to 1.38), subsidiary wholly-owned corporation of a person (see subsection 87(1.4)) means a corporation all of the issued and outstanding shares of which are owned by:

(a) that person,

(b) another corporation that is a subsidiary wholly-owned corporation of that person, or

(c) any combination of persons each of which is a person described in (a) or (b) above.

1.9 In certain Canadian jurisdictions, a simplified (or short-form) procedure is available for amalgamations involving:

(a) a corporation (referred to in this paragraph as parent) and one or more of its subsidiary wholly-owned corporations. This is commonly referred to as a vertical amalgamation, or

(b) two or more subsidiary wholly-owned corporations of the same parent. This is commonly referred to as a horizontal amalgamation.

In a short-form amalgamation, no shares are issued by the new corporation. Instead, the shares of the parent (in a vertical amalgamation) or one of its subsidiary wholly-owned corporations (in a horizontal amalgamation) are not cancelled, while the shares of the other predecessor corporation(s) are cancelled without any repayment of capital. Subsection 87(1.1) deems the shares that are not cancelled on a short-form vertical or horizontal amalgamation to be shares of the new corporation. As a result, the condition in 1.1(c) will be met in respect of these amalgamations. A merger that is a qualifying amalgamation by virtue of subsection 87(1.1) qualifies as an amalgamation for all purposes of section 87, including subsection 87(4) (see ¶1.69 to 1.76).

Triangular amalgamations

1.10 Subsection 87(9) describes a form of amalgamation that is commonly referred to as a triangular (or three corner) amalgamation. In jurisdictions which permit triangular amalgamations, the shareholders of a predecessor corporation immediately before the amalgamation receive, instead of shares of the new corporation, shares of the taxable Canadian corporation (which corporation and shares are referred to in this paragraph and ¶1.11 to 1.12, 1.83 and ¶1.91, respectively, as the parent and the parent shares) which controls the new corporation immediately following the amalgamation.

1.11 In the context of a triangular amalgamation, paragraph 87(9)(a) deems the parent shares received by the shareholders of a predecessor corporation to be shares of the new corporation for certain purposes. As a result, the condition described in ¶1.1(c) will be satisfied and the triangular amalgamation will qualify under subsection 87(1).

1.12 Paragraph 87(9)(c) provides special rules for determining the cost to the parent of shares of the new corporation acquired as a result of the triangular amalgamation. This cost is calculated as the adjusted cost base of shares of the predecessor corporations owned by the parent plus, in circumstances where the parent owns all the issued shares of the new corporation immediately after the amalgamation, an additional amount determined under subparagraph 87(9)(c)(ii). In general terms, this additional amount is equal to the amount by which the tax cost of the assets (less liabilities) of the new corporation immediately after the amalgamation (as described in subclause 87(9)(c)(ii)(A)(I)) exceeds the total of the adjusted cost bases to the parent of the shares of the predecessor corporations owned by it immediately before the amalgamation (referred to in this paragraph as the excess). The parent may choose how the excess is to be allocated to the different classes of shares owned by the parent in the new corporation. In making this allocation, the amount of the excess designated in respect of a particular class of shares cannot exceed the amount, if any, by which the fair market value of the shares of the particular class issued on the amalgamation exceeds the cost of those shares to the parent as otherwise determined. In addition, the aggregate of amounts designated in respect of all classes of shares cannot exceed the amount of the excess. The excess may be added to the adjusted cost base of the shares owned by the parent only if the parent makes a designation in respect of those shares for the tax year in which the amalgamation occurred in its return of income for that year.

New corporation

1.13 Under the corporate law in most jurisdictions, the corporate entity formed as a result of an amalgamation is a continuation of the predecessor corporations and the predecessor corporations do not cease to exist upon an amalgamation. However, in the case of a qualifying amalgamation, paragraph 87(2)(a) deems the amalgamated corporation to be a new corporation for the purposes of the Act.

Tax year-end

1.14 Paragraph 87(2)(a) deems the first tax year of the amalgamated corporation to commence at the time of the amalgamation and the tax years of the predecessor corporations to terminate immediately before the amalgamation. Since paragraph 87(2)(a) also deems the amalgamated corporation to be a new corporation for purposes of the Act, the amalgamated corporation can select a new fiscal period (and thus tax year-end – see paragraph 249(1)(a)). Under paragraph 249.1(1)(a), a fiscal period of a corporation can be up to 53 weeks.

Effective date of amalgamations

1.15 The effective date of amalgamation is governed by corporate law and is generally the date of issuance of letters patent or the date shown or set forth in the certificate of amalgamation, as the case may be. The time of the amalgamation is generally the earliest moment on that date in the absence of a particular time specified in the certificate of amalgamation. For example, where the fiscal years of the predecessor corporations normally end on December 31 and the effective date of amalgamation is January 1, the first tax year of the new corporation will commence at the earliest moment on January 1, and the tax years of the predecessor corporations will end at midnight on December 31. If the effective date of amalgamation is December 31, the first tax year of the new corporation will commence at the earliest moment on December 31, and the tax years of the predecessor corporations will end at midnight on December 30.

1.16 In certain situations, however, the CRA will consider an amalgamation to occur at a particular time on the amalgamation date even though no time is specified in the certificate of amalgamation. For example, if there is a series of transactions occurring on the same day, which is followed by an amalgamation on that same day for which no time is specified, the amalgamation will be considered to occur at the time specified in the arrangement insofar as the series occurs logically. Consequently, transactions that occur sequentially on the same day but prior to the amalgamation will be reported by the predecessor corporation in the tax year that is deemed to have ended immediately before the amalgamation.

1.17 Where the effective date of amalgamation is not the day after the normal tax year-ends of the predecessor corporations, these corporations will have short tax years ending immediately before the amalgamation. This will be relevant to a number of tax calculations including capital cost allowance in these years and the duration of the period during which the new corporation may utilize losses of the predecessor corporations. Where subsection 249(3) does not apply and the duration of such short tax years of the predecessor corporations would be a matter of days, for instance where the normal tax year-ends are July 31 and the amalgamation takes place on August 2, and there would be adverse implications in having short tax years, consideration should be given to requesting the Minister's concurrence to extend such year-ends to the date preceding the date of amalgamation. Any such request should be forwarded to the relevant tax services office.

1.17.1 As noted in ¶1.14, a fiscal period of a corporation can be up to 53 weeks. However, subsection 249(3) will prevent a predecessor corporation from extending its fiscal period where to do so would result in the corporation having a fiscal period that exceeds 365 days and, for that reason, not having a tax year that ends in a particular calendar year. For example, subsection 249(3) will prevent a predecessor corporation that has a tax year that commenced January 1, 2018 and ends on December 31, 2018 and that amalgamates with another predecessor corporation on January 2, 2019, from having its tax year that would otherwise end on December 31, 2018 extended to January 1, 2019. This is because the extension would result in the predecessor corporation not having a tax year that ended in 2018.

Acquisition of control followed by an amalgamation

1.18 It is not uncommon for control of a corporation (referred to in this Chapter as the target corporation) to be acquired, following which the target corporation is amalgamated either with the corporation that acquired control of it or with a corporation related to the controller. In such circumstances, subsection 249(4) will apply to deem a tax year-end of the target corporation immediately before the time that control is acquired. Also, paragraph 87(2)(a) will apply to deem the target corporation's tax year to end immediately before the amalgamation.

1.19 If the acquisition of control of the target corporation and its subsequent amalgamation occur on the same day, and those transactions are the only transactions occurring on that day that are outside the normal course of the target corporation's business, the CRA will accept that the target corporation will have only one deemed year-end provided that:

(a) no election under subsection 256(9) is made in respect of the acquisition of control; and

(b) no time is specified in the certificate of amalgamation.

This position is based on the fact that, provided that the conditions described in (a) and (b) above are met, the tax year-ends of the target corporation which are deemed to occur under both subsection 249(4) and paragraph 87(2)(a) will occur at the same time. Generally, a transaction would be considered to occur outside the normal course of business if, for example, the transaction is described in a closing agenda or other document describing the sequential order of transactions which must occur in order to carry out the amalgamation of the predecessor corporations.

1.20 Where a corporation amalgamates with a target corporation in the form of a horizontal amalgamation such that the former shareholders of the corporation acquire control of the new corporation, subparagraph 256(7)(b)(ii) will deem control of the target corporation to have been acquired immediately before the horizontal amalgamation. By virtue of subsection 249(4), the target corporation will be deemed to have a year-end immediately before the acquisition of control, being the time that is immediately before the time that is immediately before the horizontal amalgamation. Consequently, the horizontal amalgamation will result in two deemed year-ends for the target corporation: one under paragraph 87(2)(a) (being the time that is immediately before the horizontal amalgamation), and one under subparagraph 256(7)(b)(ii) and subsection 249(4). Subparagraph 256(7)(b)(ii) is discussed in ¶1.49(a). In such circumstances, the CRA will not accept that the target corporation has only one deemed year-end.

Multiple amalgamations

1.21 In some circumstances, it may be desirable to merge three or more taxable Canadian corporations to form one corporate entity. However, for commercial reasons, the merger might be carried out by successive amalgamations.

Example 1

Corporation A owns all of the issued shares of both Corporation B and Corporation C. In order to merge the operations of all three corporations, a short-form horizontal amalgamation of Corporation B with Corporation C is implemented to form Corporation BC. Then Corporation BC is amalgamated with Corporation A in a short-form vertical amalgamation to form Corporation ABC.

In such a situation, Corporation B and Corporation C will each be deemed by paragraph 87(2)(a) to have a tax year-end immediately before they amalgamate. Similarly, new Corporation BC will be deemed by paragraph 87(2)(a) to have a tax year-end immediately before its amalgamation with Corporation A. Consequently, any tax attributes (including non-capital losses and investment tax credits available for carry-forward) of either Corporation B or Corporation C which will be available to Corporation ABC will have aged by two tax years as a result of the two amalgamations.

Rules respecting the new corporation

Continuation

1.22 Since the corporation formed on a qualifying amalgamation is deemed by paragraph 87(2)(a) to be a new corporation, the remaining rules in subsection 87(2) are necessary to compute the new corporation's income. In general, these rules will deem the new corporation to be the same corporation as, and a continuation of, the predecessor corporations for the purposes of computing its income. However, in determining the tax consequences to the new corporation, reference should be made to the particular provision in question.

1.23 If the Act is silent on the treatment of a particular tax attribute of a predecessor corporation, that attribute generally does not flow through to the new corporation on a qualifying amalgamation.

Non-qualifying amalgamations

1.24 Where an amalgamation of two or more corporations does not satisfy the conditions in ¶1.1(a), (b) or (c), the tax consequences of such a non-qualifying amalgamation to the amalgamated corporation will generally be determined by reference to the legal consequences of the amalgamation under the corporate law governing the amalgamation. Where the applicable corporate law provides that the predecessor corporations involved in the amalgamation cease to exist and that a new corporation is formed on the amalgamation, the predecessor corporations will generally be considered to have disposed of any property held immediately before the amalgamation.

Method adopted for computing income – contractors

1.25 Payments and holdbacks which have not been included in the income of a predecessor corporation that is a contractor using the progress method of computing income are included in the new corporation's income when they become receivable. Where a predecessor corporation used the completion method of computing income on construction contracts, the deferred costs and revenues pertaining to all uncompleted jobs of that corporation flow through to the new corporation if the latter also adopts the completion method. Interpretation Bulletin IT-92R2, Income of Contractors, discusses the progress method and the completion method of computing income.

Inventory

1.26 Paragraph 87(2)(b) deems property that is inventory of the new corporation at the beginning of its first tax year to have been acquired by it for the amount that the property was valued by the particular predecessor corporation for its tax year ending immediately before the amalgamation. If a predecessor corporation used the cash method to compute its income from a farming business, the new corporation will be deemed to have acquired the inventory of that predecessor corporation at a cost equal to the amount included in the predecessor corporation's income under paragraphs 28(1)(b) and (c) for the tax year immediately before the amalgamation. Where the new corporation also computes its income under the cash method, the cost of the inventory will be deemed to be an amount paid by the new corporation. The new corporation will be entitled to deduct the cost of the inventory under paragraph 28(1)(e) and is required to consider such acquired inventory as purchased inventory for the purpose of the mandatory inventory adjustment under paragraph 28(1)(c).

1.27 As described in ¶1.26, the new corporation acquires its inventory at the value used by its predecessor corporations. The new corporation will generally be expected to follow the inventory valuation method adopted by its predecessor corporations for the purposes of computing its income. Where, however, the new corporation can establish that another valuation method which is sanctioned by subsection 10(1) provides a truer picture of the new corporation's income, the new corporation may adopt such valuation method.

Depreciable property

1.28 Paragraphs 87(2)(d) and (d.1) generally provide a rollover of a predecessor corporation's depreciable property to the new corporation.

1.29 Subparagraph 87(2)(d)(i) deems the capital cost to the new corporation of depreciable property of a prescribed class acquired from a predecessor corporation to be the amount that was the capital cost of such property to the predecessor corporation. Where a predecessor's capital cost of a depreciable property was reduced under subsection 13(7.1) for any investment tax credits claimed or government assistance received, the new corporation will be considered to have acquired such property at the reduced cost by virtue of paragraph 87(2)(j.6) (see ¶1.44).

1.30 Subparagraph 87(2)(d)(ii) determines at any time the undepreciated capital cost (UCC) to the new corporation of depreciable property of a prescribed class. Generally, under subparagraph 87(2)(d)(ii), the capital cost to the new corporation of depreciable property of a prescribed class acquired by it on the amalgamation will equal the cost amount, immediately before the amalgamation, to a predecessor corporation of each property included in that class by the new corporation. Cost amount of a depreciable property of a prescribed class is defined in subsection 248(1) and is generally the UCC of the class allocable to the particular property (on a pro rata basis, based on the capital cost of the particular property as a fraction of the capital cost of all properties in the class). The amount to be added by clause 87(2)(d)(ii)(A) is net of any deduction taken by the predecessor corporation under paragraph 20(1)(a) in computing its income for the tax year ending immediately before the amalgamation.

1.31 Where the new corporation's first tax year is less than 12 months, its capital cost allowance claims for that year must be prorated in the manner set out in subsection 1100(3) of the Regulations. In addition, the half-year rule found in subsection 1100(2) of the Regulations will apply in determining the new corporation's maximum capital cost allowance otherwise allowable on most depreciable property acquired from a predecessor corporation unless the conditions set out in paragraph 1100(2.2)(e) and paragraph 1100(2.2)(f) or (g) of the Regulations have been met. These conditions are:

(a) the predecessor was not dealing at arm's length (otherwise than because of a right referred to in paragraph 251(5)(b)) with the new corporation immediately before the amalgamation (paragraph 1100(2.2)(e)); and

(b) the property was depreciable property of the predecessor corporation and either:

(i) was owned continuously by the predecessor corporation from a day that was at least 364 days before the end of the new corporation's first tax year to the date of the amalgamation (paragraph 1100(2.2)(f)), or

(ii) subsection 1100(2.1) or 1100(2.2) of the Regulations applied to the predecessor corporation on its original acquisition of the property (paragraph 1100(2.2)(g)).

1.32 With respect to the condition described in ¶1.31(a), subsection 251(3.1) deems the new corporation formed on an amalgamation to be related to (and, therefore, not deal at arm's length with) a predecessor corporation where the two corporations would have been related immediately before the amalgamation if the new corporation had been in existence at that time with the same shareholders that it had after the amalgamation. For example, a predecessor corporation will be deemed to be related to the new corporation where the predecessor corporation was, immediately before the amalgamation, controlled by a person or group of persons and the new corporation was, immediately following the amalgamation, controlled by that same person or group of persons. In addition, subsection 251(3.2) provides that where there is an amalgamation of two or more related corporations (other than corporations which are related solely because of a right referred to in paragraph 251(5)(b)) the new corporation will be deemed to be related to (and therefore, not to deal at arm's length with) each of the predecessor corporations

1.33 The prescribed class of a particular depreciable property may change on an amalgamation because, for certain prescribed classes in Schedule II of the Regulations, the time of acquisition of the property determines its prescribed class. However, where a predecessor corporation was not dealing at arm's length (otherwise than because of a right referred to in paragraph 251(5)(b)) with the new corporation immediately before the amalgamation, subsection 1102(14) of the Regulations deems property of a prescribed class or separate prescribed class of the predecessor corporation immediately before the amalgamation to be property of that same prescribed class or separate prescribed class of the new corporation. For instance, where a property of a predecessor corporation is a timber limit which subsection 1101(3) of the Regulations prescribes to be a separate class of property, the property will be of that same separate prescribed class following the amalgamation and will not be a timber resource property as defined in subsection 13(21). The new corporation is not, however, relieved from any conditions that must be met for the property of a class to be eligible for enhanced capital cost allowance. For example, a property that was included in a separate class by virtue of an election under subsection 1101(5b.1) of the Regulations will continue to be included in that class following the amalgamation without a further election but will be eligible for the enhanced rate of capital cost allowance in paragraph 1100(1)(a.1) of the Regulations only if the property meets the requirements of that Regulation at the end of the particular year.

1.34 Subsection 1102(20) of the Regulations is an anti-avoidance rule which deems the new corporation and a predecessor corporation to be dealing at arm's length for, among other things, the purposes of subsections 1100(2.2) and 1102(14) of the Regulations. This anti-avoidance provision will apply where a new corporation would be considered not to deal at arm's length with a predecessor corporation as a result of a transaction or series of transactions the principal purpose of which may reasonably be considered to have been to cause subsection 1100(2.2) or 1102(14) of the Regulations to apply to a given amalgamation.

1.35 Where one predecessor corporation has a leasehold interest in a property owned by a second predecessor corporation, the application of section 87 to the amalgamation will only be accepted where subsection 13(5.1) is applied concurrently as if the new corporation is the same corporation as, and a continuation of, the first mentioned predecessor corporation. In this way, the UCC of the leasehold interest is carried over to the new corporation. If and to the extent the Regulations permit, the new corporation may claim capital cost allowance in respect of the leasehold interest. The predecessor corporation may not claim a terminal loss in respect of the leasehold interest and the capital cost allowance claimed by it becomes subject to the recapture rules in the hands of the new corporation.

Addition to cost of capital property

1.36 Paragraph 87(11)(b) applies where there has been an amalgamation under subsection 87(1) of a corporation (referred to in this paragraph and ¶1.37 to 1.38 and ¶1.78 as the parent) and one or more of its subsidiary wholly-owned corporations (referred to in this paragraph and ¶1.37 to 1.38 and ¶1.78 as the subsidiary). For the purposes of subsection 87(11), this means that the parent owns all of the shares of the subsidiary other than directors' qualifying shares. In this situation, paragraph 87(11)(b) deems the cost to the new corporation of each capital property of the subsidiary acquired on the amalgamation to be the amount that would have been the cost to the parent of the property if the property had been distributed at that time to the parent on a winding-up of the subsidiary and subsections 88(1) and (1.7) had applied to the winding-up. Consequently, the new corporation may be able to increase the cost amount of certain non-depreciable capital property it acquires from the subsidiary on the amalgamation to the extent that such property is not otherwise an ineligible property as defined in subparagraphs 88(1)(c)(iii) to (vi).

1.37 Generally, the increase (referred to in this paragraph and ¶1.38 to ¶1.39 as the bump amount) will only be available where the adjusted cost base of the parent's shares in the subsidiary immediately before the amalgamation exceeds the tax value of the subsidiary's property at that time less certain other amounts. The bump amount may be allocated among any eligible properties by the new corporation designating in respect of each such property in its Part I income tax return for its first tax year. The expression eligible properties refers to non-depreciable capital property that is not ineligible property and which was owned by the subsidiary without interruption from the time control of the subsidiary was last acquired by the parent to the time immediately before the amalgamation. However, the bump amount allocated to any particular eligible property may not exceed the amount determined under subparagraphs 88(1)(d)(ii) and (ii.1).

1.38 Subsection 87(11) relies upon subsections 88(1) and (1.7) to determine the type of property that qualifies for the increase and the amount of the increase in respect of each such property. In other words, to determine the bump amount available to the new corporation (if any) it is necessary to determine the amount of the bump which, under similar circumstances, would have been available under paragraphs 88(1)(c) and (d) if the subsidiary had instead been wound up into the parent. As well, subsection 87(11) relies upon subsection 88(1) to determine the parent's proceeds of disposition arising from the parent's disposition of the subsidiary's shares on the amalgamation (see ¶1.78).

1.39 As noted in ¶1.37, the designation of any bump amount must normally be made in the new corporation's Part I income tax return for its first tax year. However, subject to the conditions described in ¶1.40, the CRA will generally accept a late-filed designation where the corporation formed on an amalgamation described in subsection 87(11):

(a) agrees to make a proportional designation of the bump amount among all properties that are not ineligible properties based on the maximum amount that is allowed under subparagraph 88(1)(d)(ii); or

(b) accepts that the CRA determines, in its discretion, what portion of the bump amount will be added to the cost of any property.

1.40 The CRA will not accept a late-filed designation in situations involving retroactive tax planning, where the filing of the designation is part of a tax avoidance scheme or where it would be necessary, in order to give effect to the designation, to issue a notice of assessment or reassessment for a tax year that is statute-barred. The decision whether to accept a late-filed designation will be based on the particular facts pertaining to the situation. A taxpayer should submit a written request for approval of a late-filed designation to the Director of the relevant tax services office.

Partnership interests

1.41 Where the new corporation and the predecessor corporation are related (see ¶1.32), paragraph 87(2)(e.1) provides that the new corporation's cost of a partnership interest held by the predecessor corporation is equal to the cost of that interest to the predecessor corporation. To ensure that all adjustments required to be made by the predecessor corporation in computing the adjusted cost base of the partnership interest will be taken into account in computing the new corporation's capital gain or loss on a subsequent disposition of the interest, paragraph 87(2)(e.1) also deems the new corporation to be the same corporation as, and a continuation of, the predecessor corporation in respect of that partnership interest. Consequently, any negative adjusted cost base of the partnership interest to the predecessor corporation will flow through to the new corporation.

1.42 Where the new corporation is not related to the predecessor corporation, subsection 100(2.1) deems the predecessor corporation to have disposed of its partnership interest immediately before the amalgamation for proceeds of disposition equal to its adjusted cost base. It also deems the new corporation to have acquired the partnership interest at a cost equal to those proceeds. As a result, subsection 100(2.1) requires the predecessor corporation to recognize a gain on the disposition of any partnership interest which had a negative adjusted cost base immediately before the amalgamation. The rule in subsection 100(2.1) will apply even where the amalgamation is not a qualifying amalgamation for the purposes of section 87.

1.43 No particular tax problems result where as a matter of law a Canadian partnership continues to exist following an amalgamation involving one or more of its corporate partners. However, where a Canadian partnership ceases to exist because of an amalgamation involving one or more of the corporate partners:

  • subsection 98(5) will not be applicable to provide a rollover where the new corporation will carry on the business of the former partnership and
  • subsection 98(6) will not be applicable to provide a rollover where a new partnership is formed having the new corporation as one of its partners.

This problem can generally be avoided by having the partnership dissolve prior to the amalgamation with each partner receiving undivided interests or for civil law, undivided rights (referred to in this paragraph as undivided interests or rights) in the partnership property so as to be eligible for the rollover under subsection 98(3). Those former partners that then amalgamate would have their undivided interests or rights in the various properties combined in the new corporation with the benefit of the various rollovers provided in subsection 87(2). Where it is proposed that the new corporation enter into a Canadian partnership, the rollover provided in subsection 97(2) may be available.

Repayment of assistance

1.44 Paragraph 87(2)(j.6) deems the new corporation to be the same corporation as and a continuation of each predecessor corporation for purposes of the provisions of the Act which deal with repayments of assistance. Therefore, where the new corporation repays all or any part of such assistance that was received by a predecessor corporation, the repayment is treated in the same manner as described in Interpretation Bulletin IT-273R2, Government Assistance – General Comments.

Options granted by predecessor corporation

1.45 Paragraph 87(2)(o) applies where a predecessor corporation has granted an option to acquire its shares, bonds or debentures and the option expires after the amalgamation. In this case, for the purposes of subsection 49(2), paragraph 87(2)(o) deems the new corporation, to have granted such option and to have received proceeds equal to the amount of consideration previously received by the predecessor corporation for the granting of the option.

1.46 Where a corporation has granted an option (other than an option to acquire its shares, bonds or debentures), subsection 49(1) deems the corporation to have disposed of a property with an adjusted cost base of nil. However, if such an option is exercised in a subsequent tax year, subsections 49(3), (3.1) and (4) generally permit the corporation to move the recognition of the consideration for granting the option from the year of the option grant to the year in which the option is exercised. Where a predecessor corporation has granted such an option and that option is exercised following an amalgamation, there is no provision in the Act which allows the consideration for granting the option to be moved from the year of grant (for the predecessor corporation) to the year of exercise (for the new corporation). Specifically, subsections 49(3), (3.01), (3.1) and (4) are not applicable to the new corporation in this situation.

Losses

1.47 Subject to the restrictions in subsections 111(3) to 111(5.4) and paragraph 149(10)(c), subsection 87(2.1) permits the new corporation to deduct any net capital losses, non-capital losses, restricted farm losses, farm losses or limited partnership losses of the predecessor corporations in the same manner and to the same extent that such losses would have been deductible by the predecessor corporations had there not been an amalgamation. Subsection 87(2.1) generally does not allow losses incurred by the new corporation to be carried back and applied against the taxable income of any predecessor corporation, nor does it affect the determination of the fiscal periods or incomes of the new corporation or any predecessor corporation. However, for amalgamations of a corporation (referred to in this paragraph and in ¶1.52 to 1.53 as the parent corporation) and one or more of its subsidiary wholly-owned corporations, subsection 87(2.11) will allow the new corporation to carry back losses incurred after the amalgamation to the predecessor parent corporation (see ¶1.52).

1.48 Where an amalgamation results in an acquisition of control, the restrictions described in subsections 111(4) to (5.4) will be applicable. For example, if an amalgamation results in an acquisition of control of a predecessor corporation, that predecessor corporation's net capital losses will not be inherited by the new corporation. Further, any non-capital losses of the predecessor corporation will be inherited by the new corporation subject to the restrictions imposed under subsection 111(5). Paragraph 256(7)(b) sets out the rules which apply to determine whether there has been an acquisition of control where two or more corporations have amalgamated to form one corporate entity.

1.49 Pursuant to subparagraph 256(7)(b)(i), control of a corporation will be deemed not to have been acquired solely because of an amalgamation unless subparagraph 256(7)(b)(ii) or (iii) deems control of the corporation to have been acquired.

(a) Subparagraph 256(7)(b)(ii) provides that where a person or group of persons controls the new corporation immediately after the amalgamation and that person or group did not control a particular predecessor corporation immediately before the amalgamation, that person or group is deemed to have acquired immediately before the amalgamation control of that predecessor corporation and of each corporation controlled by that predecessor corporation at that time. This provision will not apply, however, if the person or group of persons which controls the new corporation would not have acquired control of the particular predecessor corporation if that person or group had acquired all of the shares of the predecessor corporation immediately before the amalgamation. For example, on the amalgamation of two or more corporations which were controlled by related persons prior to the amalgamation, no acquisition of control of a predecessor corporation will occur because paragraph 256(7)(a) would apply if the related persons had acquired all of the shares of the predecessor corporations prior to the amalgamation.

(b) Subparagraph 256(7)(b)(iii) provides that control of a predecessor corporation and each corporation controlled by it immediately before the amalgamation is deemed to have been acquired by a person or group of persons unless:

(i) the predecessor corporation was related (otherwise than because of a right referred to in paragraph 251(5)(b)) to each other predecessor corporation immediately before the amalgamation;

(ii) if a hypothetical person had, immediately after the amalgamation, acquired all of the shares of the new corporation received by the shareholders of the particular predecessor corporation (or another predecessor corporation that controlled the particular predecessor corporation) on the amalgamation in exchange for their shares of the predecessor corporation (or the other predecessor corporation, as the case may be), that hypothetical person would have acquired control of the new corporation. For example, this exception would apply to a particular predecessor corporation where on an amalgamation its shareholders collectively received more than 50% of the voting shares of the new corporation; or

(iii) subparagraph 256(7)(b)(iii) would otherwise apply to deem control of each predecessor corporation to have been acquired in an amalgamation of two corporations or two corporations and one or more of their controlled subsidiaries. For example, this exception would apply where two corporations of equal value amalgamated and the shareholders of each corporation received 50% of the voting shares of the new corporation on the amalgamation.

1.50 Notwithstanding subparagraph 256(7)(b)(i), the CRA considers that paragraph 256(7)(c) may apply to certain triangular amalgamations.

Example 2

Consider the situation where the shareholders of a public corporation (Pubco) acquire shares of a loss company (Lossco) on a triangular amalgamation of Pubco and a subsidiary wholly-owned corporation of Lossco. Since the shareholders of Pubco have acquired more than 50% of the shares of Lossco on the triangular amalgamation, paragraph 256(7)(c) will deem there to have been an acquisition of control of Lossco. In the CRA's view, subparagraph 256(7)(b)(i) does not override the acquisition of control under paragraph 256(7)(c) as control of Lossco has not been acquired solely because of the amalgamation.

1.51 For information concerning subsections 111(3) to 111(5.4) and paragraphs 256(7)(a) and (b) refer to Interpretation Bulletin IT-302R3, Losses of a Corporation - The Effect that Acquisitions of Control, Amalgamations, and Windings-up have on Their Deductibility - After January 15, 1987.

1.52 Where a parent corporation amalgamates with one or more of its subsidiary wholly-owned corporations, subsection 87(2.11) deems the new corporation to be the same corporation as, and a continuation of, the parent corporation for, among other things, the purposes of section 111 and Part IV in respect of the parent corporation. As a result, the new corporation formed on a qualifying vertical amalgamation can apply its post-amalgamation losses against the pre-amalgamation income of the predecessor parent corporation. Subsection 87(2.11) does not, however, permit losses of the predecessor subsidiary wholly-owned corporation to be applied against the taxable income of the predecessor parent corporation for any tax year prior to the amalgamation. It also does not permit the post-amalgamation losses of the new corporation to be applied against the taxable income of the predecessor subsidiary wholly-owned corporation for any tax year prior to the amalgamation. Effectively, following a qualifying vertical amalgamation, subsection 87(2.11) permits the parent corporation to be treated in substantially the same manner as if the subsidiary wholly-owned corporation had been wound up under subsection 88(1) into the parent corporation.

1.53 Subsection 87(2.11) may be applied to successive amalgamations of a parent corporation to allow the losses incurred by the new corporation to be carried back to offset the taxable income of the original predecessor parent corporation.

Example 3

Parent owns all of the issued shares of Subsidiary 1 that owns all of the issued shares of Subsidiary 2. Parent amalgamates with Subsidiary 1 to form Parent 2. Parent 2 then amalgamates with Subsidiary 2 to form Amalco. Any losses incurred by Amalco may, subject to the time limits set out in subsection 111(1), be carried back to reduce the taxable income of Parent by virtue of subsection 87(2.11). However, as discussed in ¶1.21, each tax year resulting from the successive amalgamations will have to be taken into account in determining to which tax year of Parent the losses of Amalco may be applied.

1.54 Where a predecessor corporation's losses have been carried forward to the new corporation under the provisions of subsection 87(2.1), it is the CRA's view that these provisions or the provisions of subsections 88(1.1), ( 1.2) or (1.3) can be applied to such losses in the event that the new corporation subsequently amalgamates pursuant to section 87 or is wound-up pursuant to subsection 88(1). Similarly, where a subsidiary's losses have been carried forward to the parent under the provisions of subsections 88(1.1), (1.2) or (1.3), these losses can be carried forward to the new corporation on a subsequent amalgamation pursuant to section 87 involving the parent.

Resource expense pools

1.55 In an amalgamation to which section 87 applies, resource properties are considered to become property of the new corporation and no disposition occurs. Furthermore, for the purposes of subsection 59(3.3), sections 66, 66.1, 66.2, 66.21, 66.4 and 66.7 and section 29 of the Income Tax Application Rules, subsection 87(1.2) deems the new corporation to be the same corporation as, and a continuation of, each predecessor corporation in an amalgamation of:

a) a corporation and one or more of its subsidiary wholly-owned corporations (see ¶1.8); or

b) two or more corporations each of which is a subsidiary wholly-owned corporation of the same person.

However, the deeming provisions under subsection 87(1.2) cannot affect the determination of any predecessor corporation's fiscal period, taxable income or tax payable.

1.56 In the case of an amalgamation to which subsection 87(1.2) does not apply, any undeducted balance in a predecessor corporation’s resource expense pools (successored resource expenses) will only be deductible where the amalgamated corporation has filed the election (Form T2010) described in paragraph 66.7(7)(c). The amount of any successored resource expenses that the amalgamated corporation may deduct will be determined under the successor rules in subsections 66.7(1) to (5) and will generally be limited to specified resource income from the resource property acquired from the particular predecessor corporation.

Debts and obligations of a predecessor corporation

1.57 Where a debt of a predecessor corporation becomes a debt of the new corporation on an amalgamation after May 6, 1974, and the amount payable by the new corporation on the maturity of the debt is equal to the amount that would have been payable by the predecessor corporation on the debt's maturity, paragraph 87(7)(c) provides that the provisions of the Act do not apply in respect of the transfer of the debt to the new corporation. Therefore, there are generally no immediate tax consequences as a result of the assumption of the debt by the new corporation. Paragraph 87(7)(d) applies the provisions of the Act to the new corporation as if it had incurred or issued the debt on the same terms and at the same time as the predecessor corporation.

1.58 Since paragraph 87(7)(d) provides that the provisions of the Act apply as if the new corporation had incurred or issued the debt at the time it was incurred or issued by the predecessor corporation, subsection 78(1) may apply to the new corporation in respect of unpaid interest on a debt that is inherited by it from a predecessor corporation. For example, in R. v. Dow Chemical Canada Inc., 2008 FCA 231, 2008 DTC 6544 (FCA), an amalgamated corporation was considered not to be dealing at arm's length with a creditor at the time an obligation to pay interest to the creditor was incurred by a predecessor corporation, because the predecessor corporation did not deal at arm's length with the creditor at that time. Moreover, because such interest continued to be unpaid at the end of the predecessor corporation's second tax year after the year in which the obligation to pay the interest arose, and the amalgamated corporation was deemed to be related to the creditor at that time under subsection 251(3.1), subsection 78(1) applied to the amalgamated corporation in respect of that unpaid interest.

1.59 Where control of a corporation is acquired and that corporation makes a designation under paragraph 111(4)(e) to realize an accrued foreign exchange gain on a foreign currency denominated debt that arises because of the application of subsection 111(12), the new corporation formed on a subsequent qualifying amalgamation of that corporation would, under paragraph 87(7)(d) and for the purposes of subsections 40(10) and (11), be considered to be the corporation that realized the gain in respect of the foreign currency denominated debt under paragraph 111(4)(e) and subsection 111(12). As a result, no double taxation of the same gain would arise when the new corporation actually repays the debt.

1.60 Where a predecessor corporation was entitled, under paragraph 20(1)(c), to deduct interest on borrowed money, such deduction would not be denied to the new corporation provided that the borrowed money continues to be used by the new corporation for the purpose of earning income from a business or property as required by paragraph 20(1)(c) (see Income Tax Folio S3-F6-C1, Interest Deductibility).

Filing of elections and information returns

1.61 If the laws governing an amalgamation provide that the predecessor corporations are continued in the amalgamated corporation, the amalgamated corporation may file an election under the various provisions contained in the Act on behalf of a predecessor corporation provided that the predecessor corporation itself would otherwise have been eligible to file the election on its own behalf if the amalgamation had not occurred. For example, the amalgamated corporation may file an election under subsection 85(1), subject to the time limits referred to in subsection 85(6) or within the parameters of subsections 85(7) or (7.1), for a property transfer which involved one or more of the predecessor corporations.

1.62 Similarly, the amalgamated corporation may, on behalf of a predecessor corporation, prepare and file information returns and slips under the various provisions of the Act if the laws governing the amalgamation provide for the continuation of the predecessor corporation in the amalgamated corporation.

Sale of accounts receivable

1.62.1 Where a new corporation that was formed on an amalgamation that was governed by section 87 sells to a purchaser all or substantially all the property that was used by a predecessor corporation in carrying on its business, including debts that had been previously included in the predecessor corporation’s income and which are still outstanding at the time of the sale, an election under section 22 by the new corporation will be accepted as valid. This will be the case even though the requirement in section 22 that the debts must have been, or would be, included in the new corporation’s income will not have been met. The acceptance of the election in these circumstances will be conditional on all other requirements of section 22 being satisfied and on there being no disruption in the operation of the business during the period from the time of the amalgamation to form the new corporation until the time the business is sold to the purchaser.

Objections, appeals, refunds and tax debts

1.63 If an assessment (or reassessment) has been received by a predecessor corporation prior to amalgamation and the predecessor corporation has filed a notice of objection prior to amalgamation, the new corporation will possess the rights arising from the filing of that notice of objection and will be able to appeal to the Tax Court of Canada within the time limits set out in section 169. Similarly, if an assessment (or reassessment) has been received by a predecessor corporation and the predecessor corporation commenced an appeal prior to amalgamation, the new corporation will be able to continue the appeal.

1.64 If an assessment (or reassessment) of a predecessor corporation is made after amalgamation, it will usually be issued to the new corporation which will have the same rights as the predecessor corporation to file a notice of objection and to appeal the assessment (or reassessment). However, where the governing corporate law considers the new corporation formed on an amalgamation to be a continuation of the predecessor corporations, an assessment or reassessment issued in the name of the predecessor corporation is valid and enforceable against the new corporation (see R. v. Guaranty Properties Ltd. et al, 90 DTC 6363 (FCA)) as well as the predecessor corporation.

1.65 Refunds of tax paid by a predecessor corporation made after the amalgamation will usually be issued to the new corporation. Tax debts of a predecessor corporation can be collected by the CRA from the amalgamated corporation as well as the predecessor corporation.

Canada Pension Plan, Employment Insurance Act and individual pension plans

1.66 A statutory amalgamation under the laws of Canada or any of the provinces does not result in the new corporation being a new employer for the purposes of the Canada Pension Plan or the Employment Insurance Act. Therefore, where there has been such an amalgamation at some point in the calendar year, contributions by employees and by predecessor corporations before the amalgamation should be taken into account in determining the required contribution to be made after the amalgamation. For instance, where the year's maximum contribution for an employee had been made prior to the amalgamation by both the employee and the predecessor employer corporation, the new corporation will not be required to make further contributions for that employee.

1.67 Pursuant to paragraph 87(2)(q), the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation for the purposes of sections 147, 147.1 and 147.2 and any regulations made under subsection 147.1(18). Therefore, in determining whether the new corporation can make an individual pension plan contribution in respect of services rendered by one of its employees to a predecessor corporation, subparagraph 8503(3)(a)(i) of the Regulations will apply following a qualifying amalgamation to include the period throughout which the employee of the new corporation was employed by, and received remuneration from, the predecessor corporation.

Rules respecting shareholders, option holders and creditors

Shares of predecessor corporations

1.68 The conversion of any share because of an amalgamation or merger constitutes a disposition under subparagraph (b)(iii) of the definition of disposition in subsection 248(1). Accordingly, when shares of a predecessor corporation are exchanged for shares of the amalgamated corporation on an amalgamation, each shareholder of the predecessor corporation will be considered to have disposed of their predecessor corporation shares.

1.69 However, subsection 87(4) provides a rollover (that is, a deferral of recognition of any capital gain or loss) to a shareholder (except any predecessor corporation) where:

  • the amalgamation is a qualifying amalgamation;
  • the shares of the predecessor corporation were capital property to the shareholder; and
  • the shareholder received no consideration for the disposition of the predecessor corporation shares other than shares of the new corporation.

Where the shares in the predecessor corporation were taxable Canadian property of the shareholder, the shares in the new corporation are deemed to be taxable Canadian property at any time that is within 60 months after the amalgamation (see ¶1.82). For greater certainty, the rollover under subsection 87(4) is not available to shareholders whose shares of a predecessor corporation are converted into shares of the amalgamated corporation on a non-qualifying amalgamation (see ¶1.24).

1.70 The rollover provided for in subsection 87(4) will not be denied solely because a shareholder of a predecessor corporation receives cash or other consideration in lieu of fractional shares of the new corporation. Where a former shareholder of a predecessor corporation receives any non-share consideration, in lieu of a fraction of a share of the new corporation, and the total amount or value of that non-share consideration does not exceed $200, the shareholder may choose to either:

(a) include the amount of any gain or loss from the disposition of the shareholder’s fractional share in the computation of income; or

(b) ignore the computation of that gain or loss and reduce the adjusted cost base of the new corporation shares received on the amalgamation by that total amount or value.

However, this choice is not available if the total amount or value of any non-share consideration received exceeds $200. In this case, to the extent that that total amount or value exceeds the paid-up capital of the fractional share that the shareholder is entitled to receive on the amalgamation, the shareholder must report a deemed dividend under subsection 84(3) and any gain or loss, as the case may be, from the disposition of its fractional share.

1.71 Under subsection 87(4), each shareholder of a predecessor corporation that holds shares of that corporation as capital property is deemed to have:

(a) disposed of the shares of the predecessor corporation for proceeds equal to the shareholder's adjusted cost base of those shares immediately before the amalgamation, and

(b) acquired shares of a class of the new corporation at a cost equal to that proportion of the proceeds determined in (a) above that:

(i) the fair market value, immediately after the amalgamation, of that class of shares of the new corporation acquired by the shareholder, is of

(ii) the fair market value, immediately after the amalgamation, of all shares of the new corporation acquired by the shareholder.

1.72 The allocation of cost described in ¶1.71(b) may cause a shift of adjusted cost base from one class of shares of a predecessor corporation to a different class of shares of the new corporation if the shareholder owned more than one class of shares of the predecessor corporation.

Example 4
Cost of shares of the new corporation if shareholder owned more than one class of shares of the predecessor corporation
Class of shares ABC of shares in predecessor corporation FMV of shares in new corporation Cost of shares of new corporation under 87(4)
Preferred $1,000 $1,000 $110
Common $100 $9,000

$990

Total $1,100 $10,000 $1,100

1.73 However, the CRA will not apply paragraph 87(4)(b) to reallocate the adjusted cost base of the shares of the new corporation if:

(a) the amalgamation agreement provides that the preferred and common shares of the predecessor corporation are to be converted into preferred and common shares, respectively, of the new corporation, or

(b) for a short-form amalgamation, the issued shares of one of the predecessor corporations become shares of the new corporation under the relevant corporate legislation.

Consequently, in the context of Example 4, the cost of the preferred and common shares of the predecessor corporation would be $1,000 and $100, respectively.

1.74 Where shares of a predecessor corporation are cancelled for no consideration pursuant to a short-form horizontal amalgamation, the adjusted cost base of such cancelled shares to the shareholder will be added to the cost of the common shares of the new corporation which are deemed to have been received by the shareholder on the amalgamation under subsection 87(1.1).

1.75 In situations where an amalgamation is used to shift all or part of the value of a shareholder's predecessor corporation shares to a person related to the shareholder whose interest in the new corporation will be enhanced by the shift in value, the rollover provided in subsection 87(4) will be denied in respect of that shareholder. Specifically, the midamble to subsection 87(4) provides that no rollover is available to a shareholder of a predecessor corporation if the following two conditions are met (referred to in this Chapter as the 87(4) exception):

(a) the fair market value of the shareholder's predecessor corporation shares immediately before the amalgamation exceeds the fair market value of the shareholder's new corporation shares immediately after the amalgamation; and

(b) it is reasonable to regard all or any portion of the excess (referred to in subsection 87(4) and in this Chapter as the gift portion) as a benefit that the shareholder desired to have conferred on a person related to the shareholder.

The 87(4) exception is similar to the benefit rules contained in other corporate reorganization provisions that otherwise provide for a rollover (see, for example, subsection 51(2), paragraph 85(1)(e.2), and subsection 86(2)).

1.76 The application of the 87(4) exception to a particular amalgamation is determined on a shareholder-by-shareholder basis. Where the conditions to the 87(4) exception are satisfied in respect of a shareholder of a predecessor corporation:

(a) the shareholder is deemed to have disposed of the predecessor corporation shares for proceeds equal to the lesser of:

i) the aggregate of the adjusted cost bases, immediately before the amalgamation, of the predecessor corporation shares plus the gift portion (subparagraph 87(4)(c)(i)), and

ii) the fair market value of the predecessor corporation shares immediately before the amalgamation (subparagraph 87(4)(c)(ii));

(b) the shareholder's capital loss otherwise determined on the disposition of the predecessor corporation shares is deemed to be nil (paragraph 87(4)(d));

(c) subject to (d) below, the cost to the shareholder of the shares of the new corporation received on the amalgamation is deemed to be the lesser of:

(i) the aggregate of the adjusted cost bases to the shareholder of the predecessor corporation shares immediately before the amalgamation (subparagraph 87(4)(e)(i)), and

(ii) the aggregate of the fair market value, immediately after the amalgamation, of the shareholder's new corporation shares and the amount that would have been the shareholder's capital loss otherwise determined had it not been deemed to be nil as in (b) above (subparagraph 87(4)(e)(ii)); and

(d) where shares of more than one class of the new corporation are received by the shareholder on the amalgamation, the deemed acquisition cost determined in (c) above is allocated to the different classes on a pro-rata basis in the same manner as that described in ¶1.71(b).

Example 5 

The 87(4) exception can be illustrated by the following example.

A parent owns all of the shares of Pco, which have an aggregate adjusted cost base and fair market value of $100 and $1000, respectively. Child owns all of the shares of Cco, which have an aggregate adjusted cost base and fair market value of $500 and $1000, respectively. Pco and Cco amalgamate to form Aco, the shares of which have an aggregate fair market value of $2000. On the amalgamation, the parent is issued 50 shares of Aco with an aggregate fair market value of $500 and the child is issued 150 shares of Aco with an aggregate fair market value of $1500, such that there has been a shift of value of $500 from the parent to the child. Under paragraph 87(4)(c), the parent will be deemed to have disposed of the Pco shares for $600, being their aggregate adjusted cost base plus the gift portion of $500. Under paragraph 87(4)(e), the Aco shares received by the parent on the amalgamation will be deemed to have an aggregate adjusted cost base of $100 determined as described in ¶1.76(c). The 87(4) exception will not apply to the child as the aggregate fair market value of the Cco shares owned by the child immediately before the amalgamation does not exceed that of the Aco shares received by the child on the amalgamation. Therefore, the proceeds of disposition received by the child on the disposition of the Cco shares and the child’s cost of the Aco shares will be determined as described in ¶1.71.

1.77 Where one predecessor corporation holds shares of another predecessor corporation, the cancellation of those shares on the amalgamation will not normally give rise to a gain or loss in the hands of the shareholder corporation, by virtue of paragraph (n) of the term disposition in subsection 248(1).

1.78 On an amalgamation described in ¶1.36, a capital gain may arise for the parent. Specifically, paragraph 87(11)(a) provides that the parent will be deemed to have disposed of the subsidiary shares immediately before the amalgamation for proceeds determined under paragraph 88(1)(b), that is, the greater of:

(a) the lesser of the paid-up capital of the subsidiary shares immediately before the amalgamation and the amount determined under subparagraph 88(1)(d)(i); and

(b) the parent's adjusted cost base of the subsidiary shares immediately before the amalgamation.

Therefore, if the paid-up capital of the subsidiary's shares exceeds their adjusted cost base to the parent immediately before the amalgamation, the parent will realize a capital gain by virtue of paragraph 87(11)(a).

Shares deemed to be listed

1.79 In certain amalgamations, the shares of a predecessor corporation which were listed on a designated stock exchange may be temporarily exchanged for shares of the new corporation which are not listed on a designated stock exchange. Subsection 87(10) deems such temporary shares to have been listed on a designated stock exchange provided that the new corporation is a public corporation and the temporary share is redeemed, acquired or cancelled within 60 days following the amalgamation. This deemed listing of the temporary shares of the new corporation is applicable for the purposes of determining whether such share is taxable Canadian property and excluded property for the purposes of section 116 and a qualified investment for certain registered plans.

Options to acquire shares of a predecessor corporation

1.80 Subsection 87(5) provides a tax-deferred rollover where a taxpayer (except any predecessor corporation) owned an option to acquire shares of a predecessor corporation as capital property and, on the amalgamation of the predecessor corporation with one or more other corporations, received no consideration other than an option to acquire shares of the new corporation. There is no requirement that the shares to be acquired under the exchanged option be similar to those covered by the original option. For example, an option to acquire common shares of the predecessor corporation may be exchanged for an option to acquire preferred shares of the new corporation. Where subsection 87(5) applies, the option holder is deemed to dispose of the old option for proceeds equal to its adjusted cost base and is deemed to have acquired the new option at a cost equal to those deemed proceeds. Where the old option was taxable Canadian property to the option holder, the new option is deemed at any time that is within 60 months after the amalgamation to be taxable Canadian property.

1.81 Subsection 87(5) does not apply where an employee holds rights under an agreement to acquire shares of a predecessor corporation and subsection 7(1) is applicable to such right, because the right will not constitute capital property of the employee. However, by virtue of subsection 7(1.4), no benefit arises under paragraph 7(1)(b) when such a right is exchanged by the employee for a right to acquire a share of the new corporation or of a corporation with which the new corporation does not deal at arm's length provided that the fair market value of the new option does not exceed the fair market value of the old option.

Non-resident shareholders

1.82 Where the shares of a predecessor corporation were taxable Canadian property of a non-resident shareholder, the postamble to subsection 87(4) deems the shares of the new corporation received by the shareholder on the amalgamation, to be taxable Canadian property of the shareholder at any time within the 60 months immediately following the amalgamation. For this reason, it is the CRA's view that a non-resident holder of shares of a predecessor corporation which constitute taxable Canadian property need not comply with the procedures set out in section 116 in respect of the deemed disposition of the old shares on an amalgamation to which subsection 87(4) is applicable.

1.83 In the context of a triangular amalgamation (see ¶1.10 to 1.11), where shares of the parent are received by a non-resident whose shares of a predecessor corporation were taxable Canadian property, paragraph 87(9)(a) and subsection 87(4) deem the parent shares to be taxable Canadian property of the shareholder at any time within the 60 months immediately following the amalgamation.

Paid-up capital

1.84 On an amalgamation or merger of two or more Canadian corporations, subsection 87(3) ensures that the aggregate paid-up capital of the issued shares of the new corporation will not exceed the aggregate paid-up capital of the issued shares of all predecessor corporations (excluding the paid-up capital of any shares of a predecessor corporation held by another predecessor corporation) immediately before the amalgamation or merger.

1.85 Subsection 87(3) would apply, for example, where the paid-up capital for tax purposes of the issued shares of a predecessor corporation is lower than their stated capital for corporate law purposes because of the previous operation of one or more of the provisions referred to in subparagraph (b)(iii) of the definition of paid-up capital in subsection 89(1). In that case, subsection 87(3) ensures that the aggregate paid-up capital of the shares in the new corporation immediately after the amalgamation or merger does not exceed the aggregate paid-up capital of the shares in the predecessor corporations immediately before the amalgamation or merger (excluding the paid-up capital of any shares held by one predecessor corporation in another predecessor corporation), even if the governing corporate law would dictate a higher amount.

1.86 Where subsection 87(3) applies, the paid-up capital reduction is pro-rated among all of the outstanding classes of shares of the new corporation in proportion to their aggregate paid-up capital. Consequently, the provisions of section 84 will not apply to deem a dividend to have been paid or received where shares of a predecessor corporation are converted into shares of the new corporation on an amalgamation.

1.87 Although subsection 87(3) limits the aggregate paid-up capital of the issued shares of the new corporation, there is no specific provision which sets out how this aggregate paid-up capital is to be allocated to the issued shares of the new corporation. Where the streaming of paid-up capital to a specific class of shares of the new corporation has been done in order to accomplish a form of surplus strip, consideration will be given to the application of the general anti-avoidance rule in section 245. In addition, a transaction or series of transactions structured to avoid the cancellation of the paid-up capital of shares held by one predecessor corporation in another predecessor corporation will be subject to the application of the general anti-avoidance rule. In Copthorne Holdings Ltd. v. R., 2011 SCC 63, 2012 DTC 5007(SCC), the general anti-avoidance rule applied to a series of transactions whereby a parent and a subsidiary corporation were converted into sister corporations for the purposes of preventing the cancellation of the paid-up capital of the parent's shares in the subsidiary which would have occurred on a vertical amalgamation of the corporations.

1.88 When a new corporation has more than one class of shares, a proportional reduction of paid-up capital under subsection 87(3) may, in certain circumstances, result in an unintended shifting of paid-up capital between the classes of shares. Consequently, subsection 87(3.1) permits the new corporation to elect not to have the provisions of subsection 87(3) apply where both of the following conditions are satisfied:

(a) all of the issued shares of each class of shares (other than a class of shares all of the issued shares of which were cancelled on the amalgamation) of each predecessor corporation are converted into a separate class of shares of the new corporation; and

(b) after the amalgamation, the number of shareholders of each class, their proportionate ownership of each class, the number of issued shares of each class, the issued capital of each class for corporate law purposes and the terms and conditions of each class of shares of the new corporation are identical to those that existed for the particular class of shares of the predecessor corporation which were converted into that separate class of shares of the new corporation.

1.89 If the conditions in ¶1.88(a) and (b) are satisfied and the new corporation elects in its return of income for its first tax year to have subsection 87(3.1) apply, each class of shares of the new corporation issued on the amalgamation will be deemed to be the same class as, and a continuation of, each class of shares of the predecessor corporation converted on the amalgamation for the purposes of computing their paid-up capital. Consequently, any paid-up capital reduction that applied to the specific class of shares of the predecessor corporation would flow through to the particular class of shares of the new corporation.

1.90 In the case of a short-form vertical or horizontal amalgamation, the CRA considers that the shares of the predecessor corporation which are not cancelled on the amalgamation have been converted into shares of the new corporation for the purposes of subsection 87(3.1).

1.91 On a triangular amalgamation of two or more taxable Canadian corporations, paragraph 87(9)(b) ensures that the aggregate paid-up capital of the issued shares of the parent corporation (see ¶1.10) will not exceed the aggregate paid-up capital of the issued shares of the parent and each predecessor corporation immediately before the amalgamation or merger (excluding the paid-up capital of any shares of a predecessor corporation held by the parent or held by another predecessor corporation or shares of a predecessor corporation held by any other person that were not exchanged for shares of the parent on the amalgamation or merger). Where shares of more than one class of the parent are issued on the amalgamation or merger, any paid-up capital reduction is pro-rated among all of such classes of shares of the parent in proportion to their aggregate paid-up capital.

Debt settlement on amalgamation

1.92 Subsection 80.01(3) relates to an amalgamation of a debtor corporation and a creditor corporation. The provision applies where an indebtedness (including a distress preferred share), as referred to in subsection 80.01(3), owed by one corporation to another corporation is cancelled or extinguished on an amalgamation of those corporations. The application of subsection 80.01(3) is not limited to a qualifying amalgamation described in ¶1.1 but may apply to any amalgamation. Where subsection 80.01(3) applies to a particular indebtedness, the indebtedness is deemed to have been settled immediately before the time that is immediately before the amalgamation by a payment made (by the debtor) and received (by the creditor) of an amount equal to the creditor's cost amount of the indebtedness at that time..

1.93 For the purposes of subsection 80.01(3), the cost amount of the settled indebtedness is to be determined using the definition of cost amount in subsection 248(1), read without reference to paragraph (e). It includes any unpaid interest relating to the indebtedness that has been included in the creditor's income and that has not been deducted from income as a bad debt. This may result in a forgiven amount to the debtor for an indebtedness extinguished on an amalgamation where the indebtedness had been purchased by the creditor from a third party for an amount less than both its principal or redemption amount and the amount for which it was originally issued by the debtor.

1.94 It is the CRA's view that any accrued foreign exchange gain or loss on a foreign currency denominated debt which is extinguished on an amalgamation of the debtor and the creditor and is deemed to be settled by virtue of subsection 80.01(3) will not be realized as a consequence of the amalgamation. This is because the payment deemed to have been made by the debtor to the creditor under subsection 80.01(3) is the creditor’s cost amount which is determined by the exchange rate at the time the indebtedness arose and not at the time the indebtedness is deemed to be settled or extinguished on the amalgamation under subsection 80.01(3).

Reserves of creditors

1.95 A person entitled to a reserve under paragraph 20(1)(n), subparagraph 40(1)(a)(iii) or subparagraph 44(1)(e)(iii) in respect of an amount not yet due from a predecessor corporation will not become disentitled to the reserve by virtue of the amount becoming an obligation of the new corporation on the amalgamation.

Amalgamation expenses

1.96 Expenses incurred before 2017 in connection with an amalgamation (or a proposed amalgamation that is not completed) of two or more corporations, such as legal fees, accounting fees, and other similar expenses, are eligible capital expenditures provided they meet the requirements of that definition in former subsection 14(5) as explained in Interpretation Bulletin IT-143R3, Meaning of Eligible Capital Expenditure. Such expenses incurred after 2016 are property described in paragraph (a) of Class 14.1 of Schedule II to the Regulations provided they meet the requirements of subsection 13(35).

Anti-avoidance rules

1.97 Subsection 69(11) is an anti-avoidance provision which may apply to deny a tax-deferred rollover of property, including under subsection 87(2). Where it applies, the predecessor corporation will be deemed to have disposed of the property for proceeds equal to its fair market value immediately before the amalgamation. Subsection 69(11) will apply where as part of a series of transactions a taxpayer disposes of property on a tax-deferred basis and it may reasonably be considered that one of the main purposes of the series is to obtain the benefit of a tax deduction or other entitlement (including tax-exempt status) which is available to a person who is not affiliated with the taxpayer in respect of a subsequent disposition of the property that occurs, or arrangements for the subsequent disposition are made, within three years of the tax-deferred disposition.

1.98 In the case of an amalgamation or merger, there may not technically be a disposition of property from a predecessor corporation to the new corporation. Accordingly, subsection 69(13) deems the property of a predecessor corporation to have been disposed of immediately before the amalgamation or merger at its cost amount for the purposes of determining whether subsection 69(11) applies to the amalgamation or merger. The expression affiliated person is defined in subsection 251.1(1) except that, for the purposes of subsection 69(11), the affiliated person rules are to be read without the extended definition of control found in subsection 256(5.1). In other words, only de jure control is considered.

1.99 Information Circular 88-2, General Anti-Avoidance Rule – Section 245 of the Income Tax Act and Information Circular 88-2S1, General Anti-Avoidance Rule also discuss a number of examples which illustrate the use of section 87 and comment on the application of subsection 245(2). These examples include using an amalgamation to change fiscal periods and shifting paid-up capital to preferred shares created on an amalgamation to give capital gain treatment to preferred shareholders on a subsequent redemption.

1.100 Various points relevant to amalgamations but not discussed in this Chapter can be found in the following publications:

Application

This updated Chapter, which may be referenced as S4-F7-C1, is effective July 25, 2019.

When it was first published on November 28, 2014, this Chapter replaced and cancelled Interpretation Bulletin IT-474R2, Amalgamations of Canadian Corporations.

The history of updates to this Chapter as well as any technical updates from the cancelled interpretation bulletin can be viewed in the Chapter History page.

Except as otherwise noted, all statutory references herein are references to the provisions of the Income Tax Act R.S.C. 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended.

Links to jurisprudence are provided through CanLII.

Income tax folios are available in electronic format only.

Reference

Section 87 (also sections 13, 22, 49, 85, 88, 98, 111, 116, 251 and 256, subsections 7(1), 7(1.4), 10(1), 14(5), 28(1), 40(10), 40(11), 51(2), 69(11), 80.01(3), 84(3), 86(2), 89(1), 96(1.01), 97(2), 100(2.1), 245(2), 248(1), 249(3), 249(4) and 251.1(1), paragraphs 20(1)(a), 20(1)(c), 20(1)(n), 249(1)(a) and 249.1(1)(a), subparagraphs 40(1)(a)(iii) and 44(1)(e)(iii) of the Act and sections 1100 and 1102 of the Regulations and Class 14.1 of Schedule II to those Regulations.

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