For various reasons, it may be desirable to consolidate two corporate entities. Share structure simplification, loss utilization, interest deductibility, synergy realization are just some examples.
Corporate Tax considerations
Provided certain criteria are met, Subsection 87 of the Income Tax Act allows for the tax-free amalgamation of corporate entities. In general, terms, if following an amalgamation, all the assets and liabilities of the predecessor corporations become the assets and liabilities of the newly amalgamated corporation, and all the previous shareholders receive shares in the newly amalgamated corporation, the conditions for a tax-free rollover can be met.
Some tax consequences of a corporate amalgamation include:
- A deemed year-end for all corporations. Corporate tax returns required for each entity.
- Short taxation years – can impact the carry forward of losses that are near expiry.
- An increase in tax value of non-depreciable capital assets. A special asset bump can be implemented under sub-sections 88(1)(d) of the Income Tax Act.
- Losses of the predecessor corporation can only be used in the year following the amalgamation.
- Losses of the Amalgamated company cannot be used against losses of the predecessor company.
- Debt between amalgamated companies is cancelled on amalgamation
- the debt forgiveness rules in Section 80 of the Income Tax Act must always be considered.
- Corporate Tax Instalment base is impacted.
- Reg. 5301(4) outlines how to calculation the new instalment base.
- Payroll withholding calculations should consider both predecessor corporations
- The CRA outlines some specific rules. See this link for more information.
In addition, to the tax consequences of an amalgamation, there are practical considerations. For example, employees will now be contracted by an amalgamated entity which can result in one-off additional payroll filings.
Ensuring the amalgamated entity has the right accounting expertise will help ensure correct underlying accounting records and lead to a smoother transition.
Robert Ng, CPA Professional Corporation is an independent tax accountant operating in London, Ontario. Contact us today for assistance with your corporate tax.
Contact us today for assistance with your corporate tax.