Amalgamating a business
By Nizam Shajani, CPA, CA, MBA, Partner
If you have several businesses and are considering consolidating them into one, an amalgamation should be considered. The combination of businesses into one entity may be done to simplify a structure, consolidate losses of a group, reorganize the share structure, allow for a deduction in one entity against the income of another or a variety of other reasons that should consider tax efficiencies. There are rules (under section 87) that allow for Canadian corporations to merge on a tax deferred basis – however if these rules are not followed, the consequences could be punitive.
A business combination can be achieved through an amalgamation agreement between the shareholders of the entities that wish to merge. This is done via a long form amalgamation or a short form amalgamation. The less exhaustive short form amalgamation may be used where only the directors (as opposed to all the shareholders) approve the amalgamation by a resolution of the directors of each of the merging entities.
The result of the amalgamation will depend on the current structure. A vertical amalgamation would be used where a parent company owns a subsidiary of which are amalgamating. In this case the articles of incorporation of the parent company are used for the amalgamated entity, no shares are issued for the amalgamated entity, the share capital of the parent company are used, and the shares of the subsidiary are cancelled without payments.
A horizontal amalgamation is used where the subsidiaries of a parent company are being combined. In this case the articles of incorporation of one of the entities would be used for the amalgamated entity, the shares of the entity whose articles of incorporation are used become the shares of the amalgamated entity, the shares of the other entity are cancelled without payment, and the combined share capital of the amalgamated entities are used for the amalgamated company.
There are rules outside of the tax act that should also be considered, including inter-provincial mergers (as corporations may be governed by different statutes between provinces) and the general requirements for mergers – however the right to mergers is generally ingrained in corporate law statutes. Considerations to merge include the ability to meet obligations (solvency) as well as filing Articles of Amalgamation and receipt of a Certificate of Amalgamation.
It is important to note that court rulings have repeatedly ruled that amalgamated entities do not extinguish the predecessor entities, but are rather a continuance of those entities. Dealings with those entities will therefore continue with the amalgamated company.
To meet the tax free requirements for an amalgamation, all property and liabilities of the predecessor corporations should become the property any liabilities of the amalgamated company and all shareholders must receive shares of the amalgamated corporation.
Where the amalgamation event also results in the acquisition or change in control of the corporation, this will also result in a deemed year end and tax filings will need to be made.
There is no automatic flow thorough of tax attributes, reserves and carry forward amounts in an amalgamation and these should be given careful consideration and required attributes should be specified.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.