SECTION 87 AMALGAMATION - corporate tax planning strategy
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Section 87 of the Income Tax Act (Canada) provides a crucial statutory framework for the tax-deferred amalgamation of two or more taxable Canadian corporations. An amalgamation, for corporate law purposes, typically results in the merger of the predecessor corporations into a single new corporate entity that inherits all the assets and liabilities of the merging entities. Without a specific provision like Section 87, this transfer of property would normally constitute a disposition at fair market value, triggering immediate capital gains tax liability for the transferring corporations. Section 87's core function is to ensure that a qualifying amalgamation is treated as a tax-neutral event, thus removing a significant tax barrier to corporate restructuring and consolidation [more on the value of tax-neutral corporate reorganizations].
To achieve this tax-deferred result, Section 87 imposes specific conditions that must be met for a merger to qualify as an "amalgamation" under the Income Tax Act. The key requirements include that all predecessor corporations must be taxable Canadian corporations, and by virtue of the merger, all their property (except for intercompany debt and shares) and all their liabilities must become the property and liabilities of the new amalgamated corporation ("Amalco"). Crucially, all shareholders of the predecessor corporations (other than an amalgamating parent corporation) must receive shares of Amalco as a result of the merger. When these conditions are satisfied, the ITA treats the transfer of assets and the exchange of shares as automatic "tax-free rollovers," meaning they are deemed to occur at their tax cost (Adjusted Cost Base or Undepreciated Capital Cost), preventing the realization of any immediate gain or loss.
The realization of tax efficiencies is one of the primary drivers for utilizing Section 87. By providing for an automatic tax-deferred transfer of assets, the provision allows companies to streamline complex corporate structures, eliminate redundant legal entities, and reduce administrative costs without incurring a premature tax burden. Furthermore, the provision dictates that Amalco is generally treated as a continuation of its predecessor corporations for various tax purposes. This continuity principle is vital, as it allows for the preservation and transfer of key corporate tax attributes that would otherwise be lost or restricted upon a taxable disposition.
One of the most significant tax efficiencies is the consolidation of tax attributes, notably non-capital losses and capital losses. Section 87 permits the newly formed Amalco to utilize the unexpired loss carry-forwards of its predecessors to offset its own future income. This ability to pool losses across the consolidated business is a powerful tool for tax planning. Other crucial tax attributes, such as the capital cost of depreciable property and the cost of non-depreciable capital property, also carry over to Amalco. This ensures that the tax depreciation (Capital Cost Allowance) claims and future capital gains calculations are based on the original historical cost to the predecessor, maintaining the integrity of the tax system while facilitating corporate reorganization.
As such, Section 87 of the Income Tax Act serves as the essential enabling provision for Canadian corporate amalgamations. It functions by establishing strict criteria for a "qualifying amalgamation" and, upon meeting those tests, grants automatic tax-deferred rollover treatment for both the asset transfers and the share exchanges. This tax neutrality, combined with the continuation of essential tax attributes like loss carry-forwards, allows corporations to pursue strategic and administrative efficiencies through consolidation without the punitive effect of immediate income tax liabilities, making it a cornerstone of corporate restructuring in Canada.
Given the complexity and potential for severe tax penalties, it is critical that your section 87 amalgamation is correctly structured, with the appropriate legal and supporting paperwork, such that it might effectively respond to any scrutiny. With over two decades of legal experience, which includes designing and implementing a multitude of section 87 amalgamations and other corporate tax planning strategies, we can put that knowledge and experience to use for the advancement of your business.
Our law firm strives to provide strategic tax-driven legal advice and direction to Calgary businesses looking to optimize their business structures and corporate transactions. Contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation for your business' tax structuring and tax planning initiatives.
