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Tax Law for Lawyers Amalgamations and Wind-Ups RON RICHLER
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Tax Law for Lawyers Amalgamations and Wind-Ups · Tax Law for Lawyers Amalgamations and Wind-Ups ... amalgamation June 30, ... Tax Law for Lawyers Amalgamations and Wind-Ups RON RICHLER.

Jul 19, 2018

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Page 1: Tax Law for Lawyers Amalgamations and Wind-Ups · Tax Law for Lawyers Amalgamations and Wind-Ups ... amalgamation June 30, ... Tax Law for Lawyers Amalgamations and Wind-Ups RON RICHLER.

Tax Law for Lawyers

Amalgamations

and Wind-Ups

RON RICHLER

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Amalgamations

Corporate Law:

• statutory procedure

• same jurisdiction

– continuance

– Quebec – new BCA

• amalgamation agreement

• shareholder approval

• dissent rights

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Corporate Law:

• articles of amalgamation

• no conveyance

• streams river

Corp A Corp B

Amalgamations

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Amalco

Corporate Law:

• articles of amalgamation

• no conveyance

• streams river

Amalgamations

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Parent

Subsidiary

Shareholders

Target

Corporate Law:

• triangular amalgamation

Amalgamations

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Shareholders

Corporate Law:

• triangular amalgamation

Amalgamations

Parent

Amalco

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Corporate Law:

• vertical short-form

Parent

Subsidiary

Amalgamations

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Corporate Law:

• vertical short-form

Amalco

Amalgamations

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Corporate Law:

• horizontal short-form

Sub A

Parent

Sub B

Amalgamations

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Corporate Law:

• horizontal short-form

Amalco

Parent

Amalgamations

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• Objectives

– rollovers for shareholders and other

security holders

– rollovers and continuity of tax accounts for

predecessor corporations

• Qualifying Amalgamation - s. 87

– not all amalgamations qualify

Tax Considerations:

Amalgamations

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• taxable Canadian corporations

• property of predecessors becomes

property of amalgamated corporation

– cash consideration to shareholders

– cash for fractional shares

Qualifying Amalgamation:

Amalgamations

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– merger of leasehold/royalty interests

– option for shares of other

predecessor

– shares of other predecessors

Qualifying Amalgamation:

Amalgamations

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• liabilities of predecessors become liabilities of

amalgamated corporation

• all shareholders receive shares of amalgamated

corporation

– vertical/horizontal short-form - s. 87(1.1)

– triangular - s. 87(9)(a)

– dissenting shareholders

– squeeze-out

Qualifying Amalgamation:

Amalgamations

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• no disposition by predecessors

• continuity of tax accounts?

• no rollover for shareholders

Non-Qualifying Amalgamation:

Amalgamations

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• s. 248(1) “disposition”

• s. 87(4) rollover

– qualifying amalgamation

– capital property

– no boot

– no benefit

Shareholders:

Amalgamations

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• no boot

– cash for fractional shares

– squeeze-out

– shareholder rights plans

Shareholders - s. 87(4):

Amalgamations

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Parent

Subsidiary

Shareholders

Target

Shareholders - s. 87(4):

• no boot

- triangular amalgamation

Amalgamations

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Amalgamations

Shareholders - s. 87(4):

• no boot

- triangular amalgamation

Shareholders

Parent

Amalco

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Shareholders - s. 87(4):

• no benefit rule

Mr. A Mrs. A

$1 M $2 M

Amalgamations

Corp YCorp X

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Shareholders - s. 87(4):

• no benefit rule

Amalgamations

Mr. A Mrs. A

$1.5M $1.5M

Amalco

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• rollover

– no election required

– disposition at acb

– acquisition at acb

Shareholders - s. 87(4):

Amalgamations

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• potential gain on vertical amalgamation

• 87(11) and 88(1)(b)

• tax trap!

Shareholders:

Amalgamations

Parent

Subsidiary

puc: $1000

net tax value of Sub’s assets: $1500

acb: $ 100

gain: $1000 - $100 = $900

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• bump in acb to Parent on triangular

amalgamation

– s. 87(9)(c)

– if Parent owns all Amalco shares

– bump to net tax cost of Amalco’s assets

(not to exceed fmv)

Shareholders:

Amalgamations

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Amalco

acb: 100

ucc: 200

cash: 50

350

liabilities: 60

net tax cost: 290

350

Bump acb of Amalco shares to 290

Amalgamations

s. 87(9)(c) bump - triangular amalgamation

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Amalgamations

Comparison of triangular amalgamation and takeover bid:

Target

Public

total acb: 200

puc: 100

fmv: 1000

net tax value: 290

acb to Parent

85.1

100

85(1)

200

No rollover 87(9)(c)

1000 290

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• relevance of puc of shares of amalgamated

corporation

• s. 87(3)

• limit under s. 87(3): puc of predecessor’s shares

(other than shares held by another predecessor)

• proportionate reduction of puc of class if exceed

limit

Shareholders - puc:

Amalgamations

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• registered plans

– qualified investment

Shareholders:

Amalgamations

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• Option holders:

– s. 87(5) rollover if capital property

– s. 7(1.4) rollover if employee options

• Debtholders:

– s. 87(6) rollover

– s. 87(7) – former 212(1)(b)(vii)

Amalgamations

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• year-end

• effective time of amalgamation

• short year-end of predecessors

• multiple year-ends

– acquisition of control followed by

amalgamation

– tax trap!

Corporate level rules:

Amalgamations

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• new corporation - s. 87(2)(a)

• continued corporation - corporate law

• Guaranty Properties

• Pan Ocean Oil

– new corporation for purpose of computing

income, taxable income and tax

• CGU Holdings – extension of new corporation

rule?

Corporate level rules:

Amalgamations

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• no disposition by predecessors

• acquisition by amalgamated corporation?

• cost to amalgamated corporation

Corporate level rules:

Amalgamations

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• cost bump on vertical amalgamation

– s. 87(11) and s. 88(1)(c) - (d)

– certain non-depreciable capital property

– acb of shares of subsidiary - [net tax cost of

subsidiary’s assets and dividends received by

parent]

– up to fmv of designated eligible property when

parent last acquired control

Corporate level rules:

Amalgamations

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• cost bump on vertical amalgamation

Corporate level rules:

Amalgamations

Parent

acb: $1,000,000

fmv: $400,000

acb: nominal

fmv: $600,000

acb: nominal

Subsidiary

Opco A Opco B

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Opco A Opco B

• cost bump on vertical amalgamation

Corporate level rules:

Amalgamations

Amalcofmv: $400,000

acb: $400,000

fmv: $600,000

acb: $600,000

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• cost bump on vertical amalgamation

– “back-door butterfly” rules

– tax trap!

Corporate level rules:

Amalgamations

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• continuity of reserves, tax accounts

Corporate level rules:

Amalgamations

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• interest expense - IT-533 paragraph 21

• capital tax (where it still exists)

Parent

Target

debt: $20,000,000

capital: $10,000,000

acb: $20,000,000

Corporate level rules:

Amalgamations

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• loss carryforwards

• acquisition of control

• losses carried forward from predecessors

– usable from time of amalgamation

– compare with wind-up

– carryforward period

Corporate level rules:

Amalgamations

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• loss carrybacks

• losses cannot be carried back to predecessor,

except:

– s. 87(2.11) vertical amalgamation

– equal footing with wind-up

– carryback from amalgamated corporation to

parent

• planning regarding amalgamation of sisters

Corporate level rules:

Amalgamations

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• foreign tax implications

• U.S. FIRPTA

– U.S. rollover

– Article XIII 8

Corporate level rules:

Amalgamations

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• no LTT, GST, RST

• no doubling up of CPP, EI contributions

Corporate level rules:

Amalgamations

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Corporate Law:

• voluntary wind-ups

• jurisdiction of subsidiary

• Quebec – new BCA

• special resolution of

shareholders

• general conveyance to parent

Parent

Subsidiary

Wind-Ups

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Corporate Law:

• consents, conveyancing

• liabilities

• tax clearances

• articles of dissolution

Wind-Ups

Parent

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• s. 88(1)

• qualifying wind-up

• rollover of assets from subsidiary to parent

• bump of cost of eligible property

• continuity of tax accounts

Tax Considerations:

Wind-Ups

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• taxable Canadian corporations

• at least 90% of shares of each class/series

– balance owned by arm’s length persons

• subsidiary “has been wound up”

– IT - 126R2

Wind-Ups

Qualifying Wind-Up:

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• s. 69(5) disposition at fmv of subsidiary’s

assets

• s. 84(2) deemed dividend

• s. 88(2) use of CDA, pre-72 CSOH

• gain/loss to parent

Wind-Ups

Non-Qualifying Wind-Up:

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• disposition at cost amount

• acquisition at cost amount plus bump

• bump of cost of eligible property

• assets distributed to repay debt or for

assumption of liabilities

Wind-Ups

Rollover of assets under s. 88(1):

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• s. 88(1)(b)

• tax trap!

Wind-Ups

Potential gain to Parent:

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• Mara Properties

– inventory of subsidiary became inventory

of parent

• Hickman Motors

– depreciable property of subsidiary became

depreciable property of parent

• factual analysis v. automatic flow-through

Wind-Ups

Characterization of Property

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• CCA claim available only if depreciable

property owned at end of year

• no CCA in year sub distributes its

assets

• compare with amalgamation

Wind-Ups

Capital Cost Allowance:

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• s. 88(1.1) and (1.2)

• first taxation year of parent that begins after

commencement of wind-up

– compare with amalgamation

• loss would have been available to subsidiary

for year beginning after commencement of

wind-up

Wind-Ups

Loss Carryforwards:

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Wind-Ups

Loss Carryforwards:

Parent

Subsidiary

wind-up July 31/09

Parent accesses loss

in June 30, 2011 year

(i.e. beginning July 1,

2010)

June 30 year-end

December 31 year-end

loss in 2008

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Wind-Ups

Loss Carryforwards:

Parent

Subsidiary

wind-up on June 30, 2010

Parent cannot access

2003 loss

June 30 year-end

December 31 year-end

loss in 2003 (expires December 31, 2010)

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• loss in subsidiary’s loss year deemed loss of

parent in taxation year of parent in which

subsidiary’s loss year ended

Wind-Ups

Loss Carryforwards:

parent

subsidiary

2003 2004

loss

2005

1 2

1 2

3

2006

3

4 5

2007

4

6

2008

5

7

2009

6

X

2010

7

XAcquisition

of control

Acquisition

of control

wind-up

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Parent

Subsidiary

December 31 year-end

December 31 year-end

Wind-Ups

Loss Carrybacks:

amalgamation June 30, 2010: losses of Amalco in December 31, 2010

(short) year carried back to December 31, 2008 year of Parent

wind-up June 30, 2010: losses of Parent in December 31, 2010

(normal) year carried back to December 31, 2007 year of Parent

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Transfer taxes, CPP, EI

• LTT in Ontario unless affiliated corporation

holds legal title and apply for exemption

• no GST

• no RST in Ontario if tax paid, for resale or

exempt (HST starts in Ontario on July 1,

2010)

• doubling up of CPP, EI contributions (fixed by

2004 Budget)

Wind-Ups

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• amalgamation not possible under corporate

law – new Quebec BCA

• deemed year-end undesirable

• extend life of loss carryforwards

• minority shareholders

Wind-Ups v. Amalgamation

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Tax Law for Lawyers

Amalgamations

and Wind-Ups

RON RICHLER