Oct 03, 2016
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“Whether an amalgamation or a wind-up is chosen, the tax consequences may be unintentionally different.”
Wind-ups and amalgamations are corporate law vehicles that are used to merge corporations. Even though the two terms are used interchangeably, there are notable differences from both the corporate law and the tax perspective. One such tax difference is the subject of this tax tip.
In some situations where there is inter-corporate debt between a parent and a subsidiary, there is a difference between an amalgamation and a wind-up.
If an amalgamation of the parent and subsidiary is undertaken, the tax consequence will automatically follow the accounting treatment and there will be no debt forgiveness arising on the transaction. For income tax purposes, there will be a deemed settlement of the debt at its cost to the debtor immediately prior to the amalgamation.
If a wind-up is undertaken, the tax consequences would be the same as under the amalgamation scenario, provided that the parent elects on prescribed Form T2027 on or before the filing due date of the parent’s corporate tax return for the year in which the wind-up occurred. It does not matter whether the debt is held by the parent; the parent must elect.
If no election is filed, there will be debt forgiveness to the debtor immediately prior to the wind-up and the debt forgiveness rules will apply. The Income Tax Act permits this election to be late filed, but late filing penalties will apply.
It is generally preferable to use an amalgamation rather than a wind-up because the former is simpler to implement from a corporate law perspective and hence cheaper to implement. There are circumstances, however, where a wind-up is required.
For example, if the business combination includes a Quebec incorporated company and a company incorporated in another jurisdiction, a wind-up must be used. This isbecause both corporations must be incorporated in the same jurisdiction to implement an amalgamation. A Quebec company cannot be continued into another jurisdiction, thereby necessitating a wind-up.
Another example is when the parent had expiring losses. An amalgamation would trigger a deemed taxation year end for both the parent and the subsidiary immediately before the amalgamation and the parent’s losses would no longer be available. Dependingon the timing of the wind-up, the parent’s losses may not expire. In circumstances likethese, the taxpayer’s advisor must be aware of the subtlety involving parent-subsidiary debt and wind-ups.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.