An amalgamation is an important tool in the tax adviser’s toolbox. He or she can use amalgamations to simplify corporate structures, get rid of unwanted shell corporations, permit the interest expense on debt used to acquire another corporation to be deducted in computing income from that corporation’s business or bump the cost of non-depreciable capital property for income tax purposes. Understanding the rules that govern amalgamations, then, is important for a tax practitioner, and an understanding of those rules begins with an understanding of the nature of an amalgamation from a corporate law perspective.
An amalgamation is effective only if it complies with the requirements of the corporate statute applicable to the amalgamating corporations. The Business Corporations Act (Ontario) (the OBCA) and the Canada Business Corporations Act contain similar rules on amalgamations. Section 174 of the OBCA states that “two or more corporations, including holding or subsidiary corporations, may amalgamate and continue as one corporation.” “Corporation” in the OBCA is a defined term: the word refers to corporations to which the OBCA applies, and so only OBCA corporations may amalgamate with each other. In general, a corporation can amalgamate only with another corporation governed by the same statute. An OBCA parent cannot amalgamate with its Canada Business Corporations Act subsidiary. Either one of the corporations must “continue” under the other statute before an amalgamation occurs or the subsidiary must wind-up into the parent. Otherwise, a merger is impossible.
Broadly speaking, there are two kinds of amalgamations under the OBCA, namely “short-form” amalgamations and the “long-form” variety. Section 177 of the OBCA permits a parent to amalgamate with one or more of its wholly-owned subsidiaries (a “vertical” short-form amalgamation) and the wholly-owned subsidiaries of the same parent to amalgamate (a “horizontal” short-form amalgamation). Such an amalgamation is called a short-form amalgamation because all that is required is the filing of a “short” form (with attached statements about solvency and related matters from an officer of each corporation) and approval by the directors of each corporation. Shareholder approval is not necessary. In general, the articles of the amalgamated entity are those of the parent (in the case of a vertical amalgamation) or one of the subsidiaries (in the case of a horizontal amalgamation). If more changes are needed to the articles of the corporation, it will usually be necessary to resort to a long-form amalgamation.
In a long-form amalgamation, any two or more corporations can merge. The formalities involved are more intricate, and the resulting articles of the amalgamated entity are more like those of a new corporation. The amalgamating corporations must enter into a written amalgamation agreement, which, among other things, must be approved by the shareholders of each corporation and must contain the provisions normally found in articles of incorporation (including the rights and restrictions applicable to the amalgamated corporation’s share capital). According to subsection 175(1) of the OBCA, the agreement must also specify “the basis upon which […] the [share]holders of […] each amalgamating corporation are to receive, (i) securities of the amalgamated corporation, (ii) money, or (iii) securities of any body corporate other than the amalgamated corporation” [emphasis added].
Short-form amalgamations are easier and cheaper to implement, but a long-form amalgamation can be a useful tool in certain circumstances. For example, consider a situation in which six members of a family each own shares in the capital of Holdco and Opco, while Holdco owns all of the issued shares of Subco, another operating entity. Each of the corporations is an OBCA corporation. One of the family members is a non-resident. Assume that the family wishes to merge the operating companies to form Amalco and have all of the family members hold their shares of the Amalco through a holding company. One method for achieving this goal would be to have each family member sell his or her shares of Opco to Holdco so that the Opco becomes a wholly-owned subsidiary of Holdco. Following the rollovers, Opco and Subco could amalgamate pursuant to a short-form amalgamation to form Amalco. To achieve these goals, it would be necessary to prepare six agreements of purchase and sale and five (or perhaps six) section 85 rollover forms. The non-resident would be required to obtain a section 116 certificate in respect of his disposition of shares of Opco, with all the paperwork that entails.
A long-form amalgamation that is “triangular” could achieve the same goals much more easily and without the necessity of preparing separate agreements of purchase and sale, filing election forms or obtaining a section 116 certificate. Under a triangular amalgamation, the shareholders of amalgamating corporations receive securities of a corporation other than the amalgamated corporation. In the example above, Subco and Opco could amalgamate to form Amalco, and the amalgamation agreement could provide that, for their shares of Opco, each family member would receive shares of Holdco, as permitted by clause (iii), emphasized in the penultimate paragraph above. The amalgamation agreement would also provide that Holdco would receive all of the shares of Amalco.
In general, subsection 87(9) of the Income Tax Act (Canada) permits such a merger to occur on a tax-deferred basis for both the amalgamating corporations and the shareholders, without the need for filing election forms. Moreover, in accordance with the CRA’s long-standing administrative position, a non-resident who disposes of shares of a taxable Canadian corporation on an amalgamation and receives only shares of another taxable Canadian corporation is not required to obtain a section 116 certificate. If the shares of Opco are taxable Canadian property (for which a 116 certificate might be necessary), then by virtue of the rules applicable to triangular amalgamations the shares of Holdco will be too.
An amalgamation can be a useful and flexible tool for achieving a client’s business and tax planning goals. Knowing a little about how amalgamations work from a corporate law perspective can help you to get more work done with that tool.
This article will appear in an upcoming edition of The Bottom Line
