Amalgamation or Wind-Up – What’s The Difference?

The Income Tax Act provides 2 main merger techniques that can be used to consolidate two or more Canadian corporations. There are quite a few reasons to do this, and all with the intent of securing additional tax and/or financial benefits than if the 2 corporations were to continue operating separately. However, is there a reason to use one over the other? And is there an optimal time to select one over the other?

Both essentially do the same thing – ie: bring 2 corporations together so that they can operate as one. There are differences that may compel the taxpayer and tax professional to choose one method over the other. The following explains the technical requirements of both:

Amalgamation -subsection 87(1)

When two or more Canadian corporations amalgamate, the assets, liabilities and equity of the corporations being amalgamated (“the ‘predecessor’ corporations”) are combined into a new amalgamated corporation (“Amalco”).

When implementing either a vertical amalgamation (Parent-subsidiary) or a horizontal amalgamation (Sister entities), there will be no tax consequences on the amalgamation if the following requirements of subsection (87)1 are met:[1]

  1. Immediately before the amalgamation, all corporations involved are taxable Canadian corporations.
  2. All of the assets and liabilities of the predecessor corporations become the assets and liabilities of Amalco.
  3. All of the shareholders of the predecessor corporations receive only shares of Amalco.
  4. All of the property in the above points are not purchased or obtained on a wind-up of a corporation

Windup – subsection 88(1)

Whereas an amalgamation is a preferred form of consolidation when desiring to combine entities regardless of corporate relationship (ie: arms-length, sister, of parent-subsidiary), a wind-up is implemented only in a Parent – subsidiary relationship. In a wind-up, all the assets and liabilities of the subsidiary corporation are “purchased” by the Parent corporation at the subsidiary’s tax cost. The necessary fact set in order to implement a wind-up are as follows:

  1. The subsidiary corporation (“Subco”) must be wound up.
  2. The parent corporation (“Parentco”) and Subco are taxable Canadian corporations.
  3. Parentco owned 90 percent or more of each class of shares of Subco immediately before the commencement of the winding-up; and
  4. The minority shareholders, if any, deal at arm’s length with Parentco.

If either transaction is done correctly, the rollover provisions automatically apply. That is, there will be no tax consequences on the deemed transfer of assets to Amalco / Parentco.

As mentioned already, there are reasons to do either an amalgamation or a wind-up:

    1. If you have 2 or more corporations and want to combine them, it may be advantageous to amalgamate because you don’t’ have to deal with the administration of multiple corporations.
    2. In a tax planning context, an amalgamation or wind-up can be used to combine operating profits and losses of separate corporation, thereby utilizing the tax advantage of losses that could otherwise not be realized if the corporations operate separately.
    3. A wind-up can facilitate a bump in the cost basis of the assets of the subsidiary up to the cost basis to the Parent in those assets.

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    Things to Watch Out For:

    1. In a wind-up, there is no provision for a bump in the cost basis of assets defined as “ineligible property”. This is discussed in our post on the section 88(1)(d) ACB bump.
    2. If one corporation in the amalgamation or wind-up has a positive Capital Dividend Account (CDA) balance and another has a negative CDA balance, the corporation should pay out a capital dividend equal to the positive CDA balance prior to the amalgamation or wind-up. If not, the 2 amounts will be netted against each other and the provision to extract equity tax-free will be diminished.
    3. In either an amalgamation or wind-up, any non-capital losses available in the corporations prior to the amalgamation or wind-up continue to be available after the transaction. The availability in years that those losses continue to be available is not altered due to the insertion of Amalco and Parentco.
    4. The Execution of either an amalgamation or a wind-up results in a Chang of Control and requisite tax filings and legal documentation requirements that such a change entails.

    An amalgamation is less labour intensive than a wind-up since there is a legal continuation of the corporations and the cost basis of the assets involved, whereas in a wind-up the subsidiary cease to exist and there is additional required to conveyance assets and discharge liabilities of the subsidiary. There is also additional work involved in a wind-up due to the requirement to obtain clearance certificates upon the deemed “sale” of assets, the possible filing of elections to avoid the debt forgiveness rules and the administrative work to utilize losses of the Subco in the year of winding-up.

    If you have any questions or want to speak further about your corporation, contact Nicholas Kilpatrick at nkilpatrick@burgesskilpatrick.com

    Nicholas Kilpatrick is a partner with the accounting firm of Burgess Kilpatrick and specializes in tax structuring and business development for his small and medium business sized clients. Please visit our website at www.burgesskilpatrick.com or on Facebook at www.facebook.com/Burgess Kilpatrick for more information on our firm.

    [1] Crowe, Wendi P., Senyk, Tom L., Miller Thomson LLP, “Amalgamation and Windup: What’s the Difference”