How does a debt push-down work in a holdco business acquisition?

In a holdco purchase, the buyer’s holding company borrows and uses the money to buy the shares of the target. The loan then sits in the holdco, one step away from the operating company that earns the income to repay it. A debt push-down is the step of moving that debt to where the business is. It happens after closing, so the lender and your tax adviser both need to know about it beforehand.

Why where the debt sits matters

The Income Tax Act’s interest deduction, in paragraph 20(1)(c), refers to interest paid or payable under a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property. The wording turns on how the borrowed money is used, so which corporation holds the debt is a question for a tax professional.

How an amalgamation moves the debt

Corporations Canada’s guide says amalgamation merges two or more corporations so they carry on as one. A vertical short-form amalgamation, between a holding corporation and its wholly-owned subsidiary, is approved by a directors’ resolution and does not need shareholder approval. Under the Canada Business Corporations Act, the property of each amalgamating corporation continues to be the property of the amalgamated corporation, which remains liable for each one’s obligations. The acquisition debt therefore ends up in the same corporation as the business assets.

What can slow or stop it

A director or officer of each amalgamating corporation must make a statutory declaration, with the articles, that there are reasonable grounds for believing each amalgamating corporation is, and the amalgamated corporation will be, able to pay its liabilities as they become due, and that the realizable value of the amalgamated corporation’s assets will not be less than its liabilities and stated capital of all classes. It must also state reasonable grounds for believing either that no creditor will be prejudiced or that adequate notice has been given to all known creditors and none objects on other than frivolous or vexatious grounds. The acquisition lender is a creditor, so read its documents first. The guide describes federal corporations; a provincial corporation must continue into the federal statute first to amalgamate with one, or follow its own province’s rules.