Section 87 amalgamation rollover

The term matters if a buyer plans to merge its acquisition company with the company it bought. The tax definition is separate from the corporate-law process: corporations amalgamate under their governing statute, and section 87 decides how the Income Tax Act treats the result. Corporations Canada’s guide covers corporations governed by the Canada Business Corporations Act.

What the definition requires

• all the predecessors’ property becomes the new corporation’s by virtue of the merger, except amounts owed by, and shares of, a predecessor
• all their liabilities become the new corporation’s, except amounts payable to a predecessor
• all shareholders of the predecessors, other than a predecessor, receive shares of the new corporation because of the merger

A merger that results from a purchase of property, or a distribution on a winding-up, does not qualify. For a merger of a corporation with its wholly-owned subsidiaries, or of wholly-owned subsidiaries of the same corporation, section 87(1.1) deems shares of a predecessor that were not cancelled to be new-corporation shares received because of the merger.

What follows

Under paragraph 87(2)(e), subject to its exceptions, the cost of capital property (other than depreciable property or a partnership interest) the new corporation acquires from a predecessor is the predecessor’s adjusted cost base immediately before the amalgamation. Section 87(11) sets a different cost rule when a parent amalgamates with a wholly-owned subsidiary. Under section 87(4), a shareholder who held old shares as capital property and received only new shares is deemed, subject to an exception where part of the value is a benefit meant for a related person, to have disposed of them for proceeds equal to their adjusted cost base. Read the section for the conditions. See amalgamation and whether a buyer and target should amalgamate after closing.