A merger of two or more companies, or the acquisition of one company by another, can have serious tax implications for all entities involved, as well as any subsidiaries. The Canada Revenue Agency (CRA) takes a close look at all mergers and acquisitions under its jurisdiction, and the tax requirements for these transactions can be complex. If your business plan includes mergers and acquisitions in Canada, working with a Canada tax attorney may help you avoid common pitfalls during this process that could cause complications with the CRA. Jeremy Scott Law works with business owners contemplating a merger or acquisition, completing due diligence and providing oversight of the process. Contact the firm today by calling (902) 403-7201 to schedule a consultation with an experienced Canada tax attorney.
What Are the Tax Implications of Mergers and Acquisitions Process?
The tax assessed on an acquisition or merger depends on the types of assets involved in the transaction. Canada does not typically assess a registration tax or a stamp tax on any acquisition of business assets or stock. However, if the transaction involves the purchase of real property (real estate), then there may be a land transfer tax. This general rule has some exceptions, however, such as those outlined in Ontario’s Land Transfer Tax Act.
For most asset transfers, there will be goods and services tax (GST), or the harmonized sales tax (HST) assessed at the federal level, although these do not apply to the purchase of stock. As explained in the CRA’s 1-4 Excise and GST/HST Rulings and Interpretations Service explains the GST or HST will generally apply on the purchase and sale of business assets if the assets were used during the course of making taxable supplies. A tax attorney can evaluate the assets acquired in the merger or amalgamation to determine which, if any, are subject to federal or provincial sales tax.
What Are the Tax Implications of Amalgamation in Canada?
An amalgamation in business is the combination of two or more corporate entities to form a new corporation. The merging companies are referred to as Predecessor Companies, and the new entity as a Successor Corporation. Amalgamations differ from mergers in that the amalgamation process is typically used for shares acquisition. The relevant territorial or provincial governments as well as Corporations Canada may be required to approve any amalgamation operating within their borders. The successor corporation may also need to provide proof of the restructuring to the CRA, via either a court order verifying the transaction or a Certificate of Amalgamation from the government or Corporations Canada.
Once the CRA receives the proof of amalgamation, it then changes the old business numbers (BN) from the predecessor companies, and may issue a new BN and CRA tax accounts for the newly formed entity. The CRA may also change the BN on any corporate income tax accounts. Any future tax filings will use the new BN. Merging companies domiciled in Canada may opt to keep the BN from one of the predecessor companies, but must alert the CRA via letter, indicating which number will be kept. This only applies if all involved corporations are residents. For non-resident corporations, a new BN is required, and the business owner may need to file a new application for it.
What Is the Merger and Acquisition Law in Canada?
Federal taxation on mergers and acquisitions is covered under Canada’s Income Tax Act. The Income Tax Act covers which supplies may be taxed and the percentage assessed on taxable business supplies, and also notes when real property may be taxed as part of a merger or acquisition.
The Income Tax Act constitutes a comprehensive set of statutes and regulations that is subject to change or updates and can quickly become complex and confusing for some business owners or investors. The Canadian tax attorneys at Jeremy Scott Law consistently review The Income Tax Act, noting changes that could affect your business and any potential merger, acquisition, or amalgamation you may wish to enter into.
Is Merger Consideration Taxable?
The tax implications of a merger depend on a few specific conditions:
- Is the target company private or publicly traded?
- Is the target company based in Canada, or is it domiciled in a different country?
- Do capital or non-capital losses apply?
- Are there intercompany loans to consider?
- What is the impact of the year-end tax burden on both companies?
These are just a few considerations a tax professional will consider when advising whether a merger, acquisition, or amalgamation is most appropriate for your transaction. The form of business reorganization you choose may also affect any tax implications.
How a Professional Tax Attorney Can Help You
Working with an experienced tax lawyer can help remove much of the stress of tax planning from a business owner’s shoulders. Professional business tax planning, preparation, and filing can help you avoid potential penalties from the CRA. Our legal team can help in the following ways:
An experienced legal team can provide purchase price allocation strategies, review the tax efficiency of your financing structure for an acquisition, and offer advice on pre-acquisition reorganizations. A tax attorney may also create and review financial modeling of tax implications on a business and examine any financing vehicles that could help the company’s growth goals.
Tax attorneys carefully evaluate the potential of any proposed amalgamations, mergers and acquisitions in Canada, completing due diligence on the target company. This includes reviewing tax compliance, tax rate, and tax account validity, as well as tax attributes and control provisions. Due diligence also includes evaluating any carryforwards. A tax attorney will frequently evaluate proposed purchase agreements, emphasizing price issues, contingencies, and any aggressive positions.
Streamlining the integration process between merged entities or corporations is easier with a specific reorganization plan. An attorney specializing in Canadian tax law may be able to answer the complex questions you may have following the acquisition to help your staff thrive in the new business environment. A tax attorney may also suggest financial planning and tax strategies, focusing on coordinating tax policies, control returns, and possible tax elections.
Do You Need a Canadian Tax Attorney?
Do not risk trouble with the CRA. Jeremy Scott Law works with businesses of all sizes to ensure compliance with tax regulations and help business owners minimize their tax burden. Call the law firm’s offices today at (902) 403-7201 to discuss the tax implications of mergers and acquisitions in Canada and put your company on the path to success.