A share purchase leaves two companies and moves the ownership of one. An amalgamation leaves one company and no purchase at all. Income Tax Act section 87, marginal note Amalgamations, decides which mergers get tax-deferred treatment — and it is not a box you tick. It applies to any merger meeting its conditions, whether or not anyone wanted it to.
Key takeaways
SECTION 01 OF 09
Buying shares moves ownership: the target keeps its charter, contracts and history, and a new name appears on the register. CBCA section 181 does something else, in one sentence — “Two or more corporations, including holding and subsidiary corporations, may amalgamate and continue as one corporation.”
Treadstone Law draws the same line: an amalgamation “combines two or more corporations into a single continuing corporation — neither predecessor keeps existing separately once the amalgamation takes effect.” Its comparison of the routes covers approvals and leaves the tax to an accountant.
The Supreme Court fixed the principle in four words in Envision Credit Union v. Canada, 2013 SCC 48: “Amalgamations are creatures of statute.” What a merger does to property, liabilities and tax attributes is set by the statutes, not by the agreement.
SECTION 02 OF 09
Subsection 87(1) requires “a merger of two or more corporations each of which was, immediately before the merger, a taxable Canadian corporation… to form one corporate entity” such that paragraph (a) moves “all of the property”, (b) moves “all of the liabilities”, and (c) gives every shareholder “shares of the capital stock of the new corporation because of the merger”.
It excludes the near-misses: not a combination reached “pursuant to the purchase of that property… or as a result of the distribution of that property… on the winding-up”. A purchase is not a merger, and a wind-up runs on section 88 — Treadstone Law compares those exits here, citing the Act generally rather than by section.
Envision shows qualifying is not a choice. Two credit unions passed surplus property to a subsidiary at the moment of merger, so that not “all of the property” reached the merged entity; Rothstein J. held the provincial statute “caused the ITA conditions to be automatically fulfilled”. It cuts both ways — on a merger that genuinely fails, ¶1.24 of Folio S4-F7-C1 treats the predecessors as having disposed of everything.
SECTION 03 OF 09
Paragraph 87(2)(e) deems the cost of capital property taken from a predecessor to be “the adjusted cost base of the property to the predecessor corporation immediately before the amalgamation”. Subparagraph (d)(i) does the same for depreciable property at capital cost, and (d)(ii) carries undepreciated capital cost across, so no recapture arises.
Paragraph 87(2)(b) carries inventory at the predecessor’s own valuation, and (g) preserves reserves by deeming them deducted a year earlier. There is no price, so nothing to allocate and no elections to file against a valuation.
Treadstone Law states the outcome: “a qualifying amalgamation is generally treated as a continuation of the predecessor corporations rather than a disposition of their assets, so no capital gains or recapture are triggered.” That answer cites the Act but not section 87; the paragraphs above are what sits behind it.
SECTION 04 OF 09
Paragraph 87(2)(a) deems the merged entity “to be a new corporation the first taxation year of which shall be deemed to have commenced at the time of the amalgamation, and a taxation year of a predecessor corporation that would otherwise have ended after the amalgamation shall be deemed to have ended immediately before the amalgamation”.
¶1.13 notes the tension: under most corporate law the merged entity is a continuation and the predecessors do not cease to exist, yet the Act deems a new corporation anyway. That is why subsection 87(2) runs from paragraph (a) to paragraph (xx) — each attribute must be handed forward expressly.
So each predecessor files a return “for the period ending immediately before the effective date of amalgamation”, flagged at Line 076 and Line 071 with Schedule 24. Per ¶1.15, a merger effective 31 December ends those years at midnight on 30 December. What an unplanned stub year costs is covered in the deemed year-end nobody budgets for.
SECTION 05 OF 09
¶1.23 carries the most useful sentence in the guidance: “If the Act is silent on the treatment of a particular tax attribute of a predecessor corporation, that attribute generally does not flow through to the new corporation on a qualifying amalgamation.” Continuity here is a list, not a principle.
The list is specific. Paragraph 87(2)(z.1) continues the capital dividend account. Paragraph (aa) carries refundable dividend tax on hand, but only “if the new corporation was a private corporation immediately after the amalgamation”. Paragraph (vv) adds to a CCPC’s general rate income pool. Losses get their own subsection, 87(2.1), subject to 111(3) to (5.4).
Attributes also age. ¶1.21 works three companies merged by two successive amalgamations and finds the surviving losses and credits “will have aged by two tax years”. Carry-forwards run on tax years, and each merger manufactures one.
SECTION 06 OF 09
Here the routes diverge. Buying a controlling block is an acquisition of control almost by definition; a merger is not. Subparagraph 256(7)(b)(i): “control of a corporation is deemed not to have been acquired by any person or group of persons solely because of the amalgamation unless it is deemed by subparagraph 256(7)(b)(ii) or 256(7)(b)(iii) to have been so acquired.”
The exceptions do the work. (ii) catches a group controlling the new corporation that did not control a given predecessor beforehand. (iii) deems control acquired unless the predecessors were related to each other, or unless that predecessor’s own shareholders emerge controlling the new corporation. ¶1.49 works both through.
Merging two companies one owner already controls generally triggers nothing; merging with a stranger’s generally does. Where it does, ¶1.48 is blunt: a predecessor’s net capital losses “will not be inherited by the new corporation”, and non-capital losses survive only subject to subsection 111(5) — dealt with in losses after an acquisition of control.
SECTION 07 OF 09
¶1.68 confirms that converting shares on a merger is a disposition. Subsection 87(4) supplies the rollover: a shareholder holding the old shares as capital property who “received no consideration… other than shares of the capital stock of the new corporation” disposes of them “for proceeds equal to the total of the adjusted cost bases”.
Notice the word no. Take cash on the merger and that shareholder loses the rollover. ¶1.70 allows one indulgence: non-share consideration in lieu of a fractional share, not exceeding $200, may simply reduce the adjusted cost base. A shareholder who exercises dissent rights instead does not spoil the merger for the others.
The trap is reallocation. Paragraph 87(4)(b) spreads the old aggregate cost across the new shares by relative fair market value, so an owner holding frozen high-cost preferreds and low-cost commons watches cost migrate to whichever is worth more — the CRA’s Example 4 turns $1,000 and $100 into $110 and $990. The fix at ¶1.73: convert preferred into preferred, common into common.
SECTION 08 OF 09
Where one company already owns the other outright, the procedure collapses. CBCA section 184 lets a holding corporation and its wholly-owned subsidiaries amalgamate “without complying with sections 182 and 183” on directors’ resolutions, the subsidiary’s shares “cancelled without any repayment of capital”. OBCA section 177 matches it; the ordinary route needs a special resolution under OBCA 176(4).
Cancelling those shares looks like a breach of paragraph 87(1)(c). Subsection 87(1.1) fixes it, deeming the shares not cancelled to be shares of the new corporation received on the merger — which is why ¶1.9 can say a short-form merger still qualifies. Treadstone Law’s short-form comparison and vertical note give the approvals without the sections.
Vertical mergers get a rule horizontal ones do not. Subsection 87(2.11) deems the new corporation a continuation of the parent for section 111 and Part IV, which ¶1.52 explains lets it carry post-merger losses back against the parent’s earlier income. Treadstone Law adds the commercial case for that second-step merger and the constraint buyers forget: “the loan agreement will typically require the lender’s consent”.
SECTION 09 OF 09
For an owner-operated business the cleaner use is internal: collapsing a Holdco into its Opco, merging two companies under one owner, retiring a shell. Control does not change, 256(7)(b)(i) keeps the loss rules asleep, nothing is priced, and the directors can approve it. It is a poorer answer to a third-party sale, where a seller wanting cash must take non-share consideration and lose the 87(4) rollover.
And everything comes with it, permanently. CBCA section 186 keeps the merged corporation “liable for the obligations of each amalgamating corporation”, with “an existing cause of action, claim or liability to prosecution… unaffected”; OBCA paragraph 179(b) reaches liabilities “including civil, criminal and quasi-criminal”; and ¶1.65 adds that a predecessor’s tax debts “can be collected by the CRA from the amalgamated corporation”.
No separate entity is left to ring-fence. Hence Treadstone Law’s rule that due diligence “has to cover both corporations fully”, its liabilities article, and its comparison framing the choice as automatic vesting versus individual transfers.
Scope. Section 87 runs to roughly 15,500 words across some 117 separately headed provisions. This page covers 87(1), the continuity and year-end rules a small-business buyer or seller meets, the 87(4) rollover and the short-form variants. Outside it: foreign mergers under 87(8) to (8.3), the triangular amalgamation under 87(9), Class 14.1 treatment of merger costs at ¶1.96, and the 69(11) backstop at ¶1.97.
Sources
