Tax rules when two Canadian corporations merge
Amalgamation of Canadian corporations
Section 87 governs "qualifying amalgamations" of Canadian corporations — two or more corporations merge into one "new" corporation. The amalgamation can occur on a tax-deferred ("rollover") basis, preserving tax attributes including ACBs, CCA pools, and loss carryforwards.
Plain-language explanation
Section 87 provides the rules for corporate amalgamations — the merger of two or more Canadian corporations into a single "new" corporation. A qualifying amalgamation under s.87 is generally tax-deferred: no gain or loss is triggered on the merger itself.
What happens on amalgamation: The predecessor corporations cease to exist and a new corporation is formed. Shareholders of the predecessors receive shares of the new corporation. If the new shares have the same cost as the old shares (the "rollover"), no immediate tax is triggered.
Continuity of tax attributes: The new corporation inherits: - CCA pools (same UCC and class as the predecessors), - Loss carryforwards (subject to loss restriction rules under s.111(5)), - Adjusted cost bases of capital property, - The capital dividend account (CDA) and GRIP of the predecessors.
Loss restriction rules: Where an amalgamation results in an "acquisition of control" of a predecessor, loss carryforwards may be restricted under s.111(5). Control acquisition triggers a deemed year-end, realizing accrued losses and restricting use of pre-acquisition losses.
Shareholder treatment: Shareholders of predecessor corporations receive shares of the new corporation at a deemed cost equal to their ACB in the predecessor's shares — so no immediate capital gain or loss.
Example
OpCo and HoldCo amalgamate to form NewCo. OpCo had a $50,000 capital loss carryforward. NewCo inherits this loss (no acquisition of control occurred). OpCo shareholders get NewCo shares at their old ACB. CCA pools carry over. The amalgamation is tax-neutral on day one.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Loss streaming rules following amalgamations refined to address vertical amalgamations (parent-subsidiary) and loss restriction events triggered by changes in ownership before the amalgamation.
Common questions
What is the difference between an amalgamation and an acquisition? +
In an amalgamation, two companies merge into one "new" corporation and both predecessor companies cease to exist. In an acquisition, one company buys the shares or assets of another — the acquiror and target remain separate entities (or the target is wound up into the acquiror). Amalgamations are governed by s.87; share purchases have different rules.
Can non-residents participate in a s.87 amalgamation? +
Yes, but only Canadian corporations are "predecessors" for a qualifying amalgamation. Foreign corporations cannot amalgamate under s.87. A foreign-to-Canadian merger would be governed by other rules (foreign affiliate rules, s.85 rollovers) and may trigger significant Canadian tax.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 87. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.