Is your incorporated company merging or combining with another corporation?
Posted October 31st 2013
There may come a time when it’s beneficial to your business to combine or amalgamate with another. Perhaps you’d like to bring your unincorporated sole proprietorship under an incorporated umbrella to limit personal liability, or maybe you’d like to branch out into a complementary line of business. Depending on circumstances, reasons for bringing the businesses together, and the preferences of the business owners involved, there are four ways this can be accomplished. Each has its own tax and accounting implications.
- Asset purchase: A corporation agrees to purchase the assets of an incorporated or unincorporated business at a price or prices agreed upon by the parties. The purchased assets are added to the asset categories of the purchasing business at those prices, and, if depreciable, are amortized at rates set by corporate policy. If the companies are unrelated, it’s difficult for the Canada Revenue Agency (CRA) or other regulatory body to dispute the values. However, if the businesses are related, the fair market value of each asset must be carefully documented. Use third-party evaluations where possible. The purchase can be financed by the acquiring company’s cash on hand, debt financing from financial institutions or by issuing equity capital to investors. The acquiring corporation continues with a larger asset base and, if a new business venture is embarked upon, a separate income statement for the new venture should be created.
- Share purchase by a corporation: A corporation can acquire the shares of another corporation and create a parent-subsidiary arrangement. Both corporations continue business as if nothing has happened, except for a change of ownership of the subsidiary. However, the purchase does automatically trigger a fiscal year-end for the subsidiary, and a new year-end has to be chosen. This may correspond with the parent company’s year-end, but doesn’t have to, as long as it is within 53 weeks of the change of control. The asset base of the acquired corporation doesn’t change for income-tax purposes. But for accounting purposes, some adjustments to cost and accumulated amortization can be recorded with corresponding credits to Contributed Surplus in the Shareholders Equity section of the balance sheet. The paid-up capital of the acquired corporation is not normally adjusted. Any debt incurred on the purchase of the shares of the subsidiary would normally be included in the liabilities of the acquiring corporation. Any loss carry forwards of the acquired corporation can be applied to its future taxable income, as long as it stays in the same business.
- Share purchase by shareholders of an existing corporation: If the shareholders of an existing corporation purchase the shares of another corporation, for income tax purposes, they’re considered “associated corporations” if the same individual or group of individuals control them both. Like a corporate share purchase, no cost base bumps are allowed in the transaction, and a new fiscal year-end must be chosen. However, any debt incurred to make the share purchase belongs to the shareholders and doesn’t appear on the balance sheet of either company. The rules for carrying forward losses are the same as for a corporate share purchase.
- Amalgamation: Two corporations can agree to merge their operations and form a new amalgamated corporation. The transaction is quite simple. Assets are added together at carrying cost, liabilities are combined at balance sheet amounts, and shareholder equity amounts— including share capital and retained earnings—are added together at their balance sheet amounts. If the calculations are performed correctly, books of the new corporation will be in balance. For income tax purposes, tax values will combine in the same fashion as the combinations for accounting purposes. All of the ancillary tax accounts, such as loss carry forwards, refundable dividend tax on hand, etc., are simply combined. After the amalgamation, shareholders of the original corporations can be removed by the corporation by buying out shares, or by the purchase of their shares by other shareholders.
Each of these methods delivers on the goal of combining two businesses but, because the tax and accounting specifics are quite different, choosing the best option is a significant decision.
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