Tax II Chapter 11 Spring 2013
Notes Chapter Eleven Lecture Notes Amalgamation
David Christian Spring Term 2013 Thorsteinssons LLP UBC Faculty of Law ______
Notes
Like mothers, taxes are often misunderstood, but seldom forgotten
Lord Bramwell.
1. Consider two Kelowna pharmacists: John and Sam. John is 15 years older than Sam. John 50, still going strong. Sam relatively new. John has a long established pharmacy: John’s Drugs Ltd. The company owns land and building: paid off. Comfortable cash flow, inventory, accounts receivable position. John previously bought some nearby property for expansion, but sold it, realizing a capital gain and the company has a $50k capital dividend account and, say, a $14k RDTOH account (remember Chapter 4).
2. John started the company with $50k of his own money. The bank financed the rest: now paid off. John has a good franchise relationship.
So, John’s store might be shown schematically as follows:
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John
common FMV $600k shares ACB $50k PUC $50k
CDA = $50k John’s Drugs RDTOH = $14k Ltd.
Pharmacy Business
Land Building Equipment Inventory Goodwill Other Total FMV 250k 50k 10k 150k 100k 40k 600k ACB 50k - - - - - UCC - 50k 10k - - - Cost - - - 150k - 40k CEC - - - - 0 -
The accrued gain in this structure appears in John’s shares ($550k), in the company’s land ($200k), and in the company’s goodwill ($100k).
3. Sam has only been around 5 years. He is the sole shareholder of a company called Kelowna Drugstore Ltd. (“KDL”). Great location. Company owns the real estate, still has some bank debt. It has less goodwill value, but excellent potential. The company has $90k of start-up losses, from the business. The real estate has grown in value (with Kelowna’s exponential growth).
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Sam
FMV $600k ACB $100k PUC $100k
non-capital losses KDL loan Bank ($90k) $100k
Pharmacy Business
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Land Building Equipment Inventory Goodwill Other Total FMV 400k 50k 15k 150k 50k 35k 700k ACB 75k - - - - - UCC - 50k 15k - - - Cost - - - 150k - 35k CEC - - - - 0 -
Loan ($100k) $600k
4. John and Sam’s kids play on the same soccer team, and they get to know each other. Sam likes John’s good name in town. Also likes his experience. John likes Sam’s ambition, location and ideas for expansion: Penticton, Hope, etc. They think a new name works: JDS Drugs.
5. They decide to “merge”. They see themselves building a mini-empire in the interior of B.C. How do they merge? They want a “new company” to own everything, and they will each own 50% of the common shares of the new company.
From what we know already, how many ways could they combine? Draw the “new company”. “What if” scenarios:
transfer assets? How, where, elect under s.85? transfer shares? How, where, elect under s.85?
Where do the “tax accounts” end up? Are there commercial concerns?
What if the existing companies simply “amalgamate” under BCBCA/CBCA and “continue as one corporation”. All assets and liabilities of the amalgamating companies become assets and liabilities of the new company.
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John Sam
50% common 50% common FMV $600k FMV $600k ACB (?) ACB (?) PUC (?) PUC (?)
JDS Drugs Loan bank $100k
The Combined Pharmacy Business
Land Building Equipment Inventory Goodwill Other Total FMV 650k 100k 25k 300k 150k 75k 1.3m ACB ? - - UCC ? ? - Cost ? - CEC ? -
Loan 100k 1.2m
The two companies have “continued as one” combined company. What numbers do we fill-in for the question marks?
What would you expect? What would John and Sam expect?
What about the non-capital losses, the capital dividend account and RDTOH account of the two companies? Where did these go?
Consider s.87.
6. Notice how many pages are covered by this section.
7. Focus on key points:
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Start with s.87(1)(a): “amalgamation means …”: property, liabilities and shareholders combine. The pre-conditions.
Subsection 87(2): “Where there has been an amalgamation … the following rules apply …”. Thus, if s.87(1) is not met, none of these rules apply. Usually, a disaster.
Paragraph 87(2)(a). Notice three things:
JDS Drugs is deemed to be an entirely new corporation;
its first taxation year starts at the time of amalgamation;
taxation years of each of the old companies (the predecessors) end just before the amalgamation.
Notice the “tax cost” rules for JDS Drugs’ property:
s.87(2)(d) and (d.1): the capital cost and UCC for depreciable property of the predecessor companies become the capital cost and UCC for the new company.
s.87(2)(e): the cost of capital property to the new company is equal to the ACB of the capital property to the predecessor companies.
s.87(2)(f): for eligible capital property: there is deemed to be a “continuation” of the old companies.
s.87(2)(b): inventory cost flows through.
Notice there is no rule that says what the “proceeds of disposition” of the corporate property are. Property has not been disposed of: the property has simply “become” property of the continued amalgamated company.
8. Consider s.87(4) for the shareholders: proceeds of disposition and cost.
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capital property,
no consideration received other than shares of the new company.
the proceeds of disposition = ACB of old shares (paragraph (a)).
cost of new shares = the proceeds of disposition (paragraph (b)).
Notice the “benefit rule” here (familiar):
test when this might arise, family members.
9. Consider the tax PUC of the new shares? Yet another PUC “grind” rule. Read s.87(3)(a). Reduce the total corporate share capital (opening PUC of JDS Drugs) to the extent that opening PUC exceeds the total tax PUC of the shares of the predecessor companies. In short, there is no increase in tax PUC allowed.
Consider John and Sam.
Total tax PUC before was $150k ($50k + $100k).
Assume corporate share capital of JDS Drugs is $150k, so no “grind” under s.87(3)(a).
What is the tax PUC after? Remember, tax PUC is a “class” concept. Lets say there are 100 common shares of JDS Drugs, and the total tax PUC is $150k. John and Sam each have 50 common shares, so:
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John Sam
FMV $600k “shift” FMV $600k ACB $50k $25k ACB $100k PUC $75k PUC $75k
JDS Drugs
There has been a “shifting” of tax PUC in favour of John to the tune of $25k. This is simply one result of the deal.
10. What about John’s company’s CDA, RDTOH and GRIP accounts? Remember JDS Drugs is deemed a new corporation (s.87(2)(a)). It has no financial history, absent specific rules.
Read s.87(2)(z.1): the amalgamated company is deemed to be a “continuation” of the old for the CDA of predecessors.
Read s.87(2)(aa): add the RDTOH accounts of the predecessor companies.
Subsection 89(5) contains a rule for computing post-amalgamation GRIP. Paragraph 87(2)(vv) adds that amount to the GRIP of the amalgamated company if it is a CCPC.
11. What about KDL’s non-capital losses? We examine corporate losses in a later chapter.
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