If you’re a dentist and you’re looking to purchase another dental practice, the chances are that you’ll likely have your dentistry professional corporation buy the shares of another dentistry professional corporation from a dentist, AND after the sale, your dental lawyers will AMALGAMATE the two corporations into ONE corporation. So what does this all mean, why is it done, and what are the tax implications?
Parent and Subsidiary
An amalgamation occurs when the purchaser’s dentistry professional corporation and the corporation that it owns all the shares of merge and continue on as one corporation. So it’s an amalgamation of a parent corporation and a wholly-owned subsidiary of the parent corporation.
The Income Tax Act says that there is an amalgamation (i.e. a merger of two or more taxable Canadian corporations) if all of the property and liabilities of the predecessor corporations immediately before the merger become the property and liabilities of the newly amalgamated corporation by virtue of the merger; also, all of the shareholders of the predecessor corporations immediately before the merger receive shares of the new corporation by virtue of the merger.
Let’s look at this in some detail, shall we?
First, there is a requirement that each predecessor corporation be a taxable Canadian corporation. So merging tax-exempt Canadian corporations or non-resident corporations with a taxable Canadian corporation won’t work.
Second, the requirement that all of the property of the predecessor corporation must become the property of the amalgamated corporation, but there is an exception: any shares owned by one of the corporations (i.e. the parent corporation) of the other corporation (i.e. the subsidiary corporation) will be cancelled on the amalgamation.
Amalgamations are attractive because the rules in the Income Tax Act relating to amalgamations are generally designed to allow an amalgamation to take place without any negative tax consequences to the purchaser. In other words, any taxes that would otherwise be payable are deferred on a rollover basis.
What happens to the shares of the two corporations?
In a short form of amalgamation, the shares of the parent corporation (in a vertical amalgamation) are not cancelled or exchanged for shares of the amalgamated corporation BUT the shares of the other predecessor corporation (i.e. the subsidiary) ARE cancelled without repayment of capital.
So if a purchase dentistry professional corporation (i.e. the parent) is amalgamating with a subsidiary, then the parent corporation’s shares are not cancelled or exchanged, but rather the shares of the subsidiary corporation ARE cancelled without repayment of capital. The Income Tax Act deems the shares of the corporation which were not cancelled to be shares of the newly amalgamated corporation by virtue of the merger.
In the next blog, I’ll discuss the taxation year for amalgamated corporations.