At DMC, we want to make it easy for dentists to understand what goes on when buying and selling a Dental Practice. Understanding amalgamations is a key part of that process because it allows a corporation that owns a dental practice to be merged into the corporation it is being sold to.
In this blog post, we will dig more into the details of amalgamations so dentists can gain more clarity. The breakdown is as follows:
What is an Amalgamation?
An amalgamation is when two corporations combine into one. While the common law does not provide one clear definition, a landmark Ontario caseR v Black and Decker Manufacturing Co., 1974 SCJ 56 describes that when there is an amalgamation,
no new company is created and no old company is extinguished … the amalgamating companies are amalgamated and continue as one company.
A helpful analogy that is often used is how two streams come together to form a river. In a more technical sense, all the assets and liabilities of the two (or more) corporations come together and continue as an amalgamated corporation.
Specifically, in regards to the dental industry, when buying a dental practice through your dentistry professional corporation (“DPC”), an amalgamation enables your DPC to take over the seller’s DPC in the context of a share sale.
Types of Amalgamations
Ontario’s Business Corporation Act (the “OBCA”) sets out two types of amalgamations: a short-form amalgamation and a long-form amalgamation. Deciding which form is appropriate will depend on the relationship of the pre-amalgamating corporations.
Short-form amalgamations involve corporations that have a parent/subsidiary relationship (the “parent” being the corporation which controls the “subsidiary” corporation).
A short-form amalgamation may be done in two ways:
- Vertically – when a parent company amalgamates with a wholly owned subsidiary corporation.
- Horizontally – when two or more subsidiary corporations with the same parent corporation amalgamate.
In terms of process, a short-form amalgamation requires a resolution to be passed by the directors of each of the amalgamating companies.
Long-form amalgamations are essentially any amalgamation that is not a short-form amalgamation. However, unlike the short-form process, this type of amalgamation requires an amalgamation agreement and shareholder approval. The amalgamation agreement sets out the terms of the amalgamation (e.g. share capital, parties, etc.). And this agreement is approved by the shareholders by way of a special resolution.
Process of Amalgamating
As mentioned, amalgamations typically happen within the dental industry when a dentist sells their practice through a share sale. For an example, let’s imagine:
- Dr. Bee operates 342 Dental through Bee Dentistry Professional Corporation (“Bee DPC”). Dr. Bee is the sole shareholder of Bee DPC.
- Dr. Cee wants to purchase 342 Dental through Cee Dentistry Professional Corporation (“Cee DPC”). Dr. Cee is also the sole shareholder of Cee DPC.
- Dr. Bee sells their shares of Bee DPC to Cee DPC.
- Immediately upon the closing of the share sale, Bee DPC would amalgamate with Cee DPC to become Dr. Cee Dentistry Professional Corporation (“Dr. Cee DPC”), of which Dr. Cee is the sole shareholder.
So, the result is that Dr. Cee DPC owns all assets/liabilities of 342 Dental and has Dr. Cee as the sole shareholder.
To proceed with an amalgamation, the new DPC must file Articles of Amalgamation (the “Articles”) with the Ontario Ministry of Government and Consumer Services (the “Ministry”), similar to filing Articles of Incorporation to create a brand-new corporation. The Articles set out all relevant information for the amalgamated corporation. (e.g., name of the amalgamating corporations, method of amalgamation, registered office etc.). The Articles also contain two schedules:
- Schedule A includes a signed statement of a director/officer of each amalgamating corporation; and
- Schedule B includes either the directors’ resolutions or the signed amalgamation agreement, depending on the type of amalgamation.
Once the Articles are filed, the Ministry will issue a Certificate of Amalgamation, an Ontario Corporation Number, and a new Company Key for the new corporation. A more detailed guide on amalgamating business corporations can be found here.
Impact on Corporate Taxes
There are no immediate tax consequences of an amalgamation. The Canadian Income Tax Act states that there is no deemed disposition (or transfer) of assets during an amalgamation. Therefore, there is no capital gain or loss to consider for tax purposes. Learn more about capital gains tax in this post.
However, an amalgamation does impact the taxation year of all the involved corporations.
- For the amalgamating corporations, the taxation year-end is deemed to be 11:59 pm of the date preceding the effective date The effective date of an amalgamation is the day that the articles of amalgamation are filed with the OCBA. of the amalgamation.
- The newly amalgamated corporation’s taxation year will begin at 12:01 am of the effective date The effective date of an amalgamation is the day that the articles of amalgamation are filed with the OCBA. of the amalgamation.
If you are considering undertaking an amalgamation, you will want to speak with your accountant about any tax consequences or resulting fiscal year-end issues before proceeding.
While the details and process of amalgamations may seem complicated, DMC is here to make the process as easy for you as possible. If you are looking to buy or sell a dental practice and want to find out whether amalgamations apply to you, or if you have any other questions about the buying or selling process, email us or give us a call at 416-443-9280.