CHAPTER 09 Selected Canadian Tax Issues in M&A Transactions
BUMP AND ASSOCIATED PLANNING – Following the acquisition of control and merger of Bidco and the target, it may be possible to step up (or bump) the tax cost of qualifying non-depreciable capital properties such as shares and land owned by the target at the time control is acquired. – Bidco must acquire nearly all of the shares of the target to undertake a bump, and will typically acquire 100%. Merely acquiring control is not sufficient. – A bump is particularly desirable when subsidiaries of a target are to be sold to a third party or when target has foreign subsidiaries that are to be transferred within the purchaser’s corporate group to optimize the group structure. > The foreign affiliate dumping rules referred to above may place a premium on transferring the target’s foreign subsidiaries out of Canada to a location elsewhere in the purchaser group. – The bump provisions contain extensive rules to prevent the bump from benefiting selling shareholders of the target. These rules impose significant limitations on transferring target assets, or property that derives its value in whole or in part from target assets, to selling target shareholders (individually or as a group). – Requirements for a bump can be most easily satisfied in an all-cash bid, but can also work in circumstances where the consideration includes Bidco shares. – The amount of “bump room” available is largely dependent on the cost of target shares to Bidco. When a rollover is provided to selling shareholders to defer their tax on sale, the amount of bump room will be reduced. > However, the bump can be applied selectively to target assets, meaning that a fully taxable purchase is often not necessary to accommodate selective bump planning. – In a friendly transaction, the target may agree to reorganize its assets before control is acquired to accommodate the bump (e.g., by transferring a division or business to a subsidiary on a tax-deferred basis). However, it is not possible to reorganize into partnership structures in contemplation of a bump transaction. TARGET CONSIDERATIONS – The acquisition of control of the target will result in a number of tax consequences to the target and its Canadian subsidiaries. – Generally, “control” for this purpose means holding sufficient target voting shares to elect a majority of the target’s board of directors. Special control rules and the Canadian “general anti-avoidance rule” need to be considered in relation to structures that provide significant economic and legal rights to an acquirer while technically avoiding an acquisition of legal control. An acquisition of control of the target will also cause an acquisition of control of its controlled Canadian subsidiaries. – The acquisition of control results in a taxation year-end.
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