CHAPTER 09 Selected Canadian Tax Issues in M&A Transactions
Shareholder Considerations
DISPOSITION OF TARGET SHARES – The disposition of shares to the acquirer is typically a taxable transaction to the shareholder. > Canadian residents include 50% of any capital gain in their income. > A non-resident is typically not subject to Canadian tax on the disposition of publicly listed shares unless at any time in the previous 60 months the non-resident (taking into account non-arm’s-length persons and certain partnerships) held 25% or more of shares of any class of the target and, at that time, the shares derived more than 50% of their value from Canadian-situated real property (including oil and gas and mineral properties). – Tax deferral can be provided to selling shareholders when the consideration includes equity of a Canadian corporation. > On a share-for-share takeover bid, when a Canadian corporate acquirer (Bidco) issues treasury shares to the selling shareholders, there is an automatic tax deferral for most shareholders dealing at arm’s length with Bidco. > When consideration includes both treasury shares and cash or other assets, tax deferral is available by joint election of the selling shareholder and Bidco up to the extent of the value reflected in the Bidco shares. ○ In both of these cases, Bidco will inherit a lower tax cost in the target shares, which may be disadvantageous in some circumstances, such as when a bump is planned. ○ No tax deferral is available when shares of the Canadian target are exchanged for shares of a foreign acquirer or when a subsidiary delivers shares of its parent as consideration. ○ When consideration would otherwise include shares of a foreign parent, tax deferral may be achieved through the use of “exchangeable shares.” Target shareholders would receive Bidco shares, on a tax-deferred basis, that are economically equivalent to the parent shares. Generally, the exchangeable shares have dividend and liquidation rights that match the parent shares and the target shareholders are provided with voting rights at the foreign parent. The shares may be exchanged by the holder on a one-for-one basis for the parent shares. Generally, the tax will be deferred until the Bidco shares are exchanged for the parent shares. • Exchangeable shares cannot be used when the acquirer is planning to use the bump unless it can be concluded that the value of the target will, at all times during the series of transactions, be less than 10% of the total value of the foreign parent. • Dividends on exchangeable shares must be paid out of taxed earnings or else the issuer will be subject to a substantial penalty tax. Variations of the exchangeable share structure can be considered to solve this issue when material dividends are expected.
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