CHAPTER 08 Selected Canadian Tax Issues in M&A Transactions
– The bump works best in an all-cash bid, but it can also work in circumstances in which the consideration includes Bidco shares. Selling shareholders cannot acquire exchangeable shares (see below) or shares of a foreign parent (unless the value of the target represents less than 10% of the total value of the foreign parent). – 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 is de jure control (i.e., acquisition of sufficient target voting shares to elect a majority of the target’s board of directors). The General Anti-Avoidance Rule will need to be considered in relation to structures intended to avoid triggering an acquisition of de jure control but provide significant economic and legal rights to an acquirer. Acquisition of control of the target will also cause an acquisition of control of the target’s controlled Canadian subsidiaries. – The acquisition of control results in a taxation year-end. – The target will be required to realize any accrued losses on depreciable and non-depreciable capital assets, inventory and accounts receivable in the taxation year ending on the acquisition of control. – Capital losses and non-capital losses from “property sources” (e.g., from making loans or earning interest or dividends) for pre-acquisition of control periods (including any arising on acquisition of control writedowns) do not survive the acquisition of control. – Pre-acquisition of control non-capital losses from a business (including any arising on acquisition of control writedowns) may be carried forward on a restricted basis. Following the acquisition of control, they will be deductible if the business giving rise to the loss is carried on with a reasonable expectation of profit throughout the taxation year in which the loss is to be deducted, and against income only from that business and similar businesses. – Pre-acquisition of control losses can be used to selectively step up the tax cost of target assets, providing an opportunity to use losses that otherwise would not survive the acquisition of control or that would be less useful as a result of acquisition of control restrictions. REPORTING OBLIGATIONS – New mandatory disclosure rules, which became law in June 2023, generally require corporations and other taxpayers and, in certain circumstances, their legal and other advisors to promptly report “reportable transactions.”
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