CHAPTER 08 Selected Canadian Tax Issues in M&A Transactions
issue treasury shares to target shareholders on a tax-deferred basis that “track” to the publicly listed shares. Generally, the exchangeable shares have dividend and liquidation rights that match the listed 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 listed parent shares. Generally, the tax will be deferred until the Bidco shares are exchanged for the listed 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 otherwise the issuer will be subject to a penalty tax. However, variations of the exchangeable structure can be considered to solve this issue when material dividends are expected. EMPLOYEE STOCK OPTIONS – Generally, when a stock option is exercised, the difference between the strike price and the fair market value of the option at the time it is exercised is included in the employee’s income as a taxable benefit. Employees are generally able to access preferential personal income tax treatment on qualifying stock options by claiming an offsetting deduction equal to 50% of the benefit. – For stock options granted after June 30, 2021, the 50% deduction may be limited to the extent that the fair market value of the securities under the options exceeds $200,000 at the time the options are granted. – Provided that an employer complies with certain notification requirements, the portion of the deduction that is denied to the employee is deductible by the employer in that year. – The stock option rules do not apply to Canadian-controlled private corporations (CCPCs) or non-CCPC employers with consolidated group revenue of $500 million or less. SAFE INCOME PLANNING – Intercorporate dividends between Canadian companies are tax-free in many cases. – Dividends paid by the target to a corporate shareholder in advance of a sale may reduce the shareholder’s capital gain on the sale. However, the dividend can be recharacterized as a capital gain when it exceeds the shareholder’s “safe income.” – Safe income often approximates the target’s taxed retained earnings on hand that accrued during the shareholder’s holding period, on a consolidated basis. – A dividend to all shareholders to access safe income planning is usually not possible or desirable (e.g., withholding tax for non-resident shareholders).
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