– Very significant taxable Canadian shareholders of the target may access safe income to step up the cost of their shares as part of the sale transaction. Typically this involves the acquirer purchasing the shares of a holding company that has been established by the corporate shareholder that holds only target shares. The shareholder will have used the safe income to step up the tax cost of the holding company shares without involving the target’s other shareholders. MERGERS (AMALGAMATIONS) – On a merger, target shareholders who receive only shares of the amalgamated company or its Canadian parent can have a complete deferral of tax, provided that all target shareholders receive only shares of the amalgamated corporation or its Canadian parent in exchange for their target shares. – When consideration includes cash or other non-share consideration, two steps are required to fit within the Canadian tax-deferred merger rules: redeemable preferred shares are issued on the amalgamation followed by immediate redemption of those shares for other consideration. This is often done through a plan of arrangement to allow immediate execution. – Redemption of the transitory shares can give rise to a deemed dividend (withholding tax for nonresidents) or a capital gain, however, depending on the circumstances, it is often possible to plan for either outcome. – The 2023 federal budget introduced draft legislation to implement a new 2% tax on share buybacks (the “Buyback Tax”). As drafted, the Buyback Tax is expected to apply to share repurchases (including the redemption of transitory shares as described previously) that occur on or after January 1, 2024. The Buyback Tax will generally be equal to 2% of a specified entity’s net repurchases of equity each taxation year. – The Buyback Tax will not apply to repurchases occurring under a defined category of “reorganization or acquisition transactions.” This would generally include equity repurchased, redeemed or cancelled in the course of amalgamations or equity exchanges whereby a holder receives only equity consideration, windings-up and so-called butterfly transactions. Several common types of transactions would fall outside the reorganization exception and be subject to the Buyback Tax (including, for example, common “squeeze out” transactions and shares repurchased under both substantial issuer bids and normal course issuer bids). – An amalgamation will often result in an acquisition of control of the target, with the consequences described above. SPINOFFS – In Canada, a tax-deferred spinoff is available only in limited circumstances. – When a spinoff qualifies, deferral is available to the company effecting the spinoff and its shareholders.
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Canadian Mergers & Acquisitions
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