Chapter Objectives

Slide 1:Chapter Objectives

Be able to: Explain what a corporate reorganization is and the tax planning opportunities. Explain and apply the four techniques used for completing a corporate reorganization. Explain and apply the approach used in determining which techniques(s) will have the most beneficial results. Explain the three situations where holding companies are useful in tax planning.

Slide 2:Corporate Reorganization

A corporate reorganization could occur within a related group of corporations having similar shareholders for the purpose of continuing the same business but from within a different entity or among independent corporations for the purpose of combinations or divestitures. The tax planning that is available is to elect a form of transaction that does not result in the fair market value disposition of assets and, thus, the deferral of income such as recapture and capital gains. The four basic reorganization techniques are the transfer of assets between corporations, the amalgamation of corporations, the wind-up of a subsidiary, and the reorganization of share capital. In an asset transfer, specific or all assets may be transferred and fair market value or an elected amount can be used for the price. The election can be applied separately per asset transferred.

Slide 3:Amalgamations

An amalgamation involves the complete merging of the assets, liabilities and shareholdings of two or more corporations. Since the former corporations cease to exist, the assets are treated as disposed of by the former corporations and, similarly, shares held by investors are treated as disposed of by the shareholders. However, the disposals are tax-free since they are made using the tax cost and, thus, all former tax positions are preserved in the combined entity. Corporate losses can normally be carried forward and continue with the same restrictions as before. An exception would be if there was a change in control. The combination of losses and profits of the former corporations is a major purpose for amalgamations. The conditions for a tax-free amalgamation are: all corporations must be Canadian corporations, all assets and liabilities must be transferred, and all shareholdings must be exchanged.

Slide 4:Share Capital Reorganization

A reorganization of share capital within a single corporation is also possible as long as all shares of a particular class are exchanged for the shares of another class. The result is that the tax consequences are deferred until the new shares are actually disposed of.

Slide 5:Holding Companies

Intercorporate dividends are tax-free except in certain circumstances of a CCPC. Dividends will flow tax-free from one CCPC to another as long as the dividends are paid from the paying corporation’s business income and the recipient owns more than 10% of the paying corporation’s shares. Holding companies can be used to reinvest tax free dividends, assist with the financing of corporate acquisitions, and increase the after tax proceeds of corporate divestitures.