CHAPTER 14:

Multiple Corporations and

Their Reorganization

Prepared by
Nathalie Johnstone
University of Saskatchewan

Electronic Presentations in Microsoft® PowerPoint®

© 2012 McGraw-Hill Ryerson Ltd. 1

 Chapter Fourteen -
Multiple Corporations and Their
Reorganization
I. Corporate Reorganizations
II. Holding Corporations and
Intercorporate Investments

© 2012 McGraw-Hill Ryerson Ltd. 2

 I. Corporate Reorganizations
• Can occur within a related • Can occur among
group of companies independent business
having similar S/H entities

Mom, Dad New Co

& Kids

Corp A Corp B Corp A Corp B

© 2012 McGraw-Hill Ryerson Ltd. 3

 I. Corporate Reorganizations
• Current tax policy provides that when a
reorganization occurs,
– may elect a form of transaction that does not result in
the FMV disposition of assets.
• This election defers the taxes related to the
disposition.

© 2012 McGraw-Hill Ryerson Ltd. 4

 I. Corporate Reorganizations

Shareholder

Corporation A Corporation C

Corporation B

© 2012 McGraw-Hill Ryerson Ltd. 5

 Asset Transfers
Assets or business segment

Corp A Corp B

Cash or Note Payable etc.

• simplest form of reorganization

• does not involve the restructuring of the corporations
• permitted to transfer either all of its activities or only a
specified part of its activities.
• involves an actual sale of property.

© 2012 McGraw-Hill Ryerson Ltd. 6

 Asset Transfers
The transfer price can be determined in two basic
ways:
1. The transfer price of assets can automatically be
deemed equal to the FMV. [ITA 69(1)]
2. If the corporations so elect, an agreed transfer
price can be chosen that is usually equal to the
cost for tax purposes. [ITA 85(1)]

© 2012 McGraw-Hill Ryerson Ltd. 7

 Asset Transfers
• Alternatives are available for each asset
transferred:
– means that some assets may be transferred at FMV
and others at an agreed lower value.
• The choice of methods depends on:
– the circumstances of the parties and
– the reasons for the transfer.

© 2012 McGraw-Hill Ryerson Ltd. 8

 Asset Transfers
Within a corporate group, assets can be transferred
vertically or horizontally.
A horizontal transaction A vertical transaction

Shareholder Shareholder

Transfer Corp X
Div 2 Div 1
Corp X Div 2
Div 1 Corp Y
Div 2 Transfer Div 2

Corp Y

© 2012 McGraw-Hill Ryerson Ltd. 9

 Amalgamations
Involves complete merging of assets, liabilities
and shareholdings of two or more corporation

Shareholders A Shareholders B

New AB Corp

Old Corp A Old Corp B

© 2012 McGraw-Hill Ryerson Ltd. 10

 Amalgamations
• All former corporations cease to exist and a new
corporation is born.
• In effect, amalgamated corporations have:
– disposed of their assets to a new corporation, and
– all of the shareholders have disposed of their shares
in exchange for shares of the new corporation.
• Corporate amalgamations can be vertical or
horizontal.

© 2012 McGraw-Hill Ryerson Ltd. 11

 Amalgamations
Tax Treatment
• Can be tax-free provided certain conditions are
met:
­ The predecessor corporations are deemed to have
sold their assets to the new corporation at their tax
values. [ITA 87(2) (b)-(j.2)]
­ The shareholders are deemed to have sold their
former shares at tax cost [ITA 87(4)]
­ New shares have cost base equal to old cost base.
­ Providing no change in control…no restriction on use
of losses. [ITA 87(2.1)]

© 2012 McGraw-Hill Ryerson Ltd. 12

 Amalgamations
Tax Treatment
Conditions for a tax-free amalgamation [ITA
87(1)]:
1. All of the corporations must be Canadian
corporations.
2. All assets and liabilities of the old corporations
must become assets and liabilities of the new
corporation.
3. All of the shareholders of the old corporations
must become shareholders of the new
corporation.

© 2012 McGraw-Hill Ryerson Ltd. 13

 Wind-up of a Subsidiary
Shareholder

Corporation A
Parent
Step 1 Step 2
Transfer assets Terminate
To Parent Subs existence
Corporation B
Subsidiary

© 2012 McGraw-Hill Ryerson Ltd. 14

 Wind-up of a Subsidiary
• The tax treatment of a wind-up is similar to that
of an amalgamation.
– In most cases no tax occurs on the transfer of assets
transfer price = tax values of assets transferred.
– any tax accounts of the subsidiary become available
to the parent. [ITA 88(1)]
• Tax free if the parent company must own at least
90% of each class of the subsidiary’s shares.

© 2012 McGraw-Hill Ryerson Ltd. 15

 Reorganization of Share Capital
• May wish to alter the nature of their interest in a
corporation without changing the amount of
dollar capital invested.
• Shareholders are permitted to exchange all
shares of a particular class of shares on a tax-
deferred basis [ITA 86]:
– All parties must maintain a continued interest in the
corporation.

© 2012 McGraw-Hill Ryerson Ltd. 16

 Reorganization of Share Capital
Before After
New
Shareholder Shareholder Shareholder
Pref. Shares Common Shares
Common Shares $100,000 $10
$100,000

Corporation Corporation
$100,000 $100,010

© 2012 McGraw-Hill Ryerson Ltd. 17

 Reorganization Procedures and Case
Analysis
1. Define the problem in the existing structure
• Define the desired objective
2. Choose and test one of the reorganization
techniques
3. Determine whether immediate and future tax
implications satisfies the problem.
• Are any new problems created?
4. Choose another method if problems is not
solved to satisfaction.

© 2012 McGraw-Hill Ryerson Ltd. 18

II. Holding Corporations and Intercorporate
Investments
• An individual who owns shares in one or more
business corporations can choose to interpose a
corporation between himself/herself and the
operating corporations.
• The interposed corporation is referred to as a
“holding corporation.”

© 2012 McGraw-Hill Ryerson Ltd. 19

II. Holding Corporations and
Intercorporate Investments

Shareholder

Holding
company

Operating
company

© 2012 McGraw-Hill Ryerson Ltd. 20

Tax Treatment of Intercorporate Dividends
1. All Canadian Dividends received by a public
corporation are tax-free.
2. Private Companies:
1. Received from non-connected corporations subject
to Part IV tax (33 1/3%) [ITA 186(1)(a)]
2. Received from connected corporations, no Part IV
tax unless the paying corporations receives an
RDTOH refund. [ITA 186(1)(b)]

© 2012 McGraw-Hill Ryerson Ltd. 21

 Dividend Reinvestment
• Primary benefit of establishing a holding
corporation is that it permits the shareholder to
receive dividends from the operating company,
free of tax, for reinvestment.

© 2012 McGraw-Hill Ryerson Ltd. 22

 Holding Companies and Corporate
Acquisitions
• A holding corporation can also be extremely
useful as a vehicle for acquiring shares in an
active business corporation:
– especially when the purchaser uses borrowed funds
to make the purchase.
• Provides tax-free cash flow to purchasing corp. which allows
for quicker repayment of the loan

© 2012 McGraw-Hill Ryerson Ltd. 23

 Holding Companies and Corporate
Divestitures
• A holding company is also useful as a means to
minimize tax on the sale of shares of a
corporation.

© 2012 McGraw-Hill Ryerson Ltd. 24