Merging Corporations: Tax Effects of Amalgamations and Asset Transfers — CPA Firm Near You, Montreal

Introduction

Merging two corporations in Quebec — whether for expansion, restructuring, or simplification — can unlock major strategic benefits but also trigger significant tax consequences. Amalgamations and asset transfers must be structured carefully under corporate and tax law to avoid capital gains, recapture of depreciation, GST/QST errors, or loss of tax attributes. This guide explains how corporate mergers work, the tax implications of each method, and how a CPA near you in Montreal can help structure the merger properly.

Legal and Regulatory Framework

Mergers in Canada typically occur through statutory amalgamation under the CBCA or QBCA, or through an asset transfer between corporations. A statutory amalgamation creates a new “merged” corporation that inherits assets, liabilities, tax pools, and corporate history of the predecessors. An asset transfer requires selling or transferring assets from one corporation to another, often triggering tax unless structured under Section 85 rollover rules. CRA requires that amalgamations meet technical conditions, and GST/QST must be applied correctly in asset transactions.

Key Court Decisions

Courts have ruled that improper amalgamations or undocumented transfers can trigger immediate tax, including capital gains and recapture. Judges have confirmed that corporations cannot claim tax attributes (losses, credits, CCA pools) unless the merger meets legislative requirements. Several cases highlight that GST/QST mishandling in asset transfers results in penalties. Courts emphasize proper documentation, commercial intent, and compliance with corporate law.

Why CRA and Revenu Québec Scrutinize Mergers

Mergers involve complex transactions, valuation issues, intercompany balances, and tax attributes. CRA reviews whether the transaction qualifies as a tax-deferred amalgamation, whether losses or CCA pools were improperly preserved, whether shareholder benefits occurred, and whether the structure has economic substance. Revenu Québec analyzes GST/QST treatment, corporate registration continuity, and whether the new entity complies with QBCA rules. Poorly documented mergers raise audit risk significantly.

Types of Mergers and Tax Implications

Statutory amalgamation

Both corporations merge into a new entity. Tax attributes continue if legislative requirements are met. No immediate tax if executed properly.

Vertical amalgamation

Parent and subsidiary merge; simpler process with full tax continuity.

Horizontal amalgamation

Sister companies merge into a new entity; tax continuity applies.

Asset transfer

Assets are transferred to a new or existing corporation; may trigger capital gains unless structured under Section 85. GST/QST must be analyzed for taxable assets.

Key Tax Considerations

Capital gains

May arise in asset transfers if not rolled over.

Recapture of depreciation

Triggered when assets are transferred above their undepreciated capital cost.

Tax loss continuity

Only preserved if amalgamation rules are met.

GST/QST

Asset transfers can be taxable unless Section 167 election applies for sale of a business.

Shareholder loans

Must be reconciled during the merger to avoid taxable benefits.

Paid-up capital

Adjusted when shares of the new corporation are issued.

Merger Process: Step-by-Step

Step 1: Evaluate merger objectives

Tax savings, simplification, succession, or expansion.

Step 2: Choose merger method

Statutory amalgamation or asset transfer.

Step 3: Perform valuations

Both corporations require asset and liability valuations.

Step 4: Draft merger agreements

Legal documentation must comply with QBCA/CBCA.

Step 5: File corporate authorizations

Articles of amalgamation or rollover elections under Section 85.

Step 6: Update minute books

Share registers, resolutions, and directors’ information must be revised.

Step 7: Integrate tax accounts

CRA and RQ registrations, GST/QST numbers, payroll accounts, and banking must be updated.

Step 8: File tax returns

Final short-year returns for predecessors and first-year return for merged entity.

Common Pitfalls

Incorrect GST/QST on asset transfers

Failure to file Section 167 election creates unnecessary sales tax.

Improper loss carryovers

Losses may be denied if merger conditions are not met.

Missing resolutions

Corporate approvals must be fully documented.

Ignoring shareholder tax consequences

Share exchanges must be structured to avoid deemed dividends.

Overlooking intercompany balances

Balances must be cleared or reconciled to avoid taxable events.

Mackisen Strategy

At Mackisen CPA Montreal, we design mergers that preserve tax attributes, avoid unnecessary tax, and comply with corporate and tax law. We prepare Section 85 elections, GST/QST planning, merger agreements, minute book updates, valuations, and filings with CRA and Revenu Québec. Our strategies ensure your merger is efficient, compliant, and aligned with long-term corporate goals.

Real Client Experience

A Montreal group attempted an internal merger without documentation; CRA denied the loss carryforwards. We rebuilt the merger with proper filings and restored tax continuity. Another client transferred assets without a Section 85 rollover, triggering capital gains; we corrected the structure for future years and minimized exposure.

Common Questions

Is a merger tax-free?

Only if structured as a qualifying amalgamation or properly rolled over.

Can losses be carried forward after a merger?

Yes, if legislative conditions are met.

Do I need CRA approval?

Not formally, but compliance is required.

Is GST/QST charged in mergers?

In asset transfers, yes, unless exempt under Section 167.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal structures tax-efficient mergers, protects loss carryforwards, ensures GST/QST compliance, and prepares all necessary documentation. We minimize tax exposure while ensuring your new corporation is fully compliant.