For corporate tax instalment purposes, an amalgamated entity (Amalco) is treated as a combination of the previous companies (predecessor companies). If Amalco's new corporate tax instalments base is not based on the total tax bases of the predecessor companies, significant non-deductible interest charges will apply. Most tax preparation software does not update instalment schedules when an amalgamation has occurred, making the risk of error higher.
There are three methods to calculate the amount of instalments a corporation must pay in respect of its taxation year:
In the first year after an amalgamation, the first instalment base is equal to the sum of each predecessor corporation’s last taxation year’s tax liability. For the same taxation year, the second instalment base is equal to the sum of each predecessor corporation’s second instalment base.
In the second year after an amalgamation, the first instalment base is generally equal to the Amalco's first year tax liability. The second instalment base is based on the predecessor companies’ combined taxes in the year before amalgamation.
Similar rules apply when a subsidiary (that is 90% or more owned by its parent) is wound-up into the parent. While these rules apply for Amalco's first taxation year after amalgamation, they apply to a parent starting in its taxation year that includes the wind-up of a subsidiary.
For example, if a subsidiary was wound up on June 30, 2011 and the parent has a December year-end, the parent had to include the relevant instalment bases of the subsidiary in its July 2011 and subsequent instalments, not January of 2012.
There are other implications of amalgamations and wind-ups that are beyond the scope of this tax tip. It is important to anticipate the various implications of an amalgamation or wind-up in advance in order to avoid costly interest and, in some cases, penalties.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.