Tax on corporate transactions in Canada: overview

A Q&A guide to tax on corporate transactions in Canada.

This Q&A gives a high level overview of tax in Canada and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on Corporate Transactions: Country Q&A tool.

The Q&A is part of the global guide to tax on transactions. For a full list of jurisdictional Q&As visit



Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The Canada Revenue Agency (CRA) is responsible for enforcing federal taxes on corporate transactions. The CRA is also responsible for enforcing provincial taxes on corporate transactions in all provinces except for Québec and Alberta.

Revenu Québec is responsible for the enforcement of provincial taxes on corporate transactions in Québec.

The Alberta Treasury Board and Finance is responsible for the enforcement of provincial taxes on corporate transactions in Alberta.

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

The CRA can provide guidance on the tax consequences of corporate transactions. The two main types of guidance a taxpayer can apply for are as follows:

  • Technical Interpretations. A Technical Interpretation provides the CRA's general interpretation of the law. It does not deal with specific fact patterns. As such, it may not apply to a particular fact pattern or determine the specific outcome of a corporate transaction.

  • Advance Tax Rulings. An Advance Tax Ruling (ATR) provides the CRA's application of the law to a particular transaction. It deals only with the specific fact pattern that is presented to the CRA. The CRA is bound by an ATR unless there is a material omission or misrepresentation in the facts presented to the CRA. Furthermore, the proposed transaction must be implemented within a specified time period and is technically only binding on the CRA with respect to the particular parties making the application for the ATR.

In addition, in October of 2013 the CRA launched a one-year pilot project for "pre-ruling consultations". A pre-ruling consultation allows taxpayers to consult with the CRA on a proposed transaction prior to submitting an ATR request. The pre-ruling consultation does not provide a definitive ruling to the taxpayer, and any comments are not binding on the CRA. However, it does provide the taxpayer with an indication of whether or not an ATR should be pursued. In December 2014, the CRA announced the extension of this pre-ruling consultation process.

The CRA can also issue a variety of clearance or compliance certificates in certain situations:

  • Section 116 certificate. The purchaser of a non-resident vendor's taxable Canadian property is required to withhold and remit a portion of the purchase price to the CRA on account of the vendor's tax liability. However, the non-resident vendor can apply for a section 116 compliance certificate to relieve the purchaser from this obligation.

  • Federal clearance certificates. The liquidator of a corporation that is being dissolved may be liable for outstanding amounts owed by the corporation. The liquidator [can] apply to the CRA for a clearance certificate in order to confirm that outstanding amounts have been paid.

  • Provincial clearance certificates. Clearance certificates may also be obtained at the provincial level with respect to outstanding provincial sales taxes.

  • Advance pricing arrangements. Canadian advance pricing arrangements (APA) is a service offered by the CRA that sets out a transfer pricing methodology for future use by related parties. In appropriate circumstances, taxpayers may find the APA useful as a means of proactively dealing with potential transfer pricing disputes and as a means of providing an increased level of certainty to the applicable parties.

Disclosure of corporate transactions

3. Is it necessary to disclose the existence of any corporate transactions to the tax authorities?

It is generally unnecessary to disclose the existence of any corporate transactions to the CRA in advance of a proposed transaction. Some provisions of the Income Tax Act (Canada) (ITA) require an election form to be filed with the CRA in order for a taxpayer to comply with such provisions. Some of the provisions of the ITA which require an election form to be filed are discussed throughout this chapter. As mentioned above, the CRA can also issue a variety of clearance or compliance certificates in certain situations. Canada does not have a regime for the reporting of uncertain tax positions similar to that of the United States of America.

Circumstances where disclosure is required

Two examples of where disclosure is required is in respect of "Tax Shelters" and "Reportable Transactions", as defined in the ITA.

Tax Shelters are, generally speaking, "Gifting Arrangements", as defined in the ITA, which entitle (or at least propose to entitle) the person making the gift to deduct losses that are in excess of the cost of the property gifted. Involvement or participation in a Tax Shelter brings about the filing obligations discussed below.

Reportable Transactions are transactions undertaken alone or as part of a series of transactions in order to avoid paying taxes and which have two of the following three features:

  • The promoter or advisor is entitled to a fee that is:

    • based on the amount of the tax benefit from the transaction;

    • contingent upon obtaining a tax benefit that results from the transaction; or

    • attributable to the number of persons participating in the transaction (or similar transaction) or who have been provided access to advice from the promoter or advisor about the tax consequences of the transaction (or similar transaction).

  • The promoter or advisor of the transaction obtains "confidential protection" (as defined in the ITA) for the transaction.

  • The taxpayer, the person who entered into the transaction on behalf of the taxpayer (including any non-arm's-length party), or the promoter or advisor has or had "contractual protection" (as defined in the ITA) for the transaction (other than as a result of a fee described in the first hallmark) (Canada Revenue Agency, "New reporting requirements: reportable transactions", 2013:

Manner and timing of disclosure

Promoters who act as principals or agents of Tax Shelters must obtain an identification number from the CRA and are required to file annual information returns by February of the calendar year immediately following the calendar year in which a person obtained an interest in the Tax Shelter. Participants in a Tax Shelter are required to file a prescribed form in conjunction with a claim for a tax deduction pursuant to a Tax Shelter.

An information return is required to be filed on or before June 30 in the calendar year immediately following the calendar year in which a Reportable Transaction occurred. Depending on the circumstances, the filing obligation may rest with the taxpayer, promoter or advisor (if entitled to a fee as described above). It is possible that the filing of the annual information form by one of these people may satisfy the filing obligations for all of them.


Main taxes on corporate transactions

Transfer taxes and notaries' fees

4. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

Transfer taxes

There are no transfer taxes with corporate transactions involving the transfer of shares in the capital of a corporation.

Goods and services tax, provincial sales tax and harmonised sales tax

Certain value added taxes (goods and services tax (GST), provincial sales tax (PST) and harmonised sales tax (HST)) are imposed on the sale of assets in Canada (see Question 6 for more details).

Land transfer taxes

Key characteristics. Land transfer taxes or fees vary from province to province with respect to application, scope and rates. For example, there are no land transfer taxes in Alberta.

Triggering event. Land transfer taxes are triggered by the transfer of real property.

Liable party/parties. The purchaser is generally liable for the land transfer taxes. However, the parties may negotiate the ultimate responsibility as between themselves.

Applicable rate(s). The rates vary from province to province. Provinces that do not have a land transfer tax typically have a registration fee payable on registration of the transfer of land.

Notaries' fees

Key characteristics. The only notaries' fees in Canada arise in Québec. There are no notaries' fees under federal law or provincial law in the other provinces.

Triggering event. The notaries' fees in Québec apply to certain transactions. These include real property transactions and security interests involving property, which must be made by notarial act.

Liable party/parties. The parties to the transaction are responsible for the notaries' fees.

Applicable rate(s). Notaries' fees are not regulated in Québec. The cost can vary depending upon the particular notary used in the transaction.

Corporate and capital gains taxes

5. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Corporate tax

Key characteristics. Corporations must pay corporate tax on corporate transactions.

Triggering event. Corporations are liable for tax with respect to their capital gains, income and dividends received:

  • Capital gains. A corporation realises a capital gain when it disposes of capital property, such as assets or shares. The quantum of the capital gain is the proceeds of disposition of the asset less the asset's adjusted cost base. However, a corporation only pays tax on one-half of the resulting capital gains. Furthermore, a corporation's taxable capital gains may be off-set against one-half of its capital losses.

  • Income. A corporation must also pay income tax on its business income. For example, the income earned from the sale of inventory or services will be taxed as business income.

  • Dividends. A corporation may also be taxed on inter-corporate dividends that it receives from another corporation that it holds shares in. However, a private corporation may be entitled to a tax refund of up to 1/3 of the taxable dividends paid to its shareholders. A corporation may actually receive declared dividends or it may be deemed to receive dividends. The latter case arises where a corporation repurchases or redeems shares from a shareholder. The amount that the repurchase or redemption price exceeds the paid up capital (PUC) attributable to such shares is deemed to be a dividend. The PUC of shares is generally the stated capital for the class of shares as determined by corporate law. Inter-corporate dividends received by a corporation are generally added to its income and taxed. However, there are a couple of scenarios where a corporation may receive dividends tax free:

    • the non-taxable half of capital gains may be added to a corporation's capital dividend account (CDA). A corporation may then elect to pay dividends out of its CDA tax free;

    • a corporation may pay inter-corporate tax free dividends to a "connected" corporation. A corporation holding shares in another corporation is connected with that other corporation if it holds more than 10% of the voting shares and the value attributable to all outstanding shares. The dividend is generally not taxable to the connected corporation receiving the dividend.

Liable party/parties. The vendor selling the property giving rise to income, or the corporate shareholder receiving dividends, is liable for the tax.

Applicable rate(s). The rate of corporate tax will depend upon the type of income earned, the type of corporation earning the income and the province in question. For example, with respect to active business income earned by a general corporation the provincial tax rates vary from 11% to 16%, while the federal net tax rate is 15%.

Value added and sales taxes

6. What are the main value added and/or sales taxes potentially payable on corporate transactions?


Key characteristics. Value added taxes are generally imposed on the sale of assets and services in Canada. At the federal level Canada has a goods and services tax (GST). Several provinces (namely, British Columbia, Manitoba and Saskatchewan) also have a provincial sales tax (PST). A harmonised sales tax (HST) is in effect in five provinces (Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island). The HST essentially combines the GST and PST imposed in those provinces. Alberta is the sole province which has only GST without any HST or PST.

Triggering event. The sale of assets (including property or services) triggers the sales tax. However, the sale of certain assets is exempt (for example, shares).

Liable party/parties. The general rule is that the purchaser is liable for paying the tax and the vendor is liable for collecting and remitting the tax. However, this is only a general rule and the rates and application of GST/HST and PST depend on:

  • The location where the assets are supplied.

  • The nature of the assets sold.

  • The nature of the parties in the transaction.

As such, the actual tax consequences of a transaction will vary.

Applicable rate(s). GST is 5%, while HST and PST vary from province to province. The combined rates of applicable GST/HST/PST vary from 0% to 15% depending upon the location the assets are supplied, the nature of the assets and the parties involved.

Other taxes on corporate transactions

7. Are any other taxes potentially payable on corporate transactions?

Canada and its provinces do not impose a capital tax on corporations.

Taxes applicable to foreign companies

8. In what circumstances will the taxes identified in Questions 4 to 7 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

Land transfer taxes

A foreign company will be liable for land transfer taxes if applicable to the province in which the land is located.

Corporate tax

A foreign company will be liable for federal corporate tax on income earned from carrying on business in Canada. It is a question of fact whether a foreign company is carrying on business in Canada. There are also certain activities that a foreign company can undertake which will automatically deem it to be carrying on business in Canada (for example, manufacturing a product in Canada). However, Canada's tax treaties generally relieve corporate tax liability and limit it to tax on income earned from a permanent establishment of the foreign company in Canada.

A foreign company will also be subject to capital gains tax on the disposal of its capital property. The purchaser of capital property that is taxable Canadian property must also be aware they are responsible for withholding and remitting 25% of the purchase price to the CRA in such transactions, unless the foreign company has obtained a compliance certificate from the CRA which is provided to the purchaser.

Where a foreign company has established a Canadian branch, it may also be responsible for a branch tax. The branch tax is payable on branch profits repatriated to the foreign company and not reinvested in Canadian assets. The rate is generally 25%, but it may be reduced depending upon whether a tax treaty exists to reduce the effective rate.


A foreign company that carries on business in Canada must register for, charge and collect GST/HST and PST.

Withholding tax

Section 212 of the ITA provides that every non-resident person shall pay an income tax of 25% of every amount that a person resident in Canada pays or credits, or is deemed by Part 1 of the ITA to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction, among other things, interest, dividends, management fees, rents, royalties and estate or trust income. The 25% withholding rate may be reduced by a tax treaty. The Canadian payer of such amounts is required to withhold and remit the tax to the CRA.



9. Is there a requirement to withhold tax on dividends or other distributions?

Withholding tax

A 25% withholding tax applies on dividends paid to non-residents. However, the rate of withholding tax may be reduced under Canada's bilateral tax treaties, assuming the recipient qualifies for treaty benefits. Under the Canada-US Income Tax Convention, the rate is reduced to 5% if the beneficial owner of the dividend is a corporation which owns at least 10% of the voting stock of the corporation paying the dividend. In all other cases, the rate is reduced to 15%. The rules regarding reduction of dividend withholding tax are similar under Canada's other bilateral tax treaties.


Share acquisitions and disposals

Taxes potentially payable

10. What taxes are potentially payable on a share acquisition/share disposal?

Land transfer tax

Generally, land transfer taxes are not payable on an acquisition or disposition of shares.


Generally, GST/HST, Québec sales tax (QST) and PST are not payable on an acquisition or disposition of shares.

Individual and corporate tax

Non-resident individuals and corporations must pay Canadian income tax on taxable capital gains earned on dispositions of "taxable Canadian property". A taxable capital gain is one-half of the capital gain on a capital property. A capital gain is the amount by which the proceeds of disposition of a capital property exceed its adjusted cost base and selling expenses.

Generally, taxable Canadian property includes a private company share if more than 50% of the fair market value of the share was derived directly or indirectly from Canadian real property or certain Canadian resource properties. Public company shares can also be taxable Canadian property in certain situations.

Exemptions and reliefs

11. Are any exemptions or reliefs available to the liable party?

Tax deferred rollovers

Under sections 51, 85, 85.1 and 86 of the ITA, an individual or corporation can transfer shares that are capital property to a corporation in exchange for other shares of that corporation (and sometimes for other consideration as well). When all conditions are satisfied, the transfer is a tax deferred rollover, meaning no taxable capital gains are triggered at the time of transfer.

Specifically, sections 51 and 86 allow a transferor to transfer shares of a corporation back to the corporation. These provisions facilitate share conversions and capital reorganisations. The two sections apply even if the corporation is a non-resident. Section 85.1 allows a tax deferred share for share exchange involving a Canadian corporation exchanging its shares for the shares of a taxable Canadian corporation.

Under section 85, most assets (not just shares) can be transferred to a taxable Canadian corporation on a tax deferred basis. The conditions for a section 85 rollover include that the transferor receives shares of the corporation and the parties file a joint election.

Lifetime capital gains exemption

If the vendor is an individual resident in Canada, taxable capital gains may be offset by utilising the lifetime capital gains exemption if the shares being sold fall within the definition of "qualified small business corporation share". The definition requires the corporation whose shares are being sold to be engaged in an active business and have limited passive assets. In 2015, the lifetime capital gains exemption is CAD$813,600, and it will be indexed in subsequent years.

Small business share rollover

An individual who disposes of common shares of an eligible small business corporation can defer capital gains if the proceeds are reinvested in another such corporation and various other conditions are met.

Tax advantages/disadvantages for the buyer

12. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.


If the corporation being acquired has loss carryforwards (non-capital losses and net capital losses), the losses may be preserved and be available to offset income and taxable capital gains. However, the ITA has many rules which restrict the use of losses on a change of control. Such rules must always be considered on an acquisition of a corporation with loss carryforwards.


The liabilities of the corporation will remain, including tax liabilities, such as unpaid income tax and failure to collect or remit GST/HST, QST and PST. The purchaser inherits the tax cost of the corporation's assets, potentially limiting the amount that can be deducted in respect of depreciable assets. Also, there may be a mismatch between newly acquired shares with a high tax cost and pre-acquisition corporate assets with a low tax cost, which can lead to higher taxation on the sale of those assets and the distribution of the proceeds (see Question 14, Acquisition bump).

Tax advantages/disadvantages for the seller

13. Please set out the tax advantages and disadvantages of a share disposal for the seller.


A share sale will generally lead to a lower effective tax rate on the purchase price received by the seller. If the purchase price is payable by instalments, a capital gains reserve is available delaying taxation on a portion of the purchase price. The cost recovery method of reporting the gain or loss on the sale may be available on earnout agreements. Individuals resident in Canada may be able to use the lifetime capital gains exemption to shield capital gains from tax (see Question 11, Lifetime capital gains exemption).


There are no tax disadvantages for the seller.

Transaction structures to minimise the tax burden

14. What transaction structures (if any) are commonly used to minimise the tax burden?

Techniques for delaying tax

If the purchase price is payable by instalments, a capital gains reserve is available (see Question 13, Advantages). All or a portion of the seller's shares can be exchanged for shares redeemable or exchangeable at the request of the purchaser or at specific times. This is implemented using a tax deferred rollover (see Question 11, Tax deferred rollovers).

Capital gains stripping

In certain circumstances involving connected corporations, dividends paid by a corporation resident in Canada to another connected corporation resident in Canada are generally disregarded. A holding company can be put in place to receive dividends from a corporation whose shares are to be sold. The dividends paid out will lower the value of those shares, reducing capital gains on the sale. If the amount of dividends paid out of the corporation exceeds its "safe income" (which is similar to the concept of after tax retained earnings), section 55 of the ITA may deem such dividends to be capital gains subject to tax.

Surplus strips

A corporate level asset sale can lead to double taxation: once at the corporate level and once on distribution of the proceeds to the shareholders. If the shares of the corporation have a tax cost that equals their fair market value, or capital gains on the shares can be avoided in some other way, various surplus stripping structures can be put in place to allow proceeds from the corporate level asset sale to be returned to the shareholders without the second level of tax. However, such structures may be considered aggressive and may be targeted by the Canada Revenue Agency.

Acquisition bump

A purchaser can incorporate a Canadian corporation to acquire 90% or more of the shares of a taxable Canadian corporation. The acquired corporation will then be amalgamated or wound-up into the acquiring corporation. The tax cost of the shares of the target will be used to "bump" the tax cost of its capital assets, other than depreciable property. This helps minimise issues arising from a high tax cost in newly acquired shares and a low tax cost in the pre-acquisition corporate assets, especially real property (see Question 12, Disadvantages).

Exchangeable shares

The ITA does not allow shares of a Canadian corporation to be transferred to a non-resident corporation on a tax free rollover basis. This is a disadvantage for non-residents seeking to acquire a target Canadian corporation whose shareholders wish to delay taxable capital gains.

In substance, a rollover can still be achieved in the above situation by issuing the shareholders of the target "exchangeable shares". This involves a non-resident corporation incorporating a Canadian acquisition corporation to acquire the shares of the target on a tax free rollover basis (see Question 11, Tax deferred rollovers). The shares of the acquisition corporation will be exchangeable into shares of the non-resident corporation at a later date with the deferred gain realised at that time.


Asset acquisitions and disposals

Taxes potentially payable

15. What taxes are potentially payable on an asset acquisition/asset disposal?

Corporate tax

Under the Canadian tax system, a company will generally prefer to sell shares rather than assets. Conversely, a purchaser will generally prefer to purchase assets instead of shares. This tension arises because, for vendors, preferential tax treatment is often available on share sales. However, purchasers will usually receive better underlying tax attributes in the assets they are acquiring if they purchase assets rather than shares.

Accounts receivable. Doubtful debts that are later collected are treated as business income in the year of sale. There is, however, an election available on the sale of accounts receivable, which allows the purchaser to maintain a reserve for the accounts receivable.

Capital property. For assets that are capital property, where such assets have increased in value, capital gains tax will generally be due on that increased value. Depending upon the province in which the disposition occurs, the effective rate of taxation is approximately between 20% to 25%. In certain non-arm's length transactions, capital gains deferral is available.

Depreciable capital property. Where such property is sold, there are a number of possible tax consequences. If the sale amount exceeds the purchase price or the undepreciated capital cost, then there will be a capital gain and possibly recapture of previously deducted depreciation. If the sale amount is less than the undepreciated capital cost, a deduction may be taken.

Eligible capital property. Eligible capital property includes such assets as customer lists, goodwill, trade marks, and quotas. The rules applicable to eligible capital property are likely to change. In general and at present, 75% of the proceeds from the sale of eligible capital property reduces the tax pool for eligible capital property, referred to as cumulative eligible capital (CEC). The reduction to the CEC results in recapture to the extent of amortisation previously claimed (eligible capital property is amortised at the annual rate of 7%). If the reduction to the CEC relating to the receipt of sale proceeds results in the balance of that being negative, then there will effectively be an income inclusion of 50% of the excess of the amount beyond the amortisation previously claimed, with the other 50% being added to the corporation's capital dividend account.

Inventory. Where a business is sold, the inventory is deemed to have been sold in the course of carrying on business. This leads to a full income inclusion.

Excise tax

While transfers of assets are generally subject to GST/HST, if substantially all of a business is being sold, relief may exist.

Land transfer tax

On sales of real property, land transfer taxes will often apply. These are administered by the provinces and are often between 0% to 2%, depending upon the value of the transfer and the province in which the land is located.

Exemptions and reliefs

16. Are any exemptions or reliefs available to the liable party?

Corporate tax

Rollovers. There are many "rollovers" available in the ITA that defer tax on sales between parties. The most notable of these allows assets (other than real property inventory) to be sold/transferred to a corporation on a tax-deferred basis under section 85 of the ITA. Under strict conditions, assets may be split out of a corporation on a tax deferred basis using a "butterfly" transaction. This rollover defers capital gains tax that would otherwise be realised on such a sale.

Excise tax

Exempt transactions. There are numerous exemptions from excise taxes. Generally, where substantially all of a business is being purchased, there is an election for GST not to apply. Likewise, provinces have their own statutory and administrative exemptions, which defer tax on the assets' sales.

Input tax credits. Because the GST is a value added tax, the purchaser will normally be able to claim input tax credits, as a method of recovering any tax paid on the transaction.

Land transfer tax

There are deferrals available in certain circumstances. These vary from province to province. These types of deferrals normally arise amongst non-arm's length parties.

Tax advantages/disadvantages for the buyer

17. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.


Purchasers generally prefer to acquire assets. The purchase price can be allocated (provided it is not unreasonable) to inventory and depreciable property, which generally have the most useful tax attributes for the purchaser. In the case of depreciable property, for instance, the taxpayer will generally want a high cost, such that the asset can be depreciated. In the case of inventory, for instance, the high cost minimises business income realised on the sale of the inventory.


Asset acquisitions are sometimes more complicated for non-tax reasons. If a business has particular licences or contracts that are not transferable, then an asset sale agreement may not be possible, particularly if certain licences are necessary for the operation of the business. Asset sale agreements may also trigger land transfer taxes that could otherwise be avoided on a share sale agreement.

Tax advantages/disadvantages for the seller

18. Please set out the tax advantages and disadvantages of an asset disposal for the seller.


Generally, a seller will prefer a share sale. Canada offers certain tax advantages on the sales of shares of Canadian-controlled private corporations. These include a CAN$813,600 lifetime capital gains exemption available to each qualifying shareholder. On an asset sale, certain advantages exist: losses on the sale of non-capital property can be used to offset income.


Unlike an asset sale, the proceeds generally end up in the hands of the vendor at the date of a sale, resulting in an immediate tax liability, though potentially subject to a five-year (maximum) reserve. This can be disadvantageous. In contrast, where a vendor keeps the proceeds of disposition of assets in the company, those proceeds can be slowly drawn out by dividends over an extended period of time, keeping the vendor individual in a lower tax bracket by paying dividends over many years.

Transaction structures to minimise the tax burden

19. What transaction structures (if any) are commonly used to minimise the tax burden?

It is impossible to summarise the myriad ways in which tax can be minimised on the sale of assets.

Allocation of purchase price. One strategy for vendors is to try to allocate as much of the purchase price to eligible capital and non-depreciable property as possible. The purchaser will usually not be amenable, but this is preferable for the vendor to having the purchase price attributable to inventory and depreciables.

Deferred distribution of sales proceeds. As considered in Question 18, providing the vendor does not require the proceeds of disposition of the assets, those proceeds can be left in the company. Tax will be payable on dividends, when those amounts are paid out. This can occur over many years, to minimise the effect of progressively higher graduated tax rates applicable to individuals.


Legal mergers

Taxes potentially payable

20. What taxes are potentially payable on a legal merger?

Land transfer tax

There is no land transfer tax levied on a merger (also referred to in Canada as an amalgamation) of two corporations. If the merger involves the winding-up of a subsidiary into its parent corporation, land transfer tax will generally apply unless certain steps are taken (see Question 22).

Income tax

Under section 87 of the ITA, provided that the merger is an amalgamation of two or more taxable Canadian corporations (a corporation incorporated or resident in Canada that is not otherwise exempt from tax under Part I of the ITA):

  • All the property and liabilities of the predecessor corporations immediately before the merger becomes property and liabilities of the amalgamated corporation.

  • All of the shareholders who are holders of the capital stock of any of the predecessor corporations before the merger receive shares of the capital stock of the amalgamated corporation.

There is generally no income tax payable as a result of the amalgamation itself.

On a winding-up of a subsidiary corporation into its parent corporation, under section 88 of the ITA, no income tax will generally be payable where both:

  • Not less than 90% of the shares of each class of the capital stock of the subsidiary corporation, itself a taxable Canadian corporation, were, immediately before the winding-up, owned by another taxable Canadian corporation.

  • All of the shares of the subsidiary not owned immediately prior to the winding-up by the parent corporation were owned at that time by persons (which includes corporations) dealing at arm's length with the parent corporation.

Exemptions and reliefs

21. Are any exemptions or reliefs available to the liable party?

Land transfer tax

See Question 22.

Income tax

See Question 20.

Transaction structures to minimise the tax burden

22. What transaction structures (if any) are commonly used to minimise the tax burden?

Land transfer tax

As previously discussed, land transfer taxes vary from province to province. For illustrative purposes, the response to this question pertains to the province of Ontario only.

There is no exemption from land transfer tax in Ontario where real property (that is, land) is transferred on a winding-up. If a subsidiary is the beneficial and legal owner of real property in Ontario, on the winding-up, Ontario land transfer tax will apply. Tax will be payable on the registration of the land in the name of the parent corporation based on the fair market value of the real property. To eliminate this, legal title can be transferred by the subsidiary to the parent such that parent holds title as a nominee. Since the value of the consideration paid by the parent to acquire legal title as a nominee is nil, no land transfer tax will be exigible. On the subsequent winding-up of the subsidiary into the parent, the parent could apply for an exemption from land transfer tax under subsection 3(9) of the Land Transfer Tax Act (Ontario). This exemption applies to the disposition of a beneficial interest in land from one corporation to another corporation, each of which is an affiliate at the time of the disposition where the land will continue to be held for a period of at least 36 months. Security (in the form of a letter of credit) for the land transfer tax otherwise payable must be posted.

Income tax

See Question 20.


Joint ventures

Taxes potentially payable

23. What taxes are potentially payable on establishing a joint venture company (JVC)?

Land transfer tax

Where real property is transferred to the JVC, land transfer tax may be payable.

Income tax

Transfer of property to a JVC will be treated as a taxable disposition under the ITA based on the fair market value, unless a rollover election is made jointly by the transferor and the transferee. This may result in the realisation of capital gains or proceeds of disposition in the hands of the transferee. In addition, income earned by the JVC, if carried on as a corporation, is subject to income tax as a Canadian taxpayer.

Exemptions and reliefs

24. Are any exemptions or reliefs available to the liable party?

Land transfer tax

Ontario provides for the deferral of land transfer tax in certain situations. The Land Transfer Tax Act (Ontario) and its associated regulations should be consulted based on the specific factual situation.

Income tax

Where the JVC is operated as a corporation, the transferor of the property may be entitled to elect jointly with the transferee to have the transfer occur on a tax-deferred basis under section 85 of the ITA. For section 85 of the ITA to apply, the transferee must receive at least one share of the JVC as consideration for the transfer of the property.

If the JVC is being operated as a partnership, a similar tax deferred transfer may be available under subsection 97(2) of the ITA.

Transaction structures to minimise the tax burden

25. What transaction structures (if any) are commonly used to minimise the tax burden?

Land transfer tax

See Question 24.

Income tax

See Question 24.


Company reorganisations

Taxes potentially payable

26. What taxes are potentially payable on a company reorganisation?

Federal and provincial income tax

Depending on the nature of the reorganisation and the parties involved, all taxes that are otherwise applicable to a corporation, including federal and provincial income tax, may also apply to the reorganisation of a corporation.


When properly structured, the reorganisation of a corporation will not typically attract GST, PST, HST, QST or retail sales tax (RST) Notwithstanding, the nature of the parties involved and the subject matter of what is being reorganised may result in the application of one or more the aforementioned taxes. The potential application of these taxes should always be considered, as such taxes can have a material adverse effect on the reorganisation and the benefits sought to be obtained by that reorganisation.

Land transfer tax

If the reorganisation includes the transfer of Canadian real property, pursuant to which registration of the transfer is made, land transfer tax may apply. Land transfer taxes vary by province and territory and are highest in Nova Scotia. Alberta, Saskatchewan, Newfoundland, Yukon, the Northwest Territories and Nunavut do not charge land transfer taxes, although there are fees associated with registering a transfer of real property in these jurisdictions.

Withholding tax

Where one or more of the parties involved in a reorganisation is non-resident in Canada for tax purposes, withholding taxes may be applicable and certificates of compliance may need to be obtained, otherwise the purchaser may be liable for the tax the vendor would otherwise be liable to pay.

Exemptions and reliefs

27. Are any exemptions or reliefs available to the liable party?

Rollovers, exchanges, butterflies and spin-offs

Reorganisations are commonly structured to make use of or otherwise rely on specific tax exemption and tax deferral mechanisms found in the ITA. Some of the more common mechanisms are colloquially referred to as rollovers, exchanges, butterflies and spin-offs.

In brief, a rollover involves the transfer of certain property, known as eligible property, to a corporation or partnership. Provided the conditions for the transfer are met, which includes that the transferor receive a share of the transferee corporation, or in the case of a partnership an additional interest in the transferee partnership, as part of the consideration paid to the transferor, the transfer will take place on a tax-deferred basis for income tax purposes.

Provided certain conditions are met, the ITA also provides for a deferral of income taxes where shares in the share capital of a corporation are exchanged for shares of a different class, either as part of a reorganisation of capital of the corporation or where such shares constitute convertible property to the taxpayer.

Another type of reorganisation commonly carried out is the "butterfly" or "spin-off" reorganisation. While not specifically provided for in the ITA like rollovers or exchanges, a butterfly or spin-off reorganisation makes use of various provisions of the ITA to carry out the objective of dividing a corporation or otherwise removing certain corporate assets, or a division of them, on a tax-deferred basis.

Transaction structures to minimise the tax burden

28. What transaction structures (if any) are commonly used to minimise the tax burden?

Restructuring and insolvency

29. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Tax implications for the business

The Bankruptcy and Insolvency Act is the Canadian federal statute that primarily governs bankruptcies in Canada. Where a corporation is bankrupt, a trustee in bankruptcy is appointed to take over the bankrupt's affairs. Upon declaring bankruptcy, a corporation is deemed to have year-end for tax purposes on the day immediately before the corporation is bankrupt. If a corporation receives an absolute discharge from bankruptcy certain losses, in particular restricted farm losses, non-capital losses and net-capital losses, are lost for the taxation year in which the aforementioned discharge was granted and any taxation year thereafter and are not deductible in calculating the corporation's income. Such losses may, however, be deductible for years prior to the bankruptcy.

In the context of insolvency, a corporation may make arrangements with its creditors to settle debts for less than the face value of that debt. Where a debt is settled for less than its face value, the ITA contains rules that are referred to as the debt forgiveness rules. The debt forgiveness rules may become applicable in the context of bankruptcy and insolvency in connection with any settlement of debt for less than the face value of that debt by the corporation with any of its creditors.

In brief, where all or a portion of a debt is forgiven, the forgiven amount (being the difference between the face value of the debt and the amount the debt is settled for) is applied to reduce certain tax accounts of the corporate debtor to the extent of the forgiven amount. Where the tax accounts of the corporate debtor are insufficient to cover the forgiven amount, one half of such remaining forgiven amount is included in the corporate debtor's income for tax purposes. In certain circumstances, the forgiven amount may be transferred in whole or in part to a related party.

Tax implications for the owners

A shareholder of a Canadian corporation is not liable for the debts of the corporation by virtue of being a shareholder. A shareholder's liability is limited to the amount paid to subscribe or otherwise acquire the shares in the share capital of the particular corporation. Where a shareholder is the owner of shares in a bankrupt corporation, the shareholder may be able to claim a capital loss in respect of such shares, notwithstanding whether the subject shares have been disposed of by the shareholder. Where the claim for a capital loss is allowed, the shares will be deemed to have been disposed of for proceeds equal to nil and immediately reacquired at a cost of nil. Consequently, any subsequent disposition in excess of nil proceeds will result in a capital gain to the shareholder.

Tax implications for the creditors

Where a debt, or portion a debt, becomes a bad debt, a creditor may elect to have the debt treated as a bad debt and make a corresponding deduction for that bad debt. In such circumstances, the bad debt is deemed to have been disposed of and reacquired for nil proceeds, such that any subsequent collection of the debt, or part of the debt, will result in an inclusion in income for tax purposes.


Share buybacks

Taxes potentially payable

30. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 4to 7 as appropriate.)

Deemed dividend

Where a shareholder has his or her shares repurchased by the corporation in which such shares are held, the shareholder is deemed to have received a dividend equal to the amount by which the amount paid by the corporation to repurchase the shares exceeds the paid-up capital of the shares repurchased. If the shareholder is a connected corporation, as that term is defined in the ITA, the dividend may be received by the shareholder tax-free.

Capital gain

In certain circumstances, in particular in the context of a sale transaction, a repurchase of shares that would otherwise have resulted in a tax-free intercorporate dividend, as described above, may be recharacterised as a taxable capital gain.

Exemptions and reliefs

31. Are any exemptions or reliefs available to the liable party?

Mutual fund corporation

Where a mutual fund corporation repurchases shares in its share capital, the shareholder whose shares were so repurchased is deemed to have a received a capital gain, calculated as the difference between the adjusted cost base of the shares and the price paid by the mutual fund corporation to repurchase the shares from the shareholder.

Public company shares

The rules regarding deemed dividends described in Question 30 do not apply in respect of any purchase by a corporation of any of its shares in the open market, if the corporation acquired those shares in the manner in which shares would normally be purchased by any member of the public in the open market. In other words, where a publicly traded Canadian corporation repurchases shares in itself on the open market, the shareholder whose shares are so repurchased will, where such shares constitute capital property to the shareholder, realise a capital gain on that disposition (rather than a deemed dividend) equal to the difference between the repurchase price and the adjusted cost base of the repurchased shares to the shareholder.

Transaction structures to minimise the tax burden

32. What transaction structures (if any) are commonly used to minimise the tax burden?

Reorganisations to connect the corporations or to shift paid-up capital

As discussed in Question 30, a connected corporation may receive the deemed dividend tax-free. Accordingly, a reorganisation which results in the shareholder corporation and the acquiring corporation being connected (as defined in the ITA) may be undertaken such that the deemed dividend arising as a result of the repurchase of shares will be effected on a tax-free basis.

In a similar vein, because the deemed dividend is calculated as the difference between the amount the corporation paid to acquire the share and the paid-up capital in respect of such share, a reorganisation to increase the paid-up capital will reduce the deemed dividend commensurate with the amount of such increase.


Private equity financed transactions: MBOs

Taxes potentially payable

33. What taxes are potentially payable on a management buyout (MBO)?

Taxes payable on an MBO

There are no provisions in the ITA that are particular to MBOs. As such, the taxation of an MBO will depend on the structuring of the transaction and be treated as any other transaction.

Exemptions and reliefs

34. Are any exemptions or reliefs available to the liable party?

Transaction structures to minimise the tax burden

35. What transaction structures (if any) are commonly used to minimise the tax burden?


36. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

In its 2015 budget (Budget 2015), the Federal Government of Canada once again pledged its support for the Organization for Economic Co-operation and Development (OECD) Action Plan on Base Erosion and Profit Shifting, released by the OECD in July 2013 (Base Erosion Plan). In brief, the Base Erosion Plan seeks to address the shifting of income to low tax jurisdictions by multinational corporations and other entities.

Also contained in Budget 2015 are proposed new rules aimed at perceived abuses of tax-free inter-corporate dividends among connected corporations and related tax planning. If the legislation as currently drafted is made law, any tax planning or transactions which have tax-free inter-corporate dividends as a component will have to be revisited.

In November 2014, the group of 20 nations (G20) endorsed the adoption of a new common reporting standard for automatic exchange of information developed by the OECD, and committed to a first exchange of information by 2018. This new reporting standard is based on the US Foreign Account Tax Compliance Act (FATCA). Under the new reporting standard, foreign tax authorities will provide information to the CRA relating to financial accounts held by Canadian residents in their respective jurisdictions. In turn, the CRA will furnish information to the foreign tax authorities with respect to Canadian accounts held by residents of their jurisdictions.


Online resources

Justice Laws Website


Description. The Justice Laws Website is the online source of the consolidated Acts and regulations of Canada. The consolidations are generally updated every two weeks.

Canadian Legal Information Institute (CanLII)


Description. CanLII is a non-profit organisation managed by the Federation of Law Societies of Canada. CanLII's goal is to make Canadian law accessible for free on the Internet. CanLII's website provides access to court judgments, tribunal decisions, statutes and regulations from all Canadian jurisdictions.

Contributor profiles

William J Fowlis, QC, FCPA, FCA, TEP, Partner (Barrister and Solicitor, Alberta)

Miller Thomson LLP

T 403 298 2413
F 403 262 0007

Brendon Ho, LL.B. Associate (Barrister and Solicitor, Alberta)

Miller Thomson LLP

T 780 429 9717
F 780 424 5866

Regan O'Neil, LL.B.Partner (Barrister and Solicitor, Alberta)

Miller Thomson LLP

T 403 298 2452
F 403 262 7000

Graham Purse, LL.B. Associate (Barrister and Solicitor, Saskatchewan)

Miller Thomson LLP

T 306.347.8338
F 306.347.8350

All of the contributing authors are members of the tax group of Miller Thomson LLP.

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