Clarifying Rules on Qualifying Amalgamations

The Supreme Court of Canada (SCC) recently released its decision in Envision Credit Union v. Canada, a case concerning an amalgamation of two credit unions in British Columbia.

Although the transaction was undertaken for reasons other than tax optimization, it was in fact structured to obtain the best possible tax result. The seven-justice bench unanimously ruled against the taxpayer Envision.

The single entity that was formed following the amalgamation was Envision, which argued the transaction was not a "qualifying amalgamation" under the Income Tax Act (the Act). A qualifying amalgamation is a tax-deferred merger of the two qualifying entities.

Envision made this atypical argument to claim entitlement to an inflated capital cost allowance (CCA) amount on depreciable assets, since it would therefore not have to account for deductions made by its predecessor entities.

Qualifying amalgamations are found in section 87 of the Act; they have three basic requirements:

            (a) All of the property of the predecessor corporations immediately before the merger must become property of the amalgamated corporation (“Amalco”) by virtue of the merger;

            (b) All of the liabilities of the predecessor corporations immediately before the merger must become liabilities of Amalco by virtue of the merger; and

            (c) All of the shareholders, who owned shares of the capital stock of any predecessor corporation immediately before the merger, must receive shares of the capital stock of Amalco because of the merger. 

If those requirements are met, the Act operates in a manner that essentially flows‑through certain tax attributes of the entities while ignoring others. The tax implications of non‑qualifying amalgamations are not specified in the Act.

The Honourable Justice Rothstein stated at paragraph 35 that “protection for creditors is a key issue in an amalgamation”. All of the judges agreed that amalgamations are not intended to permit corporations to split liabilities from assets, and that was really the crux of this decision.

This decision is a welcome response in the uncertainty of some aspects of the law following the Federal Court of Appeal’s decision earlier in the proceedings. This final judgment is a clear and unequivocal answer to the legality of the transaction attempted by Envision.