Amalgamating and amalgamated company

When two or more companies merge, tax law needs clean names for each side. It uses two paired terms.

The amalgamating company is the one that disappears. There can be more than one. Each one merges away and stops existing on its own.

The amalgamated company is the one that survives. It absorbs every amalgamating company. It can also be a brand-new company, formed just to receive the merger.

So the direction is simple: the amalgamating company merges into the amalgamated company, never the other way round.

The label matters for tax. Shareholders of the amalgamating company get shares in the amalgamated company instead. What tax they owe on that swap depends on whether the merger counts as a genuine amalgamation, and not an ordinary sale dressed up as one.

For a merger to count as an amalgamation under the Income Tax Act, and for the amalgamating/amalgamated labels to trigger tax relief, three conditions from the Act's definition must all be met:

a) All the property of the amalgamating company (or companies) becomes the property of the amalgamated company, by virtue of the amalgamation. b) All the liabilities of the amalgamating company become liabilities of the amalgamated company. c) Shareholders holding not less than 75% in value of the shares in the amalgamating company become shareholders of the amalgamated company by virtue of the amalgamation — excluding shares the amalgamated company (or its subsidiary) already held before the merger.

A fourth requirement rules out disguised sales: the amalgamation must be otherwise than as a result of purchasing the amalgamating company's property, or as a result of distributing that property after winding up.

Once these are satisfied, allotment of the amalgamated company's shares to shareholders of the amalgamating company — in exchange for shares held as capital assets — is not treated as a "transfer" under Section 47(vii), so no capital gains tax arises at that point. Shares held as stock-in-trade are outside this protection; the exchange is taxed as business income.

Company A Ltd merges with Company B Ltd to form a new company, AB Ltd.

• A Ltd is the amalgamating company — it ceases to exist. Its property and liabilities all pass to AB Ltd.
• AB Ltd is the amalgamated company — the entity formed by, and receiving everything from, the merger.

Shareholders holding 80% in value of A Ltd's shares (comfortably above the 75% test) receive shares in AB Ltd in exchange for their A Ltd shares. Because all three conditions are met — property transferred, liabilities transferred, 75%-plus of shareholders carried across — this qualifies as an amalgamation under the Income Tax Act.

Mr X, one of those shareholders, held his A Ltd shares as a capital asset. His exchange for AB Ltd shares is not a taxable transfer at that point — no capital gains tax arises on receiving the new shares, only later when he eventually sells the AB Ltd shares (see the related /glossary/amalgamation entry for that computation).

Chapter 13 (Tax Provisions for Special Cases), section 13.5 — Taxation in case of Mergers & Acquisitions — defines amalgamating and amalgamated company as part of the statutory amalgamation test. Expect a question testing the 75% shareholder-value threshold, or asking which company in a given merger scenario is the amalgamating one and which is the amalgamated one.

• 75% is measured in value of shares, not number of shareholders.
• All three conditions — property, liabilities, 75% shareholders — must be met together for the merger to qualify as an amalgamation under the Act; a merger failing any one of them is taxed as an ordinary sale.
• The amalgamating company is the one that disappears; the amalgamated company is the one that remains or is newly formed — an easy pair to swap under exam pressure.
• Section 47(vii) protection applies only where shares are held as capital assets — stock-in-trade holders get no relief from tax at the exchange stage.