Two companies in one group rarely need two sets of filings. The Act gives you two ways to collapse them: an amalgamation under section 87, or a windup under section 88. Canadian tax rules defer the gain on both routes, so the tax consequences turn on timing rather than on the size of the bill. This guide covers what each route does to losses, tax cost and paperwork, so you can tell whether an amalgamation or a dissolution fits before the lawyers start drafting.
Key Takeaways
- Section 87 creates a new corporation for tax purposes, with a deemed year-end for every predecessor.
- Section 88 leaves the parent standing and dissolves the company below it.
- Losses move on both routes, but winding up delays them until the parent’s next fiscal year.
- The cost bump on non-depreciable capital property is available either way, within limits.
- Corporate law, not tax, drives most of the cost difference.
How an Amalgamation Works Under Section 87
Subsection 87(1) treats a merger of two or more corporations as tax-deferred only when three things are true. Every merging company was a taxable Canadian corporation immediately before the amalgamation. All of the predecessor corporations’ property and liabilities become property and liabilities of the combined company. And their shareholders receive shares of a corporation formed on the merger as consideration.
Get those right and the combined company, usually called Amalco, is treated as a continuation of each predecessor. It is also a new corporation whose first tax year starts at the merger, and each predecessor’s year is deemed to end immediately before it. Every predecessor therefore files a final income tax return. Under corporate law the surviving corporation is considered a continuation of the predecessors, which is why licences and contracts carry on, while tax law takes the opposite view and treats it as a new corporate entity.
Two shapes are common. A horizontal merger combines sister companies owned by the same shareholders. A vertical one combines a parent with the company beneath it. Both shapes fall under section 87, and both are routine steps when a group has grown past the structure it was first incorporated with in Ontario.
How a Winding-Up Works Under Section 88
Section 88 runs the other direction. Where a parent corporation owns at least 90% of the issued shares of each class of a subsidiary, subsection 88(1) lets the property of the corporation below move up at cost amount. No gain is realized, the parent inherits the tax attributes, and the lower-tier company files a final return before it is dissolved. Parent and subsidiary each keep their own tax accounts until that day. Property distributed to the parent keeps its old tax cost, so nothing is triggered on the way up.
The 90% test is the whole ballgame. Miss it and the application of subsection 88(2) follows instead: property moves at fair market value, and the shareholders trigger a deemed dividend on the distribution. That is a rollover in name only, which is why the minority shares of the subsidiary usually get bought in first. Section 88 sets out both paths.
Subsection 84(2) reaches further still. Where funds or property of a corporation are distributed or otherwise appropriated to shareholders on the winding-up, discontinuance or reorganization of its business, the excess over paid-up capital is taxed in their hands. Undocumented distributions out of a company being collapsed are exactly what that provision was written to catch.
Loss Carryforwards After an Amalgamation vs a Wind-Up
Here is where the routes separate. Under subsection 87(2.1), Amalco inherits each predecessor’s non-capital and capital losses and can claim them in its first year. Under subsections 88(1.1) and 88(1.2), a subsidiary’s losses only reach the parent for a taxation year commencing after the winding-up began. That is up to a full year of waiting.
What the delay costs. Holdco has a December 31 year-end and earns $250,000 of active income above the group’s small business limit. Opco carries $400,000 of unused non-capital losses. Merge the two on March 31 and Amalco applies those losses against that same year’s income. Dissolve Opco on the same date and the losses wait for Holdco’s year starting January 1, deferring roughly $66,000 of tax at Ontario’s 26.5% general corporate rate.
Acquisition of control is the other trap. Where control of a company changes, subsection 111(5) limits its non-capital losses to income from the same or a similar business, and net capital losses expire outright. Neither route repairs that, so test it before you pick a structure. Neither route erases an existing assessment either, so open tax disputes travel with whichever company survives.
The Section 88 Bump on Non-Depreciable Property
Paragraphs 88(1)(c) and (d) let the parent increase the tax cost base of certain non-depreciable capital property it receives, most often land, shares or partnership interests. The room available is capped by the parent’s gain on the subsidiary’s shares and by each property’s fair market value when control was acquired. Depreciable property, inventory, and Canadian or foreign resource property are excluded, along with a long list of ineligible property. Which assets qualify is governed by subsection 88(1) itself.
Owners often assume the bump is a reason to dissolve rather than merge. It is not. The rules under subsection 87(11) apply the same paragraphs to a vertical merger, so a parent that amalgamates with its subsidiary can bump the same assets. CRA sets out the mechanics in Income Tax Folio S4-F7-C1.
| Question | Section 87 merger | Section 88 dissolution |
|---|---|---|
| Who survives | A new corporation continuing both | The parent only |
| Deemed year-end | Yes, for every predecessor | For the subsidiary only |
| Losses usable | Amalco’s first year | Parent’s next full fiscal year |
| Ownership needed | None; sister companies qualify | Parent must hold at least 90% |
| Cost bump | Available on a vertical merger | Available under 88(1)(d) |
| Contracts and licences | Usually continue automatically | Often need assignment |
Articles of Amalgamation vs Voluntary Dissolution
Corporate law drives most of the cost gap. From a corporate law perspective you file articles under a federal or provincial statute, such as the Ontario Business Corporations Act or the Canada Business Corporations Act, and receive a certificate of amalgamation. The combined company then keeps every contract, lease, licence and bank security the predecessors held. Short-form mergers of wholly owned companies need only director resolutions, which is why they are inexpensive.
The dissolution of a corporation runs slower. You pass the resolutions, settle or assign every liability, ask the Canada Revenue Agency for a clearance certificate on Form TX19 before the final distribution, then file articles of dissolution. Directors who distribute property before that certificate arrives can be assessed personally for the company’s unpaid tax. Counsel handles the statutory filings, but the year-end modelling should come first.
Choosing Between Amalgamation and Wind-Up
From a tax perspective, use section 87 when you need the losses this year, when contracts or licences would be painful to assign, or when both companies are active and you want a single continuing entity. Buyers who acquire a target through a share purchase rather than an asset purchase often merge it into the acquiring company shortly after closing for exactly that reason.
Use section 88 when the parent holds the history you want to keep, such as payroll accounts, GST/HST registration and lender relationships held by the parent, and when the business of the corporation below has already wound down. Groups built around a holding company structure usually fall into this camp, because the holdco is the entity everyone banks with.
In our corporate tax planning work, the deciding factor is rarely the tax rules. It is the deemed year-end. Corporate reorganizations timed mid-year hand each predecessor a short tax year, and the $500,000 small business limit is prorated by days over 365. A corporation may therefore lose more than half its limit in the year of the merger, which can push income into the general rate in a year nobody planned for. Two reorganizations within a short period compound the same problem. Choosing an effective date that lands on an existing year-end costs nothing and removes it entirely.
Frequently Asked Questions
What are the two types of amalgamation in Canada?
Horizontal and vertical. A horizontal merger combines sister companies with the same shareholders, and a vertical one combines a parent with a company it owns. Corporate statutes add a second split, short-form and long-form, which describes the approval process rather than the tax result.
Does a merger trigger a tax year-end?
Yes. Each predecessor’s tax year is deemed to end immediately before the merger, so each files a final T2 and the combined company starts a fresh one. Short years prorate the small business limit and capital cost allowance.
What happens to losses after a corporate merger in Canada?
Subsection 87(2.1) carries them into the combined company, which may claim them in its first year. Acquisition-of-control rules still apply, so merging cannot revive losses that subsection 111(5) has already restricted.
What is the difference between an amalgamation and a merger?
In Canada they describe the same transaction. “Merger” is commercial language, while the statutes use the technical term. A US-style merger where one company survives and the other disappears looks more like a wind-up here.
What is a corporate wind-up?
Winding up means distributing a corporation’s property to its shareholders and dissolving it. Where the parent holds at least 90% of each class, subsection 88(1) moves that property at cost amount instead of fair market value.
Do you need approval to amalgamate or dissolve?
No. Both routes are self-assessed, and you report the result on the affected T2 returns. A clearance certificate is different: directors should hold the final distribution until one is issued.
The Bottom Line
Both routes get you to one company without a tax bill. They differ in what survives, when losses become usable, and how much filing work sits between you and the result.
- Section 87 suits active companies that need losses now and hold contracts worth preserving.
- Section 88 suits dormant subsidiaries where the parent’s own history matters more.
- The 90% ownership test is a precondition, not a detail.
- Match the effective date to an existing year-end and you avoid a prorated small business limit.
Group structures rarely collapse cleanly on paper alone, because intercompany balances, minority shares and old loss years all change the answer. Professional advice on the effective date costs far less than unwinding a merger afterwards. Talk to our team before you commit to one.
