Corporate Tax Planning for Mergers and Acquisitions in Ontario

# Corporate Tax Planning for Mergers and Acquisitions in Ontario

Mergers and acquisitions represent critical inflection points for Canadian businessesopportunities that can unlock significant value when structured correctly or trigger devastating tax consequences when poorly planned. For business owners and CFOs navigating M&A transactions in Ontario, understanding the tax implications is not optional; it’s essential to preserving deal value and avoiding costly surprises.

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

At Insight Accounting CPA, our team works with businesses throughout Mississauga, Toronto, and the Greater Toronto Area to structure M&A transactions that maximize tax efficiency while maintaining CRA compliance. Whether you’re acquiring a competitor, merging with a strategic partner, or preparing your business for sale, proactive tax planning can mean the difference between a successful transaction and a costly mistake.

Understanding the Tax Framework for M&A Transactions in Canada

Canadian M&A tax planning operates within a complex framework governed by the Income Tax Act, provincial legislation, and CRA administrative positions. The core principle: structure determines outcomes. Two seemingly identical transactions can generate dramatically different tax results based solely on how they’re structured.

Asset Purchase vs Share Purchase: The Fundamental Choice

The asset-versus-share decision represents the most critical tax fork in any M&A transaction. Each structure creates distinct tax consequences for buyers and sellers.

Asset Purchase Benefits for Buyers:

• Step-up in tax basis of acquired assets to fair market value

• Enhanced depreciation deductions through higher UCC balances

• Ability to cherry-pick specific assets and avoid unwanted liabilities

• No assumption of target company’s historical tax issues

Asset Purchase Drawbacks for Sellers:

• Full recapture of CCA on depreciable assets

• Realization of capital gains on eligible capital property

• Potential loss of capital gains exemption eligibility

• Double taxation risk on corporate-level gain plus shareholder distribution

Share Purchase Benefits for Sellers:

• Access to lifetime capital gains exemption (currently $1,016,836 for QSBC shares in 2026)

• Single level of taxation at shareholder level

• Deferral opportunities through share exchange provisions

• Cleaner transaction structure

Share Purchase Drawbacks for Buyers:

• No step-up in underlying asset tax basis

• Assumption of all known and unknown corporate liabilities

• Inherited tax attributes (loss carryforwards, CDA, RDTOH)

• Due diligence complexity and risk

For Ontario businesses, the buyer-seller tension is real. Buyers typically prefer asset purchases for tax efficiency; sellers prefer share sales to access capital gains treatment. Successful deals require creative structuring to bridge this gapoften through price adjustments, earnouts, or hybrid structures.

Tax Deferral Mechanisms: Preserving Capital for Growth

Smart acquirers don’t just focus on purchase pricethey optimize the timing and character of tax recognition. Several Income Tax Act provisions enable tax-deferred M&A transactions when properly structured.

Section 85 Rollover: Tax-Deferred Share Exchanges

Section 85 of the Income Tax Act allows shareholders to transfer property (including shares) to a Canadian corporation in exchange for shares of the acquiring company on a tax-deferred basis. This powerful tool enables:

Key Section 85 Applications in M&A:

• Target shareholders receive acquirer shares without immediate tax

• Elected amount becomes the proceeds of disposition and cost base to acquirer

• Tax liability deferred until eventual disposition of acquirer shares

• Flexibility to partially realize gains through boot (non-share consideration)

Critical Section 85 Requirements:

• Target property must be eligible (shares, depreciable property, certain other capital property)

• Elected amount must fall within prescribed range (ACB elected amount FMV)

• Election must be filed with CRA within prescribed timelines

• Both transferor and transferee must agree on elected amount

For GTA businesses structuring tax-efficient acquisitions, Section 85 often serves as the foundation. However, execution matters: missed filing deadlines or incorrect elected amounts can destroy the tax deferral and create unintended consequences.

Section 86 Share Reorganization: Pre-Transaction Planning

Before an M&A transaction, sellers often use Section 86 to reorganize their share capitalexchanging common shares for preferred shares or creating different share classes. This enables:

• Estate freeze structures that lock in current value for senior generation

• Income splitting opportunities with family members (subject to TOSI rules)

• Capital gains crystallization to utilize lifetime exemption before sale

• Price adjustment mechanisms through retractable preferred shares

Ontario business owners planning for sale should consider Section 86 reorganizations at least 12-24 months before entering serious M&A discussions. Rushed pre-sale reorganizations invite CRA scrutiny and potential GAAR challenges.

Section 87 Amalgamation: Combining Entities Tax-Free

When two or more Canadian corporations merge, Section 87 provides for tax-deferred amalgamation. The resulting amalgamated company (Amalco) inherits the tax attributes of its predecessors, including:

• Loss carryforwards (subject to streaming rules and acquisition of control limitations)

• Capital dividend account (CDA) balances

• Refundable dividend tax on hand (RDTOH)

• Scientific research expenditures and investment tax credit pools

Amalgamations offer clean, tax-efficient consolidation for groups of related companies or post-acquisition integration. However, timing matters: loss carryforward restrictions apply when control changes occur, potentially limiting the value of acquired losses.

Cross-Border M&A: Navigating International Tax Complexity

When Ontario businesses acquire US targets or foreign companies acquire Canadian businesses, cross-border tax considerations multiply exponentially.

Inbound Acquisitions: Foreign Buyers Acquiring Canadian Companies

Foreign buyers of Canadian businesses face several Canada-specific tax issues:

Section 116 Compliance:
When a non-resident sells Canadian property (including shares of private corporations if 50%+ of value derives from Canadian real estate), the buyer must withhold 25% of the purchase price unless the seller obtains a Section 116 clearance certificate from CRA. Failure to withhold creates joint and several liability for the buyer.

Thin Capitalization Rules:
Foreign parent companies must carefully structure acquisition financing to avoid thin capitalization rules that deny interest deductibility when debt-to-equity ratios exceed 1.5:1. Excessive related-party debt can trigger interest recharacterization as dividends.

Transfer Pricing:
Post-acquisition intercompany transactions (management fees, royalties, transfer pricing for goods/services) must comply with arm’s length standards. CRA increasingly scrutinizes cross-border related-party arrangements, and transfer pricing documentation is essential.

Outbound Acquisitions: Canadian Companies Buying Foreign Targets

Canadian buyers acquiring US or international targets face different challenges:

Foreign Accrual Property Income (FAPI):
Canadian-controlled foreign affiliates that earn passive income (interest, royalties, rents) may trigger immediate Canadian taxation under FAPI rules, even without repatriation. Proper structuring can minimize FAPI exposure.

Foreign Tax Credit Planning:
Canadian corporations can claim credits for foreign taxes paid, but “baskets” and limitations apply. Poor planning can result in unrelieved foreign taxes that reduce after-tax returns.

Financing Structure:
Whether to fund foreign acquisitions through Canadian parent debt, foreign subsidiary equity, or hybrid instruments significantly impacts global tax efficiency. Advance planning with experienced tax planning advisors is critical.

Due Diligence: Identifying and Quantifying Tax Risks

Every M&A transaction carries hidden tax risks. Comprehensive tax due diligence uncovers potential liabilities before they become buyer obligations.

Critical Tax Due Diligence Areas

Income Tax Compliance History:

• Review all filed corporate tax returns (T2) for at least past three years

• Verify payment of all taxes, interest, and penalties

• Identify open audit years and CRA audit history

• Assess quality of tax positions taken (aggressive vs conservative)

GST/HST Compliance:

• Confirm timely filing and payment of GST/HST returns

• Review input tax credit claims for supportability

• Identify potential reassessment exposure from CRA GST audits

• Verify proper registration and collection on all taxable supplies

Payroll Tax Compliance:

• Audit source deductions (income tax, CPP, EI) for accuracy and timeliness

• Review T4/T4A reporting for compliance

• Assess worker classification (employee vs contractor) for exposure

• Confirm Workers’ Compensation Board (WSIB) compliance

Tax Attributes and Timing Items:

• Quantify non-capital loss and capital loss carryforwards

• Verify eligibility and amount of investment tax credits (SR&ED, apprenticeship)

• Identify timing differences and potential reassessment adjustments

• Assess quality of CDA and RDTOH calculations

Indirect and Other Taxes:

• Review property tax assessments and appeals

• Identify transfer tax exposure (land transfer tax, securities transfer tax)

• Assess commodity tax compliance for manufacturers

• Verify import/export compliance for international businesses

For Mississauga businesses, working with experienced M&A tax advisors during due diligence can identify issues earlyenabling deal repricing, escrow arrangements, or indemnification provisions that protect buyer interests. At Insight Accounting CPA, our CFO advisory services include comprehensive tax due diligence for middle-market transactions throughout Ontario.

Post-Acquisition Integration: Preserving Tax Attributes

Closing the deal is only the beginning. Post-acquisition tax planning determines whether anticipated synergies materialize.

Loss Utilization Strategies

When acquiring companies with tax loss carryforwards, buyers must navigate acquisition of control (AOC) rules that restrict loss utilization:

AOC Triggered Limitations:

• Non-capital losses only deductible against income from same or similar business

• Net capital losses expire immediately on control change (limited carryback possible)

• Accrued but unrealized losses deemed realized on control change

• Restricted farm losses subject to similar business tests

Strategies to Preserve Loss Value:

• Structure transactions to avoid control change (less than 50% ownership)

• Acquire assets rather than shares (losses remain with seller but don’t assist buyer)

• Time transaction to occur after target realizes losses against current year income

• Maintain target as separate legal entity operating same business

Integration vs Standalone Operation

Whether to amalgamate acquired companies or maintain separate legal entities involves tax tradeoffs:

Benefits of Amalgamation:

• Simplified tax compliance (single T2 return)

• Ability to offset profits and losses across combined operations

• Consolidated reporting for financial statement purposes

• Administrative cost savings

Benefits of Maintaining Separate Entities:

• Preservation of loss carryforwards subject to AOC restrictions

• Flexibility to sell portions of acquired business in future

• Limited liability segregation by business line

• Potential small business deduction multiplier (subject to associated company rules)

Ontario businesses should model both approaches before making irreversible integration decisions. The optimal structure depends on specific facts, including quantum of losses, business similarity, and future strategic plans.

Special Considerations for Ontario M&A Transactions

Small Business Deduction Planning

The federal small business deduction (currently 9% rate vs 15% general rate) provides significant tax savings for Canadian-controlled private corporations (CCPCs) earning up to $500,000 annually. However, associated company rules require affiliated corporations to share this $500,000 limit.

Post-Acquisition SBD Planning:

• Determine whether acquired companies will be associated with acquirer

• Plan allocation of $500,000 limit among associated group

• Consider push-down of acquisition debt to reduce active business income

• Evaluate holding company structures to avoid association

Capital Dividend Account Optimization

Private company M&A transactions often generate capital dividend account (CDA) balancesthe tax-free portion of capital gains realized. Smart structuring enables tax-free distributions to shareholders:

CDA Utilization Strategies:

• Pay capital dividends to Canadian resident shareholders before or after closing

• Transfer CDA balances through amalgamation

• Utilize CDA to extract post-transaction value tax-efficiently

• Coordinate with RDTOH planning for optimal shareholder distributions

For GTA business owners, maximizing CDA utilization can save 40%+ in personal taxes on post-transaction distributionsa significant wealth preservation opportunity.

AI-Powered Tax Compliance and Monitoring

As part of our patent-pending AI governance framework, Insight Accounting CPA integrates advanced technology into M&A tax planning and post-transaction monitoring. Our Accounting Intelligence approach enables:

• Automated identification of tax attribute changes requiring attention

• Real-time compliance monitoring across acquired entities

• Predictive modeling of tax positions and exposure quantification

• Continuous CRA audit risk assessment across merged operations

This technology-enabled approach, combined with deep technical expertise, gives our Mississauga and Toronto clients confidence that tax opportunities are captured and risks are managed proactively.

Selecting the Right M&A Tax Advisor in the GTA

M&A transactions represent high-stakes events where tax planning directly impacts deal economics. The complexity demands specialized expertise.

What to Look for in an M&A Tax Advisor

Transaction Experience:
Look for advisors with demonstrable experience structuring deals in your industry. Generic tax knowledge isn’t enoughyou need someone who understands your business model, typical deal structures, and industry-specific tax issues.

Technical Depth:
M&A tax planning requires mastery of specialized Income Tax Act provisions (Sections 85, 86, 87, 88, etc.) that don’t arise in day-to-day compliance work. Verify your advisor’s technical credentials and continuing education.

Collaborative Approach:
Successful M&A tax planning requires coordination with legal counsel, investment bankers, and other deal advisors. Choose advisors who work effectively in multidisciplinary teams and communicate complex issues clearly.

CRA Relationships:
Experienced M&A tax advisors maintain constructive relationships with CRA and understand how to position transactions to minimize audit risk and successfully defend positions if challenged.

At Insight Accounting CPA, we’ve guided dozens of Ontario business owners through successful M&A transactionsfrom $2 million local acquisitions to $50 million cross-border deals. Our team combines technical excellence, transaction experience, and practical business judgment to deliver tax-efficient outcomes. Learn more about our approach on our About page.

Frequently Asked Questions

Q: What’s the difference between an asset sale and a share sale for tax purposes in Ontario?

A: In an asset sale, the buyer acquires specific assets and liabilities, typically receiving a step-up in tax basis to fair market value, which generates higher future depreciation deductions. The seller realizes income on the sale (including recapture and capital gains), and shareholders face double taxation if proceeds are distributed. In a share sale, the buyer acquires the corporation itself with no step-up in underlying assets, but the seller often qualifies for capital gains treatment and potential lifetime capital gains exemption, resulting in significantly lower taxes. The choice dramatically impacts both parties’ after-tax proceeds.

Q: Can I defer taxes when selling my Ontario business?

A: Yes, several mechanisms enable tax deferral. Section 85 rollovers allow you to exchange your business shares for shares of an acquiring corporation on a tax-deferred basis, postponing tax until you eventually sell the acquirer shares. This works well in share-for-share mergers or when an acquirer offers stock as consideration. Alternatively, proper structuring with earnouts, promissory notes, or vendor take-back financing can spread tax recognition over multiple years. The optimal approach depends on your specific situation and goals.

Q: How do I protect myself from the target company’s historical tax liabilities when buying a business?

A: Comprehensive tax due diligence is essential. Engage experienced tax advisors to review historical tax returns, audit CRA reassessment exposure, and identify potential compliance issues. Based on findings, negotiate appropriate purchase price adjustments, escrow holdbacks, and seller indemnification provisions. For higher-risk situations, consider purchasing assets rather than shares (which generally insulates the buyer from seller’s historical tax liabilities). Representations, warranties, and indemnification clauses in the purchase agreement should specifically address tax matters with appropriate caps, baskets, and survival periods.

Q: What happens to loss carryforwards when I acquire a company?

A: Acquisition of control (AOC) triggers significant restrictions on loss utilization. Non-capital losses can only be used against income from the same or similar business carried on after the acquisition, and only if that business is carried on with reasonable expectation of profit. Net capital losses generally expire on AOC (though a limited carryback is possible). Additionally, any accrued but unrealized losses on property must be recognized at the time of AOC. Careful structuringsuch as maintaining less than 50% ownership, acquiring assets instead of shares, or timing the transaction strategicallycan help preserve loss value. This area is highly technical and requires expert advice.

Take Action: Strategic M&A Tax Planning for Your Ontario Business

Whether you’re pursuing an acquisition, considering a merger, or preparing your business for sale, proactive tax planning is essential to maximizing value and minimizing risk. The tax implications of transaction structure, timing, and integration decisions can easily represent millions of dollars in your ultimate outcome.

Insight Accounting CPA provides comprehensive M&A tax advisory services to businesses throughout Mississauga, Toronto, and the Greater Toronto Area. Our team brings deep technical expertise, transaction experience, and practical business judgment to every engagement.

Ready to discuss your M&A tax strategy? Contact Insight Accounting CPA today:

(905) 270-1873

Let us help you structure your transaction for optimal tax efficiency and long-term success.

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*Insight Accounting CPA Professional Corporation provides expert tax planning, M&A advisory, and strategic financial services to businesses throughout Mississauga, Toronto, and Ontario. Our patent-pending AI governance framework and Accounting Intelligence approach deliver sophisticated insights with personalized service.*