What are the tax effects when two of my client's corporations amalgamate under section 87?
In Canada, a qualifying section 87 amalgamation of taxable Canadian corporations is tax deferred: each predecessor's year ends immediately before the merger, and the new corporation inherits its losses, UCC, cost of property, CDA, GRIP and, if private, RDTOH. Shareholders roll their shares at cost under 87(4). The price is a short final year and one more T2.
Which tax accounts carry over to the amalgamated corporation?
Almost all of them. Subsection 87(2) deems the merged entity a new corporation and then carries each predecessor's tax attributes into it, paragraph by paragraph laws-lois.justice.gc.ca.
| Account | What the new corporation gets | ITA |
|---|---|---|
| Non capital and net capital losses | Treated as a continuation of each predecessor for loss rules | 87(2.1) |
| UCC and capital cost of depreciable property | The predecessor's capital cost and UCC | 87(2)(d) |
| Other capital property | Cost equal to the predecessor's ACB | 87(2)(e) |
| Inventory | Acquired at the value the predecessor used for its last year | 87(2)(b) |
| Reserves | Deemed deducted by the new corporation in the prior year, so they come back into income | 87(2)(g) |
| Capital dividend account | Treated as a continuation of each predecessor | 87(2)(z.1) |
| Eligible and non eligible RDTOH | Added to the new corporation's pools, only if it is a private corporation right after the merger | 87(2)(aa) |
| GRIP | Added under 89(5), only if the new corporation is a CCPC in its first year | 87(2)(vv) |
| Paid up capital | Capped at the predecessors' total PUC | 87(3) |
Two conditions in that table catch people. RDTOH only survives if the new corporation is private immediately after the merger, and GRIP only if it is a CCPC in its first year laws-lois.justice.gc.ca. For how each pool works on its own, see the capital dividend account, RDTOH and GRIP pages.
What does the deemed year end cost your client?
Under 87(2)(a), every predecessor's taxation year ends immediately before the amalgamation, and the new corporation's first year starts at that moment laws-lois.justice.gc.ca. The CRA's folio says these short years matter for CCA and for how long the new corporation can use predecessor losses
canada.ca. They also shrink the small business deduction: a CCPC with a year shorter than 51 weeks gets its $500,000 business limit prorated by days over 365 under 125(5)(b)
laws-lois.justice.gc.ca.
Worked example. Opco has a December 31 year end and amalgamates with its sister Realco effective July 1, 2026. Opco claims the whole business limit for the group, because Realco earns no active business income.
| Period | Days | Business limit |
|---|---|---|
| Opco final year: January 1 to June 30, 2026 | 181 | $500,000 × 181 ÷ 365 = $247,945 |
| New corporation first year: July 1 to December 31, 2026 | 184 | $500,000 × 184 ÷ 365 = $252,055 |
| Calendar 2026 total | 365 | $500,000 |
The two limits add back to $500,000 only because the new corporation chose December 31. Pick a first year end of March 31, 2027 instead and that year runs 274 days, for a limit of $500,000 × 274 ÷ 365 = $375,342.
The loss clock moves too. Non capital losses carry forward 20 taxation years laws-lois.justice.gc.ca, and that count is in years, not calendar time. An Opco loss from its 2024 year now sees two taxation years end in 2026 (the June 30 short year and the new corporation's December 31 year), so its last usable year ends in 2043 instead of 2044. The non capital loss carryover page has the full rule.
Opco's final return is due six months after June 30, so by December 31, 2026 laws-lois.justice.gc.ca. The CRA also warns that instalments can change after an amalgamation and that a special rule sets the balance due day and business limit
canada.ca.
How do vertical and horizontal amalgamations differ?
A vertical amalgamation merges a parent with one or more wholly owned subsidiaries. A horizontal one merges sister corporations owned by the same parent or shareholders. Some corporate statutes allow either as a short form amalgamation, where the new corporation issues no shares canada.ca.
| Issue | Vertical (parent and wholly owned sub) | Horizontal (sisters) |
|---|---|---|
| Bump in cost of the sub's capital property | Available under 87(11), designated in the first T2 | Not available |
| Carry a new loss back to a predecessor year | Yes, against the parent's income, 87(2.11) | Generally no, 87(2.1) |
| Old shares not cancelled | Deemed shares of the new corporation, 87(1.1) | Same rule for sister subs of one parent, 87(1.1) |
| Parent's shares of the sub | Deemed disposed of under 87(11)(a), using 88(1)(b) proceeds | Not applicable |
The 87(11) bump lets the new corporation step up the cost of the subsidiary's non depreciable capital property when the parent's ACB in the sub shares is higher than the sub's tax cost of its assets, and the CRA expects the designation in the new corporation's first return canada.ca. It borrows its math from the winding up rules; the section 88 wind up page walks through the bump limits and ineligible property.
On losses, the folio is direct: 87(2.1) lets the new corporation use predecessor losses but generally does not let its own losses go back to a predecessor year. The exception is 87(2.11), which treats the new corporation as the parent for section 111 in a vertical merger, so a loss after the merger can reduce the parent's income from before it canada.ca.
What happens to the shareholders of the predecessors?
A shareholder who gets only new shares is deemed to dispose of the old shares for their ACB and to acquire the new shares at that same total cost, so no gain or loss arises under 87(4) laws-lois.justice.gc.ca. The cost is spread over the new share classes by fair market value
canada.ca.
Cash breaks the rollover only in small ways. Cash in place of a fractional share of $200 or less can be reported as a gain or loss or applied against ACB, while a larger amount over the fractional share's PUC can be a deemed dividend. A dissenting shareholder paid out in cash doesn't disqualify the amalgamation for everyone else canada.ca.
Watch two things in the reorg memo. First, 87(3) caps the new corporation's total PUC at the predecessors' total, and any grind is shared across all share classes. Second, 87(4) gives no rollover where the exchange shifts value to a related person as a benefit, which is the same trap as the gift portion in a section 85 rollover canada.ca.
When does an amalgamation fall outside section 87?
Section 87 applies only to a merger of two or more taxable Canadian corporations (Canadian corporations not exempt from Part I tax) in which all property and all liabilities of the predecessors pass to the new corporation, and the predecessors' shareholders receive shares of the new corporation canada.ca. Receivables and payables between the predecessors, and shares one predecessor holds in another, are carved out of those tests
laws-lois.justice.gc.ca.
Miss a condition, for example by merging with a corporation that is not a Canadian corporation, and the result follows corporate law instead. The CRA's view is that the predecessors are then generally treated as having disposed of their property, and the 87(4) share rollover is gone canada.ca.
What do you file with the CRA after the merger?
Send the certificate of amalgamation or court order to the tax centre. The CRA then updates the old business numbers and may register a new one; to keep one of the old BNs, write to the CRA saying which number to keep canada.ca.
Each predecessor files a final T2 for the period ending immediately before the effective date and answers yes at line 076. The new corporation answers yes at line 071 on its first return, completes lines 031 to 038 and files Schedule 24, and its first year can't run longer than 53 weeks from the amalgamation canada.ca.
When the old year ends and the new one starts on the same day, enter hours and minutes. The CRA's example has two predecessors amalgamating at 09:44 on January 15, 2025: each reports a year end of 09:43 and the new corporation a start of 09:44 canada.ca. The guide adds that the CRA can't accept a final return for a period ending before any date other than the effective date of amalgamation.
Sources
Does an amalgamation count as an acquisition of control?
Not by itself. Paragraph 256(7)(b) says control isn't acquired merely because of the merger, but a person or group that controls the new corporation and did not control a predecessor beforehand is deemed to have acquired control of that predecessor just before the amalgamation laws-lois.justice.gc.ca. That brings the loss restrictions in 111(4) and (5) and can add another deemed year end under 249(4)
canada.ca.
Can the new corporation choose a different year end from the predecessors?
Yes. The new corporation picks its own fiscal period, but the first year can't exceed 53 weeks from the amalgamation canada.ca. Choosing a year end that leaves it under 51 weeks prorates the business limit again, as in the example above.
Does the new corporation get a full year of CCA in a short first year?
No. The folio says the new corporation's CCA claims must be prorated when its first taxation year is shorter than 12 months, and it flags the predecessors' short final years as a CCA issue too canada.ca. The half year rule generally still applies to additions unless the conditions in Regulation 1100(2.2) are met.
Is a wind up under section 88 a better route than amalgamating a subsidiary?
It depends on the year end. Both move a wholly owned sub into its parent on a rollover, and 87(11) borrows the wind up bump rules, but an amalgamation also ends the parent's taxation year because the parent is a predecessor laws-lois.justice.gc.ca. Compare the two on the section 88 wind up page before you pick one.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.