In mergers and acquisitions, preparation is everything. The right elections and structure can preserve millions, while the wrong move can create unexpected tax and compliance exposure. To help businesses successfully navigate M&A tax planning, we’ve compiled our top 7 M&A Tax Planning Tips For Canadian Business Leaders.
Preserve the Lifetime Capital Gains Exemption (LCGE)
With a CAD $1.25 million limit for 2026, the LCGE remains one of the most valuable exit tools for preserving wealth tied up in qualifying small business corporation (QSBC) shares. Eligibility depends on share ownership continuity and the corporation meeting the active‑business asset tests for the required period.
Early planning is essential to preserve QSBC status and avoid disqualification from excess cash, passive investments or non‑qualifying activities. If excess cash or investments threaten QSBC status, consider purification strategies long before a sale, such as paying a dividend, transferring passive assets to a holding company, or restructuring operations under a new entity.
Use a Section 85 Rollover to Defer Tax on Transfers to a Corporation
Section 85 allows individuals, trusts or corporations to transfer eligible property to a taxable Canadian corporation on an elected amount between tax cost and fair market value (FMV), deferring immediate gains when done correctly. The election requires careful valuation, joint filing (T2057) and attention to anti‑avoidance rules. Be sure to prepare asset lists, supporting valuations and draft T2057 schedules early so the elected amounts can be negotiated alongside price and share structure.
3️⃣ Share Sale vs. Asset Sale: Know What You're Negotiating
Buyers typically prefer asset purchases to obtain a tax basis step‑up and avoid legacy liabilities. Sellers usually prefer share sales because capital gains treatment applies at a 50% inclusion rate, and qualifying shares can access the LCGE.
Each structure affects GST/HST, recapture of CCA, and the allocation of purchase price between capital and inventory. Negotiation should therefore include a tax allocation schedule and indemnities that reflect the chosen structure. When a buyer insists on an asset deal, sellers can often negotiate a higher price or a tax gross‑up to offset double taxation and recapture exposure.
4️⃣ GST/HST: Use Election 167 For Going‑Concern Transfers
When a purchaser acquires substantially all assets necessary to continue the business, and both parties are GST/HST registrants, a joint Election 167 can treat the transfer as a non‑taxable supply for GST/HST purposes. Filing Form GST44 on time avoids the purchaser having to pay GST/HST and then claim input tax credits, improving cash flow and simplifying closing mechanics. Note that certain supplies and post‑closing services remain taxable even with the election.
5️⃣ Consider an Amalgamation
An amalgamation can convert two or more corporations into a single new corporation on a tax‑deferred basis under subsection 87, preserving tax cost continuity and many corporate tax attributes. This can be a useful tool for simplifying group structures before or after a sale.
Qualifying amalgamations generally treat the new corporation as a continuation of the predecessors for most Income Tax Act purposes, which preserves loss pools, the Capital Dividend Account, and other accounts that affect post‑deal extraction and tax exposure.
Be sure to model the tax and commercial tradeoffs before committing to the structure. Timing can create a deemed year‑end that affects loss carryforwards and tax attributes. Amalgamations can also block a buyer’s preferred step‑up or complicate the availability of the LCGE.
6️⃣ The 88(1)(d) Cost Bump
The 88(1)(d) “cost bump” is a narrow opportunity to increase the tax cost of assets on a wind‑up where the parent’s outside basis exceeds the subsidiary’s inside basis. It effectively reduces potential capital gains by allowing the parent to use its higher cost base of the subsidiary’s shares (outside basis) to increase the tax basis of the assets (inside basis), up to their FMV at the time control was acquired. Implementation requires precise timing and compliance with the Income Tax Act and CRA folios.
7️⃣ Don't Overlook the Capital Dividend Account
The CDA determines how much of the sale proceeds can be paid out to shareholders as tax‑free capital dividends. Be sure to confirm the corporation’s CDA balance and the events that will change it before closing. Coordinate the timing of gain crystallization and any life‑insurance receipts with closing mechanics so the untaxed portion of gains sits in the selling corporation (or an appropriate holding company) when the capital dividend election is filed.
Final Thoughts
M&A tax planning affects the numbers on the term sheet and the cash on the table. These tips and tax strategies can help owners optimize deal value and post‑closing outcomes. Business leaders looking to maximize after‑tax proceeds and speed up closing need a tailored M&A tax plan in place. Reach out to our expert team to map your options.
This article was written by NVS Professional Corporation, your knowledgeable Barrie, Markham and Burlington accountants. The content is intended as a general guide for informational purposes only. For specialist advice tailored to your specific situation, please reach out to our expert team.
About the Author: Vick Vij, CPA, CA, LPA, is a Founding Partner and Head of Tax at NVS Professional Corporation, with over 25 years of experience in Canadian tax and financial advisory. Before co-founding NVS, Vick built his career at a Big Four multinational accounting firm, developing the depth of expertise that now shapes his strategic approach to tax planning for businesses across Canada. As a Chartered Professional Accountant and Licensed Public Accountant, Vick advises entrepreneurs, corporations, and investors on corporate tax structuring, compliance, cross-border real estate, and capital asset strategy. His thought leadership cuts through the complexity of Canadian tax law, delivering practical, actionable insights that help business owners and finance professionals stay ahead of their obligations and make smarter financial decisions.
