Merger, Amalgamation & Takeover: ACB Rules

When Company A acquires Company B, shareholders of B receive consideration in one of three forms:

The simplest case. Your shares are cancelled and you receive cash. This is a standard disposition:

• Proceeds of disposition = Cash received per share x number of shares
• Capital gain = Proceeds − Total ACB − Selling expenses
• Report on Schedule 3 in the year the deal closes (not when announced)

The disposition date is the day the deal officially closes and your shares are cancelled — not the announcement date, not the tender deadline, and not when you receive the cheque.

If you held shares in a non-registered account, ensure you use the correct ACB including all prior DRIP reinvestments, return of capital adjustments, and previous corporate actions.

Section 85.1 of the Income Tax Act provides an automatic tax-deferred rollover when:

• A Canadian public corporation (the acquirer) issues its own shares
• In exchange for shares of another Canadian public corporation (the target)
• The exchange is for shares of the same class (common for common)

When these conditions are met, the rollover is automatic — you don't need to elect or file anything special. Your old ACB transfers to the new shares:

Important limitations:

• Does NOT apply to cross-border deals (US acquirer buying Canadian company)
• Does NOT apply to private company acquisitions
• Does NOT apply if you receive shares of a class that didn't exist before (in some structures)
• The acquirer must be a taxable Canadian corporation

Most large takeovers offer a mix of cash and shares. The CRA requires you to allocate your ACB proportionally between the two components based on their fair market values:

Example: You hold 200 shares with ACB of $5,000 total. The deal offers $15 cash + 0.5 shares of AcquireCo (FMV $60/share = $30 per old share) per old share:

• Cash per share: $15; Share FMV per share: $30; Total consideration per share: $45
• Cash portion: $15/$45 = 33.3%; Share portion: $30/$45 = 66.7%
• ACB to cash: $5,000 × 33.3% = $1,667; Gain on cash: ($15 × 200) − $1,667 = $1,333
• ACB to new shares: $5,000 × 66.7% = $3,333; New shares: 200 × 0.5 = 100 shares at $33.33/share ACB

When the exchange ratio results in fractional shares, most acquirers pay cash-in-lieu for the fractional portion. This is treated as a small partial disposition:

• Calculate the ACB for the fractional share using the same per-share ACB
• The gain on the fraction = Cash-in-lieu received − ACB of fractional share
• Report this tiny gain on Schedule 3

Example: If you're entitled to 103.7 shares and receive 103 whole shares + cash for 0.7 shares, the cash-in-lieu for 0.7 shares is a disposition of that fraction.

An amalgamation under section 87 is when two or more companies merge into a new combined entity. Shareholders of both predecessor companies receive shares of the amalgamated company:

• Your shares in the predecessor are exchanged for shares of the new entity
• This is generally a tax-deferred rollover — ACB carries over
• The deemed cost of the new shares equals your ACB of the old shares
• The deemed proceeds of the old shares equals their ACB (no gain or loss)

This applies to legal amalgamations under corporate law (CBCA, OBCA, etc.) — not all business combinations labelled "mergers" are legal amalgamations.

When a US company acquires a Canadian company:

• Section 85.1 does NOT apply (the acquirer is not a Canadian corporation)
• If you receive only shares of the US company, this is generally a taxable disposition
• Some deals offer a section 85(1) election to defer the gain — check the company's letter to shareholders
• If a section 85 election is available, you must file it with your return by the deadline

Always check the company's circular/letter of transmittal for Canadian tax guidance. Large cross-border deals typically include a section explaining the Canadian tax treatment.

Our merger & takeover ACB calculator handles all three deal types:

• All-cash: enter your shares and ACB to see the capital gain
• All-shares: enter the exchange ratio and new share FMV to see your rolled-over ACB
• Mixed: enter both cash and share components to see the proportional allocation

Sched3 also handles mergers automatically when you import your broker data — it reads the corporate action, applies the correct allocation, and carries the new ACB forward.