The target is first continued as a Nova Scotia corporation, a process that requires Ontario Finance's consent and takes about one week. A Nova Scotia Supreme Court judge in chambers must approve the application for amalgamation, generally supported by the approval of major creditors and an affidavit indicating that trade creditors will be paid in the ordinary course of business.
Judicial approval requires about two weeks.
Purchaseco is financed so that the acquisition is structured as 25 percent equity and 75 percent interest-bearing debt of Purchaseco, to avert the thin cap rules. Because Purchaseco is treated as a branch for US purposes, interest income paid to its shareholder is not taxable there. The interest deduction in Canada should compensate in part for the lack of a step-up in the Canadian tax cost of the assets. Because the target company is a flowthrough entity for US purposes, the purchaser has a stepped-up basis in the assets for US tax purposes. After Purchaseco acquires the target's shares, the two amalgamate, enabling interest on the debt to be deducted in calculating the Canadian taxable income of the target business in the amalgamated corporation.