Employers aren’t static or frozen in time. There is a constant turnover, as entrepreneurs start new businesses, as companies buy and sell existing operations or as entities merge or migrate from one ownership structure to another. Merger and acquisition are the terms generally used to describe such activities.

What impact do mergers and acquisitions have on payroll source deductions, particularly the Business Number (BN) used for T4 and ROE reporting, and on how CPP/EI YTD maximums are applied?

The problem with assessing the impact of mergers and acquisitions on T4 reporting is that these terms encompass at least 3 distinct types of transactions:

1. A purchase and sale of an existing business between two distinct legal entities;
2. A change in the ownership or control of an incorporated entity or partnership; and
3. A merger of one or more existing entities into a single, ongoing entity.

Sometimes it’s not clear which of these best describes a transaction.

In number 1 above, a purchase and sale, an existing entity transfers all or part of its operations, assets, liabilities or employment contracts to another legal entity. For example, a sole proprietor incorporates and transfers all of her existing operations to the new corporation. Even though the former sole proprietor is the new entity’s only shareholder, the proprietor and the corporation are different legal entities with separate BNs.

Point number 2 above applies to what are termed ‘legal persons’, meaning incorporated entities such as limited companies, corporations and not-for-profits, as well as to partnerships. For these types of entities there are two possible ways to transfer a business from one party to another. Either the entity:

• can sell off all its assets and liabilities, including employment contracts; or
• ownership and control of the entity can itself be sold.

For example, the owners of XYZ Inc. want to retire. They can either sell off XYZ’s receivables, liabilities, long-term assets and employment contracts to one or more 3^rd parties or they can sell XYZ’s shares to other owners. The first of these bullets is the same as point number 1 above and the second represents point number 2. In this second circumstance there is no change in the legal entity that holds the employment contracts. It’s just the ownership of this legal entity that has changed. This means there is no change in the BN, since the same legal entity remains the employer before and after the change in control.

The third point above is a special case. A merger is not a sale or transfer of control, in the same way as in the two previous points. Rather mergers occur when two or more previously separate entities combine into one going forward. The going-forward entity is not ‘new’; rather, it’s understood as continuing the previous existences of the now merged companies. In a merger, for example, shareholders may surrender their shares in the previous entities and for these receive equivalent shares in the now merged company.

For T4 reporting purposes, transactions of type number 1 above will always require multiple T4s, if they occur during a tax year. For example, effective July 1, a large-multinational sells the plant and equipment in one of its divisions to a 3^rd party. The 3^rd party also takes on the employment contracts of the people who worked at this division, and, together with the purchased plant and equipment, continues the work previously done in the former division. In these circumstances, the multinational and the 3^rd party will have to issue separate T4s for these employees, for that tax year.

By contrast, there is no need to issue multiple T4s for transaction types 2 and 3. In both cases, the employer of record at year-end can issue T4s covering the whole tax year. However, if transaction type 3 occurs during a tax year, payroll will have to coordinate with the CRA, to ensure that source deductions, previously remitted separately by each now merged company are properly transferred to the BN for the newly merged entity. Usually, the merged entity will be able to take on the BN from one of the merged companies.

For ROE purposes, none of these 3 transaction types require that ROEs be issued. However, for transaction type 1, this requires that the new employer has access to the previous employer’s payroll records and is willing to assume responsibility for issuing ROEs related to any prior employment.

For CPP and EI purposes, for transaction types 2 and 3, there is in effect no new employer, so a single YTD maximum applies throughout the whole tax year. For transaction type 1, single YTD maximums may apply, at the new employer’s option. If the new employer agrees, it means taking on previously paid pensionable and insurable earnings, as if these prior payments had been made by the new employer itself. In most situations there would be an obvious benefit in not having to re-start CPP and EI employer contributions from scratch. However, a common occurrence for employers that run into financial troubles is to fall behind in remittances to the CRA. If this has happened, the liability for any unremitted CPP and EI source deductions might be greater than any CPP or EI amounts owing for the remainder of the year. As such, the new employer might decline to take on responsibility for the pensionable and insurable earnings previously paid by the former employer.

Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@shaw.ca, (250) 228-5280 or visit www.alanrmcewen.com for more information. This article was first posed to Canadian HR Reporter on October 15, 2013.