It’s not easy to keep payroll operations functioning smoothly when your organization is involved in a merger or acquisition. Here’s what you need to understand about how the transaction impacts your payroll source deductions and T4 and ROE reporting to minimize disruption through and beyond the transition.
Different Deals, Different Payroll Ramifications
The T4 consequences of a merger and acquisition vary depending on the type of deal involved. There are 3 basic deal types or patterns:
- One business entity purchases another business entity;
- An incorporated entity or partnership undergoes a change in corporate ownership and control; and
- Two entities merge to form one single, continuing entity.
Type 1: Purchase & Sale
Deal Pattern: An existing legal entity transfers all or part of its operations, assets, liabilities or employment contracts to another existing legal entity, e.g., where 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 Business Numbers (BNs).
T4 Reporting Consequences: Type 1 deals will always require multiple T4s if they occur during a tax year. Example: Effective July 1, ABC Company buys the plant and equipment of the division of a large-multinational corporation, taking on the employment contracts of the people working at and continuing the work performed by the division using the purchased plant and equipment. Result: Both ABC Company and the multinational must issue separate T4s for the division’s employees for the tax year of acquisition.
EI & CPP Deductions Consequences: Single YTD maximums may apply, at the new employer’s option. The new employer may agree to taking on previously paid pensionable and insurable earnings as if it had made those prior payments itself. In many situations, it would be beneficial to not have to re-start CPP and EI employer contributions from scratch. But if employers run into financial troubles and fall behind in their remittances to the CRA, the liability for any unremitted CPP and EI source deductions could be greater than any CPP or EI amounts owing for the remainder of the year. Accordingly, the new employer might decline to take on responsibility for the pensionable and insurable earnings previously paid by the former employer.
ROE Consequences: Type 1 deals don’t trigger the need to issue an ROE. However, the new employer must have access to the previous employer’s payroll records and be willing to assume responsibility for issuing ROEs for any employees related to their employment before purchasing the entity they work for.
Type 2: Change in Ownership or Control
Deal Pattern: An existing “legal person” or incorporated entity such as a limited liability company, corporation or partnership, undergoes a change in ownership or control. Example: Boss Sunova, owner and founder of XYZ Corporation, wants to retire. One way he could transfer ownership would be to sell off all of XYZ’s assets and liabilities, including its employment contracts, to HIJ Ltd; or, he could sell just his ownership and control by transferring his XYZ shares to HIJ.
T4 Reporting Consequences: In the first situation, the transfer of XYZ’s assets and liabilities would be treated the same as a Type 1 deal. So, if the transaction occurs during a tax year, both Boss and HIJ would have to issue T4s for the XYZ employees during the year. But if Boss sells off his shares and nothing else, the transaction is nothing more than a transfer of ownership in which XYZ continues with the same BN it had before the change in control. Accordingly, there’s no need to issue multiple T4s. As employer of record at year-end, HIJ, can issue T4s for XYZ employees covering the whole tax year.
EI & CPP Deductions Consequences: Type 2 deals have no EI or CPP consequences for the new employer.
ROE Consequences: Type 2 deals don’t trigger the need to issue an ROE.
Type 3: Merger
Deal Pattern: A pair of existing entities combine to form a merged entity that continues the business going forward. Technically, the combined entity is treated not as a new entity but a continuation of the now merged companies typically operating under the BN from one of the merged companies.
T4 Reporting Consequences: As with a Type 2 ownership transfer, in a merger like this the employer of record at year-end, i.e., the combined entity, issues T4s for the combined entity’s employees. However, if the merger occurs during a tax year, payroll must coordinate with the CRA to ensure that source deductions remitted separately by each of the now merged entities before the merger are properly transferred to the BN for the newly merged entity.
EI & CPP Deductions Consequences: Type 3 deals have no EI or CPP consequences for the new employer.
ROE Consequences: Type 3 deals don’t trigger the need to issue an ROE.
Alan McEwen is a Vancouver Island-based HRIS/Payroll consultant, software developer and freelance writer with over 25 years’ experience in all aspects of the industry. He can be reached at firstname.lastname@example.org, (250) 228-5280 or visit www.alanrmcewen.com for more information.