Generally, when the assets of one company are sold to another company, a gain or loss on the disposition has to be calculated which often leads to a tax bill. The selling company then has to be wound up, adding to the administration costs and professional fees. Finally, any carryover losses held by the old company that is not utilized will be lost.

Section 87 allows the two companies to be amalgamated into a new one. The shareholder of the old companies exchanges his old shares for new shares in the new company. There is no change in the cost base of the shares. Unlike some of the other rollover sections, the only consideration the shareholders can receive shares. So conceptually the shareholder has not really disposed of anything; he has just swapped shares while retaining the same businesses. Therefore, it would be unfair to tax such a transaction.

The newly amalgamated company would consist of the assets and liabilities of the old companies. For example, if the old companies each owned vehicles costing $25,000 and $10,000, the new company now owns both vehicles and reports the cost of these vehicles as being $35,000. Likewise, if the cost of the shares of both companies were $100 each, the shareholder will now own shares with a cost of $200 in the new company. Section 87 allows this amalgamation to be done at cost, thus deferring tax. In addition, any loss carryovers held by the old companies are passed on to the amalgamated company. The new company is viewed as a continuation of the old companies.