Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Does subsection 86(1) require amendments to articles of incorporation?
Reasons: No change warranted.
2020 CTF Annual Conference
Question 14: Section 86 Reorganization of Capital
Section 86 allows for a tax-free exchange of shares where there is a reorganization of capital.
The CRA states that articles of amendment need to be filed in order to meet this condition. Views Doc. No. 2010-0373271C6 [October 8, 2010]: The CRA stated that “in the context of subsection 86(1) …, a reorganization of the capital of a corporation should normally require amendments to the articles of incorporation.”
Views Doc. No. 2000-0048075 [February 22, 2001]: This document provides an example of the application of Section 86 in the context of a foreign affiliate. The CRA confirms that when the articles of association or other constating documents of a foreign affiliate are amended to authorize a new class of common shares a reorganization of capital is undertaken. In addition, the surrender of shares for fair market value is also required.
Views Doc. No. 9233955 [January 13, 1993]: The CRA takes the position that “where a corporation’s existing capital structure provides for it, the issuance of additional shares by the corporation would not of itself be such a reorganization whether the additional shares are issued pursuant to a rights offering or otherwise.”
Views Doc. No. RCT 5-3240 [May 20, 1987]: The CRA expresses the opinion that “the operation of an existing set of rights, conditions, or obligations [(such as where a share carries an automatic conversion right)] cannot be said to be a reorganization for purposes of section 86.”
The problem is that reorganization of capital is not defined in the Act nor is it a concept widely used in corporate law.
It is not uncommon for companies to include multiple share classes in their corporate structure in contemplation of subsequent reorganizations or restructurings. That being said, to ensure that the rollover treatment is available under subsection 86(1), articles of amendment are often still filed. The question is whether this is necessary where the corporation had the foresight to provide for a wide range of classes of shares.
Arguably the CRA’s view is too narrow and an exchange of shares by a shareholder for new shares with different rights and restrictions is also a reorganization of capital.
Will the CRA reconsider its previous position and confirm that articles of amendment need not be filed to meet the condition in subsection 86(1) that there has been a reorganization of capital?
The CRA’s position on the application of subsection 86(1) has not changed, i.e., a reorganization of capital in the context of subsection 86(1) should normally require amendments to the articles of incorporation. As noted in the response in document 2010-0373271C6, even if subsection 86(1) does not apply in a given situation, another rollover provision such as section 51 or 85 of the Act may apply, depending on the circumstances.
October 27, 2020
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