Section 85.1

Subsection 85.1(1) - Share for share exchange

Administrative Policy

2014 Ruling 2014-0530371R3 - Combination of credit unions

credit union share-for-share exchange/ cash redemption

CRA provided s. 85.1 rulings respecting "Acquireco" acquiring all of the shares of the members of a widely-held credit union under s. 85.1 in exchange for Acquireco treasury shares (with the exception of the Class D shares of the target, which will be redeemed for cash).

See summary under s. 88(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 137 - Subsection 137(4.1) s. 137(4.1) inapplicable to Buyer of credit union who winds it up rather than becoming a member 235
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) "immediately before" referenced share ownership on completion of the preceding transaction in a same-day series 240

S4-F5-C1 - Share for Share Exchange

Subsection 85.1(1) will not apply where:

a. the vendor acquires shares of the purchaser in exchange for other shares of the purchaser;

b. the vendor acquires shares of the purchaser from a shareholder of the purchaser in exchange for shares of the acquired corporation; ...

g. subject to ¶1.7, the consideration received by the vendor for the exchanged shares includes shares of more than one class of the capital stock of the purchaser (paragraph 85.1(2)(d)); or

h. subject to ¶1.7, the consideration received by the vendor for the exchanged shares includes consideration other than shares of the purchaser (non-share consideration) (paragraph 85.1(2)(d)). A right to acquire shares to be issued by the purchaser in the future as a settlement of a portion of the exchange is non-share consideration.

1.7 In certain circumstances, even if a share exchange is one that is described in ¶1.6(g) or (h,) subsection 85.1(1) could still apply. Subsection 85.1(1) may apply where a vendor:

  • receives newly issued shares of one class from the purchaser for some of the exchanged shares and non-share consideration or shares of a different class for other exchanged shares. The vendor must be able to clearly identify which exchanged shares were exchanged in consideration for the newly issued shares of that class of the purchaser and which were exchanged in consideration for shares of another class of the purchaser or for non-share consideration….
  • receives newly issued shares of the purchaser and non-share consideration for each exchanged share. The purchaser's offer must clearly indicate which fraction of each exchanged share is exchanged in consideration for the newly issued shares of the purchaser and which fraction of each exchanged share is exchanged for non-share consideration….
  • cannot receive a fractional share but is entitled under an exchange agreement to receive cash or other non-share consideration in lieu of a fraction of a newly issued share of the purchaser. Where the total value of the non-share consideration is $200 or less, the vendor may ignore the computation of the gain or loss on the partial disposition and reduce the adjusted cost base of the shares received by the amount of that value. Alternatively, the vendor may report the gain or loss. …

1.12 Paragraph 85.1(1)(b)… appl[ies] even if the vendor has otherwise reported a gain or loss on the exchange.

25 August 1991 T.I. (Tax Window, No. 8, p. 16, ¶1412)

The fact that shares are divided into two blocks -one of which is exchanged for cash and the other which is exchanged for shares - in order to bring the transaction within s. 85.1, does not by itself result in the application of GAAR.

IT-450 "Share for Share Exchange"

7

...Where the vendor receives shares and cash or other consideration for each exchanged share, subsection 85.1(1) may be utilized for the fraction of each exchanged share for which only share consideration was received, provided that the purchaser's offer clearly indicates that the share consideration will be exchanged for a specified fraction of each share tendered and the non-share consideration will be given for the remaining fraction. ...

Articles

Cobb, "Share-for-Share Exchanges: Section 85.1", The Taxation of Corporate Reorganizations, 1995 Canadian Tax Journal, Vol. 43, No. 6, p. 2230.

Smith, "Corporate Restructuring Issues: Public Corporations", 1990 Corporate Management Tax Conference Report, pp. 6:8-6:10: discussion of receipt of non-share consideration.

Subsection 85.1(2.1) - Computation of paid-up capital

Administrative Policy

S4-F5-C1 - Share for Share Exchange

1.16 Paragraph 85.1(2.1)(a) is applicable…even if the vendor has otherwise reported a gain or loss on the exchange.

17 February 2003 External T.I. 2002-017645 -

Aco holds 30 common shares of Opco (30% of the common shares) having an ACB and PUC of $30 and an FMV of $300 (the gross and net fair market value of the assets of Opco having an FMV of $1,000). A (an individual who is the sole shareholder of Aco) transfers all his common shares of Aco (being 30 common shares having an FMV of $300 and ACB and PUC of $30) to Opco in exchange for 30 Opco shares, realizing a capital gain of $270. A and Aco deal at arm's length with Opco.

Subsection 85.1(2.1) will apply to grind the paid-up capital of the Opco shares from $300 down to $30.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(1) no 84(1) application on tuck under 108

Subsection 85.1(3) - Disposition of shares of foreign affiliate

Administrative Policy

2016 Ruling 2015-0571441R3 - Dutch Cooperative - 93.2 & 95(2)(c)

joint contribution of shares of FA to Netherlands co-op in consideration for credits to their respective membership accounts deemed to be for share consideration

Ruling respecting the combined operation of s. 95(2)(c) (similar in this regard to s. 85.1(3)) and s. 93.2) on a joint contribution by the three foreign affiliate shareholders of a foreign affiliate of their respective shareholdings to a Dutch co-operative (with membership interests rather than share capital) in consideration for credits to their respective membership interest accounts.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(c) rollover is available on joint drop-down of shares of a Dutch private limited liability company into a Dutch cooperative in consideration for respective credits to the membership accounts 455
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation Dutch cooperative whose articles limited member liability was a corp 251
Tax Topics - Income Tax Act - Section 93.2 - Subsection 93.2(2) membership interest in Dutch cooperative ruled to be shares 90
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Controlled Foreign Affiliate non-resident subsidiaries CFAs of bottom-tier Cdn partnership and FAs of Canadian corporate partners 126

26 May 2016 IFA Roundtable Q. 10, 2016-0642101C6 - 93.2 & 95(2)(c)

drop-down of FA shares to non-share FA deemed to be for share consideration

S. 95(2)(c) which, insofar as relevant to the question of how it dovetails with s. 93.2, is essentially identical to s. 85.1(3). Respecting the transfer by a foreign affiliate (FA1) of Canco of all its the shares of FA2 to another non-resident subsidiary of FA1, viz., a non-share corporation (“FA3”), as a capital contribution, CRA noted that, as a technical matter, s. 93.2(3)(a) does not appear to go quite far enough so as to permit the particulars of the cost-apportionment formula in s. 95(2)(c) to be filled in. However, CRA went on to find that despite these “textual challenges,” the s. 95(2)(c) rollover would be available provided that the fair market value of the membership interest in FA3 increased by the FMV of the contributed shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(c) dropdown of shares made to an LLC as a contribution of capital deemed by s. 93.2(3) to be for "share” consideration 150
Tax Topics - Income Tax Act - Section 93.2 - Subsection 93.2(3) s. 95(2)(c) rollover can apply on a dropdown of shares made to an LLC as a contribution of capital rather than for “share” consideration 252

2016 Ruling 2016-0648991R3 - Internal spinoff reorganization of XXXXXXXXXX

a double transfer of shares under s. 85(1) and 85.1(3) would not affect the shares’ capital property status

CRA provided s. 55(3)(a) rulings respecting a spin-off by one Canadian subsidiary (CanSub1) of a public company (ParentCo) of CanSub1’s foreign subsidiary (ForSub1) to another wholly-owned Canadian subsidiary (CanSub2) of ParentCo. It was proposed that the acquisition by CanSub2 of the ForSub1 shares be followed by their s. 85.1(3) drop-down to a foreign subsidiary of CanSub2 in consideration for common shares of equivalent value. CRA ruled that this double transfer of the ForSub1 shares would not result in those shares not qualifying as capital property:

For purposes of subsection 85.1(3), provided that the ForSub1 Common Shares constitute capital property to CanSub1 immediately prior to the transfer of the shares by CanSub1 to CanSub2 … the transfer by CanSub1 of the ForSub1 Common Shares to CanSub2 … and the subsequent transfer by CanSub2 of such shares to ForSub2 … will not, in and by themselves, cause such ForSub1 Common Shares not to be capital property of CanSub2.

The reorganization also included a similar double-transfer of shares of another subsidiary (ForSub3), and CRA provided a similar ruling.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) spin-off from one sub of public company to another with no streaming of cost base and cross redemption of preferred shares 465
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares shares did not lose capital property character on internal spin-off transfer with a view to their further dorp-down 104

21 October 2013 Internal T.I. 2013-0505831I7 - Rollover and subsequent disposition of property

s. 69(11)(b) not applied

The taxpayer, a Canadian corporation, transferred all its voting and participating shares of Subco, a non-resident subsidiary wholly-owned corporation, to Forco (another controlled foreign affiliate) in consideration for shares of Forco. Forco also exercised an option to acquire IP from a group member. Forco sold its IP to an arm's length US purchaser ("Purchaseco") and another company in the Purchaseco group, and then sold all its shares of Subco to Purchaseco.

In finding that s. 69(11)(b) did not apply to deny a rollover under s. 85.1(3) for the drop-down of Subco to Forco, the Directorate stated:

The fact that there is no tax payable under the Act by Forco with respect to its gain on the disposition of the Subco shares is due to the fact that the disposition does not result in any income under the Act (Forco is simply not subject to tax under subsection 2(3) of the Act), not because an exemption from tax payable under the Act is available to Forco. Consequently, paragraph 69(11)(b) of the Act would not apply… .

The Directorate went on to state:

[A] court would probably be reluctant to apply subsection 69(11) of the Act to deny the benefit of the 85.1(3) rollover where the conditions to apply subsection 85.1(3) of the Act are met (considering paragraph 95(6)(b) of the Act) and where subsection 85.1(4) of the Act does not apply in a particular situation.

S. 85.1(4) was not considered here because there was to be a separate referral on that issue.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) Forco not a targeted tax exempt 243

2010 Ruling 2010-0373801R3 - Conversion from a BV to a DC

A foreign cooperative, treated as a corporation under the foreign nation's law, is deemed to have "shares" for the purposes of determining "direct equity percentage" under s. 95(4), for disposition of shares of a foreign affiliate under s. 85.1(3), and for exchanges of shares under s. 86(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(4) - Direct Equity Percentage 44
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) exchange of shares in Netherlands BV for membership interests in Dutch coop qualified under s. 86 139
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Share membership interest in Dutch coop a share 131
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition conversion of Netherlands BV to Dutch co-op 89

Articles

Tasso Lagios, Arda Minassian, "Foreign Accrual Property Income: Pitfalls for the Unwary", 1999 Conference Report, c. 3.

R. Ian Crosbie, "Canadian Income Tax Issues Relating to Cross-Border Share Exchange Transactions", 1997 Corporate Management Tax Conference Report, c. 12.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 87 - Subsection 87(8) 0

Schwartz, "Tax-Free Reorganizations of Foreign Affiliates", 1984 Canadian Tax Journal, November-December 1984, p. 1039.

Subsection 85.1(4) - Exception

Administrative Policy

25 October 1994 T.I. 941409 (C.T.O. "Transfer of Shares of Foreign Affiliate (H.A.A. 6363)")

S.85.1(4) will not apply where Canco, which owns 100% of USco, transfers its shares of USco for fair market value consideration to a U.S. holding company ("Holdco") that also is a foreign affiliate of Canco, and Holdco then issues common shares to the public and has some of its shares sold by Canco to the public.

Subsection 85.1(5) - Foreign share for foreign share exchange

Administrative Policy

23 August 2016 External T.I. 2015-0614981E5 - Foreign Share for share Exchange

position on fractional share exchanges under 85.1(1) applies to 85.1(5) exchanges

Shares of a foreign public company (“Foreign Target”) were exchanged by a Canadian partnership (“Vendor”) for treasury shares of another foreign public company (“Foreign Purchaser”) and cash. Although the cash received for each share tendered was specified in the offer, the fraction of the total consideration that it represented could not be determined until the date of the exchange because the total exchange consideration was dependent upon the average trading price of Foreign Purchaser’s shares immediately before the exchange. Except respecting the treatment of the cash consideration, all the s. 85.1(5) conditions were satisfied. Was the s. 85.1(5) rollover applicable?

CRA quoted S4-F5-C:

Subsection 85.1(1) may apply where a vendor receives newly issued shares of the purchaser and non-share consideration for each exchanged share. The purchaser’s offer must clearly indicate which fraction of each exchanged share is exchanged in consideration for the newly issued shares of the purchaser and which fraction of each exchanged share is exchanged for non-share consideration.

and then stated:

[W]e note that the position in point 2 of paragraph 1.7 [of S4-F5-C1] would equally apply to a foreign share for share exchange… . Nonetheless, where the purchaser’s offer does not clearly specify the fractional information noted in point 2 of paragraph 1.7 of the Folio…the requirements of 85.1(5) will not be met in a situation where a vendor receives newly issued shares of the purchaser and non-share consideration for each exchanged share.

19 June 2000 Internal T.I. 2000-002778 -

Where a U.S. public company of which the taxpayer's employer was a Canadian subsidiary merges with another corporation, s. 85.1(5) will not provide rollover treatment in respect of the issuance of shares by the merged corporations to the taxpayer in exchange for his employee stock option rights.

Articles

Christopher Steeves, "Foreign Share Exchanges and Foreign Spinoffs", The Taxation of Corporate Reorganizations, 2001 Canadian Tax Journal, Vol. 49, No. 4, p. 1066.

Subsection 85.1(7) - Application of subsection (8)

Articles

Mitchell, Sherman, "SIFT Update - Conversions and Normal Growth", Corporate Finance, 2009, p. 1678.

F. Brent Perry, "Income Trusts: Reorganiations and Planning for 2011", 2008 Conference Report.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88.1 - Subsection 88.1(2) 0