Subsection 86(1) - Exchange of shares by a shareholder in course of reorganization of capital
Cases
Special Risks Holdings Inc. v. The Queen, 86 DTC 6035, [1986] 1 CTC 201 (FCA)
The taxpayer, following a modification in the capital structure of a company ("RMC") exchanged its voting shares of that company for non-voting...
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| Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | relationship enabling one party to dictate terms | 148 |
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(9) | 166 |
See Also
Dunstan v. Young, Austen & Young Ltd., [1989] BTC 77 (C.A.)
In finding that an issuance of shares by a company to its existing beneficial shareholder, followed by the application of the subscription...
Administrative Policy
2023 Ruling 2022-0958241R3 - Public Spin-Off Butterfly
CRA ruled on a butterfly spin-off by a listed Canadian corporation (DC) of its indirect interest in a foreign project to a “SpinCo” to be held...
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| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.02) | public company spin-off with s. 51 reversal of new s. 86 common shares | 948 |
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Public Corporation - Paragraph (b) | public spinco to elect effective before its shares were listed | 84 |
| Tax Topics - General Concepts - Fair Market Value - Shares | FMV of listed shares based on their 5-day VWAP pre-spin-off or post spin-off | 173 |
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(a) | pre-butterfly transactions included DC acquiring shares under a plan of arrangement | 71 |
2021 Ruling 2021-0916821R3 F - Continuance corporation from CBCA to Co-operative
A corporation incorporated under the Canada Business Corporations Act (Opco) was continued as a co-operative under the Co-operative Corporations...
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | continuance from the CBCA to a Co-operatives Act did not entail disposition of assets, but s. 86 applied at the shareholder level | 155 |
2022 Ruling 2021-0884331R3 - Gross Asset Butterfly
As a preliminary to a gross-asset butterfly transaction in which DC (whose preferred shares and common shares each were owned equally by three...
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| Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution | gross asset butterfly between 3 siblings with DC retained | 254 |
2020 Ruling 2020-0854401R3 - Internal Reorganization 55(3)(a)
CRA ruled on the s. 55(3)(a) spin-off by DC (held by three siblings through holding companies and, in turn, holding three Opcos as well as three...
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| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) | s. 55(3)(a) spin-off with rep that TC does not intend to dispose of its acquired property | 428 |
27 October 2020 CTF Roundtable Q. 14, 2020-0860971C6 - Section 86 Reorganization of Capital
It is common for corporations to include multiple share classes in their corporate structure in contemplation of subsequent reorganizations or...
2017 Ruling 2016-0679281R3 - subsections 84(4.1) and 86(1)
Preliminary reorganization
An arrangement agreement is entered into between Parent (a listed Canadian public corporation) and its new subsidiary...
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | change of common shares into multiple-voting common shares not a disposition | 168 |
2016 Ruling 2016-0635101R3 - 55(3)(a) Spin-Off to Use Parent Losses
As a preliminary step in a s. 55(3)(a) spin-off transaction, a preliminary s. 86 reorg was effected through an exchange of the “old” common...
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| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) | where land transferred under s. 85(1) along with terminal loss building, elect high with a view to s. 13(21.1)(a) applying to reduce the land proceeds to ACB | 189 |
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) | 55(3)(a) spin-off of property already subject to sale agreement to parent before closing date | 592 |
| Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(a) | elected amount deterines proceeds before s. 13(21.1)(a) grind | 203 |
2016 Ruling 2015-0623731R3 - Subsections 55(2) and (2.1)
As part of a s. 55(3)(a) spin-off transaction, Sub2 and its Parent undertake a s. 86 reorganization of Sub 2’s capital so that, following...
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| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) | requirement to pro-rate PUC | 576 |
| Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount | policy on set-off of unequal redemption notes does not extend beyond a butterfly reorg | 433 |
2015 Ruling 2014-0558831R3 - No-type of property spin-off butterfly
DC is a public corporation with two classes of common shares (namely, multiple and subordinate voting shares). Preliminarily to a butterfly...
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| Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution | prior drop-down of assets to Newco/split of DC manager's business/CEC proration/replacement option issuance as boot | 1177 |
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.4) | replacement stock options issued by Spinco treated as boot | 112 |
| Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(d) | proration of CEC preliminary to butterfly | 156 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | splitting of fee for management of 2 divisions not a disposition of contract | 145 |
2014 Ruling 2014-0533601R3 - Spin-off butterfly - subsection 55(2)
A spin-off butterfly reorganization by DC (a Canadian controlled private corporation) commenced with what was ruled to be a s. 86 reorganization...
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| Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) | matching of PUC of cross-shareholdings to match Part IV tax | 152 |
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution | spin-off by CCPC under Plan of Arrangement of two businesses/matching of PUC of cross-shareholdings to match Part IV tax/leased property as business property | 978 |
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(1) | stated capital distribution effected by set-off | 77 |
2013 Ruling 2013-0491651R3 - Cross-Border Butterfly
Preliminarily to a split-up butterfly of DC which, in turn will precede a spin-off by Foreign PubCo (DC's non-resident indirect public company...
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| Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution | cross-border b/f with 3-party exchange, cash-out of ineligible shareholders, proportionate allocation of foreign spinco debt, pension liability classification, prelim non-series dividend | 1011 |
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(a) | preliminary LP acquisition, cross-border debt repayments and dividend: not part of series | 230 |
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(b) - Subparagraph 55(3.1)(b)(i) | cross-border b/f with 3-party exchange, pro rata application of upper tier debt, cash-out of ineligible shareholders | 501 |
7 October 2011 Roundtable, 2011-0412191C6 F - Sec. 86 - Reorganisation of the Capital of a Corp.
Q.B.C.A. s. 91 of the new Q.B.C.A. permits a corporation to convert the shares of a particular class into shares of a new class, through a simple...
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| Tax Topics - Income Tax Act - Section 51 - Subsection 51(1) | s. 51(1) applies where share conversion pursuant only to directors’ resolution | 199 |
10 June 2011 Roundtable, 2011-0404641C6 F - Shareholders Agreement and FMV
2008-0285241C6 indicated that a shareholders' agreement should not contain clauses that would have the effect of reducing the value of freeze...
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| Tax Topics - General Concepts - Fair Market Value - Shares | examples of clauses reducing the FMV of freeze preferred shares | 169 |
2010 Ruling 2010-0373801R3 - Conversion from a BV to a DC
Proposed transactions
BV, which is a private limited liability company under Dutch law, will convert into a Dutch cooperative ("DC") pursuant to...
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| Tax Topics - Income Tax Act - Section 85.1 - Subsection 85.1(3) | drop-down by the two Cdn. “shareholders” of Dutch co-op (DC) of FAs in consideration for proportionate “increases” in their membership interests considered to be for “shares” | 199 |
| Tax Topics - Income Tax Act - Section 95 - Subsection 95(4) - Direct Equity Percentage | 46 | |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Share | membership interest in Dutch coop a share | 139 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | conversion of Netherlands BV to Dutch co-op | 97 |
5 May 2010 External T.I. 2010-0359791E5 F - Significant increase - redemption of shares
An estate freeze was implemented for the benefit of X’s child under which X’s Holdco and a third-party Holdco exchanged 60% and 40% of the...
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| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) | s. 55(3)(a)(ii) or (v) likely applicable where related shareholder’s prefs are partially redeemed - even if matching partial redemption of arm’s length pref shareholder 1 hr later | 333 |
2006 Ruling 2006-0177342R3 - Creation of an income trust
With a view to implementing a butterfly reorganization, the common shares of BCo are exchanged for newly created common shares of CCo (having the...
16 December 2005 External T.I. 2005-0150411E5 F - Roll-over Provisions and Partnership
Are the rules in ss. 51(1), 85.1(1) or 86(1) (which refer to a "taxpayer") available to a partnership in a reorganization where it exchanges...
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| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxpayer | partnership with non-resident partners is a taxpayer for s. 51(1), 85.1(1) or 86(1) rollover purposes | 121 |
| Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(a) | partnership is taxpayer for income computation purposes even if it has non-resident partners | 36 |
28 Aug. 89 T.I. (Jan. 90 Access Letter, ¶1080)
The fact that the exchange shares were authorized before the exchange was contemplated would make little difference as to whether the shares...
ATR-22R (14 April 89)
Favourable rulings are given where:
- Holdco "exchanges" 100% of the issued common shares of Opco for redeemable retractable non-voting special...
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| Tax Topics - General Concepts - Fair Market Value - Shares | 107 | |
| Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) | 33 | |
| Tax Topics - Income Tax Application Rules - Subsection 26(27) | 31 |
87 C.R. - Q.67
The automatic conversion of an old share to a new share of another class would not necessarily be a reorganization for purposes of section 86.
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| Tax Topics - Income Tax Act - Section 51 - Subsection 51(1) | automatic conversion | 9 |
Articles
Paul Tamaki, "Book4Golf: Convertible Share Financing", Corporate Finance, Vol VII, No. 2, 2000, p. 731
Discussion of utilization of s. 86 reorganization in order to receive boot (warrants) on a tax-free basis.
Ewens, "Reorganizations of Capital: Section 86", 1995 Canadian Tax Journal, Vol. 43, No. 3, p. 783.
Smith, "Corporate Restructuring Issues: Public Corporations", 1990 Corporate Management Tax Conference Report, pp. 6:28-6:32.
Subsection 86(2) - Idem [Exchange of shares by a shareholder in course of reorganization of capital]
See Also
Mady v. The Queen, 2017 TCC 112
The taxpayer, who owned all the shares of his dental corporation (“MDPC”), agreed to sell all the MDPC shares to third-party purchaser and its...
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| Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(11) | transfer from wife to higher-income husband was infused with his income-splitting purpose (as well as regulatory breach if she didn’t transfer) | 393 |
| Tax Topics - General Concepts - Ownership | wife and children did not acquire beneficial interest in shares the taxpayer was to transfer to them, under tax plan, until the share transfer occurred | 263 |
| Tax Topics - General Concepts - Fair Market Value - Shares | arm’s length sales price established FMV for closing-date internal transfer of same shares | 482 |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) - Subparagraph 69(1)(b)(i) | contemporaneous arm’s length sale price established that shares previously transferred at undervalue | 478 |
| Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) | was not responsible under s. 163(2) for the unbeknownst sharp practice of his tax advisor | 692 |
| Tax Topics - General Concepts - Price Adjustment Clause | no jurisdiction to comment on application of price adjustment clause where the affected taxpayers are not appellants | 233 |
Administrative Policy
S4-F3-C1 - Price Adjustment Clauses
CRA will consider a price adjustment clause to represent pricing at fair market value if:
- the agreement reflects a bona fide intention of the...
1996 Corporate Management Tax Conference Round Table, Q. 13 (C.T.O. "Benefit of Conversion")
Although s. 86(2) does not contain an exclusion for wholly-owned corporations, ordinarily RC would not consider that it is reasonable to regard...
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| Tax Topics - Income Tax Act - Section 51 - Subsection 51(2) | 66 |
24 March 1993 T.I. (Tax Window, No. 30, p. 1, ¶2490)
Re potential application of s. 86(2) where, following a decline in the fair market value of Opco, the holder of redeemable preferred shares...
1993 A.P.F.F. Round Table Q. 6
S.86(2) normally should not apply to an estate refreeze in which preferred shares having a redemption value of $2 million and a fair market value...
Subsection 86(2.1)
Administrative Policy
1 June 2001 External T.I. 2001-0075455 F - Remaniement et capital versé
On a reorganization of capital, Ms. A exchanges her common shares of Aco, having a PUC and ACB of $10 and an FMV of $10,000 (with the balance of...
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| Tax Topics - Income Tax Act - Section 84 - Subsection 84(5) | no s. 84(3) deemed dividend on s. 86 reorg by virtue of ss. 86(2.1) and 84(5) | 81 |
Subsection 86(3) - Application
Administrative Policy
1995 Tax Executives Institute Round Table Q. 21 (C.T.O. Fax Service Doc. No. 9510750)
Where all the outstanding common shares of Opco are held by Publico, and following the amendment of the articles of Opco, Publico exchanges half...