Section 86

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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Locations of other summaries Wordcount
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...

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Administrative Policy

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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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...

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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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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...

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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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Locations of other summaries Wordcount
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...

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ATR-22R (14 April 89)

Favourable rulings are given where:

  1. Holdco "exchanges" 100% of the issued common shares of Opco for redeemable retractable non-voting special...

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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.

Locations of other summaries Wordcount
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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Locations of other summaries Wordcount
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

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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Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 51 - Subsection 51(2) 64

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...

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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...

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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...

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