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Published: April 13, 2020

Last Updated: April 13, 2020

One of the least well known tax-free reorganization sections of the Tax Act is the Share for Share Exchange provisions set out in Section 85.1. This is not to be confused with the Asset Rollover provisions contained in Subsection 85(1) which operates in different situations and has a different set of rules.

Section 85.1 has two purposes. First, it is designed to defer the recognition of capital gains and losses which would otherwise be realized on the disposition of corporate shares to a Canadian corporation in exchange for shares in the latter Corporation. It therefore provides for a “rollover” in respect of the shares disposed of by the taxpayer. The deemed cost to the acquiring Corporation is the lesser of the fair market value of the shares immediately before the exchange and the paid-up capital in respect of the shares immediately before the exchange.

The second purpose is to provide for a deferral of capital gains and losses in respect of the disposition of shares of a foreign affiliate of a taxpayer.

The conditions for the rollover to apply are summarized as follows:

  • The taxpayer acquiring shares of the Canadian Corporation must have acquired the shares after May 6, 1974;
  • The Corporation acquiring the shares must be a Canadian Corporation;
  • The shares given up by the taxpayer must be capital property;
  • The acquiring Canadian Corporation must issue its own shares as consideration for the acquisition of the taxpayer’s shares;
  • The taxpayer must receive as consideration for the disposition of shares of any particular class, shares of any particular class of the acquiring Canadian Corporation.

Section 85.1 is often considered to be applicable only in the case of a public Corporation which acquires shares of another Corporation by issuing its own shares. While the rollover available in Section 85.1 is certainly applicable in that case, there is no requirement that the acquiring Corporation be publicly traded. The rollover is available in a private context as well and provides for many planning opportunities. Where Subsection 85.1(1) is applicable, the provision effects a deferral of any capital gain or loss which would have otherwise been realized on a disposition by the vendor taxpayer. Further, rules are provided to establish the acquiring Canadian Corporation’s deemed cost of the exchanged shares.

It is also interesting to note that where a number of shareholders dispose of shares in a Corporation on a Share for Share Exchange with a Canadian Corporation, the non-application of Subsection 85.1 to one or more of the shareholders does not prevent the provisions from applying to the others. Therefore taxpayers who are in a gain position could defer their gain by utilizing Section 85.1 while those shareholders who have an accrued loss can choose to recognize that loss.

Unlike some other rollover provisions in the Tax Act, Section 85.1 does not require that a specific election form be filed. Also, unlike a Subsection 85(1) rollover, the parties must be dealing at arm’s length in order to utilize the Share for Share Exchange provisions of Section 85.1.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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