Section 86 of the Income Tax Act allows a tax-deferred share-for-share exchange carried out as part of a reorganization of a corporation's capital. It is most often used to implement an internal estate freeze: the shareholder exchanges existing common shares for fixed-value preferred shares of the same corporation, and new common shares are issued to a family trust or to the next generation to capture future growth.
The deferral requires that no boot be received, that the exchange be part of a reorganization of capital, and that the fair market value of the share consideration equal the value of the shares given up. Section 86 sits alongside the section 85 holding-company freeze as one of the principal mechanisms for freezing the value of an interest while shifting future appreciation.