Corporate Tax Restructuring

The reorganization toolkit

The Canadian Income Tax Act provides multiple tax-deferred mechanics for reorganizing a corporation without triggering accrued gains. Each has different mechanics, different election requirements, and different post-reorganization tax consequences. The choice among them depends on what the reorganization needs to accomplish.

Section 85 — the workhorse

Section 85 lets a taxpayer transfer property (assets, shares, partnership interests) to a Canadian corporation in exchange for shares of that corporation on a tax-deferred basis. The taxpayer and the corporation jointly elect (Form T2057) to treat the transfer at an "agreed amount" between the taxpayer's cost base and the property's FMV — usually at cost base, deferring all gain.

Common Section 85 uses:

• Estate-freeze transfers — the owner transfers operating-company shares to a newly-incorporated holdco in exchange for preferred shares.
• Asset incorporations — a sole proprietorship's operating assets are transferred into a corporation in exchange for shares.
• Pre-sale restructurings — moving non-saleable assets out of the corporation to a sister holdco before a share sale.
• Multi-entity reorganizations — consolidating or splitting business divisions into separate corporations.

The election must be filed by the earlier of the parties' return due dates for the year of transfer. Late-filing relief is available (under Section 85(7) or 85(7.1)) but at a per-day penalty.

Section 86 — the single-corporation share-class change

Section 86 applies when an existing shareholder of a corporation exchanges their existing shares for new shares of a different class issued by the same corporation. No new corporation is involved. The mechanic is automatic if the conditions are met (it doesn't require an election form, though documentation of the exchange is essential).

Section 86's primary use is the share-class-freeze: the owner converts common shares into frozen-value preferred shares while the corporation simultaneously issues new growth common shares to a family trust or to the next generation. See the Estate Freeze page for the planning context.

Section 87 — amalgamation

Section 87 combines two or more Canadian corporations into a single amalgamated entity. The amalgamation is tax-deferred at the corporate level for both predecessors' tax pools — the amalgamated corporation inherits cost bases, RDTOH balances, capital dividend accounts, and loss carryforwards (with anti-stripping rules in Section 256.1 limiting loss inheritance after acquisition of control).

Amalgamation is the right answer when two operating companies should be merged (eliminating inter-company invoicing, consolidating administration), when a parent-subsidiary structure should be flattened, or when a Section 88(1) wind-up isn't available because both corporations have third-party shareholders.

Section 88(1) — parent-subsidiary wind-up

When a wholly-owned subsidiary is wound up into its parent (or 90%+-owned), Section 88(1) provides tax-deferred treatment for the wind-up and — critically — allows a "bump" of the cost base of certain assets to FMV. The bump can shelter substantial future gains on appreciated subsidiary assets (land, depreciable property, shares of other subsidiaries).

The wind-up route is preferred over amalgamation when there's only one shareholder (the parent), the parent's tax attributes shouldn't be disturbed, and the bump on subsidiary assets is valuable.

Section 51 — share-rights conversion

Section 51 applies when shares of a corporation are exchanged for other shares of the same corporation under a corporate reorganization (typically a share-rights amendment). The mechanic is simpler than Section 86 — no fresh issuance of new share classes is needed; just an amendment to the rights attaching to the existing shares.

Butterfly transactions

A "butterfly" transaction is a tax-deferred split of one corporation into two or more separate corporations, each owned by different (or differently-allocated) shareholders. The classic use case: two siblings inherit shares of the family corporation and want to split the underlying assets (or business divisions) into separate entities they each control independently. The butterfly mechanic in paragraph 55(3)(b) makes this possible without triggering corporate gain — but the conditions are precise and the structuring takes substantial planning.

Timing and election filings

Most corporate reorganizations require election forms filed on time:

• T2057 (Section 85 transfer) — by the earlier of the parties' T1/T2 due dates.
• T2058 (Section 85 partnership transfer) — same timing.
• Amalgamation effective date — determined by the articles of amalgamation.
• Wind-up notice — within prescribed time after dissolution.

How we work the file

Reorganization engagements at Barrett Tax Law include the structural memo, the corporate documents (resolutions, articles of amendment, share-purchase agreements between the corporation and the shareholder), the tax-election forms, and the post-implementation summary. Most engagements are fixed-fee for the design and implementation. We coordinate with corporate counsel on the corporate-law side where the reorganization crosses into share-acquisition or shareholder-agreement territory.