Subsection 85.1(1) - Share for share exchange
Administrative Policy
2014 Ruling 2014-0530371R3 - Combination of credit unions
CRA provided s. 85.1 rulings respecting "Acquireco" acquiring all of the shares of the members of a widely-held credit union under s. 85.1 in exchange for Acquireco treasury shares (with the exception of the Class D shares of the target, which will be redeemed for cash).
See summary under s. 88(1).
11 June 2015 Folio S4-F5-C1
Subsection 85.1(1) will not apply where:
a. the vendor acquires shares of the purchaser in exchange for other shares of the purchaser;
b. the vendor acquires shares of the purchaser from a shareholder of the purchaser in exchange for shares of the acquired corporation; ...
g. subject to ¶1.7, the consideration received by the vendor for the exchanged shares includes shares of more than one class of the capital stock of the purchaser (paragraph 85.1(2)(d)); or
h. subject to ¶1.7, the consideration received by the vendor for the exchanged shares includes consideration other than shares of the purchaser (non-share consideration) (paragraph 85.1(2)(d)). A right to acquire shares to be issued by the purchaser in the future as a settlement of a portion of the exchange is non-share consideration.
1.7 In certain circumstances, even if a share exchange is one that is described in ¶1.6(g) or (h,) subsection 85.1(1) could still apply. Subsection 85.1(1) may apply where a vendor:
- receives newly issued shares of one class from the purchaser for some of the exchanged shares and non-share consideration or shares of a different class for other exchanged shares. The vendor must be able to clearly identify which exchanged shares were exchanged in consideration for the newly issued shares of that class of the purchaser and which were exchanged in consideration for shares of another class of the purchaser or for non-share consideration….
- receives newly issued shares of the purchaser and non-share consideration for each exchanged share. The purchaser's offer must clearly indicate which fraction of each exchanged share is exchanged in consideration for the newly issued shares of the purchaser and which fraction of each exchanged share is exchanged for non-share consideration….
- cannot receive a fractional share but is entitled under an exchange agreement to receive cash or other non-share consideration in lieu of a fraction of a newly issued share of the purchaser. Where the total value of the non-share consideration is $200 or less, the vendor may ignore the computation of the gain or loss on the partial disposition and reduce the adjusted cost base of the shares received by the amount of that value. Alternatively, the vendor may report the gain or loss. …
1.12 Paragraph 85.1(1)(b)… appl[ies] even if the vendor has otherwise reported a gain or loss on the exchange.
25 August 1991 T.I. (Tax Window, No. 8, p. 16, ¶1412)
The fact that shares are divided into two blocks -one of which is exchanged for cash and the other which is exchanged for shares - in order to bring the transaction within s. 85.1, does not by itself result in the application of GAAR.
IT-450 "Share for Share Exchange"
7
...Where the vendor receives shares and cash or other consideration for each exchanged share, subsection 85.1(1) may be utilized for the fraction of each exchanged share for which only share consideration was received, provided that the purchaser's offer clearly indicates that the share consideration will be exchanged for a specified fraction of each share tendered and the non-share consideration will be given for the remaining fraction. ...
Articles
Cobb, "Share-for-Share Exchanges: Section 85.1", The Taxation of Corporate Reorganizations, 1995 Canadian Tax Journal, Vol. 43, No. 6, p. 2230.
Smith, "Corporate Restructuring Issues: Public Corporations", 1990 Corporate Management Tax Conference Report, pp. 6:8-6:10: discussion of receipt of non-share consideration.
Subsection 85.1(2.1) - Computation of paid-up capital
Administrative Policy
11 June 2015 Folio S4-F5-C1
1.16 Paragraph 85.1(2.1)(a) is applicable…even if the vendor has otherwise reported a gain or loss on the exchange.
17 February 2003 T.I. 2002-017645 -
Aco holds 30 common shares of Opco (30% of the common shares) having an ACB and PUC of $30 and an FMV of $300 (the gross and net fair market value of the assets of Opco having an FMV of $1,000). A (an individual who is the sole shareholder of Aco) transfers all his common shares of Aco (being 30 common shares having an FMV of $300 and ACB and PUC of $30) to Opco in exchange for 30 Opco shares, realizing a capital gain of $270. A and Aco deal at arm's length with Opco.
Subsection 85.1(2.1) will apply to grind the paid-up capital of the Opco shares from $300 down to $30.
Subsection 85.1(3) - Disposition of shares of foreign affiliate
Administrative Policy
21 October 2013 Memorandum 2013-0505831I7 - Rollover and subsequent disposition of property
The taxpayer, a Canadian corporation, transferred all its voting and participating shares of Subco, a non-resident subsidiary wholly-owned corporation, to Forco (another controlled foreign affiliate) in consideration for shares of Forco. Forco also exercised an option to acquire IP from a group member. Forco sold its IP to an arm's length US purchaser ("Purchaseco") and another company in the Purchaseco group, and then sold all its shares of Subco to Purchaseco.
In finding that s. 69(11)(b) did not apply to deny a rollover under s. 85.1(3) for the drop-down of Subco to Forco, the Directorate stated:
The fact that there is no tax payable under the Act by Forco with respect to its gain on the disposition of the Subco shares is due to the fact that the disposition does not result in any income under the Act (Forco is simply not subject to tax under subsection 2(3) of the Act), not because an exemption from tax payable under the Act is available to Forco. Consequently, paragraph 69(11)(b) of the Act would not apply… .
The Directorate went on to state:
[A] court would probably be reluctant to apply subsection 69(11) of the Act to deny the benefit of the 85.1(3) rollover where the conditions to apply subsection 85.1(3) of the Act are met (considering paragraph 95(6)(b) of the Act) and where subsection 85.1(4) of the Act does not apply in a particular situation.
S. 85.1(4) was not considered here because there was to be a separate referral on that issue.
2010 Ruling 2010-037380
A foreign cooperative, treated as a corporation under the foreign nation's law, is deemed to have "shares" for the purposes of determining "direct equity percentage" under s. 95(4), for disposition of shares of a foreign affiliate under s. 85.1(3), and for exchanges of shares under s. 86(1).
Articles
Tasso Lagios, Arda Minassian, "Foreign Accrual Property Income: Pitfalls for the Unwary", 1999 Conference Report, c. 3.
R. Ian Crosbie, "Canadian Income Tax Issues Relating to Cross-Border Share Exchange Transactions", 1997 Corporate Management Tax Conference Report, c. 12.
Schwartz, "Tax-Free Reorganizations of Foreign Affiliates", 1984 Canadian Tax Journal, November-December 1984, p. 1039.
Subsection 85.1(4) - Exception
Administrative Policy
25 October 1994 T.I. 941409 (C.T.O. "Transfer of Shares of Foreign Affiliate (H.A.A. 6363)")
S.85.1(4) will not apply where Canco, which owns 100% of USco, transfers its shares of USco for fair market value consideration to a U.S. holding company ("Holdco") that also is a foreign affiliate of Canco, and Holdco then issues common shares to the public and has some of its shares sold by Canco to the public.
Subsection 85.1(5) - Foreign share for foreign share exchange
Administrative Policy
19 June 2000 Memorandum 2000-002778
Where a U.S. public company of which the taxpayer's employer was a Canadian subsidiary merges with another corporation, s. 85.1(5) will not provide rollover treatment in respect of the issuance of shares by the merged corporations to the taxpayer in exchange for his employee stock option rights.