Income Tax Act

Marginal note:Share for share exchange

• 85.1 (1) Where shares of any particular class of the capital stock of a Canadian corporation (in this section referred to as the “purchaser”) are issued to a taxpayer (in this section referred to as the “vendor”) by the purchaser in exchange for a capital property of the vendor that is shares of any particular class of the capital stock (in this section referred to as the “exchanged shares”) of another corporation that is a taxable Canadian corporation (in this section referred to as the “acquired corporation”), subject to subsection 85.1(2),

  • (a) except where the vendor has, in the vendor’s return of income for the taxation year in which the exchange occurred, included in computing the vendor’s income for that year any portion of the gain or loss, otherwise determined, from the disposition of the exchanged shares, the vendor shall be deemed

    • (i) to have disposed of the exchanged shares for proceeds of disposition equal to the adjusted cost base to the vendor of those shares immediately before the exchange, and

    • (ii) to have acquired the shares of the purchaser at a cost to the vendor equal to the adjusted cost base to the vendor of the exchanged shares immediately before the exchange,

    and where the exchanged shares were taxable Canadian property of the vendor, the shares of the purchaser so acquired by the vendor shall be deemed to be taxable Canadian property of the vendor; and

  • (b) the cost to the purchaser of each exchanged share, at any time up to and including the time the purchaser disposed of the share, shall be deemed to be the lesser of

    • (i) its fair market value immediately before the exchange, and

    • (ii) its paid-up capital immediately before the exchange.

• Marginal note:Where s. (1) does not apply

  (2) Subsection 85.1(1) does not apply where

  • (a) the vendor and purchaser were, immediately before the exchange, not dealing with each other at arm’s length (otherwise than because of a right referred to in paragraph 251(5)(b) that is a right of the purchaser to acquire the exchanged shares);

  • (b) the vendor or persons with whom the vendor did not deal at arm’s length, or the vendor together with persons with whom the vendor did not deal at arm’s length,

    • (i) controlled the purchaser, or

    • (ii) beneficially owned shares of the capital stock of the purchaser having a fair market value of more than 50% of the fair market value of all of the outstanding shares of the capital stock of the purchaser,

    immediately after the exchange;

  • (c) the vendor and the purchaser have filed an election under subsection 85(1) or 85(2) with respect to the exchanged shares;

  • (d) consideration other than shares of the particular class of the capital stock of the purchaser was received by the vendor for the exchanged shares, notwithstanding that the vendor may have disposed of shares of the capital stock of the acquired corporation (other than the exchanged shares) to the purchaser for consideration other than shares of one class of the capital stock of the purchaser; or

  • (e) the vendor

    • (i) is a foreign affiliate of a taxpayer resident in Canada at the end of the taxation year of the vendor in which the exchange occurred, and

    • (ii) has included any portion of the gain or loss, otherwise determined, from the disposition of the exchanged shares in computing its foreign accrual property income for the taxation year of the vendor in which the exchange occurred.

• Marginal note:Computation of paid-up capital

  (2.1) Where, at any time, a purchaser has issued shares of its capital stock as a result of an exchange to which subsection 85.1(1) applied, in computing the paid-up capital in respect of any particular class of shares of its capital stock at any particular time after that time

  • (a) there shall be deducted that proportion of the amount, if any, by which

    • (i) the increase, if any, as a result of the issue, in the paid-up capital in respect of all the shares of the capital stock of the purchaser, computed without reference to this subsection as it applies to the issue,

    exceeds

    • (ii) the paid-up capital in respect of all the exchanged shares received as a result of the exchange

    that

    • (iii) the increase, if any, as a result of the issue, in the paid-up capital in respect of the particular class of shares, computed without reference to this subsection as it applies to the issue,

    is of

    • (iv) the amount, if any, determined in subparagraph 85.1(2.1)(a)(i) in respect of the issue; and

  • (b) there shall be added an amount equal to the lesser of

    • (i) the amount, if any, by which

      • (A) the total of all amounts each of which is an amount deemed by subsection 84(3), 84(4) or 84(4.1) to be a dividend on shares of that class paid by the purchaser before the particular time

      exceeds

      • (B) the total that would be determined under clause 85.1(2.1)(b)(i)(A) if this Act were read without reference to paragraph 85.1(2.1)(a), and

    • (ii) the total of all amounts required by paragraph 85.1(2.1)(a) to be deducted in respect of that particular class of shares before the particular time.

• Marginal note:Disposition of shares of foreign affiliate

  (3) Where a taxpayer has disposed of capital property that was shares of the capital stock of a foreign affiliate of the taxpayer to any corporation that was, immediately following the disposition, a foreign affiliate of the taxpayer (in this subsection referred to as the “acquiring affiliate”) for consideration including shares of the capital stock of the acquiring affiliate,

  • (a) the cost to the taxpayer of any property (other than shares of the capital stock of the acquiring affiliate) receivable by the taxpayer as consideration for the disposition shall be deemed to be the fair market value of the property at the time of the disposition;

  • (b) the cost to the taxpayer of any shares of any class of the capital stock of the acquiring affiliate receivable by the taxpayer as consideration for the disposition shall be deemed to be that proportion of the amount, if any, by which the total of the adjusted cost bases to the taxpayer, immediately before the disposition, of the shares disposed of exceeds the fair market value at that time of the consideration receivable for the disposition (other than shares of the capital stock of the acquiring affiliate) that

    • (i) the fair market value, immediately after the disposition, of those shares of the acquiring affiliate of that class

    is of

    • (ii) the fair market value, immediately after the disposition, of all shares of the capital stock of the acquiring affiliate receivable by the taxpayer as consideration for the disposition;

  • (c) the taxpayer’s proceeds of disposition of the shares shall be deemed to be an amount equal to the cost to the taxpayer of all shares and other property receivable by the taxpayer from the acquiring affiliate as consideration for the disposition; and

  • (d) the cost to the acquiring affiliate of the shares acquired from the taxpayer shall be deemed to be an amount equal to the taxpayer’s proceeds of disposition referred to in paragraph 85.1(3)(c).

• Marginal note:Exception

  (4) Subsection 85.1(3) is not applicable in respect of a disposition at any time by a taxpayer of a share of the capital stock of a foreign affiliate, all or substantially all of the property of which at that time was excluded property (within the meaning assigned by subsection 95(1)), to another foreign affiliate of the taxpayer where the disposition is part of a series of transactions or events for the purpose of disposing of the share to a person who, immediately after the series of transactions or events, was a person (other than a foreign affiliate of the taxpayer) with whom the taxpayer was dealing at arm’s length.

• Marginal note:Foreign share for foreign share exchange

  (5) Subject to subsections (3) and (6) and 95(2), where a corporation resident in a country other than Canada (in this section referred to as the “foreign purchaser”) issues shares of its capital stock (in this section referred to as the “issued foreign shares”) to a vendor in exchange for shares of the capital stock of another corporation resident in a country other than Canada (in this section referred to as the “exchanged foreign shares”) that were immediately before the exchange capital property of the vendor, except where the vendor has, in the vendor’s return of income for the taxation year in which the exchange occurred, included in computing the vendor’s income for that year any portion of the gain or loss, otherwise determined, from the disposition of the exchanged foreign shares, the vendor is deemed

  • (a) to have disposed of the exchanged foreign shares for proceeds of disposition equal to the adjusted cost base to the vendor of those shares immediately before the exchange, and

  • (b) to have acquired the issued foreign shares at a cost to the vendor equal to the adjusted cost base to the vendor of the exchanged foreign shares immediately before the exchange,

  and where the exchanged foreign shares were taxable Canadian property of the vendor, the issued foreign shares so acquired by the vendor are deemed to be taxable Canadian property of the vendor.

• Marginal note:Where subsection (5) does not apply

  (6) Subsection (5) does not apply where

  • (a) the vendor and foreign purchaser were, immediately before the exchange, not dealing with each other at arm’s length (otherwise than because of a right referred to in paragraph 251(5)(b) that is a right of the foreign purchaser to acquire the exchanged foreign shares);

  • (b) immediately after the exchange the vendor, persons with whom the vendor did not deal at arm’s length or the vendor together with persons with whom the vendor did not deal at arm’s length

    • (i) controlled the foreign purchaser, or

    • (ii) beneficially owned shares of the capital stock of the foreign purchaser having a fair market value of more than 50% of the fair market value of all of the outstanding shares of the capital stock of the foreign purchaser;

  • (c) consideration other than issued foreign shares was received by the vendor for the exchanged foreign shares, notwithstanding that the vendor may have disposed of shares of the capital stock of the other corporation referred to in subsection (5) (other than the exchanged foreign shares) to the foreign purchaser for consideration other than shares of the capital stock of the foreign purchaser;

  • (d) the vendor

    • (i) is a foreign affiliate of a taxpayer resident in Canada at the end of the taxation year of the vendor in which the exchange occurred, and

    • (ii) has included any portion of the gain or loss, otherwise determined, from the disposition of the exchanged foreign shares in computing its foreign accrual property income for the taxation year of the vendor in which the exchange occurred; or

  • (e) the vendor is a foreign affiliate of a taxpayer resident in Canada at the end of the taxation year of the vendor in which the exchange occurred and the exchanged foreign shares are excluded property (within the meaning assigned by subsection 95(1)) of the vendor.