Mark Brender, Osler, Hoskin & Harcourt LLP, Montreal Rick McLean, CPA, CA, KPMG LLP, Toronto Shawn Porter, Deloitte LLP, Toronto

Transcription

1 Mark Brender, Osler, Hoskin & Harcourt LLP, Montreal Rick McLean, CPA, CA, KPMG LLP, Toronto Shawn Porter, Deloitte LLP, Toronto

2 Introduction Section 85 Section 84.1 Section Section 86 Section 51 Section

3 Overview of Provisions Governing Share Exchanges 86, 51, 85, and 85.1 permit tax-deferred share exchanges in various circumstances 86 and 51 applies to share exchanges involving the same corporation only 85 applies to share exchanges involving the same or another corporation Order of application is 85, then 86, then 51 86(3) provides that 86(1) does not apply if 85(1) applies 51(4) provides that 51(1) does not apply if 85(1) or 86(1) applies 85.1 applies to shares exchanges involving another corporation only 85.1(2)(c) provides that 85.1(1) does not apply if 85(1) applies 84.1 and are anti-avoidance rules applicable to share exchanges involving another corporation 3

4 Section 85 4

5 Subsection 85(1) Requirements disposition of property property is eligible property in 85(1.1) disposition to a taxable Canadian corporation consideration must include shares taxpayer and corporation jointly elect 5

6 Subsection 85(1) Requirement to Receive Shares Consideration must include shares but nonshare consideration ( boot ) can be issued 248(1) share means a share or fraction of a share Timing of receipt of share issued subsequent to transfer of property 6

7 Subsection 85(1) Disposition to a taxable Canadian corporation can apply on exchange of shares of the same corporation or another corporation 51(1) and 86(1) only provide rollover for shares of same corporation 7

8 Section 85 Conditions for Application 85(1) provides joint election to transfer certain assets on a tax-deferred basis Conditions Taxpayer is transferor Partnership must elect under 85(2) Taxable Canadian corporation is transferee 89(1) taxable Canadian corporation means Canadian corporation not tax exempt 89(1) Canadian corporation generally means incorporated in Canada 85 can apply on share exchange with same or another corporation 84(9) treats redemption as disposition of shares by taxpayer to corporation, and facilitates 85 share exchange with same corporation Taxpayer disposes of eligible property to the corporation 85(1.1) eligible property includes shares held by taxpayer as capital property 8

9 Section 85 Conditions for Application Consideration received by taxpayer includes shares of corporation Boot is possible Shares need not be issued simultaneously with the transfer of property as consideration but obligation to issue shares can be executory within a reasonable time: see Dale v. The Queen, 94 D.T.C at para. 51 (T.C.C.), aff d 97 D.T.C (F.C.A.) Taxpayer and corporation jointly elect in prescribed form within time set by 85(6) Possible to late-file as of right within 3 years per 85(7), and thereafter with leave of Minister per 85(7.1), subject to penalty 9

10 Section 85 Consequences of Election Generally, tax attributes limited to the elected amount set out in the 85 election Taxpayer realizes POD for property equal to elected amount under 85(1)(a) Corporation s ACB of property equal to elected amount under 85(1)(a) 85(2.1) sets PUC of shares of corporation issued to taxpayer Unless 84.1 or applies, if stated capital of shares exceeds difference between elected amount and FMV of boot, then PUC reduced to the amount by which elected amount exceeds boot, and allocated amongst various classes of new shares pro rata based on legal stated capital per 85(2.1)(a) 85(2.1)(b) adds back to PUC of shares any deemed dividend arising thereafter under 84(3), (4) or (4.1) as a result of the PUC reduction under 86(2.1)(a) 10

11 Section 85 Consequences of Election Taxpayer s ACB of boot and shares of corporation in aggregate equals the elected amount, allocated as follows: First to boot up to its FMV allocated pro rata amongst all non-share consideration based on their relative FMV under 85(1)(f) Then to preferred shares allocated pro rata amongst various classes based on their relative FMV under 85(1)(g) Last to common shares pro rata amongst various classes based on their relative FMV under 85(1)(h) 11

12 Section 85 Elected Amount Elected amount must fall within permissible range between lower and upper limits Upper limit set by 85(1)(c) at the FMV of the property Cannot elect to create excessive capital gain or limit a capital loss to the taxpayer and imbue property with an inherent loss for the corporation Lower limit for the elected amount set by 85(1)(e.3) at greater of the amount determined under 85(1)(b) and (c.1) 85(1)(b) provides elected amount cannot be less than FMV of boot Excessive boot gives rise to a capital gain to the taxpayer 85(1)(c.1) provides that, for non-depreciable capital property, the lower limit is the lesser of FMV of the property and the ACB to the transferor of the property Tax deferral available to extent of share consideration Cannot elect to create a capital loss to the taxpayer 12

13 100 c/s ACB = 100 FMV = 200 Opco Taxpayer 100 new c/s FMV = 100 Holdco Note FMV = Taxpayer exchanges 100 Opco c/s for 100 new c/s of Holdco and a Note 2. Taxpayer and Holdco jointly elect under 85(1) at elected amount of $100 Section 85 Example Taxpayer realizes proceeds of disposition for Opco shares equal to $100, the elected amount No gain or loss Holdco acquires 100 Opco c/s at cost of $100, the elected amount Taxpayer acquires Note (boot) at a cost of $100, the elected amount Taxpayer acquires 100 new c/s of Holdco at cost of nil PUC of 100 new c/s reduced to nil 13

14 Subsection 85(1) Transfer shares of one corporation to another 15(1) conferral of benefit? 69(1)(a) cost adjustment? 69(1)(b) deemed proceeds? 14

15 FMV 10 A Opco Issue 1 addl share FMV 20 Holdco Other Subsection 85(1) - example A owns 100% of Opco A owns 100% of Holdco A transfer shares of Opco to Holdco for 1 Holdco share FMV of Opco shares is $10 FMV of each Holdco share is $20 1 Holdco share issued as consideration for Opco shares, does A receive benefit? 15

16 Subsection 85(1) 15(1) Where a benefit is conferred on a shareholder Value of benefit included in income In wholly-owned situation, is it reasonable to say the shareholder has received a benefit? CRA technical interpretation

17 FMV 20 A Opco Issue share FMV 10 Holdco Other Subsection 85(1) example A owns 100% of Opco A owns 100% of Holdco A transfers shares of Opco to Holdco for 1 Holdco share FMV of Opco shares is $20 (ACB is $20) FMV of each Holdco share is $10 1 Holdco share issued as consideration for Opco shares 17

18 Subsection 85(1) 69(1)(b) Deemed to received FMV proceeds because only received $10 instead of $20 18

19 Subsection 85(1) 69(1)(a) Taxpayer has acquired share of Holdco Consideration paid was $20 (Opco share) Consideration paid was in excess of property acquired ($10 Holdco share) Taxpayer deemed to have acquired share at cost of $10 19

20 Subsection 85(1) 85(1) overrides 69(1) 69(1) begins with except as expressly otherwise provided File 85(1) election to avoid 69(1)(a), (b) 20

21 Subsection 85(1) In above example, taxpayer received share consideration worth $10 for property worth $20 85(1)(e.2) Gifting provision If reasonable to consider any excess of FMV of property transferred over FMV of consideration as a benefit that transferor desired to confer on a related person Excess is added to elected amount and increases proceeds of disposition A corporation that is wholly-owned by the taxpayer is excluded from being a potential recipient of a benefit 21

22 Subsection 85(1) Internal Share Exchanges Isolation of Adjusted Cost Base 85(1)(g), (h) Elected amount allocated to preferred shares first (up to FMV) Cannot be done under 86(1) or 51(1) 22

23 Subsection 85(1) Internal Share Exchanges Example: Common Shares of Opco FMV $2,000 ACB $500 PUC $0 Exchange common shares for: Pref Common FMV $500 FMV $1,500 ACB $500 ACB $0 Elect under 85(1) at ACB of $500 Consider allocation of safe income 23

24 Subsection 85(1) Internal Share Exchanges Deemed Dividend Trap Exchange common shares for: Pref Common FMV $500 FMV $1,500 ACB $500 ACB $0 PUC of old shares was nil What if legal stated capital of new shares set at FMV on exchange? 24

25 Subsection 85(1) Internal Share Exchanges Deemed Dividend Trap 85(2.1) restricts PUC to cost of acquired property 85(1) deems cost of acquired property to be equal to elected amount In above example, elected amount $500 PUC reduced to $500 under 85(2.1) 25

26 Subsection 85(1) Internal Share Exchanges Deemed Dividend Trap PUC before was nil PUC after is $500 Deemed dividend of $500 under 84(1) Consider ability to set stated capital under relevant Business Corporations Act 26

27 Section 85 Share Exchange to Isolate ACB (Deemed Dividend Trap) 100 old c/s ACB = 50 FMV = 200 PUC = nil Taxpayer Opco 100 new c/s FMV = p/s FMV = Taxpayer exchanges 100 old c/s for 100 new c/s and 100 p/s of Opco 2. Taxpayer and Opco jointly elect under 85(1) at elected amount of $50 Taxpayer does not realize gain or loss on disposition of 100 old c/s Taxpayer acquires 100 p/s at cost of $50, the elected amount (allocated first to the p/s of Opco) Taxpayer acquires 100 new c/s of Holdco at cost of nil (no remaining elected amount) Isolates ACB in p/s only If stated capital of p/s and new c/s set at FMV, 85(2.1) grinds PUC of both classes pro rata down to elected amount of $50 in aggregate PUC of p/s reduced to $12.50 PUC of new c/s reduced to $ (1) deemed dividend arises because PUC before was nil, PUC after is $50 SOLUTION may be to restrict legal stated capital voluntarily to nil per OBCA 24(3)(a) 27

28 Subsection 85(1) Disposition on Internal Share Exchanges 85(1) and 86(1) require the old shares to be disposed of CRA comments on conversion of common shares into preferred shares

29 Subsection 85(1) Disposition on Internal Share Exchanges 248(1) disposition (b) disposition where share is cancelled Document E5 No disposition even though cancelled OBCA amendments 22(7) Different classes may have same rights 29

30 Section 85 Other Pitfalls Can create shareholder benefit under 15(1) if FMV of boot exceeds FMV of transferred property If property transferred is taxable Canadian property, shares received are deemed to be taxable Canadian property (85(1)(i)) Can create benefit conferral issue under 85(1)(e.2) if FMV of transferred property exceeds each of FMV of consideration received and elected amount and desired to confer benefit on related person. Adjusted elected amount upward in that case 30

31 Section 84.1 Section

32 Section 84.1 Anti-avoidance rule Aimed at preventing surplus stripping Can apply when shares of one corporation are transferred to another Can result in deemed dividend and / or PUC grind 32

33 Section 84.1 Can apply when shares of one corporation are transferred to another Doesn t apply if transferor is a corporation If taxpayer and purchaser corporation ( purchaser ) deal non-arm s length If transferred corporation connected with purchaser immediately after 33

34 Section 84.1 Act allows creation of PUC in certain cases PUC can be created from ACB of shares of another corporation 85(2.1) limits PUC to elected amount not old PUC Above subject to

35 Section 84.1 Not Applicable to Transfer by Corporation Opco shares acquired by Acquisitionco FMV $100 ACB $100 PUC $0 Later, want to extract purchase price Transfer Opco shares to related Holdco 35

36 Non-Arm s Length Transfer by Corporation - 85(2.1) Opco shares FMV $100 ACB $100 PUC $0 Holdco shares FMV $100 ACB $100 PUC $100 85(2.1) does not reduce PUC 84.1 does not apply Does not matter that transfer was non-arm s length AcqCo F 100 A 100 P 0 Opco F 100 A 100 P 100 Holdco 36

37 Section 84.1 Opco shares acquired by individual in arm s length purchase FMV $100 ACB $100 PUC $0 Later, want to extract purchase price Transfer Opco shares to related Holdco 37

38 Section 84.1 Opco shares FMV $100 ACB $100 PUC $0 Holdco shares FMV $100 ACB $100 PUC $100 85(2.1) does not reduce PUC Consider application of 84.1 Taxpayer F 100 A 100 P 0 Opco F 100 A 100 P 100 Holdco 38

39 Section (2.1) does not apply if 84.1 applies In above example, 84.1 is applicable Transfer by individual Non-arm s length Connected corporations 39

40 Section 84.1 Deemed dividend if boot exceeds Greater of PUC of old shares Hard ACB PUC reduction based on greater of amounts above less boot 40

41 Section 84.1 Hard ACB ACB reduced for CGE claimed by taxpayer or non-arm s length person V-Day Value increments In above example, hard ACB of 100 Can create PUC of

42 Sections 84.1 Simple Example Father Dadco c/s FMV = 100 PUC = 1 ACB = 1 Note FMV = $100 Dadco Sonco Son Father sells Dadco c/s to Sonco for Note of $100 Non-arm s length sale of Dadco shares by Father to another Sonco with which Father does not deal at arm s length, and the two corporations are connected thereafter 84.1(1)(b) deems dividend paid to Father by Sonco of $99, being the difference between FMV of Note ($100) and greater of PUC and Hard ACB ($1) Father s POD for Dadco c/s reduced by amount of deemed dividend down to $1 No gain or loss Cannot claim capital gains exemption; instead realize deemed dividend 42

43 Section 84.1 Case Law: Desmarais Misuse or abuse of section 84.1 Avoided connected test by transferring 9.8% of shares Used surpluses of another corporation GAAR applied 43

44 Section 84.1 Case Law: Brouillette CRA said taxpayer not dealing at arm s length with purchaser corporation Court found dealing at arm s length Interests were distinct Use of same accounting firm for tax-planning advice did not mean acting in concert Clients, not advisers made decisions and acted with their own benefit in mind 44

45 A FMV > ACB PUC = 0 Cash = 500K Farmco Xco X FMV = 500K Section 84.1: CGE Monetization Taxpayer A and Taxpayer X are not related A sells 500K of shares to Xco A claims CGE Xco pays 500K cash to A A lends the cash to Farmco Farmco redeems the shares held by Xco CRA: 84.1 applies CRA: GAAR could apply See E5 See Geransky and MacDonald cases 45

46 A B X 50% Note 33.33% Newco Section 84.1: Purchase Shares of Co-Owner Opco A, B, X own 1/3 of Opco A, B set up Newco to buy shares from X Newco issues Note to X Opco purchases for cancellation shares held by Newco CRA: No 84.1; No 55(2) See

47 Section 84.1 CRA Comments at 2012 Canadian Tax Foundation Annual Conference Employee Buyco Rulings In the late 1990s and early 2000s, advance income tax rulings were issued on transactions that were designed to allow departing employeeshareholders of private corporations to realize a capital gain, as opposed to a deemed dividend, on the disposition of their shares. In a typical transaction, employees of a corporation (Opco) would receive Opco shares as incentives under an Opco employee share ownership plan (ESOP). Under the terms of the ESOP, on retirement or other termination of employment, the employees would be required to dispose of these shares. To facilitate the disposition, Opco would incorporate and fund another corporation (Buyco). Buyco would use the funds to purchase the departing employee's Opco shares. 47

48 Section 84.1 CRA Comments at 2012 Canadian Tax Foundation Annual Conference In the advance income tax rulings issued in respect of these transactions, we had provided assurance that section 84.1 would not apply to deem departing employees to receive a dividend on the disposition of their Opco shares. However, this assurance was based on representations that the employees would deal at arm's length with Buyco and that Buyco was not an agent of Opco. We are of the view that, given the degree of accommodation provided by Buyco to the departing employees and the parties' lack of separate interests, the better view is that the employees and Buyco are generally not dealing at arm's length. This view is consistent with several of our published documents7 as well as the jurisprudence.8 Accordingly, in ruling requests on this type of transaction considered in 2012, we refused to confirm that section 84.1 would not apply to deem employees to receive a dividend from a Buyco on the disposition of their Opco shares. 48

49 Section 84.1 Conditions for Application 84.1 is an anti-avoidance rule for a non-arm s length sale of shares by individual Vendor is an individual or trust resident in Canada Vendor disposes of shares that are capital property ( subject shares ) Subject shares are shares of class of a corporation resident in Canada ( subject corporation ) Purchaser is another corporation ( purchaser corporation ) that does not deal at arm s length with the taxpayer Taxpayer and purchaser corporation deemed non-arm s length if taxpayer is part of a group of fewer than 6 persons that controlled the subject corporation before transfer and taxpayer is part of same group (or subset thereof) that controlled purchaser corporation after transfer No Silicon Graphics nexus required for persons to form group per 84.1(2.2)(b) Multiple groups possible per 84.1(2.2)(d)) 49

50 Section 84.1 Conditions for Application After disposition, purchaser corporation and subject corporation are connected per 186(4) Control (including control by other non-arm s length persons per 186(2)); or Ownership of shares having 10% votes and value 84.1 aims at artificial capital gains stripping in a non-arm s length context by an individual who wishes to access the capital gains exemption or lower capital gains tax rates Similar rule in for non-arm s length sale of Canco shares by nonresident to another Canco Foreign affiliate dumping rules in extend principle in in certain circumstances 50

51 Section 84.1 Consequences of Application PUC in shares of purchaser corporation issued to taxpayer limited to the greater of Hard ACB and PUC of subject shares less FMV of boot per 84.1(1)(a) Hard ACB means basis in subject shares that excludes tax-free permanent ACB bumps Ignore V-day bump in ACB per 84.1(1)(a) Ignore bump in ACB attributable to capital gains exemption of the taxpayer or a non-arm s length person in respect of a previous disposition of share per 84.1(2)(a.1)(ii) If multiple classes of shares of purchaser corporation issued, such reduced PUC allocated pro rata amongst all classes based on legal stated capital Deemed dividend paid to taxpayer by purchaser corporation in amount of difference between FMV of boot and the greater of PUC of subject shares and Hard ACB 84.1(1)(b) deemed dividend reduces 54 proceeds of disposition (k) of subject shares to avoid double tax 51

52 Section Rule similar to 84.1 in for non-arm s length sale of Canco shares by non-resident to another Canco However, hard ACB is not relevant Consideration over PUC is deemed dividend PUC grind for new PUC in excess of old PUC Foreign affiliate dumping rules in extend principle in in certain circumstances 52

53 Section 86 53

54 Section 86 Conditions for Application S86 provides a tax-deferred share exchange of the same corporation In the course of a reorganization of capital Includes an amendment to the articles of incorporation/continuance/amalgamation: see CRA document no C6, dated October 8, 2010; and ATR-33, dated October 7,

55 Section 86 Conditions for Application Taxpayer is vendor A corporation Includes non-resident corporation, tax-exempt corporation Taxpayer disposes of all of its shares of a class of the corporation ( exchanged shares ) Exchanged shares are capital property to the taxpayer Consideration includes other shares of the same corporation Possible to issue non-share consideration ( boot ) Section 85 joint election is not filed per 86(3) 55

56 Section 86 disposed of capital property that was all the shares of any particular class 86 requires taxpayer to dispose of all of the exchanged shares Consider share exchange of old c/s of corporation for new c/s with identical terms and conditions 248(1) disposition (b)(i) includes a redemption or cancellation of shares Should be no requirement to alter share terms to create disposition CRA accepts this conclusion in some cases: see CRA document no

57 Section 86 Disposition of all shares BUT CRA has said that a taxpayer would not have realized a disposition of a particular share of a corporation if, after an exchange of shares, he finds himself with a share having the same rights, preferences, conditions and restrictions as those of the particular share : see CRA document nos , E5 Eliminate uncertainty by changing share terms For examples, see CRA document nos R3, R3, R3 as well as R3 Mere conversion of shares into a different class (e.g., renaming class of shares) is insufficient: see CRA document no , dated March 19, 1992 For example: Double the number of votes per share Nominal liquidation or dividend entitlement (e.g. same rights as old but entitled to first $100 on liquidation) BUT can create taxable preferred share concern Nominal voting restriction BUT can give rise to Part IV tax on inter-corporate dividend as connected requires control or ownership of 10% of votes and value of shares with full voting rights in all circumstances per 186(2) and (4) 57

58 Subsection 86(1) Allocation of ACB 86(1)(b) Allocated pro rata to new classes based on relative FMV PUC grind 86(2.1) Based on PUC of old less boot Different than 85(2.1) 58

59 Subsection 86(1) Distribution of property under 86(1) Transactions have used 86(1) to distribute property ( boot ) Deemed dividend under 84(3) If boot exceeds old PUC Consider application of 55(2) 59

60 Subsection 86(1) Deemed dividend under 84(3) reduces deemed proceeds of disposition 86(1)(c) Paragraph (j) proceeds of disposition in section 54 Can have combination of deemed dividend and capital gain 60

61 Subsection 86(1) Example: Exchange share under 86(1) FMV $100 ACB $10 PUC $10 Boot $15 Deemed dividend of $5 POD 86(1)(c) Boot $15 less dividend of $5 = POD of $10 POD $10 ACB $10 = $0 capital gain 61

62 Note FMV = 50 Taxpayer 100 p/s FMV = c/s ACB = 50 FMV = 200 PUC = nil Opco Children new c/s ACB = nil FMV = nil PUC = nil 1. Opco amends articles of incorporation to create a new class of p/s 2. Taxpayer exchanges 100 c/s for 100 p/s having FMV of $150 and a Note having FMV of $50 3. Children subscribe for c/s for nominal consideration Section 86 Estate Freeze (Deemed Dividend Trap) Taxpayer s ACB in Note is $50, FMV of boot Taxpayer s ACB in 100 p/s of Opco equals nil, the ACB of old shares ($50) less FMV of boot ($50) 84(3) creates deemed dividend of $50, the difference between redemption price ($50) and PUC of old c/s (nil) No 55(2) if internal reorg per 55(3)(a) Tax cost if Taxpayer not a corporation (If no Note, 84(3) should not apply as 84(5) would cause redemption price to be nil, equal to the nil PUC of shares issued) Taxpayer s POD for 100 c/s is nil, equal to the ACB of new shares (nil) plus FMV of boot ($50) less the 84(3) deemed dividend ($50) PUC of 100 p/s of Opco is nil, being the difference, if any, between PUC of old shares (nil) less FMV of boot ($50) per 86(2.1)(a) Tax under Part IV, and Parts VI.1 and IV.1, should not arise if taxpayer is a corporation, taxpayer and Opco are connected and Taxpayer has significant interest in Opco, respectively 62

63 c/s Spinco old c/s Public Target Purchaser p/s 1. Purchaser proposes to take over Target but is not interested in Spinco 2. Target amends articles of incorporation to create a class of preferred shares redeemable in aggregate at the takeover price 3. Public exchanges Target old c/s for p/s and boot consisting of c/s of Spinco 4. Purchaser acquires p/s of Target 86 Example: Public Spinoff 86 applies to share exchange before takeover Public s ACB of c/s of Spinco equals FMV Public s ACB of p/s of Target equals difference between ACB of old c/s of Target and FMV of boot (i.e., Spinco c/s) Public s POD for old c/s equals total of ACB of new p/s of Target and FMV of boot (i.e., Spinco c/s) (subject to any 84(3) deemed dividend arising) PUC of p/s of Target is difference, if any, between PUC of old shares less FMV of boot per 86(2.1)(a) Need mechanism for funding dividend WHT for non-resident shareholders if deemed dividend arose 63

64 Section 86 Consequences of Application Taxpayer s ACB of boot equals FMV thereof per 86(1)(a) Taxpayer s ACB of new shares of any class of corporation is difference between ACB of old shares less FMV of boot allocated pro rata amongst all classes of new shares based on relative FMV per 86(1)(b) Cannot isolate ACB PUC of new shares limited to the PUC of old shares less FMV of boot per 86(2.1)(a) allocated amongst various classes of new shares pro rata based on legal stated capital 86(2.1)(b) adds back to PUC of shares any deemed dividend arising thereafter under 84(3), (4) or (4.1) as a result of the PUC reduction under 86(2.1)(a) Taxpayer realizes POD of old shares equal to ACB of new shares and FMV of boot per 86(1)(c) No gain if FMV of boot does not exceed ACB of the old shares If FMV of boot exceeds ACB of old shares, a capital gain or a deemed dividend or both can arise and ACB of new shares is nil Deemed dividend On redemption of shares, 84(3) deems a dividend paid to taxpayer by corporation to the extent that redemption price exceeds PUC of old shares (for share consideration, redemption price valued at PUC of shares issued per 84(5)) If FMV of boot exceeds PUC of old shares, deemed dividend arises Consider the application of 55(2) 84(3) deemed dividend reduces deemed POD per 54 proceeds of disposition (j) 64

65 Section 86 Other Considerations No rule that continues taxable Canadian property status, unlike 51, 85, and 85.1 Rule may benefit a non-resident, subject to the GAAR 86(4) preserves debt forgiveness history of old shares for the new shares Can create benefit conferral issue under 86(2) if FMV of old shares exceeds FMV of consideration received and desired to confer benefit on related shareholder Unlike 85(1)(e.2), no exception for related person that is wholly-owned subsidiary of the taxpayer Taxpayer realizes POD for old shares equal to FMV of boot plus the amount of the benefit (up to FMV of old shares) Taxpayer s ACB of new shares deemed to be equal to its ACB of old shares less total of FMV of boot and amount of benefit If more than one class of new shares issued, ACB allocated amongst classes in relation to their respective FMV 65

66 Section 51 66

67 Subsection 51(1) Applies on an exchange of a share for another share of the same corporation No non-share consideration Automatic No election No disposition required 67

68 Subsection 51(1) Allocation of ACB 51(1)(d) Allocated pro rata to new classes based on relative FMV Proration formula applies even if one class of shares What if FMV of new shares is nil? 68

69 Subsection 51(1) CRA technical interpretation C6 FMV of old shares: nil (or negative ) debt exceeds company s value ACB of old shares: say, $10 million New shares received have FMV of nil 51(1)(d): ACB of new shares = ACB old x 0/0 If old / new shares had value of even $1.00, ACB of new shares would be $10 million Anomaly also applies to 86(1) 69

70 Subsection 51(1) PUC grind 51(3) Based on PUC of old Different than 85(2.1) and 86(2.1) 70

71 Taxpayer A 100 Class A c/s 100 Class B c/s Taxpayer B Section 51 Example: Simplification of Capital Structure new c/s Opco new c/s 1. Each of Taxpayer A and Taxpayer B converts 100 Class A c/s and 100 Class B c/s, respectively, into new c/s of Opco 51 share exchange Taxpayer A and Taxpayer B deemed not to dispose of old shares Taxpayer A and Taxpayer B s ACB of new c/s equals its ACB of its old shares PUC of new c/s equals PUC of old shares 71

72 Section 51 Conditions for Application Section 51 provides tax-deferred exchange of shares (or convertible debt into shares) of the same corporation Conditions Taxpayer acquires share of a corporation from the corporation Corporation can be a non-resident or a tax exempt Exchange with the issuer only (not another shareholder or another corporation) 72

73 Section 51 Conditions for Application In exchange for capital property of the taxpayer that is Another share of the same corporation No need for conversion feature within the share terms A bond, debenture or note of the corporation the terms of which confer on the holder the right to make the exchange ( convertible debt ) Possible to add a conversion right to debt without triggering a disposition: see IT-448, Dispositions Changes in Terms of Securities, dated June 6, 1980, at para. 5 No need to convert all shares or convertible debt held by taxpayer No boot is received by the taxpayer CRA accepts non-share consideration in lieu of fractional share, but taxpayer must reduce ACB of whole shares received by FMV of that boot 85 and 86 do not apply 73

74 Section 51 Consequences of Application Vendor deemed not to dispose of the old shares or convertible debt per 51(1)(c) Except for purposes of 20(21) relating to over-accrual of interest income and certain rules for non-resident trusts in 44.1(6) and 94(2)(m) Therefore, no gain or loss realized by vendor No reporting or elections required Vendor s ACB in new shares of corporation equals the ACB to vendor of old shares or convertible debt, allocated pro rata amongst all classes of new shares based on their relative FMV per 51(1)(d) PUC of new share limited to PUC of the old share allocated amongst various classes of new shares pro rata based on their relative legal stated capital per 51(3)(a) 51(3)(b) adds back to PUC of shares any deemed dividend arising thereafter under 84(3), (4) or (4.1) as a result of the PUC reduction under 51(3)(a) 74

75 Section 51 Other Pitfalls On exchange of convertible debt for shares of the corporation, debt settled for amount equal to FMV of the share per 80(2)(g) Consider debt forgiveness issues on exercise of convertible debt If old shares were taxable Canadian property new shares are deemed to be taxable Canadian property (51(1)(f)) 51(1)(d.1) and (d.2) preserve debt forgiveness history of old shares for the new shares 75

76 Section 51 Other Pitfalls Can create benefit conferral issue under 51(2) if FMV of old shares (or convertible debt) exceeds FMV of consideration received and desired to confer benefit on related shareholder Taxpayer deemed to have disposed of old shares (or convertible debt) for POD equal to lesser of total of ACB of old shares plus FMV of benefit and FMV of old shares Any capital loss deemed to be nil Taxpayer s ACB of new shares equals lesser of ACB of old shares (or convertible debt) and total FMV of new shares plus capital loss (if it were not deemed nil), allocated amongst all classes of new shares pro rata based on their relative FMV 76

77 Section

78 Section 85.1 Conditions for Application 85.1(1) provides tax-deferred share exchange for shares of another, arm s length corporation Conditions Vendor is a taxpayer Purchaser is Canadian corporation Transferred property is shares of a taxable Canadian corporation that are capital property Consideration received by taxpayer must be shares of purchaser Disposition of exchanged shares reported as completely taxdeferred in return of vendor for its taxation year that includes the exchange 78

79 Section 85.1 Denial Rules 85.1(2) denies the tax-deferred share-for-share exchange in certain circumstances Vendor and purchaser were, immediately before the exchange, not dealing at arm s length (ignore 251(5)(b) right to acquire shares) Significant shareholders and corporation may jointly elect under 85 as precaution Vendor (or other non-arm s length persons) controlled purchaser immediately after the exchange 85(1) or (2) election filed 79

80 Section 85.1 Denial Rules 85.1(2) denies the tax-deferred share-for-share exchange in certain circumstances Consideration other than shares of the particular class is received by the vendor Includes boot Includes shares of another class 80

81 Section 85.1 Denial Rules 85.1(2) denies the tax-deferred share-for-share exchange in certain circumstances Boot issued as consideration Possible to structure exchange whereby shares of purchaser and boot issued to vendor, but only if vendor can clearly identify which shares were exchanged for [boot] and which were exchanged for shares of the purchaser : see IT-450R, Share for share exchange, dated April 8, 1993, at para. 7 Same position applies where shares of more than one class issued CRA ignores restriction for $200 or less received in lieu of a fraction of a share Many transactions are structured to break 85.1 by including boot 81

82 Section 85.1 Denial Rules 85.1(2) denies the tax-deferred share-for-share exchange in certain circumstances Vendor is a foreign affiliate of a Canadian-resident taxpayer and included gain or loss from the disposition of the exchanged shares in FAPI 82

83 Section 85.1 Consequences of Application Vendor realizes POD for exchanged shares equal to its ACB of those shares per 85.1(1)(a)(i) Vendor s ACB in shares of purchaser equals the ACB to vendor of exchanged shares per 85.1(1)(a)(ii) 83

84 Section 85.1 Consequences of Application Purchaser s ACB for exchanged shares equals the lesser of FMV and PUC of the exchanged shares immediately before the exchange per 85.1(1)(b) ACB to the purchaser may not matter if acquired corporation wound-up or amalgamated with the purchaser Purchaser can lose basis if ACB (or FMV) of exchanged shares exceeds their PUC In that case, to increase purchaser s ACB in exchanged shares, purchaser and significant shareholders of the acquired corporation may jointly elect under 85 84

85 Section 85.1 Consequences of Application PUC of shares of purchaser issued to vendor limited to PUC of exchanged shares allocated amongst various classes of new shares pro rata based on legal stated capital per 85.1(2.1)(a) 85.1(2.1)(b) adds back to PUC of shares any deemed dividend arising thereafter under 84(3), (4) or (4.1) as a result of the PUC reduction under 85.1(2.1)(a) 85

86 Section 85.1 Example: US Silver & Gold (2012) Plan of arrangement (simplified) Public RX Gold USSG Public US Silver 1. Public shareholders of each of US Silver and RX Gold exchanged their shares of US Silver and RX Gold, respectively, for shares of a new public company, US Silver & Gold Public realizes POD for the exchanged shares equal to ACB No gain or loss Public acquires shares of USSG at a cost equal to its ACB of the exchanged shares A rollover of basis USSG acquires shares of RX Gold and US Silver at a cost equal to lesser of FMV and PUC thereof PUC of USSG shares ground down to PUC of the exchanged shares 86

87 Step 1 Cenovus 87 Public Encana c/s Subco Cenovus Assets new c/s + s/s Step 2 Public c/s Cenovus new c/s s/s Encana c/s Subco Cenovus Assets Encana : Cenovus Spin-Off (2009) Plan of arrangement (simplified) and Advance Income Tax Ruling 55(3)(b) Butterfly Reorganization reorganization of old c/s of Encana into new c/s and special shares 2. Public disposes of special shares of Encana to Cenovus in exchange for c/s of Cenovus Public that wished to report full gain could simply report it in return for the taxation year of the exchange in order to avoid 85.1 Public that wished to report partial gain could contact Encana to file 85 joint election Public that wished to report nil gain could rely on section 85.1

88 Encana: Cenovus Spin-Off Step 3 Step 4 Public Public 3. Encana transfers c/s of Subco to Cenovus for special shares of Cenovus 4. Cross-redeem the special shares of Encana and Cenovus and set-off notes Cenovus Encana Cenovus Encana c/s s/s s/s c/s Subco Cenovus Assets Subco Cenovus Assets 88

89 Public Pubco FMV 100 ACB 50 PUC 40 FMV 40 ACB 40 PUC 40 Pubco S86 With Boot Pubco to be acquired by Bidco (another public company) Bidco does not want Spinco Spinco to be distributed to shareholders of Pubco Spinco 89

90 Public Pubco S86 With Boot FMV 40 ACB 40 PUC 40 Spinco New Shares FMV 60 ACB 10 PUC 0 Pubco Shares of Pubco exchanged for New Shares of Pubco and boot (Spinco shares) under S86 Boot does not exceed PUC No deemed dividend Shares of Pubco will be sold to Bidco Gain of 50 S86 boot reduced PUC and ACB 90

91 Public Pubco FMV 100 ACB 50 PUC 40 FMV 40 ACB 40 PUC 40 Pubco S86 With Boot 85.1 Planning Pubco to be acquired by Bidco (another public company) Bidco does not want Spinco Spinco to be distributed to shareholders of Pubco Spinco 91

92 FMV 40 ACB 20 PUC 40 Public Pubco FMV 60 ACB 30 PUC 0 Pubco S86 With Boot 85.1 Planning S86 to exchange existing shares of Pubco for 2 new classes One class has redemption amount and PUC = Spinco value Spinco FMV 40 ACB 40 PUC 40 92

93 FMV 40 ACB 20 PUC 40 Public FMV 60 ACB 30 PUC 0 Pubco Pubco S86 With Boot 85.1 Planning Shareholders of Pubco transfer shares of Pubco to Spinco 85.1 Spinco acquires shares of Pubco at ACB = PUC under 85.1 rules FMV 40 ACB 40 PUC 40 FMV 40 ACB 40 PUC 40 Spinco 93

94 FMV 40 ACB 20 PUC 40 Public FMV 60 ACB 30 PUC 0 Pubco Pubco S86 With Boot 85.1 Planning Shareholders of Pubco sell shares to Bidco Gain of 30 Without 85.1 planning (previous slides), gain was 50 Initial S86 transaction preserved some ACB in the shares of Pubco Spinco 94

95 Public Class B p/s FMV = SilverBirch Class A c/s FMV = Other Assets old c/s SilverBirch UTS Note FMV = SilverBirch Public Total Other Assets 1. Total proposes to take over UTS (except its interest in spin-off assets) 2. UTS contributes spin-off assets to SilverBirch for nominal-value c/s of SilverBirch and a note 3. UTS amends articles of incorporation to create Class A c/s and Class B p/s (redeemable in aggregate at FMV of SilverBirch) (Steps 4 to 6 follow) UTS/SilverBirch and Total (2010) Regular section 86 spin-off would shift basis from UTS shares to SilverBirch shares to the extent of the fair market value of the spin-off, increasing the gain to the public on the takeover FMV of SilverBirch very significant so special structuring preserved public s basis in the UTS shares Plan of arrangement (simplified) Transfer of Spin-off Assets: UTS realizes a gain on the transfer of the assets to SilverBirch in a taxable transaction Section 86 share exchange involving UTS: ACB of new shares = ACB of old shares, apportioned amongst Class A c/s and Class B p/s based on their relative FMV Cannot isolate ACB under 86, only with 85 joint election (impractical for public) PUC of new shares = PUC of old shares, allocated first to Class B p/s to extent of redemption price, and next to Class A c/s POD equals ACB of new shares (being ACB of old shares) plus FMV of boot (being nil) No gain or loss 95

96 Class B p/s FMV = SilverBirch Public SilverBirch Class A c/s FMV = Other Assets UTS Note FMV = SilverBirch Public Total 4. Canadian public transfer Class B p/s of UTS to SilverBirch for c/s of SilverBirch (Steps 5 and 6 follow) Other Assets UTS/SilverBirch and Total (2010) Section 85.1 share-for-share exchange: Public s POD for Class B p/s of UTS equal ACB thereof No gain or loss Public s ACB of c/s of SilverBirch equals ACB of Class B p/s of UTS Effectively a rollover of ACB SilverBirch s ACB of Class B p/s of UTS equals lesser of FMV and PUC of the UTS Class B shares (both are equal to the redemption price) PUC of c/s of SilverBirch limited to PUC of Class B p/s of UTS 96

97 Class B p/s FMV = SilverBirch Public SilverBirch Class A c/s FMV = Other Assets UTS Note FMV = SilverBirch Public Total 5. SilverBirch redeems Class B p/s of UTS in consideration for cancellation of nominal-value SilverBirch c/s and the Note (Step 6 follows) Other Assets UTS/SilverBirch and Total (2010) Redemption of Class B p/s of UTS: No 84(3) deemed dividend as redemption amount (being FMV of the Class B p/s of UTS) does not exceed PUC of Class B p/s (being the full redemption price per 86 exchange at step #3) SilverBirch does not realize gain or loss on redemption as POD (being the redemption price at FMV) equals the ACB of the Class B p/s of UTS (being lesser of FMV or PUC of the UTS Class B p/s per 85.1 exchange at step #4, each of which equal FMV) 97

98 Public SilverBirch Class A c/s FMV = Other Assets UTS Public Total Other Assets 6. Canadian public transfer Class A c/s of UTS to Total for cash UTS/SilverBirch and Total Taxable Sale: Public realizes a gain or loss on the disposition of the Class A c/s of UTS However, public preserved most of the basis in old c/s of UTS in the Class A c/s of UTS on the section 86 exchange In other words, the public transferred a portion of the inherent gain in their old UTS c/s to their new SilverBirch c/s, and reduced the amount of their gain on the transfer of their new Class A c/s of UTS These additional steps might be warranted only if FMV of Spinco very significant so that it is worth shifting the inherent gain before the sale to defer gain in this way 98

99 BCE-Nortel Butterfly Spin-off Step 1 - Pre-Butterfly * BCE cm Public Network Holdco BCE 100% 100% 100% Network Holdco Sub Canada Inc. cm Canada Inc. cm cm NETWORK cm cm Network Public Incorporation of Network Holdco and Network Holdco Sub. Network Holdco will subscribe to one common share of Network Holdco Sub 99

100 BCE-Nortel Butterfly Spin-off Step 2 - Pre-Butterfly * BCE cm Public Network Holdco BCE 100% Network Holdco Sub 100% Canada cminc. 100% Canada Inc. cm cm NETWORK cm cm cm Network Public Canada Inc. transfers 3M common shares of Network it owns at FMV to Canada Inc. in return for common shares of Canada Inc. 100

101 BCE-Nortel Butterfly Spin-off Step 3 - Pre-Butterfly * BCE cm Public BCE Network Holdco 100% Canada Inc. 100% Network Holdco Sub cm Canada Inc. cm NETWORK cm cm Network Public BCE transfers all of its Network shares at FMV to Canada Inc. in return for Canada Inc. common shares. 101

102 BCE-Nortel Butterfly Spin-off Step 4 - Butterfly * BCE cm Public cm class B Network Holdco BCE cm 100% Canada Inc. Network Holdco Sub cm NETWORK cm Network Public BCE and amalgamate. BCE common shareholders receive new BCE common shares (on a one-for-one basis) and non-voting convertible class B shares (class B common shares will track to value of shares to be butterflied in step 7) 102

103 BCE-Nortel Butterfly Spin-off Step 5 - Butterfly * cm BCE cm Public class B Network Holdco BCE PUC increase 100% cm 100% Canada Inc. Network Holdco Sub cm NETWORK cm Network Public , through a series of resolutions, increases the PUC of common shares up to safe income on hand, resulting in an increase in the ACB of common shares to BCE. 103

104 BCE-Nortel Butterfly Spin-off Step 6 - Butterfly * cm BCE cm Public cm Network Holdco Class B BCE 100% 100% cm Canada Inc. Network Holdco Sub cm NETWORK cm Network Public BCE cm Public transfer the BCE Class B common shares to Network Holdco in exchange for common shares of Network Holdco. 104

105 BCE-Nortel Butterfly Spin-off Step 7 - Butterfly * cm BCE cm Public Network Holdco cm Network Holdco Sub class B cm cm BCE cm 95% cm Canada Inc. cm NETWORK cm 5% cm Network Public BCE transfers approximately 95% of the common shares it holds in to Network Holdco Sub in exchange for Network Holdco Sub common shares. 105

106 BCE-Nortel Butterfly Spin-off Step 8 - Butterfly * cm BCE cm Public Network Holdco cm cm BCE Network Holdco Sub 95% cm Canada Inc. cm NETWORK cm 5% cm Network Public Network Holdco Sub purchases for cancellation the Network Holdco Sub common shares held by BCE in return for a noninterest bearing demand note. 106

107 BCE-Nortel Butterfly Spin-off Step 9 - Butterfly * Network Holdco cm Network Holdco Sub BCE cm Public BCE cm 95% cm Canada Inc. cm NETWORK 5% cm Network Public BCE purchases for cancellation the BCE class B common shares held by Network Holdco in return for a non-interest bearing demand note. 107

108 BCE-Nortel Butterfly Spin-off Step 10 - Butterfly * Network Holdco cm Note Note BCE cm Public BCE cm 95% cm Canada Inc. cm NETWORK cm 5% cm Network Public Network Holdco Sub is wound up into Network Holdco. 108

109 BCE-Nortel Butterfly Spin-off Step 11 - Butterfly * cm BCE cm Public cm Network Holdco BCE 95% cm Canada Inc. 5% cm The two notes are cancelled. cm NETWORK Network Public 109

110 BCE-Nortel Butterfly Spin-off Step 12 - Post- Butterfly * Network Public cm Network Holdco cm BCE cm Public BCE cm 95% cm Canada Inc. cm NETWORK 5% cm REVERSE TAKE-OVER ASPECT Network Holdco acquires all of the Network common shares held by Network Public in exchange for Network Holdco common shares. 110

111 BCE-Nortel Butterfly Spin-off Step 13 Post- Butterfly * 60%cm Network Public cm 40% BCE cm Public cm Network Holdco cm BCE 100% cm NETWORK Network Holdco and amalgamate. Network Public, BCE cm Public and BCE receive new Network Holdco common shares. 111

112 Thank you 112