Tax Tip – Share Consideration Issued on a Tax-Deferred Rollover

June 2011 | Bryant D. Frydberg

Have you ever considered whether you can transfer eligible property on a tax-deferred rollover basis for consideration consisting of shares that have not been legally authorized under the articles of the transferee corporation at the time of the transfer?

Recently, in a response to the above question at a Roundtable on Federal Taxation -2010 APFF Conference, in its written response to questions, Canada Revenue Agency (“CRA”) indicated that it will accept an election under subsection 85(1) of the Income Tax Act (Canada) (the “ITA”), if the following conditions are met:

  1. there is an agreement between the transferor and transferee whereby the transferee agrees to issue the required shares;
  2. the transferee immediately carries out the necessary steps to file articles of amendment to create the required shares; and
  3. once the articles of amendment are filed, the transferee corporation issues the shares without delay.

If the above conditions exist and even if the articles of amendment are filed after the filing deadline for the election form for the transfer pursuant to subsection 85(6) of the ITA, CRA will accept the election.

Similar treatment will not however, be afforded to the rollover provisions contained in subsection 51(1) as the preamble to subsection 51(1) suggests, according to CRA, that there must be a simultaneous exchange of the property transferred and the receipt of the share consideration. Curiously, CRA did not comment on the application of subsection 86(1) to the issue at hand.

The CRA’s administrative position outlined herein should afford a certain degree of flexibility in giving effect to tax-deferred rollover transactions.

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