Can I still roll into a holdco after sale negotiations have started?

Section 85 does not ask whether a buyer is already at the table. The timing question comes from elsewhere in the Act and from the deal itself, which is why it deserves an adviser’s review before any shares move.

What the rollover itself requires

The conditions in subsection 85(1) concern the property, the corporation, the consideration and the election: eligible property is disposed of to a taxable Canadian corporation for consideration that includes its shares, and the two jointly elect on CRA form T2057. None of those conditions asks when sale talks began. The rollover is not barred by negotiations as such. The risk lies in how the Act then looks at the step.

Why timing changes the analysis

A transaction that would result in a tax benefit, which the Act defines to include a deferral of tax, is an avoidance transaction unless it may reasonably be considered that obtaining the benefit was not one of its main purposes. The general anti-avoidance rule then applies only if the result is a misuse or abuse of the Act’s provisions. The Act also deems a series of transactions to include related transactions completed in contemplation of the series, so a rollover made after a price is discussed can be treated as part of the sale. See how the CRA can challenge a pre-sale reorganization.

What else the timing touches

The lifetime capital gains deduction belongs to individuals, and the definition of a qualified small business corporation share tests ownership and asset mix over the 24 months before the determination time, so a transfer made close to closing can change the result. Check the letter of intent and any shareholders’ agreement before moving shares: they may restrict a transfer or name you as the seller, so confirm with the buyer who is meant to sell.

Questions for your advisers

• Which provisions apply to the transfer, including section 84.1 when the buyer is your own corporation.
• Whether the shares meet the exemption tests before and after the transfer.
• Whether the buyer must consent, and how the agreement names the seller.
• What reasons other than tax support the timing, and whether they were recorded.