Section 86 reorganization

Section 86 is one of the Income Tax Act’s share-exchange rules. It can come up if an adviser proposes swapping existing shares for a different class of shares in the same company. It is separate from the section 85 rollover, which needs a joint election under subsection 85(1).

What the Act requires

• The exchange happens in the course of a reorganization of the capital of a corporation
• The taxpayer disposes of capital property that was all the shares of a particular class owned by the taxpayer
• The property receivable from the corporation includes other shares of the same corporation, called the new shares

Paragraphs 86(1)(a) to (c) then fix the cost of the new shares and of any other property received, and the taxpayer’s proceeds. Subsection 86(2) overrides that result where the old shares were worth more than what was received and it is reasonable to regard any portion of the excess as a benefit the taxpayer desired to have conferred on a related person.

What to check

Subsection 86(3) says sections 86(1) and 86(2) do not apply where subsection 85(1) or 85(2) applies, so ask which one the plan relies on. The CRA’s T5008 guide says a corporation that acquires, redeems or cancels its own shares does not file a T5008 return for a section 86 exchange if no consideration other than the new shares is receivable. See whether a freeze always needs a section 85 or 86 election.