SECTION 51(1): SHARE EXCHANGE
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SECTION 51(1) OF THE INCOME TAX ACT

Convertible property

51. (1) Where a share of the capital stock of a corporation is acquired by a taxpayer from the corporation in exchange for

(a) a capital property of the taxpayer that is another share of the corporation (in this section referred to as a “convertible property”), or

(b) a capital property of the taxpayer that is a bond, debenture or note of the corporation the terms of which confer on the holder the right to make the exchange (in this section referred to as a “convertible property”)

and no consideration other than the share is received by the taxpayer for the convertible property,

(c) except for the purpose of subsection 20(21), the exchange shall be deemed not to be a disposition of the convertible property,

(d) the cost to the taxpayer of all the shares of a particular class acquired by the taxpayer on the exchange shall be deemed to be the amount determined by the formula

A × B/C

where

A is the adjusted cost base to the taxpayer of the convertible property immediately before the exchange,

B is the fair market value, immediately after the exchange, of all the shares of the particular class acquired by the taxpayer on the exchange, and

C is the fair market value, immediately after the exchange, of all the shares acquired by the taxpayer on the exchange,

(d.1) there shall be deducted, after the exchange, in computing the adjusted cost base to the taxpayer of a share acquired by the taxpayer on the exchange, the amount determined by the formula

A × B/C

where

A is the total of all amounts deducted under paragraph 53(2)(g.1) in computing, immediately before the exchange, the adjusted cost base to the taxpayer of the convertible property,

B is the fair market value, immediately after the exchange, of that share, and

C is the fair market value, immediately after the exchange, of all the shares acquired by the taxpayer on the exchange,

(d.2) the amount determined under paragraph 51(1)(d.1) in respect of a share shall be added, after the exchange, in computing the adjusted cost base to the taxpayer of the share,

(e) for the purposes of sections 74.4 and 74.5, the exchange shall be deemed to be a transfer of the convertible property by the taxpayer to the corporation, and

(f) where the convertible property is taxable Canadian property of the taxpayer, the share acquired by the taxpayer on the exchange is deemed to be, at any time that is within 60 months after the exchange, taxable Canadian property of the taxpayer.

Idem

(2) Notwithstanding subsection 51(1), where

(a) shares of the capital stock of a corporation have been acquired by a taxpayer in exchange for a convertible property in circumstances such that, but for this subsection, subsection 51(1) would have applied,

(b) the fair market value of the convertible property immediately before the exchange exceeds the fair market value of the shares immediately after the exchange, and

(c) it is reasonable to regard any portion of the excess (in this subsection referred to as the “gift portion”) as a benefit that the taxpayer desired to have conferred on a person related to the taxpayer,

the following rules apply:

(d) the taxpayer shall be deemed to have disposed of the convertible property for proceeds of disposition equal to the lesser of

(i) the total of its adjusted cost base to the taxpayer immediately before the exchange and the gift portion, and

(ii) the fair market value of the convertible property immediately before the exchange,

(e) the taxpayer’s capital loss from the disposition of the convertible property shall be deemed to be nil, and

(f) the cost to the taxpayer of all the shares of a particular class acquired in exchange for the convertible property shall be deemed to be that proportion of the lesser of

(i) the adjusted cost base to the taxpayer of the convertible property immediately before the exchange, and

(ii) the total of the fair market value immediately after the exchange of all the shares acquired by the taxpayer in exchange for the convertible property and the amount that, but for paragraph 51(2)(e), would have been the taxpayer’s capital loss on the disposition of the convertible property,

that

(iii) the fair market value, immediately after the exchange, of all the shares of the particular class acquired by the taxpayer on the exchange

is of

(iv) the fair market value, immediately after the exchange, of all the shares acquired by the taxpayer on the exchange.

Computation of paid-up capital

(3) Where subsection 51(1) applies to the exchange of convertible property described in paragraph 51(1)(a) (referred to in this subsection as the “old shares”), in computing the paid-up capital in respect of a particular class of shares of the capital stock of the corporation at any particular time that is the time of, or any time after, the exchange

(a) there shall be deducted the amount determined by the formula

(A - B) × C/A

where

A is the total of all amounts each of which is the amount of the increase, if any, as a result of the exchange, in the paid-up capital in respect of a class of shares of the capital stock of the corporation, computed without reference to this subsection as it applies to the exchange,

 B is the paid-up capital immediately before the exchange in respect of the old shares, and

C is the increase, if any, as a result of the exchange, in the paid-up capital in respect of the particular class of shares, computed without reference to this subsection as it applies to the exchange; 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 deemed by subsection 84(3), 84(4) or 84(4.1) to be a dividend on shares of that class paid by the corporation before the particular time

exceeds

(B) the total that would be determined under clause 51(3)(b)(i)(A) if this Act were read without reference to paragraph 51(3)(a), and

(ii) the total of all amounts required by paragraph 51(3)(a) to be deducted in respect of that particular class of shares before the particular time.

Application

 (4) Subsections 51(1) and 51(2) do not apply to any exchange to which subsection 85(1) or 85(2) or section 86 applies.

NOTE: Application provisions are not included in the consolidated text; see relevant amending Acts. R.S., 1985, c. 1 (5th Supp.), s. 51; 1994, c. 21, s. 20; 1995, c. 21, s. 16; 1998, c. 19, s. 92; 2010, c. 12, s. 3.. 

 

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Tax Lawyer Christopher Neufeld with the business law firm of Neufeld Legal Professional Corporation, is admitted to practice law in Alberta and Ontario (Canada) and New York State (United States of America).  Christopher's legal practice focuses primarily on business law, in particular corporate commercial transactions and contract work  - directed at transactional tax optimization and effective tax planning. The content of this website is purely for informational purposes and should not be relied upon - as you should consult a lawyer with respect to the specifics of your particular legal matter.  Please review our legal disclaimer and privacy policy prior to contacting us and be advised that contacting us does not create a lawyer-client relationship. National headquarters: 1600, 144 - 4th Avenue SW, Calgary, Alberta. COPYRIGHT 2010-12.

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