Section 85.1 Takeover Rollover - Corporate Tax Strategies

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

A section 85.1 rollover is an alternate form of tax-deferred rollover (as distinguished from a section 85 rollover), which tends to be used in corporate reorganizations, particularly in share-for-share exchanges. This is a crucial distinction from the more general rollover under Section 85 of the Income Tax Act (Canada).

The central aspects associated with a section 85.1 rollover include:

• Share-for-Share Exchange: The core purpose of section 85.1 is to allow a shareholder to exchange their shares in one Canadian corporation for shares in another Canadian corporation without triggering an immediate capital gain or loss.

• Automatic Rollover: Unlike a section 85 rollover, which requires a joint election to be filed with the Canada Revenue Agency (CRA), a section 85.1 rollover is an automatic provision. This makes it particularly suitable for arm's-length transactions, such as public company takeovers, where it may not be practical to have every individual shareholder file an election form.

• No "Boot": The provision generally requires that the only consideration received by the vendor (the shareholder giving up their shares) is newly issued shares of a single class of the acquiring corporation. The receipt of any non-share consideration (often referred to as "boot," such as cash or other property) would prevent the full application of the rollover.

• Adjusted Cost Base (ACB): When the rollover applies, the shareholder's proceeds of disposition are deemed to be equal to the adjusted cost base (ACB) of the shares they are giving up. This means no gain or loss is realized at the time of the exchange. The ACB of the new shares received is also deemed to be the same as the ACB of the shares that were exchanged. This effectively "defers" the tax liability until the new shares are ultimately sold.

• Parties Must be at Arm's Length: For the rollover to apply, the shareholder and the acquiring corporation must be dealing at arm's length. Canadian Corporations: Both the corporation whose shares are being exchanged and the corporation acquiring the shares must be "taxable Canadian corporations."

While both section 85.1 and section 85(1) are tax-deferred rollover provisions, they have significant differences:

• Election: Section 85(1) requires a joint tax election (Form T2057) to be filed with the CRA, while section 85.1 is an automatic provision.

• Flexibility: Section 85(1) is much broader. It can be used to transfer a wide range of "eligible property" (not just shares) to a corporation, and it allows for the receipt of non-share consideration ("boot"). It also allows the parties to choose an "elected amount" for the transfer, within certain limits, which provides greater tax planning flexibility.

• Relationship: Section 85(1) is commonly used for non-arm's length transactions, such as when an individual incorporates a sole proprietorship, while section 85.1 is designed for arm's-length share-for-share exchanges.

For knowledgeable and experienced tax law representation for corporate tax rollovers and other tax planning strategies, as your business enterprise strives to optimize the financial advantages of legal tax structuring, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

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