Share for Share Exchange s. 85.1 Rollover

Share for Share Exchange s. 85.1 Rollover

General
  • The 1 Share for Share Exchange is an automatic rollover (therefore, no elections need to be made by the person exchanging the shares)
  • The s85.1 is used when an acquirer corporation wants to take over an acquiree corporation (takeover and business combinations)
    • The shareholders of the acquiree corporation exchange their shares in the acquiree corporation for shares of the acquirer corporation
    • Although, the shareholders of the acquiree can exchange their shares in a tax-free manner using s. 85 (1); this is not ideal in situations where there are a large number of diverse shareholders because each shareholder would need to manually make an election
    • With s. 85.1 no election is needed; an exchange happens at the Adjusted Cost Base (ACB) and the Paid up Capital (PUC) automatically – Therefore no Capital Gains or Deemed Dividends
Example: 85.1
  • John is the shareholder of John Inc. John owns all 1000 of the shares (with ACB/PUC)=$1,000
  • Alex owns all 1000 of Alex Inc. shares (with ACB/PUC=$2,000)
  • Alex Inc. wants to buyout John Inc.
  • Alex Inc. exchanges 500 of its own shares for 1000 shares of John Inc.
  • Alex Inc. shares are worth $20/share
  • Without s85.1, John is deemed to have disposed his shares at fair value = $20*500 = 10,000; he will have a capital gain of $9,000 ($10,000-1,000).
  • With the s85.1 Rollover, the transfer happens at the ACB; therefore, no capital gains.
    • New ACB = OLD ACB=$1,000
    • The Old PUC gets added to the PUC of Alex Inc. shares; $1,000 will get added to the PUC of Alex Inc. shares; therefore total PUC of Alex Inc. shares = $3,000 (John’s PUC = 3000*500/1500 = $1,000)
    • The ACB of John Inc. shares to Alex Inc. equals to the lesser of:
      1. Fair Market Value = 20*500 = $10,000; or
      2. PUC of John Inc. shares = $1,000
        • Therefore ACB of John Inc. shares to Alex Inc. = $1,000