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Corporate Reorganizations
Most private companies are still wearing the structure they were incorporated with. That structure was designed for a business that no longer exists.
What this covers
A corporate reorganization changes the legal and share structure of a business without changing the underlying enterprise — inserting a holding company, moving assets between related corporations, resetting share classes, or splitting a company between shareholders. Done correctly it happens on a tax-deferred basis, using specific rollover provisions of the Income Tax Act rather than a taxable sale.
Who this is for
- Owners with retained earnings or real estate sitting inside the operating company
- Shareholders who want to separate and each take part of the business
- Companies preparing for a sale, an investor, or a new share class
- Groups that have accumulated corporations over the years without a deliberate structure
What you end up with
The point of the exercise
A structure that fits the business
Share classes, corporations, and asset locations that match how the enterprise actually operates and where it is going.
Risk separated from value
Surplus cash and real estate held outside the entity that carries the trade creditors and the operating risk.
Sale-ready when the moment comes
Asset tests satisfied, exemptions protected, and no scramble during a buyer's due diligence.
Corporate Reorganizations in detail
The reason structures go stale
A company incorporated with two common shareholders and no holding company is a reasonable starting point. Fifteen years later there is surplus cash the business does not need, a building the operating company owns, a spouse who should be a shareholder, a child who should not be one yet, and a share register that no longer matches how anyone thinks about the business.
None of that is a crisis on its own. It becomes one at a transaction — a sale, a death, a dispute, a bank asking questions — because the structure determines what is possible and how much tax it costs. Restructuring in advance is inexpensive. Restructuring under deadline pressure is not, and sometimes the option you wanted is simply gone.
Rollovers: moving property without triggering tax
Section 85 allows you to transfer eligible property to a taxable Canadian corporation in exchange for shares, and to elect an amount that determines how much gain, if any, is realised. Elect at cost and the transfer is fully tax-deferred; elect higher and you deliberately realise a measured gain, which is occasionally exactly what you want — to use up a capital loss, for instance, or to crystallise the capital gains exemption.
Section 86 handles a reorganization of share capital: all of a class is exchanged for new shares of the same corporation, which is the usual mechanism for an estate freeze. Section 51 covers a conversion under existing share terms. Section 87 governs amalgamations and section 88 the wind-up of a subsidiary, including the bump that can increase the cost of certain assets on a qualifying acquisition of control.
These are elective, technical provisions with filing deadlines and precise conditions. The elections are what make the deferral real — the paperwork is not administrative, it is the transaction.
Holding companies: creditor protection and clean cash
Inserting a holding company above the operating company lets surplus cash be moved up by tax-free intercorporate dividend, out of reach of the operating company's trade creditors, and invested without the operating risk. It also separates the people who need to hold shares of an active business from the people who should hold passive investments — which matters a great deal for the capital gains exemption and for the split income rules.
The constraint is subsection 55(2), an anti-avoidance rule that can recharacterise an intercorporate dividend as a capital gain where it exceeds safe income on hand and one of the specified purposes is present. Dividends between connected corporations are not automatically free. Getting the safe income analysis right before the dividend is declared is the difference between a routine step and a reassessment.
Purification, and protecting the capital gains exemption
The lifetime capital gains exemption applies only to qualified small business corporation shares, and qualification depends on asset tests — broadly, that substantially all of the assets are used in an active business at the time of sale, and that a majority have been so used throughout the preceding twenty-four months.
Excess cash, a portfolio of marketable securities, or a rental property inside the operating company can put those tests at risk. Purification moves the offending assets out — usually to a holding company or a sister corporation — and it has to happen well before a sale, because the twenty-four-month test looks backwards. A buyer's letter of intent is far too late to start.
Splitting a company between shareholders
When two shareholders want to go separate ways and each take part of the business, the default outcome is a taxable sale of shares or assets. The alternative is a divisive reorganization — commonly called a butterfly — which relies on paragraph 55(3)(b) to divide the corporation's property between the shareholders on a tax-deferred basis.
These are among the more demanding transactions in Canadian tax. They require a defensible valuation, a careful allocation of each type of property, and strict attention to the anti-avoidance conditions. They also require both shareholders to still be able to cooperate on paperwork, which is a real planning consideration: the same split is dramatically cheaper to execute six months before the relationship breaks down than six months after.
The rules that constrain everything above
Section 84.1 prevents an individual from converting a dividend into a capital gain by selling shares to a corporation controlled by a non-arm's-length person. Section 245 — the general anti-avoidance rule, strengthened by amendments in 2024 that lowered the avoidance-transaction threshold and added a penalty and reporting regime — sits behind all of it.
The practical consequence is that a reorganization has to have a real, documented commercial purpose and a paper trail that supports it. We would rather tell you a step does not work than build a structure that unwinds on audit.
How it runs
What working together looks like
Map the existing group
Every corporation, share class, and intercompany balance is charted, with adjusted cost base, paid-up capital, and safe income where relevant.
State the commercial objective
Creditor protection, sale readiness, separating shareholders, or bringing family in — the tax route follows from the objective, never the reverse.
Design the steps
A written step plan with the provision relied on at each stage, the elections required, and the order they must occur in.
Value what needs valuing
Where a step depends on fair market value, an independent valuation and a price adjustment clause protect the position if the number is later challenged.
Execute and file
Resolutions and agreements with your lawyer, elections and returns with the CRA, and a closing memorandum that records why each step was taken.
Questions
Corporate Reorganizations, answered
General information about how the rules work, current at the time of writing — not advice about your situation. Speak to Ray Loucks before acting on any of it.
What is a section 85 rollover?
Section 85 of the Income Tax Act lets you transfer eligible property to a taxable Canadian corporation in exchange for shares, and jointly elect an amount that sets how much of the accrued gain is realised. Electing at the property's cost defers the tax entirely. It is the standard mechanism for incorporating a proprietorship, moving assets between related corporations, and crystallising the capital gains exemption. The election has a filing deadline, and late-filing relief comes with a penalty, so timing is part of the plan.
Why would I insert a holding company?
Three common reasons: to move surplus cash out of the operating company where trade creditors can reach it, to hold passive investments separately from the active business so the shares stay eligible for the capital gains exemption, and to give different family members or family trusts appropriate positions in the structure. The step itself is usually tax-deferred, but the subsequent dividends need a safe income analysis under subsection 55(2) before they are declared.
My business partner and I want to separate. Can we split the company without paying tax?
Potentially, through a divisive reorganization — a butterfly — that relies on paragraph 55(3)(b) to divide the corporation's property between you on a tax-deferred basis. It requires a defensible valuation, careful allocation across each class of property, and strict compliance with anti-avoidance conditions. It also requires both parties to cooperate through a multi-step process, so the transaction gets both cheaper and more likely to succeed the earlier it is started.
How long does a reorganization take?
A straightforward holding company insertion is typically a few weeks from instruction to closing, most of which is legal drafting and, where needed, valuation. A divisive reorganization or a freeze combined with a new trust runs to a few months. Where the structure needs to satisfy a look-back test — the twenty-four-month asset test for the capital gains exemption, for instance — the real timeline is measured in years before the transaction you are preparing for.
Do we need a formal valuation?
Whenever a step depends on fair market value, yes — and a price adjustment clause alongside it. The CRA can challenge a value years after the fact, and if the value in a freeze or a rollover is wrong, the consequences can include a deemed benefit rather than a simple correction. An independent valuation and a properly drafted adjustment clause are the cheapest insurance in the transaction.
Often needed together