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
Why structures go stale
A company incorporated with two shareholders and no holding company is a fine start. Fifteen years later there is surplus cash, a building inside the operating company, a spouse who should be a shareholder and a child who should not be one yet. None of it is a crisis until a sale, a death or a dispute, when the structure decides what is possible and what it costs.
Rollovers: moving property without triggering tax
Section 85 transfers property into a corporation for shares at an elected amount, so no gain is realised unless you choose to realise one. Section 86 reorganizes share capital, which is how most estate freezes are done; sections 87 and 88 cover amalgamations and wind-ups. The elections are the transaction, not the paperwork, and they have deadlines.
Holding companies and purification
A holding company above the operating company moves surplus cash out of reach of trade creditors by tax-free intercorporate dividend, within the safe income rules. It is also where excess cash and investments go so the operating company stays a qualified small business corporation for the capital gains exemption, a test that looks back twenty-four months from a sale.
Splitting a company between shareholders
Two shareholders going separate ways can divide the company's property on a tax-deferred basis through a divisive reorganization, the butterfly. It needs a defensible valuation, a careful allocation of each kind of property, and both parties still able to sign documents, which makes it far cheaper six months before a relationship breaks down than six months after.
The rules behind it
Section 84.1 stops a dividend being dressed as a capital gain on a sale to a related corporation, and the general anti-avoidance rule, strengthened in 2024, sits behind everything. A reorganization needs a real commercial purpose and a paper trail that shows it. We would rather tell you a step does not work than build one 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.
What does a corporate reorganization cost?
It depends on how many corporations are involved, whether a valuation is needed, and whether a trust is being settled at the same time. A straightforward holding company insertion is at the low end; a butterfly between two shareholders is at the high end, because of the valuation and the legal work. We quote a fixed figure once the steps are designed, after a first conversation that is free. In almost every case the cost is a small fraction of the tax the structure defers or avoids.
Do I need a tax lawyer or an accountant for a reorganization?
Both, doing different jobs. The accountant designs the steps, works out the tax consequences of each, prepares the valuations and files the elections that make the deferral real. The lawyer drafts the resolutions, share terms and agreements and keeps the corporate records right. We work alongside your lawyer, or can recommend one who does this work regularly.
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.
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