Mark Brender, Osler, Hoskin & Harcourt LLP, Montreal
Rick McLean, CPA, CA, KPMG LLP, Toronto
Shawn Porter, Deloitte LLP, Toronto
Toronto Young Practitioners Group
Share Exchanges
Introduction
◦
◦
◦
◦
◦
◦
2
Section
Section
Section
Section
Section
Section
85
84.1
212.1
86
51
85.1
Toronto Young Practitioners Group
Share Exchanges
Overview of Provisions Governing Share Exchanges
◦ 86, 51, 85, and 85.1 permit tax-deferred share exchanges in
various circumstances
◦ 86 and 51 applies to share exchanges involving the same
corporation only
◦ 85 applies to share exchanges involving the same or another
corporation
 Order of application is 85, then 86, then 51
 86(3) provides that 86(1) does not apply if 85(1) applies
 51(4) provides that 51(1) does not apply if 85(1) or 86(1)
applies
◦ 85.1 applies to shares exchanges involving another corporation
only
 85.1(2)(c) provides that 85.1(1) does not apply if 85(1) applies
◦ 84.1 and 212.1 are anti-avoidance rules applicable to share
exchanges involving another corporation
3
Toronto Young Practitioners Group
Share Exchanges
◦ Section 85
4
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)

Requirements
◦
◦
◦
◦
◦
5
“disposition” of property
property is “eligible property” in 85(1.1)
disposition to a taxable Canadian corporation
consideration must include shares
taxpayer and corporation jointly elect
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)
Requirement to Receive Shares


Consideration must “include” shares but nonshare consideration (“boot”) can be issued
248(1) “share”
◦ means a share or fraction of a share

Timing of receipt of share
◦ issued subsequent to transfer of property
6
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)

Disposition to a taxable Canadian corporation
◦ can apply on exchange of shares of the same
corporation or another corporation

7
51(1) and 86(1) only provide rollover for
shares of same corporation
Toronto Young Practitioners Group
Share Exchanges
Section 85 – Conditions for Application
85(1) provides joint election to transfer certain assets on a tax-deferred basis
◦ Conditions
 Taxpayer is transferor
 Partnership must elect under 85(2)
 Taxable Canadian corporation is transferee
 89(1) “taxable Canadian corporation” means Canadian corporation not tax
exempt
 89(1) “Canadian corporation” generally means incorporated in Canada
 85 can apply on share exchange with same or another corporation
 84(9) treats redemption as disposition of shares by taxpayer to corporation,
and facilitates 85 share exchange with same corporation
 Taxpayer disposes of eligible property to the corporation
 85(1.1) “eligible property” includes shares held by taxpayer as capital property
8
Toronto Young Practitioners Group
Share Exchanges
Section 85 – Conditions for Application
 Consideration received by taxpayer includes shares of corporation
 Boot is possible
 Shares need not be issued simultaneously with the transfer of
property as consideration but obligation to issue shares can be
executory within a reasonable time: see Dale v. The Queen, 94 D.T.C.
1100 at para. 51 (T.C.C.), aff’d 97 D.T.C. 5252 (F.C.A.)
 Taxpayer and corporation jointly elect in prescribed form within time set
by 85(6)
 Possible to late-file as of right within 3 years per 85(7), and
thereafter with leave of Minister per 85(7.1), subject to penalty
9
Toronto Young Practitioners Group
Share Exchanges
Section 85 – Consequences of Election
Generally, tax attributes limited to the elected amount set out in the 85 election
◦ Taxpayer realizes POD for property equal to elected amount under 85(1)(a)
◦ Corporation’s ACB of property equal to elected amount under 85(1)(a)
◦ 85(2.1) sets PUC of shares of corporation issued to taxpayer
 Unless 84.1 or 212.1 applies, if stated capital of shares exceeds difference
between elected amount and FMV of boot, then PUC reduced to the
amount by which elected amount exceeds boot, and allocated amongst
various classes of new shares pro rata based on legal stated capital per
85(2.1)(a)
 85(2.1)(b) adds back to PUC of shares any deemed dividend arising
thereafter under 84(3), (4) or (4.1) as a result of the PUC reduction
under 86(2.1)(a)
10
Toronto Young Practitioners Group
Share Exchanges
Section 85 – Consequences of Election
◦ Taxpayer’s ACB of boot and shares of corporation in aggregate equals the
elected amount, allocated as follows:
 First to boot up to its FMV allocated pro rata amongst all non-share
consideration based on their relative FMV under 85(1)(f)
 Then to preferred shares allocated pro rata amongst various classes based
on their relative FMV under 85(1)(g)
 Last to common shares pro rata amongst various classes based on their
relative FMV under 85(1)(h)
11
Toronto Young Practitioners Group
Share Exchanges
Section 85 – Elected Amount
◦ Elected amount must fall within permissible range between lower and upper
limits
 Upper limit set by 85(1)(c) at the FMV of the property
 Cannot elect to create excessive capital gain or limit a capital loss to
the taxpayer and imbue property with an inherent loss for the
corporation
 Lower limit for the elected amount set by 85(1)(e.3) at greater of the
amount determined under 85(1)(b) and (c.1)
 85(1)(b) provides elected amount cannot be less than FMV of boot
 Excessive boot gives rise to a capital gain to the taxpayer
 85(1)(c.1) provides that, for non-depreciable capital property, the lower
limit is the lesser of FMV of the property and the ACB to the transferor
of the property
 Tax deferral available to extent of share consideration
 Cannot elect to create a capital loss to the taxpayer
12
Toronto Young Practitioners Group
Share Exchanges
Note
FMV = 100
Taxpayer
100 new c/s
FMV = 100
Holdco
100 c/s
ACB = 100
FMV = 200
Opco
1. Taxpayer exchanges 100 Opco c/s
for 100 new c/s of Holdco and a Note
2. Taxpayer and Holdco jointly elect
under 85(1) at elected amount of $100
13
Section 85 – Example
 Taxpayer realizes proceeds of
disposition for Opco shares
equal to $100, the elected
amount
 No gain or loss
 Holdco acquires 100 Opco c/s
at cost of $100, the elected
amount
 Taxpayer acquires Note (boot)
at a cost of $100, the elected
amount
 Taxpayer acquires 100 new
c/s of Holdco at cost of nil
 PUC of 100 new c/s reduced
to nil
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)

Transfer shares of one corporation to another
◦ 15(1) conferral of benefit ?
◦ 69(1)(a) cost adjustment ?
◦ 69(1)(b) deemed proceeds ?
14
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1) - example
A
Issue 1 addl share
FMV 20
 A owns 100% of Opco
 A owns 100% of Holdco
FMV 10
Holdco
 A transfer shares of Opco to Holdco
for 1 Holdco share
 FMV of Opco shares is $10
Other
Opco
15
 FMV of each Holdco share is $20
 1 Holdco share issued as
consideration for Opco shares, does
A receive benefit?
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)

15(1)
◦ Where a benefit is conferred on a shareholder
◦ Value of benefit included in income


In wholly-owned situation, is it reasonable to
say the shareholder has received a benefit?
CRA technical interpretation
◦ 2000-0010165
16
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1) – example
A
Issue share
FMV 10
 A owns 100% of Opco
 A owns 100% of Holdco
FMV 20
Holdco
Other
 A transfers shares of Opco to Holdco
for 1 Holdco share
 FMV of Opco shares is $20 (ACB is
$20)
 FMV of each Holdco share is $10
Opco
17
 1 Holdco share issued as
consideration for Opco shares
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)

69(1)(b)
◦ Deemed to received FMV proceeds because only
received $10 instead of $20
18
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)

69(1)(a)
◦ Taxpayer has acquired share of Holdco
◦ Consideration paid was $20 (Opco share)
◦ Consideration paid was in excess of property
acquired ($10 Holdco share)
◦ Taxpayer deemed to have acquired share at cost of
$10
19
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)



20
85(1) overrides 69(1)
69(1) begins with “except as expressly
otherwise provided…”
File 85(1) election to avoid 69(1)(a), (b)
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)



21
In above example, taxpayer received share consideration
worth $10 for property worth $20
85(1)(e.2) Gifting provision
◦ If reasonable to consider any excess of FMV of property
transferred over FMV of consideration as a benefit that
transferor desired to confer on a related person
◦ Excess is added to elected amount and increases
proceeds of disposition
A corporation that is wholly-owned by the taxpayer is
excluded from being a potential recipient of a benefit
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)
Internal Share Exchanges

Isolation of Adjusted Cost Base
◦ 85(1)(g), (h)
◦ Elected amount allocated to preferred shares first
(up to FMV)

22
Cannot be done under 86(1) or 51(1)
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1) Internal Share Exchanges



Example:
Common Shares of Opco
◦ FMV
$2,000
◦ ACB
$500
◦ PUC
$0
Exchange common shares for:
Pref
◦ FMV
$500
◦ ACB
$500
Common
FMV
ACB
◦ Elect under 85(1) at ACB of $500

23
Consider allocation of safe income
Toronto Young Practitioners Group
$1,500
$0
Share Exchanges
Subsection 85(1)
Internal Share Exchanges
Deemed Dividend Trap


Exchange common shares for:
Pref
Common
◦ FMV
$500 FMV
$1,500
◦ ACB
$500 ACB
$0

PUC of old shares was nil
What if legal stated capital of new shares set at FMV
on exchange?
24
Toronto Young Practitioners Group

Share Exchanges
Subsection 85(1)
Internal Share Exchanges
Deemed Dividend Trap




25
85(2.1) restricts PUC to cost of acquired
property
85(1) deems cost of acquired property to be
equal to elected amount
In above example, elected amount $500
PUC reduced to $500 under 85(2.1)
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)
Internal Share Exchanges
Deemed Dividend Trap




26
PUC before was nil
PUC after is $500
Deemed dividend of $500 under 84(1)
Consider ability to set stated capital under
relevant Business Corporations Act
Toronto Young Practitioners Group
Share Exchanges
Section 85 – Share Exchange to Isolate ACB
(Deemed Dividend Trap)
Taxpayer
100 “old” c/s
ACB = 50
FMV = 200
PUC = nil
100 “new” c/s
FMV = 150
100 p/s
FMV = 50
Opco
1. Taxpayer exchanges 100 “old” c/s for
100 “new” c/s and 100 p/s of Opco
2. Taxpayer and Opco jointly elect under
85(1) at elected amount of $50
27
 Taxpayer does not realize gain or loss on
disposition of 100 “old” c/s
 Taxpayer acquires 100 p/s at cost of $50, the
elected amount (allocated first to the p/s of
Opco)
 Taxpayer acquires 100 new c/s of Holdco at
cost of nil (no remaining elected amount)
 Isolates ACB in p/s only
 If stated capital of p/s and new c/s set at FMV,
85(2.1) grinds PUC of both classes pro rata
down to elected amount of $50 in aggregate
 PUC of p/s reduced to $12.50
 PUC of “new” c/s reduced to $37.50
 84(1) deemed dividend arises because PUC
before was nil, PUC after is $50
 SOLUTION may be to restrict legal stated
capital voluntarily to nil per OBCA 24(3)(a)
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)
Disposition on Internal Share Exchanges


85(1) and 86(1) require the old shares to be
“disposed of”
CRA comments on conversion of common
shares into preferred shares
◦ 2000-0001833
28
Toronto Young Practitioners Group
Share Exchanges
Subsection 85(1)
Disposition on Internal Share Exchanges

248(1) “disposition” (b)
◦ disposition where share is cancelled

Document 2004-0092561E5
◦ No disposition even though cancelled

OBCA amendments 22(7)
◦ Different classes may have same rights
29
Toronto Young Practitioners Group
Share Exchanges
Section 85 – Other Pitfalls
◦ Can create shareholder benefit under 15(1) if FMV of
boot exceeds FMV of transferred property
◦ If property transferred is “taxable Canadian property”,
shares received are deemed to be taxable Canadian
property (85(1)(i))
◦ Can create benefit conferral issue under 85(1)(e.2) if
FMV of transferred property exceeds each of FMV of
consideration received and elected amount and
desired to confer benefit on related person. Adjusted
elected amount upward in that case
30
Toronto Young Practitioners Group
Share Exchanges
◦ Section 84.1
◦ Section 212.1
31
Toronto Young Practitioners Group
Share Exchanges
Section 84.1

Anti-avoidance rule

Aimed at preventing surplus stripping


32
Can apply when shares of one corporation are
transferred to another
Can result in deemed dividend and / or PUC
grind
Toronto Young Practitioners Group
Share Exchanges
Section 84.1

Can apply when shares of one corporation are
transferred to another
◦ Doesn’t apply if transferor is a corporation
◦ If taxpayer and purchaser corporation (“purchaser”)
deal non-arm’s length
◦ If transferred corporation “connected” with
purchaser immediately after
33
Toronto Young Practitioners Group
Share Exchanges
Section 84.1


Act allows creation of PUC in certain cases
PUC can be created from ACB of shares of another
corporation

85(2.1) limits PUC to elected amount not old PUC

Above subject to 84.1
34
Toronto Young Practitioners Group
Share Exchanges
Section 84.1
Not Applicable to Transfer by Corporation

Opco shares acquired by Acquisitionco
◦ FMV $100
◦ ACB $100
◦ PUC


35
$0
Later, want to extract purchase price
Transfer Opco shares to related Holdco
Toronto Young Practitioners Group
Share Exchanges
Non-Arm’s Length Transfer by
Corporation - 85(2.1)




Opco shares
◦ FMV
$100
◦ ACB
$100
◦ PUC
$0
Holdco shares
◦ FMV
$100
◦ ACB
$100
◦ PUC
$100
85(2.1) does not reduce PUC
84.1 does not apply
AcqCo
F 100
A 100
P 0
 Does not matter that transfer was
non-arm’s length
36
Toronto Young Practitioners Group
Opco
F 100
A 100
P 100
Holdco
Share Exchanges
Section 84.1

Opco shares acquired by individual in arm’s
length purchase
◦ FMV $100
◦ ACB $100
◦ PUC


37
$0
Later, want to extract purchase price
Transfer Opco shares to related Holdco
Toronto Young Practitioners Group
Share Exchanges
Section 84.1




38
Opco shares
◦ FMV
$100
◦ ACB
$100
◦ PUC
$0
Holdco shares
◦ FMV
$100
◦ ACB
$100
◦ PUC
$100
85(2.1) does not reduce PUC
Consider application of 84.1
Taxpayer
F 100
A 100
P 0
Toronto Young Practitioners Group
F 100
A 100
P 100
Holdco
Opco
Share Exchanges
Section 84.1

85(2.1) does not apply if 84.1 applies

In above example, 84.1 is applicable
◦ Transfer by individual
◦ Non-arm’s length
◦ Connected corporations
39
Toronto Young Practitioners Group
Share Exchanges
Section 84.1

Deemed dividend if boot exceeds
◦ Greater of
 PUC of old shares
 “Hard” ACB

40
PUC reduction based on greater of amounts
above less boot
Toronto Young Practitioners Group
Share Exchanges
Section 84.1

“Hard” ACB
◦ ACB reduced for
 CGE claimed by taxpayer or non-arm’s length person
 V-Day Value increments

In above example, “hard” ACB of 100
◦ Can create PUC of 100
41
Toronto Young Practitioners Group
Share Exchanges
Sections 84.1 – Simple Example
Father
Son
Note
FMV = $100
Sonco
Dadco c/s
FMV = 100
PUC = 1
ACB = 1
Dadco
Father sells Dadco c/s to Sonco for
Note of $100
42
◦ Non-arm’s length sale of Dadco shares
by Father to another Sonco with which
Father does not deal at arm’s length,
and the two corporations are
“connected” thereafter
◦ 84.1(1)(b) deems dividend paid to
Father by Sonco of $99, being the
difference between FMV of Note ($100)
and greater of PUC and Hard ACB ($1)
◦ Father’s POD for Dadco c/s reduced by
amount of deemed dividend down to
$1
 No gain or loss
 Cannot claim 110.6 capital gains
exemption; instead realize deemed
dividend
Toronto Young Practitioners Group
Share Exchanges
Section 84.1

Case Law: Desmarais
◦ Misuse or abuse of section 84.1
◦ Avoided connected test by transferring 9.8% of
shares
◦ Used “surpluses” of another corporation
◦ GAAR applied
43
Toronto Young Practitioners Group
Share Exchanges
Section 84.1

Case Law: Brouillette
◦ CRA said taxpayer not dealing at arm’s length with
purchaser corporation
◦ Court found dealing at arm’s length
 Interests were distinct
 Use of same accounting firm for tax-planning advice
did not mean acting in concert
 Clients, not advisers made decisions and acted with
their own benefit in mind
44
Toronto Young Practitioners Group
Share Exchanges
A
X
Cash = 500K
FMV > ACB
PUC = 0
Xco
FMV = 500K
Farmco
45
Section 84.1: CGE Monetization
 Taxpayer A and Taxpayer X are
not related
 A sells 500K of shares to Xco
 A claims CGE
 Xco pays 500K cash to A
 A lends the cash to Farmco
 Farmco redeems the shares
held by Xco
 CRA: 84.1 applies
 CRA: GAAR could apply
 See 2004-0106161E5
 See Geransky and MacDonald
cases
Toronto Young Practitioners Group
Share Exchanges
A
B
33.33%
Newco
Opco
46
50%
X
Note
Section 84.1: Purchase Shares
of Co-Owner
 A, B, X own 1/3 of Opco
 A, B set up Newco to buy
shares from X
 Newco issues Note to X
 Opco purchases for
cancellation shares held
by Newco
 CRA: No 84.1; No 55(2)
 See 1999-0008945
Toronto Young Practitioners Group
Share Exchanges
Section 84.1
CRA Comments at 2012 Canadian Tax Foundation Annual Conference
Employee Buyco Rulings
In the late 1990s and early 2000s, advance income tax rulings were issued
on transactions that were designed to allow departing employeeshareholders of private corporations to realize a capital gain, as opposed
to a deemed dividend, on the disposition of their shares.
In a typical transaction, employees of a corporation (Opco) would receive
Opco shares as incentives under an Opco employee share ownership plan
(ESOP). Under the terms of the ESOP, on retirement or other termination of
employment, the employees would be required to dispose of these shares.
To facilitate the disposition, Opco would incorporate and fund another
corporation (Buyco). Buyco would use the funds to purchase the departing
employee's Opco shares.
47
Toronto Young Practitioners Group
Share Exchanges
Section 84.1
CRA Comments at 2012 Canadian Tax Foundation Annual Conference
In the advance income tax rulings issued in respect of these transactions, we
had provided assurance that section 84.1 would not apply to deem
departing employees to receive a dividend on the disposition of their Opco
shares. However, this assurance was based on representations that the
employees would deal at arm's length with Buyco and that Buyco was not
an agent of Opco.
We are of the view that, given the degree of accommodation provided by
Buyco to the departing employees and the parties' lack of separate
interests, the better view is that the employees and Buyco are generally
not dealing at arm's length. This view is consistent with several of our
published documents7 as well as the jurisprudence.8 Accordingly, in
ruling requests on this type of transaction considered in 2012, we refused
to confirm that section 84.1 would not apply to deem employees to
receive a dividend from a Buyco on the disposition of their Opco shares.
48
Toronto Young Practitioners Group
Share Exchanges
Section 84.1 – Conditions for Application
84.1 is an anti-avoidance rule for a non-arm’s length sale of shares by individual
◦ Vendor is an individual or trust resident in Canada
◦ Vendor disposes of shares that are capital property (“subject shares”)
◦ Subject shares are shares of class of a corporation resident in Canada (“subject
corporation”)
◦ Purchaser is another corporation (“purchaser corporation”) that does not deal at
arm’s length with the taxpayer
 Taxpayer and purchaser corporation deemed non-arm’s length if taxpayer is part
of a group of fewer than 6 persons that controlled the subject corporation before
transfer and taxpayer is part of same group (or subset thereof) that controlled
purchaser corporation after transfer
 No Silicon Graphics nexus required for persons to form group per 84.1(2.2)(b)
 Multiple groups possible per 84.1(2.2)(d))
49
Toronto Young Practitioners Group
Share Exchanges
Section 84.1 – Conditions for Application
◦ After disposition, purchaser corporation and subject corporation are
“connected” per 186(4)
 Control (including control by other non-arm’s length persons per
186(2)); or
 Ownership of shares having 10% votes and value
◦ 84.1 aims at “artificial” capital gains stripping in a non-arm’s length
context by an individual who wishes to access the capital gains exemption
or lower capital gains tax rates
◦ Similar rule in 212.1 for non-arm’s length sale of Canco shares by nonresident to another Canco
 Foreign affiliate dumping rules in 212.3 extend principle in 212.1 in
certain circumstances
50
Toronto Young Practitioners Group
Share Exchanges
Section 84.1 – Consequences of Application
◦ PUC in shares of purchaser corporation issued to taxpayer limited to the greater of
“Hard ACB” and PUC of subject shares less FMV of boot per 84.1(1)(a)
 Hard ACB means basis in subject shares that excludes tax-free permanent ACB
bumps
 Ignore V-day bump in ACB per 84.1(1)(a)
 Ignore bump in ACB attributable to capital gains exemption of the taxpayer or a
non-arm’s length person in respect of a previous disposition of share per
84.1(2)(a.1)(ii)
 If multiple classes of shares of purchaser corporation issued, such reduced PUC
allocated pro rata amongst all classes based on legal stated capital
◦ Deemed dividend paid to taxpayer by purchaser corporation in amount of difference
between FMV of boot and the greater of PUC of subject shares and Hard ACB
 84.1(1)(b) deemed dividend reduces 54 “proceeds of disposition” (k) of subject
shares to avoid double tax
51
Toronto Young Practitioners Group
Share Exchanges
Section 212.1
◦ Rule similar to 84.1 in 212.1 for non-arm’s length sale of
Canco shares by non-resident to another Canco
◦ However, “hard ACB” is not relevant
◦ Consideration over PUC is deemed dividend
◦ PUC grind for new PUC in excess of old PUC
◦ Foreign affiliate dumping rules in 212.3 extend principle in
212.1 in certain circumstances
52
Toronto Young Practitioners Group
Share Exchanges
◦ Section 86
53
Toronto Young Practitioners Group
Share Exchanges
Section 86 – Conditions for Application
S86 provides a tax-deferred share exchange of the same corporation
 In the course of a reorganization of capital
 Includes an amendment to the articles of
incorporation/continuance/amalgamation: see CRA document no.
2010-0373271C6, dated October 8, 2010; and ATR-33, dated
October 7, 1998
54
Toronto Young Practitioners Group
Share Exchanges
Section 86 – Conditions for Application
 Taxpayer is vendor
 “A” corporation
 Includes non-resident corporation, tax-exempt corporation
 Taxpayer disposes of all of its shares of a class of the corporation
(“exchanged shares”)
 Exchanged shares are capital property to the taxpayer
 Consideration includes other shares of the same corporation
 Possible to issue non-share consideration (“boot”)
 Section 85 joint election is not filed per 86(3)
55
Toronto Young Practitioners Group
Share Exchanges
Section 86 – “disposed of capital property that was all the shares of
any particular class …”
86 requires taxpayer to dispose of all of the exchanged shares
◦ Consider share exchange of old c/s of corporation for new c/s with
identical terms and conditions
◦ 248(1) “disposition” (b)(i) includes a redemption or cancellation of
shares
 Should be no requirement to alter share terms to create
“disposition”
 CRA accepts this conclusion in some cases: see CRA document
no. 2003-0038863
56
Toronto Young Practitioners Group
Share Exchanges
Section 86 – Disposition of all shares
 BUT CRA has said that “a taxpayer would not have realized a disposition of a
particular share of a corporation if, after an exchange of shares, he finds himself with
a share having the same rights, preferences, conditions and restrictions as those of
the particular share”: see CRA document nos. 2009-033016, 2004-0092561E5
 Eliminate uncertainty by changing share terms
 For examples, see CRA document nos. 2007-0247611R3, 2006-0207721R3,
2005-0111421R3 as well as 2004-0091911R3
 Mere conversion of shares into a different class (e.g., renaming class of shares)
is insufficient: see CRA document no. 9134555, dated March 19, 1992
 For example:
 Double the number of votes per share
 Nominal liquidation or dividend entitlement (e.g. same rights as old but entitled
to first $100 on liquidation)
 BUT can create taxable preferred share concern
 Nominal voting restriction
 BUT can give rise to Part IV tax on inter-corporate dividend as “connected”
requires control or ownership of 10% of votes and value of shares with full
voting rights in all circumstances per 186(2) and (4)
57
Toronto Young Practitioners Group
Share Exchanges
Subsection 86(1)

Allocation of ACB
◦ 86(1)(b)
◦ Allocated pro rata to new classes based on relative
FMV

PUC grind
◦ 86(2.1)
◦ Based on PUC of old less boot
◦ Different than 85(2.1)
58
Toronto Young Practitioners Group
Share Exchanges
Subsection 86(1)

Distribution of property under 86(1)
◦ Transactions have used 86(1) to distribute property
(“boot”)

Deemed dividend under 84(3)
◦ If boot exceeds old PUC

59
Consider application of 55(2)
Toronto Young Practitioners Group
Share Exchanges
Subsection 86(1)

Deemed dividend under 84(3) reduces deemed
proceeds of disposition
◦ 86(1)(c)
◦ Paragraph (j) “proceeds of disposition” in section 54

60
Can have combination of deemed dividend
and capital gain
Toronto Young Practitioners Group
Share Exchanges
Subsection 86(1)




61
Example:
Exchange share under 86(1)
◦ FMV
$100
◦ ACB
$10
◦ PUC
$10
◦ Boot
$15
Deemed dividend of $5
POD 86(1)(c)
◦ Boot $15 less dividend of $5 = POD of $10
◦ POD $10 – ACB $10 = $0 capital gain
Toronto Young Practitioners Group
Share Exchanges
Section 86 – Estate Freeze (Deemed
Dividend Trap)
Taxpayer
100 p/s
FMV = 150
Note
FMV = 50
Children
100 c/s
ACB = 50
FMV = 200
PUC = nil
“new” c/s
ACB = nil
FMV = nil
PUC = nil
Opco
1. Opco amends articles of incorporation
to create a new class of p/s
2. Taxpayer exchanges 100 c/s for 100
p/s having FMV of $150 and a Note
having FMV of $50
3. Children subscribe for c/s for nominal
consideration
62

Taxpayer’s ACB in Note is $50, FMV of boot

Taxpayer’s ACB in 100 p/s of Opco equals nil, the
ACB of old shares ($50) less FMV of boot ($50)

84(3) creates deemed dividend of $50, the
difference between redemption price ($50) and
PUC of old c/s (nil)

No 55(2) if internal reorg per 55(3)(a)

Tax cost if Taxpayer not a corporation

(If no Note, 84(3) should not apply as 84(5) would
cause redemption price to be nil, equal to the nil
PUC of shares issued)

Taxpayer’s POD for 100 c/s is nil, equal to the
ACB of new shares (nil) plus FMV of boot ($50)
less the 84(3) deemed dividend ($50)

PUC of 100 p/s of Opco is nil, being the
difference, if any, between PUC of old shares (nil)
less FMV of boot ($50) per 86(2.1)(a)

Tax under Part IV, and Parts VI.1 and IV.1, should
not arise if taxpayer is a corporation, taxpayer
and Opco are connected and Taxpayer has
significant interest in Opco, respectively
Toronto Young Practitioners Group
Share Exchanges
86 – Example: Public Spinoff
Public
Purchaser
“old” c/s
p/s
c/s
Target
Spinco
1. Purchaser proposes to take over Target but is not
interested in Spinco
2. Target amends articles of incorporation to create a
class of preferred shares redeemable in aggregate at
the takeover price
3. Public exchanges Target “old” c/s for p/s and boot
consisting of c/s of Spinco
4. Purchaser acquires p/s of Target
63
 86 applies to share exchange before
takeover
 Public’s ACB of c/s of Spinco equals
FMV
 Public’s ACB of p/s of Target equals
difference between ACB of “old” c/s of
Target and FMV of boot (i.e., Spinco
c/s)
 Public’s POD for “old” c/s equals total
of ACB of new p/s of Target and FMV
of boot (i.e., Spinco c/s) (subject to any
84(3) deemed dividend arising)
 PUC of p/s of Target is difference, if
any, between PUC of old shares less
FMV of boot per 86(2.1)(a)
 Need mechanism for funding dividend
WHT for non-resident shareholders if
deemed dividend arose
Toronto Young Practitioners Group
Share Exchanges
Section 86 – Consequences of Application
Taxpayer’s ACB of boot equals FMV thereof per 86(1)(a)

Taxpayer’s ACB of new shares of any class of corporation is difference between ACB of old
shares less FMV of boot allocated pro rata amongst all classes of new shares based on relative
FMV per 86(1)(b)


PUC of new shares limited to the PUC of old shares less FMV of boot per 86(2.1)(a) allocated
amongst various classes of new shares pro rata based on legal stated capital


Cannot isolate ACB
86(2.1)(b) adds back to PUC of shares any deemed dividend arising thereafter under 84(3),
(4) or (4.1) as a result of the PUC reduction under 86(2.1)(a)
Taxpayer realizes POD of old shares equal to ACB of new shares and FMV of boot per 86(1)(c)

No gain if FMV of boot does not exceed ACB of the old shares

If FMV of boot exceeds ACB of old shares, a capital gain or a deemed dividend or both can
arise and ACB of new shares is nil

Deemed dividend


On redemption of shares, 84(3) deems a dividend paid to taxpayer by corporation to the
extent that redemption price exceeds PUC of old shares (for share consideration,
redemption price valued at PUC of shares issued per 84(5))
If FMV of boot exceeds PUC of old shares, deemed dividend arises


64
Consider the application of 55(2)
84(3) deemed dividend reduces deemed POD per 54 “proceeds of disposition” (j)
Toronto Young Practitioners Group
Share Exchanges
Section 86 – Other Considerations
◦ No rule that continues “taxable Canadian property” status, unlike 51, 85, and 85.1
◦
◦
 Rule may benefit a non-resident, subject to the GAAR
86(4) preserves debt forgiveness history of old shares for the new shares
Can create benefit conferral issue under 86(2) if FMV of old shares exceeds FMV of consideration
received and desired to confer benefit on related shareholder

Unlike 85(1)(e.2), no exception for related person that is wholly-owned subsidiary of the taxpayer

Taxpayer realizes POD for old shares equal to FMV of boot plus the amount of the benefit (up to
FMV of old shares)


65
Taxpayer’s ACB of new shares deemed to be equal to its ACB of old shares less total of FMV of boot
and amount of benefit
If more than one class of new shares issued, ACB allocated amongst classes in relation to their
respective FMV
Toronto Young Practitioners Group
Share Exchanges
◦ Section 51
66
Toronto Young Practitioners Group
Share Exchanges
Subsection 51(1)



Applies on an exchange of a share for another
share of the same corporation
No non-share consideration
Automatic
◦ No election

67
No disposition required
Toronto Young Practitioners Group
Share Exchanges
Subsection 51(1)

Allocation of ACB
◦ 51(1)(d)
◦ Allocated pro rata to new classes based on relative
FMV
◦ Proration formula applies even if one class of shares

68
What if FMV of new shares is nil?
Toronto Young Practitioners Group
Share Exchanges
Subsection 51(1)
CRA technical interpretation 2008-0300391C6






69
FMV of old shares: nil (or “negative”)
◦ debt exceeds company’s value
ACB of old shares: say, $10 million
New shares received have FMV of nil
51(1)(d): ACB of new shares = ACB old x 0/0
If old / new shares had value of even $1.00,
◦ ACB of new shares would be $10 million
“Anomaly” also applies to 86(1)
Toronto Young Practitioners Group
Share Exchanges
Subsection 51(1)

PUC grind
◦ 51(3)
◦ Based on PUC of old
◦ Different than 85(2.1) and 86(2.1)
70
Toronto Young Practitioners Group
Share Exchanges
Taxpayer A
Taxpayer B
100 Class A c/s
100 Class B c/s
“new” c/s
“new” c/s
Opco
1. Each of Taxpayer A and Taxpayer B
converts 100 Class A c/s and 100 Class B
c/s, respectively, into “new” c/s of Opco
71
Section 51 – Example:
Simplification of Capital
Structure
 51 share exchange
 Taxpayer A and Taxpayer B
deemed not to dispose of old
shares
 Taxpayer A and Taxpayer B’s
ACB of “new” c/s equals its
ACB of its old shares
 PUC of “new” c/s equals PUC
of old shares
Toronto Young Practitioners Group
Share Exchanges
Section 51 – Conditions for Application
◦ Section 51 provides tax-deferred exchange of shares (or convertible debt
into shares) of the same corporation
 Conditions
 Taxpayer acquires share of “a” corporation from the corporation
 Corporation can be a non-resident or a tax exempt
 Exchange with the issuer only (not another shareholder or another
corporation)
72
Toronto Young Practitioners Group
Share Exchanges
Section 51 – Conditions for Application
 In exchange for capital property of the taxpayer that is
 Another share of the same corporation
 No need for conversion feature within the share terms
 A bond, debenture or note of the corporation the terms of which
confer on the holder the right to make the exchange (“convertible
debt”)
 Possible to add a conversion right to debt without triggering a
disposition: see IT-448, “Dispositions – Changes in Terms of
Securities,” dated June 6, 1980, at para. 5
 No need to convert all shares or convertible debt held by taxpayer
 No boot is received by the taxpayer
 CRA accepts non-share consideration in lieu of fractional share, but
taxpayer must reduce ACB of whole shares received by FMV of that
boot
 85 and 86 do not apply
73
Toronto Young Practitioners Group
Share Exchanges
Section 51 – Consequences of Application
◦ Vendor deemed not to dispose of the old shares or convertible debt per
51(1)(c)
 Except for purposes of 20(21) relating to over-accrual of interest
income and certain rules for non-resident trusts in 44.1(6) and 94(2)(m)
 Therefore, no gain or loss realized by vendor
 No reporting or elections required
◦ Vendor’s ACB in new shares of corporation equals the ACB to vendor of
old shares or convertible debt, allocated pro rata amongst all classes of
new shares based on their relative FMV per 51(1)(d)
◦ PUC of new share limited to PUC of the old share allocated amongst
various classes of new shares pro rata based on their relative legal stated
capital per 51(3)(a)
 51(3)(b) adds back to PUC of shares any deemed dividend arising
thereafter under 84(3), (4) or (4.1) as a result of the PUC reduction
under 51(3)(a)
74
Toronto Young Practitioners Group
Share Exchanges
Section 51 – Other Pitfalls
 On exchange of convertible debt for shares of the corporation,
debt settled for amount equal to FMV of the share per 80(2)(g)
 Consider debt forgiveness issues on exercise of convertible
debt
 If old shares were “taxable Canadian property” new shares are
deemed to be “taxable Canadian property” (51(1)(f))
 51(1)(d.1) and (d.2) preserve debt forgiveness history of old
shares for the new shares
75
Toronto Young Practitioners Group
Share Exchanges
Section 51 – Other Pitfalls
 Can create benefit conferral issue under 51(2) if FMV of old shares (or
convertible debt) exceeds FMV of consideration received and desired to
confer benefit on related shareholder
 Taxpayer deemed to have disposed of old shares (or convertible debt)
for POD equal to lesser of total of ACB of old shares plus FMV of benefit
and FMV of old shares
 Any capital loss deemed to be nil
 Taxpayer’s ACB of new shares equals lesser of ACB of old shares (or
convertible debt) and total FMV of new shares plus capital loss (if it
were not deemed nil), allocated amongst all classes of new shares pro
rata based on their relative FMV
76
Toronto Young Practitioners Group
Share Exchanges
◦ Section 85.1
77
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Conditions for Application
85.1(1) provides tax-deferred share exchange for shares of another,
arm’s length corporation
◦ Conditions
 Vendor is a “taxpayer”
 Purchaser is “Canadian corporation”
 Transferred property is shares of a taxable Canadian
corporation that are capital property
 Consideration received by taxpayer must be shares of purchaser
 Disposition of exchanged shares reported as completely taxdeferred in return of vendor for its taxation year that includes
the exchange
78
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Denial Rules
85.1(2) denies the tax-deferred share-for-share exchange in certain
circumstances
 Vendor and purchaser were, immediately before the exchange, not
dealing at arm’s length (ignore 251(5)(b) right to acquire shares)
 Significant shareholders and corporation may jointly elect under 85
as precaution
 Vendor (or other non-arm’s length persons) controlled purchaser
immediately after the exchange
 85(1) or (2) election filed
79
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Denial Rules
85.1(2) denies the tax-deferred share-for-share exchange in certain
circumstances
 Consideration other than “shares of the particular class” is received by
the vendor
 Includes boot
 Includes shares of another class
80
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Denial Rules
85.1(2) denies the tax-deferred share-for-share exchange in certain
circumstances
 Boot issued as consideration
 Possible to structure exchange whereby shares of purchaser and boot
issued to vendor, but only if “vendor can clearly identify which shares
were exchanged for [boot] and which were exchanged for shares of
the purchaser”: see IT-450R, “Share for share exchange,” dated April
8, 1993, at para. 7
 Same position applies where shares of more than one class issued
 CRA ignores restriction for $200 or less received in lieu of a fraction
of a share
 Many transactions are structured to “break” 85.1 by including boot
81
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Denial Rules
85.1(2) denies the tax-deferred share-for-share exchange in certain
circumstances
 Vendor is a foreign affiliate of a Canadian-resident taxpayer and
included gain or loss from the disposition of the exchanged shares in
FAPI
82
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Consequences of Application
◦ Vendor realizes POD for exchanged shares equal to its ACB of those
shares per 85.1(1)(a)(i)
◦ Vendor’s ACB in shares of purchaser equals the ACB to vendor of
exchanged shares per 85.1(1)(a)(ii)
83
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Consequences of Application
◦ Purchaser’s ACB for exchanged shares equals the lesser of FMV and PUC of
the exchanged shares immediately before the exchange per 85.1(1)(b)
 ACB to the purchaser may not matter if acquired corporation wound-up
or amalgamated with the purchaser
 Purchaser can “lose” basis if ACB (or FMV) of exchanged shares exceeds
their PUC
 In that case, to increase purchaser’s ACB in exchanged shares,
purchaser and significant shareholders of the acquired corporation
may jointly elect under 85
84
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Consequences of Application
◦ PUC of shares of purchaser issued to vendor limited to PUC of exchanged
shares allocated amongst various classes of new shares pro rata based on
legal stated capital per 85.1(2.1)(a)
 85.1(2.1)(b) adds back to PUC of shares any deemed dividend arising
thereafter under 84(3), (4) or (4.1) as a result of the PUC reduction
under 85.1(2.1)(a)
85
Toronto Young Practitioners Group
Share Exchanges
Section 85.1 – Example: US Silver & Gold
(2012) Plan of arrangement (simplified)
Public
Public
USSG
RX Gold
US Silver
1. Public shareholders of each of US Silver
and RX Gold exchanged their shares of US
Silver and RX Gold, respectively, for shares
of a new public company, US Silver & Gold
86
 Public realizes POD for the
exchanged shares equal to ACB
 No gain or loss
 Public acquires shares of USSG at a
cost equal to its ACB of the
exchanged shares
 A rollover of basis
 USSG acquires shares of RX Gold and
US Silver at a cost equal to lesser of
FMV and PUC thereof
 PUC of USSG shares ground down to
PUC of the exchanged shares
Toronto Young Practitioners Group
Share Exchanges
Step 1
Public
Public
“new” c/s +
s/s
Cenovus
Encana : Cenovus Spin-Off
(2009)
Plan of arrangement
(simplified) and Advance
Income Tax Ruling
55(3)(b) Butterfly
Reorganization
Step 2
Encana
c/s
Subco
Cenovus
Assets
“new” c/s
c/s
s/s
Cenovus
Encana
c/s
Subco
Cenovus
Assets
1.
2.
86 reorganization of “old” c/s of
Encana into “new” c/s and special
shares
Public disposes of special shares of
Encana to Cenovus in exchange for
c/s of Cenovus

87
Toronto Young Practitioners Group
Public that wished to report
full gain could simply report it
in return for the taxation year
of the exchange in order to
avoid 85.1

Public that wished to report
partial gain could contact
Encana to file 85 joint election

Public that wished to report
nil gain could rely on section
85.1
Share Exchanges
Encana: Cenovus Spin-Off
Step 3
Step 4
Public
Public
Cenovus
c/s
s/s
Encana
s/s
Cenovus
Encana
c/s
Subco
Subco
Cenovus
Assets
Cenovus
Assets
88
3. Encana transfers c/s of
Subco to Cenovus for
“special” shares of Cenovus
4. Cross-redeem the special
shares of Encana and
Cenovus and set-off notes
Toronto Young Practitioners Group
Share Exchanges
Pubco S86 With Boot
Public
FMV 100
ACB 50
PUC 40
Pubco
• Pubco to be acquired by Bidco
(another public company)
• Bidco does not want Spinco
• Spinco to be distributed to
shareholders of Pubco
FMV 40
ACB 40
PUC 40
Spinco
89
Toronto Young Practitioners Group
Share Exchanges
Pubco S86 With Boot
Public
FMV 40
ACB 40
PUC 40
Spinco
New Shares
FMV 60
ACB 10
PUC 0
Pubco
• Shares of Pubco exchanged for New
Shares of Pubco and boot (Spinco
shares) under S86
• Boot does not exceed PUC
• No deemed dividend
• Shares of Pubco will be sold to Bidco
• Gain of 50
• S86 boot reduced PUC and ACB
90
Toronto Young Practitioners Group
Share Exchanges
Pubco S86 With Boot – 85.1 Planning
Public
FMV 100
ACB 50
PUC 40
Pubco
• Pubco to be acquired by Bidco
(another public company)
• Bidco does not want Spinco
• Spinco to be distributed to
shareholders of Pubco
FMV 40
ACB 40
PUC 40
Spinco
91
Toronto Young Practitioners Group
Share Exchanges
Pubco S86 With Boot – 85.1 Planning
Public
FMV 40
ACB 20
PUC 40
FMV 60
ACB 30
PUC 0
Pubco
• S86 to exchange existing shares of
Pubco for 2 new classes
• One class has redemption
amount and PUC = Spinco value
FMV 40
ACB 40
PUC 40
Spinco
92
Toronto Young Practitioners Group
Share Exchanges
Pubco S86 With Boot – 85.1 Planning
Public
• Shareholders of Pubco transfer
shares of Pubco to Spinco
• 85.1
• Spinco acquires shares of Pubco
at ACB = PUC under 85.1 rules
FMV 60
ACB 30
PUC 0
FMV 40
ACB 20
PUC 40
Pubco
FMV 40
ACB 40
PUC 40
FMV 40
ACB 40
PUC 40
Spinco
93
Toronto Young Practitioners Group
Share Exchanges
Pubco S86 With Boot – 85.1 Planning
Public
FMV 40
ACB 20
PUC 40
FMV 60
ACB 30
PUC 0
Pubco
• Shareholders of Pubco sell shares to
Bidco
• Gain of 30
• Without 85.1 planning (previous
slides), gain was 50
• Initial S86 transaction “preserved”
some ACB in the shares of Pubco
Spinco
94
Toronto Young Practitioners Group
Share Exchanges
UTS/SilverBirch and Total (2010)
Public
Class B p/s
FMV = SilverBirch
Class A c/s
FMV = Other Assets
Public
“old” c/s
Total
UTS

Regular section 86 spin-off would shift basis
from UTS shares to SilverBirch shares to the
extent of the fair market value of the spin-off,
increasing the gain to the public on the takeover

FMV of SilverBirch very significant so special
structuring preserved public’s basis in the UTS
shares

Plan of arrangement (simplified)

Transfer of Spin-off Assets:

UTS realizes a gain on the transfer of the assets
to SilverBirch in a taxable transaction

Section 86 share exchange involving UTS:

SilverBirch
Note
FMV =
SilverBirch
Other
Assets
1. Total proposes to take over UTS (except its interest
in spin-off assets)
2. UTS contributes spin-off assets to SilverBirch for
nominal-value c/s of SilverBirch and a note
3. UTS amends articles of incorporation to create
Class A c/s and Class B p/s (redeemable in aggregate at
FMV of SilverBirch)
(Steps 4 to 6 follow)
95
ACB of new shares = ACB of old shares,
apportioned amongst Class A c/s and Class B
p/s based on their relative FMV

Cannot isolate ACB under 86, only with 85
joint election (impractical for public)

PUC of new shares = PUC of old shares,
allocated first to Class B p/s to extent of
redemption price, and next to Class A c/s

POD equals ACB of new shares (being ACB of
old shares) plus FMV of boot (being nil)

Toronto Young Practitioners Group
No gain or loss
Share Exchanges
UTS/SilverBirch and Total (2010)
Public
Class B p/s
FMV = SilverBirch
Public
Class A c/s
FMV = Other
Assets
Total
UTS
SilverBirch
Note
FMV =
SilverBirch
Other
Assets
4. Canadian public transfer Class B p/s of UTS to
SilverBirch for c/s of SilverBirch
(Steps 5 and 6 follow)
96
 Section 85.1 share-for-share
exchange:
 Public’s POD for Class B p/s of UTS
equal ACB thereof
 No gain or loss
 Public’s ACB of c/s of SilverBirch
equals ACB of Class B p/s of UTS
 Effectively a rollover of ACB
 SilverBirch’s ACB of Class B p/s of UTS
equals lesser of FMV and PUC of the
UTS Class B shares (both are equal to
the redemption price)
 PUC of c/s of SilverBirch limited to PUC
of Class B p/s of UTS
Toronto Young Practitioners Group
Share Exchanges
Public
Class B p/s
FMV = SilverBirch
Public
Class A c/s
FMV = Other
Assets
Total
UTS
SilverBirch
Note
FMV =
SilverBirch
5. SilverBirch redeems Class B p/s of UTS in
consideration for cancellation of nominal-value
SilverBirch c/s and the Note
(Step 6 follows)
97
Other
Assets
UTS/SilverBirch and Total (2010)
Redemption of Class B p/s of UTS:
 No 84(3) deemed dividend as
redemption amount (being FMV of the
Class B p/s of UTS) does not exceed
PUC of Class B p/s (being the full
redemption price per 86 exchange at
step #3)
 SilverBirch does not realize gain or loss
on redemption as POD (being the
redemption price at FMV) equals the
ACB of the Class B p/s of UTS (being
lesser of FMV or PUC of the UTS Class
B p/s per 85.1 exchange at step #4,
each of which equal FMV)
Toronto Young Practitioners Group
Share Exchanges
Public
Public
Class A c/s
FMV = Other
Assets
Total
UTS
SilverBirch
Other
Assets
6. Canadian public transfer Class A c/s of UTS to Total
for cash
98
UTS/SilverBirch and Total
 Taxable Sale:
 Public realizes a gain or loss on the
disposition of the Class A c/s of
UTS
 However, public preserved most of
the basis in “old” c/s of UTS in the
Class A c/s of UTS on the section
86 exchange
 In other words, the public
transferred a portion of the
inherent gain in their old UTS c/s to
their new SilverBirch c/s, and
reduced the amount of their gain
on the transfer of their new Class A
c/s of UTS
 These additional steps might be
warranted only if FMV of “Spinco”
very significant so that it is worth
shifting the inherent gain before
the sale to defer gain in this way
Toronto Young Practitioners Group
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 1 - Pre-Butterfly *
BCE cm
m
Public
BCE
Network Holdco
100%
100%
100%
Network
Holdco Sub
3056074
Canada Inc.
cm
3263207
Canada Inc.
cm
cm
cm
NETWORK
cm
Incorporation of Network Holdco and Network Holdco Sub.
Network Holdco will subscribe to one common share of Network Holdco Sub
99
Toronto Young Practitioners Group
Network
Public
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 2 - Pre-Butterfly *
BCE cm
m
Public
Network Holdco
BCE
100%
Network
Holdco Sub
100%
100%
3056074
Canada
cmInc.
cm
3263207
Canada Inc.
cm
NETWORK
cm
cm
cm
3056074 Canada Inc. transfers 3M common shares of Network it owns at FMV to
3263207 Canada Inc. in return for common shares of 3263207 Canada Inc.
100
Toronto Young Practitioners Group
Network
Public
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 3 - Pre-Butterfly *
BCE cm
Public
BCE
Network Holdco
100%
Network
Holdco Sub
100%
3056074 Canada Inc.
cm
cm
3263207 Canada Inc.
Network
Public
cm
NETWORK
cm
BCE transfers all of its Network shares at FMV to 3263207 Canada Inc.
in return for 3263207 Canada Inc. common shares.
101
Toronto Young Practitioners Group
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 4 - Butterfly *
BCE cm
m
Public
cm
Network Holdco
class B
BCE
cm
3263207
Canada Inc.
100%
cm
Network
Holdco Sub
NETWORK
Network
Public
cm
BCE and 3056074 amalgamate. BCE common shareholders receive new BCE common shares (on
a one-for-one basis) and non-voting convertible class B shares (class B common shares will track to
value of 3263207 shares to be butterflied in step 7)
102
Toronto Young Practitioners Group
Share Exchanges
BCE-Nortel Butterfly Spin-off
BCE cm
Public
Step 5 - Butterfly *
cm
Network Holdco
class B
BCE
100% cm
PUC increase
3263207
Canada Inc.
100%
Network
Holdco Sub
Network
Public
cm
NETWORK
cm
3263207, through a series of resolutions, increases the PUC of 3263207 common shares up to “safe
income on hand”, resulting in an increase in the ACB of 3263207 common shares to BCE.
103
Toronto Young Practitioners Group
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 6 - Butterfly *
BCE cm
m
Public
cm
cm
Network Holdco
Class B
BCE
100% cm
100%
Network
Holdco Sub
3263207
Canada Inc.
Network
Public
cm
NETWORK
cm
BCE cm Public transfer the BCE Class B common shares to
Network Holdco in exchange for common shares of Network Holdco.
104
Toronto Young Practitioners Group
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 7 - Butterfly *
BCE cm
m
Public
cm
Network Holdco
cm
class B cm
BCE
cm
Network
Holdco Sub
cm
5% cm
95% cm
3263207
Canada Inc.
Network
Public
cm
NETWORK
105
cm
Toronto Young Practitioners Group
BCE transfers approximately
95% of the common shares it
holds in 3263207 to Network
Holdco Sub in exchange for
Network Holdco Sub common
shares.
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 8 - Butterfly *
BCE cm
m
Public
cm
Network Holdco
cm
BCE
cm
Network
Holdco Sub
5% cm
95% cm
3263207
Canada Inc.
cm
NETWORK
106
cm
Network
Public
Toronto Young Practitioners Group
Network Holdco Sub purchases
for cancellation the Network
Holdco Sub common shares
held by BCE in return for a noninterest bearing demand note.
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 9 - Butterfly *
BCE cm
Public
Network Holdco
cm
cm
BCE
Network
Holdco Sub
95% cm
3263207
Canada Inc.
cm
NETWORK
107
5% cm
Network
Public
Toronto Young Practitioners Group
BCE purchases for cancellation
the BCE class B common shares
held by Network Holdco in
return for a non-interest
bearing demand note.
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 10 - Butterfly *
BCE cm
Public
cm
cm
Note
BCE
Network Holdco
Note
95% cm
5% cm
3263207
Canada Inc.
cm
NETWORK
108
Network
Public
cm
Toronto Young Practitioners Group
Network Holdco Sub is
wound up into Network
Holdco.
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 11 - Butterfly *
BCE cm
Public
cm
cm
BCE
Network Holdco
95% cm
3263207
Canada Inc.
cm
NETWORK
109
5% cm
Network
Public
Toronto Young Practitioners Group
The two notes are
cancelled.
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 12 - Post- Butterfly *
Network
Public
BCE cm
Public
cm
cm
cm
BCE
Network Holdco
95% cm
3263207
Canada Inc.
5% cm
cm
NETWORK
110
Toronto Young Practitioners Group
REVERSE TAKE-OVER
ASPECT
Network Holdco acquires all of the
Network common shares held by
Network Public in exchange for
Network Holdco common shares.
Share Exchanges
BCE-Nortel Butterfly Spin-off
Step 13 – Post- Butterfly *
Network
Public
BCE cm
Public
cm
40%
60%cm
Network Holdco
cm
cm
BCE
100% cm
NETWORK
111
Network Holdco and 3263207 amalgamate.
Network Public, BCE cm Public and BCE receive
new Network Holdco common shares.
Toronto Young Practitioners Group
Share Exchanges
Thank you
112
Toronto Young Practitioners Group