Corporate Reorganization for Tax Efficiency: A Canadian CPA’s Strategic Guide

By Bader Chowdry, CPA | Insight Accounting CPA

Introduction

As businesses grow and evolve, their initial corporate structure often becomes a liability rather than an asset. What worked for a startup rarely serves a mature enterpriseand the tax consequences of getting it wrong can be severe. At Insight Accounting CPA Professional Corporation, we specialize in Accounting Intelligence-driven corporate reorganizations that preserve wealth, optimize tax positions, and position Ontario businesses for continued growth.

This comprehensive guide explores corporate reorganization strategies available under Canadian tax law, from Section 85 asset rollovers to estate freezes, helping business owners understand when and why to restructure.

What Is Corporate Reorganization?

Corporate reorganization involves restructuring a company’s legal, ownership, or capital structure to achieve specific business or tax objectives. Unlike simple operational changes, reorganizations typically involve:

Share capital modifications
Asset transfers between entities
Ownership transitions
Amalgamations or wind-ups
Estate and succession planning integration

Why Reorganize?

Tax Efficiency: The primary driver for most reorganizations is tax optimizationdeferring capital gains, accessing enhanced capital gains exemptions, or splitting income among family members.
Risk Management: Separating operating assets from investment assets protects wealth from business liabilities.
Succession Planning: Reorganization facilitates smooth ownership transitions to the next generation or external buyers.
Growth Enablement: Clean corporate structures attract investors, enable mergers, and support strategic acquisitions.

Section 85 Rollovers: The Foundation of Tax-Deferred Transfers

Section 85 of the Income Tax Act is the cornerstone of Canadian corporate reorganization, allowing assets to be transferred to a corporation without triggering immediate tax consequences.

How Section 85 Works

When transferring assets to a corporation, Section 85 permits the transferor to elect a transfer price (the “elected amount”) between the asset’s adjusted cost base and its fair market value. This election:

Defers capital gains that would otherwise arise on the transfer
Allows tax-deferred “rollover” of appreciated assets
Provides flexibility in structuring the consideration received

Common Section 85 Applications

Sole Proprietorship to Corporation:

Entrepreneurs often start as sole proprietors and later incorporate. Section 85 allows transfer of business assetsequipment, inventory, goodwillto the new corporation without immediate tax.

Corporate Restructuring:

Existing corporations can transfer assets to holding companies or sister corporations to achieve operational or risk management objectives.

Estate Planning:

Parents can transfer business assets to children using Section 85, controlling the tax consequences and enabling staggered ownership transitions.

Section 85 Requirements

To qualify for Section 85 treatment:

Both parties must file a joint election (Form T2057)
The transferor must receive at least one share of the transferee corporation
The elected amount must meet specific floor and ceiling limitations
The transfer must occur at fair market value

Critical Timing:

The joint election must be filed by the earlier of the transferor’s and transferee’s filing deadlines for the taxation year in which the transfer occurs. Missing this deadline can result in significant and unintended tax consequences.

Estate Freezes: Locking In Value, Transferring Growth

An estate freeze is one of the most powerful tools in Canadian tax planning, enabling business owners to crystallize the current value of their shares while transferring future growth to the next generation.

How Estate Freezes Work

In a typical estate freeze:

The parent exchanges common shares (with high current value and future growth potential) for fixed-value preferred shares
New common shares are issued to children or a family trust
Future business appreciation accrues to the new common shareholders
The parent’s estate tax liability is capped at the frozen preferred share value

Types of Estate Freezes

Internal Freeze:

The existing corporation reorganizes its share capital, converting the parent’s common shares to fixed-value preferred shares and issuing new common shares to successors.

Section 86 Reorganization:

A capital reorganization where existing shares are exchanged for new shares with different rights. The parent receives high-vote, fixed-value shares; children receive growth-oriented common shares.

Section 85 Rollover Freeze:

Assets are transferred to a new holding company using Section 85, with parents receiving fixed-value preferred shares and children receiving common shares.

Estate Freeze Benefits

Tax Deferral: Future growth occurs in children’s hands, deferring capital gains tax until they eventually sell.
Capital Gains Exemption: Growth shares held by children may qualify for the lifetime capital gains exemption (LCGE) on qualified small business corporation shares.
Income Splitting: Dividends on growth shares can be distributed to lower-income family members.
Estate Planning Control: Parents maintain voting control through preferred shares while gradually transferring economic ownership.

When to Implement an Estate Freeze

Ideal timing considerations:

Business valuation is favorable but expected to grow
Children are ready to assume management responsibility
Parent is typically 45-60 years old (allowing time for growth to compound in children’s hands)
Capital gains exemption limits have been or will be maximized

Butterfly Reorganizations: Dividing Corporate Assets

When business partners or family members wish to go separate ways, a butterfly reorganization enables division of corporate assets into separate entities without triggering tax.

The Butterfly Structure

A typical butterfly involves:

A divisive reorganization where corporate assets are transferred to a new corporation
Shareholders of the original corporation receive shares of the new corporation
Each shareholder group ends up with direct ownership of specific business assets or divisions

Types of Butterflies

Traditional Butterfly:

Assets are transferred to a new corporation in exchange for shares, which are then distributed to specific shareholders. The original corporation is wound up or continues with remaining assets.

Partial Butterfly:

Only specific assets or divisions are separated, with the original corporation continuing operations with its remaining business.

Cross-Redemption Butterfly:

A variation where shares are redeemed rather than distributed directly, useful for specific shareholder separation scenarios.

Butterfly Requirements

Must meet detailed technical requirements under Section 55 and related provisions
Transactions must occur in specific sequence and timing
Continuity of ownership tests apply
Business purpose must be genuine (not solely tax avoidance)

Common Butterfly Applications

Family Business Separation:

Siblings who jointly own a family business decide to operate independently, with each taking specific assets or divisions.

Investment vs. Operating Assets:

Separating passive investment assets from active business operations for risk management or strategic reasons.

Geographic Division:

Separating operations by region when shareholders want to focus on different markets.

Amalgamations and Wind-Ups: Consolidating Structure

Sometimes the optimal reorganization involves combining entities rather than dividing them.

Amalgamations

An amalgamation combines two or more corporations into a single continuing entity. Under Section 87, qualifying amalgamations are tax-deferred:

Assets and liabilities of predecessor corporations transfer at tax basis
Tax attributes (losses, credits, capital cost allowance pools) generally carry forward
No disposition occurs for tax purposes

Benefits:

Simplified corporate structure
Consolidated tax filing
Operational synergies
Reduced administrative costs

Wind-Ups

A wind-up involves distributing a subsidiary corporation’s assets to its parent, typically under Section 88:

Tax-deferred transfer of assets to parent
Ability to step up cost basis of certain assets
Loss utilization opportunities
Simplified corporate structure

Tax Traps and Common Mistakes

Section 55 Anti-Avoidance

Section 55 contains anti-avoidance rules targeting transactions that convert capital gains into tax-preferred dividends. Corporate reorganizations must be carefully structured to avoid:

Deemed capital gains where dividends were intended
Unexpected tax consequences on intercorporate transfers
Loss of tax deferral benefits

Attribution Rules

When reorganizing for estate planning or income splitting, attribution rules may apply:

Transfers to spouses or minor children can trigger income attribution
Corporate attribution rules apply to certain shareholder loans
Careful structuring is required to achieve desired results

Capital Gains Exemption Planning

While reorganizations can facilitate access to the lifetime capital gains exemption, technical requirements must be met:

24-month holding period for shares
Active business asset tests
Small business corporation requirements
Planning must occur well before a contemplated sale

Probate and Estate Integration

Corporate reorganization should integrate with overall estate planning:

Beneficiary designations on insurance policies
Will provisions for share dispositions
Power of attorney considerations for corporate voting rights
Trust arrangements for minor children

When to Engage a CPA for Corporate Reorganization

Corporate reorganizations are not DIY projects. The complexity of tax law and the irreversible nature of many transactions demand professional guidance.

Engage a CPA when:

Business value exceeds $500,000
Multiple shareholders or family members are involved
Estate or succession planning objectives exist
Asset protection is a concern
You anticipate selling the business within 5-10 years
Current corporate structure no longer serves operational needs

Due Diligence Process:

At Insight Accounting CPA, our reorganization process includes:

Current State Analysis: Review existing structure, tax attributes, and agreements
Objective Definition: Clarify business, tax, and estate planning goals
Option Modeling: Analyze alternative structures using Accounting Intelligence tools
Implementation Planning: Detailed transaction steps, timelines, and documentation
Execution Support: Coordination with lawyers, valuators, and other advisors
Post-Reorganization Compliance: Ensuring ongoing tax and legal compliance

Industry-Specific Reorganization Considerations

Professional Corporations

Ontario professional corporations (medical, dental, accounting, legal) face unique constraints:

Only licensed professionals can hold voting shares
Family members typically cannot hold shares
Reorganization options are more limited but still available

Real Estate Holdings

Real estate corporations often benefit from:

Separating development activities from rental operations
Purifying for capital gains exemption eligibility
Estate freezes to transfer property appreciation

Technology Companies

Tech companies may require:

IP holding company structures
Investor-ready capitalization tables
Share option plan integration
Cross-border expansion planning

The Bottom Line

Corporate reorganization is a powerful tool for tax efficiency, risk management, and succession planningbut only when executed correctly. The complexity of Canadian tax law, combined with the significant dollars at stake, makes professional guidance essential.

For Ontario business owners, proper planning today can save hundreds of thousands in taxes tomorrow while ensuring smooth transitions to the next generation of ownership.

At Insight Accounting CPA Professional Corporation, we combine decades of corporate tax expertise with Accounting Intelligence analytics to design reorganizations that achieve your objectives while minimizing risk. Whether you’re considering a Section 85 rollover, estate freeze, or complex multi-step reorganization, we guide you through every step.

Frequently Asked Questions

How much does a corporate reorganization cost?

Costs vary based on complexity. Simple Section 85 transfers may cost $3,000-5,000. Multi-step reorganizations involving estate freezes, trusts, and multiple entities can range $10,000-25,000+. The tax savings typically justify the investment many times over.

How long does a corporate reorganization take?

Simple reorganizations can complete in 4-6 weeks. Complex multi-step transactions may take 3-6 months, particularly if valuations are required or multiple advisors must coordinate.

Can I reorganize my corporation myself?

Technically possible for the simplest transactions, but strongly discouraged. The tax consequences of errors often exceed professional fees by orders of magnitude. Corporate reorganizations require coordination between CPAs and lawyers.

Will a reorganization trigger an audit?

Properly structured reorganizations using established tax provisions (Section 85, 86, 87) are routine and unlikely to trigger audits. However, aggressive or artificial transactions lacking genuine business purpose may attract CRA attention.

What’s the difference between an estate freeze and a Section 85 rollover?

An estate freeze is a strategic objective (crystallizing value, transferring growth). A Section 85 rollover is a technical mechanism that may be used to implement a freeze. Freezes can also use Section 86 reorganizations.

Should I reorganize before selling my business?

Often yes. Pre-sale reorganizations can:

Purify the corporation for capital gains exemption eligibility
Remove passive assets that would disqualify QSBC status
Implement family trusts to multiply exemptions
Separate real estate from operating assets

Planning should begin 2+ years before an anticipated sale.

Considering a corporate reorganization?

Contact Bader Chowdry, CPA at Insight Accounting CPA Professional Corporation for expert guidance on tax-efficient restructuring, estate freezes, and succession planning. Serving businesses across Mississauga, Toronto, and the GTA.

Call (905) 270-1873 or visit our consultation page to discuss your reorganization strategy.

*Insight Accounting CPA Professional Corporation Accounting Intelligence for Ontario’s Growing Businesses*