What documents do I need for a Section 86 share exchange?
A Section 86 internal reorganization requires: (1) directors’ and shareholders’ resolutions approving the share exchange and share-condition changes, (2) articles of amendment filed with the corporate registry, (3) share-subscription documentation for any new share issuance, and (4) an internal s. 86 rollover memorandum documenting the exchange. Unlike Section 85, no election form is filed with CRA.
Section 86 is a technical rollover triggered automatically when all conditions are met: (a) the taxpayer disposes of all of a class of shares of a Canadian corporation in exchange for new shares of the same corporation, (b) the exchange occurs on a reorganization of capital, and (c) the taxpayer receives only shares (or shares plus limited non-share consideration).
Documentation checklist. Corporate: articles of amendment restating share classes (rights, restrictions, conditions on new frozen preferred and new common); directors’ resolution authorizing the amendment; shareholders’ resolution consenting; share cancellation and issuance ledger entries; new share certificates.
Tax: valuation of the corporation at exchange date (CRA’s minimum defence on freeze value); s. 86 rollover memo showing ACB, PUC, and FMV before and after; if a family trust is subscribing for new common, trust deed, trustee resolutions, and subscription agreement.
Example: Bader owns 100 common shares (ACB $100, FMV $2M). He exchanges them under s. 86 for 100 new frozen preferred shares (retraction value $2M). Simultaneously, family trust subscribes for 100 new common at $100. No T2057 needed; the transaction is captured on the corporation’s minute book and articles of amendment.
Note: Section 86 fails if boot exceeds the ACB of the exchanged shares (deemed dividend under s. 84(3) or capital gain). Keep the freeze consideration entirely in shares.
Source: canada.ca â Corporate reorganizations
— Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA
Disclaimer: Bader A. Chowdry, CPA, CA, LPA is a Licensed Public Accountant regulated by CPA Ontario. Insight Accounting CPA Professional Corporation is a Chartered Professional Accountant firm. This content is general information only and does not constitute professional advice for your specific facts. Confirm current rules and figures with your own advisor before acting.