Income Tax Act — I-3.3 85.1
Share for share exchange 85.1 (1) Where shares of any particular class of the capital stock of a Canadian corporation (in this section referred to as the “purchaser”) are issued to a taxpayer (in this section referred to as the “vendor”) by the purchaser in exchange for a capital property of the vendor that is shares of any particular class of the capital stock (in this section referred to as the “exchanged shares”) of another corporation that is a taxable Canadian corporation (in this section referred to as the “acquired corporation”), subject to subsection 85.1(2), (a) except where the vendor has, in the vendor’s return of income for the taxation year in which the exchange occurred, included in computing the vendor’s income for that year any portion of the gain or loss, otherwise determined, from the disposition of the exchanged shares, the vendor shall be deemed (i) to have disposed of the exchanged shares for proceeds of disposition equal to the adjusted cost base to the vendor of those shares immediately before the exchange, and (ii) to have acquired the shares of the purchaser at a cost to the vendor equal to the adjusted cost base to the vendor of the exchanged shares immediately before the exchange, and where the exchanged shares were taxable Canadian property of the vendor, the shares of the purchaser so acquired by the vendor are deemed to be, at any time that is within 60 months after the exchange, taxable Canadian property of the vendor; and (b) the cost to the purchaser of each exchanged share, at any time up to and including the time the purchaser disposed of the share, shall be deemed to be the lesser of (i) its fair market value immediately before the exchange, and (ii) its paid-up capital immediately before the exchange. Where s. (1) does not apply (2) Subsection 85.1(1) does not apply where (a) the vendor and purchaser were, immediately before the exchange, not dealing with each other at arm’s length (otherwise than because of a right referred to in paragraph 251(5)(b) that is a right of the purchaser to acquire the exchanged shares); (b) the vendor or persons with whom the vendor did not deal at arm’s length, or the vendor together with persons with whom the vendor did not deal at arm’s length, (i) controlled the purchaser, or (ii) beneficially owned shares of the capital stock of the purchaser having a fair market value of more than 50% of the fair market value of all of the outstanding shares of the capital stock of the purchaser, immediately after the exchange; (c) the vendor and the purchaser have filed an election under subsection 85(1) or 85(2) with respect to the exchanged shares; (d) consideration other than shares of the particular class of the capital stock of the purchaser was received by the vendor for the exchanged shares, notwithstanding that the vendor may have disposed of shares of the capital stock of the acquired corporation (other than the exchanged shares) to the purchaser for consideration other than shares of one class of the capital stock of the purchaser; or (e) the vendor (i) is a foreign affiliate of a taxpayer resident in Canada at the end of the taxation year of the vendor in which the exchange occurred, and (ii) has included any portion of the gain or loss, otherwise determined, from the disposition of the exchanged shares in computing its foreign accrual property income for the taxation year of the vendor in which the exchange occurred. Computation of paid-up capital (2.1) Where, at any time, a purchaser has issued shares of its capital stock as a result of an exchange to which subsection 85.1(1) applied, in computing the paid-up capital in respect of any particular class of shares of its capital stock at any particular time after that time (a) there shall be deducted that proportion of the amount, if any, by which (i) the increase, if any, as a result of the issue, in the paid-up capital in respect of all the shares of the capital stock of the purchaser, computed without refere