Compliance & tax
Section 86 reorganization
Tax-deferred share exchange within the same corporation under Section 86(1) ITA. Common in estate freezes.
Definition
A Section 86 reorganization is a tax-deferred exchange of shares within the same corporation, under Section 86(1) of the Income Tax Act. The shareholder exchanges existing shares for shares of a different class of the same corporation. No new corporation is involved — the original corporation's share structure is reorganized. Most commonly used in estate freezes where the founder exchanges common shares for fixed-value preferred shares of the same corporation.
Same concept, different references
| Canada (ITA) | Section 86(1) — share-for-share rollover within same corporation |
|---|---|
| Quebec | Article 541 (TA) — equivalent provincial rollover |
| US equivalent | Recapitalization under IRC § 368(a)(1)(E) |
| Filing | No election form required (vs. T2057 for Section 85) |
How Section 86 works
The mechanics of a Section 86 reorganization are conceptually simpler than Section 85:
- The corporation's articles are amended to create a new class of shares (e.g., new preferred shares)
- The shareholder surrenders all old common shares to the corporation
- In exchange, the corporation issues the new preferred shares (and may also issue boot — cash or non-share consideration up to a limit)
- The cost base of the old shares carries over to the new shares (full rollover if no boot received)
- No T2057 or other election form is required — the rollover is automatic if the conditions are met
Conditions for Section 86 to apply
Section 86 has specific conditions that must be met:
- The exchange must be of all the shares of a particular class held by the shareholder
- The shares received must be capital property
- The exchange must occur in the course of a reorganization of the corporation's capital
- Boot (non-share consideration) received is taxable to the extent it exceeds the cost base of the old shares
Section 86 vs Section 85
Both sections enable tax-deferred rollovers, but they differ:
- Same corporation vs different corporation: Section 86 is within the same corporation (restructure existing share capital). Section 85 involves a transfer between the transferor and a separate corporation
- Election required: Section 85 requires a joint T2057 election. Section 86 is automatic if conditions are met — no election form
- Typical use case: Section 86 is the workhorse of estate freezes where no new corporation is needed. Section 85 is used when assets or operations are moving to a new or different corporation
- Boot treatment: similar in both — boot up to cost base is tax-free; excess is taxable. But the specific calculations differ
In Octelligence
Section 86 reorganizations in the corporate record.
Octelligence captures the share class amendments, share exchange resolutions, and updated registers automatically when you execute a Section 86 reorganization in Octelligence.
View digital corporate recordsCanadian tax structuring
Track every Canadian tax structure at the share level.
Holdco-opco, estate freezes, intercorporate dividends, safe income, GRIP, CDA. Recorded against the corporation, surfaced when relevant.