Tax Question:
What is a corporate reorganization?
Facts:
During the life of a company we often find that the share structure requires changing because it was inappropriate at incorporation, is no longer suitable or events require a company to change its share ownership. This can be achieved through reorganization.
The right share structure is important as it permits income splitting, determines control, impacts the lifetime capital gains exemptions and promotes succession. It is not unusual to see companies having set up their share structure without much thought of the future or done cheaply to save legal fees. Fortunately, there are mechanisms available to amend the original share structure. This allows the company’s share structure to change over time, as the company grows and matures.
A corporate reorganization is basically where a company changes the type of shares held or the number of shareholders to meet new opportunities such as succession planning or introducing another stakeholder. Whenever there is a change in shares, there is usually a deemed disposition. In other words, the company is selling one type of share in exchange for another type of share. Such transactions are usually tax triggers requiring a capital gain to be reported on the sale of the old shares.
To recognize that in many instances the share reorganization has not resulted in the original owners giving up their value in the company, a number of different provisions have been introduced to defer the tax implications to a later date.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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