Often, a husband and wife will set up a corporation on a 50:50 ownership basis with both shareholders having the same class of shares. Then, a few years later, one of the spouses reduces his or her involvement in the business and seeks employment outside the corporation. This shareholder is now getting employment income from a third party in addition to a 50:50 share of the income from the corporation. The 50:50 share structure is no longer efficient because the spouse with the third party income will often be in a higher tax bracket due to the added employment income.

Having two spouses in separate tax brackets is not tax-efficient as it means one spouse is paying more taxes on income that could be earned by the other spouse at a lower tax rate. A solution to this problem is to convert the current shares into different classes of shares so that different dividends can be paid to each shareholder. Shareholders owning the same class of shares can only take dividends in proportion to their shareholdings. However, shareholders with different classes of shares can take different amounts of dividends, which are independent of the amounts of dividends issued to the other shareholders.

As with most reorganizations, a share swap constitutes a disposition of shares, which would result in a capital gain and a tax bill. Section 51 allows a shareholder to swap shares of one class with shares of another class in the same corporation without it being viewed as a sale, providing that the shareholder is not getting any additional benefit as a result of the swap. In other words, as long as they have the same rights to income, voting, and any other entitlements before and after the share swap, it will not attract a tax liability.