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What is a Section 51 Reorganization?

March 15, 2013

Tax Question:

What is a section 51 corporate reorganization?


Income splitting is one of the most tax-effective tools that a corporate structure permits. However, many corporations are not set up for the most tax-efficient distribution of income. Often, this is because little attention is given to the current or future relationship or income-earning activities of the shareholders.


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.

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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