Canada’s Corporate Reorganization Tax Deferral Regime Extended

The Canadian Minister of Finance recently proposed to retroactively extend the corporate tax-deferral "rollover" provisions of the federal Income Tax Act to include the shares of foreign corporations.

Under the current rollover provisions in sections 85.1 and 87 of the Income Tax Act, a taxpayer who disposes of shares of one taxable Canadian corporation and receives shares of another, on a "share-for-share" exchange or a merger of such corporations, may defer the recognition of any gain or loss arising on the disposition. The gain or loss will ultimately be recognized when the shares received on the exchange are sold in a taxable transaction.

The government has announced that it will extend this tax-deferral treatment to taxpayers who dispose of shares of one foreign corporation for shares of another on a share-for-share exchange or foreign merger. The foreign corporations would not have to be residents of the same foreign jurisdiction. These changes would apply to share exchanges that occur after 1997. They would also apply to share exchanges that occurred after 1995 and before 1998 where the taxpayer elects by notifying the Minister of National Revenue in writing. A taxpayer would also be able to elect, for the year in which a share exchange occurs, not to have these proposed tax-deferral changes apply in respect of the disposition. In this case, any gain or loss realized by the taxpayer on the exchange of the shares of the foreign corporation would be included in computing the taxpayer’s income for tax purposes in the year of the exchange.

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