What is a corporate reorganization?
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 a 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 overtime, 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.
We have a series of FAQ’s that will examine each of these different provisions and shed light on when they should be used.
If you have questions concerning reorganizations, please contact us for our help on this issue.Download a copy of this issue