The purpose of a business reorganization is to alter the existing corporate structure and affairs to achieve certain commercial results. In certain circumstances, a reorganization of a business may be undertaken to achieve specific tax purposes. For example, a reorganization may precede a complete or partial disposition of business. In all cases, where tax efficiencies are gained as a result of a reorganization, the specific anti-avoidance rules, such as subsection 55(2) of the Income Tax Act, and the General Anti-Avoidance Rule (GAAR) has to be considered.
As a general rule, all transfers of property to and from a corporation are considered, for tax purposes, to be a disposition of that property and may result in taxable income or capital gain to a transferor. For example, absent special relief provided in the Income Tax Act discussed below, a transfer of assets from one taxpayer to another taxpayer is deemed to always take place on a fair market value basis. Consequently, any transfer of property between taxpayer, including related taxpayers, such as sister corporations or individual members of the same family, may result in taxable income or capital gain realized by the transferor.
In order to facilitate reorganizations of the existing business structures, the Income Tax Act prescribes a number of transactions or property that can be implemented with no immediate adverse tax consequences to the transferor; the tax would be deferred until the occurrence of a future taxable event. Generally, the Income Tax Act contemplates that these transfers take place on a “rollover” basis at the cost amount of the property. In such case, a transferee holding property “inherits” the tax requisites of the property.
The following transactions may take place on the tax-deferred basis:
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