When businesses grow, bring in investors, restructure ownership, or begin succession planning, one of the most common questions we hear is “Can I change my shares without triggering tax?”

The good news is that the Income Tax Act provides two powerful tools that allow you to exchange or reorganize shares without paying tax immediately:

• Section 51 – simple share-for-share rollover
• Section 86 – rollover during a reorganization of share capital

Both allow shareholders to defer tax, but they apply in different situations. This article explains each and helps you understand when they are appropriate.

Why Share Reorganizations Happen

Share changes are often needed when:

• You’re doing an estate freeze
• You’re introducing a new class of shares
• You’re changing voting rights or control
• You’re bringing in new owners or investors
• You’re cleaning up an outdated or messy share structure
• You want to convert old shares or debt into new shares

You shouldn’t pay tax simply because you changed the “format” of your shares. Sections 51 and 86 exist to prevent that.

Section 51: Simple Share-for-Share Exchanges

What it does

Section 51 allows you to exchange one type of share (or certain convertible debt) for another within the same corporation without triggering tax. 

Key features

• Applies only to share-for-share or debt-for-share exchanges
• No election needs to be filed
• No valuation is required for tax purposes
• Your tax cost on the old shares simply becomes the tax cost of the new shares

It is an automatic rollover. Think of Section 51 as a clean swap of old shares for new shares with no tax triggered.

Common uses

• Estate freezes
• Changing voting rights
• Converting old shares into new classes
• Cleaning up the share structure

Example 

You own 100 common shares. You exchange them for 100 fixed-value preferred shares as part of an estate freeze.

Section 51 lets this happen tax-free.

Section 86: Share Reorganizations During a Corporate Recapitalization

Section 86 applies when the corporation is undergoing a share capital reorganization, meaning you exchange all shares of a certain class for a new package of shares (and sometimes other consideration).

What makes Section 86 different?

It applies when:

• A class of shares is being reorganized, not just swapped
• You give up all shares of one class
• You receive one or more types of new shares (and possibly other property)
• The change is part of a larger restructuring, not simply an elective swap

Like Section 51, it is automatic and you do not need to file an election.

Think of Section 86 as a tax-deferred rollover when a whole class of shares is being replaced as part of a restructuring.

Common uses

• Complex estate freezes
• Recapitalizing the company
• Replacing outdated shares with a new multi-class structure
• Converting a whole class of shares during a reorganization

Example 

You own 100 voting common shares. The corporation reorganizes its capital and replaces that class entirely. You receive fixed-value preferred shares plus new non-voting common shares.

Section 86 allows this exchange without triggering tax.

Section 51 vs Section 86: What’s the Difference?

Here is a simple comparison:

	Section 51	Section 86
Type of transaction	Simple share-for-share swap	Reorganization of a whole share class
Applies to	Shares or convertible debt	Entire class of shares given up
Election required?	No	No
Valuation needed?	Not usually	Often yes, due to the reorganization
Typical use	Estate freezes, changing voting rights, cleaning up structure	Full recapitalizations, replacing outdated share classes
Tax treatment	Cost carries over to new shares	Cost carried over; allocation rules may apply

The rule of thumb:

Section 51 = simple swap (narrow)
Section 86 = full share class reorganization (broader)

When Each Section Should Be Used

Use Section 51 when:

• You are only exchanging some shares, not reorganizing a whole class
• You are converting one share class into another as part of a freeze
• You simply need a new class of shares, but the company isn’t restructuring its entire capital

Use Section 86 when:

• The corporation is fundamentally restructuring its share capital
• A whole class of shares is being cancelled or replaced
• You receive a mix of shares or other forms of consideration
• There are multiple shareholders affected by the reorganization

If the transaction is small or simple, Section 51 is typically right.
If the transaction is broader or affects share classes globally, Section 86 is usually required.

Why This Matters

Choosing the wrong rollover provision can:

• Trigger unnecessary capital gains
• Create long-term tax problems
• Affect access to the lifetime capital gains exemption
• Disrupt an estate freeze
• Require costly corrections later

Even though Sections 51 and 86 operate automatically, the surrounding corporate work and tax planning must be done precisely.

How Du Plooy Law Can Help

Share reorganizations are some of the most powerful tools available for building, protecting, and transitioning a business, but only when they’re done right. Whether you’re preparing for an estate freeze, bringing in new partners, restructuring control, or simply cleaning up an outdated share structure, our team ensures the process is smooth, strategic, and tax-efficient. 

We work closely with your accountant to design the correct structure, apply the rollover rules properly, and make sure your corporate documents reflect the long-term plan, not just the immediate transaction. 

The goal is simple: protect you from unexpected tax, preserve your ability to use key advantages like the lifetime capital gains exemption, and position your business for future growth or succession. 

If you’re considering any share changes or planning for the next stage of your company, Du Plooy Law is here to guide you through it with clarity and confidence.