Corporate reorganization

How BC law treats it

A solvent reorganization of a BC company uses the tools in the Business Corporations Act, SBC 2002, c 57 (BCBCA). The company can alter its authorized share structure, create or change share classes and special rights, or exchange shares, by the type of resolution its articles require, or by special resolution if they are silent. A special resolution normally needs two thirds of the votes cast. Companies can amalgamate under Part 9, Division 3, and more complex changes can be done by a court approved arrangement (s. 288). Some changes give shareholders dissent rights (s. 238), so they can require the company to buy their shares at fair value. Most reorganizations are driven by tax. The Income Tax Act lets owners transfer property to a Canadian corporation for shares on a tax deferred basis by filing a joint election (s. 85), exchange shares in a reorganization of capital (s. 86), as in a typical estate freeze, and amalgamate without immediate tax (s. 87). Anti-avoidance rules can recharacterize gains as dividends, so the steps must be planned with an accountant before any document is signed. A solvent reorganization is different from insolvency restructuring. A company that cannot pay its debts restructures under the federal Bankruptcy and Insolvency Act (a proposal) or, where claims exceed $5 million, the Companies' Creditors Arrangement Act, under court supervision.

What it means for your business

Reorganizations let owners bring in a holding company to protect retained earnings, freeze value for the next generation, separate real estate from operations, or prepare for a sale. Done well, they save significant tax. Done badly, with missing resolutions, unfiled elections or steps out of order, they can trigger immediate tax, invalid share issuances or minority shareholder claims. Legal and tax advisers should work from one step plan. Example: The owner of a Surrey trucking company exchanges her common shares for fixed value preferred shares under an estate freeze, and a family trust subscribes for new common shares so future growth accrues to her children.

Risks and common mistakes

Starting the legal steps before the accountant has confirmed the tax plan and the order of steps. Missing the filing deadline for the section 85 election with the Canada Revenue Agency. Passing the wrong type of resolution because the articles were not checked first. Forgetting to update the notice of articles, articles and central securities register after the change. Confusing a solvent reorganization with insolvency restructuring under the BIA or CCAA.