When does section 51 apply to a share exchange, and how is it different from section 86?
Section 51 applies automatically when your client exchanges a share, or a convertible bond, debenture or note, held as capital property for new shares of the same corporation and receives nothing but shares. No election is filed, the exchange is not a disposition, and the old ACB moves to the new shares. Sections 85 and 86 take priority.
Section 51 applies only when every condition below holds
Subsection 51(1) covers a share of a corporation that your client acquires from that same corporation in exchange for "convertible property", with no other consideration received laws-lois.justice.gc.ca. Miss one condition and the exchange is an ordinary disposition at fair market value, unless another rollover catches it.
| Condition | What the Act requires | What breaks it |
|---|---|---|
| Same corporation | The new share is acquired from the corporation whose share or debt is given up | Shares of a different corporation |
| Convertible property | Another share of the corporation, or a bond, debenture or note of the corporation | A plain loan or other property |
| Exchange right for debt | The bond, debenture or note must carry, in its terms, the right to make the exchange | Debt converted by agreement when its terms give no such right |
| Capital property | The old share or debt is capital property of your client | Shares held as inventory by a trader or dealer |
| Shares only | No consideration other than the new share | Cash, a note, or any other boot |
| Nothing higher applies | Section 86 and subsections 85(1) and 85(2) do not apply to the exchange | A capital reorganization that meets section 86, or a filed T2057 |
For a share, no conversion right is needed. The CRA notes that before December 22, 1992 a share had to carry a conversion privilege to count as convertible property, and that requirement is gone canada.ca. A bond, debenture or note still needs the exchange right in its own terms
laws-lois.justice.gc.ca.
Sections 85 and 86 both beat section 51 when they apply
Subsection 51(4) says subsections 51(1) and 51(2) do not apply to any exchange covered by subsection 85(1), 85(2) or section 86 laws-lois.justice.gc.ca. Section 86 in turn steps aside for section 85
laws-lois.justice.gc.ca. So section 51 is the fallback: it picks up share swaps that are not a reorganization of capital, or that leave your client holding some shares of the old class.
| Point | Section 51 | Section 86 | Section 85 |
|---|---|---|---|
| Election | None | None | Form T2057 |
| Property given up | A share, or convertible debt, of the same corporation | All the shares of a class your client owns | Eligible property |
| Reorganization of capital required | No | Yes | No |
| Boot allowed | No | Yes | Yes |
| Shares received | Shares of the same corporation | Includes new shares of the same corporation | Includes shares of the transferee corporation |
| Gain on the exchange | None, unless 51(2) applies | Boot above ACB, or the 86(2) gift rule | Elected amount above tax cost |
| Benefit rule | 51(2) | 86(2) | 85(1)(e.2) |
| PUC grind | 51(3) | 86(2.1) | 85(2.1) |
| Priority | Lowest | Yields to 85 | Highest |
Section 86 applies where, in the course of a reorganization of capital, your client disposes of all the shares of a class they own and receives property that includes other shares of the corporation laws-lois.justice.gc.ca. That is the usual estate freeze route, covered on the section 86 estate freeze page. Section 85 needs an election on Form T2057
canada.ca and carries its own benefit rule in 85(1)(e.2) and PUC grind in 85(2.1)
laws-lois.justice.gc.ca. The section 85 rollover page covers the elected amount limits.
The old ACB and PUC move to the new shares, split by value
Paragraph 51(1)(c) deems the exchange not to be a disposition, and 51(1)(d) gives the new shares of each class a cost equal to the old ACB times that class's share of the total value received laws-lois.justice.gc.ca. Subsection 51(3) then grinds the paid up capital of the new shares so it can't exceed the PUC of the old shares.
Worked example. Your client holds class A common shares of Opco with an ACB of $10,000, PUC of $10,000 and a value of $750,000, as capital property. Section 86 does not apply because your client keeps other class A shares. Opco issues preferred shares worth $600,000 and class B common shares worth $150,000 in exchange, and under corporate law adds $750,000 to stated capital.
| Step | Preferred | Class B common | Total |
|---|---|---|---|
| Value immediately after the exchange | $600,000 | $150,000 | $750,000 |
| Cost under 51(1)(d): $10,000 × class value / $750,000 | $8,000 | $2,000 | $10,000 |
| Stated capital added under corporate law | $600,000 | $150,000 | $750,000 |
| 51(3)(a) grind: ($750,000 minus $10,000) × class increase / $750,000 | $592,000 | $148,000 | $740,000 |
| PUC for tax purposes | $8,000 | $2,000 | $10,000 |
The capital gain on the exchange is nil. The $740,000 of accrued gain sits in the new shares, and it comes out when they are sold, redeemed or deemed disposed of. Track the split ACB on your adjusted cost base working papers, because the preferred and common shares will usually leave at different times.
The gift rule in 51(2) taxes a value shift without raising the cost
Subsection 51(2) applies when the convertible property is worth more than the shares received and part of the excess can reasonably be seen as a benefit your client wanted to give a related person. Your client is then deemed to dispose of the old shares for the lesser of ACB plus the gift portion and their fair market value, any capital loss is deemed nil, and the new shares take a cost of the lesser of the old ACB and the value received plus the denied loss laws-lois.justice.gc.ca.
Worked example. Same Opco facts, but your client receives only the $600,000 of preferred shares for class A shares worth $750,000, and the missing $150,000 accrues to class B shares held by their adult child. Treat the whole $150,000 as the gift portion.
| Step | Amount |
|---|---|
| ACB plus gift portion: $10,000 + $150,000 | $160,000 |
| Value of the old shares | $750,000 |
| Deemed proceeds (the lesser) | $160,000 |
| Capital gain: $160,000 minus $10,000 | $150,000 |
| Taxable capital gain at 50% | $75,000 |
| Cost of the preferred shares: lesser of $10,000 and $600,000 | $10,000 |
The trap is the last row. Your client reports a $150,000 gain, but the cost of the preferred shares stays at $10,000, so the same value can be taxed again later. The 50% inclusion matches the 2026 inclusion rate. Price the new shares at full value, usually with a price adjustment clause, and the gift portion never arises.
Attribution, TCP status and fund switches still follow the exchange
Paragraph 51(1)(e) deems the exchange a transfer of the convertible property to the corporation for sections 74.4 and 74.5 laws-lois.justice.gc.ca. Under subsection 74.4(2), if one of the main purposes is to reduce your client's income and benefit a designated person, your client can be deemed to receive interest at the prescribed rate on the outstanding amount, less certain dividends, for any year the corporation is not a small business corporation
laws-lois.justice.gc.ca. A designated person is your client's spouse or common law partner, or a person under 18 who doesn't deal at arm's length with your client or is their niece or nephew
laws-lois.justice.gc.ca. See the spousal attribution rules and the current prescribed rate.
Paragraph 51(1)(f) keeps the taxable Canadian property label: if the old shares were TCP, the new shares are deemed TCP for 60 months after the exchange laws-lois.justice.gc.ca. That matters for a client who later leaves Canada and sells, which brings in the section 116 certificate.
Mutual fund corporation switches are carved out. Subsection 131(4.1) turns off sections 51, 85, 85.1, 86 and 87 when an investor exchanges a share of a mutual fund corporation class recognized as an investment fund for another share of a mutual fund corporation, with narrow exceptions laws-lois.justice.gc.ca. A switch between fund classes inside a corporate class structure is therefore usually a disposition.
Sources
Does my client file an election for a section 51 exchange?
No. Section 51 has no election and no prescribed form, so it applies whenever its conditions are met laws-lois.justice.gc.ca. Form T2057 belongs to section 85
canada.ca. Document the exchange in the corporate minutes and keep a valuation supporting that the shares received equal the value given up.
Can my client opt out of section 51 to crystallize a gain?
Not inside section 51, which has no elected amount. Your client can instead transfer the shares under subsection 85(1) with a T2057 at the amount they want, and subsection 51(4) then switches section 51 off laws-lois.justice.gc.ca. That is the usual way to use the lifetime capital gains exemption on a share swap.
Can a shareholder loan be converted into shares under section 51?
Only if the loan is a bond, debenture or note of the corporation whose terms give the holder the right to make the exchange, and your client holds it as capital property laws-lois.justice.gc.ca. An open shareholder loan account with no conversion right doesn't fit 51(1)(b), so look at section 85 instead.
Is a section 51 exchange reported on a T5008?
Usually not. The T5008 guide lists section 51 exchanges among the transactions that need no slip, and cash of $200 or less paid instead of a fractional share doesn't change that; above $200 the whole exchange is reported canada.ca. On the tax side, the CRA's archived bulletin lets a holder getting $200 or less for a fractional share either report the gain or loss or reduce the ACB of the new shares
canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.