Does an estate freeze always need a section 85 or section 86 election?

The rule: an exchange with no consideration other than the share

Under section 51(1), where a share is acquired from the corporation in exchange for another share or a convertible bond, debenture or note, and no consideration other than the share is received, “the exchange is deemed not to be a disposition of the convertible property”. No prescribed form, no joint election, and no filing deadline attaches to it — the deferral is automatic on the facts, which is exactly why it is easy to miss as an option.

When it changes

Section 51 only helps where the instrument being exchanged was drafted with a conversion right in the first place, typically sitting in the articles from the corporation’s original organization. Sections 85 and 86 remain the general-purpose tools where no such convertible instrument exists, and each carries its own conditions and, for section 85, a filing deadline in subsection 85(6) with a late-filing penalty under subsection 85(7).

Where this played out — Case Files

In one file, the cheapest route to a freeze had been sitting in the articles since incorporation, and section 51 reached the same commercial result as a section 86 exchange with none of its filing risk. A related file shows the valuation-protection question that still applies once a freeze has been chosen, whichever section executes it.

Sources

• • Income Tax Act s.51(1) — laws-lois.justice.gc.ca.
• • Income Tax Act s.85(6) and s.85(7), the filing deadline and late-filing penalty for a section 85 election — cited for the contrast, not separately quoted here.
• • Treadstone Law — corporate reorganization services in Ontario — general background on structuring a reorganization; it does not distinguish the no-election route under section 51, which is the specific point here.