Exchangeable shares were developed to allow a tax deferral for Canadian shareholders when selling shares of a Canadian corporation (“Canadian Target Co.”) to a non-resident corporation (“Non-Resident Co.”) wholly or partly in consideration for shares of the Non-Resident Co.
A tax deferral is available under Canada’s Income Tax Act when a Canadian corporation (“Resident Co.”) acquires shares of a Canadian Target Co. in consideration for shares of the Resident Co. This tax deferral is not available, however, where the acquiring corporation is a Non-Resident Co.
To allow selling Canadian shareholders to access the tax deferral where a Non-Resident Co. acquires a Canadian Target Co., the transaction is structured such that, instead of issuing shares of the Non-Resident Co., a Canadian subsidiary of the Non-Resident Co. issues shares that can be exchanged for shares of the Non-Resident Co. and which have substantially the same economic and voting rights as shares of Non-Resident Co.
Because the consideration for shares of the Canadian Target Co. is shares of a Canadian corporation, selling Canadian shareholders can access the tax deferral, subject to compliance with applicable statutory requirements