Exchange and conversion of shares

Closed transmitter status
June 10, 2021
Issued and paid-up share capital account (or stated capital)
June 13, 2021

Corporate legislation, both provincial and federal, allows for various changes in the share capital of a corporation, including share exchange and conversion. These two changes in share capital should not be confused, even though the result is often the same.

The share exchange is a transaction specific to the individual shareholder, and constitutes simultaneously a sale of shares to the company and an issue of shares by the company. The shareholder enters into a share exchange agreement whereby he or she surrenders his or her shares to the company and receives shares of another class that are part of the authorised share capital. A share exchange generally requires the following:

  • A resolution of the board of directors of the company authorising the conclusion of a share exchange agreement and the issue of the shares to be received by the shareholder;
  • A share exchange agreement signed by a company representative and the shareholder, which stipulates the terms and conditions of the share exchange;
  • Endorsement and delivery by the shareholder of his share certificate in favour of the company (or transfer instructions for uncertificated shares), and in exchange the issue of new shares by the company.

A share conversion is most often (but not always) aimed at all shareholders holding a particular class of shares and the procedure is different from a share exchange. A share conversion is the transformation of a share (its designation, rights and restrictions) into another class. For federal corporations, an amendment to the articles of incorporation by way of articles of amendment is required to effect a conversion. For provincial corporations, the law provides that a simple resolution of directors , approved by a special resolution of the shareholders, may be used to proceed with a conversion; however, an amendment to the articles may be necessary if a new class is to be created at the time of the conversion.

Share exchanges and conversions are often used for tax planning purposes, in particular to freeze the value of common shares and to bring in new shareholders, who will be able to subscribe to shares for a minimal amount. Various provisions in the Income Tax Act allow for the exchange or conversion of shares to be done without immediate tax impact, if all conditions are met.

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