Using S42 to restructure your company tax efficiently

28 March 2022,  Candice Reynders 1185
My clients are often hesitant to consider restructuring their company because of the fear of possible tax implications in doing so. Of course, depending on what you want to do, tax consequences may follow and restructuring should be approached with caution and with good legal support at hand.

That said, clients are generally not aware of section 42 of the Income Tax Act and the roll-over relief it can provide when assets are exchanged for shares in a company – a section 42 asset-for-share transaction as it’s commonly referred to. When used correctly such transactions enable quite extensive corporate restructuring without the lurking threat of tax consequences.

An asset-for-share transaction allows a taxpayer to transfer assets to a company or close corporation in exchange for an interest in such an entity without incurring certain taxes such as capital gains tax, transfer duty and securities transfer tax. Taxes such as VAT and donations tax could also be exempted if the asset-for-share transaction is correctly structured to enable the benefit of these exemptions. 

As is to be expected, there are qualifications to qualify for an asset-for-share transaction. Simply, in order to qualify for the roll-over relief offered in asset-for-share transactions, the taxpayer must receive a qualifying interest of at least 10% in the corporate entity and must hold that interest for at least 18 months with a failure to do so leading to a forfeiture of the roll-over relief. Each transaction, however, needs to be assessed separately in order to ensure that a transaction falls within the parameters of an asset-for-share transaction.

But, if done correctly and with the correct agreements in place, asset-for-share transactions could be a useful option for certain types of corporate restructuring.

So don’t let the fear of tax consequences make you hesitant to consider important changes to your company structure and make contact with us to help you. 

Disclaimer: This blog is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s)

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