Canada: No Tax Triggered When Affiliate Converts To Co-op, CRA Says

Last Updated: March 14 2011
Article by Matthew Peters

Reprinted from Tax Notes Int'l, February 7, 2011, p. 415

The Canada Revenue Agency has confirmed in a January 19 advance tax ruling1 that the conversion of a Dutch company (BV) into a cooperative under the Dutch Civil Code could qualify as a tax-deferred reorganization of capital under section 86 of the Canadian Income Tax Act. Thus, the conversion itself would not trigger Canadian tax on Canadian resident members of the BV. The ruling provides much-needed clarification of what types of transformative transactions can be undertaken in the context of a foreign affiliate reorganization.

As a vehicle through which to carry out an active foreign business or to hold investments in other foreign affiliates, a Dutch co-op can provide tax advantages not available to other foreign companies. Most notably, dividends paid by a Dutch co-op to a Canadian shareholder are exempt from Dutch domestic withholding tax. (Contrast this with dividends from a BV to a Canadian shareholder, which are generally subject to 5 percent dividend withholding tax under the Canada- Netherlands tax treaty.) The imposition of foreign dividend withholding tax is typically a significant concern to Canadian resident shareholders because this tax is usually not creditable in Canada under Canada's exempt surplus regime. Therefore, it is not surprising that Canadian multinationals have increasingly sought to reorganize their foreign operations by transferring shares of foreign affiliates to a newly created Dutch co-op.

In a typical Dutch co-op structure, and in the context of a typical foreign affiliate reorganization involving a Dutch co-op, it is usually important for the co-op to be characterized as a corporation (and, consequently, a foreign affiliate for Canadian tax purposes) as opposed to, for example, a partnership. This isn't always a straightforward analysis because Dutch co-ops usually have some characteristics that are similar to partnerships under Canadian law. Fortunately, the CRA has issued numerous rulings confirming that such entities can qualify as corporations for Canadian tax purposes as long as certain general criteria are satisfied. Moreover, the CRA has ruled in a number of circumstances that the transfer by a Canadian corporation of shares of a foreign affiliate to a newly created Dutch co-op in exchange for additional membership interests in the co-op will qualify as a tax-deferred ''share-forshare exchange'' for purposes of the ITA. These rulings are significant because they confirm that not only can a Dutch co-op be used as a holding company to repatriate profits to Canada in a tax-efficient manner but that Canadian multinationals can, in certain circumstances, reorganize their existing foreign operations by transferring shares of foreign affiliates to a co-op on a tax-deferred basis.

Nevertheless, there has been some uncertainty concerning the Canadian tax characterization of certain foreign ''transformative'' transactions involving co-ops, including the conversion under Dutch law of a BV to a co-op. In some circumstances, such conversions may facilitate and simplify the planning and implementation of foreign affiliate reorganizations; however, there has long been a question of whether for Canadian tax purposes a conversion could result in a disposition of the BV's assets to the co-op or a disposition of the Canadian corporation's shares of the BV (either of which may be a taxable event for Canadian tax purposes). The ruling provides significant clarification of these issues, specifically:

  • On the conversion, the BV will not be considered to have disposed of any of its property for purposes of the ITA. This conclusion is premised on the understanding that under the Dutch Civil Code, the co-op will be regarded as the same corporation as, and a continuation of, the BV and the BV will not be considered to have disposed of any of its property to any person on the conversion. Presumably, if a new corporation were to have been created on the conversion under Dutch law or if the co-op were to be regarded as a partnership under Canadian law, the CRA's conclusion regarding the disposition of the BV's assets would have been quite different.
  • The cancellation of the BV's shares and the issuance of additional membership interests in the co-op as a result of the conversion will qualify as a tax-deferred reorganization of capital for purposes of section 86 of the ITA. Here the CRA confirmed not only that a membership interest in the co-op will qualify as a share for Canadian tax purposes (which is a significant prerequisite for the application of section 86), but that the cancellation of the BV's shares in exchange for membership interests in the co-op will qualify as a reorganization of capital. This is significant because the term ''reorganization of capital'' lacks a precise meaning under Canadian tax law in even the seemingly most straightforward domestic circumstances.


The ruling builds on prior CRA rulings regarding foreign affiliate reorganizations involving Dutch co-ops and confirms that a broader range of transactions can be implemented on a tax-deferred basis other than (and in addition to) the usual share-for-share exchange. Of course, the ruling is limited to its facts and there is no guarantee that the same result would flow from every conversion transaction. Thus, taxpayers should carefully review any proposed co-op structure because there is often a small margin for error and the Canadian income tax consequences can be significant.


1CRA Document No. 2010-0373801R3.

About Fraser Milner Casgrain LLP (FMC)

FMC is one of Canada's leading business and litigation law firms with more than 500 lawyers in six full-service offices located in the country's key business centres. We focus on providing outstanding service and value to our clients, and we strive to excel as a workplace of choice for our people. Regardless of where you choose to do business in Canada, our strong team of professionals possess knowledge and expertise on regional, national and cross-border matters. FMC's well-earned reputation for consistently delivering the highest quality legal services and counsel to our clients is complemented by an ongoing commitment to diversity and inclusion to broaden our insight and perspective on our clients' needs. Visit:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
17 Nov 2017, Seminar, Edmonton, Canada

Join Dentons’ Employment and Labour Group for our breakfast seminar as we discuss current developments, changes and topics on how to protect your business and thrive in today’s volatile conditions.

24 Nov 2017, Seminar, Toronto, Canada

Please join us for a complimentary half-day seminar on emerging workplace and human resources issues.

28 Nov 2017, Seminar, Toronto, Canada

Dentons is pleased to host a Women in Capital Markets lunch and learn

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.