2004-0092561E5 indicated that an exchange of 100 common shares for 500,000 preferred shares and 100 common shares of the same corporation (with the same attributes), followed by the cancellation of the “old” common shares, would not constitute a disposition of the 100 common shares, so that the s. 85(1) election would not be available. Would s. 51(1) apply to the exchange? CRA responded:
[S]ection 51 should apply only where the exchange results in a disposition of the convertible property.
Furthermore, an exchange of shares that does not result in a disposition of the convertible property would not result in a capital gain or loss for the taxpayer.