Delaware Flip (US Flip)

A Delaware flip turns a Canadian company into the subsidiary of a new US parent. Before the flip, founders and investors own shares of an Ontario or federal corporation. Afterwards, they own shares of a Delaware corporation, or Canadian exchangeable shares that track it, and the Delaware corporation owns the Canadian company. The Canadian company usually keeps its employees, contracts and operations.

The usual reason is investor demand. Many US venture funds, accelerators and acquirers prefer a Delaware C corporation because its law, documents and tax treatment are familiar to them. Y Combinator's deal page describes the mechanics plainly: a startup incorporated outside its accepted countries must flip so that it has a parent in one of them, and the original entity often becomes a subsidiary of the new parent.

A flip is the opposite of the usual expansion structure, in which the Canadian company stays on top and sets up a US subsidiary for US sales and hiring. Our guide to the US LLC versus the Canadian corporation explains why the choice of US entity matters for Canadian owners, and our startup legal hub covers financing structures more broadly.

Every flip is custom, but most follow the same sequence:

1. Incorporate the US parent, almost always a Delaware C corporation.
2. Choose the exchange route for each shareholder group. Canadian residents with meaningful gains often take exchangeable shares of a new Canadian subsidiary of the parent; others take parent shares directly.
3. Complete the share exchange, so the Canadian company becomes wholly owned within the parent group.
4. Replace or assume stock options, warrants, SAFEs and convertible notes at the parent level and rebuild the cap table.
5. Paper the approvals: board and shareholder resolutions, securities-law exemptions for issuing parent shares to Ontario holders, and a check of whether an Investment Canada Act filing applies.
6. Decide where the intellectual property sits. Moving IP out of Canada is generally a taxable disposition at fair market value, so many companies leave it in the Canadian subsidiary and license it.

A less common route is to continue the Ontario corporation itself into Delaware. The OBCA allows an export continuance with a special resolution and the Director's authorization, but a corporation that stops being resident in Canada generally falls under the Income Tax Act's corporate emigration rules, which can tax its accrued gains.

Canada's share-exchange rollovers only work when the buyer is Canadian. Section 85.1 of the Income Tax Act gives an automatic deferral only when a Canadian corporation issues its shares in exchange for shares of a taxable Canadian corporation. A section 85 rollover needs a joint election with a taxable Canadian corporation as the buyer. A Delaware parent is neither, and the separate foreign share-for-share rule in subsection 85.1(5) covers only exchanges of shares of one foreign corporation for shares of another. A direct swap of Ontario shares for Delaware shares is therefore generally a taxable disposition at fair market value. That costs little at a very early stage, when the shares are worth about what the founders paid, and a lot once real value exists.

Exchangeable shares solve this. The parent forms a Canadian subsidiary, often called Exchangeco, and Canadian shareholders exchange their shares for its exchangeable shares. Those shares are built to mirror the parent's common stock: equivalent dividends, a right to exchange them one-for-one for parent shares, and votes at the parent level through a trust or special voting share. Because the holder still owns shares of a Canadian corporation, the exchange can be tax-deferred. Tax arises later, when the holder exchanges into parent stock or sells.

Section 85.1 usually does not fit this structure. It does not apply if the holder receives anything other than shares of one class, and exchangeable shareholders also receive contractual exchange and voting rights. Advisers therefore commonly rely on a joint section 85 election for each holder, which also lets each holder choose how much gain, if any, to recognize.

Once a non-resident parent controls it, the Canadian company stops being a Canadian-controlled private corporation. That holds even if the founders run everything from Toronto: under Article IV(3) of the Canada-US tax treaty, a company resident in both countries that was created under US law but not Canadian law is resident only in the US, and subsection 250(5) of the Income Tax Act then deems it not resident in Canada. The consequences:

• Deemed year-end. The Canadian company's taxation year generally ends immediately before the change, under subsection 249(3.1) or, where control is acquired, subsection 249(4), so it files a short-year return.
• Small business deduction. Lost on active business income from then on.
• SR&ED credits. The enhanced 35% refundable credit for CCPCs gives way to the 15% basic credit, which the CRA lists as non-refundable for most other corporations (as of October 2026).
• Lifetime capital gains exemption. Exchangeable shares and the subsidiary's shares are not shares of a CCPC, so growth after the flip cannot qualify for the lifetime capital gains exemption. Founders whose shares still qualify may be able to use the exemption on value built up before the flip, but that has to be planned before signing.
• Stock options. Options granted while the company was a CCPC generally keep the CCPC deferral. Subsection 7(1.4) lets employees exchange them for parent options without tax, provided the in-the-money value does not increase, and treats the new option as a continuation of the old one. New options granted after the flip are generally taxed on exercise; see stock option taxation in Canada.

QSBS. Section 1202 of the US Internal Revenue Code lets eligible holders exclude gain on qualified small business stock. Public Law 119-21, commonly called the One Big Beautiful Bill Act and signed July 4, 2025, expanded it for stock acquired after that date: a 50% exclusion after three years, 75% after four and 100% after five; a per-company cap equal to the greater of US$15 million (indexed for inflation after 2026) and 10 times basis; and a US$75 million gross-assets ceiling, up from US$50 million. Only stock of a US domestic C corporation qualifies, so shares of an Ontario company never do. That is one reason US investors push for a flip. It matters far less to a Canadian-resident founder who is not a US citizen or resident, because Canada, not the US, generally taxes that founder's capital gains. How much of any holder's post-flip stock qualifies turns on US rules for stock received in exchange for property, which need US tax advice.

Y Combinator. YC's published deal terms, checked in October 2026, say it invests in US, Canadian, Cayman and Singapore corporations. YC had earlier removed Canada from that list; on February 5, 2026, it announced it was adding Canada back, noting that its top-performing Canadian companies had reincorporated in the US. An Ontario or federal corporation therefore does not need to flip to join YC, though the question often returns at a priced US round. Lamba Law's startup incorporation and structuring service reviews these trade-offs with founders and their tax advisers.

Zara Adeyemi and Mateo Lindqvist hold 85% of the fully diluted equity of a Mississauga software company incorporated under the OBCA; the rest is an option pool and two SAFEs. A San Francisco fund offers a US$4 million seed round on condition that the company flips to Delaware. The round values the founders' shares at about C$10 million, against a cost of a few hundred dollars.

A direct swap into Delaware shares would realize a capital gain of almost the full C$10 million. Instead, their lawyers and accountants use an exchangeable share structure with section 85 elections, so the founders defer their gains until they exchange into parent stock. The 14 employees' options are exchanged for parent options under subsection 7(1.4), and the SAFE holders sign replacement SAFEs with the parent.

The cost shows up in SR&ED. The company expected C$900,000 of qualified spending next year. As a CCPC, that would earn about C$315,000 of refundable credits. After the flip, the 15% basic credit is about C$135,000 and is non-refundable, so it helps only once the company owes tax. The founders accept the trade for the round. Before signing, they review with their tax adviser whether to use part of their capital gains exemption on pre-flip value, and they plan for the deemed year-end and the extra short-year return the closing will trigger.