CRA rules on CCPC split-up which was structured to avoid Part IV tax circularity

Where the distributing corporation (DC) in a butterfly is a Canadian-controlled private corporation with refundable dividend tax on hand, a circular computation of Part IV tax under s. 186(1)(b) arises if the butterfly mechanics entail it both paying and receiving a deemed dividend from the transferee corporation (TC), as the resulting generation of a dividend refund to it will trigger Part IV tax and an RDTOH addition to TC which, in turn, will trigger Part IV tax and a dividend refund on the deemed dividend going the other way, and so on.

In a butterfly reorganization for the split-up of DC into three TCs, this circularity problem was solved by having DC transfer its properties to respective new Subcos of each TC, so that no s. 186(1)(b) Part IV tax was generated on the redemption of the prefs received by DC as consideration on this transfer.  The Subcos then were wound-up into the respective TCs, and DC was wound-up under s. 88(2) into the TCs, with  s. 186(1)(b) applying non-circularly to the resulting s. 88(2)(b)(iii) deemed dividends.

Neal Armstrong.  Summary of 2014 Ruling 2013-0513211R3 under s. 55(1) – distribution.