CRA considers that a pipeline transaction can be coupled with a butterfly split-up

CRA favourably addressed whether the application of deemed dividend treatment under s. 84(2) would still be avoided if, during the second year of conventional pipeline transactions, the Newco was split between the estate beneficiaries under a butterfly reorg. CRA considered these transactions:

• The shares of the opco (“Corporation 1”), whose ACB was stepped up on death, are sold by the estate to its newly-incorporated “Corporation 2” for high-PUC prefs (rather than the more usual note);
• after the wind-up of Corporation 2 into Corporation 1 a year later under s. 88(1), the shares (both common and pref) of Corporation 1 are distributed to the two beneficiaries;
• two months later, there is a split-up butterfly of Corporation 2 between the two newcos (Corporations 3 and 4) of the two beneficiaries, so that Corporations 3 and 4 between them continue to carry on the business which previously was carried on by Corporations 1 and 2. In the meantime during the year following the winding up of Corporation 1, there is no bulk redemption (“rachat massif”) of the prefs of Corporation 2 or the successor prefs of Corporations 3 and 4.

CRA concluded:

[W]e could accept, in such a case, that the beneficiaries of the estate would not receive the property or funds of Corporation 1, in any manner whatever, on the winding-up, discontinuance or reorganization of the business of Corporation 1 and that what they received came instead from Corporation 2, or Corporations 3 or 4. In such circumstances, subsection 84(2) would not apply.

CRA considered that there was nothing inherent in these bare-bone transactions that would necessarily preclude the butterfly exemption from being potentially available. In particular, there was nothing especially problematic about both Corporations 1 and 2 being distributing corporations for purposes of s. 55(3.1)(b). (Only Corporation 2 would be a distributing corporation for purposes of ss. 55(3.1)(a) , (c) and (d).)

Neal Armstrong. Summaries of 22 January 2016 T.I. 2015-0617601E5 F under s. 84(2), s. 55(3.1)(b).