CRA rules on a split-up butterfly entailing an immediate sale of distributed shares by one TC to the other

Features of a ruling letter for the butterfly split-up of DC (a CCPC with three types of property including tenant receivables) equally between the family holding companies (Shareholder1 and Shareholder2) for two unrelated families include the following features:

  • The redemption by DC of the common shares held in it by the two respective transferee corporations (TC1 and TC2) is handled so as to result in TC2 but not TC1 receiving a capital dividend, i.e., the CDA is not split pro rata.
  • Deferred revenue (presumably prepaid rent) for which a s. 20(24) election is made on the distribution by DC is treated as boot.
  • The shares of Subco2, which might be a significant subsidiary of DC, are split 50-50 between TC1 and TC2 on the butterfly, then TC1 sells its shares of Subco2 to TC2 for FMV consideration.
  • On the winding-up of DC, it distributes the remaining notes owing to it by TC1 and TC2 (resulting from the redemption of the preferred shares issued by them on the butterfly distribution) to TC1 and TC2, respectively, with CRA ruling that this does not give rise to a forgiven amount (i.e., implicitly the notes are treated as if they were repaid in full by way of set-off against the winding-up distribution).

Neal Armstrong. Summary of 2015 Ruling 2014-0552871R3 under s. 55(1) – distribution.