101139810 Saskatchewan – Tax Court of Canada decision discloses that CRA assessed only a single level of corporate taxation on a bad butterfly

An individual (Case) held his 1/3 shareholding in a small business corporation through a personal holding company (8231) which also held 1/3 of its assets in the form of investment assets. In order to accomplish a sale of the SBC shareholding to the two other SBC shareholders, that shareholding was first split between two new wholly-owned corporations of Case (TC1 and TC2), essentially using butterfly mechanics, with Case then selling his shares of TC1 and TC2 to the other two shareholders, and applying the capital gains exemption to a modest portion of the resulting gain. This plan did not work because the purchasers were unrelated, thereby precluding access to the butterfly or s. 55(3)(a) spin-off safe harbour.

As one might expect, CRA initially assessed both 8231, and TC1 and TC2, to convert their s. 84(3) deemed dividends realized on the cross-redemption of the shareholdings between them which had arisen under the butterfly mechanics, into capital gains (subject to a deductions in the case of TC1 and TC2 for the safe income of 8231 considered to be received by them.) However 15 months later, CRA vacated the s. 55(2) assessment of 8231 for reasons that are not explained – so that the only outstanding s. 55(2) assessments were of the corporations acquired by the purchasers.

Case did not treat this as munificence, and his counsel argued that the assessments of TC1 and TC2 also should be vacated, on the grounds that essentially the same gain was reported by him. In addition to finding that this argument did not dovetail with the s. 55(2) wording, Favreau J stated:

I am inclined to favour a narrow construction of double taxation such that it arises where the same amount is taxed in the hands of the same person. Mr. Case and the appellants are not the same persons.

Neal Armstrong. Summaries of 101139810 Saskatchewan Ltd. v. The Queen, 2017 TCC 3 under s. 55(2.1)(b) and s. 55(2)(f).