CRA accommodates the equitable division of RDTOH on sequential split-up butterflies of an investments holding company

An investment holding company (DC1) is held directly by A and his brother B (apparently, a non-resident) and by an upper-tier holding company (DC2), whose shares are held by A and B, as well as by their mother (X).

In order to accomplish a split-up of DC1’s assets amongst A, B and X,

  1. X’s shares are redeemed by DC2, and
  2. there then is a pro rata butterflying of the assets of DC1 amongst DC2 and newly-formed holding companies for A and B (TC1 and TC2, the latter, a ULC) followed by
  3. a s. 88(2) wind-up of DC1 into TC1, TC2 and DC2.

Preliminarily to the next set of transactions,

  1. DC2 pays a s. 84(1) safe income dividend to all the TCs in relation to DC2, including a second ULC (TC3) of B, in amounts sufficient to trigger a full refund of its RDTOH balance.


  1. There is a single-wing split-up butterfly of DC2's assets so that a pro rata portion of its two types of property is butterflied to TC1.
  2. X then steps back into the picture by subscribing for preferred shares of DC2.
  3. DC2 continues as a ULC and amalgamates with a wholly-owned ULC subsidiary of B to which he had previously transferred a portion of his [common] shares of DC2, and
  4. B then receives his share of Amalco’s assets first by way of a s.84(1) dividend followed by a PUC distribution, and second by way of having all of his shares redeemed.

In order to create CDA to facilitate the redemption (in Step 1 above) of X’s preferred shares in DC2, DC1 first effects a taxable drop-down of low-ACB marketable securities to a Newco subsidiary, with the resulting CDA being pushed out to DC2 under s.84(1). In addition “redeeming the … preferred shares held by Ms. X crystalizes the additional RDTOH so that it is an asset for the purposes of the butterfly, which allows for a more equitable distribution of assets on the single-wing butterfly of DC2’s assets.”

In order that the safe income dividend in Step 4 generates a full refund of the RDTOH (having regard to a deemed dividend also being paid in Step 5 to only one of the TCs) CRA agrees to there being a taxation year end immediately after Step 4.

Although the published rulings usually redact all numerical information even if it relates only to CRA policies or statutory rules rather than to the taxpayer’s situation, this ruling letter discloses that the Directorate still tolerates only a very small departure (within 1%) for meeting the test for a pro rata distribution of each type of property of the distributing corporations.

Neal Armstrong. Summaries of 2017 Ruling 2016-0674681R3 under s. 55(1) – distribution and s. 55(3.1)(a).