CRA rules on a butterfly on a gross FMV basis and finishing with an estate freeze

CRA ruled on a butterfly split-up of DC (a Canadian-controlled private corporation holding marketable securities and cash, and also with related-person liabilities) among new holding companies (ACo1, BCo1 and CCo1) for A and her two adult children, B and C. The steps entailed initially packaging DC’s assets into two new subs (BSub and CSub) pursuant to a s. 85(1) drop-down, so that after effecting the butterfly split-up, BCo1 held shares of BSub, CCo1 held shares of CSub and ACo1 held shares both of BSub and CSub.

This was the set-up for ACo to then transfer its shares of BSub and CSub to BCo1 and CCo1, respectively, under s. 85(1) in consideration for preferred shares of the transferees, thereby permitting A’s interest in the DC assets to be frozen for the future benefit of her children.

The spin–off of the DC assets was to be accomplished on a gross FMV basis rather than net FMV basis, i.e., liabilities of DC were not taken into account in determining whether there was a pro rata distribution of each type of property of DC. The butterfly mechanics avoided any Pt IV tax circularity issues.

Neal Armstrong, Summary of 2018 Ruling 2017-0733011R3 under s. 55(1) – distribution.