CRA rules on butterfly split-up of rental property into co-ownership arrangement

CRA provided the usual butterfly and other rulings on a butterfly split-up of a DC holding rental property between two transferee corporations (the TCs) for two unrelated families, with undivided interests in the real estate being transferred to each TC in consideration for the assumption of liabilities (in such proportions as to ensure satisfaction of the pro rata distribution requirement) and for voting preferred shares, which were promptly redeemed for notes. There was no business property, and the cash or near-cash assets (including a demand non-interest-bearing loan receivable from a corporation jointly controlled by the two families) was expected to be exceeded by the current liabilities, so that effectively there was to be just one type of property to distribute.

DC was then to be wound-up into its two shareholders (the TCs) and its sole assets at that time – the two redemption notes owing by the two TCs – distributed to that TC so that the note was extinguished. Apparently, in order to avoid circularity issues, the winding-up dividend (effected through such note distribution) was to occur in a subsequent calendar year (i.e., at the beginning of 2020?). When DC receives a dividend refund for this winding-up dividend, there will be a further dividend “under the terms of the agreement governing the winding-up of DC” declared and paid by it to the two TCs.

By the way, a new term to roll off the tongue: NERDTOH (“non-eligible refundable dividend tax on hand”).

Neal Armstrong. Summary of 2019 Ruling 2018-0758411R3 under s. 55(1) – distribution.