CRA rules on a split-up reorganization where, on the numbers, a butterfly was unnecessary

Following the death of the father, his preferred shares of a CCPC (“Opco”), that held only cash as a result of having sold all its marketable securities, were distributed by his estate to his three beneficiaries (his three children), and then Opco was divided equally between the three holding companies for the three children’s families, each holding 1/3 of the Opco common shares.

This was not accomplished pursuant to a butterfly. Instead, Opco was wound up into the three Holdcos pursuant to s. 88(2), thereby giving rise, to some extent, to deemed dividends pursuant to ss. 88(2)(b) and 84(2).

The taxpayers represented that each dividend arising under ss. 88(2)(b) and 84(2) will not significantly reduce the capital gain that, but for that taxable dividend, would have been realized on a disposition of a share of Opco at FMV immediately before such dividend. On this basis, CRA ruled that s. 55(2) would not apply.

Neal Armstrong. Summaries of 2020 Ruling 2020-0840631R3 F under s. 55(2.1)(b) and s. 88(2)(b).