CRA rules on gross asset butterfly with preliminary safe income dividend to increase ACB to exceed pre-1972 CSOH

CRA ruled on a butterfly split-up of a rental property company ("DC" - which was considered to carry on an active business because it had more than five full-time employees) between two transferee companies (TCs) formed by its two shareholders, being holding companies for the families of two brothers (one of them, deceased). The butterfly spin-off was to be effected on a gross asset basis rather than a net asset basis, i.e., immediately after the spin-off, the gross FMV of each type of property (business assets, and cash and near-cash assets) received by each TC will be equal or approximate (within 1%) 50% of the gross FMV of that type of property of DC immediately before the spin-off. The numbers apparently permitted this result to be accomplished by transferring 3 out of 4 of the rental properties to one TC and the 4th to the other, i.e., there was no necessity to deal in co-ownership interests.

Except for preliminary transactions to transfer registered title to the properties to new nominees, the proposed transactions were essentially to commence with DC increasing the PUC of its common shares by the lesser of (a) the safe income on hand attributable to the common shares at that time and (b) the aggregate of (i) its pre-1972 CSOH and (ii) an amount sufficient to trigger a refund of its RDTOH balance at that time, if any. The stated principal purpose of this step was to increase the ACB of the DC common shares, so as to eliminate the capital gain that would otherwise arise as a result of s. 88(2)(b)(ii) deeming the pre-1972 CSOH amount to be proceeds of disposition rather than a deemed dividend on the winding-up of DC at the completion of the transactions.

The ruling letter also indicates that if there is any significant dividend refund on this step, DC likely will submit a request to the relevant TSO to have a change of taxation year end (i.e., to avoid dividend circularity issues).

Neal Armstrong. Summary of 2021 Ruling 2020-0863171R3 under s. 55(1) – distribution.