Issues in a applying the s. 55(3.1)(c) butterfly exclusion include uncertainties respecting the “series” and “ordinary course” and testing FMV at any time in the series
S. 55(3.1)(c) generally precludes a butterfly where a group of companies engages in transactions for the transfer of assets from the distributing company (DC) to the transferee company (TC), with the intention, from the outset, of having the TC immediately sell those assets to an unrelated third party within the same series so that the shareholder can “cash out” or otherwise gain some sort of tax benefit.
Technical issues as to the application of s. 55(3.1)(c)include:
- Regarding the connecting factor in s. 55(3.1)(c)(i) that (to taint the transactions) requires that the property be acquired from TC by a non-related person in the same series of transactions or events as the butterfly, s. 248(10) “is broad enough to catch any transactions that have some connection, however remote, with the butterfly” so “that a very conservative interpretation could preclude the TC from ever disposing of property received in the butterfly to a non-related person because the series seemingly continues in perpetuity.”
- A carve-out from the above rule for dispositions of property to unrelated persons in the ordinary course of business creates difficulties of interpretation, for example, where “the taxpayer’s ‘ordinary business’ involves transactions that are large and relatively few in number.”
- Respecting the accessing of a further carve-out (which applies inter alia where the property that is disposed of to unrelated persons as part of the series constitutes less than 10% of the FMV of all of the butterflied property - ignoring for these purposes, money and indebtedness), the property so disposed of cannot exceed 10% of the total value of the butterflied property at any time after the butterfly and prior to the end of the series – so that even if the FMV of certain property constituted, for example, 7% of the total FMV on the disposition date, it might exceed 10% of the total FMV at some point between the butterfly date and the disposition date, so as to put the butterfly offside.
Neal Armstrong. Summary of David Carolin and Manu Kakkar, “Problematic Post-Butterfly Transferee Corporation Dispositions Involving Paragraph 55(3.1)(c): Part I,” Tax for the Owner-Manager, Vol. 22, No. 2, April 2022, p. 3 under s. 55(3.1)(c).