CRA rules on a gross asset butterfly

A simple butterfly concerns DC (whose assets, other than minor cash, consist solely of publicly-traded shares) which is owned equally by three siblings. Siblings 1 and 2 will each transfer his DC shares (being common shares) on a s. 85(1) rollover basis to TC1 and TC2, respectively (each incorporated by the respective Sibling) for TC1 or TC2 common shares, and DC will transfer, on a s. 85(1) rollover basis, 1/3 of each of its types of property in consideration solely for non-voting redeemable retractable special shares to each of TC1 and TC2. The shareholdings between DC and TC1, and between DC and TC2, will then be cross-redeemed for notes, and the notes set off.

This is to be done as a “gross asset” butterfly, i.e., each TC receives 1/3 of the total investment (and any cash) assets of DC, and any liabilities of DC (there are represented to be none) get left behind (and DC itself will remain in existence). If in fact there were liabilities, these would be borne by the 1/3 asset share of DC.

Although DC started with an ERDTOH balance, the transactions did not evince any concerns about Pt. IV tax circularity issues.

Neal Armstrong. Summary of 2022 Ruling 2021-0884331R3 under s. 55(1) – distribution and s. 86(1).