It may be possible to effect an estate freeze on a TC as part of a series entailing a butterfly split-up

There are some contrasts in the ability to carry out an estate freeze following a spin-off in intended reliance on the s. 55(3)(a) exception, and following a butterfly spin-off. Here is one example.

Suppose that Dad and Son, who are the 50-50 shareholders of Opco, effect a split-up reorganization in favour of Dadco and Sonco. However, as part of the same series, Son freezes Sonco in favour of Son Trust but retains control of Sonco. If even one of the beneficiaries of the trust was not related to Son (e.g., a nephew or cousin), Son Trust would be deemed pursuant to s. 55(5)(e)(ii) and (iii) not to be related to Sonco, so that the freeze would result in an increase in interest described in s. 55(3)(a)(ii) or (v), i.e., the s. 55(3)(a) exemption would not be available.

Suppose instead that the 50-50 shareholders of DC are Brother and Sister who, by virtue of s. 55(5)(e)(i), are deemed to be unrelated, and that they effect a split-up butterfly in favour of their respective TCs. In this context, s. 55(3.1)(b)(i) relevantly provides that, except in specific carve-out situations, any person who disposes of property within the butterfly series must be related to the acquirer of the property. Furthermore, s. 55(3.1)(b)(i)(C) establishes a continuity rule requiring that where property is disposed of within the butterfly series in succession (i.e., where there is a disposition of property, substituted property, or of any further substituted property in a continuous sequence), the final acquirer in that chain must be related to the original vendor at the start of the succession.

If the TC of Brother effects an estate freeze in favour of a trust, it would appear that s. 55(3.1)(b) would not apply because the trust would subscribe for shares rather than receiving them in substitution for other shares—and that this could be the case even if some of the beneficiaries of the trust were not related persons.

Neal Armstrong. Summaries of David Carolin and Manu Kakkar. “Freezes and Butterflies: Who Said Freezes are Easy?”, Tax for the Owner-Manager,” Vol. 25, No. 2, April 2025, p. 9 under s. 55(3)(a)(ii) and s. 55(3.1)(b)(1)(C).