CRA accepts a pre-butterfly amalgamation to create business property and a post-butterfly amalgamation to minimize Pt. IV tax

CRA ruled on a gross FMV butterfly to effectively split a Canadian rental real estate operation equally (i.e., 1/3 each) between the three transferee corporations (TCs) for the three holding companies (the Holdcos) for three siblings.

The first step in the proposed transactions was to amalgamate all but one of the corporations in the existing corporate structure, i.e., the parent, its wholly owned subsidiary, and nine of the 10 grandchild subsidiaries, to form DC. Taking into account that one of the grandchild subsidiaries had more than five full-time employees, this had the purpose and effect of converting all the rental properties into business property for purposes of the types-of-property butterfly classification and avoiding DC having a specified investment business. (The TCs apparently acquired the rental properties as investment property.)

The mechanics then involved all three Holdcos transferring their shares of DC to their respective TCs on a s. 85 rollover basis, and then 1/3 of the properties being transferred on a s. 85 rollover basis to each of the respective TCs for Holdco 2 and 3. The transfer of the other 1/3 to TC1 was accomplished by amalgamating it with DC. The stated purposes of this amalgamation was to create a short taxation year for DC, so that it would not generate significant property income that might result in Part IV tax on deemed dividends received by TC2 and 3 as part of the reorganization.

In order to produce an exact 1/3 division of the rental properties, some might be held by the TCs in co-ownership. CRA received various representations that went towards establishing that indeed such properties would be held in co-ownership rather than partnership, e.g., that in various regards, each would and could deal with its co-ownership interest separately.

Neal Armstrong. Summaries of 2021 Ruling 2019-0821121R3 under s. 55(1) – distribution and s. 96.