20 November 2000 External T.I. 2000-0043835 - acqui. of shares on a permitted redemption

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether the acquisition of shares of the distributing corporation on a permitted redemption would be considered an acquisition in contemplation of a distribution for purposes of subparagraph 55(3.1)(b)(iii) of the Act.

Position: No.

Reasons:

The word in contemplation of a distribution suggests that the shares must ordinarily be received prior to the distribution. The acquisition of the shares on redemption occurs after the distribution and would not be considered for purposes of subparagraph 55(3.1)(b)(iii) of the Act. Furthermore, the single-wing butterfly falls within the policy intent of the butterfly exemption.

		2000-004383
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
Attention:  XXXXXXXXXX 

November 20, 2000

Dear Sirs:

Re: Subparagraph 55(3.1)(b)(iii) of the Income Tax Act

We are writing in reply to your letter of August 23, 2000 wherein you requested our opinion regarding the application of subparagraph 55(3.1)(b)(iii) of the Income Tax Act (the "Act") in the following hypothetical fact situation.

You have outlined a situation where the shares in a distributing corporation are owned by two brothers, Brother A and Brother B, each owning 50% of the distributing corporation's shares. The brothers wish to carry out a single-winged butterfly and the following transactions are carried out:

a) Brother B incorporates a holding corporation which will be the transferee corporation for his interest in the distributing corporation;

b) Brother B transfers all of his shares of the distributing corporation to the transferee corporation under section 85 of the Act in return for shares of the transferee corporation;

c) The distributing corporation transfers 50% of each type of property held by it to the transferee corporation under section 85 in return for shares of the transferee corporation;

d) The distributing corporation and the transferee corporation each redeem their shares held in the other corporation, resulting in deemed dividends; and

e) The amounts owing as a result of the share redemptions are set-off against each other.

Specifically, you have asked whether the acquisition of shares in the distributing corporation by the distributing corporation on the redemption of such shares is an acquisition of shares in contemplation of a distribution to which subparagraph 55(3.1)(b)(iii) will apply to deny the protection of the butterfly exemption. In this regard you note that subparagraph 55(3.1)(b)(iii) does not include an exception for an acquisition of shares of the distributing corporation on a permitted redemption.

Our Comments

In our view, the acquisition of shares in the distributing corporation by the distributing corporation on the redemption of such shares, where the share redemption qualifies as a "permitted redemption" within the meaning of subsection 55(1), would not ordinarily be considered an acquisition in contemplation of a distribution. As such, subparagraph 55(3.1)(b)(iii) will not normally apply to deny the butterfly exemption in such circumstances.

We trust our comments will be of assistance to you. However, as noted in Information Circular 70-6R3 issued on December 30, 1996, the above comments are not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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