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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: 1) Whether paragraph 55(3.1)(c) of the Act would apply with respect to a transferee corporation in a particular situation where shares of a subsidiary have been butterflied and additional shares of such subsidiary are issued to unrelated persons after the butterfly distribution and in the series of transactions that includes the receipt of a dividend by a transferee corporation. 2) Whether paragraph 55(3.1)(c) of the Act would apply with respect to a transferee corporation in another particular situation where shares of a subsidiary that constitute butterflied property are disposed of by another transferee corporation to unrelated persons after the butterfly distribution and in the series of transactions that includes the receipt of a dividend by the transferee corporation.
Position: 1) Yes. Technically, paragraph 55(3.1)(c) of the Act could apply. 2) Yes. Technically, paragraph 55(3.1)(c) of the Act could apply.
Reasons: Wording of paragraph 55(3.1)(c) of the Act.
2002-012031
XXXXXXXXXX S. Prud'Homme
(613) 957-8975
February 28, 2002Dear Sir,
Subject: Request for a Technical Interpretation of paragraph 55(3.1)(c) of the Income Tax Act
This is in response to your letter of January 18, 2002, in which you requested our views on the application of paragraph 55(3.1)(c) of the Income Tax Act in certain specific situations. Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act.
It appears to us that the situations described in your letter and summarized below could be actual situations involving taxpayers. As stated in Information Circular 70-6R4, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved one or more specific taxpayers and completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments which may be of assistance to you. It should be noted that the application of one or more provisions of the Income Tax Act generally requires an analysis of all the facts relating to a particular situation. As a result, and given that your letter only briefly describes hypothetical situations, our comments below may not fully apply to specific situations.
1) First Particular Situation
You have presented us with the situation described below (the "First Particular Situation") in the course of your request for a technical interpretation.
(a) A transferor company ("Holdco") held as its only assets shares in the capital stock of a public company ("Pubco").
(b) All of the shares of the capital stock of Holdco were held by corporations residing in Canada (the "Transferee Corporations").
(c) As part of a butterfly reorganization, Holdco transferred its shares in the capital stock of Pubco to the Transferee Corporations. This transfer of shares constituted a "distribution" within the meaning of the definition set out in paragraph 55(1).
(d) Immediately after the butterfly reorganization described above, Pubco proceeded with a public issuance of shares. The shares issued in the course of this issue were acquired by persons who were not related to the Transferee Corporations.
(e) We have assumed that immediately after the butterfly reorganization described above, Holdco was not related to the Transferee Corporations.
You asked whether the shares acquired by the persons who were not related to the Transferee Corporations will be property described in clause 55(3.1)(c)(ii)(B) and, if that provision applies to the First Particular Situation, whether the dividends received by the Transferee Corporations in connection with the butterfly reorganization will be subject to subsection 55(2).
2) Second Particular Situation
You have also presented us with the situation described below (the "Second Particular Situation") in the course of your request for a technical interpretation.
(a) A transferor corporation ("Holdco") held as its only assets shares in the capital stock of a public corporation ("Pubco").
(b) All of the shares of the capital stock of Holdco were held by corporations residing in Canada ("Aco" and "Bco"). More specifically, Aco and Bco held 20% and 80%, respectively of the shares of the capital stock of Holdco.
(c) In the course of the butterfly reorganization, Holdco transferred to Aco and Bco 20% and 80%, respectively of the Pubco shares it held. This transfer of shares constituted a "distribution" within the meaning of the definition in subsection 55(1). The fair market value ("FMV") of the shares of the capital stock of Pubco held by Holdco was $100,000 at the time of the distribution. As part of the reorganization described above, Aco and Bco therefore acquired shares of the capital stock of Pubco with an FMV of $20,000 and $80,000, respectively.
(d) Immediately after the butterfly reorganization described above, Bco disposed of a portion of its Pubco shares to a person who was not related to Aco for a consideration of $8,000.
(e) We have assumed that immediately after the butterfly reorganization described above, Holdco was not related to Aco and/or Bco.
You asked whether the dividend received by Aco in the course of the butterfly reorganization described in the Second Particular Situation was subject to subsection 55(2) by virtue of the application of paragraph 55(3.1)(c). You asked us the same question, this time regarding the dividend received by Bco in the course of the butterfly reorganization described above.
You then added a transaction to the Second Particular Situation described above (such modified particular situation, the "Modified Second Particular Situation"). This transaction consists of a disposition by Aco, immediately after the butterfly reorganization described above, of a portion of its Pubco shares to a person who was not related to Aco for consideration of $2,000.
In connection with this Modified Second Particular Situation, you asked whether the dividend received by Aco in the course of the butterfly reorganization was subject to subsection 55(2) by virtue of the application of paragraph 55(3.1)(c). You asked the same question regarding the dividend received by Bco in connection with the butterfly reorganization described above.
Clause 55(3.1)(c)(ii)(A) refers to property (other than money, indebtedness that is not convertible into other property, a share of the capital stock of the transferee corporation and property more than 10% of the fair market value of which is attributable to one or more such shares) that the transferee corporation received on the distribution. In the First Particular Situation, the shares of the capital stock of Pubco that the Transferee Corporations received on the distribution was property described in clause 55(3.1)(c)(ii)(A).
Clause 55(3.1)(c)(ii)(C) refers to a property (other than money, indebtedness that is not convertible into other property, a share of the capital stock of the transferee corporation and property more than 10% of the fair market value of which is attributable to one or more such shares) to which the FMV of property described in clause 55(3.1)(c)(ii)(A) is attributable in whole or in part during the course of the series of transactions or events that includes the receipt of a dividend by a transferee corporation. In the First Particular Situation, property held by Pubco (other than money, indebtedness that is not convertible into other property, a share of the capital stock of the transferee corporation and property more than 10% of the fair market value of which is attributable to one or more such shares) would be property described in clause 55(3.1(c)(ii)(C) because the FMV of the shares of the capital stock of Pubco received by the Transferee Corporations on the distribution was wholly or partly attributable during the series to property held by Pubco.
Clause 55(3.1)(c)(ii)(B) refers to a property more than 10% of the FMV of which is attributable, after the distribution and before the end of the series, to property (other than money and indebtedness that is not convertible into other property) described in clause 55(3.1)(c)(ii)(A) or (C). In the First Particular Situation and to the extent that the newly issued shares of the capital of Pubco were acquired by persons not related to the Transferee Corporations in the course of the series of transactions or events that included the receipt of dividends by the Transferee Corporations, such newly issued shares of the capital of Pubco would be property described in clause 55(3.1)(c)(ii)(B) because more than 10% of their FMV was attributable, after the distribution and before the end of the series, to property held by Pubco (i.e., property described in clause 55(3.1)(c)(ii)(C)).
Having regard to the foregoing and to the extent that:
- shares of the capital stock of Pubco newly issued to persons not related to the Transferee Corporations were acquired by such persons in the course of the series of transactions or events that included the receipt of dividends by the Transferee Corporations, and
- the FMV at the time of the acquisition of the shares of the capital stock of Pubco newly issued to persons not related to the Transferee Corporations was more than 10% of the FMV, at the time of the distribution, of the shares of the capital stock of Pubco received by any of the Transferee Corporations on distribution (the "De Minimis Rule"),
we are of the view that the acquisition of such newly issued shares of the capital stock of Pubco could technically fall within paragraph 55(3.1)(c). Consequently, and notwithstanding subsection 55(3), a dividend received by the relevant Transferee Corporation in the course of the butterfly reorganization described in the First Particular Situation and to which subsection 55(2) would apply, but for paragraph 55(3)(b), would not be excluded from the application of subsection 55(2).
In this regard, you stated that you are of the view that in order for a property to be described in clause 55(3.1)(c)(ii)(B), more than 10% of its FMV must be attributable, after the distribution and before the end of the series, to a single property described in clause 55(3. 1(c)(ii)(A) (i.e., a property received by the transferee corporation on the distribution) or to a single property described in clause 55(3.1)(c)(ii)(C) (i.e., a property to which the FMV of a property received by the transferee corporation on the distribution is attributable in whole or in part during the series). We disagree with this interpretation. In our view, such an interpretation is not supported by, among other things, the English version of subparagraph 55(3.1)(c)(ii). Parliament uses the words "is a property" at the beginning of that provision, whereas it uses the expressions "attributable to property" and "the fair market value of property described" in clauses 55(3.1)(c)(ii)(B) and (C), respectively. It therefore seems to us that, under the wording of the English version of subparagraph 55(3.1)(c)(ii), a property would be described in clause 55(3.1)(c)(ii)(B) to the extent that more than 10% of its FMV would be attributable, after distribution and before the end of the series, to property described in clause 55(3.1)(c)(ii)(A) or to property described in clause 55(3.1)(c)(ii)(C). In our view, the latter interpretation is more consistent with the terms of both the French and English versions of clause 55(3.1)(c)(ii)(B) and better reflects the tax policy underlying paragraph 55(3.1)(c).
Furthermore, with respect to the De Minimis Rule, the position of the Canada Customs and Revenue Agency (the "CCRA") is that the determination of the FMV of property in the phrase "fair market value of property ... received by the transferee corporation on the distribution" provided for in or under paragraph 55(3.1)(c) must be made on the basis of the net FMV of the property (i.e., taking into account the liabilities of a distributing corporation assumed by a transferee corporation in the course of a distribution), where a distribution has been made using the net FMV method accepted by the CCRA in a particular situation.
Regarding Aco
As part of the analysis of the Second Particular Situation and with respect to Aco, it must be determined, among other things, whether the shares of the capital stock of Pubco disposed of by Bco to a person not related to Aco are property described in subparagraph 55(3.1)(c)(ii).
In the Second Particular Situation, a property described in clause 55(3.1)(c)(ii)(A) would be one of the shares of the capital stock of Pubco that Aco received on the distribution. Since Aco retained all of the shares of the capital stock of Pubco received on the distribution, the shares of the capital stock of Pubco acquired from Bco by a person not related to Aco would not be property described in clause 55(3.1)(c)(ii)(A) in the circumstances.
Furthermore, in the Second Particular Situation, the property held by Pubco (other than money, indebtedness that is not convertible into other property, a share of the capital stock of the transferee corporation and property more than 10% of the fair market value of which is attributable to one or more such shares) would be property described in clause 55(3.1(c)(ii)(C) because the FMV of the shares of the capital stock of Pubco received by Aco on the distribution would be wholly or partly attributable during the course of the series to property held by Pubco. Since it was shares of the capital stock of Pubco that were acquired by a person not related to Aco and not property held by Pubco, such shares of the capital stock of Pubco acquired by a person not related to Aco would not be property described in clause 55(3.1)(c)(ii)(C).
However, to the extent that shares of the capital stock of Pubco were acquired by a person not related to Aco in the course of the series of transactions or events that included the receipt of the dividend by Aco, it could be argued that the shares of the capital stock of Pubco acquired by a person not related to Aco would be property described in clause 55(3.1)(c)(ii)(B). Indeed, more than 10% of their FMV would be attributable, after the distribution and before the end of the series, to property held by Pubco (i.e., property described in clause 55(3.1)(c)(ii)(C)).
Based on the foregoing and to the extent that the shares of the capital stock of Pubco were acquired by a person not related to Aco in the course of the series of transactions or events that included the receipt of the dividend by Aco, we are of the view that the acquisition of such shares of the capital stock of Pubco could technically fall within paragraph 55(3.1)(c). Accordingly, and notwithstanding subsection 55(3), a dividend received by Aco in connection with the butterfly reorganization described in the Second Particular Situation and to which subsection 55(2) would apply, but for paragraph 55(3)(b), would not be excluded from the application of subsection 55(2).
It should be noted in this regard that the De Minimis Rule would not apply in the circumstances to prevent the application of paragraph 55(3.1)(c) in respect of Aco since the FMV, on acquisition, of the shares of the capital stock of Pubco acquired by a person not related to Aco ($8,000) would represent more than 10% of the FMV, on the acquisition, of the shares of the capital stock of Pubco received by Aco on the distribution ($20,000 x 10% = $2,000).
Regarding Bco
To the extent that the shares of the capital stock of Pubco were acquired from Bco by a person not related to Bco, those shares would be property described in clause 55(3.1)(c)(ii)(A) for purposes of the Second Particular Situation because they would be shares of the capital stock of Pubco that Bco would have previously received on the distribution.
However, even assuming that the shares of the capital stock of Pubco were acquired by a person not related to Bco in the course of the series of transactions or events that included the receipt of the dividend by Bco, we are of the view that this acquisition of shares of the capital stock of Pubco would not come within paragraph 55(3.1)(c) in the Second Particular Situation because of the De Minimis Rule. Indeed, the FMV, on the acquisition, of the shares of the capital stock of Pubco acquired by the person who was not related to Bco ($8,000) would not represent more than 10% of the FMV, on the distribution, of the shares of the capital stock of Pubco received by Bco on the distribution ($80,000 x 10% = $8,000).
Regarding Aco
In the Modified Second Particular Situation, the shares of the capital stock of Pubco that Aco received on the distribution were property described in clause 55(3.1)(c)(ii)(A). Consequently, the shares of the capital stock of Pubco acquired from Aco by a person not related to Aco would be property described in clause 55(3.1)(c)(ii)(A) in the circumstances.
Furthermore, in the Modified Second Particular Situation, the property held by Pubco (other than money, indebtedness that is not convertible into other property, a share of the capital stock of the transferee corporation and property more than 10% of the fair market value of which is attributable to one or more such shares) was property referred to in clause 55(3.1)(c)(ii)(C) because the FMV of the shares of the capital stock of Pubco received by Aco on the distribution were wholly or partly attributable during the course of the series to property held by Pubco. Given that it would be shares in the capital stock of Pubco that were acquired by a person not related to Aco and not property held by Pubco, such shares of the capital stock of Pubco acquired by a person not related to Aco would not be property described in clause 55(3.1)(c)(ii)(C).
However, to the extent that shares of the capital stock of Pubco were acquired from Bco by a person not related to Aco in the course of the series of transactions or events that included the receipt of the dividend by Aco, the shares of the capital stock of Pubco acquired from Bco by a person not related to Aco would be property described in clause 55(3.1)(c)(ii)(B). Indeed, more than 10% of their FMV would be attributable, after the distribution and before the end of the series, to property held by Pubco (i.e., property described in clause 55(3.1)(c)(ii)(C)).
Based on the foregoing and to the extent that the shares of the capital stock of Pubco were acquired by a person not related to Aco in the course of the series of transactions or events that includes the receipt of the dividend by Aco, we are of the view that the acquisition of such shares of the capital stock of Pubco could technically fall within paragraph 55(3.1)(c). Consequently, and notwithstanding paragraph 55(3), a dividend received by Aco in the course of the butterfly reorganization described in the Modified Second Particular Situation and to which paragraph 55(2) would apply, but for paragraph 55(3)(b), would not be excluded from the application of paragraph 55(2).
It should be noted in this regard that the De Minimis Rule would not be applicable in the circumstances to prevent the application of paragraph 55(3.1)(c) in respect of Aco because the FMV, on the acquisition, of the shares of the capital stock of Pubco acquired by a person not related to Aco ($8,000 + $2,000 = $10,000) represented more than 10% of the FMV, at the time of the distribution, of the shares of the capital stock of Pubco received by Aco on the distribution ($20,000 x 10% = $2,000).
Regarding Bco
To the extent that the shares of the capital stock of Pubco were acquired from Bco by a person not related to Bco, such shares would be property described in clause 55(3.1)(c)(ii)(A) for the purposes of the Modified Second Particular Situation because they would be shares of the capital stock of Pubco that Bco had previously received on the distribution.
In addition, the property held by Pubco (other than money, indebtedness that is not convertible into other property, a share of the capital stock of the transferee corporation and property more than 10% of the fair market value of which is attributable to one or more such shares) was property described in clause 55(3.1)(c)(ii)(C) since the FMV of the shares of the capital stock of Pubco received by Bco on the distribution was wholly or partly attributable during the course of the series to property held by Pubco. Taking into account that it would be shares of the capital stock of Pubco that would be acquired in the circumstances and not property held by Pubco, those shares of the capital stock of Pubco would not be property described in clause 55(3.1)(c)(ii)(C).
However, to the extent that the shares of the capital stock of Pubco were acquired from Aco by a person not related to Bco during the course of the series of transactions or events that included the receipt of the dividend by Bco, the shares of the capital stock of Pubco previously held by Aco and acquired by a person not related to Bco would be property described in clause 55(3.1)(c)(ii)(B). Indeed, more than 10% of their FMV would be attributable, after attribution and before the end of the series, to property held by Pubco (i.e., property described in clause 55(3.1)(c)(ii)(C)).
Based on the foregoing and to the extent that the shares of the capital stock of Pubco were acquired by a person not related to Bco in the course of the series of transactions or events that included the receipt of the dividend by Bco, we are of the view that the acquisition of such shares of the capital stock of Pubco could technically fall within paragraph 55(3.1)(c). Consequently, and notwithstanding subsection 55(3), a dividend received by Bco in the course of the butterfly reorganization described in the Modified Second Particular Situation and to which subsection 55(2) would apply, but for paragraph 55(3)((b), would not be excluded from the application of subsection 55(2).
It should be noted in this regard that the De Minimis Rule would not be applicable in the circumstances to prevent the application of paragraph 55(3.1)(c) in respect of Bco since the FMV, on the acquisition, of the shares of the capital stock of Pubco acquired by a person not related to Bco ($8,000 + $2,000 = $10,000) represented more than 10% of the FMV, on the distribution, of the shares of the capital stock of Pubco received by Bco on the distribution ($80,000 x 10% = $8,000).
Please note that this opinion does not constitute an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, it is not binding on the CCRA with respect to any particular factual situation.
We hope that our comments will be of assistance to you.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and
Resource Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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