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.
Principal Issues: Would 160(1) or 160(4) apply in the case of a butterfly reorganization?
Position: Question of fact.
STEP CRA Roundtable June 2012
QUESTION 2
Section 160 provides for joint and several liability between a transferor and a non-arm's length transferee where a transfer has occurred at less than fair market value. In the case of a separation or divorce, an exception is provided for transactions between spouses.
In more complex divorce situations, it is not uncommon to carry out a corporate reorganization of one form or another (often a butterfly reorganization) to divide up the family's assets between the spouses. A typical butterfly reorganization normally involves two share redemptions, giving rise to taxable dividends which offset one another. In such circumstances, does section 160 apply, or is there an exemption because fair market value consideration was paid in the form of shares which were tendered back to the corporation for redemption?
CRA Response
Subsection 160(1) provides that a non-arm's length transferee of property is jointly and severally liable to pay the taxes of the transferor in respect of the taxation year in which the property is transferred or any preceding year. Subparagraph 160(1)(e)(i) will limit the transferee's liability to the excess of the fair market value of the property transferred over the fair market value of consideration given for the property.
In the case of a "butterfly reorganization", it would be a question of fact as to whether subsection 160(1) would apply to any of the transfers of property that would form part of the transactions involved in the reorganization. Subsection 160(1) would not apply to any transfers of property where fair market value consideration is received in return.
Where subsection 160(1) is applicable to a particular situation, an exception may be available in subsection 160(4) in respect of property transferred by a taxpayer to the taxpayer's spouse (or common-law partner) pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement if, at the time the property was transferred, the taxpayer and the spouse were living separate and apart as a result of the breakdown of their relationship.
Without additional details as to what the particular concern is, we cannot comment further. However, if you would like to submit the question to us along with your specific concerns, we can re-examine it in more detail.
Michel Gauthier
2012-044268
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