5 May 1983 Income Tax Severed Letter 5-4911 - [830505]

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.

XXXX K.H. Major (613) 995-1178

May 5, 1983

Dear XXXX

This is in reply to your letter of February 23, 1983 in which you requested our comments on certain questions which have arisen in your consideration of "butterfly" transactions and paragraph 55(3)(b) of the Income Tax Act (the Act).

1. Butterfly Transactions and Winding-up

In our view the winding-up of the distributing corporation is a preferable step in the butterfly transactions and should take place whenever possible. In this way the transferee completely severs its ties with the distributing corporation. Assuming all the conditions of paragraph 55(3)(b) of the Act are met, it could be said that the butterfly transactions permit the tax-free wind-up of a corporation where its shares are held by more than one shareholder and those shareholders deal at arm's length with. each other.

It is our opinion that the provisions of subsections 84(2) and 88(2) of the Act apply to the winding-up. For the purposes of those subsections the wind-up is considered to have commenced after the rollover of assets, pursuant to the provision of subsection 85(1) of the Act, to the transferees or their intermediary companies and the redemption of the shares taken back in consideration on those rollovers.

55(3)(b)

2. Butterfly Transactions followed by a Freeze

In our view where the conditions of paragraph 55(3)(b) of the Act are otherwise met and the individual shareholder would then desire to freeze his interest in the transferee corporation, the setting up of the freeze at that time will not (assuming it is an acceptable freeze in accordance with the Department's practice) in and by itself prevent the application of paragraph 55(3)(b) of the Act to the series of transactions. On the other hand the setting up of a freeze and the introduction of-other shareholders into the transferee corporation before the distributing of assets and severing of ties with distributing corporation is complete does not comply with the provisions of paragraph 55(3)(b) of the Act and subsection 55(2) of the Act will apply to the series of transactions.

We trust that this information will be of assistance to you.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR

R.D. WEIL

for Director General Corporate Rulings Directorate Legislation Branch