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.
| |
Officer: P. Diguer |
| |
File: 7-912218 |
ROUND TABLE - CGA - JANUARY 10, 1992
QUESTION #13
A and B are the sole shareholders of AB Ltd. Each owns 50% of the common shares, which are the only shares that have been issued. A wishes to withdraw and C, who is dealing at arm's length with A and B, wishes to acquire the shares owned by A on condition that a "butterfly" transaction (as described in paragraph 55(3)(b) of the Act) is carried out immediately after C acquires the shares, since C is interested only in certain assets of AB Ltd. B agrees to the "butterfly" transaction.
If we assume that at the time of the sale, A is aware of the "butterfly" transaction planned by B and C, would the Department invoke the provisions of subsection 110.6(7) of the Act and if so, why?
ANSWER
Subsection 110.6(7) of the Act is an anti-avoidance rule preventing the conversion of taxable capital gains of a corporation into exempt capital gains of an individual.
A number of provisions in the Act allow the transfer of property between corporations with tax deferral. The purpose of subsection 110.6(7) of the Act is not to restrict the application of these provisions. However, subsection 110.6(7) of the Act is necessary to ensure that these provisions are not used to sell property belonging to the corporation in such a way that the capital gain on the property is converted to a capital gain of a shareholder who is an individual and who is entitled to the exemption.
The question of whether the transactions relating to a so-called "butterfly" reorganization are part of the same series of events or transactions that includes a disposition resulting in a capital gain is a question of fact. In the situation described above, it would appear that the sale of the shares and the butterfly reorganization are part of the same series of transactions. We are therefore of the opinion that subsection 110.6(7) of the Act applies.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1992
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1992
Email this Content