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.
SUBJECT: BUTTERFLY EXEMPTION SECTION: 55(3)(b)]
PRAIRIE PROVINCES TAX CONFERENCE
DRAFT/EBAUCHE May 19 & 20, 1992
Question 4
Application of Paragraph 55(3)(b) "Butterfly Exemption"
Subco 2 is a wholly-owned subsidiary of Subco 1 which, in turn, is wholly-owned by Parentco.
Subco 1 and Subco 2 are engaged in identical businesses but in different countries. All of the assets of Subco 1 and Subco 2 are used to produce active business income, and none of their assets is cash or near cash.
Parentco wishes to effect a reorganization whereby the 2 subsidiaries will become sister companies with each being wholly-owned by Parentco. It is contemplated that Subco 2 may be sold in the next couple of years.
A newly created company ("Newco") would be set up as a wholly-owned subsidiary of Parentco. Parentco would transfer shares of Subco 1 to Newco having a fair market value equal to the fair market value of Subco 2.
The reorganization, a "single-wing butterfly", would require Subco 1 to transfer under subsection 85(1) its shares of Subco 2 to Newco.
The Department has stated on several occasions that, for purposes of ascertaining the value and types of property of a particular corporation, it will apply a "look-through" approach to examine property held by subsidiaries of the particular corporation.
With respect to the above scenario:
- (a) To the extent that the consolidated properties of Subco 1 and Subco 2 can otherwise be regarded to be properties of one "type" (i.e. business assets), will the fact that the assets of Subco 2 are employed in a different country have any bearing on their status as properties of the same type as those employed by Subco 1?
- (b) Assuming that the requirements of paragraph 55(3)(b) are otherwise satisfied, would the butterfly described above qualify for exemption under paragraph 55(3)(b) as long as the fair market value of Newco's interest in Subco 1 is, prior to the butterfly, equal to the fair market value of the property (i.e. the shares of Subco 2) transferred by Subco 1 to Newco?
DEPARTMENT'S POSITION
- (a) Not ordinarily.
- (b) Not necessarily. In the situation described, paragraph 55(3)(b) would require that the fair market value of the Subco 2 shares received by Newco be equal to or approximate the proportion of the fair market value of all of the property of Subco 1 that the fair market value of the shares of Subco 1 is of the fair market value of all the issued shares of Subco 1. Unless the fair market value of all of the shares of Subco 1 happened to be equal to (or approximate) the fair market value of all of the assets of Subco 1, the transactions described would not meet the requirements of paragraph 55(3)(b).
Example to illustrate:
- (i) The fair market value of all of Subco 1's shares held by Parentco is $800.
- (ii) The fair market value of all the assets of Subco 1 is $1000, consisting of assets in Subco 1 of $600 and the shares of Subco 2 with a fair market value of $400.
- (iii) The fair market value of the shares of Subco 1 to be transferred to Newco to effect the butterfly must not be $400 (fair market value of Subco 2 shares), but $320.
Computed as follows:
FMV of Subco 2 ($400 x FMV of Subco
1 shares ($800)
FMV of all assets of Subco 1($1000)
7 -921147
J. Teixeira
As stated by Mr. Hiltz in his comments on "Types of Property - Look-through Approach" in the 1989 Canadian Tax Foundation 1989, "consolidation of domestic and foreign subsidiaries is required and would be done on the basis of Canadian accounting principles, ... to determine the types of property which would exist in the particular corporation if a subparagraph 55(3)(b) transaction were undertaken".
in the case where the fair market value of the shares held by Parentco in Subco 1 and the fair market value of the assets in Subco 1 and Subco 2 are not equal, the fair market value of the shares of Subco 1 to be owned by Newco in order to implement a butterfly reorganization which satisfies the pro rata test must be determined recognizing this variance.
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