13 January 1993 Income Tax Severed Letter 9229095 -  

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.

922909
XXXXXXXXXX                                 M.P. Sarazin
                                           (613) 957-2118

Attention: XXXXXXXXXX

January 13, 1993

Dear Sirs:

Re: Butterfly Reorganization, Paragraph 55(3)(b)

This is in reply to your facsimile of September 29, 1992 wherein you requested our comments as to whether or not the provisions of paragraph 55(3)(b) of the Income Tax Act (Canada) (the "Act") would apply to a situation where a corporation transfers its shares of a wholly-owned subsidiary corporation ("Old Subco") to two newly incorporated subsidiary corporations ("Newcos") and then Old Subco transfers to each of the Newcos its pro-rata share of each type of property held by Old Subco at that time. In addition, you would like to know whether this series of transactions would qualify as a "reorganization" for purposes of the phrase "in the course of a reorganization" which appears in the preamble of paragraph 55(3)(b) of the Act.

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation and the Special Release thereto dated September 30, 1992. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

The fact that all of the issued and outstanding shares of a particular corporation are initially held by one person will not necessarily preclude a subsequent reorganization from complying with the provisions of paragraph 55(3)(b) of the Act. Assuming that all of the other requirements of paragraph 55(3)(b) are met, what must be determined is whether or not each corporate shareholder which owns shares of the particular corporation immediately before the transfer of property in the course of a reorganization and which has received property of the particular corporation in the course of that reorganization has received its pro rata share of each type of property of the particular corporation, determined immediately before the transfer, which is transfered in the course of the reorganization.

The Department's views regarding the term "reorganization" as it applies to the phrase "in the course of a reorganization" were expressed in Mr. Michael A. Hiltz's address to the 1989 Conference of the Canadian Tax Foundation. On page 20:44 of the Report of Proceedings of the Forty-first Tax Conference, Mr. Hiltz states:

"In our view, the limited Canadian jurisprudence which exists with respect to the meaning of the word "reorganization" suggests that a reorganization involves the continuation of a business in an altered form by substantially the same persons who previously carried it on. The application of this concept to paragraph 55(3)(b) would require that each shareholder- transferee retain its pro rata share of the property transferred to it by the particular corporation for some period. As a result, dividends arising on an initial transfer of property that complied with paragraph 55(3)(b) would not be exempted from the application of subsection 55(2) if the "reorganization" included a subsequent transfer of property by the shareholder-transferee to a subsequent transferee or by the particular corporation to the shareholder- transferee, whether carried out on a taxable or tax- deferred basis."

Finally, unless the series of transactions, within the meaning of subsection 248(10) of the Act, described in your letter includes a disposition of property to an arm's length person or a significant increase in the interest of an arm's length person in one of the corporations described, you may wish to consider whether any dividends arising in the series of transactions will be exempt from the application of subsection 55(2) by virtue of paragraph 55(3)(a) of the Act.

We hope that the above comments will be of assistance to you.

Yours truly,

for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch