14 December 1988 Income Tax Severed Letter 95-6879 F

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.

Dear Sirs:

RE:     Subsection 55(3) of the Income Tax Act

This is in reply to your letter of October 18, 1988, whereby you request our comments concerning the application of subsection 55(3) of the Act in the following situation.

1. Y-Co. and Z-Co. are wholly-owned subsidiaries of X-Co., a Canadian public corporation.

2. Y-Co. and Z-Co. are Alberta Corporations

3. Y-Co. and Z-Co. own one-third and two-thirds respectively of all the issued and outstanding common shares of YZ-Co., an Alberta Corporation. YZ-Co. has not issued any class of shares other than common shares.

4. Other than the shares Z-Co. holds in YZ-Co., its current assets which consist primarily of operating receivables and a note receivable from X-Co., the only other assets of significance in Z-Co. are foreign resource properties together with pertinent tangibles related thereto.

5. YZ-Co.'s assets also consist Of current operating assets, a receivable from Y-Co. and foreign resource properties located in a different jurisdiction than the foreign resource properties of Z-Co.

It is the intention of Y-Co. to coordinate a series of reorganization transactions in order to facilitate the transfer of the YZ-Co. shares held by Z-Co. to Y-Co. by way of a "one-winged butterfly". The purpose of this series of transactions is preparatory to a disposition of the Z-Co. shares to an arm's-length party. The overall result would be that the X-Co. consolidated group would be disposing of the foreign resource properties (together with related tangibles) held by Z-Co. while at the same time, the YZ-Co. shares would be retained within the corporate group.

Using these facts, you are interested in our response to the following two questions:

a. Is it appropriate to assume that the Robertson Rules still apply so that in determining the "types" of property within the meaning of paragraph 55(3)(b) of the Act, one should look through the corporate veil of controlled corporations? More specifically, given the facts above, is it appropriate to consider that the types of property held by Z-Co. do not include the foreign resource properties and related tangibles of Z-Co. plus the investment in YZ-Co. as separate types of property, but rather include foreign resource properties and tangibles as only one type (business assets)?

b. Does Revenue Canada still consider purchase butterflies to be acceptable transactions? In other words, can Revenue Canada provide some assurance that GAAR would not apply to such purchase butterfly transactions?

Assurance as to the tax consequences of proposed transactions can only be provided in response to a request for an advance income tax ruling. The procedures for requesting a ruling are stated in Information Circular 70-6R, and the Special Release thereto. However, we can provide you with the following general comments.

den classifying the types of property held by a parent, it is the practice of Revenue Canada, in appropriate circumstances, to look through the shares of the subsidiary in order to classify the shares of the subsidiary held by the parent. For example, this approach would be used where there is a high amount of cash held by a subsidiary. Shares of the subsidiary would be treated as cash or near cash assets in such a case, because classification of the subsidiary shares as investment assets would facilitate a tax-free cashing out of the subsidiary in a butterfly transaction. We understand that the intent of the inclusion of the types of property test in paragraph 55(3)(b) of the Act was to prevent such a result. The approach may also be used on a relieving basis: such as in a case where the assets of a subsidiary are substantially business assets, and the classification of the shares of the subsidiary as business assets, rather than as investment assets, would facilitate the satisfaction of the types of property test in paragraph 55(3)(b) of the Act.

Your second question relates to the application of subsection 245(2) of the Act to a butterfly transaction. As stated in paragraph 7 of Information Circular 88-2, Revenue Canada's position in this regard is that, if each step in a butterfly arrangement carried out after September 13, 1988 is consistent with the intent of paragraph 55(3)(b) of the Act, subsection 245(2) of the Act will not apply.

It is our opinion that properly structured purchase butterfly arrangements, involving the purchase by a corporation of shares of a particular corporation from existing shareholders, in contemplation of a distribution of assets of the particular corporation to the purchaser, are within the intent of the paragraph 55(3)(b) exemption.

As previously stated, the above represents only our opinion and does not constitute an advance ruling and is therefore not binding on the Department.