27 April 1995 Roundtable Q. 2, 9510740 - BUTTERFLY - TRANSFER TO PARTNERSHIP

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.

Revenue Canada Round Table

Tax Executives Institute, Inc.

1995 Annual Canadian Tax Conference

Question #2

BUTTERFLY REORGANIZATIONS - TRANSFERS TO PARTNERSHIPS

Revenue Canada's Income Tax Technical News No.3, dated January 30, 1995, states that the enactment of paragraph 55(3.1)(c) of the Act will prevent a transferee corporation that is not related to the distributing corporation after the butterfly from transferring butterflied property to a partnership.

The Explanatory Notes to Bill C-59, issued by the Minister of Finance on November 24, 1994, also state that new paragraph 55(3.1)(c) denies the protection of the butterfly exemption for a dividend received by a transferee corporation in circumstances where, as part of the series of transactions or events that includes the receipt of the dividend, a significant portion of the property received by the transferee corporation on a distribution becomes property of a partnership or a person who is not related to the transferee corporation. The stated intention of the restriction is to ensure that the shareholders of the distributing corporation maintain a certain continuity of interest in its underlying business and assets after the butterfly reorganization.

The following example illustrates a potential problem in respect of the above restriction which is outside the stated intention:

Corporation A owns 30% of the share capital of corporation B; the balance of B's share capital is owned by several corporations not related to A. The shareholders of B intend to liquidate B and distribute its property proportionately to its shareholders pursuant to the butterfly rules. Since substantially all of A's business is operated through a partnership it has with its wholly-owned subsidiary, A intends to transfer to that partnership the 30% undivided interest in B's property it would receive upon B's liquidation.

Would A's transfer of its interest in B's former property to the partnership be regarded as part of the "series of transactions or events" which would consequently deny A the protection of the butterfly exemption ? If this is the case, is the Department of Finance prepared to introduce an amendment to paragraph 55(3.1)(c) so that the butterfly exemption would still apply if the transferee corporation subsequently transferred the butterflied property to a partnership which is related to the transferee corporation ?

Department's position

Whether a subsequent disposition of butterflied assets is part of a series of transactions that includes the butterfly reorganization would depend on the facts of a particular situation. However, in view of the extended meaning given to "series of transactions or events" by subsection 248(10), it seems likely that the disposition to the partnership described in the example would occur as part of the series that includes the butterfly reorganization.

( Question concerning amendment to paragraph 55(3.1)(c) to be answered by the Department of Finance )

Author: M. Symes
File: 951074
Date: April 27, 1995