12 June 1996 CTF Roundtable Q. 16, 9620770 - BUTTERFLY - MEANING OF "REORGANIZATION"

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.

Canadian Tax Foundation
Corporate Management Tax Conference
June 14, 1996

Question 16 - Meaning of "Reorganization" for Butterfly Transaction

Paragraph 55(3)(b) applies where the dividend referred to therein is received "in the course of a reorganization". Paragraph 55(3)(b) is the "butterfly" exception to subsection 55(2). Questions that arise in many cases are:

-what constitutes a reorganization?

-when does a reorganization end (i.e. when are subsequent transactions considered part of the "reorganization" and when are they outside the "reorganization" or part of a second reorganization)?

Revenue Canada gave several examples in response to this issue in the 1989 Conference Report, specifically Questions 21 and 22.

Can Revenue Canada provide an update on this issue?

Department's Response

It is our view that the 1994 amendments to the butterfly provisions made it clear that the word "reorganization" as it is now used in the context of section 55 is intended to have a narrower meaning than elsewhere in the Act. The rules in subsection 55(3.1) now specify the transactions which may and may not be carried out in contemplation of or after a butterfly distribution. Accordingly, we are of the view that the "reorganization" referred to in section 55 would normally include only transfers of property by the distributing corporation to its shareholders (or corporations related to its shareholders) and the cross-redemption of shares or winding-up of the distributing corporation.

Thus the following transactions, occurring after a pro rata distribution and cross-redemption of shares, would normally not be considered to occur as part of the butterfly reorganization:

-an amalgamation of a transferee corporation with its parent

-a winding-up of a transferee corporation into its parent

-a transfer of butterflied property by a transferee corporation:

-to another shareholder of the distributing corporation

-back to the distributing corporation

-to its subsidiary

-to a third party

On the other hand, the reorganization would normally include all transfers of property by the distributing corporation to its corporate shareholders (or to corporations related to such shareholders), including taxable sales and dividends.

It should also be recognized that, while a transaction may not be viewed as occurring as part of the butterfly reorganization, it may nevertheless occur as part of the series of transactions. If so, the transaction would come under the scrutiny of the rules in subsection 55(3.1)

Author: Mark Symes
File: 5-962077
Date: June 12, 1996