14 June 1996 CTF Roundtable Q. 19, 9620800 - BUTTERFLIES - TOLERANCE LEVELS

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 19 - Net Butterfly

An administrative practice has been developed by Revenue Canada to deal with the butterfly rules in section 55. Notwithstanding the 1994 amendments, there is still little guidance within the legislation as to the meaning of the concept of "type" of property, as to how debt should be dealt with, and to the concept of acquisition of property in contemplation of the butterfly. These issues are dealt with by administrative practice.

Regardless of whether the taxpayer applies for an advance ruling, what degree of tolerance is there should the executed transaction be offside the administrative guidelines but not by "a significant degree"?

The purpose of the question is to get some feel for the Department's tolerance level, taking into account the comments in John Robertson's 1981 paper:

"Where there is no attempt to use the butterfly transaction to disguise a sale or barter transaction or to achieve any undue tax advantage, an effort will be made to make the transactions work with an acceptable result to both the taxpayer and the Department." (1981 Conference Report, page 97.)

Department's Response

The Department's approach in this area was summarized in the introduction of a paper presented by Michael Hiltz at the 1989 annual conference. The 1989 statement was intended to clarify Mr. Robertson's general 1981 remarks quoted in the question. To summarize, we indicated that we take a "plain meaning" approach in interpreting the provisions of the Act, including the butterfly provisions. Where the words have a plain meaning, as in the case of the definition "distribution", which clearly requires a pro rata distribution to shareholders based on relative fair market value, the words are interpreted to give effect to that plain meaning. If, on the other hand, the words of a provision are unclear, as in the case of the "type of property" requirement, the Department has tried to adopt interpretations which are reasonable, taking into account the intent of the provision.

The definition "distribution" in section 55 requires that the property transferred to a shareholder be equal to or approximate that shareholder's pro rata share. The Department has consistently maintained that the word "approximate" provides limited scope for discrepancies. In the paragraph immediately preceding the above-quoted remarks in the 1981 Robertson paper, it was indicated that the distribution "must be very close to equal" to a pro rata distribution. In 1991 we indicated that, for purposes of advance rulings, we are prepared to accept a discrepancy of up to 1 percent.

Author: Mark Symes
File: 5-962080
Date: June 14, 1996ENDNOTES

1.Michael A. Hiltz, "The Butterfly Reorganization: Revenue Canada's Approach," in Report of Proceedings of the Forty-First Tax Conference, 1989 Conference Report, 20:32-33.

2.John R. Robertson, "Capital Gains Strips: A Revenue Canada Perspective on the Provisions of Section 55," in Report of Proceedings of the Thirty-Third Tax Conference, 1981 Conference Report, 97.

3.Ted Harris, "An Update of Revenue Canada's Approach to the Butterfly," in Report of Proceedings of the Forty-Third Tax Conference, 1991 Conference Report, 14:8-9.