30 November 1997 Ruling 9727253 - BUTTERFLY 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.

Principal Issues:butterfly reorganization

Position:routine

Reasons:routine

XXXXXXXXXX
XXXXXXXXXX 972725
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sir:

Re: XXXXXXXXXX / Proposed Butterfly Reorganization
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

You advise that to the best of your knowledge and that of the parties involved, none of the issues involved in this ruling request is being considered by a Tax Services Office or Taxation Centre in connection with any tax return already filed and, further, none of the issues involved is the subject of any notice of objection or is under appeal.

Our understanding of the statements of facts and proposed transactions is as follows:

Statement of Facts

1 XXXXXXXXXX is a taxable Canadian corporation and a private corporation, as such terms are defined in subsection 89(1) of the Income Tax Act (the "Act"). XXXXXXXXXX was incorporated pursuant to the laws of the Province of XXXXXXXXXX on XXXXXXXXXX. The issued share capital of XXXXXXXXXX is comprised of XXXXXXXXXX common shares and XXXXXXXXXX non-cumulative, redeemable voting Class B preference shares having a redemption price of $XXXXXXXXXX per share.

2. The beneficial ownership of the shares of XXXXXXXXXX is as follows:

Shareholder Class of Shares Number of Shares Voting % Equity %

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

3 All of the XXXXXXXXXX issued and outstanding Class B voting preference shares and XXXXXXXXXX of the issued and outstanding common shares of XXXXXXXXXX are beneficially owned by Father, of XXXXXXXXXX. Father is currently incapacitated and his affairs are handled by his spouse, XXXXXXXXXX (the "Spouse") who holds a properly executed power of attorney. The Class B shares were originally issued to Father by XXXXXXXXXX for a cash subscription price of $XXXXXXXXXX per share, which is equal to the redemption price and paid-up capital of each Class B share. The Class B shares and the XXXXXXXXXX common shares are currently registered in the name of XXXXXXXXXX ("BTrustco") as bare trustee for the benefit of Father.

4. XXXXXXXXXX owns XXXXXXXXXX of the common shares of XXXXXXXXXX.

5. XXXXXXXXXX is an investment holding company, all of the shares of which are owned by XXXXXXXXXX (the "Son"), the son of Father.

6. The remaining XXXXXXXXXX common shares in the capital of XXXXXXXXXX are owned by XXXXXXXXXX.

7. XXXXXXXXXX holds its shares in XXXXXXXXXX as capital property. The terms "capital property" and "paid-up capital" as used herein, have the meaning assigned by section 54 and subsection 89(1) of the Act, respectively.

8. XXXXXXXXXX is an investment holding company. The issued share capital of XXXXXXXXXX consists of XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares and XXXXXXXXXX class C shares. XXXXXXXXXX common shares in the capital of XXXXXXXXXX represents XXXXXXXXXX%, of the equity of XXXXXXXXXX.

9. The shares of XXXXXXXXXX are held as follows:

Shareholder Class of Shares Number of Shares

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

10. XXXXXXXXXX is an investment holding company controlled by XXXXXXXXXX, one of Father's daughters.

11. XXXXXXXXXX is an investment holding company, the shares of which are owned by XXXXXXXXXX, the daughter of Father's deceased daughter, XXXXXXXXXX, and by trusts of which she is the principal beneficiary.

12. XXXXXXXXXX is an investment holding company controlled by XXXXXXXXXX, one of Father's daughters.

13. All of the Class A, Class B and Class C shares in the capital of XXXXXXXXXX are voting shares, and each share entitles the holder to one vote. Each of the Class A, Class B and Class C shares have the same rights, restrictions and conditions attached with the exception of rights upon liquidation, dissolution or winding-up where the Class A shares are entitled to receive the sum of $XXXXXXXXXX before any amounts are distributed to Class B, Class C or common shares, the Class B shares are entitled to receive the sum of $XXXXXXXXXX before any amounts are distributed to Class C or common shares and the Class C shares are entitled to receive the sum of $XXXXXXXXXX before any amounts are distributed to common shares. There are no common shares issued and outstanding.

14. The principal assets of XXXXXXXXXX are XXXXXXXXXX common shares in the capital of XXXXXXXXXX representing direct ownership of XXXXXXXXXX% of the issued and outstanding common shares of XXXXXXXXXX.

15. XXXXXXXXXX carries on a XXXXXXXXXX is a public corporation and a taxable Canadian corporation. The common shares and the Class A shares of XXXXXXXXXX are listed on XXXXXXXXXX. The Class A shares of XXXXXXXXXX are identical in equity with the common shares but the Class A shares do not confer upon their holders any general voting rights. In addition to the XXXXXXXXXX common shares of XXXXXXXXXX held by XXXXXXXXXX directly, XXXXXXXXXX also holds an additional XXXXXXXXXX common shares and XXXXXXXXXX common shares in XXXXXXXXXX indirectly through its subsidiary wholly-owned corporations, XXXXXXXXXX ("HSub 1") and XXXXXXXXXX ("HSub 2"), respectively. Together with XXXXXXXXXX indirect investment in XXXXXXXXXX through HSub1 and HSub2, XXXXXXXXXX total investment in XXXXXXXXXX represents approximately XXXXXXXXXX% of the issued common shares of XXXXXXXXXX. The term "public corporation" as used herein, has the meaning assigned by subsection 89(1) of the Act.

16. The material ownership of XXXXXXXXXX is as follows:

Shareholder Class of Shares Number of Shares

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

17. Both HSub 1 and HSub 2 are subsidiary wholly-owned corporations of XXXXXXXXXX. The term "subsidiary wholly-owned corporation", as used herein, has the meaning assigned by subsection 248(1) of the Act.

18. Both OSub 1 and OSub 2 are subsidiary wholly-owned corporations of XXXXXXXXXX.

19. PSub is a subsidiary wholly-owned corporation of XXXXXXXXXX.

20. XXXXXXXXXX is a corporation, all of the shares of which are registered in the name of B Trustco.

21. B Trustco is a corporation, all of the shares of which are registered in the name of Spouse as bare trustee for Father.

22. The other assets of XXXXXXXXXX consist primarily of XXXXXXXXXX common shares in the capital of XXXXXXXXXX also has immaterial cash and short-term deposits and inter-company loans.

23. XXXXXXXXXX liabilities consist solely of:

(i) accounts payable and accrued liabilities; and

(ii) loans from subsidiary corporations, HSub 1 and HSub 2.

XXXXXXXXXX has no long-term liabilities.

24. The principal assets of XXXXXXXXXX consist of real property and related assets held in connection with commercial and residential rental activities. As at XXXXXXXXXX both wholly-owned subsidiary corporations of XXXXXXXXXX, amalgamated with XXXXXXXXXX to create a new amalgamated corporation carrying on business under the name of XXXXXXXXXX.

25. The issued and outstanding share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares. The shares of XXXXXXXXXX not owned by XXXXXXXXXX were distributed, together with other assets of XXXXXXXXXX, in the course of a previous butterfly reorganization which was completed in XXXXXXXXXX. An advance income tax ruling dated XXXXXXXXXX, was issued by Revenue Canada, Taxation with respect to this reorganization, (our file 3-920161). As a result of this reorganization, the holdings of XXXXXXXXXX are as follows:

Shareholder Class of Shares Number of Shares

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

26. With the exception of XXXXXXXXXX, each of the corporations referred to in this ruling request is a private corporation and a taxable Canadian corporation.

27. Immediately before the transfers described in paragraph 32 below and before the allocation of liabilities, the types of property of XXXXXXXXXX will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation over which XXXXXXXXXX has the ability to exercise significant influence and will be classified into three classes of property for purposes of paragraph 55(3)(b) of the Act:

(i) cash or near-cash property;

(ii) investment property; and

(iii) business property.

28. No assets have been or will be acquired and no liabilities have been or will be incurred or paid by XXXXXXXXXX in contemplation of the transfers of property described in paragraphs 32 and 34 below, except as described herein and any legal, accounting, valuation and other fees or expenses related to the transactions proposed herein.

29. For the purposes of this ruling request, the term "Butterfly Proportion" is defined to be the ratio of the XXXXXXXXXX common shares of XXXXXXXXXX held by XXXXXXXXXX to the aggregate number of common shares of XXXXXXXXXX held by all parties immediately prior to the transaction contemplated herein. For greater certainty, the XXXXXXXXXX common shares of XXXXXXXXXX held by XXXXXXXXXX represent a XXXXXXXXXX% equity interest in XXXXXXXXXX as the Class B shares held by Father are of nominal value.

Proposed Transaction

30. A new corporation will be formed under the laws of the province of XXXXXXXXXX ("XXXXXXXXXX Newco"). The authorized capital of the corporation will consist of common shares and non-cumulative, non-voting class A preference shares that are redeemable and retractable at a price of $XXXXXXXXXX per share.

31. Upon incorporation of XXXXXXXXXX Newco, XXXXXXXXXX will acquire one common share in the capital of XXXXXXXXXX Newco for $XXXXXXXXXX. XXXXXXXXXX will be the sole shareholder of XXXXXXXXXX Newco.

32. XXXXXXXXXX will sell at fair market value its XXXXXXXXXX common shares in the capital of XXXXXXXXXX to XXXXXXXXXX Newco, which constitutes all of the shares of XXXXXXXXXX owned by XXXXXXXXXX, in exchange for common shares of XXXXXXXXXX Newco having a fair market value equal to the fair market value of the shares in the capital of XXXXXXXXXX transferred to XXXXXXXXXX Newco. XXXXXXXXXX and XXXXXXXXXX Newco will file a joint election in respect of the transfer pursuant to subsection 85(1) of the Act in the prescribed form and within the prescribed time. For the purposes of the election, the agreed amount in respect of paragraph 85(1)(a) of the Act will be an amount equal to the lesser of the fair market value of the shares of XXXXXXXXXX and the adjusted cost base of the shares of XXXXXXXXXX to XXXXXXXXXX. The amount to be added to the stated capital account of the XXXXXXXXXX Newco common shares issued by XXXXXXXXXX Newco to XXXXXXXXXX on the exchange of shares of XXXXXXXXXX owned by XXXXXXXXXX for shares of XXXXXXXXXX Newco shall not be greater than the maximum amount that could be added to the paid-up capital of the XXXXXXXXXX Newco common shares having regard to subsection 85(2.1) of the Act.

33. As control of XXXXXXXXXX remains with Father through his beneficial ownership of the XXXXXXXXXX Class B shares, the transaction contemplated in paragraph 32 above should not result in a "corporate incest" situation.

34. XXXXXXXXXX will then transfer to XXXXXXXXXX Newco the following assets (collectively referred to as the "Transferred Assets"):

(a) the Butterfly Proportion of its common shares of XXXXXXXXXX;

(b) the Butterfly Proportion of its common shares of XXXXXXXXXX; and

(c) the Butterfly Proportion of its cash and near-cash property.

35. As you are providing for a pro-rata distribution of the shares of XXXXXXXXXX and XXXXXXXXXX held by XXXXXXXXXX, you will satisfy XXXXXXXXXX Newco's proportional interest in XXXXXXXXXX entirely out of XXXXXXXXXX direct interest in XXXXXXXXXX as opposed to transferring a proportion of XXXXXXXXXX indirect interest in XXXXXXXXXX through HSub 1 and HSub 2. As such, for greater certainty, XXXXXXXXXX will transfer XXXXXXXXXX common shares in the capital of XXXXXXXXXX to XXXXXXXXXX Newco, being XXXXXXXXXX% of the aggregate of XXXXXXXXXX common shares in the capital of XXXXXXXXXX held directly by XXXXXXXXXX, XXXXXXXXXX common shares in the capital of XXXXXXXXXX held by XXXXXXXXXX indirectly through HSub 1 and XXXXXXXXXX common shares in the capital of XXXXXXXXXX held by XXXXXXXXXX indirectly through HSub 2.

36. For greater certainty, as contemplated by paragraph 34 above, XXXXXXXXXX will also transfer to XXXXXXXXXX Newco XXXXXXXXXX common shares in the capital of XXXXXXXXXX, representing XXXXXXXXXX Newco's XXXXXXXXXX% interest in XXXXXXXXXX common shares in the capital of XXXXXXXXXX.

37. As consideration for the transfer, XXXXXXXXXX Newco will assume certain liabilities of XXXXXXXXXX (which in total will represent the Butterfly Proportion of all of the liabilities of XXXXXXXXXX, HSub 1 and HSub 2) and will, in addition, issue as consideration to XXXXXXXXXX that number of Class A shares having an aggregate redemption price equal to the aggregate fair market value of the Transferred Assets less the aggregate amount of the liabilities assumed. XXXXXXXXXX will file a joint election with each of such corporations pursuant to subsection 85(1) of the Act in prescribed form and within the prescribed time. For the purposes of the election, the agreed amount in respect of paragraph 85(1)(a) of the Act will be an amount equal to the lesser of the respective adjusted cost bases to XXXXXXXXXX and the fair market values thereof at the time of the transfer. No portion of the liabilities of XXXXXXXXXX assumed by XXXXXXXXXX Newco in consideration for, inter alia, the Transferred Assets to XXXXXXXXXX Newco by XXXXXXXXXX will be treated as being assumed in consideration for the transfer of a particular asset by XXXXXXXXXX to XXXXXXXXXX Newco to the extent that the principal amount of the liabilities exceeds the agreed amount under subsection 85(1) of the Act in respect of the transfer of that asset by XXXXXXXXXX to XXXXXXXXXX Newco. The amount to be added to the stated capital account of the XXXXXXXXXX Newco Class A shares issued by XXXXXXXXXX Newco to XXXXXXXXXX shall not be greater than the maximum amount that could be added to the paid-up capital of the XXXXXXXXXX Newco Class A shares having regard to subsection 85(2.1) of the Act.

38. XXXXXXXXXX Newco will redeem its class A shares held by XXXXXXXXXX for their redemption price payable by the issuance of a non-interest-bearing demand promissory note (the "XXXXXXXXXX Newco Note"), having a principal amount equal to the redemption price. XXXXXXXXXX Newco will end its first fiscal period and taxation year at the close of business on such date.

39. XXXXXXXXXX will redeem its XXXXXXXXXX common shares held by XXXXXXXXXX Newco for their redemption price by the issuance of a non-interest-bearing demand promissory note (the "XXXXXXXXXX Note") having a principal amount equal to the redemption price.

40. The XXXXXXXXXX Newco Note will be set off against the XXXXXXXXXX Note and the respective notes will be cancelled.

Other Information

41. There are not and will not be any "guarantee agreements" within the meaning of subsection 112(2.2) of the Act in respect of any of the shares of any of the corporations referred to in this letter.

42. None of the shares of any of the corporations referred to in this letter were or will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5) of the Act.

43. None of XXXXXXXXXX is a specified financial institution as such term is defined in subsection 248(1) of the Act.

44. None of the corporations referred to herein has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1) of the Act, in respect of any of the shares to be redeemed as part of the proposed transactions.

Purpose of Proposed Transaction

45. The purpose of the proposed transactions is to allow XXXXXXXXXX, as a shareholder of XXXXXXXXXX to separate its interests from the other shareholders of XXXXXXXXXX to promote family harmony.

Rulings

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

1. Provided that joint elections are filed pursuant to subsection 85(1) of the Act, in the prescribed form within the prescribed time, the provisions of subsection 85(1) of the Act will apply to:

(a) the transfer by XXXXXXXXXX to XXXXXXXXXX Newco of the common shares of XXXXXXXXXX described in paragraph 32 above;

(b) the transfer by XXXXXXXXXX to XXXXXXXXXX Newco of the Transferred Assets described in paragraph 34 above

such that, in accordance with paragraph 85(1)(a) of the Act, the particular transferor's proceeds of disposition of each such property and the particular transferee's cost of each such property will be deemed to be the agreed amount in respect of the particular property.

2. The provisions of paragraph 85(1)(e.2) of the Act will not apply to any of the transfers described in paragraphs 32 and 34 above.

3. Upon the redemptions and purchases for cancellation of shares in the transactions described in paragraphs 38 and 39 above:

(a) the holder of the shares so redeemed or purchased will be deemed, pursuant to subsection 84(3) of the Act, to have received at that time a dividend equal to that amount, if any, by which the amount paid to redeem or purchase the particular share exceeds the paid-up capital of the particular shares immediately before the particular redemption or purchase, as the case may be; and

(b) to the extent that a dividend described in (a) above is a taxable dividend, such dividend will, pursuant to subsection 112(1) of the Act be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received, and, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act.

4. Any taxable dividends deemed to arise in respect of the redemptions and purchases for cancellation of shares described in paragraphs 38 and 39 above will:

(a) be excluded from the proceeds of disposition, as such term is defined in section 54 of the Act, of the shares on which the dividend is received; and

(b) pursuant to subsection 112(3) of the Act, reduce the amount of any loss arising on the redemptions and purchases for cancellation.

5. Any taxable dividends deemed to arise in respect of the redemptions and purchases for cancellation of shares will:

(a) not result in tax being exigible under subsection 186(1) of the Act, except to the extent that the payor is entitled to a dividend refund within the meaning of subsection 129(1) of the Act in the taxation year in which the dividend is deemed to have been paid; and

(b) be an "excluded dividend" within the meaning of subsection 191(1) of the Act and an "excepted dividend" within the meaning of section 187.1 of the Act.

6. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(c) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d);

which has not been described herein, then by virtue of paragraph 55(3)(b) of the Act, subsection 55(2) of the Act will not apply to the taxable dividends referred to in the rulings given above and, for greater certainty, subsection 55(3.1) of the Act will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

7. The provisions of subsection 80(1) of the Act will not apply to the set off and cancellation of the XXXXXXXXXX Newco Note against the XXXXXXXXXX Note as described in paragraph 40 above.

8. The provisions of subsections 15(1), 56(2) and 246(1) of the Act will not be applied as a result of the proposed transactions, in and by themselves.

9. Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences in the rulings given.

10. Subsection 256(7) of the Act will apply with respect to the proposed acquisitions, redemption and cancellation of shares described above, with the result that no person or group of persons will be regarded as having acquired control of XXXXXXXXXX or any corporation controlled by any of such corporations, for purposes of the provisions of the Act referred to in the preamble to such subsection.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996, and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Nothing in this ruling should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to:

(a) the determination of the adjusted cost base of any share or the paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, we are not providing any comments with respect to the statement in paragraph 29 that the Class B shares of Father are of nominal value.

Opinion

Provided that :

(a) our understanding of the facts and proposed transactions described herein is correct;

(b) section 55 is amended in substantially the same form as proposed in Bill C-28 which was passed by the House of Commons on April 21, 1998; and

(c) as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

(i) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(ii) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(iii) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(iv) an acquisition of property in the circumstances described in paragraph 55(3.1)(d);

which has not been described herein,

it is our opinion that by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the rulings given above, and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

Your truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch