CRA rules on a butterfly transaction for a farming corp. (DC) of two brothers coupled with an immediate gift of shares of DC and TC to their respective sons under s. 73(4.1)

CRA ruled on transactions under which the assets of a farming corporation (DC) owned by the two farmer brothers were split under a net asset butterfly between DC and a Newco for the other brother (TC). Immediately after the butterfly, the brother owning TC gifts a portion of his shares to his adult son (also involved in the farming business) in reliance on the s. 73(4.1) rollover; and similarly, thereafter the brother left with TC effects a s. 51 exchange of a portion of his TC common shares for preferred shares and gifts his common shares to his son, who is active in the business and also on a s. 73(4.1) rollover basis. Perhaps because of this introduction of cousins into the structure, there is an unusual step in which, immediately after the issuance by TC of preferred shares to DC on the butterfly distribution to it of the three types of assets, an agreement is entered into specifying a dollar amount for those preferred shares for purposes of s. 191(4), which does not exceed the FMV immediately before the entering into of the agreement of each such share (with CRA ruling that there will be no Pt. VI.1 or IV.1 tax).

It is also stated that after the butterfly, TC will engage in an asset purchase, or acquire shares of a corporation and merge with it.

Pt. IV tax circularity issues are avoided by having a TC year end occur between TC’s purchase for cancellation of its preferred shares held by DC in consideration for a demand note, and DC’s purchase for cancellation of its shares held by TC for a demand note (so that TC is subject to Pt. IV tax on the second transaction).

The butterfly asset division includes the transfer, on a non-rollover basis in accordance with s. 148(7), of an undivided interest in a life insurance policy.

Neal Armstrong. Summary of 2021 Ruling 2021-0904311R3 F under s. 55(1) – distribution.