CRA rules that post-butterfly sales and redemptions of shares received on the butterfly were not part of the same series

CRA ruled on whether subsequent sale and redemption transactions involving shares that had been distributed on the third butterfly reorganization described in 2020-0848061R3 would cause the s. 55(3)(b) exception to cease to be available pursuant to s. 55(3.1).

In that butterfly reorganization, a pro rata portion of the shares of a corporation (Xco) was spun off by a corporation owned jointly by two unrelated family corporations (Dco and Eco) to the transferee corporation of Eco, so that, following appropriate amalgamations, the two families’ holding companies (Dco Amalco and Eco Amalco) now held “their” Xco shares directly. The balance of the Xco shares were held by the holding company for a third family (Aco Amalco, for the family of A) which had also participated indirectly (through a predecessor) in the butterfly reorganizations but not so as to affect its direct ownership throughout of Xco shares. Some Xco shares were also held by the holding company for a son of A, and by an unrelated third party.

Now, about a year later, Dco Amalco and Eco Amalco wanted to exit from their investment in Xco rather than committing the additional funds required to expand the Xco business. Accordingly, it was proposed that Aco Amalco would purchase the Xco shares of Eco Amalco (which would be problematic under s. 55(3.1)(c) if this occurred as part of the same series of transactions as the third butterfly) and that Xco would redeem the shares of Dco Amalco, including through the application of share subscription proceeds received from the holding company for the son of A (which would be problematic under s. 55(3.1)(d), as expanded by s. 55(3.2)(e), if part of the same series) – so that Xco would now mostly be owned by the two A-family companies.

In explaining its granting of the ruling, the CRA summary stated:

The taxpayers’ representations that the Proposed Transactions are not part of the same series of transactions as the Sequential Butterfly are reasonable and supported by the facts.

Neal Armstrong. Summary of 2023 Ruling 2022-0958601R3 under s. 55(3.1)(c).