CRA rules on a butterfly split-up that is integrated with a prior pipeline transaction

Following the death of the Parent, the estate of Parent, whose two beneficiaries were testamentary trusts for the two children of Parent, implemented a pipeline transaction respecting the preferred shares of an investments holding company (Holdco) that had been held by Parent. As a result of that pipeline transaction, the estate ended up holding both preferred shares and a note of the corporation (the distributing corporation or DC) resulting from the amalgamation of the Newco used in connection with the pipeline transaction and Holdco. A portion of that note was then repaid and distributed by the estate to the two testamentary trusts, from them in equal shares to the two children, and by each child to their respective new wholly-owned holding companies (TC1 and TC2). The common shares of DC, which were held in an inter vivos trust (the Trust) principally for the two children, were unaffected by the pipeline transaction.

Preliminarily to a proposed butterfly split-up of DC between TC1 and TC2, the note owing to the estate, and the DC preferred shares, would be distributed on a 50-50 basis under s. 107(2) to the two testamentary trusts, from them on a s. 107(2) rollover basis to the two respective children, and by each of them to her or his TC on a s. 85(1) rollover basis – and similarly, the DC common shares would be distributed on a s. 107(2) rollover basis by the Trust to the two children, and by them on a s. 85(1) rollover basis to their respective TCs. These transactions were to be followed by the butterfly split-up of DC between the two TCs, which would include the assumption by each TC of half of the note owing by DC, so that such pipeline note would be extinguished by operation of law (implied set-off). In order to avoid circularity issues, the preferred shares of the TCs would be redeemed before their first taxation year ends, and DC would be wound up into the TCs under s. 88(2) after those year ends.

Neal Armstrong. Summary of 2023 Ruling 2022-0957491R3 F under s. 55(1) – distribution.