Subsection 55(3) - Application

Paragraph 55(3)(a)

Administrative Policy

10 September 2018 External T.I. 2018-0772501E5 - Internal spin-off

a lower tier internal spin-off transaction accompanied by an upper-tier sale by a minority shareholder was subject to s. 55(2)

Holdco A has wholly-owned Opco spin off Opco’s real estate to a newly-formed subsidiary of Holdco A (and sister of Opco), namely, to Realco. The spin-off entails a cross-redemption of shares and resulting s. 84(3) dividends. In the course of the spin-off transactions, an unrelated shareholder of Holdco A (Holdco C) with a direct and indirect equity interest in Holdco A of around 16% sells its interest at fair market value (giving rise to gain) to arm’s length purchasers. Does s. 55(2) apply to the s. 84(3) dividends?

CRA indicated that assuming (as appeared to be the case) that the sale by Holdco C was part of the same series as the spin-off, and that the shares of Opco and Realco represented more than 10% of the value of what Holdco C was selling, then ss. 55(3)(a)(iii)(B) and 55(3)(a)(iv)(B) would “technically apply” to oust the s. 55(3)(a) exemption. Respecting the fact that the deemed dividends at the Opco and Realco level did not affect the capital gains arising on the share sales by Holdco C, CRA stated:

[P]aragraph 55(3)(a) is intended to provide an exemption from the application of subsection 55(2) for certain dividends received in the course of related-party transactions. … [S]ince the other direct or indirect shareholders of Holdco A are not related persons, and the transactions … include a sale of Holdco A shares as part of the same series as the deemed dividends … the application of subsection 55(2) is operating as intended.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(iii) - Clause 55(3)(a)(iii)(B) s. 55(3)(a)(iii)(B) exclusion applied to lower tier internal spin-off transaction accompanied by an upper-tier sale by an arm’s length shareholder with a direct and indirect 16% shareholding 456

2016 Ruling 2016-0648991R3 - Internal spinoff reorganization of XXXXXXXXXX

spin-off from one sub of public company to another with no streaming of cost base and cross redemption of preferred shares

Current structure

ParentCo, a taxable Canadian corporation and a public corporation, owns all the common shares of CanSub1 and all the shares of ForSub4. CanSub1 and CanSub2 hold ForSub1 and ForSub2, respectively. ForSub5, which is an indirect wholly-owned subsidiary of ParentCo, wholly owns ForSub3.

Proposed transactions
  1. ParentCo will transfer its ForSub4 common shares to CanSub2 under s. 85(1) in consideration for common shares.
  2. CanSub2 will transfer such shares to ForSub2 for common shares.
  3. CanSub2 will amend its articles to create two new classes of redeemable, retractable non-voting preferred shares (the ForSub1 Transfer and ForSub3 Transfer preferred shares).
  4. CanSub1 will effect a reorganization of its capital under which it will amend its articles to create new common shares (which will be identical to the existing common shares except for bearing X votes per share) and new redeemable, retractable non-voting preferred shares (the CanSub1 New Preferred Shares), and will issue such shares of two classes in exchange for all of its existing common shares, which will be cancelled. The paid-up capital of the cancelled common shares will be allocated to the shares of the two new classes pro rata to their respective FMVs.
  5. ParentCo will transfer the CanSub1 New Preferred Shares to CanSub2 under s. 85(1) in consideration for common shares.
  6. CanSub1 will transfer the common shares of ForSub1 to CanSub2 under s. 85(1) in consideration for ForSub1 Transfer preferred shares.
  7. There will be a redemption of the preferred shares held by CanSub1 and CanSub2 in each other in consideration for the issuance of notes, with eligible dividend designations being made.
  8. Such notes will be set off.
  9. CanSub2 will transfer its common shares of ForSub1 to ForSub2 in consideration for common shares.
  10. ForSub5 will transfer all of its ForSub3 common shares to CanSub2 in consideration for ForSub3 Transfer preferred shares.
  11. CanSub2 will transfer all of its ForSub3 common shares to ForSub2 in consideration for common shares.
Additional Information

ParentCo does not intend to make any specific contemporaneous public disclosure of the Proposed Transactions. Management of ParentCo has no reason to believe that: (a) the Proposed Transactions will have any material impact on the trading price of shares in the capital stock of ParentCo; and (b) public trading of shares in the capital stock of ParentCo will in any way be facilitated or motivated by the Proposed Transactions. It is possible that the Proposed Transactions may be disclosed in the ParentCo’s regular disclosure documents… .

Rulings

Including that the transactions will not by themselves be considered to result in any disposition of property to, or increase in interest by, an unrelated person described in any of ss. 55(3)(a)(i) to (v). Respecting the non-application of GAAR, the summary states "there is no creation or streaming of cost base and the preferred shares ... are cross-redeemed for notes that are set-off and cancelled."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85.1 - Subsection 85.1(3) a double transfer of shares under s. 85(1) and 85.1(3) would not affect the shares’ capital property status 171
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares shares did not lose capital property character on internal spin-off transfer with a view to their further dorp-down 104

2016 Ruling 2016-0635101R3 - 55(3)(a) Spin-Off to Use Parent Losses

55(3)(a) spin-off of property already subject to sale agreement to parent before closing date

Background

Subco is wholly-owned by Parent, which holds all of its common shares (“Subco Old Common Shares”) and all of its non-voting, redeemable and retractable preferred shares (“Subco Old Preferred Shares”). Subco is the beneficial owner of parcels of land held as capital property together with buildings thereon (collectively, “Property”). Subco has entered into an agreement of purchase and sale (the “Property Sale Agreement”) to sell the Property for its FMV to an arm’s length third party (“Purchaser”). Subco is not prohibited from assigning its rights as vendor under the Property Sale Agreement to Newco and Parent.

Proposed spin-off of Property to Parent before closing of sale
  1. Parent will transfer all of the Subco Old Preferred Shares to Subco in consideration for one newly issued Subco Old Common Share, electing under s. 85(1) at the nominal ACB of the transferred shares.
  2. Subco will add Subco A Preferred Shares and Subco A Common Shares to its capital by articles of amendment. In order to distinguish the new shares, the Subco A Preferred Shares will be entitled to a non-cumulative dividend, and the Subco A Common Shares will be entitled to more than one vote per share.
  3. Pursuant to a share exchange agreement, Parent will exchange all of the Subco Old Common Shares for (a) newly issued Subco A Preferred Shares having an aggregate FMV equal to the FMV of the Property, net of the Assumed Liabilities; and (b) newly issued Subco A Common Shares having an aggregate FMV equal to the balance of the Exchanged Shares’ FMV. No s. 85(1) election will be made. The aggregate amount to be added by Subco to the stated capital accounts for the Subco A Preferred Shares and the Subco A Common Shares issued on the exchange of the Exchanged Shares will be equal to the aggregate PUC of the Exchanged Shares and will be allocated between the two classes based on their relative FMV.
  4. Parent will transfer its Subco A Preferred Shares to a newly-incorporated subsidiary (“Newco”) in consideration for newly issued common shares of Newco, with the elected amount under s. 85(1) being equal to the transferred shares’ FMV and less than their ACB, thereby resulting in a suspended loss under s. 40(3.4).
  5. Subco will transfer the Property to Newco in consideration for the assumption of liabilities and the issuance of redeemable Newco Preferred shares. An s. 85(1) election will be made only respecting the Land parcels, with the agreed amount for each parcel equalling its ACB plus the terminal loss that, but for ss. 13(21.1) and (21.2), would be recognized on the disposition of the Building thereon (except that the elected amount will not exceed the parcel’s FMV).
  6. Newco will redeem all of the Newco Preferred Shares held by Subco and Subco will redeem all of the Subco A Preferred Shares held by Newco, in each case, for a note, and the two notes will be settled by way of set-off.
  7. Newco will be wound up into Parent.
  8. Parent will sell the Property to Purchaser and apply a portion of its net capital losses and/or non-capital losses to reduce its taxable income resulting from the sale.
Ruling

The proposed transactions by themselves will not be considered to result in any disposition or increase in interest described in any of ss. 55(3)(a)(i) to (v).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) where land transferred under s. 85(1) along with terminal loss building, elect high with a view to s. 13(21.1)(a) applying to reduce the land proceeds to ACB 177
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) s. 86(1) applied where “dirty” s. 85 exchange mechanic used, but no s. 85 election made 91
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(a) elected amount deterines proceeds before s. 13(21.1)(a) grind 197

2016 Ruling 2015-0623731R3 - Subsections 55(2) and (2.1)

requirement to pro-rate PUC

Background

As described in 2015-0601441R3, Sub1 and Sub2 (both taxable Canadian corporations and wholly-owned subsidiaries of Parent, a public corporation) accomplished a winding-up of a general partnership (“Partnership”) through a transfer by Sub2 of its interest in Partnership to Sub1 in consideration for Sub1 Preferred Shares and for a non-interest bearing demand promissory note (the “Sub1 Note”) with a principal amount equal to the non-interest-bearing demand promissory note (the “Sub2-Partnership Note”) owing by Sub2 to the Partnership, jointly electing under s. 85(1).

Proposed transactions
  1. The Sub1 Note and the Sub2-Partnership Note will be settled in full by way of set-off.
  2. Sub1 will redeem the Sub1 Preferred Shares held by Sub2. The redemption amount will be satisfied by the issuance of a non-interest bearing promissory note (the “Sub1 Redemption Note”), whose redemption amount may include an amount respecting accrued and unpaid dividends. Sub1 will designate a portion of the resulting deemed dividend as an eligible dividend per s. 89(14).
  3. Sub2 and Parent will undertake a s. 86 reorganization of Sub 2’s capital so that, following articles of amendment, Parent will exchange all of the issued and outstanding shares of Sub2 for Sub2 New Common Shares and (non-voting redeemable retractable) Sub2 Preferred Shares. The aggregate redemption amount of the Sub2 Preferred Shares will be equal to the amount owing by Sub1 under the Sub1 Redemption Note, and the aggregate FMV of the Sub2 New Common Shares and Sub2 Preferred Shares will be equal that of the exchanged Sub2 Shares, which will be greater than the FMV of the Sub1 Redemption Note.
  4. A paragraph (no. 42.1) was added stating: "The agreement described in paragraph 42(b) above will also provide that the aggregate Capital of the newly issued Sub2 New Common Shares and Sub2 Preferred Shares for purposes of Act 2 will be equal to the PUC of the Exchanged Sub2 Shares, immediately before the exchange, and that such Capital will be allocated to the newly issued Sub2 New Common Shares, as a class, and to the newly issued Sub2 Preferred Shares, as a class, proportionately based on each classes respective FMV."
  5. Parent will transfer to Sub1 all of the Sub2 Preferred Shares (the “Transferred Sub2 Shares”) in consideration for the issuance of Sub1 common shares (the “New Sub1 Shares”), electing under s. 85(1) at Parent’s ACB of the Transferred Sub2 Shares.
  6. Sub2 will redeem the Transferred Sub2 Shares held by Sub1. The redemption amount will be satisfied by the issuance of a non-interest bearing promissory note (the “Sub2 Redemption Note”), with Sub2 making an s. 89(14) designation.
  7. The Sub1 Redemption Note and the Sub2 Redemption Note will be settled by way of set-off and cancelled in full satisfaction of the obligations under the Sub1 Redemption Note and the Sub2 Redemption Note.
Ruling

Ss. 55(2) and (2.1) will not apply to the deemed dividends arising in 2 and 6 by virtue of the exception in s. 55(3)(a), provided that, as part of the series of transactions or events as part of which these dividends are received, there is no event described in ss. 55(3)(a)(i) to (v) which has not been described above, and that the transactions and events described in a redacted paragraph were carried out in the manner described.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount policy on set-off of unequal redemption notes does not extend beyond a butterfly reorg 389
Tax Topics - Income Tax Act - Section 86 - Subsection 86(1) stated capital of old shares required to be prorated amongst new classes based on relative FMV 130

2017 Ruling 2016-0675881R3 - Paragraph 55(3)(a) Internal Reorganization

division of rental real estate company between holdcos for 2 children but with parents' holdco retaining voting control
clarifications re division between beneficial and registered ownership of buildings were made in 2017-0704351R3

Current structure

Canco is a Canadian-controlled corporation holding “Parcel One” and “Parcel Two” (consisting in each case of the beneficial ownership of two of the four buildings of Canco, a percentage of Canco’s interest in a rental real estate joint venture, near-cash assets and marketable securities plus, in the case of Parcel Two, the “Equalization Amount,” whose purpose is to equalize the net value of the assets received by each of Newco 1 and Newco 2 from Canco in 5 below, so as to effectively compensate Newco 2 for the excess value so received by Newco 1. Canco’s shareholders are Holdco 1 (whose shareholders are Mr. and Mrs. A, each holding common shares and Class A or Class B preferred shares), Holdco 2 (Holdco 1 Holdco owned by Child 1 (their son) and Holdco 3 (owned by Child 2, their daughter). Canco does not have a material balance of CDA or RDTOH.

Proposed transactions
  1. Holdco 1 will incorporate Newco 1 and Newco 2 and subscribe (presumably, a nominal amount) for super-voting redeemable retractable non-dividend-bearing shares of each. "The reason that Holdco 1 will acquire super-voting shares and redeemable, preferred shares of Newco 1 and Newco 2 as part of the Proposed Transactions is to preserve Holdco 1’s economic interest in the underlying assets as it was before the Proposed Transactions."
  2. Following articles of amendment to create Canco Super-Voting Shares (similar to those of Newco 1 and 2), Holdco 1 will subscribe for Canco Super-Voting Shares of Canco.
  3. Holdco 1 under s. 85(1) will transfer XX% and (100-XX)%) of each of its Class A and Class B preferred shares to Newco 1 and 2, respectively, in consideration for non-voting redeemable and retractable Newco 1 or 2 Class A Preferred Shares.
  4. Holdco 2 and 3 under s. 85(1) will transfer all of their Canco common shares to Newco 1 and 2, respectively in exchange for Newco 1 or 2 Common Shares.
  5. Canco will transfer Parcel One and Two to Newco 1 and 2, respectively, in consideration for assumption of liabilities (including mortgages) and for Newco 1 or 2 Class B Preferred Shares. The s. 85(1) elected amounts will be within the permitted range.
  6. Newco 1 and 2 will redeem all of the Newco 1 and 2 Class B Preferred Shares respectively held by Canco, and issue a demand, non-interest bearing promissory note in full payment of the respective redemption amounts (the “Newco 1 Note” and “Newco 2 Note,” respectively).
  7. Canco will purchase for cancellation all of the Canco Ordinary Shares, and redeem the Class A and B preferred shares (held by Newco 1 and Newco 2), and issue a demand, non-interest bearing promissory note to each of Newco 1 and 2 in full payment of the respective purchase and redemption amounts (the “Canco 1 Note” and “Canco 2 Note,” respectively).
  8. The Newco 1 Note and the Canco 1 Note, and the Newco 2 Note and the Canco 2 Note, will be set off.
Rulings

Including re s. 55(3)(a).

For the purposes of determining the elected amount under s. 85(1)(e) in 5 above:

the reference to “the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition” in subparagraph 85(1)(e)(i) will be read to mean the proportion of the undepreciated capital cost to Canco of all the property of that class that the capital cost of the property so transferred before the disposition is of the capital cost of all property of that class immediately before the disposition.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(4) s. 55(3)(a) split-up between Newcos for two siblings which were related due to multiple-voting shares held by the father’s and mother’s Holdco 164
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e) UCC on s. 55(3)(a) spin-off prorated based on relative capital cost rather than FMV 160
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) where circular RDTOH calculation arises on spin-off transaction, it is for the TSOs to sort out which corporations should bear Part IV tax 241

12 May 2017 External T.I. 2017-0683511E5 F - Purpose tests of a dividend or repurchase of share

using s. 55(3)(a) to distribute cash otherwise than from safe income likely abusive

The CRA position on creditor-proofing suggested that if Opco, which has no safe income and whose common shares have a nominal adjusted cost base and paid-up capital, uses cash (or other assets) to pay a dividend to its shareholder (Holdco) to fund Holdco’s purchase of real property to be rented to it, that cash dividend likely would be considered to have a tainting purpose described in s. 55(2.1)(b)(ii). Accordingly, Opco avoids s. 55(2.1)(b) by using the cash to purchase most of its common shares for cancellation. CRA stated:

[S.] 55(3)(a) is intended to facilitate corporate reorganizations made in good faith by related persons but is not intended to accommodate the payment or receipt of dividends or transactions or events which seek to increase, manipulate or manufacture tax basis.

Thus, the application of the general anti-avoidance rule in subsection 245(2) should be queried, considering that the money given to Holdco would not come from the income that had already been taxed in Opco and that the adjusted cost base of participating shares in the capital stock of Opco would be nominal.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) - Subparagraph 55(2.1)(b)(ii) redeeming common shares otherwise than out of safe income may be GAARable 324
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) use of s. 55(3)(a) redemption exception to circumvent safe income limitation could be offensive 52

13 January 2016 External T.I. 2015-0604521E5 - ACB increase in paragraph 55(3)(a) reorganization

GAAR may be applied if the transactions produce an outside basis step-up

Parentco owns 100% of Holdco which owns 100% of Opco. There are two alternatives for spinning-off one of Opco’s existing business lines to Newco, a new subsidiary of Holdco:

Alternative 1:

  1. Holdco transfers shares of Opco (with a value equaling the Opco assets transferred in step 2) to Newco for Newco shares, electing under s. 85(1).
  2. Opco transfers the relevant assets to Newco for Newco preferred shares, electing under s. 85(1).
  3. Newco redeems its preferred shares in consideration for the “Newco note”.
  4. Opco redeems the shares that Newco received in step 2 in consideration for the issuance to Newco of the “Opco note”.
  5. The two notes are set off.

Alternative 2:

  1. Opco transfers the relevant assets to Newco for Newco preferred shares, electing under s. 85(1).
  2. Newco redeems the shares that it issued to Opco in step 1 in consideration for the “Newco note”.
  3. Opco transfers the Newco note to Holdco in redeeming a portion of its shares (with a value equal to the value of the Opco assets transferred in step 1).
  4. Holdco transfers the Newco note to Newco as a capital contribution or share subscription.

In either case, the series of transactions does not include a triggering event involving an unrelated person described in s. 55(3)(a). Would either alternative engage s. 55(2) or 245(2)?

Before concluding that GAAR or s. 55(2) would not apply to the first alternative, CRA noted that although the receipt of the Opco or Newco Notes may result in an increase in the ACB of property held by Newco or Opco “both notes are offset and cancelled, eliminating therefore any increase in ACB of property held by either Newco or Opco.”

Respecting the second alternative, CRA noted that as a result of the transactions “the aggregate ACB in all the shares held by Holdco in Opco and Newco…is significantly greater than the ACB of the shares of Opco that were held by Holdco at the beginning of the series,” and that the scheme of s. 55(2) in its proposed form “is to prevent…the creation or multiplication of ACB with the use of tax-free inter-corporate dividends, and concluded that it “would consider the application of GAAR to Alternative 2,” and also would consider arguing that any ultimate disposition of Newco shares to an unrelated person was part of the series.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) objectionable for a s. 55(3)(a) spin-off to result in an increase in the aggregate outside basis 169
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount contribution of note by creditor to debtor 34

2015 Ruling 2014-0559181R3 - Internal Reorganization

business division spin-offs by indirect public corp sub to new sisters

Current Structure

Parentco (a subsidiary wholly-owned corporation of Ultimate Parentco, which is a listed public corporation) holds all of the common shares of Aco (a CBCA holding corporation), which wholly owns Bco, Cco, Dco and Eco. Bco has four business divisions (Divisions 1, 2, 3 and 4) carried on directly or through subsidiaries.

Proposed transactions

Bco will spin-off Divisions 1, 2 and 3 to what apparently are newly-incorporated subsidiaries of Aco (Cco, Dco and Eco, respectively), using essentially the same spin-off mechanics. For example, under the spin-off to Cco:

  1. Bco will transfer the Division 1 assets to Cco in consideration for preferred shares, electing under s. 85(1).
  2. Aco will transfer a proportion of its common shares of Bco (having a fair market value equal to that of the preferred shares issued in 1 to Cco in consideration for Cco common shares, electing under s. 85(1).
  3. Bco will purchase for cancellation its common shares held by Cco in consideration for issuing a non-interest bearing demand note, with the resulting deemed dividend designated as an eligible dividend.
  4. Cco will redeem the preferred shares held by Bco in consideration for issuing a non-interest bearing demand note, with the resulting deemed dividend designated as an eligible dividend.
  5. The two notes will be set off.
Additional information

(transactions kept mum).

Management…has no reason to believe that any person holding, owning or exercising control or direction over any of the shares of the capital stock of Ultimate Parentco is aware of the Proposed Transactions. … [or that the] Proposed Transactions… will have any material impact on the trading price of the shares of the capital stock of Ultimate Parentco or the value of the options held by the Optionholders.

Rulings

Including that "the Proposed Transactions, in and by themselves, will not be considered to result in any disposition of property to, or increase in interest by, an unrelated person described in any of subparagraphs 55(3)(a)(i) to (v)."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) internal spinoff by "profitco" for previous loss transfer rulings will not prejudice those rulings 163

14 April 2015 External T.I. 2015-0570021E5 F - Présomption de gain en capital

application of safe harbour where holdco interposed before spin-off transaction

S. 55(3.01)(g) generally permitted two unrelated individuals to spin-off real estate from a jointly owned Opco to a newly-incorporated jointly-owned Realtyco, provided that they first interposed a holding company between themselves and their two companies (Opco and Realtyco), so that s. 55(3)(a)(ii) did not apply to the acquisition of their investment in the holdco. See summary under s. 55(3.01)(g).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.01) - Paragraph 55(3.01)(g) application of safe harbour where holdco interposed before spin-off transaction 346

11 February 2015 External T.I. 2014-0557251E5 F - paragraph 110.1(1)(c) and clause 55(3)(a)(i)(B)

"proceeds" of a gift for s. 55(3)(a)(i)(B) purposes were its deemed s. 69 proceeds of disposition

In the course of a series of transactions including the redemption of shares subject to s. 84(3), a corporation made a gift of cultural property to an unrelated person with the resulting gain being exempted under s. 39(1)(a)(i.1), claimed a deduction for the eligible amount of the gift under s. 110.1(1)(c) and did not elect under s. 110.1(3) to reduce its deemed proceeds. Would it be considered to have disposed of the property for its fair market value for purposes of s. 55(3)(a)(i)(B)? CRA responded (TaxInterpretations translation):

[I]f subparagraph 69(1)(b)(ii) applies to a gift, the CRA will consider, for purposes of clause 55(3)(a)(i)(B), that there has been a disposition of property made for proceeds not less than its fair market value. In such a case, this disposition will not be considered to be an event contemplated under subparagraph 55(3)(a)(i).

10 October 2014 APFF Roundtable Q. 16, 2014-0538031C6 - APFF 2014 Q. 16 - Capital gain

interposition of holdco to permit related-person spin-off compliant with s. 55(3)(a)(ii) and (v)

Facts

The exception in s. 55(3)(a) would not be available where a new corporation was created in the series. Consider this example:

  1. Husband, Wife and (unrelated) Third Party each subscribe for 1/3 of the voting common shares of newly-incorporated Realtyco.
  2. They transfer equal portions of their current equal shareholdings of Opco to Realtyco under s. 85(1) in consideration for preferred shares of equivalent fair market value.
  3. Opco transfers realty to Realtyco under s. 85(1) in consideration for preferred shares of equivalent FMV.
  4. The cross-shareholdings between Opco and Realtyco are redeemed for notes, thereby giving rise to deemed dividends.
  5. The notes are set-off.
Questions

Does s. 55(2) not apply in light of s. 55(3.01)(g)(v)? Would this change if before Step 1 Husband and Wife incorporated Holdco and they and Third Party rolled all their Opco shares into Holdco before Holdco (rather than they) proceeds with Steps 1 to 5?

1st Scenario

In finding that the s. 55(3)(a) exception was not available for the deemed dividends arising in Step 4 under the first Scenario, CRA first indicated (TaxInterpretations translation):

Respecting the issuance of shares on an incorporation…prior to the first issuance…the incorporator controls [the corporation] and consequently…he will be considered as being related to that corporation before the first issuance of shares. …[T]he initial subscriptions by Husband and Wife (the incorporators) would not result in an increase in interest described by subparagraphs 55(3)(a)(iii) to (v).

CRA noted:

  • The initial subscription for Realtyco shares by Third Party would result in a s. 55(3)(a)(ii) increase as Third Party was unrelated to the dividend recipients (Opco and Realtyco) as well as s. 55(3)(a)(v) increase of Third Party relevant to the deemed dividend paid by Realtyco to Opco.
  • Third Party also would have a s. 55(3)(a)(ii increase of interest from its transfer of Opco shares to Realtyco for preferred shares (Step 2), as well as when the cross-shareholdings were redeemed (Step 4).

CRA then stated:

Furthermore, as regards the dividend deemed to be received by Opco, an increase in interest of Third Party described in subparagraph 55(3)(a)(v) would result from the transfer of the shares of Opco by Third Party to Realtyco in consideration for preferred shares in the capital of Realtyco, as well as on the redemption of the preferred shares in the capital of Realtyco held by Opco. Finally, on the purchase for cancellation of the shares in the capital of Opco held by Realtyco, Third Party increased its interest in Opco, which is a particular described in subparagraph 55(3)(a)(v) regarding the dividend deemed to be received by Realtyco.

Because paragraph 55(3.01)(g) does not exclude an increase in interest described in subparagraph 55(3)(a)(v), the dividend recipients, Opco and Realtyco, would be unable to utilize the exception…provided in paragraph 55(3)(a). ... [In any event] the condition provided in subpargraph 55(3.01)(g)(v) would not be satisfied as the shares of the recipients of the dividends, Opco and Realtyco, were held by individuals at the moment of receipt of the dividends.

2nd Scenario

Respecting the second Scenario, CRA assumed that Holdco and Realtyco were incorporated by Husband or Wife, so that Holdco was related to Realtyco and Opco, and Husband and Wife were related to Realtyco, and that the original investment of Third Party in Opco was not part of the same series of transactions as the receipt of the dividends in Step 4.

CRA then stated:

The disposition of the shares … of Opco by Husband, Wife and Third Party to Holdco would not result in a disposition described in subparagraph 55(3)(a)(i), (ii) or (v) as, immediately before the disposition, Holdco would be related to Opco and Realtyco, the dividend recipients.

However, the investment of Third Party in Holdco … would result in an increase in interest described in subparagraph 55(3)(a)(ii) as Third Party would be…unrelated to Opco and Realtyco, the dividend recipients.

Finally, the investment of Holdco in Opco…would not constitute an increase in interest described in subparagraph 55(3)(a)(ii) and (v) as … Holdco would be related to Opco and Realtyco immediately before the transfer of the shares.

…[T]he "particular corporation" [under s. 55(3.01)(g)] would be Holdco. …[T]he increase in interest of Third Party in Holdco described in subparagraph 55(3)(a)(ii) would be deemed not to be described in that subparagraph [by s. 55(3.01)(g)].

...[T]he other transactions of the series…would occur between persons related to the dividend recipients since Holdco would control both Opco and Realtyco.

Consequently, based on paragraph 55(3.01)(g)…it is possible that Opco and Realtyco could utilize the exception to the application of subsection 55(2) provided in paragraph 55(3)(a).

...[However] it would be important that the transactions respecting the formation of Holdco and Realtyco (the dividend recipients) be properly effected. …For example, the disposition of the shares of Opco by Husband, Wife and Third Party to Holdco could technically be described by subparagraphs 55(3)(a)(iii) and (v) respecting the dividend deemed to be received by Realtyco. In effect, immediately before the disposition, Holdco would be considered to not be related to Realtyco if the latter did not exist at that moment.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(b) - Subparagraph 251(2)(b)(i) incorporator related to corporation 61
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.01) - Paragraph 55(3.01)(g) interposition of holdco to permit related-person spin-off compliant with s. 55(3)(a)(ii) and (v) 844

2014 Ruling 2013-0505431R3 - XXXXXXXXXX

public trading in dividend recipient does not engage exclusion in s. 55(2)(a)(iv)

Existing structure

Pubco, a CBCA public corporation, and Subco, its wholly-owned CBCA corporation, are partners, along with GPCo (also wholly-owned by Pubco), of Partnership D. Partnership D has a royalty which represents an interest in XX% of the net profits from the production from a specified property of two other partnerships (Partnership E and LP) and from other cash flows generated in Partnership E (the "Royalty"). The net profits are computed by reference to XX% of the interest that Partnership E owns in a specified property and by reference to XX% of the interest in LP of Partnership E. Subco and XX are members of Partnership B, and Pubco, Subco and Partnership B are members of Partnership H. Partnerships D, B and H are general partnerships.

Proposed transactions
  1. All the issued shares of Subco will be exchanged by Pubco under s. 86 for one new common share and one new preferred share.
  2. Pubco will acquire an undivided percentage interest in the Royalty from Partnership D in consideration for the issuance of a demand promissory note (the "Royalty Purchase Note"), with the proceeds being allocated by Partnership D to its partners (Subco and Pubco.)
  3. Subco will transfer its interests in Partnerships D and H and other "Distributed Assets" to a newly-incorporated subsidiary of Pubco (Newco 1) in consideration for redeemable preferred shares of Newco 1 with a price adjustment clause and with a s. 85(1) election made.
  4. Newco 1 will redeem such preferred shares for the Newco 1 Note (also subject to a price adjustment clause), and with a contemporaneous notice that the deemed dividend is an eligible dividend.
  5. Subco will redeem the preferred share issued to Pubco in 1 in consideration for transferring the Newco 1 Note and for issuing a further Note, with a contemporaneous eligible dividend notice.
  6. Newco 1 will then be wound-up into Pubco. Pubco will elect to have s. 80.01(4) apply to the resulting settlement of the Newco 1 Note.
  7. Pubco will transfer its undivided interest in the Royalty to Partnership D as a contribution to its capital, with a s. 97(2) election being made.
  8. Partnership B will transfer its interest in Partnership H and certain shares to a newly-incorporated subsidiary of Pubco (Newco 2) in consideration for redeemable preferred shares of Newco 2 with a price adjustment clause and with a s. 85(2) election made.
  9. Newco 2 will redeem such preferred shares for the Newco 2 Note (also subject to a price adjustment clause), with a contemporaneous eligible dividend notice.
  10. Newco 2 will then be wound-up into Pubco, with the obligation to pay the Newco 2 Note assumed by Pubco. Newco 2 will be dissolved, but not before XX months have elapsed.
  11. After Partnership B's next year-end, Partnership B will distribute the Newco 2 Note to Subco and XX, reducing the ACB of their partnership interests by virtue of s. 53(2)(c)(v) of the Act.
  12. XX will then distribute to Subco its portion of the Newco 2 Note and the Newco 2 Note owed to Subco will be set-off against the XX Note.
  13. The Royalty Purchase Note (owing by Pubco to Subco) will be repaid in the ordinary course.
Trading in Pubco shares

27. Dispositions and acquisitions of Pubco shares by members of the public will occur during the same time frame as the Proposed Transactions in the ordinary course of public trading of those shares on the stock exchanges on which they are listed. Dispositions and acquisitions of Pubco shares may also occur by virtue of the exercise of employee stock options or through employee participation and other employee incentive plans. The Proposed Transactions do not, in any manner, facilitate any acquisition or disposition of Pubco's shares as described in this paragraph and are not undertaken with such trading in Pubco shares in mind but, rather, are purely internal transactions.

Purposes

The reorganization, by bringing principal revenue sources together in Pubco (which incurs head office and financing costs), will match operating income with related expenses, and will help Pubco to effect an income tax consolidation within Canada and move some of Subco's CCDE balances to it.

Rulings

Include:

S. 55(2) will not apply to the deemed dividends arising in 4, 5 and 9 above provided that there is not a disposition of property or an increase in interest described in any of ss. 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the proposed transactions (which, by themselves, will not be considered to result in such a disposition or increase in interest.). "For greater certainty, a disposition of a partnership interest in Partnership B to an unrelated person that is undertaken as part of the series of transactions or events that includes the Proposed Transactions will result in the taxable dividend referred to [above]… being subject to the provisions of subsection 55(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - Canadian development expense - Paragraph (e) transfer of roylaty from partly-owned partnership 429
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) delay in filing articles of dissolution 47
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) s. 97(2) applicable to contribution (no equity consideration) 55

25 April 2014 External T.I. 2014-0528011E5 F - Subsection 55(2) - redemption of shares

increase in direct interest under s. 55(3)(a)(ii) or (v) with no increase in indirect interest; tainting effect on redemption occurring as part of series

A and B each is the sole shareholder of Holdco 1 and Holdco 2, respectively, which each holds 50% of the voting common share of Opco as well as 50% of the voting common shares of Quebeco 1. A and B also each hold 50% of the voting common shares of Quebeco 2. Quebeco 1 holds preferred shares of Quebeco 2 with a redemption amount of $1 million and nominal paid-up capital.

Opco incorporates Quebeco 3 and holds all the voting common shares. Quebeco 2 transfers real property with a fair market value of $100,000 and a nominal cost amount to Quebeco 3 under s. 85(1) in consideration for $100,000 of preferred shares.

Quebeco 3 subsequently redeems the preferred shares held by Quebeco 2 for $100,000 and Quebeco 2 redeems for $1 million the preferred shares held by Quebeco 1.

In finding that s. 55(3)(a)(ii) or (v) could apply to the redemption by Quebeco 2, CRA stated (TaxInterpretations translation):

A or B…would not be related to the recipient of the dividend, Quebeco 1. Furthermore, any increase in the direct interest of A or B in Quebeco 2 would result from the disposition of shares… of Quebeco 2 by Quebeco 1 for proceeds of disposition less than fair market value by virtue of the application of paragraph (j) of the definition of "proceeds of disposition" in section 54… . Therefore, the question becomes whether the direct interest of A and B in Quebeco 2 increases significantly… .

CRA then adverted to a discussion earlier in the letter of "significant increase," including quoting 9725615 and indicating that there would need to be a before and after comparison of the percentage interest of A and B in the shares of Quebeco 2.

Respecting the redemption by Quebeco 3, s. 55(3)(a)(ii) could apply if it occurred as part of the same series as the redemption by Quebeco 2 and the latter redemption resulted in a significant increase, as discussed above.

3 January 2014 External T.I. 2013-0514021E5 F - Subsection 55(2) - redemption of shares

dividend recipient unrelated to nephew's company; "small" percentage not "significant;" previous estate freeze might be part of series

Structure

Holdco is controlled by Father through his holding of special voting shares, and its equity is held by his three children (C-1, C-2 and C-3) and the C-1, C-2 and C-3 Trusts. Holdco holds 47.5% of the common shares of Opco and 50% of its Class D preferred shares, along with special voting shares giving it voting control of Opco. HoldcoC3, which is controlled by C-3 and owned by C-3 and the C-3 Trust, holds the other 50% of Opco's Class D preferred shares as well as 47.5% of its common shares. C-3 holds Class C preferred shares of Opco directly (whose number is 25% of the number of Class D preferred shares). Nephew Inc., which is wholly-owned by the son of C-1, holds 5% of the common shares of Opco.

Questions

Would the exemption in s. 55(3)(a) apply to the redemption by Opco of all the Class D preferred shares of Holdco or of HoldcoC3?

Holdco redemption

Respecting the Holdco redemption, CRA stated (TaxInterpretations translation) in finding that the "triggers" in ss. 55(3)(a)(ii) and (v) did not apply:

Despite the increase in the interest of Nephew Inc., Holdco C3 and C-3 resulting from the redemption of the Class D shares of Opco held by Holdco, Nephew Inc., Holdco C3 and C-3 were all related to the dividend recipient, Holdco, immediately before such increase by virtue of subparagraphs 251(2)(b)(iii) and 251(2)(c)(ii), as the case may be, because of F-1’s control of Holdco. … Our conclusion would be the same if the transactions respecting a freeze of Opco in order to introduce Nephew were part of the series of transactions that included the deemed dividend received by Holdco as a result of the redemption of the Class "D" shares of the capital stock of Opco held by Holdco, as Nephew and Nephew Inc. were related to Holdco, the dividend recipient, by virtue of subparagraphs 251(2)(b)(iii) and 251(2)(c)(ii), respectively.

HoldcoC3 redemption

Here, CRA noted that the triggers in s. 55(3)(a)(ii) and (v) would apply, as Nephew Inc. was not related to the deemed dividend recipient (HoldcoC3), unless the increase in interest of Nephew Inc. was not significant. After quoting 9725615 as to the meaning of "significant," CRA noted that an "increase in interest of only a small percentage ["faible pourcentage"] could be considered by the CRA not to be significant." CRA went on to state:

Insofar as Opco's freeze transactions to introduce Nephew were part of a series of transactions that included the deemed dividend received by Holdco C3 due to the redemption of the Class "D" shares of the capital stock of Opco, the acquisition of the common shares of the capital stock of Opco by Nephew Inc. could also be a "trigger" event described in subparagraphs 55(3)(a)(ii) and (v) to the extent that this acquisition would result in a "significant" increase in Nephew Inc.'s interest in Opco, thereby precluding the application of the paragraph 55(3)(a) exemption.

2013 Ruling 2013-0501811R3 - Internal Reorganization - 55(3)(a)

redemption of cross-shareholding by grandchild of NR Pubco - s. (iii) and (iv); no public disclosure of transactions

Starting structure

Aco, Bco and Cco are wholly-owned Canadian subsidiaries of non-resident holding companies, namely, ParentAco, ParentBco and ParentCco, except that shares of Cco also are held by Bco, namely, non-voting redeemable and retractable Class B Preferred Shares with a paid-up capital and adjusted cost base lower than their redemption amount. ParentAco, ParentBco and ParentCco are direct or indirect subsidiaries of a non-resident public corporation (Pubco).

Proposed transactions

:

  1. ParentAco will sell all the Aco shares to ParentCco for fair market value cash consideration.
  2. Cco will redeem the Class B Preferred Shares for cash.
  3. Bco will make a cash distribution to ParentBco, first as a PUC distribution, and next as a dividend.
  4. Cco will acquire all the Aco shares from ParentCco for FMV consideration comprising cash (in excess of the PUC of the Aco shares so that a deemed dividend arises under s. 212.1) and a common share with full stated capital (but whose PUC is ground to nil under s. 212.1(1)(b).)
  5. Cco will use borrowed money to pay a dividend to ParentCco (subject to Treaty-reduced withholding).
Additional information re s. 55(3)(a)
  • No person/group has direction over more than X% of Pubco's shares.
  • More than 10% of the FMV of Pubco's shares is derived from the shares of Cco and [of] Bco.
  • The proceeds received in 1, 3, 4 and 5 will be used for general business purposes and not distributed up to the shareholders of Pubco.
  • "Management is not aware and has no reason to believe[,] that any person holding, owning or exercising control or direction over any of the shares of the capital stock of Pubco is aware of the Proposed Transactions;" nor will they be publicly disclosed; nor does management have any reason to believe they will have any material impact on the Pubco share trading price.
  • No party intends as part of the series "to dispose of any property to, or to increase any interest in any corporation of any person or partnership that is an unrelated person to Bco, in any of the ways described in subparagraphs 55(3)(a)(i) to (v)."
Rulings

: Including that "the Proposed Transactions, in and by themselves, will not be considered to result in any disposition to, or increase in interest by, an unrelated person described in subparagraphs 55(3)(a)(i) to (v)."

16 February 2011 External T.I. 2012-0435381E5 - Subsection 55(2) - redemption of shares

"significant increase"

A percentage increase of 1.28% or 1.33% could be considered not to be significant for purposes of s. 55(3)(a)(ii) or (v).

27 January 2000 External T.I. 1999-000937 -

acquisition as part of series

The exemption in s. 55(3)(a) would not apply to the payment of a dividend by a holding company that was equally owned by two brothers through their own holding companies, where as part of the same series of transactions 25% of its shares (or 50% in total) were acquired by a holding company owned by each brother's daughter.

1999 APFF Round Table, Q. 15

"significant increase"

"The Department considers, however, that there is generally a significant increase in the total direct interest of the common shareholders of a given corporation when preferred shares of the capital stock of the given corporation are redeemed and when these preferred shares were issued in consideration for the common shares of the given corporation's capital stock as part of a reorganization of capital."

3 February 1999 Ruling 971084

Ruling that a normal course issuer bid (which would result in some minority shareholders who do not sell their shares having their percentage interest in the corporation increase) came within the exception in s. 55(3)(a). The "Additional Information" contained a statement that because a holding corporation's interest in the public corporation will be not less than o%, the collective interest of the minority shareholders would not increase by more than o%.

1 December 1998 TEI Conference, Q. XXIII

"significant" increase

"In determining whether an increase in interest in a corporation is 'significant' in the context of paragraph 55(3)(a), an analysis of the increase both in terms of an absolute dollar amount and on a percentage basis is required. Whether the dollar amount of the increase is significant depends, in part, on a comparison of the increase in relation to the dollar value of all interests in the corporation. However, we are of the view that a large increase in absolute terms may be significant even if it represents a relatively small portion of the total interests in the corporation. ...

In many situations, there may be no increase in the value of a shareholder's interest in a company as expressed in dollars (for example, where shares owned by another shareholder are redeemed at fair market value); in such circumstances, it is our practice to compare the value of a person's interest in the corporation as a percentage of the value of all interest in the corporation immediately before the cancellation of the shares to the value of that person's interests in the corporation as a percentage of the value of all interests in the corporation immediately after the share cancellation."

7 July 1998 TI 964116

"The issuance of shares does not represent an event described in subparagraph 55(3)(a)(ii)."

3 November 1997 T.I. 9725615 [meaning of "significant"]

meaning of "significant"

"In circumstances where no person has acquired any shares of the corporation in question, it is our view that for the purposes of determining whether there has been 'a significant increase ... in the total direct interest' of an unrelated person in the corporation for purposes of ... subparagraph 55(3)(a)(ii) and (iv) [sic] of the Act that one must compare the value of a person's interest in the corporation as a percentage of the value of all interests in the corporation immediately before the share redemption to the value of that person's interest in the corporation as a percentage of the value of all interests in the corporation immediately after the share redemption." Accordingly, in a situation where a substantial preferred share interest of one shareholder was redeemed, there was a significant increase in the total direct interests of the other unrelated shareholders of the corporation.

1997 Ruling 3-970402 -

substantial issuer bid

Ruling that a substantial issuer bid (effected by way of auction tender) in which a major shareholder of the corporation would have a proportionate number of its shares in the corporation purchased for cancellation and minority shareholders who did not tender to the bid could see their proportionate interest in the corporation increase, came within the exemption in s. 55(3)(a).

29 April 1997 External T.I. 5-971115 -

disposition of cash

"Where a share whose fair market value exceeds its paid-up capital is redeemed for an amount of cash equal to its fair market value, the disposition of the cash to the shareholder on the redemption will ordinarily be described in one or both of clauses 55(3)(a)(i)(A) and (B)."

1996 Ontario Tax Conference Round Table, "Creditor Protection and Butterfly Transactions", 1997 Canadian Tax Journal, Vol. 45, No. 1, pp. 214-215

After it was noted that the exception in s. 55(3)(a) would apply where two individuals hold their investment in Opco through Holdco, and the assets of Opco are spun off to Newco which is a subsidiary of Holdco, whereas that exception would not apply where the two individuals held Opco and Newco directly, RC noted that in the second situation, if Holdco was formed as part of the same series of transactions, the exemption in s. 55(3)(a) also would not be available.

1996 Corporate Management Tax Conference Report, Q. 15

The related-person test should be applied at the time of the relevant disposition of property or increase of interest.

27 June 1995 External T.I. 5-942536 -

A payment of cash on the purchase for cancellation of common shares held by an estate would be considered to be a disposition of property by the corporation to the estate.

16 September 1992 T.I. (Tax Window, No. 24, p. 16, ¶2196)

A beneficiary holding a contingent beneficial interest in an estate whose property includes a share of a corporation, has an "interest" in that corporation for purposes of s. 55(3)(a)(ii).

10 January 1992 CGA Roundtable, Q. 19, 7-912224

Where Mr. A and Mr. B, who each own 50% of the shares of A Ltd. and B Ltd., enter into a shareholders' agreement with respect to their shareholdings in both corporations which include clauses that fall under s. 251(5)(b) (for example, the obligation to buy and sell if one withdraws from the business), the two corporations will be related for purposes of the exemption in s. 55(3)(a), unless s. 55(4) applies.

10 January 1992 Memorandum (Tax Window, No. 17, p. 15, ¶1773)

Where a parent, in order to reduce its debt, instructs its subsidiary to sell properties to a third party and use the cash proceeds to pay a dividend on the common shares or redeem the preferred shares, the resulting dividend or deemed dividend may be subject to s. 55(2).

10 January 1992 Memorandum (Tax Window, No. 17, p. 14, ¶1773)

S.55(2) will apply where one wholly-owned subsidiary of a corporation transfers property to another wholly-owned subsidiary of that parent with unused capital losses ("Lossco"), with a view to Lossco immediately reselling the property at a capital gain.

10 January 1992 Memorandum (Tax Window, No. 17, p. 12, ¶1773)

In order for the exemption in s. 55(3)(a) to apply to a transaction involving a transfer of assets from a corporation owned equally by Messrs. A and B to a second corporation owned equally by them, Mr. A and Mr. B must be acting in concert to control the two corporations not only with respect to the series of transactions in question, but also on a continuing basis.

24 February 1992 Memorandum (Tax Window, No. 13, p. 13, ¶1627)

A participation in a phantom stock plan may represent an interest in a corporation.

19 December 1990 T.I. (Tax Window, Prelim. No. 2, p. 6, ¶1054)

The exemption in s. 55(3)(a) generally will be available in a reorganization undertaken to facilitate the division of family assets on divorce. This represents a reversal of a previous position that the exemption was not available because the series of transactions included the divorce, after which the couple are not related to each other.

19 March 1990 T.I. (August 1990 Access Letter, ¶1371)

A single-wing butterfly reorganization carried out as part of a divorce settlement whereby property ends up owned by the wife's corporation will be off-side because the subsequent divorce occurs as part of the series of transactions.

29 January 1990 T.I. (June 1990 Access Letter, ¶1268)

If at the time of the preliminary transaction the taxpayer has the intention of implementing subsequent transactions, the subsequent transactions would be part of the series even though at the time of the preliminary transaction all the important elements of the subsequent transactions such as the identity of the other taxpayers involved had not been determined, or the taxpayer lacked the ability to implement the subsequent transactions.

3 November 89 T.I. (April 90 Access Letter, ¶1172)

A U.S. corporation has a wholly-owned Canadian operating subsidiary ("Subco 1") and a newly incorporated wholly-owned Canadian subsidiary ("Subco 2"). Part of the business of Subco 1 is transferred to Subco 2 for business reasons and a deemed dividend is received in the course of the reorganization. If the shares of Subco 2 are sold to an arm's length buyer in a transaction that was not part of the original series of transactions, then the fact that the subsequent sale would not have occurred if the reorganization had not taken place does not establish a sufficient causal connection to say that the restructuring "resulted in" the sale. However, if one of the purposes of the restructuring was to make the business division of Subco 1 that was transferred to Subco 2 saleable to potential buyers, then RC likely would consider the restructuring and the ultimate sale to form part of the same series of transactions or events.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) 107

1 November 89 T.I. (April 90 Access Letter, ¶1172)

The exemption will not be available where a corporation transfers property to a related corporation under the rollover in s. 85(1), the transferee corporation sold the property to an arm's length party so that its capital gain offsets its capital loss and the transferee corporation then redeems the shares which it had issued to the transferor corporation.

Articles

Doron Barkai, Alexander Demner, "Dealing with New Subsection 55(2): Issues and Strategies", 2016 Conference Report (Canadian Tax Foundation), 6:1–56

Avoidance of s. 55(2) through accessing related party exemption (p. 6:31)

[O]ne strategy to avoid subsection 55(2) is to restructure a dividend as a share redemption or repurchase… .

[A]ssume that Opco is a wholly owned subsidiary of Holdco, which owns 100 common shares of Opco worth $ 1 million (with nil ACB and PUC). Opco wishes to pay a dividend of $100,000 to Holdco….

The optimal approach to restructuring the dividend to satisfy the related-party exception is through an initial share-for-share exchange effected pursuant to subsection 86(1). Holdco first exchanges all of its Opco common shares for (1) preferred shares with a fixed redemption value of $100,000, and (2) common shares with a value equal to the balance ($900,000). The preferred shares are thereafter redeemed.

Provided that the Opco common shares (before the exchange) are worth considerably more than the amount of cash to be distributed to Holdco, no concerns regarding valuation should exist….

Appropriateness of preliminary transactions to stream ACB to non-redeemed shares (pp. 6:32-33)

[I]t appears [having cited 2015-0610681C6] that the CRA would challenge a preliminary transaction segregating pre-existing ACB from shares to be subsequently redeemed … .

[S]uppose that Holdco had pre-existing ACB of $100,000 and undertook a preliminary share-for-share exchange … under subsection 85(1). Under paragraph 85(l)(g), the ACB would be streamed to the newly issued preferred shares. Accordingly, the subsequent redemption of these shares would result in Holdco losing its pre-existing ACB. Arguably, however, the correct result is that only $10,000 (10 percent) of the pre-existing ACB is lost. It is unclear whether the CRA would sanction a preliminary cost base consolidation transaction to ensure that result.

Carla Hanneman, "Reorganization Strategies for Proposed Paragraph 55(3)(a)", Canadian Tax Focus, Volume 5, Number 3, August 2015, p.8.

Accessing new s. 55(3)(a) rules by ensuring that all dividends arise under s. 84(3) (pp. 8-9)

Consider a corporate group comprising Parentco, Parentco's subsidiary Holdco, and Holdco's subsidiary Opco. The group intends to transfer one of Opco's existing business lines to Newco, a new subsidiary of Holdco… . [T]he key goal of the structuring is to ensure that all dividends arise under subsection 84(3),…

Alternative 1

1) Holdco forms Newco.

2) Opco transfers the relevant assets to Newco on a tax-deferred basis pursuant to subsection 85 (1) in exchange for shares of Newco. (Preferred shares rather than common shares are typically used, largely to avoid valuation issues.)

3) Newco redeems the shares transferred to Opco in step 2 in exchange for a note.

4) Opco redeems a portion of its shares (with a value equal to the value of the Opco assets transferred to Newco in step 2) and transfers the Newco note to Holdco as an in-kind redemption payment.

5) Holdco transfers the Newco note to Newco in exchange for shares or as a capital contribution (thereby cancelling the note).

Before the budget, step 4 may have consisted of Opco declaring a dividend in kind of the Newco note to preserve Holdco's ACB of the Opco shares. This is no longer an effective strategy, however, because dividends in kind do not fall under the protective cover of proposed paragraph 55(3)(a).

Alternative using butterfly-style mechanics (p. 9)

Some practitioners might consider another way of implementing the transfer, which differs in steps 3 through 6: …

3) Holdco transfers shares of Opco (with a value equal to the value of the OPco assets transferred to Newco in step 2) to Newco in exchange for shares of Newco on a tax-deferred basis.

4) Newco redeems the shares that it issued to Opco in step 2 and issues a note to Opco as an in-kind redemption payment for the redeemed shares.

5) Opco redeems the shares that Newco received in step 3, and issues a note to Newco as an in-kind redemption payment for the redeemed shares.

6) The notes issued in steps 3 and 4 are offset and cancelled.

General preference for 1st (note-redemption) approach (p.9)

The two alternatives differ in their final outcomes with respect to Holdco's ACB of the Newco shares:

  • In alternative 1, the ACB is the FMV of the Newco note (plus the nominal incorporating amount).
  • In alternative 2, the ACB is Holdco's ACB of the Opco shares that Holdco transferred to Newco in step 3 (plus the nominal incorporating amount).

The two ACB amounts could be the same, but in most circumstances the first amount will be greater.

Benjamin Alarie, Julia Lockhart, "The Importance of Family Resemblance: Series of Transactions After Copthorne", Canadian Tax Journal (2014) 62:1, 273-99.

Purpose of s. 55(3)(a)(ii) (pp. 96-7)

Subparagraph 55(3)(a)(ii)… seems to have been enacted for the purposes of avoiding a relatively straightforward avoidance technique: rolling an asset that the taxpayer intends to sell to a third party into a newly created subsidiary, having the third party subscribe for shares of the subsidiary, and then having the subsidiary use the subscription proceeds to redeem the shares held by the taxpayer. [fn 91: See generally David Tetreault, "Reorganizations of Private Corporations," in 1991 Ontario Tax Conference (Toronto: Canadian Tax Foundation, 1991), 14:1-166.]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) 1136

Michael N. Kandev, Abraham Leitner, "Through the Looking Glass: Dividing up a Family Business in a Canada-US Cross-Border Context", 2011 Canadian Tax Journal, Vol 59, No. 4, p. 899: Canada-US cross-border divisions of family operations that are structured under s. 55(3)(a) are generally constrained by the stricter rules of Code section 355.

Firoz Ahmed, "Subsection 55(3) Update", Canadian Current Tax, Vol. 15, No. 8, May 2005, p. 1: CRA's "new position is that the acquisition of shares of a corporation representing less than three percent of the fair market value of the shares of the capital stock of the corporation will not generally result in a significant increase in interest even if the shares have a very high value".

K.A. Siobhan Monaghan, "Doomed (or 'Deemed') to Fail", Corporate Structures and Groups, Vol. V, No. 1, p. 253.

Subparagraph 55(3)(a)(ii)

Administrative Policy

2018 Ruling 2017-0683941R3 - Split-up transactions

split-up to resolve business differences between daughter and mother, with relevant significant investment of arm's length investor in further transferee company

Structure

Amalco (which resulted from a recent amalgamation of Holdco 1 and its subsidiary, Opco) carries on Business 1 in Facility 1 and Facility 2, and Business 2 in Facility 2. Mother controls Amalco through her Amalco Class A Voting Special Shares. The Amalco Class A Voting Common Shares are owned by Mother and Holdco 2, the Amalco Class B Voting Common Shares are owned by Daughter and the Amalco Class B Non-Voting Special (redeemable) shares are owned by Mother and Daughter. The shares of Holdco 2 are held by Mother (who controls it) and by Trust, and the assets of Holdco 2 are an investment property, and shares of and loans to Amalco and XCo. Mother is the sole trustee of Trust and the two minor children of Daughter (mother’s grandchildren) are its beneficiaries. Its assets include Amalco Class C Voting Common Shares and Holdco 2 Class A voting common shares.

Previous dispute re development project

Mother asked an unrelated individual (the “Investor” - who had provided consulting services to Amalco and Opco) to participate in a development plan. Daughter opposed the development plan and she did not want Opco to undertake the Development Plan if it proceeded. Accordingly, Mother and the Investor incorporated and jointly subscribed for common shares of Xco, and Xco used borrowed funds received from Opco (the “Opco XCo Receivable”) which, in turn, had borrowed those funds from a bank, and from the Investor (the “Investor XCo Receivable”) to acquire the piece of land in question (the “Land”), and is in the process of developing it using further such borrowed funds.

Daughter wanted Mother to sell Opco. Mother refused. Consequently, Daughter wanted to sell her entire shareholding interest in Opco and Holdco 1 by: (a) taking Facility 2, but without Business 1 and its related business assets, and (b) operating Business 2 solely in Facility 2.

Through a series of debt repayment transfers, the Opco XCo Receivable was transferred into the hands of Holdco 2. The Investor and Holdco 2 converted the Opco XCo Receivable and Investor XCo Receivable into XCo Class B non-voting special shares (collectively, the “Acquisitions”), with Mother thereafter continuing to control XCo.

Proposed transactions
  1. Daughter will incorporate Newco and subscribe for Newco Common Shares.
  2. Daughter will transfer all of her Amalco shares to Newco in consideration for redeemable retractable non-voting non-cumulative Newco Class A Special Shares, with a joint s. 85(1) election being made.
  3. Amalco will transfer a portion of its property to Newco and Newco will assume a portion of Amalco’s existing liabilities such that immediately thereafter, Newco will have acquired, a proportion of the net FMV of all property owned by Amalco corresponding to the relative FMV of the Daughter Amalco Shares owned by Newco. Newco will issue redeemable retractable non-voting non-cumulative Newco Class B Special Shares to Amalco. Joint s. 85(1) and 22 elections will be made. The Distribution Property will include Facility 2, but without Business 1 including its related assets and Amalco’s accounts receivable relating to Business 2.
  4. The shareholdings between Newco and Amalco will be redeemed for notes and the notes set off.
  5. Amalco will enter into a lease agreement (Lease) with Newco to lease at a FMV rent the portion of Facility 2, with such Lease to will continue until development on the Land is completed and the Province has permitted the transfer by Amalco of the XXXXXXXXXX that related to Business 1 in Facility 2 to XCo.
Additional information

The Acquisitions did not rely on the Proposed Transactions in order to produce a given result, or vice versa, and none of the Acquisitions was undertaken in contemplation of any of the Proposed Transactions and each would have been undertaken irrespective of whether any of the Proposed Transactions will be implemented.

Amalco will transfer Business 1 in Facility 2 including the XXXXXXXXXX to XCo at FMV after:

(a) the Province has approved such transfer of the XXXXXXXXXX; and

(b) the XXXXXXXXXX has been completed on the Land.

Ruling

By virtue of s. 55(3)(a), the provisions of s. 55(2) will not apply to any of the dividends arising on the cross-redemptions provided that there is no disposition or significant increase in interest described in any of ss. 55(3)(a)(i) to (v) as part of the series that includes such dividends that is not described in the letter.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) arm's length investment in proposed purchaser of spinco assets not part of spin-off series 219
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) year-end established in middle of cross-redemptions to avoid circularity 212

2015 Ruling 2015-0605901R3 F - Présomption de gain en capital

spin-off of real estate beneath new common holdoc of unrelated shareholders

CRA ruled (as well as providing an opinion under the July 31, 2015 draft amendments) on the non-application of s. 55(2)(a) to transactions, which start with individuals (who apparently are unrelated for s. 55 purposes) holding their shares of Opco through their respective holding companies, then entail the holding companies transferring their Opco shares to a common holding company (Holdco) and, following a spin-off of Opco real estate to a new subsidiary of Holdco (Realtyco), Holdco ends up holding each of Opco and Realtyco as standalone subsidiaries. CRA also specifically ruled that the transactions would be deemed by s. 55(3.01)(g) to not be described in s. 55(3)(a)(ii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.01) - Paragraph 55(3.01)(g) separation of real estate assets beneath new holdco formed by unrelated shareholders 512
Tax Topics - Income Tax Act - Section 249.1 - Subsection 249.1(7) taxation year end changed to immediately before building spin-off 93
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) year end selection to avoid Pt. IV circularity 91

Subparagraph 55(3)(a)(iii)

Administrative Policy

2015 Ruling 2015-0604051R3 - Internal Reorganization

note resulting from share redemption required to be vapourized on amalgamation/GAAR assessment required to reduce outside Canadian basis that US parents “paid for” by paying 5% Canadian withholding tax/rep re pubco share value being unaffected

Background

XXXco1, a (U.S.?) corporation which is the survivor of a merger of three corporations and apparently is an indirect subsidiary of a non-resident public corporation (“Parent”), wholly-owns Canco1, as well as holding the shares of USco2 that are not held by USco1 (described below). Canco1 (a holding company) wholly owns Canco2 (the Canadian operating entity), which wholly owns Canco3 (a holding company), which wholly owns USco1 (a holding company), which jointly owns USco2 along with XXXco1. USco2 is the group U.S. operating entity. Canco4 is an unlimited liability company with no material assets which is wholly-owned by USco3, which is an indirect wholly-owned subsidiary of [Parent]. Canco1, Canco2 and Canco4 are SFIs under4 para. (g) of the SFI definition.

Preliminary proposed transactions

Articles of amendment will be filed to convert the common shares of Canco1 to Class A common shares having no par value, and to add to its authorized capital Calass B Common Shares having a par value. Canco1 will convert to an unlimited liability company that is disregarded for Code purposes, and Canco3 will subdivide its shares.

Substantive proposed transactions
  1. Canco3 will repurchase all but one of its common shares in consideration for a non-interest bearing demand note (“Canco3 Promissory Note”), giving rise to a s. 84(3) deemed dividend.
  2. Canco2 will reduce its stated capital and Canco1 will exchange its common shares of Canco2 for new Class2 Class A common shares of Canco2 with multiple votes per share and for redeemable retractable non-voting preferred shares.
  3. Canco2 will redeem all its preferred shares in consideration for delivering its Canco3 Promissory Note and common share of Canco3, giving rise to a s. 84(3) deemed dividend. Canco3 will convert to an unlimited liability company so that it is disregarded for U.S. tax purposes.
  4. XXXco1 will transfer a portion of its Class A Common Shares of Canco1, corresponding to the FMV of Canco1’s investment in Canco3, to USco3 in consideration for additional ordinary shares of USco3.
  5. Canco1 will pay (and XXXco1 and USco3 will receive) a stock dividend on the Class A Common Shares, comprising par value (Class B) common shares having an FMV equal to that of such Class A Common Shares immediately before the dividend, so that the FMV of such Class A Common Shares (held by XXXco1 and USco3) will be diluted to an immaterial amount. The stock dividend FMV will be subject to s. 212(2) withholding.
  6. USco3 will transfer the Class B Common Shares of Canco1 so received by it to Canco4 in consideration for additional common shares of Canco4, which will have a PUC equal to that of the transferred shares.
  7. Canco1 will transfer the Canco3 Promissory Note (and the remaining outstanding share of Canco3) to Canco4 as consideration for the purchase for cancellation of the Class B Common Shares held by Canco4, giving rise to a s. 84(3) deemed dividend.
  8. Canco3 and Canco4 will amalgamate, with the Canco3 Promissory Note being extinguished by operation of law. Amalco will be disregarded under the Code.

The proposed transactions will not be subject to any specific public disclosure, and will not materially affect Parent’s share price.

Purposes

To align the group activities on a country-by-country rather than business-line basis. The amalgamation in 8 eliminates the tax basis in the Canco3 Promissory Note.

Rulings

The s. 55(3)(a) exception will apply to the dividends in 1, 3 and 7, provided there is not a disposition of property or an increase in interest described in ss. 55(3)(a)(i) to (v) which is part of the series of transactions or events – and the proposed transactions, by themselves, will not be considered to result in any disposition to, or increase in interest by, an unrelated person described in ss. 55(3)(a)(i) to (v).

S. 15(1.1) will not apply to the stock dividend in 5.

S. 212.3(2) will not apply to any of the proposed transactions, provided that, respecting the acquisitions of Canco3 common shares, Canco1 Class B Common Shares and Canco3 common shares in 3, 6 and 7, (a) none of Canco1, Canco2, Canco3, Canco4 and USco3 deal at arm’s length with any of Parent, XXXco1, USco3 and other listed non-resident corporations at any time that is during the series of transactions or events and, in the case of acquisitions of Canco3 common shares, Canco1 Class B Common Shares and Canco3 common shares in 3, 6 and 7, before such acquisitions and (b) there are no other non-resident corporations that participate in the series.

S. 245(2) will apply to deny the tax benefit arising from the ACB, to USco3 and XXXco1, of the Canco1 Class A common shares.

The above rulings are binding provided that, after implementation:

  • A notice of determination is sent pursuant to s. 152(1.11) to USco3 and XXXco1 to reduce the ACB, to USco3 and XXXco1, of the Canco1 Class A common shares to a nominal amount; and
  • USco3 and XXXco1 waive in writing the right of objection or appeal relative to such determination pursuant to ss. 165(1.2) and 169(2.2).
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1.11) s. 55(3)(a) rulings conditional on U.S. parents accepting GAAR assessments to reduce their outside basis 224
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1.1) pro-rata highly dilutive stock dividend 115
Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(2) extensive reps required re series of transactions 45

Clause 55(3)(a)(iii)(B)

Administrative Policy

10 September 2018 External T.I. 2018-0772501E5 - Internal spin-off

s. 55(3)(a)(iii)(B) exclusion applied to lower tier internal spin-off transaction accompanied by an upper-tier sale by an arm’s length shareholder with a direct and indirect 16% shareholding

Holdco A and its wholly-owned CCPC subsidiary, Opco own real estate that is used in Opco’s active business. Holdco C (owned equally by husband and wife) owns 11% of the Holdco A shares and 12.5% of the shares of Holdco B (which holds 40% of Holdco A’s shares). The remaining 49% of the Holdco A shares 87.5% of the Holdco B shares are owned by unrelated individuals and holding companies, respectively.

Holdco A will transfer its interest in the real estate asset to a newly-incorporated subsidiary (“Realco”) under s. 85(1) and Opco’s interest therein will be spun-off to Realco through: a s. 85(1) transfer of such interest to Realco under s. 85(1) in consideration for preferred shares; a transfer by Holdco A of a portion of its Opco shares to Realco under s. 85(1) for preferred shares; and a cross-redemption by Realco and Opco of such preferred shares for notes, which then are set off.

Holdco C will now sell its shares of Holdco B and Holdco A to one or more of the other shareholders of Holdco A and Holdco B for their fair market value, triggering a capital gain to Holdco C. The negotiation of this sale occurred during the above steps.

Would it be inappropriate for s. 55(3)(a)(iii)(B) or 55(3)(a)(iv)(B) to exclude s. 55(3)(a) exemption given that the deemed dividends at the Opco and Realco level do not affect the capital gains arising on the Holdco A and Holdco B share sales by Holdco C? CRA stated:

It appears … that the sale of the shares of Holdco B and Holdco A by Holdco C takes place as part of the same series of transactions as the share redemptions … .

While it might be reasonable to conclude that the deemed dividends … do not affect the fair market value of the Holdco A and Holdco B shares (and consequently any capital gain realized by Holdco C on its disposition of such shares), such dividends would reduce a portion of the capital gain that, but for such dividend, would have been realized on a disposition at fair market value of any shares (i.e., the shares of Realco and Opco). …

… If the shares of Opco and Realco represent more than 10% of the value of Holdco A and Holdco B .. then … clause 55(3)(a)(iii)(B) and clause 55(3)(a)(iv)(B) will technically apply.

…[P]aragraph 55(3)(a) is intended to provide an exemption from the application of subsection 55(2) for certain dividends received in the course of related-party transactions. … [S]ince the other direct or indirect shareholders of Holdco A are not related persons, and the transactions … include a sale of Holdco A shares as part of the same series as the deemed dividends … the application of subsection 55(2) is operating as intended.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) a lower tier internal spin-off transaction accompanied by an upper-tier sale by a minority shareholder was subject to s. 55(2) 245

Subparagraph 55(3)(a)(v)

Administrative Policy

29 October 2013 External T.I. 2013-0489771E5 F - Internal Reorganization - 55(3)(a)

relief under s. s. 256(7)(a)(i)(C) or (D) is relevant to s. 55(3.1)(b)(ii), but not to ss. 55(3)(a)(i) to (v)

Three brothers held Corporation A as to 1/3 each and their mother’s estate held all of Corporation B. Following the distribution of the Corporation B shares to them qua equal estate beneficiaries, Corporation A transferred some of its assets on a s. 85 rollover basis to Corporation B, followed by a redemption of the preferred shares taken back. After noting that if the estate distribution occurred as part of the series in which Corporation A received its s. 84(3) dividend (which appeared likely), the three brothers would have an increase in their interest in Corporation B described in s. 55(3)(a)(v), and with the estate distribution also constituting an s. 55(3)(a)(iii) triggering event, CRA stated:

Clauses 256(7)(a)(i)(C) and (D) are also examples of relieving measures for situations involving an estate. Control of a particular corporation is deemed not to have been acquired by the mere acquisition of shares of a corporation by a person described in clauses 256(7)(a)(i)(C) and (D) . This is relevant to … [s.] 55(3.1)(b)(ii), which applies to an acquisition of control of the transferor or transferee corporation … [but not] for the purposes of paragraph 55(3)(a) since subparagraphs 55(3)(a)(i) to (v) relate only to dispositions or increases in interest and do not apply to acquisitions of control.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) estate distribution of corporation followed by transfer of assets from related corporation could be part of same series 160
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.2) - Paragraph 55(3.2)(d) s. 55(3.2)(d) application to estate distribution of corporation to 3 sibling beneficiaries does not deem them to be related to each other 237

Paragraph 55(3)(b)

See Also

Deuce Holdings Ltd. v. The Queen, 97 DTC 921 (TCC)

With respect to a divisive reorganization which entailed the receipt by the taxpayer both of a cash dividend and a deemed dividend, Bell TCJ. rejected a Crown submission that the cash dividend and deemed dividend should be treated as one dividend for purposes of considering the application of s. 55(3)(b). Accordingly, the transaction entailing the deemed dividend was found to comply with the exemption in s. 55(3)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2) safe income on hand reduced by taxes, but not by inchoate retiring allowance 52

Administrative Policy

1997 Ruling 971037

Favourable rulings given with respect to public company spin-off transactions.

1996 Corporate Management Tax Conference Round Table, Q. 16

"The 'reorganization' referred to in section 55 would normally include only transfers of property by the distributing corporation to its shareholders (or corporations related to its shareholders) and of the cross-redemption of shares or winding-up of the distributing corporation."

1996 Corporate Management Tax Conference Round Table, Q. 19 (C.T.O. "Butterflies - Tolerance Levels")

"The word 'approximate' provides limited scope for discrepancies ... . In 1991 we indicated that, for purposes of advance rulings, we are prepared to accept a discrepancy of up to one percent."

1996 Tax Ruling 963488

Favourable ruling given on public company butterfly.

93 C.R. - Q. 13

A distribution to all shareholders that does not include all the assets of a particular type owned by the distributing corporation will not comply with s. 55(3)(b).

11 November 1993 Memorandum (Tax Window, No. 30, p. 3, ¶2482)

Where a corporation (A) is owned equally by three shareholders who deal with one another at arm's length and do not act in concert amalgamates with a wholly-owned subsidiary (B) before a butterfly reorganization of the amalgamated corporation occurs, the exemption in s. 55(3)(b)(ii) would not be available because the shareholders of A do not, as a group, exercise control over A, and the amalgamated corporation, A and B would not be related persons pursuant to s. 251(3.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(3.1) 74

8 April 1993 T.I. (Tax Window, No. 30, p. 19, ¶2502)

An acquisition of property will not normally be considered to have occurred in contemplation of a butterfly reorganization where the acquisition occurred in the ordinary course of the particular corporation's business and would have occurred irrespective whether the butterfly reorganization subsequently occurred, the structure and timing of the acquisition was not affected by butterfly-related considerations, and the acquisition was [not] conditional on completion of the butterfly transactions.

13 January 1993 T.I. 922909 (November 1993 Access Letter, p. 496, ¶C38-180)

Discussion of availability of exemption, and of meaning of "reorganization", where a corporation transfers its shares of a wholly-owned subsidiary ("Subco") to two newly incorporated subsidiary corporations, and Subco then transfers to each of the newly incorporated subsidiaries their pro-rata share of the property of Subco.

25 August 1992 T.I. (Tax Window, No. 23, p. 6, ¶2133)

RC will apply the look-through approach to a general partnership interest but not to a limited partnership interest. Accordingly, where Holdco owns shares of the particular corporation ("Opco") which, in turn, is a general partner in a partnership, and on a butterfly reorganization of Opco, Holdco receives a proportionate share of the partnership interest and then, on a dissolution of the partnership, receives a proportionate distribution of property, the exemption in s. 55(3)(b) will apply provided that the partnership agreement shows that the corporation is a general partner. This would be the case, for example, where the partnership agreement provides that all profits, losses and capital distributions will be allocated proportionately to the partners based on their interest in the general partnership.

The exemption will apply even though some of the butterflied properties is sold by one transferee to another, provided that the property so sold is used in the same business as the other assets acquired by the transferee on the butterfly. The exemption also will apply where there are taxable sales of butterflied property to an arm's length third party, or taxable sales of investment property from one transferee to another unless the result of the taxable sales is that one or more transferees may reasonably be considered to have been wholly or partially cashed out.

Where undivided interests in the property of a particular corporation have been distributed to its shareholders in accordance with s. 55(3)(b), the shareholders are permitted to contribute such property to a general partnership of which they are the only partners in proportion to their respective shareholdings.

Tax Professionals Mini Round Table - Vancouver - Q. 3 (March 1993 Access Letter, p. 101)

Where property of a particular corporation is transferred to a wholly-owned subsidiary of a corporate shareholder, the subsidiary must be wound-up into the corporate shareholder (rather than being left extant, or being amalgamated).

26 November 1992 Memorandum (Tax Window, No. 27, p. 13, ¶2351)

RC's position that property received by a corporation on a winding-up of a partnership prior to the butterfly reorganization will not nullify the application of s. 55(3)(b) is not considered to be inconsistent with its position that a foreign corporation whose shares are owned by a corporate partnership is a foreign affiliate of the partnership and not of the corporate partners.

31 August 1992 Memorandum (Tax Window, No. 24, p. 3, ¶2191)

The use of s. 55(3)(b) to effect a transfer of assets deriving their value principally from real estate in the guise of a treaty-protected share sale was a misuse of the Act within the meaning of s. 245(4).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 37

92 CR - Q.30

A faulty evaluation of distributed assets for purposes of attempting to comply with the requisite proportions set out in s. 55(3)(b) will not be corrected by the operation of a price adjustment clause.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 19

92 C.R. - Q25

Even if the decision in The Queen v. Guaranty Properties, 90 D.T.C 6363 stands for the proposition that an amalgamating corporation does not cease to exist, it does not follow that property transferred by a particular corporation to a shareholder which then amalgamates with its parent will comply with the indirect transfer provisions of s. 55(3)(b).

17 July 1992 External T.I. 5-913100 -

The pro rata test in s. 55(3)(b) will be met if, following the transfer of the required percentage of property by the particular corporation to Newco, the particular corporation is wound-up into its parent corporation.

Harris, "An Update to Revenue Canada's Approach to the Butterfly Reorganization", 1991 Conference Report, c 14.

5 July 1991 Memorandum (Tax Window, No. 5, p. 18, ¶1338)

A favourable ruling will not be given in respect of a partial butterfly unless the ACB of the shares of the particular corporation are reduced by a reasonable amount.

11 April 1991 T.I. (Tax Window, No. 2, p. 19, ¶1199)

GIC's which are current assets capable of reasonably prompt liquidation generally will be considered to be cash or near-cash assets.

27 December 1990 T.I. (Tax Window, Prelim. No. 2, p. 6, ¶1058)

Where on the dissolution of a partnership each partner's share of the distributed property is a proportionate interest in the specific items of property that together constitute the partnership property, no property will have become property of the partner upon the dissolution for purposes of the in-contemplation rule.

19 April 1990 T.I. (September 1990 Access Letter, ¶1416)

Where in contemplation of a transfer of property to its shareholders in a butterfly reorganization a partnership of which the particular corporation is a member is dissolved and an undivided interest in each of its assets is distributed to each of the partners including Opco, the subsequent reorganization will not qualify as a butterfly reorganization even if the property distributed on the butterfly does not include property that was received on the winding-up of the partnership.

Hiltz, "The Butterfly Reorganization

Revenue Canada's Approach", 1989 Conference Report, p. 20:32.

Read, "Section 55

A Review of Current Issues", 1988 Conference Report, c. 18.

89 C.M.TC - Q.16

Real estate used partially in an active business and partially in a specified investment business will generally constitute two types of property.

89 C.M.TC - Q.17

RC will not only rule on a butterfly reorganization carried out on a gross asset basis, but will also accept the net equity method if the conditions in the various papers are met. For purposes of the net equity method, tracking the original use of the borrowed funds generally is not necessary.

87 C.R. - Q.57

The transfer of all one type of property to the shareholders may qualify where the ACB of the shares of the transferor is reduced appropriately.

87 C.R. - Q.56

Although property distributed by way of dividend in a butterfly reorganization is subject to the proportionate sharing rules, preferred shares may be redeemed where they are the only class of shares held by the shareholder and the shares were acquired for cash consideration equal to the fixed redemption price.

ATR-47, February 24, 1992

Description of an estate thaw butterfly entailing the transfer of real estate by the estate freeze corporation to a corporation whose common shares are owned by the fathers.

Hiltz, "Section 55: An Update" 1984 Corporate Management Tax Conference Report, p. 40.

Articles

Firoz Ahmed, "Return of the Somersault", Canadian Current Tax, Vol. 11, No. 1, October 2000, p. 1.

Sider, "Corporate Reorganizations: A Review of a Divestiture", 1993 Conference Report, c. 14

Review of the spin-off of certain divisions of Ocelot Energy Inc.

Robertson, "Capital Gains Strips: A Revenue Canada Perspective on the Provisions of Section 55", 1981 Conference Report, p. 81.

Hausman, "U.S.-Canada Cross-Border Reorganizations", 1990 Canadian Tax Journal, p. 678.

Lemons, Matsuba, Olson, "How U.S. Shareholders Can Avoid the Sting of the Canadian Butterfly", 1991 Canadian Petroleum Tax Journal, Spring 1991, p. 67.