Subsection 55(3.2)

Paragraph 55(3.2)(d)

Administrative Policy

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

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

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, 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:

[F]or the purposes of paragraph 55(3.1)(b), paragraph 55(3.2)(d) provides that where a share is acquired by an individual from a personal trust in satisfaction of all or a part of the individual’s capital interest in the trust, the individual shall be deemed, in respect of that acquisition, to be related to the trust. Although by virtue of s. 55(5)(e)(iii), this presumption may be considered to deem the brothers to be related to the estate with respect to that acquisition, the brothers would still be deemed not to be related to each other and, therefore, would continue to be unrelated to the dividend recipient, Corporation A, in determining whether or not the "triggering" events described above for the purposes of paragraph 55(3)(a) are engaged.

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) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(v) 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) 213

Paragraph 55(3.2)(h)

Administrative Policy

2013 Ruling 2012-0459781R3 - Cross border butterfly

4-party exchange to avoid s. 55(3.2)(h)

This was a cross-border butterfly of a Canadian spin business (already packaged into a subsidiary of DC) by DC to TC, an indirect subsidiary of Foreign SpinCo, before Foreign SpinCo was distributed up the chain for inclusion in the assets of New Foreign PubCo, which would then be dividended by the current parent (Foreign PubCo) to its public shareholders. Rather than using the usual 3-party exchange in order to avoid the application of s. 55(3.2)(h) (see Desjardins and Diksic), here a 4-party exchange was contemplated, i.e., including both the immediate non-resident parent (Foreign SpinCo Sub) and non-resident grandparent (Foreign SpinCo) of TC in a circular exchange of consideration.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution cross-border butterfly reversing previous amalgamation and using 4-party exchange 1042
Tax Topics - Income Tax Act - Section 212.1 - Subsection 212.1(1.1) - Paragraph 212.1(1.1)(b) PUC grind where shares issued in 4-party exchange 212


Rick McLean, Canadian Tax Highlights, Vol. 22, No. 5, May 2014, p. 6.

Conventional mechanics for butterfly by foreign Pubco of Canco to foreign Spinco caught by s. 55(3.1)(b)(i) (p. 7)

Pubco incorporates a foreign corporation (Spinco) and transfers the foreign spin business to Spinco in consideration for Spinco shares. Pubco transfers to Spinco (for more Spinco shares) Canco shares whose value relative to all shares of Canco equals the value of the Canadian spin business relative to the value of all Canco's property (transfer 1). Spinco then transfers the Canco shares to a newly incorporated Canadian corporation (Newco) for Newco shares (transfer 2). Canco transfers the Canadian spin business to Newco for Newco preferred shares. Newco and Canco cross-redeem their mutual shareholdings. …Pubco distributes the Spinco shares to its shareholders.

Absent paragraph 55(3.2)(h), paragraph 55(3)(b) applies in this situation if at all times in the series less than 10 percent of the FMV of Spinco shares was derived from shares of Canco or Newco and there is no acquisition of control of Newco as a consequence of the transactions. Under paragraph 55(3.2)(h), however, Spinco is deemed to be a transferee corporation in relation to Canco because at one point during the series (between transfers 1 and 2) Spinco is a shareholder and a specified shareholder of Canco. Thus, Pubco's disposition of its Spinco shares to the public (Pubco's shareholders) is a disposition to persons unrelated to Pubco of shares of a transferee corporation that is described in subclause 55(3.1)(b)(i)(A)(I).

Resolution through use of three-party exchange (p. 7)

[Under] a three-party share exchange… (1) Pubco transfers its Canco shares to Newco (but Newco does not issue shares to Pubco); (2) Newco issues shares to Spinco in consideration for Newco's acquisition of Canco shares; and (3) Spinco issues shares to Pubco in consideration for Spinco's acquisition of shares of Newco. …

Spinco is not a shareholder of Canco at any time in the series, and thus paragraph 55(3.2)(h) does not deem Spinco to be a transferee corporation. Therefore, clause 55(3.1)(b)(i)(A) does not apply when Pubco distributes its Spinco shares to the public (provided that the Spinco shares derive less than 10 percent of their value from Newco or Canco shares at all times during the series).

Three-party exchange is a "permitted exchange" (p. 7)

Moreover, subparagraph 55(3.1)(b)(i) does not apply to the three-party share exchange because the transaction is a "permitted exchange" under paragraph (b) of the definition of that term in subsection 55(1). …

The acquirer is not required to acquire the distributing corporation's shares; it must only be "another corporation."

Janice G. Russell, "Cross-Border Butterfly Ruling", (2011) vol. 19, no. 1 Canadian Tax Highlights, 8-9:

Overview description of 2009-0335441R3 (p.8)

The ruling…includes a foreign corporation's (Forpubco's) distribution to its shareholders, as a dividend in kind, of the shares of another foreign corporation (Forspinco) whose subsidiary (Forspinsub) owns shares of a taxable Canadian corporation (Transfereeco) that is a transferee corporation… .

Avoidance of s. 53(3.2)(h) thorough three-party agreement (p. 8)

The ruling's three-party agreement is the primary means for Forspinsub to acquire shares of Transfereeco without either Forspinsub or its parent, Forspinco, ever being a shareholder of Distributingco, the distributing corporation… . Forspinco is thus not deemed to be a transferee corporation under paragraph 55(3.2)(h): if either it or its parent is so deemed, the butterfly exception is denied when Forpubco distributes its Forspinco shares to the public.

Description of three-party agreement (pp. 8-9)

Forpubco transfers its Distributingco special shares to Transfereeco, which pays for them by issuing common shares to Forspinsub, which in payment therefor issues common shares to Forpubco, which in turn pays for the Forspinsub common shares by transferring the Distributingco special shares to Transfereeco. ...The ruling confirms that the paragraph 55 (3)(b) butterfly exception applies to the dividends arising on the cross-redemption of the Distributingco and Transfereeco shares, apparently on the basis of a conclusion that the three -party share exchange is a permitted exchange (subsection 55 (1)) and that paragraphs 55 (3.1)(b) and 55 (3.2 )(h ), read together, do not deny the butterfly exception.

Permitted exchange (p. 9)

A permitted exchange in relation to a distribution by a distributing corporation includes an exchange of its shares by one or more of its shareholders (a participant, Forpubco) for shares of another corporation (an acquiror, Forspinsub) in contemplation of the distribution, where no share of the acquiror (Forspinsub) outstanding immediately after the exchange is then owned by any person or partnership other than a participant (Forpubco) and a pro rata shareholding requirement is met. On the ruling's facts, the pro rata shareholding requirement is met because immediately before the distributed assets' distribution the FMV of Forpubco's common shareholding in Forspinsub equals the amount determined by the formula in subparagraph (b)(iii) of the "permitted exchange" definition.

Kila, Williamson, "Section 55 Case Study: Impact of Proposed Paragraph 55(3.2)(h) on a Cross-Border Spin-off Transaction", Corporate Structures and Groups, Vol. IV, No. 2, 1997, p. 203.

Marc N. Ton-That, Serge Bilodeau, "Breaking Up Is Hard To Do", 96 Conference Report (CTF), p.11:51

Blackmail potential (p. 11:51

The application of paragraph 55(3.2)(h ) for the purposes of subparagraph 55(3.1)(b) could expose a distributing corporation to blackmail. If a corporation does not want a distributing corporation to butterfly its assets, it only needs to acquire 10 percent of the distributing corporation and claim that the acquisition is made in contemplation of the butterfly.

At any time in series (p. 11:51)

Paragraph 55(3.2)(h ) also applies for the purposes of subparagraph 55(3.1)(b) . Paragraph 55(3.2)(h ) deems a corporation to be a transferee if the corporation was a shareholder and a specified shareholder of the distributing corporation at any time in the series. For example, a specified shareholder, Holdco, holds 10 percent of the shares of a distributing corporation, DC. The value of the DC shares represents only 0.1 percent of the value of Holdco. If, prior to the butterfly, Holdco transferred all the shares of DC to a transferee on a permitted exchange, Holdco is not in fact a transferee. If paragraph 55(3.2)(h ) was not introduced, a disposition of shares of Holdco by its specified shareholders would not be subject to subparagraph 55(3.1)(b)(i) because the shares of Holdco do not meet the test under subclause 55(3.1)(b) and the vendor would not be a specified shareholder of DC or of the transferee. With the introduction of paragraph 55(3.2)(h ), the sale of the shares of Holdco is subject to subparagraph 55(3.1)(b)(i), since Holdco is deemed to be a transferee and the specified shareholders of Holdco are also considered to be specified shareholders of a transferee corporation—that is, Holdco.