Subsection 55(1)

Background

The distributing corporation (“DC”) is a vehicle for two sisters (A and B) and trusts for the benefit of B's adult children to invest in portfolio investments. A has the voting control of DC through the direct holding of Class A voting shares, A’s personal holding company (Holdco A) holds Class D non-voting common shares and class Y preferred shares of DC, and the transferee corporation (TC) holds Class B non-voting common shares and Class X preferred shares of DC.

The shareholders of TC are B’s personal holding company (Holdco B), an inter vivos trust for B and her descendants and two holding companies held by A and by two inter vivos trusts for the benefit of B’s children.

Completed transaction

TC incorporated Newco.

Proposed transactions

1. DC effected increases in the stated capital of the Class D and Class B shares in order to accomplish a proportionate distributions of its capital dividend account (taking into account the required s. 83(2) elections) and made further increases to the stated capital of those shares (by an amount not exceeding the safe income attributable to those shares) in order to proportionately distribute the ERDTOH and NERDTOH of DC to Holdco A and to TC (with eligible dividend elections being made under s. 89(14).)
2. DC will distribute, on a net fair market value basis, a proportionate part of its assets (which do not include business property) to Newco on a s. 85 rollover basis in consideration for the assumption of liabilities and the issuance of Newco preferred shares.
3. Newco will redeem the shares so issued by it to DC in consideration for the issuance of a demand non-interest bearing note.
4. Newco will be wound up into TC so that the note of Newco will be assumed by TC. Newco will subsequently be dissolved.
5. DC will purchase for cancellation the Class B and Class X shares held in it by TC in consideration for its issuance of a demand non-interest bearing note.
6. The notes issued above will be set off.
7. A will transfer her voting Class A shares of DC to Holdco A for cash consideration and the two corporations will be vertically amalgamated.

Rulings

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

CRA has ruled on a relatively straightforward cross-border butterfly. Before the distribution of the shares of Foreign Spinco (holding the business to be spun-off) by its parent (Foreign Services) up the chain for distribution by Foreign Pubco to its shareholders, it was necessary for the Canadian spin business carried on through a Canadian subsidiary (Subco 1) of a Canadian subsidiary (DC) of Foreign Services to be transferred in a butterfly spin-off to a new Canadian subsidiary (TC) of Foreign Spinco.

As with other cross-border butterflies, it was required, in order to avoid Foreign Spinco becoming a deemed transferee corporation at any time in the series as a result of becoming a shareholder of DC, to accomplish the transfer of DC preferred shares to TC pursuant to a three-corner agreement among Foreign Services, Foreign Spinco and TC, i.e.:

1) Foreign Services transfers the DC preferred shares directly to TC as consideration for the shares of Foreign Spinco issued in step 3;

2) TC issues common shares to Foreign Spinco as consideration for those DC shares; and

3) As consideration for the TC shares, Foreign Spinco issues shares to Foreign Services.

DC then spins off the relevant business assets (the Subco 1 shares) to TC, and the two cross pref shareholdings are redeemed for notes, which are set-off.

Also, as in other cross-border butterflies, the shares of Foreign Spinco were effectively required by s. 55(3.1)(b)(i)(A)(II) to at no time in the series derive 10% or more of their FMV from the Canadian spin business (or the shares of TC). In this regard, CRA ruled that, for the purposes of s. 55(3.1)(b)(i)(A)(II), in determining whether 10% or more of the FMV of the Foreign Spinco common shares is derived from shares of TC or DC “any indebtedness of Foreign Spinco that is not a secured debt and that is not a debt related to a particular property will be considered to reduce the FMV of each property of Foreign Spinco pro rata in proportion to the relative FMV of all property of Foreign Spinco.”

Background

The common shares and non-voting Class C preferred shares of the distributing corporation (DC) are held by two sisters and its Class E voting non-participating shares are held by three brothers. DC has cash and a stock market portfolio, held as long-term investments.

Completed transactions

The two transferee corporations (TC1 and TC2) were incorporated without the issuance of shares.

DC declared a capital dividend on its common shares (intending to clear out its capital dividend account) and paid it by issuing demand notes.

Proposed transactions

1. One of the sisters will transfer, on a s. 85(1) rollover basis, her common and Class C shares, and her three brothers will transfer their Class C shares, of DC to TC1 in consideration for Class A voting participating shares, and non-voting preferred shares, respectively, of TC1.
2. The other sister will transfer, on a s. 85(1) rollover basis, her common and Class C shares of DC to TC2 in consideration for Class A voting participating shares of TC1.
3. The cash and near cash assets of DC (described as including “cash (including cash, if any, in investment accounts managed by investment advisors), accounts receivable (including income taxes receivable), certificates of deposit and similar short-term investments, marketable securities (other than those held as portfolio investments)”) and DC’s investment property (i.e., its portfolio of listed shares) will be transferred under s. 85(1) on a pro rata (and net FMV) basis to TC1 and TC2 in consideration for the assumption of liabilities (including the CDA note owing to the respective sister) and for non-voting preferred shares.
4. The preferred shares of each TC will be redeemed for a note.
5. Each TC will end its first fiscal period.
6. DC will be wound-up into TC1 and 2 (and then dissolved) with each TC being liable for Pt. IV tax under s. 186(1)(b) and the resulting dividend refund to DC also being distributed by it) and with the excess of the winding-up dividend over the amount deemed by ss. 88(2)(b)(i) and 83(2) to be a capital dividend being deemed to be a taxable dividend under s. 88(2)(b)(iii) (which in turn will be designated as an eligible dividend to the extent of the positive GRIP balance). As a result of the distribution of the notes issued on the redemptions in 4, they will be extinguished by operation of law.

Rulings

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

Background

Transferor is a holding company holding near-cash and investment property including shares of a public corporation (Corporation). Its preferred shares are held by the estate of the deceased parent (Parent) of Child and 2 and its Class A common shares are held by an inter vivos trust (the Trust). The beneficiaries of the estate are two respective testamentary trusts for the children (Child 1 and 2) of Parent. The beneficiaries of the Trust are Child 1 and 2 and their respective children and any corporation controlled by any such beneficiary.

Completed pipeline transaction

The estate had engaged in a pipeline transaction under which it transferred its shares of a predecessor of Transferor (Holdco) to a newly-incorporated corporation (Newco) in consideration for a note (the Estate Note), and preferred shares, of Newco, with Newco subsequently being amalgamated with Holdco so as to bump the shares of Corporation pursuant to s. 87(11). A portion of the Estate Note was then repaid and distributed by the estate to the two testamentary trusts, from them to Child 1 and 2, and by Child 1 and 2 to their respective new wholly-owned holding companies, viz., Child 1 Holdco and Child 2 Holdco.

Proposed transactions

1. The estate will distribute on a s. 107(2) rollover basis in equal shares to the two testamentary trusts its preferred shares of Transferor, and the Estate Note.
2. Each such testamentary trust will distribute on a s. 107(2) rollover basis the assets so received by it to Child 1 or 2 in satisfaction of all or part of the capital interest of the child in such trust.
3. Each child will transfer the assets so received by her or him to Child 1 Holdco, or Child 2 Holdco, on a s. 85(1) rollover basis, in consideration for a note and preferred shares of the respective Child Holdco, with the PUC of such preferred shares being determined in accordance with s. 84.1(1)(a).
4. Similarly, the Trust will distribute on a s. 107(2) rollover basis in equal shares to the two children its common shares of Transferor, and a note owing to it by Transferor (the Trust Note), with each child then transferring the assets so received by her or him to Child 1 Holdco, or Child 2 Holdco, on a s. 85(1) rollover basis in consideration for a note and preferred shares of the respective Child Holdco, with the PUC of such preferred shares being determined in accordance with s. 84.1(1)(a).
5. Transferor will transfer a pro rata portion of its two types of property to Child 1 Holdco and Child 2 Holdco on a s. 85(1) rollover basis in consideration in each case for preferred shares of the respective Holdco and the assumption of ½ of the Estate Note and Trust Note, so that the two notes will be extinguished by operation of law.
6. Each such Holdco will redeem the preferred shares issued as described immediately above for a note (Note 1 or 2).
7. The first taxation years of each of Child 1 Holdco and Child 2 Holdco will occur at the end of the day on which the above redemptions occur.
8. On the following day, the winding-up of Transferor will be authorized and the Transferor’s assets, namely Note 1 and Note 2, will be distributed to Child 1 Holdco and Child 2 Holdco, respectively, with the result that the two Notes are extinguished by operation of law.
9. To the extent that Transferor has a positive balance in its CDA immediately prior to the distribution of its property on winding-up, it will make the s. 83(2) election so that the portion of the winding-up dividend deemed under s. 88(2)(b)(i) to be a separate dividend will be deemed to be a capital dividend to the extent of Transferor's CDA balance immediately prior to such distribution of its property on winding-up. The subsection 83(2) election will be made in the prescribed manner.
10. A similar GRIP designation will be made in accordance with s. 89(14) regarding the portion of the winding-up dividend deemed under s. 88(2)(b)(iii), based on the Transferor’s GRIP balance at the end of that taxation year.
11. Once Transferor has received the dividend refund resulting from the winding-up dividend and its notices of assessment for the winding-up taxation year from CRA and the ARQ, Transferor will apply for dissolution, and file the required tax returns up to the date of dissolution.
12. Since Transferor will receive a dividend refund arising from the winding-up dividend, Child 1 Holdco and Child 2 Holdco will have Part IV tax payable to the extent provided for in s. 186(1)(b).
13. Immediately following its winding-up and prior to its dissolution, Transferor will not own or acquire any property, other than the receipt of the dividend refund, and will not carry on any business.

Rulings

Including re ss. 55(2), 88(2) and 84.1.

CRA ruled on butterfly spin-off transactions to effect the split-up of DC2, a public corporation, into two publicly listed companies: DC2 and SpinCo. There were to be two successive butterflies since the subsidiaries to be transferred to SpinCo started off as subsidiaries of a wholly-owned subsidiary of DC2, namely, DC1. Accordingly, such subsidiaries were to be first dropped under s. 85(1) into a Newco subsidiary of DC1, then Newco was to be spun-off by DC1 to a newly-formed subsidiary of DC2 (SpinCo Sub) under a butterfly, and then DC2 was in turn to effect a butterfly spin-off pursuant to a plan of arrangement of SpinCo Sub to SpinCo (now held by the DC2 shareholders).

DC1 was a “specified wholly-owned corporation” so that, pursuant to s. 55(3.02), and like DC2, it was not subject to the types-of-properties strictures on its butterfly spin-off.

Background

Transferor is a farming corporation whose Class A common and Class D preferred shares are both held by two resident brothers (A and B). Each has an adult son who is or will be engaged in the farming operations. There are balances in the Transferor’s CDA, ERDTOH, NERDTOH and GRIP accounts.

Proposed transactions

• Amounts in the NISA Fund No. 2 will be withdrawn.
• B will transfer all his shares (both Class A and D) of Transferor on a s. 85(1) rollover basis to a newly incorporated corporation (Newco) for shares of two classes, with the shares of one class having an FMV equalling the aggregate FMV of the transferred shares.
• Transferor will transfer to Newco on a partial s. 85(1) rollover basis a portion of its property and Newco will assume a portion of Transferor's liabilities, such that Newco will receive its pro rata share of the net FMV of the "cash", "investment property" and "business property" held by Transferor immediately prior to the transfer. Newco will issue preferred shares with a redemption value equal to the net FMV of the transferred assets.
• Immediately after the issuance of those shares, an agreement in respect of those shares will be entered into specifying an amount in respect of each such share for which the share is to be redeemed, acquired or cancelled for the purposes of s. 191(4), which does not exceed the FMV immediately before the entering into of the agreement of each such share.
• Included in the transferred assets will be an undivided interest in a life insurance policy, with the proceeds of disposition thereof to Transferor being determined under s. 149(7), without such interest being included in the s. 85(1) election.
• Before the end of Newco's taxation year, Newco will purchase for cancellation the Newco preferred shares held by Transferor in consideration for a demand note.
• After the end of Newco's first fiscal period, Transferor will purchase for cancellation the Class A shares and Class D shares of its capital stock held by Newco in consideration for a demand note.
• The two notes will be set off.
• Approximately one week later, B will give certain shares of Newco to his son.
• Up to a number of months later, A will effect a s. 51 exchange of Class A shares of the Transferor for Class B preferred shares thereof, and thereafter will give Class A shares of Transferor to his son.
• Newco will engage in an asset purchase, or acquire shares of a corporation and merge with it.

Rulings

Including:

• re exception in s. 55(3)(b),
• division of the UCC under s. 85(1)(e) based on the relative FMV of the transferred depreciable property,
• Newco being subject to Pt. IV tax given the generation of a dividend refund to Transferor, whereas Transferor will not be subject to Pt. IV tax since Newco is not entitled to a dividend refund, and
• ss. 73(4) and (4.1) applying to the share gifts to the sons.

Background

Aco to Eco are corporations held by unrelated individuals (A to E) or their families or family trusts. They wish to separate their economic interests in the shares of Tco, a public corporation traded on the stock exchange. Xco (discussed in 2022-0958601R3), whose shares are held by Aco and Kco (a predecessor of KL Amalco) and unrelated shareholders and which is an investment company will have no change to its ownership by those shareholders or their successors by amalgamation except by virtue of the 3^rd butterfly below.

Proposed transactions

Aco and Bco first will effect estate freezes.

Butterfly 1

DC2, whose shares (being three different classes of common shares) are held by Aco, Bco and Cco, and KL Amalco, whose shares (being two different classes of common shares) are held by Dco and Eco, will effect a butterfly split-up of DC1 Amalco (whose assets include Tco shares) between their respective TCs (TC1 and TC2) formed by DC2 and KL Amalco.

Amalgamation 3

DC2 and TC1 will amalgamate to form DC2 Amalco.

Butterfly 2

Bco and Cco, will effect a butterfly partial split-up of DC2 Amalco involving transfers of their shareholdings of DC2 Amalco (but not those of Aco) to their respective TCs (TC3 and TC4) formed by Bco and Cco, pro rata spin-offs of DC2 Amalco net assets to those two TCs, and share cross-cancellations.

Amalgamation 4

KL Amalco and TC2 will amalgamate to form DC3 Amalco.

Butterfly 3

There will be a pro rata butterfly transfer of the assets of DC3 Amalco to the TC (TC5) of Eco, a pro rata spin-offs of KL Amalco net assets to TC5, and share cross-cancellations.

Amalgamation 5-9

Aco and DC2 Amalco will amalgamate to form Aco Amalco, Bco and TC3 will amalgamate to form Bco Amalco, Cco and TC4 will amalgamate to form Cco Amalco, Dco and DC3 Amalco will amalgamate to form Dco Amalco and Eco and TC5 will amalgamate to form Eco Amalco.

Rulings

Including re exception in s. 55(3)(b) and non-application of s. 55(3.1).

CRA provided standard rulings for a one-wing split-up butterfly respecting the “Transferor,” which computed the income from its business (presumably, a farming business) under s. 28(1) and in which two brothers, A and B (survivors of their father, C), were both actively involved. They hold the common shares, and the estate of C and their mother hold preferred shares.

As provided for in the shareholders agreement, the transactions were to commence with the Transferor paying a capital dividend to the estate of C equal to the excess of the proceeds received by it on the policy on the life of C over the adjusted cost basis of the policy, with the Transferor then redeeming the preferred share held by the estate for its redemption value.

A will then transfer his common shares of the Transferor to a newly incorporated “Transferee” on a s. 85(1) rollover basis for shares of the Transferee. There then will be a pro rata spin-off of the two types of property of the Transferor (cash and near cash assets, and business property) on a net asset basis to the Transferee using the usual cross-redemption/note mechanics.

CRA implicitly regarded the cash distribution of the life insurance proceeds to the estate as being separate and apart from the pro rata distribution occurring on the butterfly. It provided its usual ruling that the strict requirements of s. 85(1)(e) could be ignored, so that there could be a pro rata division of the UCC of the depreciable property, rather than disproportionate UCC going to the Transferee.

Background

The shares (being preferred and common shares) of DC, whose assets (other than minor cash) consisted solely of publicly-traded shares, were held equally by three adult siblings. DC had no liabilities, and positive ERDTOH and GRIP, and nil NERDTOH and CDA, balances.

Proposed transactions

1. DC’s articles will be amended to change all of the DC preferred shares into DC common shares.
2. Siblings 1 and 2 will each transfer his DC common shares on a s. 85(1) rollover basis to TC1 and TC2, respectively (each incorporated by the respective Sibling for one common share) solely in consideration for TC1 or TC2 common shares.
3. DC will contemporaneously transfer, on a s. 85(1) rollover basis, 1/3 of each of its types of property (investment, and cash, property) in consideration solely for non-voting redeemable retractable special shares to each of TC1 and TC2.
4. Each TC will purchase for cancellation its special shares for a note (which it will have the financial capacity to honour), accepted by DC as full payment.
5. DC will purchase for cancellation its common shares held by each TC for a note, accepted by the TC as full payment.
6. DC will designate, a portion of the taxable dividend arising from the purchases for cancellation in 5 to be eligible dividends by notifying TC1 and TC2, respectively, in writing, within the s. 89(14) time limit.
7. The notes will be set-off.

Rulings

Including re ss. 129(1.2), 55(2) and 55(2).

Background

DC owns four rental properties (Properties 1, 2, 3 and 4) which generate business income rather than being a specified investment business by virtue of having more than five full-time employees. It is held by two holding companies: Holdco1, owned by members of the AB family (i.e., by the estate of AB and children of AB); and Holdco2, owned by members of the AB family (i.e., by the estate of AB and children of AB); and Holdco2, owned by members of the CD family (i.e., by CD, the brother of AB, children and the spouse of CD, and a CD holding company).

Proposed transactions

1. There will be a preliminary transfer by DC of registered title to its 4 properties to newly-incorporated nominee corporations held by the respective Holdcos.
2. DC will increase the PUC of its common shares by the lesser of (a) the safe income on hand attributable to the common shares at that time and (b) the aggregate of (i) its pre-1972 CSOH and (ii) an amount sufficient to trigger a refund of its RDTOH balance at that time, if any. The principal purpose will be to increase the ACB of the DC common shares, so as to eliminate or reduce the capital gain that would otherwise arise by virtue of an amount equaling DC’s pre-1972 CSOH not be treated as a dividend on the winding-up distribution from DC in 7 below pursuant to s. 88(2)(b)(ii), and instead being treated as “proceeds of disposition” under para. (i) of the definition.
3. DC may submit a request to the relevant Tax Services Office to have a change of taxation year end, if there is a material balance of RDTOH, such that the steps below giving rise to dividends occur in its following taxation year.
4. Each of Holdco1 and Holdco2 will transfer its common shares of DC to a corporation newly-formed by it (TC1 or TC2) on a s. 85(1) rollover basis in consideration for common shares.
5. DC (which will have not investment property) will transfer simultaneously to each of TC1 and TC2 on a s. 85(1)rollover basis 50% of its cash or near-cash and business property, on a gross FMV basis (such that immediately following such transfers the FMV of each type of property so received by TC1 and TC2 will be equal to or will approximate 50% of the FMV of that particular type of property of DC immediately before such transfers) in consideration for the assumption of liabilities and the issuance of redeemable preferred shares. As a result TC1 will become the beneficial owner of Property2, Property3 and Property4 and TC2 will become the beneficial owner of Property1.
6. TC1 and TC2 will each redeem the preferred shares held by DC for a demand, non-interest bearing promissory note.
7. Immediately thereafter, the shareholders of DC (being TC1 and TC2) will resolve to wind-up and dissolve DC and, pursuant to the winding-up, the two notes owing by TC1 and TC2 will be distributed to TC1 and TC2, respectively, and be cancelled.
8. To the extent that DC has GRIP at the time of the winding-up, DC will designate a portion of the winding-up dividend referred to in s. 88(2)(b)(iii) to be an eligible dividend.
9. Any tax refund that DC is entitled to will be distributed pro rata to each of TC1 and TC2.
10. DC will be dissolved.

Rulings

Including re non-application of s. 55(3.1) or s. 80 and application of Reg. 1100(2.2).

Background

The Corporation, which is held by Holdco, three siblings (Child 1, 2 and 3) and three trusts (Newtrust 1, 2 and 3) for the benefit of their respective families, has been holding cash, marketable securities and real estate investments. Holdco, also a CCPC, is held by Child 1, 2 and 3 and trusts (Trust 1, 2 and 3) for their respective spouses and children. The Corporation has ERDTOH, and GRIP balances, and a negative CDA.

Proposed transactions

Holdco and the Corporation will amalgamate.

• The following transactions will be effected to effect a split-up of Amalco between three transferee corporations (TC 1, 2 and 3), which have been incorporated by Child 1, 2 and 3, respectively. The description below focuses on TC 1, but comparable transactions are effected for TC 2 and 3 and the comparable family trusts.
• Child 1, Newtrust 1 and Trust 1 will transfer a portion of their common shares of Amalco to TC 1 under s. 85(1) in consideration for common shares of TC 1.
• Amalco will transfer a pro rata portion (determined on a net rather than gross FMV basis) of each of its two types of property (cash and near cash, and investment assets) on an s. 85(1) basis to TC 1 in consideration for assumption of liabilities and non-voting retractable preferred shares of TC 1.
• Such preferred shares will then be redeemed in consideration for a TC 1 note.
• TC 1 will then end its first taxation year.

As noted, comparable transactions will contemporaneously carried out for the Child 2 and 3 “wings” of this split-up butterfly.

• On the following day, the winding-up of Amalco will be authorized.
• The only assets of Amalco, being the notes owing by TC 1, 2 and 3 will be distributed on the winding-up (to which s. 88(2)(b) will apply), thereby generating deemed dividends under s. 84(2) (which will be designated as eligible dividends) and a dividend refund to Amalco (generating a corresponding s. 186(1)(b) liability to TC 1, 2 and 3). Such distribution of the notes to their respective debtors will result in their extinguishment.
• On the end of that day, Amalco will end is first taxation year.
• Amalco will not be dissolved until it has received and distributed, on a pro rata basis, the dividend refund.

Rulings

Standard (including re no application of s. 80).

Current structure

DC, which is the beneficial owner of a rental real estate property (representing a specified investment business), is held by two families (dealing with each other at arm’s length) as follows: a portion of the DC common shares are held by TC1, which is held by Trust A2 (which, like Trust A1, is a discretionary trust for the issue of Mr. A) and Holdco A which, in turn, is held by Trust A1 and the three adult children of Mr. A; and the balance of the DC common shares are held by TC2, whose shares are held by the four children of Mr. B and a CCPC for the first child and a discretionary trust for that child’s family.

Types of property

DC’s property consists of cash or near-cash assets (including a demand non-interest-bearing loan receivable from a corporation jointly controlled by Mr. A and B). Its deferred expenses will not be considered property for these purposes. As its cash or near-cash assets are currently significantly less than the current liabilities, it is expected that all the DC unallocated liabilities will be allocated to its investment property.

Transactions

1. Following the transfer of legal title to the rental property being transferred to new nominee corporations held by Mr. A or members of the B family, DC will simultaneously transfer to each of TC1 and TC2 under s. 85(1) a pro rata (1/2) portion of the net FMV of each type of property owned by it (so that each will receive an undivided beneficial interest in the rental property) in consideration for the assumption of liabilities (so as to ensure the pro rata test is satisfied) and for the issuance of voting Class B Preferred Shares (representing more than XX% and less than 50% of the votes of the issuer).
2. Such preferred shares will be redeemed for redemption notes.
3. TC1 and TC2 will resolve to wind-up and dissolve DC and in connection therewith, DC will distribute all its assets to TC1 and TC2 and, in particular, will distribute each redemption note owing by TC1 or TC2 to such debtor, thereby resulting in the notes’ extinguishment.
4. To the extent that the CDA of DC has a positive balance at the time of the winding-up of DC, and immediately prior to the distribution of the Redemption Notes by DC to TC1 and TC2, DC will elect under s. 83(2), to treat the portion of the winding-up dividend referred to in s. 88(2)(b)(i) as a separate capital dividend paid to TC1 and TC2.
5. Upon the receipt of any dividend refund by DC, it will immediately transfer the cash received in the form of a dividend (under the terms of the agreement governing the winding-up of DC) on a pro rata basis to each of TC1 and TC2.
6. Within a reasonable time thereafter, articles of dissolution will be filed by DC.

Pt IV tax planning

The preferred share redemptions and winding-up dividends in __ and __ occur in different taxation years to avoid a possible Part IV tax “circularity” issue.

Rulings

Including re s. 55(2) and no application of Pt. IV (except under s. 186(1)(b)), Pt. IV.1 or Pt. VI.1.

Current structure

The shareholders of DC (a Canadian-controlled private corporation) are A and her two adult children, B and C, each holding common shares. DC owns marketable securities, cash and short term investments, and its liabilities include accounts payable and promissory notes payable to related party individuals.

Proposed transactions

1. A, B and C will each incorporate ACo1, BCo1 and CCo1 which, in turn, will each incorporate ACo2, BCo2 and CCo2.
2. DC will incorporate BSub and CSub.
3. A, B and C will each transfer their DC shares to ACo1, BCo1 and CCo1, respectively, under s. 85(1) in consideration for common shares.
4. DC will transfer (electing under s. 85(1)) the same percentage of each “Type of Property” under the Robertson rules to each of BSub and CSub. Since BSub and CSub will each receive a proportionate allocation of each Type of Property owned by DC, the BSub Common Shares and CSub Common Shares will be assets of the same Type of Property in the immediately subsequent distribution described in 6 below. This transfer (and that in 6 below) will be made on a gross FMV basis. In determining the gross FMV of each Type of Property of DC immediately before the transfer, no liabilities of DC will be allocated to, and deducted from the calculation of the gross FMV of each Type of Property.
5. In consideration for such transfers, each of BSub and CSub will assume DC’s liabilities in the same percentage proportion as described in 6 above and issue common shares for the balance of the FMV consideration. Following such transfers, the only assets owned by DC will be its BSub and CSub Common Shares.
6. DC will transfer, in consideration for Class A preferred shares of the transferee, a portion (represented by the ratio of the FMV of all the shares of DC owned by ACo1, BCo1 and CCo1 immediately before the transfer, to the FMV of all the shares of DC immediately before the transfer) of its BSub Common Shares to ACo2, its CSub Common Shares to BCo2 and both BSub and CSub shares to CCo2 such that, immediately thereafter, the FMV of the each Type of Property received by ACo2, BCo2 and CCo2 will approximate such ratio. A joint s. 85(1) election will be filed.
7. ACo2, BCo2 and CCo2 will each redeem all of its Class A Preferred Shares owned by DC in consideration for a non-interest bearing demand note.
8. ACo2, BCo2 and CCo2 will be wound-up into ACo1, BCo1 and CCo1, respectively.
9. DC will be wound-up into ACo1, BCo1 and CCo1.
10. ACo1 will transfer BSub and CSub Common Shares to BCo1 and CCo1, respectively, in consideration for Class A Preferred Shares, with a joint s. 85(1) election being filed.
11. BSub and CSub will be wound-up.

Purposes

A, B and C will be enabled to receive their proportionate share of each Type of Property of DC; and A’s interest in the DC assets will be frozen for the future benefit of B and C.

Rulings

Include butterfly rulings.

Current structure

The shareholders of DC, a Canadian-controlled private corporation carrying on a farming business are Mother, holding non-cumulative non-participating redeemable retractable non-voting Class B shares, and Child 1 and Child 2, holding Class B and common shares. DC’s assets include cash, farming assets and life insurance policies on the lives of Mother and Child 1 and Child 2.

Proposed transactions

1. Child 2 will incorporate an operating company, TC.
2. Child 2 will transfer all his Class B and common shares of DC to TC under s. 85(1) in consideration for TC common shares.
3. Mother will transfer all her Class B shares of DC to TC under s. 85(1) in consideration for TC non-cumulative non-participating redeemable retractable non-voting Class A special shares.
4. DC will transfer to TC a proportionate share of DC’s: cash or near-cash property (including cash, HST receivable, Agri-invest deposit, inventory and an amount “up to” the cash surrender value of the Mother and Child 2 insurance policy); investment property (including the amount, if any, by which the FMV of each such policy exceeds its CSV); and business property.
5. As part of such transfer, DC will transfer a percentage interest in the Mother insurance policy, and all of the Child 2 policy, to TC for proceeds determined in accordance with s. 148(7) as the greater of the value of the interest; the FMV of the consideration given therefor; and the adjusted cost basis of the interest and the consideration therefor, in each case being a non-interest bearing demand promissory note in the principal amount equal to the FMV of the policy. The percentage respecting the Mother policy will be such as will result in TC acquiring its proportionate share of each type of property. Each policy will not be eligible property and no s. 85 election will be made.
6. Except as described above, the consideration for the property transferred to TC (occurring under s. 85(1), and with the farm house being retained by DC) will be the assumption of a proportionate portion of the DC liabilities and the issuance of non-cumulative non-participating redeemable retractable non-voting Class B special shares.
7. Each of DC and TC will redeem the shares held by the other for a note, with the notes (including those from 5) being set off.

Additional information

None of DC, Mother, Child 1 and Child 2 expect that the Mother or Child 2 insurance policy will be disposed of or that any benefits will be paid thereunder as part of the same series of transactions or events that include the Proposed Transactions; or that the farm houses will be disposed of by DC or TC as part of the same series of transactions or events that include the Proposed Transactions.

Rulings

Standard split-up butterfly

Current Structure

Foreign Parentco, which is governed by the laws of (foreign) Country 1 and has two classes of issued and outstanding shares (Class A and B common shares) which are identical other than the differing votes per shares. There are American depositary receipts for the shares. Foreign Shareholder is the only significant shareholder, whose representatives are a minority on the Foreign Parentco board. Foreign Parentco holds all the ordinary shares of Foreign Subco 2 and Foreign Subco 1 (a holding company in Country 2) and all the common shares of Foreign Spinco and (after giving effect to 4 below) of DC. Foreign Spinco wholly-owns Foreign Spinco Sub (which, like Foreign Spinco, is governed by the laws of Country 1).

DC (before 2 below) carried on the Canadian Transferred Businesses and carries on the Canadian Retained Businesses. DC rents the “Industrial Property” to an arm’s-length tenant which, due to an encumbrance, has a nil fair market value (“FMV”). DC has no subsidiaries other than Newco, which it incorporated for nominal consideration. DC was formed on the vertical short-form amalgamation of a buyco which had acquired all the shares of the subsidiary for cash from an arm’s length vendor.

Completed Transactions

1. The above structure reflects the transfer by Foreign Subco 1 of all of its shares of Foreign Subco 2 to Foreign Parentco in exchange for Foreign Parentco Foreign Parentco’s shares of Foreign Subco 4.
2. DC transferred (DC Transfer 1) the Canadian Transferred Business (which included the accounts receivable, trade receivables, inventories, prepaid expenses and business assets) to Newco in consideration for the assumption of liabilities, the issuance of a promissory note (Newco Debt) and the issuance of common shares, with a s. 85(1) election being filed.
3. Foreign Spinco Sub subscribed for one common share of TCo (governed by Act 1, the same as for DC) on its incorporation.
4. The above structure reflects the transfer by Foreign Subco 2 of all of its common shares of DC to Foreign Parentco as a dividend.
5. The above structure also reflects the transfer by Foreign Parentco of all its common shares of Foreign Spinco Sub to Foreign Spinco for notes that were then capitalized as equity.

Proposed Transactions

6. Prior to the implementation of the Canadian butterfly transactions, Foreign Spinco and Foreign Spinco Sub will acquire, through a series of stock sales, asset sales and other transfers, worldwide assets of the Transferred Businesses (other than the Canadian Transferred Businesses) from Foreign Parentco and/or its wholly-owned subsidiaries.
7. DC will: (a) reorganize its capital by amending its articles of association to create a new class of common shares (DC New Common Shares) containing more than one vote per share and a new class of redeemable retractable non-cumulative non-voting preferred shares (DC Special Shares); and (b) exchange (DC Share Exchange) each issued and outstanding DC Common Share for one DC New Common Share and one DC Special Share. The aggregate PUC of the (existing) DC Common Shares will be apportioned between the DC New Common Shares and the DC Special Shares in proportion to the relative aggregate FMV of such shares.
8. Following the DC Share Exchange, in the context of a four-party share exchange (Four-Party Share Exchange), pursuant to an agreement among Foreign Parentco, Foreign Spinco Sub, Foreign Spinco and TCo:

(a) TCo will agree to pay the purchase price for the DC Special Shares transferred to it by Foreign Parentco on the Four-Party Share Exchange, by issuing TCo Common Shares to Foreign Spinco Sub, which are agreed to be issued in respect of the disposition by Foreign Parentco of the DC Special Shares to TCo; the amount added to the stated capital of the TCo Common Shares will equal the FMV of the DC Special Shares rather than the lesser amount under s. 212.1(1.1)(b) “is simply a matter of convenience, in terms of executing the necessary corporate resolutions to effect these steps”;

(b) Foreign Parentco will agree to pay the purchase price for the common shares of Foreign Spinco issued to it in (c) below by transferring all of its DC Special Shares to TCo;

(c) Foreign Spinco will agree to pay the purchase price for the common shares of Foreign Spinco Sub issued to it by Foreign Spinco Sub in (d) below (which issuance is agreed to be in respect of the disposition by Foreign Parentco of the DC Special Shares to TCo) by issuing Foreign Spinco common shares to Foreign Parentco; and

(d) Foreign Spinco Sub will agree to pay the purchase price for the TCo Common Shares issued to it by TCo, by issuing Foreign Spinco Sub common shares to Foreign Spinco.

As a result of the four-party exchange, TCo (wholly-owned by Foreign Spinco Sub) will own all the DC Special Shares.

9. DC will become legally obligated to make the DC Cash Transfer and to transfer the Newco Common Shares and a loan receivable (the DC Receivable) from Newco to TCo in consideration for the assumption of a portion of the debt, owing by DC to a non-resident indirect subsidiary of Foreign Parentco, equal in amount to the DC Receivable and, respecting the transferred Newco share and DC Cash Transfer, for the assumption of liabilities and the issuance of TCo Preferred Shares. This is expected to entail the transfer of two types of property (business and cash and near cash), given that the Industrial Property has a nil FMV. These two types of property will be determined after giving effect to the reclassification of net receivables as business property). An s. 85(1) election will be made.
10. The DC Cash Transfer will occur within XX days of the transfer in 10 above to the extent necessary to ensure that there has been a proportionate transfer to TCo of the cash or near cash assets of DC determined under the consolidated look-through approach.
11. DC Special Shares owned by TCo and the TCo Preferred Shares owned by DC will be redeemed, with the resulting notes set off.
12. Foreign Parentco will contribute all of the DC New Common Shares to Foreign Subco 2.
13. Foreign Parentco will distribute all of the Foreign Spinco shares (after steps to effectively convert them to Class A and B shares) to its shareholders as a special dividend.

Rulings

Include standard rulings re non-application of s. 55(2) due to s. 55(3)(b) conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TCo shares or DC special shares.

CRA ruled on a combined pipeline and split-up butterfly transaction respecting DC, which invested in marketable securities, and the shares in which passed to the estate with their adjusted cost based having been stepped-up under s. 70(5). DC then transferred its marketable securities to three transferee corporations (TCs) for the three beneficiaries in consideration for “butterfly shares” – but with DC holding onto the notes that it received on the immediate redemption of the butterfly shares for a redacted period of time, after which DC was wound-up into the TCs, thereby resulting in deemed winding-up dividends and in the notes being extinguished on their being assigned to the TCs.

DC had refundable dividend tax on hand. This sequencing of the two deemed dividends (coupled with the appropriate choice by the TCs of their first year end) avoided Part IV tax circularity issues.

Background

DC1 holds cash and cash-like assets (e.g., money market funds or GICs), marketable securities and has an RDTOH and CDA balance. Its common shares are held by Mr. B (apparently, non-resident, see para. 90 of letter and Step 19 below) and by an investment holding corporation (TC1) whose common shares are held by Mr. B’s brother (Mr. A). The Class A voting preferred shares, and Class C non-voting preferred shares, of DC1 are held by DC2.

DC2 holds such preferred shares as well as advances receivable from DC1. Its Class A voting and Class B non-voting common shares are held by Mr. A and Mr. B, respectively, and its Class B non-voting and Class D voting preferred shares are held by their mother, Ms. X. DC2 also has a CDA and RDTOH balance.

Mr. B incorporated and subscribed for common shares of TC2 and TC3.

Proposed Transactions

1. Mr. A. will transfer his Class A and B common shares of DC2 on a s. 85(1) rollover basis to TC1 for TC1 Class A shares.
2. Mr. B will transfer his common shares of DC1 to TC2 and his Class B common shares of DC2 to TC3, on a s. 85(1) rollover basis in exchange for common shares of TC2 or TC3.
3. DC1 will transfer marketable securities, having a low ACB, to a newly-incorporated wholly-owned subsidiary (“Securitiesco”) on a non-rollover basis and then amalgamate with it, thereby creating a short taxation year.
4. DC1 will increase the PUC of its Class C shares held by DC2 and elect under s. 83(2).
5. DC2 will increase the PUC of its remaining Class B preferred shares (held by Ms. X), elect under s. 83(2) and redeem those shares as well as her Class D preferred shares.
6. DC2 will incorporate SubDC2 and TC1 will incorporate SubTC1A and SubTC1B, and TC2 will incorporate SubTC2. SubTC1A and SubTC2 will have initial year ends immediately after the redemptions in 8 (and SubTC1B, immediately after the redemption in 14.)
7. DC1 will transfer under s. 85(1) a pro rata portion of each of its three types of property to SubDC2, SubTC1A and SubTC2 in consideration for the assumption of liabilities and the issuance of special shares, so as to satisfy the percentage test in s. 55(1) – distribution to within 1%.
8. The special shares in 7 will be redeemed for notes.
9. SubDC2, SubTC1A and SubTC2 will be wound-up into DC2, TC1 and TC2, with their notes issued in 8 being assumed.
10. DC1 will be wound-up so that the notes issued in 8 will be distributed to DC2, TC1 and TC2, with DC1 making a s. 83(2) election on resulting s. 88(2)(b)(i) dividends.
11. DC2 will increase the PUC of its Class A and B common shares in an amount, not exceeding its safe income on hand, sufficient to trigger a refund of its RDTOH balance. DC2 has requested a change in its year end, so that the subsequent steps will occur in its next taxation year.
12. DC2 will transfer under s. 85(1) a pro rata portion of each of its three types of property to SubTC1B in consideration for the assumption of liabilities and the issuance of special shares.
13. SubTC1B will redeem its special shares for a note.
14. SubTC1B will be wound-up into TC1, so that TC1 will assume the note in 13.
15. DC2 will purchase for cancellation all shares in its capital owned by TC1 for a note.
16. The notes in 15 and 16 will be set off.
17. Ms. X will subscribe for Class D preferred shares of DC2.
18. DC2 will be continued as an unlimited liability company (“ULC”), and thereafter amalgamate with TC3.
19. Amalco will increase the PUC of its common shares (held by Mr. B) and distribute cash or a note to Mr. B (CRA states that it is not commenting on the rate of Pt XIII withholding).
20. B’s shares of Amalco will be redeemed.

Rulings

Include that the above transactions will not cause s. 55(3.1) to apply to deny the s. 55(3)(b) exemption.

Background

All of the common shares of Canadian DC are owned by Forco 2 which, in turn, is wholly-owned by Forco 1 which, in turn, is wholly-owned by Foreign Pubco. The business operations carried on by Canadian DC include the Canadian DC Spin Business, and real property of Canadian DC is shared by the Canadian DC Spin Business and other business operations. Canadian DC has an interest-bearing term loan receivable from a Canadian sister corporation (Canco 1), that is repayable in equal annual instalments and that was used to finance an acquisition by a predecessor of Canco 1 and that is prepayable at Canco 1’s option (the “Canco 1 Loan”). Canadian DC has subleased portions of particular properties, each of which as to its balance is used Canadian DC’s businesses, to arm’s length sublessees for lower rents than what Canadian DC pays. Canadian DC holds 3 of the quotas in the capital of Forco 3 and the balance are held by Forco 1 – and otherwise does not hold any shares or units. Canadian DC is the head entity in cash pooling arrangements with Canadian affiliates (each a “Cash Pooling Participant”) and a financial institution and holds the bank account in which the cash of the various Cash Pooling Participants is pooled.

Proposed transactions

1. Foreign Pubco will incorporate Foreign Spinco, New LLC and Foreign Holdco 1, Foreign Holdco 1 will incorporate Foreign Holdco 2, and the foreign members of the Pubco Group will directly or indirectly transfer the assets of the Foreign Spin Business to New LLC or Foreign Holdco 1 (or a direct or indirect subsidiary of Foreign Holdco 1).
2. Foreign Pubco will transfer the shares of Foreign Holdco 1 to New LLC for additional units or by way of a capital contribution.
3. With a view to the “First Three-Party Share Exchange” in 4 below, Forco 2 will incorporate Foreign DC, Foreign DC will incorporate Canadian TC and the existing common shares of Canadian DC will be exchanged under s. 86 for non-voting redeemable and retractable “Canadian DC Special Shares,” as well as for “Canadian DC New Common Shares.”
4. Pursuant to the agreement between Forco 2, Canadian TC and Foreign DC for the “First Three-Party Share Exchange,” Forco 2 will transfer the Canadian DC Special Shares to Canadian TC and it will be further agreed that
   
   1. Canadian TC will acquire such Canadian DC Special Shares in consideration for issuing Canadian TC Common Shares to Foreign DC;
   2. Forco 2 will transfer all of the Canadian DC Special Shares to Canadian TC in consideration for the issuance in c; and
   3. Foreign DC will issue units to Forco 2 in consideration for the issuance in a. (There is no Canadian tax reason for transferring the Canadian DC Special Shares to Canadian TC by way of the First Three-Party Share Exchange rather than in consideration for Canadian TC Common Shares.)
5. Canadian DC will transfer the Canadian DC Spin Business assets (the “Distribution Property”) to Canadian TC in consideration for the assumption of certain liabilities and the issuance of Canadian TC Special Shares, with a joint s. 85(1) election being made - and with s. 20(24) payments made by it treated as part of the property so distributed.
6. Immediately before the transfer in 5 , the FMV of the Foreign DC units of Forco 2 will approximate the formula set out in s. (b)(iii) of the definition of “permitted exchange” in s. 55(1) on the assumption that Forco 2 is the participant, Canadian DC is the distributing corporation and Foreign DC is the acquiror.
7. For the purposes of determining that there has been a pro rata distribution of each of the three-types-of property:
   
   1. following the allocation of current liabilities to each cash or near-cash property on a pro rata basis, any remaining net FMV of any accounts receivable (including HST/GST/QST receivables and accounts receivable owing from non-arm’s length persons), inventories and prepaid expenses of Canadian DC will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
   2. amounts receivable by Canadian DC under the cash pooling arrangement will be considered cash or near-cash property and any amounts payable by it thereunder will be considered current liabilities allocable solely to cash (if the cash pool account is in a negative balance position, due to outstanding cheques or otherwise, that negative balance can be offset against any other bank account that is in a positive position);
   3. the quotas of Forco 3 owned by Canadian DC will be considered investment property;
   4. the portion of loans or advances (including the Canco 1 Loan) that is due within the next [12] months, as well as loans and advances with no fixed terms of repayment will be considered cash or near cash assets, and the balance of any such term loans (including the Canco 1 Loan) will be considered investment property;
   5. the real properties of Canadian DC, including its leasehold interests which are subject to the subleases, will be considered business property;
   6. any amount collected from customers and recorded as deferred revenue will not be considered a liability provided it does not represent a true legal liability capable of quantification;
   7. any net pension plan asset (i.e., actuarial plan assets in excess of actuarial plan liabilities) of Canadian DC will not be considered property of Canadian DC, but any net pension liability (i.e. actuarial plan liabilities in excess of actuarial plan assets for a registered pension plan will be considered a legal liability capable of quantification;
   8. any liability that is related to an unregistered retirement plan or similar post-employment arrangement (e.g., supplemental retirement or health care plan) will be disregarded where the amounts are dependent on future events;
   9. In the event that Canadian DC has cash or near-cash property (“cash”) at the time of the transfer in 5, then no later than XX days thereafter, Canadian DC will transfer cash as is required to ensure that the net FMV of the cash of Canadian DC transferred to Canadian TC will approximate the ratio of (a) the aggregate FMV of the Canadian DC Special Shares owned by Canadian TC immediately before the transfer, to (b) the aggregate FMV of all the issued and outstanding shares of Canadian DC immediately before the transfer - and such transfer will be considered to have been occurred as part of the transfer in 5.
   10. To the extent that current liabilities of Canadian DC are allocated to more than one type of property of Canadian DC (for example, as a result of the reclassification in 7(a)) and all or a portion of those liabilities are assumed by Canadian TC in 5, Canadian TC will have the option to allocate those current liabilities to any such corresponding type of property of Canadian TC, provided that the amount so allocated to a particular type of property of Canadian TC does not exceed the amount allocated to that same type of property by Canadian DC;
   11. Since the Canco 1 Loan (transferred in 5) will be considered to be both an investment, and cash and near cash asset, Canadian DC and Canadian TC will jointly agree on the portion of thereof that is of each property type of property, provided that the amount of the transferred Canco 1 Loan considered to be a particular type of property of Canadian TC does not exceed its amount that is considered to be of that type by Canadian DC;
8. Canadian TC will redeem all of the outstanding Canadian TC Special Shares held by Canadian DC for a non-interest-bearing promissory note, payable on demand, and Canadian DC will accept the note as full payment of such redemption consideration.
9. Canadian DC will redeem all of the outstanding Canadian DC Special Shares held by Canadian TC for note on a similar basis.
10. The two notes will be set-off.
11. Forco 2 will distribute the units of Foreign DC to Forco 1 as a dividend and a return of share premium, and Forco 1 will, in turn, distribute them to Foreign Pubco as a dividend.
12. Prior to the “Second Three-Party Share Exchange” in 13, New LLC will incorporate Foreign TC and subscribe a nominal amount for ordinary shares.
13. Under the “Second Three-Party Share Exchange,” Foreign Pubco will transfer the Foreign DC units to Foreign TC in the following manner:
    
    1. Foreign TC will agree to pay to acquire Foreign DC units from Foreign Pubco in consideration for issuing Foreign TC shares to New LLC;
    2. Foreign Pubco will agree to transfer the Foreign DC units to Foreign TC in consideration for being issued New LLC units; and
    3. New LLC will agree to issue units to Foreign Pubco as the purchase price for the Foreign TC Common Shares issued to it.
14. Immediately before the transfer by Foreign DC to Foreign TC in 13, the FMV of the units of New LLC owned by Foreign Pubco will approximate the formula set out in s. (b)(iii) of the definition of “permitted exchange” in s. 55(1) on the assumption that Foreign Pubco is the participant, Foreign DC is the distributing corporation and New LLC is the acquiror.
15. Foreign DC will be wound-up into Foreign TC so that the shares of Canadian TC will be distributed to Foreign TC.
16. Foreign Pubco will transfer the units of New LLC to Foreign Spinco for cash and shares of Foreign Spinco.
17. Through a series of transactions, the shares of Foreign TC will be transferred to an indirect subsidiary of New LLC.
18. Foreign Pubco will distribute the Foreign Spinco shares pro rata to its shareholders.

Rulings

Include that the described transactions will not cause s. 55(3.1) to deny the s. 55(3)(b) exemption.

Overview

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. DC was the product of a prior amalgamation of two corporations carrying on the Canadian spin and keep businesses, respectively. 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. In the context of this 4-party share exchange, the increase in the paid-up capital in respect of the shares of TC issued to Foreign SpinCo Sub occurred "by virtue of the disposition" of the special shares of DC by its foreign parent to TC. Accordingly, s. 212.1(1)(b) (now, s. 212.1(1.1)(b)) applied to grind the PUC of those shares to an amount equal to the PUC of the DC special shares. The butterfly ruling was conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TC shares or DC special shares. As in, for example, 2014-0530961R3, there was provision for a second stage transfer of cash by DC to TC if (contrary to expectation, as it was anticipated that, after applying the usual consolidated look through rules, including to foreign subsidiaries, there would be only business property) that was required to satisfy the requirements under the butterfly rules for a pro rata distribution of property of DC.

Current structure

Foreign Sub 5, which was an indirect wholly-owned Canadian subsidiary of Foreign PubCo, wholly-owned A Co. B Co was the result of an amalgamation of H Co and I Co. H Co was a wholly-owned subsidiary of Foreign Sub 4 (Foreign Sub 5) and whose business activities were substantially related to the Keep Business (also carried on by Foreign PubCo), and I Co was a wholly-owned subsidiary of A Co whose business activities were substantially related to the Spin Business. This amalgamation was not entered into in contemplation of the distribution in 5.

Pre-proposed transactions

A Co and B Co amalgamated to form DC, and DC transferred all its assets relating to the Canadian Spin Business to newly-incorporated DC Sub under s. 85(1) in consideration for shares and the assumption of liabilities. Foreign Sub 3 (the parent of Foreign Sub 5) incorporated Foreign SpinCo, which incorporated Foreign SpinCo Sub, which incorporated TC as a Canadian unlimited liability company.

Proposed transactions

1. Foreign Sub 4 will distribute its DC Common Shares.
2. Foreign Sub 3 will transfer the DC Common Shares to Foreign Sub 5 in exchange for an additional membership interest.
3. Under a s. 86 reorganization, the DC Common Shares will be exchanged for DC New Common Shares carrying X votes per share, and for non-voting redeemable retractable noncumulative DC Special Shares.
4. Foreign Sub 5 will transfer the DC Special Shares to TC. As part of this transfer, Foreign Sub 5, Foreign SpinCo, Foreign SpinCo Sub, and TC will enter into a four-party transfer agreement (the “Four-Party Share Exchange”) (which will be effective after the (undescribed) transfer of the Foreign Spin Business to Foreign SpinCo) whereby: (a) TC will agree to pay the purchase price for the DC Special Shares transferred to it by Foreign Sub 5 by issuing TC Common Shares to Foreign SpinCo Sub having a stated capital equal to the FMV of the DC Special Shares; (b) Foreign Sub 5 will agree to pay the purchase price for the Foreign SpinCo Common Shares issued to it by Foreign SpinCo in (c) below by transferring all of the DC Special Shares to TC; (c) Foreign SpinCo will agree to pay the purchase price for the Foreign SpinCo Sub Common Shares issued to it in (d) below by issuing Foreign SpinCo Common Shares to Foreign Sub 5; and (d) Foreign SpinCo Sub will agree to pay the purchase price for the TC Common Shares issued to it by TC in (a) above by issuing Foreign SpinCo Sub Common Shares to Foreign SpinCo.

5. DC will transfer the “Distribution Property” (i.e., the DC Sub Common Shares) under s. 85(1) to TC in consideration for the issuance of TC Preferred Shares and (if applicable) the assumption of certain DC liabilities. Although it is anticipated that DC will only have net business property (based on applying the usual consolidated look-through approach to determining the net FMV of each of the three types of property of DC), should DC have cash and near-cash property at the time of such transfer (the “transfer time”), the transfer of any cash and near-cash property by DC to TC in this step will occur no later than XX days after the transfer time but will nonetheless be considered to have been Distribution Property transferred to TC at the transfer time for s. 55 purposes.

6. TC will redeem all the TC Preferred Shares, and DC will redeem all the DC Special Shares, in each case, in consideration for issuing a promissory note.

7. Each promissory note in 6 will be set off against the other.

8. All of the interest in Foreign SpinCo will be distributed up the chain from Foreign Sub 5 to Foreign Sub 3, from Foreign Sub 3 to Foreign Sub 2 (but with Foreign Sub 2 then contributing all of its interest in Foreign SpinCo to New Foreign Sub 2, so that what thereafter is distributed is the interest in New Foreign Sub 2), from Foreign Sub 2 to Foreign Sub 1, and from Foreign Sub 1 to Foreign PubCo.

9. Foreign PubCo will transfer all of its interest in New Foreign Sub 2 to New Foreign PubCo.

10. Foreign PubCo will distribute all of its interest in New Foreign PubCo to its shareholders as a dividend-in-kind.

    Rulings

    The increase in the paid-up capital in respect of the shares of TC issued to Foreign SpinCo Sub in 4(a) was reduced by s. 212.1(1)(b) (now, s. 212.1(1.1)(b) to the PUC of DC Special Shares acquired by TC. The butterfly ruling was conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TC shares or DC Special Shares. Other standard rulings.

Background

Mr. D and Mr. E (and their respective families), with the two families being unrelated, decided to split up the business of the CCPC distributing corporation (“DC”) and to each carry on half of the business of DC independently. DC holds inter alia Subco 1 and Subco 1, cash and cash equivalents, the Collectibles (being investment property), tenant receivables and FF&E. Shareholder1 is owned by Mr. E and his family, and Shareholder2 is indirectly held for the benefit of Mr. D’s family. Prior to XX, DC was effectively using an undocumented interest-bearing loan from Canco1 (whose shareholders were Individual1 and Shareholder2) as an operating line of credit.

Preliminary transactions

1. Shareholder2 acquired all the marketable securities of Subco 1 in consideration for a demand note.
2. Subco 1 lent cash to Shareholder1 for a promissory note.
3. Canco1 declared and paid to its shareholders, Shareholder2 and Individual1, each a cash dividend in the same amount.
4. Simultaneously with 1, Shareholder1 acquired from Shareholder2 all of Shareholder2’s shares of Canco1 for cash FMV consideration, paid for by Shareholder1 with the cash borrowed in 2.
5. DC lent funds Canco1 against the receipt by it from DC of the Canco1 Loan Note (classified as a near-cash asset).
6. Subco 1 will be wound up, so that the promissory notes owing to it by Shareholder1 and Shareholder2 will be distributed to DC.

Butterfly transaction

1. Shareholder1 and Shareholder2 will transfer common shares of DC to (newly-incorporated) TC1 and TC2 for common shares of TC1 and TC2, respectively, electing under s. 85(1).
2. DC will transfer the three types of property to TC1 and TC2 in consideration for assuming undertakings to which s. 12(1)(a) applies, assuming other obligations and the issuance of Class X Preferred Shares, with joint elections made under s. 20(24) and s. 85(1).
3. Each of TC1 and TC2 will redeem its Class X Preferred Shares in consideration for issuing to DC two non-interest bearing promissory notes. The first set of notes, TC1DC Expenses Note and TC2DC Expenses Note, will each have a principal amount equal to the amount of the purchase for cancellation proceeds referred to in 4 below. The second set of notes, TC1DC Note and TC2DC Note, will each have a principal amount equal to the balance of the excess of the respective aggregate Class X Preferred Shares Redemption Amounts.
4. DC will purchase for cancellation sufficient common shares of DC held by TC2 in order to pay a capital dividend in the entire amount of the resulting deemed dividend. DC will simultaneously purchase for cancellation the same number of common shares held by TC1, with no s. 83(2) dividend paid. DC will pay the amount owing on the repurchase of common shares held by TC1 and TC2 by issuing promissory notes to TC1 and TC2 respectively. These promissory notes will be set-off against the TC1DC Expenses Note and the TC2DC Expenses Note referred to in 3 above.
5. DC will assign the TC1DC Note to TC1 and the TC2DC Note to TC2 on its winding-up. As a result of the assignment and distribution of the TC1DC Note and the TC2DC Note, the obligations of TC1 and TC2 under the notes will be extinguished.
6. DC will elect under s. 83(2) to treat the portion of the winding-up dividend referred to in subparagraph 88(2)(b)(i) as a separate capital dividend paid on the common shares of DC. Pursuant to s. 88(2)(b)(iv), TC1 and TC2 will each be deemed to have received a proportionate capital dividend from DC.
7. To the extent that there is GRIP in DC, DC will designate, pursuant to subsection 89(14), a portion of the winding-up dividend referred to in subsection 88(2)(b)(iii), which is deemed to be a separate dividend, to be an eligible dividend by notifying TC1 and TC2 in writing, in a timely manner, that the dividend is an eligible dividend.

Post-butterfly transactions

TC2 will acquire common shares of Subco2 owned by TC1, and part of the Collectibles owned by TC1, for FMV consideration. TC1 will acquire from TC2 its interest in the Canco1 Loan Note for FMV consideration. Various prohibited post-butterfly transactions are listed in the master transaction agreement.

Rulings

Standard. Also that the extinguishment of the TC1DC Note and the TC2DC Notes in 5 will not result in a forgiven amount.

Background

DC is a public corporation all of whose multiple-voting (common) shares (“DC MVS”) and some of whose subordinate-voting (common) shares (“DC SVS”) are held by (Canadian-resident) DC Shareholder. DC is managed pursuant to the “MSA” by Manageco (a taxable Canadian corporation owned by Manageco Principal. The MSA may be renewed from year to year at Manageco’s option. The current normal-course issuer bid of DC is a continuation of a succession of previous one-year normal-course issuer bids.

Proposed or completed transactions

1 to 5 occur preliminarily to the spin-off by DC of Divisions 2 and 3 to newly-incorporated Spinco under a Plan of Arrangement, whose steps are described in 6 to 16:

1. Various reorganization transactions were implemented to eliminate cross-ownership interests and inter-company payables/receivables between Division 1 (which will be retained by Amalco) and Division 2 and Division 3 (which latter two Divisions will be transferred to Spinco), to simplify DC’s corporate structure (and do so in a manner that is tax neutral, to the extent possible, in countries other than Canada) and to consolidate Divisions 2 and 3 into one entity with the appropriate capital structure. These are not summarized as DC is a specified corporation, so that s. 55(3.1)(a) did not apply.
2. The DC MSA will be restated to provide inter alia that the base fee amount under the long term incentive arrangement contained therein “will be divided in respect of the Division 1 Segment and the Division 2 and 3 Segment based on the ratio of the Net Fair Market Value of the common shares in the capital stock of Newco [to hold Divisions 2 and 3, as described below] to the Net Fair Market Value of all property owned by DC immediately before the Distribution;”
3. DC will transfer Division 2 and Division 3 to a newly-incorporated taxable Canadian corporation (“Newco”) by transferring all its shares and debt of various subsidiaries, certain intangible property; and its interest in all contracts pertaining to Division 2 and Division 3 (including the DC MSA relating to the Division 2 and 3) in consideration for shares and the “Newco Internal Note” of Newco and the assumption of liabilities. For purposes of s. 85(1)(d)(i), the reference therein to DC’s cumulative eligible capital in respect of its business immediately before the disposition shall be interpreted to mean a pro rata proportion of DC’s cumulative eligible capital in respect of its business immediately before the transfer to Newco represented by the transferred eligible capital property in respect of the business (based on the relative “fair market value at that time or the amount of the cumulative eligible capital that is attributable to” the transferred eligible capital property relative to that of all of DC’s eligible capital property in respect of the business.)
4. Concurrently with the transfer of assets from DC to Newco in 3, Manageco will divide its existing management services business into two separate businesses, and in connection therewith: Manageco will transfer (i) the portion of its management business that is referable to Division 1 (including the benefits and obligations of the DC MSA as it relates to Divisions 1) and (ii) the portion thereof that is referable to Divisions 2 and Division 3 (including the benefits and obligations of the DC MSA as it relates to Divisions 2 and 3), to two newly-incorporated subsidiaries (“Manageco Sub 1” and “Manageco Sub 2”), respectively, in consideration for common shares. In the case of transferred eligible capital property, the elected amount will be the least of the amounts described in ss. 85(1)(d)(i), (ii) and (iii).
5. Newco will borrow from arm’s length persons and repay the Newco Internal Note in cash and by assuming a portion of the “DC Notes.”
6. DC shares held by those dissenting will be transferred to DC for an entitlement to receive their fair value.
7. Each holder of a DC stock option will dispose of pro rata portions (based on the relative FMV of the Newco shares) of its option to Spinco and DC in consideration for the grant of replacement options. Such issuance by Spinco will be in anticipation of the transfer of all of the common shares of Newco to Spinco in 10 and will form part of the non-share consideration therefor.
8. DC shareholders will exchange: (a) each DC MV Share (after having had their number of votes per share changed by article of amendment) for one DC New MV Share (with identical terms, subject to the rights of the DC MV Shares) and one non-voting redeemable retractable DC MV Special Share with a fixed-dollar (non-formulaic) s. 191(4) specified amount and with a liquidation priority for the redemption amount; and (b) each DC SV Share (also following a votes-per share amendment) for one DC New SV Share (with identical terms, subject to the rights of the DC SV Shares) and one non-voting redeemable retractable DC SV Special Share with a fixed-dollar (non-formulaic) s. 191(4) specified amount and with a liquidation priority for the redemption amount. The stated capital of the exchanged shares will be apportioned to the shares received therefor based on their relative FMV.
9. Each participant will transfer each DC MV Special Share and DC SV Special Share for one Spinco MV Share and one Spinco SV Share.
10. DC will transfer the common shares of Newco to Spinco for Spinco Special Shares, with an FMV equal to the FMV of the Newco common shares minus that of the Spinco replacement stock options and with a fixed-dollar (non-formulaic) s. 191(4) specified amount, with an s. 85(1) election being made.
11. Spinco will redeem its Spinco Special Shares for a note, and designate the resulting deemed dividend as an eligible dividend.
12. Spinco will redeem its Special Shares for a note, and designate the resulting deemed dividend as an eligible dividend.
13. Each will repay its note by transferring the other note to the other.
14. Spinco will wind-up Newco.
15. DC will acquire all of the shares (and options to acquire shares) of a Canadian subsidiary (“DC Sub 1”) held by minority shareholders in consideration for DC New SV Shares and/or cash.
16. DC and DC Sub 1 will amalgamate.
17. Subsequently to the Plan of Arrangement, Spinco will elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.

Purposes

“The use of Newco simplifies the distribution process, as it allows DC to transfer only a single asset on the Distribution (i.e., the shares of Newco), rather than transferring the operating assets of Division 2 and Division 3 individually.”

Rulings

Including application of s. 7(1.4) to 7, s. 86(1) to 8, s. 85.1(1) to 9 (provided no s. 85(1) election filed), s.55(3)(b) to deemed dividends in 11 and 12, and non-application of s. 80 to 13. The restatement of the DC MSA in 2 will not result in a disposition by any person of its rights under the DC MSA.

After discussing the allocation of safe income between two classes of discretionary dividend common shares, CRA added this comment (TI translation):

[T]he use of discretionary dividend shares could have an adverse effect if a butterfly transaction was contemplated in a particular situation. Indeed, given the uncertainty in the valuation of discretionary dividend shares, it could be more difficult to satisfy the conditions for there being a distribution, as defined in subsection 55(1)… .

A split up of DC's business among three brothers (A, B and C) and their respective immediate families is accomplished by split-up style butterfly transfers to ACo and Bco of pro rata portions of the three types of DC's property, so that C remains as a shareholder of DC.

DC carries on a farming business. There is a single-wing butterfly transfer of its three types of property to TC, to which Sibling 1 has transferred his shares of DC, so that Siblings 1 and 2 may now indirectly carry on separate farming businesses.

Current structure

DC, which is a Canadian-controlled private corporation, carries on the production, processing and sale of XX (the "DC Retained Business") through subsidiaries including Subco 1 (which is wholly-owned) and a chain of U.S. subsidiaries (Foreignco 1, Foreignco 2 and Foreignco 3) as its principal business, and also carries on the "Subco 1 Transferred Business 1") and the "Subco 1 Transferred Business" (also both active businesses) through Subco 1. DC's issued share capital consists of Class A common shares and Class B and C common shares which are convertible into Class A common shares, as well as non-voting non-retractable and redeemable Class A and B preferred shares. The DC shareholders (who mostly are CCPCs but also include individuals and trusts) each hold an equal number of common and preferred shares on a stapled basis (i.e., any sale must consist of an equal number of common and preferred shares).

Subco 1 lands

Subco 1 carries on the Subco 1 Transferred Business 1 on the "Subco 1 Land 1" and "Subco 1 Land 2". Currently certain of the land surrounding the existing operations as described above acts as XX for those operations. Of these XX are presently leased to XX. All leasing revenue received has been reported by Subco 1 as active business income, representing income that is earned in connection with the Subco 1 Transferred Business 1. Subco 1 has also leased portions of the Subco 1 Land 1 and a portion of the Subco 1 Land 2 to third parties that operate XX businesses. Subco 1 acquires the XX of these businesses, and uses XX for its business operations. In addition, a business operates a XX business on an incidental portion of the same acreage that Subco 1 uses primarily as the XX. All leasing revenue received by Subco 1 from the XX businesses has been reported by Subco 1 as active business income, such income being earned in connection with the Subco 1 Transferred Business 1.

Proposed transactions

The following transactions will occur under a Plan of Arrangement to accomplish a spin-off of Subco 1 and 2 Transferred Business through Spinco, which was incorporated but has no shareholders:

1. Under a s. 86 reorganization, each DC shareholder will exchange all of its DC common shares for "DC Butterfly Shares" and Class D, E or F common shares (with the aggregate paid-up capital of the exchanged shares being apportioned), such that the aggregate fair market value of the DC Butterfly Shares will be equal to the "Butterfly Ratio" (equal to the relative net FMV of Subco 1 Transferred Business 1 and 2) multiplied by the aggregate FMV of all the DC shares held immediately before the exchange – and the FMV of the Class D, E or F common shares received on the exchange will capture the balance of the FMV of the exchanged Class A, B or C common shares. The Class E and F common shares will be convertible into Class D common shares. "The holders of these shares will not be entitled to stock dividends having a different stated capital amount as [was the case for] the A Common Shares, B Common Shares, and C Common Shares…[and] shall be provided consolidated unaudited quarterly financial statements prepared by DC in accordance with international financial reporting standards…[a right which] does not exist for the holders of the A Common Shares, B Common Shares, and C Common Shares" (para. 23.2). Also under the s. 86 reorganization, each DC shareholder's Class A (or B) Preferred Shares will be exchanged for Class G (or H) Common Shares having an aggregate FMV equal to that of the exchanged shares.
2. The DC shareholders will transfer each DC Butterfly Share to Spinco in exchange for one Spinco common share (so that the test in s. (b)(iii) of "permitted exchange" in s. 55(1) is satisfied).
3. Subco 1 will transfer the "Subco 1 Retained Business" solely in consideration for the "Sale Note." ("The preference of management was not to further complicate the Proposed Transactions by inserting a sequential butterfly transaction' here instead.)
4. Subco 1 will distribute an amount to DC as a reduction of the PUC of its shares and declare dividends equal to any remaining portion of the amount received in 3, with payment effected by set-off of the Sale Note.
5. Foreignco 1 will pay a cash dividend to DC.
6. With a view to the pro rata cash or near cash test to be satisfied in 7 below, DC will contribute the cash so received to Subco 1.
7. DC will transfer its Subco 1 shares to Spinco in consideration for "Spinco Redemption Shares," with a joint s. 85(1) election filed. Having regard to the pro rata three types of property tests, the Suhco 1 land will be classified as business property, and no property will be treated as investment property.
8. DC will accept a note from Spinco as full payment for redemption of the Spinco Redemption Shares.
9. DC will reduce the stated capital of the DC Butterfly Shares to an amount equaling that of the Spinco Redemption Shares before their redemption ("to ensure that each of Spinco's and DC's respective dividend refunds under subsection 129(1) and respective Part IV tax under paragraph 186(1)(a) (all in respect of the dividends arising on the redemption of the DC Butterfly Shares, and the dividends arising on the redemption of the Spinco Redemption Shares) will be approximately equal to each other, such that each of DC and Spinco will not have any net tax liabilities (i.e., as a result of each corporation's Part IV tax liabilities exceeding such corporation's dividend refund)."
10. Similarly to 8, DC will redeem the DC Butterfly Shares.
11. The notes issued in 8 and 10 will be set off.

Rulings

: Including application of s. 85.1 to 2, s. 86 to 1 and standard butterfly rulings.

Overview

In connection with a spin-off by a U.S. public company (Foreign PubCo) of a U.S. subsidiary (Foreign Spinco) to which one of its businesses was transferred, there was a butterfly split-up of an indirect Canadian subsidiary (DC) directly and indirectly holding Canadian portions of the two businesses in question, so that the Canadian transferee corporation (TCo) of DC was a subsidiary of Foreign Spinco. In order that the butterfly transactions could qualify as a tax-free spin-off for Code purposes, TC (a ULC) and Foreign Spinco (an LLC) initially were fiscally transparent for Code purposes – then TC elected to be fiscally regarded in order that it could qualify for Treaty benefits and the Foreign Spinco became a C-corp in order that its spin-off could comply with Code rules. There was provision for a second stage transfer of cash by DC to TC if that was required to satisfy the requirements under the butterfly rules for a pro rata distribution of property of DC. As with other cross-border butterflies, there was a three-party share exchange agreement.

Background

Foreign Pubco is a U.S. resident whose common shares trade on an exchange. Prior to the "Spin-Out," being the distribution of Foreign Spinco Shares as a dividend-in-kind to the shareholders of Foreign Pubco, Foreign Pubco was engaged, through its subsidiaries, in the "Retained Services Business" and the "Transferred Services Business." The Retained Services Business in Canada and the Canadian Transferred Services Business were operated directly by Canco and indirectly through its subsidiaries. Canco was a subsidiary of Canada Holding.

Preliminary transactions

• "Foreign Spinco" was established as an LLC by Foreign Pubco.
• The worldwide Transferred Services Business, other than the Canadian Transferred Services Business, was transferred to Foreign Spinco.

Butterfly and Spin-Out transactions

1. Canada Holding and Canco amalgamated through a vertical amalgamation to form DC, which elected to be treated as a corporation for Code purposes.
2. The common shares of DC were changed by articles of amendment into a shares of a new class of common shares (the "DC New Common Shares") having X votes per share and shares of a new class of non-voting redeemable retractable non-cumulative special shares (the "DC Special Shares"), with the cumulative stated capital of the issued DC New Common Shares and DC Special Shares not exceeding that of the old common shares.
3. Under a three-party transfer agreement between Foreign Pubco, Foreign Spinco and TCo (a newly-incorporated Canadian subsidiary of Foreign Spinco which was fiscally transparent for Code purposes): ( a) TCo paid the purchase price for DC Special Shares transferred to it by Foreign Pubco as described in para. (b) below by issuing TCo Common Shares to Foreign Spinco; (b) Foreign Pubco paid the purchase price for the member ship interests issued to it by Foreign Spinco as described in para. (c) below by transferring all of the DC Special Shares to TCo; and (c) Foreign Spinco paid the purchase price for the TCo Common Shares issued to it by TCo as described in para. (a) above by issuing membership interests to Foreign Pubco.
4. DC transferred a proportionate share of each type of its property to "Newco," a newly-incorporated subsidiary (with such transferred assets relating to the Canadian Transferred Services Business and including the shares of some of its subsidiaries and portions of the vendor take-back notes ("Notes 1 and 2") received on a previous sale of subsidiaries in consideration for additional Newco common shares and the assumption of liabilities related to the Canadian Transferred Services Business. In determining the net FMV of each type of property of DC and its subsidiaries (anticipated to be cash or near-cash property, including excess cash from the previous sale of subsidiaries, investment property comprising Note 2, and business property), the net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of such corporation or partnership remaining after the allocation of current liabilities to cash or near-cash property were reclassified as business property "to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to which such property relates." For the purposes of the related s. 85(1) election "the reference in subparagraph 85(1)(e)(i) to the ‘undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition' shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all of the property of that class immediately before the disposition, that the FMV at that time of the particular property that was transferred was of the FMV at that time of all property of that class."
5. DC transferred all of the Newco Common Shares to TCo and became legally obligated to transfer to TCo within XX days any cash or near-cash property required in order to result in a proportionate transfer of that type of property.
6. TCo and DC redeemed the TCo Preferred Shares and DC Special Shares respectively for promissory notes, which were accepted as full repayment of the redemption prices ("with the risk of the note being dishonored").
7. The promissory notes were set-off against each other.
8. TCo elected to become a corporation for Code purposes.Newco paid a dividend to TCo comprising cash and the portions of Notes 1 and 2 received by it in 4.

9. TCo, in turn, paid a dividend (net of withholding) to Foreign Spinco comprising the cash and Note interests received in 9 plus the right acquired in 5 to the additional cash transfer. Foreign Spinco in turn distributed such property to Foreign Pubco.
10. Foreign Spinco converted from an LLC into a C-Corp.
11. Foreign Spinco borrowed the "External Debt" from third party lenders (which did not relate to any particular assets of Foreign Spinco) and "distributed" the applicable portion thereof to Foreign Pubco so as to qualify as a tax-free distribution under Code s. 361(b).
12. The only parties to an Agreement were Foreign Pubco and Foreign Spinco "and, therefore, Canada Holding or its subsidiaries (or DC following the Amalgamation) did not acquire any rights pursuant to this agreement as a party thereto."
13. Foreign Pubco distributed the Foreign Spinco Shares pro rata to its shareholders as a dividend-in-kind (the "Spin-Out"), with such shares being listed. The Foreign Pubco shareholders who are US residents are not taxable respecting the Spin-Out.
14. To comply with s. 86.1 respecting the Spin-Out, Foreign Pubco will provide the Minister with the required s. 86.1(2)(e) information and the Canadian resident shareholders of Foreign Pubco will elect in writing (including the s. 86.1(2)(f) information) for s. 86.1 to apply to the Spin-Out.

Additional information and purposes

DC intends to pay a dividend to Foreign Pubco during its XXXX taxation year after the completion of the Subject Transactions. This dividend will be considered to be paid out of previously taxed income, for US tax purposes, that can be distributed to Foreign Pubco without additional US tax. This dividend and the Canadian butterfly transactions (in 1 to 7) are completely unrelated.

TCo was initially a fiscally disregarded entity for Code purposes in order for the transactions in 1 to 7 to qualify as a tax-free spin-off for such purposes - and it converted to a fiscally regarded entity in 8 to qualify US Treaty benefits.

None of the purposes of the dividend in 9 was to reduce the gain inherent in the Newco Common Shares, as TCo has no intention to dispose of the Newco Common Shares.

Without the amalgamation in 1, two butterfly transactions would have been required.

Foreign Spinco was formed as an LLC in order for the transactions described in 1 to 7 to qualify as a tax-free spin-off for Code purposes., and converted to a C-corp prior to the Spin-Out in order for the distribution of Foreign Pubco's Foreign Spinco Shares to its public shareholders in 14 to comply with the Code rules.

Rulings

• S. 55(3)(b) ruling is premised on 10% or more of the FMV of the Foreign Spinco membership interests or shares not, at any time, during the course the series being derived from the DC Special Shares or TCo Common Shares. For these purposes, the External Debt of Foreign Spinco will be considered to reduce the FMV of each property of Foreign Spinco pro rata in proportion to the relative FMV of all property of Foreign Spinco.
• S. 86 will apply to 2.
• Provided that all of the conditions of ss. 86.1(2)(e) and (f) are met, the Spin-Out in 14is an eligible distribution for purposes of s. 86.1.

Current structure

The Class A common shares of DC1, a CCPC, are owned equally by Holdco1, Holdco2 and Holdco3 and its Class J preferred shares are owned equally by Trust1, Trust2 and Trust3. The Class A common and Class E preferred shares of DC2 are owned equally by Holdco1, Holdco2 and Holdco3.

Proposed transactions

1. Holdco1 and Trust1 will form TC1, Holdco2 and Trust2 will form TC2 and Holdco3 and Trust3 will form TC1.
2. DC1 and DC2 will amalgamate to form DC Amalco.
3. The three shareholder groupings (comprising a Holdco and Trust) will transfer their DC Amalco shares to their TC in consideration for shares of that TC (with appropriately limited stated capital), electing under s. 85(1).
4. DC Amalco will transfer to a Subco of each TC a pro rata portion of each of its three types of property (determined on a net basis) in consideration for the assumption of liabilities and the issuance of redeemable preferred shares, election under s. 85(1).
5. Each Subco will redeem such preferred shares for a note.
6. Each Subco will be wound up into its respective TC parent, with the notes thereby being assumed by the respective TCs.
7. DC Amalco will be wound up into the three TCs, so that the respective notes will be assigned to the respective TC which, as such TC also is the debtor, will result in each such note being extinguished.
8. DC Amalco will elect under s. 83(2) to treat the portion of the winding-up dividend referred to in s. 88(2)(b)(i) as a separate capital dividend paid on its classes of shares.
9. DC Amalco will make a s. 89(14) designation on the portion of the winding-up dividend referred to in s. 88(2)(b)(iii) which is deemed to be a separate dividend.
10. Following receipt of a dividend refund arising under the transactions, DC Amalco will dividend such cash to each TC.
11. Within a reasonable time thereafter articles of dissolution will be filed by DC Amalco.

Part IV tax circularity/83(2.1)

"[A]t no time will one of the main purposes of the acquisition of the shares of DC Amalco be to receive a capital dividend. ... The purpose of the incorporation of Subco1, Subco2 and Subco3 is to avoid circularity in the calculation of DC Amalco's refundable dividend tax on hand and Part IV tax, that would otherwise occur if the transfer of property described in [4] were made directly to each TC by DC Amalco."

Rulings

Standard butterfly rulings. S. 88(2) rulings re DC Amalco wind-up (steps 7-9).

underline;">: Background. The sole shareholders of DC, which holds a farm property, are two siblings (Sibling1 and Sibling2) and their respective spouses (Spouse1 and Spouse2). Prior to the series of transactions, Sibling1 and Sibling2 had DC sold most of its farm machinery and commenced to operate on a share crop basis.

There is no connection between the farm machinery and equipment sales and the series. …

DC owns property ("Property1") which was rezoned… . From XX to XX, XX lots of Property1 have been severed and sold. There may be subsequent sales of lots of Property1.

Proposed transactions

Under a single-wing split-up butterfly of DC, a proportionate share (determined on a net basis) of each of its three types of property, including a co-ownership interest in Property1, will be transferred to TC, which will be owned by Sibling1 and Spouse1.

Rulings

: Typical butterfly rulings including that s. 85(1) will apply to the transfers of eligible property held by DC to TC, and that for this purpose

the "undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition, that the fair market value at that time of the property that is transferred is of the fair market value at that time of all property of that class.

Split-up butterfly is "being undertaken to allow each of [cousins] B and C to carry on separate farming operations from one another, and to independently formulate and implement a strategic development plan in respect of the portion of DC's property to be transferred to BCo and CCo."

Standard split-up butterfly of DC for division of DC between families of Brother 1 and 2.

Overview

The ordinary shares of Foreign PubCo, which was formed under the laws of Country 1, trade on Exchange 1. The worldwide business operations in one of its two main business segments (the Spin-Off Business), which are not already owned directly or indirectly by Foreign SpinCo, will be transferred directly or indirectly to Foreign SpinCo (a great-grandchild subsidiary held by Foreign PubCo "through" ForCo 1 and ForCo 2) and Foreign PubCo will retain the Retained Business segments. DC (a wholly-owned subsidiary of ForCo 2 and thus a "sister" of Foreign SpinCo) owns A Co, which directly carries on the activities that relate to the DC Spin-Off Business and will become the indirect subsidiary of Foreign SpinCo in preparation for the Spin-Out, by virtue of DC effecting a split-up butterfly of the Spin-Off Business to TC, a direct newly-incorporated Newco subsidiary of ForCo2. Activities directly carried on in Canada by other subsidiaries of DC, namely, B Co (whose commons shares also were held by ForCo11, a subsidiary of Foreign PubCo), C Co, D Co (wholly-owned by C Co), and LP 1 and E Co, the GP of LP 1, are to be retained by DC after the Spin-Out.

Preliminary transactions

• LP 1 was acquired by DC at a time that "the directors of DC had no knowledge or expectation of the Proposed Transactions," with such acquisition being represented to be part of the series which includes 3.
• ForCo 10 (described in redacted para. 61 and likely owned outside the DC group) repaid debt owing to B Co, B Co paid a dividend to DC and ForCo11,and DC paid a dividend to ForCo2 with such transactions being represented not have been effected before the proposed transactions were contemplated.
• Numerous restructuring steps with a view to the spin-off in 9 occurred outside Canada and did not impact any of the Canadian entities or the types of property analysis for DC as no properties were transferred to or from DC group.

Proposed transactions

1. The common shares of DC will be changed by articles of amendment into a shares of a new class of common shares (the "DC New Common Shares") having one vote per share and shares of a new class of non-voting redeemable retractable non-cumulative special shares (the "DC Special Shares"), with the cumulative stated capital of the issued DC New Common Shares and DC Special Shares not exceeding that of the old common shares.
2. A three-party transfer agreement will be concluded and implemented between ForCo 2, Foreign SpinCo and TC (a newly-incorporated Canadian subsidiary of Foreign SpinCo) in which: ( a) TC will agree to pay the purchase price for DC Special Shares transferred to it by ForCo 2 as described in para. (b) below by issuing TC Common Shares to Foreign SpinCo; (b) ForCo 2 will agree to pay the purchase price for the common shares issued to it by Foreign SpinCo as described in para. (c) below by transferring all of the DC Special Shares to TC; and (c) Foreign SpinCo will agree to pay the purchase price for the TC Common Shares issued to it by TC as described in para. (a) above by issuing common shares to ForCo 2.
3. DC will transfer a proportionate share of each type of its property to TC (with certain cash or near-cash property transferred XX days later) in consideration for TC Preferred Shares. In determining the net FMV of each type of property of DC and its subsidiaries (anticipated to be cash or near-cash property and business property), (a) the net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of such corporation or partnership remaining after the allocation of current liabilities to cash or near-cash property will be reclassified as business property "to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to which such property relates," and (b) any current ("as determined by the method prescribed by the applicable pension legislation") pension plan, post-retirement benefit or liability insurance liabilities of DC will be allocated to cash or near-cash property, and any such liabilities of a non-current nature will be allocated to business property – and similarly for employee incentive plans.
4. TC and DC will redeem the TC Preferred Shares and DC Special Shares respectively for promissory notes, which will be accepted as full repayment of the redemption prices.
5. The promissory notes will be set-off against each other.
6. ForCo 2 will sell all of its issued and outstanding shares in Foreign SpinCo to Foreign PubCo for book value in exchange for an intercompany loan.
7. ForCo 2 will declare a dividend to ForCo 1, and ForCo 1 will declare a dividend to Foreign PubCo, which in each case will be settled with an intercompany loan.
8. Foreign PubCo will not distribute shares of Foreign SpinCo to shareholders who are domiciled in countries where Foreign SpinCo shares cannot be offered through the proposed Spin-Out, and to shareholders who hold a small number of Foreign SpinCo shares. Instead, it will issue the affected Foreign SpinCo share to an independent trustee who will sell them in the open market and distribute the net cash proceeds to such ineligible shareholders.
9. Subject to 10, Foreign PubCo will distribute the remaining outstanding shares in Foreign SpinCo pro rata to its shareholders under a scheme of arrangement on a proportionate basis.

Rulings

• S. 55(3)(b) ruling is premised on 10% or more of the FMV of the Foreign SpinCo shares not, at any time, during the course the series being derived from the DC Special Shares or TC Common Shares. For these purposes, any indebtedness of Foreign SpinCo will be considered to reduce the FMV of each property of Foreign SpinCo pro rata in proportion to the relative FMV of all property of Foreign SpinCo.
• No s. 86 ruling.

Structure

The DC is a CCPC owned (as to both DC-Class A (common) and DC-Class D (pref)) by Son1, Son2 and Mother and which formerly had carried on a farming business. The farm (a.k.a., the "Lands") now is rented out to farmers, with the exception of the "Home Quarter," containing three residences which are rented out to Son1, Son2 and Mother (although Son1 still occupies his residence.) DC holds the "Patronage Reserves" as capital property (namely, membership equity of DC in various co-operatives from which DC purchased agricultural-related supplies for maintaining the Lands and carrying on its business and in respect of which DC is entitled to receive an annual patronage dividend, the amount, if any, of which depends on the level of DC's patronage for such year).

Purpose

To split-up DC between TCs (TC1 to 3) for the three shareholders.

Types of property

The investment property of DC comprises portfolio investments in publicly traded securities, the Lands (including the Home Quarter unless sold prior to the Distribution) "on the basis that they are currently being used by DC to generate income from property in the form of rent," and the Patronage Reserves "on the basis that they currently generate income from property for DC in the form of patronage dividends." Inventory and the remaining farm equipment will be classified as business property "on the basis that it is currently being used… to generate business income from its sale." Cash and term deposits are classified as cash or near-cash property.

Reorganization

1. DC will pay a dividend (through issuing demand notes) to each of Son1, Son2 and Mother so as to entitle it to a refund of its RDTOH for that year and will designate such dividends as eligible dividends, and will also pay capital dividends to them, with the notes and shareholder loans then being repaid in cash.
2. After having incorporated his or her respective TC (TC1 to 3) and subscribed for Class A voting participating shares, each of Son1, Son2 and Mother transfers his or her DC-Class A and DC Class-D shares to such TC in consideration for non-voting retractable Class C shares of TC, electing under s. 85(1).
3. DC transfers pro rata portions of its three types of property (including the Home Quarter and farm equipment to the TCs as tenants-in-common if not yet sold) to the TCs in consideration for non-voting Class D redeemable retractable shares, electing under s. 85(1).
4. Each TC redeems its Class D shares for demand promissory notes; and DC redeems its DC-Class D and DC-Class A shares for demand promissory notes, designating pro rata portions of its GRIP as eligible dividends under s. 89(14).
5. The promissory notes are set-off.
6. DC is dissolved.

Circularity comment

. After giving relatively standard butterfly rulings and rulings that the s. 84(3) deemed dividends arising on the redemptions by the TCs and DC in 4 will be subject to Part IV tax to the extent described in s. 186(1)(b), CRA noted that this "could give rise to what is referred to as a "circular" calculation of RDTOH," and stated that "the district taxation office at which each of the corporations files its T2 income tax return will have to be consulted in order to determine which corporation will receive the dividend refund and which corporation will be subject to the Part IV tax liability under paragraph 186(1)(b)."

A standard split-up butterfly for the pro rata division of the assets (mostly portfolio shares) of DC (a CCPC with no liabilities other than accrued professional fees) between TC1 for Brother and TC2 for Sister, followed by the winding-up of DC.

Preliminary

As a preliminary step under a plan of arrangement, the shareholders of Old Pubco (a Canadian public corporation dealing at arm's length with each shareholder) will transfer (in a s. 85.1 exchange) all their Old Pubco common shares to a newly-incorporated Canadian subsidiary of Old Pubco (New Pubco) in consideration for New Pubco common shares, and New Pubco will reduce the stated capital of its shares (in order to satisfy the solvency test for any future dividends).

Spin-off transactions

1. The Old Pubco shares of New Pubco will be converted into New Common Shares (having two votes per share) and new Preferred Shares (which will be redeemable and retractable for the "Butterfly Proportion" of the old common shares of Old Pubco, subject to a price adjustment clause).
2. New Pubco will transfer to a newly incorporated subsidiary ("Newco") the Old Pubco New Preferred Shares, in exchange for Newco Common Shares, electing under s. 85(1).
3. Old Pubco will transfer to Newco the Spin-off Properties (being shares of various non-resident subsidiaries) in consideration for the issuance of the Newco Preferred Shares, electing under s. 85(1). "[T]he FMV of the property of Old Pubco will be determined as though there was only one type of property, as contemplated by subsection 55(3.02), on a net FMV basis."
4. Newco will redeem "from Old Pubco" all of the issued and outstanding Newco Preferred Shares, and Old Pubco will redeem "from Newco" all of the outstanding Old Pubco New Preferred Shares, in each case in consideration for issuance of a non-interest-bearing demand promissory note. In each case, the resulting deemed dividend will be designated to be an eligible dividend.
5. The two notes will be set off.
6. New Pubco will draw down under the "New Pubco Multicurrency Credit Facilities" and use the proceeds to lend at a small spread to Old Pubco (under the "Old Pubco Internal Multicurrency Debt"), and Old Pubco will use such proceeds to pay off the "Old Pubco Multicurrency External Debt." "Simultaneously, Old Pubco will enter into an internal hedging contract ("Hedging Contract 2") with New Forco Holding 2 [included in the Spin-off Properties] to mitigate foreign exchange exposure in respect of the Old Pubco Internal Multicurrency Debt.

Rulings

• Standard butterfly rulings.
• Ruling re interest deductibility on the Old Pubco Internal Multicurrency Debt to the extent the Old Pubco Multicurrency Internal Debt does not exceed the PUC of the Old Pubco New Preferred Shares, determined immediately before the redemption."

Facts

DC is a CCPC holding company whose assets consist of the shares of Aco (controlled by uncles, aunts and cousins), which are investment property as it does not have significant influence over it, and cash or near cash assets. All the Class B shares of DC, which are voting and non-participating, as well as the Class A shares, which are voting and entitled to discretionary dividends, are held by Sibling 1 to 5, except that Sibling5 holds her Class A shares through TC5. The Class B shares were issued prior to December 20, 2002, so that qualify as shares of a specified class notwithstanding their voting rights. "DC may pay dividends on the Class "A" shares of the capital stock owned by the current shareholders before the Proposed Transactions (such dividends not to exceed the income of DC for the current taxation year)."

Proposed transactions

1. Each of TC1 through to TC4, which is solely owned by Sibling 1 to 4, respectively, will acquire the Class A Shares of the respective Sibling for treasury common shares utilizing s. 85.
2. DC will transfer a proportionate share (based on the relative fair market value of the shares in its capital held by the particular TC): of its common shares and Class B shares of Aco, as well as its "Fund Units" to each of the five TCs in consideration for Class X preferred shares of that TC; of its Series A and B preferred shares of ACo to each TC in consideration for a non-interest-bearing Note1 of the respective TC; and of cash to each TC in consideration for a non-interest-bearing Note2 of the respective TC.
3. Each TC will redeem its Class X preferred shares for a Note3.
4. DC will pay a capital dividend on its Class A shares by issuing a Note DC-TC to each TC.
5. On a winding-up of DC, it will distribute the Notes1 to 3 to the respective TC thereby paying off the DC-TC Notes and with the distributed Notes being extinguished, and with DC designating the resulting s. 88(2)(b) deemed dividend under s. 89(14), and with any dividend refund to DC being distributed on a pro rata basis.

Rulings

Inter alia on ss. 129(1.2), 55(3)(b) and 80.

Existing situation

DC, which is a CCPC beneficially owning rental real estate encumbered with mortgages (the "Buildings") and which carries on a specifed investment busines, has Holdco A and B as its (common) shareholders, who also hold shareholder advances and deal with each other at arm's length, and with Holdco B being the controlling shareholder of DC. In connection with the settlement of a lawsuit between Holdco A and its shareholders, and Holdco B and its shareholders, it was agreed that Holdco B would make a payment to the plaintiffs and that there would be a transfer of Buildings on a single-wing butterfly basis to Holdco B.

Proposed transactions

1. DC will increase the stated capital of its common shares by the applicable multiple of its RDTOH at the end of the taxation year arising from Holdco A's acqusisition of conrol referred to in 3 below, with such increase not exceeding the safe income on hand attributable to the DC common shares of Holdco A and Holdco B at the safe-income determination time. Holdco A and Holdco B will make s. 55(5)(f) designations in respect of the resulting deemed dividend.
2. DC will transfer a proportionate share of its two types of property (cash and near cash; and investment property, namely, the Buildings and related assets) on a net asset butterfly basis under s. 85(1) to a newly-incorporated subsidiary of Holdco B (Holdco B Sub) in consideration for the assumption of liabilities and for Holdco B Sub Special Shares (which will carry more than 10% and less than 50% of the votes for all Holdco B Sub shares), with Holdco B Sub thereby being connected with DC; the shareholder loans will be considered current liabilities for this purpose;
3. DC will purchase for cancellation all of the DC common shares held by Holdco B in consideration for issuing a Note, which will be accepted as absolute payment; no s. 256(9) election will be made respecting the resulting acquisition of control of DC by Holdco A.
4. Holdco B Sub will redeem all of the Holdco B Sub Special Shares held by DC in consideration for issuing a Note, which will be accepted as absolute payment.
5. Holdco B Sub will be wound–up – and then dissolved.
6. The two Notes will be set-off.

Purposes of transactions

58. The purpose of the PUC increase [in 1]… is to enable DC to receive a dividend refund equal to the amount of DC's RDTOH at the end of the year that will end immediately before the acquisition of control of DC by Holdco A….

60. The purpose for Holdco B incorporating Holdco B Sub…is to avoid circularity in the calculation of DC's RDTOH and Part IV tax, that would otherwise occur if the Distribution Property were transferred directly to Holdco B by DC.

61. The purpose for DC not filing a subsection 256(9) election [see 3]… is to ensure that the dividend refund that DC will obtain, arising on the PUC increase [in 1]… will occur in the taxation year of DC that will end immediately before the acquisition of control of DC by Holdco A….

Rulings

Standard butterfly rulings.

Under the proposed transactions for a spin-off butterfly of Spinco by DC (a public corporation and principal business corporation as defined in s. 66(15)):

• no dissent rights were exercised
• Spinco, which is a taxable Canadian corporation and whose common shares have been conditionally accepted for listing but which will not issue any shares until the time of transfer to it below of the DC Butterfly Shares, will elect to be a public corporation by filing the T2073 prescribed form
• each DC shareholder will exchange each of its DC common shares for one DC New Common Share (having the same rights as the old common shares except that the DC New Common Shares will give the holders thereof the right to vote, to the exclusion of any other class of shares of DC, for the election of directors at any meeting of shareholders called for that purpose) and one DC Butterfly Share (which will be non-voting and redeemable and retractable for the "Butterfly Proportion" of the fair market value of an old DC common share immediately before such reorganization)
• each DC stock option holder will exchange its options for new DC stock options and Spinco stock options ("The issuance by Spinco of the Spinco Stock Options will be in anticipation of the [butterfly] distribution ... and will form part of the non-share consideration relating to such transfer." – para. 29)
• each DC Butterfly Shares will be transferred to Spinco in consideration for one Spinco common share, with the Spinco common shares being listed on a designated stock exchange
• the net FMV of each of the three types of property of DC will be determined on a consolidated basis (and where the property of DC is a share of a corporation over which DC has a significant influence, the net FMV of the share of the particular corporation will be multiplied by the proportion that the net FMV of that type of property of the particular corporation is of the net FMV of all the property of the particular corporation - and following the allocation of current liabilities to each cash or near cash property, any remaining net FMV of any accounts receivable, inventories and prepaid expenses of a particular corporation will be reclassified as business property and excluded from cash or near cash property, to the extent that such property will be collected, sold or used by the particular corporation in the ordinary course of the business to which such property relates)
• DC will transfer to Spinco each transferred asset such that following the transfer the net FMV of each type of transferred property will approximate the Butterfly Proportion; and in consideration therefor Spinco will issue the Spinco Stock Options and Spinco Redemption Shares; DC and Spinco will make a joint s. 85(1) election
• Spinco and DC will redeem the Spinco Redemption Shares and DC Butterfly Shares for redemption notes (making a s. 89(14) designation respecting the resulting deemed dividend), and will each satisfy its note by transferring the other note to its debtor

Rulings:

• s. 86 rulings re exchange of DC common shares for new common shares and DC Butterfly Shares
• s. 85.1(1) rulings re transfer of DC Butterfly Shares to Spinco
• cross-cancellation of notes will not give rise to gain or forgiven amounts

Overview

A non-resident public company (Foreign Pubco) will be spinning off Business A to its shareholders, to be accomplished by a dividend-in-kind of its shares of Foreign Spinco (also non-resident) to its shareholders. Business B will be retained. Preliminarily to this spin-off, an indirect Canadian subsidiary of Foreign Pubco (Canco – which is the distributing corporation) will transfer the Canadian business relating to Business B as well as related foreign subsidiaries held directly (Forsub) or through a partnership (Forlp) and a partner thereof (Canco Sub 4) to the transferee corporation (TCo – a ULC). This will be accomplished through a direct transfer of the Newco holding company for such assets (Newsub) to TSub (a subsidiary of TCo), with TSub then being wound up into TCo. TCo (through transactions which are heavily redacted – see perhaps para. 122) will be indirectly transferred to Foreign Pubco, whereas Canco will become an indirect subsidiary of Foreign Spinco.

Indemnity – effect on net value of types of property

In order to accomplish the butterfly spin-off of Canco's portion of Business B, Canco will first transfer such assets to Newsub under s. 85(1). The letter states (para. 61):

For purposes of applying the types of property classification in regards to Canco and Newsub, any liability that is assumed by Newsub, but in respect of which Canco provides an indemnity to Newsub, will, to the extent of that indemnity, be treated as a liability of Canco and not of Newsub, and any liability that is retained by Canco, but in respect of which Newsub provides an indemnity to Canco, will, to the extent of that indemnity, be treated as a liability of Newsub and not of Canco.

Cash adjusting payment

XXX days after the transfer of Newsub to TSub, Canco will transfer any additional cash or near cash assets to TCo as is required to satisfy the requirement for the butterfly percentage for the transferred net business, and cash and near cash, assets being approximately the same (there being no investment assets) (para. 84.1).

Structure

The DC is a CCPC whose only significant assets is shares (being investment property) of Pubco (a Canadian public company over which it does not have significant influence - whose standard definition referred to s. 3051.04 of the Private Enterprises standards, or IAS 28 for IFRS). Dividends on its Pubco shares are subject to Part IV tax. The TCs are numerous CCPCs controlled by 3rd or 4th generation family members. DC is not connected under s. 186(4) with each TC, which holds less than 10% of the voting shares of DC and deals at arm's length with most of the other TCs.

Reorganization

DC transfers pro rata portions of its Pubco shares and incidental assets to the TCs for preferred shares having nominal stated capital, which are redeemed for promissory notes. DC reduces the stated capital of its shares to a nominal amount, and then assigns the promissory notes to the TCs in the course of its winding-up. DC also distributes the dividend refund, generated on the s. 84(2) dividends deemed to arise on its winding-up, pro rata to the TCs.

Before going on to give relatively standard butterfly rulings and rulings that both the s. 84(3) deemed dividends arising on the redemption of the TC preferred shares and the s. 84(2) dividends arising on the winding-up of DC will be subject to Part IV tax and generate a dividend refund, the letter states (para. 70) that the purpose for the nominal stated capital of the DC shares and TC preferred shares is:

to ensure that each of the TCs and DC's respective dividend refund under subsection 129(1) and respective Part IV tax liabilities under paragraph 186(1)(a) (all in respect of the winding-up dividend arising on the wind-up of DC...and the dividends arising on the redemptions of the TC Preferred Shares of the TCs...), will approximately be equal to each other.

Preliminary transactions

. The transactions entail the spin-off by Foreign Pubco of Foreign Spinco Parent including a Canadian business which will have been butterflied (as described below) from DC to TC, a Canadian subsidiary of Foreign Spinco Parent. Accordingly, preliminary transactions are effected to indirectly transfer the "Spin-off Business" to Foreign Spinco Parent. First, the shares of DC will be distributed by its immediate non-resident parent (DC Parent), through a dividend in kind to the shareholder of DC Parent, and thereafter is distributed though dividends-in-kind by further intermmediate corporations, to Foreign Pubco. Furthermore, a "demerger transaction" (perhaps the UK equivalent of a spin-off transaction) is effected pursuant to which DC Parent transfers its portion of the Spin-off business to a subsidiary of its parent (Forco8), and similar demerger transactions are carried out to indirectly transfer the assets of the Spin-off business upstream through a succession of levels of Foreign Spincos and Forcos, followed by further distributions through a succession of dividends in kind of such assets to Foreign Spinco Parent.

DC and s. 86 reorganization

Each common share of DC will be changed into one redeemable retractable non-voting DC preferred shares (a DC New Preferred Share1) and one DC New Common Share.

Three-Party Share Exchange

In the context of a three-party transfer agreement (the "Three-Party Share Exchange") between Foreign Pubco, Foreign Spinco Parent and TC (a newly-incorporated Canadian subsidiary of Foreign Spinco Parent):

a) TC will agree to pay the purchase price for DC New Preferred Shares1 transferred to it by Foreign Pubco as described in para. (b) below by issuing TC Common Shares to Foreign Spinco Parent;

b) Foreign Pubco will agree to pay the purchase price for the common shares issued to it by Foreign Spinco Parent as described in para. (c) below by transferring all of the DC New Preferred Shares1 to TC; and

c) Foreign Spinco Parent will agree to pay the purchase price for the TC Common Shares issued to it by TC as described in para. (a) above by issuing common shares to Foreign Pubco (para. 66).

Permitted exchange

Immediately before the transfer of Newco common shares by DC to TC described below, the common shares of Foreign Spinco Parent (viewed as the "acquiror") owned by Foreign Pubco (viewed as the "participant") will have a fair market value that accords with the formula in (b)(iii) of the "permitted exchange" definition (para. 71).

Drop-down of Canadian Spin-off Business to Newco

DC will transfer its assets of the Spin-off Business to a newly-incorporated subsidiary (Newo) in consideration for assumption of liabilities and the issuance of common shares (para 74-75). A s. 20(24) election may be made. The undepreciated capital cost of depreciable property will be pro-rated.

Three types of property

Immediately before the drop-down transaction referred to above the property of DC will be classified as three types of poroperty under a net asset butterfly approach. Following the allocation of current liabilities to cash or near-cash property in accordance with the usual methodology, provided that the net FMV of the cash or near-cash property of such corporation is positive, any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of such corporation will be reclassified as business property of such corporation and excluded from the net FMV of the cash or near-cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to which such property relates (para. 73(b)). The net fair market value of each type of property transferred to Newco will be such as to satisfy the proportionality test in the distribution definition.

Butterfly distribution

. DC transfers its common shares of Newco to TC in consideration for TC preferred shares (para. 80).

Cross-redemption

TC will redeem its preferred shares, and DC will redeem the DC Preferred Shares1, in each case for a demand promissory note. Immediately thereafter, the principal amounts owing thereunder will be set-off against each other.

Spin-off by Foreign Pubco

Foreign Pubco will distribute all its shares of Foreign Spinco Parent to its shareholders as a dividend-in-kind.

Rulings

. S. 55(2) will not apply to the deemed dividends arising on the cross-redemptions (referred to in Ruling D) provided that:

10% or more of the FMV of the Foreign Spinco Parent common shares that Foreign Pubco owns was not, at any time during the course of any series of transactions or events that includes the dividends described in Ruling D (a) and (b), derived from the DC New Preferred Shares1 or the TC Common Shares. (Ruling F)

Background

Foreign Pubco has announced that it will divide itself into three separate publicly traded companies by making a distribution by way of dividend of shares of Foreign Spinco 1 and Foreign Spinco 2 to its shareholders (the "Spin-out"). Foreign Spinco 1 will indirectly hold the Foreign Spin Business (para. 28). Various transactions (para. 102 to 121) to separate the Foreign Spin Business from the Foreign Keep Business, and arrange for the Foreign Spin Business to be held by Foreign Spinco 1, will occur before the Canadian butterfly transactions described below occur (entailing the separation of the DC Spin Business from the DC Keep Business) with (somewhat counter-intuitively) DC being included in what will be spun out as part of Foreign Spinco 1, and TC being retained as an indirect subsidiary of Foreign Pubco.

DC and s. 86 reorganization

The only issued and outstanding shares of DC, a private corporation and a taxable Canadian corporation (and, per para. 149, a deemed specified financial institution), are common shares which currently are owned by Foreign Sub 2, but after the preliminary transactions referred to above, they will be owned by Foreign Sub 1 (para. 118). DC holds foreign subsidiaries (the A Co and E Co and subsidiaries thereof). Each common share of DC will be changed into one redeemable retractable non-voting DC special share and one DC New Common Share.

Permitted exchanges/Three-Party Share Exchange

Foreign Sub 1 will concurrently make the following transfers of its shares of DC (which will not be taxable Canadian property):

(i) transfer all the DC Special Shares to TC, a newly-incorporated private corporation subsidiary of Foreign Sub 1 (para. 126(a)) in consideration for the issue of common shares of TC; and

(ii) transfer all the DC New Common Shares to Foreign Sub 15, a newly-incorporated LLC subsidiary of Foreign Spinco 1 which, in turn will be a non-Canadian subsidiary of Foreign Sub 1 (para. 126(b)).

In connection with the transfer in (ii) above, Foreign Sub 1, Foreign Sub 15, and Foreign SpinCo 1 will enter into a three-party agreement (the "Three-Party Share Exchange"), whereby:

(a) Foreign Sub 15 will agree to pay the purchase price for the DC Common Shares transferred to it by Foreign Sub 1 by issuing membership interests in the capital of Foreign Sub 15 to Foreign SpinCo 1 having an aggregate FMV at that time equal to the aggregate FMV of the DC Common Shares so transferred to it by Foreign Sub 1 as described in [para. (b) below]...;

(b) Foreign Sub 1 will pay the purchase price for the Foreign SpinCo 1 Common Shares issued to it by Foreign SpinCo 1 as described in [para. (c) below], by transferring all of the DC Common Shares to Foreign Sub 15; and

(c) Foreign SpinCo 1 will agree to pay the purchase price for the membership interests in Foreign Sub 15 by issuing common shares to Foreign Sub 1 having an aggregate FMV at that time equal to the aggregate FMV of the membership interests in Foreign Sub 15 so issued by Foreign Sub 15 to Foreign SpinCo 1 described in para. (a) above.

Immediately before the butterfly "distribution" by DC described below, the common shares of Foreign Spinco 1 (viewed as the "acquiror") owned by Foreign Sub 1 (viewed as the "participant") will have a fair market value that accords with the formula in (b)(iii) of the "permitted exchange" definition (para. 130). Immediately before that "distribution", the common shares of Foreign Spinco 1 (viewed as the "acquiror") owned by Foreign Sub 1 (viewed as the "participant") also will have a fair market value that accords with the formula in (b)(iii) of the "permitted exchange" definition (para. 131).

Consolidated look-through/leased property as business asset

In applying the consolidated look-through approach to the property of DC (under a net asset butterfly approach), it will not be considered to have any property other than business property (para. 133, 136). In this connection, a leasehold interest which DC is subleasing to a third party will be considered to be a business property (para. 132(h)). DC had recently acquired this property as a result of acquiring another Canadian corporation (Canco 11), winding-up Canco 11, transferring the personnel at the facility to other leased premises of DC, and then subleasing to the third party for the duration of the lease:

The entering into of the sublease was motivated entirely by DC's desire to reduce to the extent possible, the cost of the lease obligation assumed on the liquidation of Canco 11. Controlling lease costs is a normal business transaction for DC as that entity has approximately XX leases for various premises across Canada and routinely reviews its leased space and costs (para. 73).

Following the allocation of current liabilities to cash or near-cash property of a corporation in accordance with the usual methodology, provided that the net FMV of the cash or near-cash property of such corporation is positive, any remaining net FMV of any accounts receivable, trade receivables, inventories and prepaid expenses of such corporation will be reclassified as business property of such corporation and excluded from the net FMV of the cash or near-cash property, to the extent that such property will be collected, sold, used or consumed in the ordinary course of business to which such property relates.

Amounts capitalized under SAB 101 (an SEC Bulletin on revenue recognition) will not be treated as property (para. 132(j)). In particular, "any amounts collected from customers and set up as deferred revenue under SAB 101 will not be considered a liability as there is no legal obligation to repay the amount or provide further services" (para. 134(c)(viii)).

Butterfly distribution

. DC transfers assets to TC including A Co and E Co (the Foreign Subsidiaries of CFAs) in consideration for the assumption of liabilities and the issuance by TC of preferred shares, so that the proportion of the net business assets received by TC approximates the ratio of the FMV of the DC Special Shares to the FMV of all the issued and outstanding DC shares. An s. 85(1) election is made (but with the reference in s. 85(1)(e)(i) to undepreciated capital cost of depreciable property of DC being interpreted as referring to its proportionate UCC (para. 139)). Payments made by DC to TC respecting the assumption by TC of deferred revenue obligations will be considered part of the property transfer for these purposes. A related s. 13(24) election will be made.

Cross-redemption

TC will redeem its preferred shares, and DC will redeem the DC Special Shares, in each case for a demand promissory note. Immediately thereafter, the principal amounts owing thereunder will be set-off against each other.

Refinancing

Amounts owing by DC to related parties that were not assumed will be repaid or refinanced. The debt assumed by TC may also be repaid or refinanced.

Spin-off by Foreign Pubco

Foreign Sub 1 will contribute its shares of Foreign Sub 3 to Foreign Spinco 1, and Foreign Sub 1 will then distribute all its shares of Foreign Spinco 1 to Foreign Pubco. Foreign Pubco will distribute all its shares of Foreign Spinco 1 (as well as all its shares of Foreign Spinco 2, which holds assets that were not involved in the butterfly reorganization) to its shareholders as a dividend-in-kind.

Rulings/Opinions

S. 55(2) will not apply to the deemed dividends arising on the cross-redemptions (referred to in Ruling D) provided that:

10% or more of the FMV of the Foreign SpinCo 1 Common Shares was not, at any time, during the course of the series of transactions or events that includes the dividends described in Ruling D, derived from the DC New Common Shares or derived from the membership interest in Foreign Sub 15....For the purposes of subclause 55(3.1)(b)(i)(A)(II), in determining whether 10% or more of the FMV of the common shares of Foreign SpinCo 1 was derived from the DC New Common Shares that Foreign Sub 15 owns or derived from the membership interest in Foreign Sub 15 that Foreign SpinCo 1 owns, as described in Ruling F(I) above, any indebtedness of Foreign SpinCo 1, that is not a secured debt and that is not a debt related to a particular property, will be considered to reduce the FMV of each property of Foreign SpinCo 1 (or indirectly the FMV derived from DC Common Shares owned by Foreign Sub 15) pro rata in proportion to the relative FMV of all property of Foreign SpinCo 1. (Ruling F)

Interest on DC's retained debt will be deductible (subject to the more usual qualifications) to the extent that its aggregate amount does not exceed the contributed capital and accuulated profits of the DC Special Shares which were redeemed. (Ruling K)

DC and TC will be a predecessor corporation and acquiring corporation for purposes of Reg. 5905(5) in respect of the CFAs acquired by TC. (Ruling L)

The Finance Comfort Letter recommends changes to the draft s. 212.3 rule to avoid a deemed dividend to DC on its transfer of the CFAs to TC.

Similar circular

The distributing corporation ("DC") is controlled by a financial institution ("Owner 1" - perhaps a credit union) and its only assets are a partnership interest in a limited partnership ("LP") together with a portion of the common shares of the general partner thereof. The balance of the interests in LP are held by another credit union. LP apparently has an asset management business.

The assets of DC (i.e., essentially, LP) are divided among its shareholders (all of them non-public corporations, including Owner 1) utilizing conventional split-up butterfly mechanics, so that on completion, DC has been wound-up into the transferee corporation (a "TC") of Owner 1 and all the TCs (including the TC of Owner 1) have been wound up.

The ruling states that DC is not expected to have any business property. A preliminary transaction is for the current liabilities of DC to be paid off through the application of regular partnership distributions received from LP.

Where two siblings are the shareholders of two transferee corporations which are to receive two life insurance policies taken out by the distributing corporation on the life of each sibling to fund the redemption of the other's shares on the other's death, the cash surrender value of each property would be treated as a cash or near cash asset. The excess of the fair market value over the cash surrender value potentially may be treated as an investment asset (see 2010-0358061R3, where the distributing corporation did not own any business property), although CRA may be prepared to be flexible respecting the classification of such excess and potentially could treat the excess as business property. CRA would accept that each type of property transferred may be determined on a net basis (thereby applying liabilities of the DC), although such liabilities would have to be allocated following a predetermined pattern.

CRA also stated:

[I]f the circumstances of a case show an intention to cash out the life insurance policy or if the death of the insured person is imminent, the FMV of a life insurance policy, including its CSV, as the case may be, may need to be classified as "cash or cash equivalents".

In a single-wing butterfly of a company whose assets consisted of cash and cash equivalents, tenant receivables and a revenue producing rental property, the revenue-producing properties and prepaid rent were considered business property and loans receivable from certain Holdcos, which had no specified terms of repayment, were considered to be near cash assets.

After the allocation of current liabilities to cash and near cash assets, "the remaining net fair market value, if any, of any amounts receivable and prepaid expenses of Opco (other than the Prepaid Rent) will be reclassified as business property and excluded from cash or near-cash property, to the extent that such property will be collected or used in the ordinary course of the business to which such property relates" (para 66(b)).

Furthermore, "following such allocation of liabilities...it is not expected that Opco will have any cash or near cash property...."

preliminarily to butterfly transactions involving a CCPC (DC) whose individual shareholders are implementing a settlement agreement in respect of an oppression remedy brought by some of the individual shareholders (H to M, who act as a group): Mr. A (a major shareholder of DC), Mrs A and Mr G are paid retiring allowances; and various of the individual shareholders who are not specified shareholders elect to cash out substantially all their interest in DC by electing to receive a substantial cash dividend (including a capital dividend) on their shares (representing most of the value of those shares) with those shares then being converted into Class B Freeze shares having a nominal value.

In the first gross asset butterfly transaction, DC transfers a portion of each of its three types of property: to a subsidiary (Subco A) of a TC for Mr A (Transferee A), with Subco A then being wound up into Transferee A; and to a TC for G to M (Transferee Z). DC then is dissolved. In the second gross asset butterfly, Transferee Z (now referred to as DC2) transfers a portion of each of its three types of property to TCs for each of its individual shareholders (or a TC (Transferee N) with nominal value for the shareholders of DC who elected to be cashed out).

The liabilities assumed on the butterfly transfers to and by Transferee Z include contingent environmental liabilities (para. 37, 80).

there are two proposed successive butterfly reorganizations in which DC, which is a CCPC whose assets include development real estate, mortgage receivables and portfolio investments and which is owned by a testamentary trust, a subsidiary ("Newco 1") of the estate and a Mr. B, transfers a portion of its assets on a butterfly reorganization to a corporation ("Transferee A") owned by the same shareholders, and Transferee A then transfers a portion of its assets on a butterfly reorganization to a corporation ("Transferee C") owned by Mr. B.

On both butterfly distributions, the amount of the cash to be transferred to Transferee A or C will be determined within X days of the transfer of the other property to such transferee corporation and an adjustment will be made as required to the amount of cash transferred (para. 41, 53).

At or around the time of the above transactions, and following the exchange by the trust of its exisiting shares of DC for two new classes of shares, one of which will be retained by it and the other transferred by it on a share-for-share exchange to Transferee A, DC will pay in cash a capital dividend on the shares retained or to be retained by the trust.

In a net equity butterfly, after the current liabilities are allocated to cash and near-cash property, "any remaining net FMV of any accounts receivable , trade receivables, inventories and prepaid expenses of Canco will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates." (para 35(b)(ii))

Business property did not include (and investment property included) assets any income from which would be income from a specified investment business. (para. 33)

Vacant land of a distributing corporation used as a parking lot for a facility owned by a subsidiary, and vacant land owned by the distributing corporation for the purpose of constructing a facility, will be considered to be capital property and business property.

The cash and near cash property of DC Amalco includes funds in an escrow bank account which, pursuant to the relevant loan agreement, DC Amalco is under an unconditional commitment to expend on property taxes; and its business property includes funds in escrow bank accounts which, pursuant to the relevant loan agreement, DC Amalco is under an unconditional commitment to expend on future acquisitions of furniture, fixtures and equipment (paras. 3 and 22).

Where TC receives a butterfly property from DC on spin-off butterfly, the sale by TC of some of the butterflied property back to DC after the spin-off butterfly (where such sale will not exceed the limitation in s. 55(3.1)(c)), will not affect the pro rata distribution rule.

sequential butterfly. In each butterfly, "to the extent a portion of the cash or near cash property of the [DC] Group is committed by the [DC] Group in order to fund the acquisition of a business property (that is to be acquired regardless of the Proposed Transactions), such cash or near cash property will be classified as business property." (para.52(g) and 73(f)) "[T]he net FMV of all accounts receivable, inventory and prepaid expenses of [DC]'s that are initially classified ...as cash or near cash property that will relate to a business that will be carried on by the [TC Groups] and that will be collected or consumed in the ordinary course of such business, will then be reclassified as business property...." (para. 53(a)(ii) and (b)(ii)), 62(a)(ii) and (b)(ii))

No look-through approach was applied to holdings in public corporation where each holding was less than 20% and neither the taxpayer nor persons related to it were on the board or participated in the decision-making processes of the investees.

Where the distributing corporation or a look-through corporation has limited partnership interests, the consolidated look-through approach will be used only in cases where such holder on a consolidated basis can exercise significant influence over the affairs of the partnership. (para. 43(a)).

Since space that was subleased was generally either previously occupied or potentially needed for future expansion, the entire leasehold interest will be classified as business property (para. 43(n)(ii)).

Certain "look-through" entities ... have in the past acquired land for future expansion of the business operations. In some circumstances, the expansion plans have been abandoned and such vacant lands are currently held for resale pending of the locating of an acceptable purchaser. Since in all the circumstances, the vacant land was initially acquired for future expansion and either continues to be held for such expansion or for resale, these interests in vacant lands will be classified as "business property" (para. (n)(v)).

In determining the net fair market value of property of the distributing corporation, liabilities should be valued at their principal amount rather than their fair market value (per summary).

Where the terms of debt require payments to a sinking fund, the liability arising from that debt should be allocated first to the sinking fund assets (per summary).

An amount of cash or near cash assets equal to the amount of unconditional purchase commintments to fund the acquisition cost of business property which will be acquired in the ordinary course of business regardless of whether the butterfly distribution will occur, is classified as business property (para. III.27). Conversely, where there are unconditional commitments to sell business property in the ordinary course of business, an amount equal to the sales proceeds to be received will be classified as cash or near cash property (para. III.28).

Intellectual property which has been primarily developed or acquired for application and use in the business activities of the group is classified as business property notwithstanding that there is incidental licensing of the property (para. III.30).

Real property interests consisting of redundant space within structures which are used, or held for use, in the business activities wthin the group, and real property interests whcih consist of residential properties acquired from relocated employees, are classified as business property (para. III.31).

Where a subsidiary has a net FMV of cash or near cash property of -$200, and a net FMV of business property of $1,200 and a net FMV of investment property of nil, and if the FMV of the shares and debt of the corporation are $900, then the amount added to the consolidated net FMV of the distributing corporation cash or near cash property and net business property will be -$180 and $1,080, respectively (para. III.23.(3)).

sales proceeds, in the form of cash and a non-convertible note receivable, which DC received on the sale of its interests in [unspecified assets] were treated as business assets because DC directly or indirectly entered into unconditional commitments to use the proceeds to acquire business assets including corporations over which it would exercise significant influence.

Vacant land held for development, which was capital property, was categorized as investment property. Any tax accounts, such as the balance of any RDTOH account or capital dividend account would not be considered to be property.

A foreign public company (Foreign Pubco) is to spin-off a newly-formed non-resident subsidiary (Foreign Spinco). preparatoryh to this, there is abutterflying of the Canadian spin business of Canadian DC (which is a direct sub of “Forco 2” and indirect sub of Foreign Pubco) to Canadian TC (which is the child of Foreign DC and a grandchild of Forco 2.) Immediately before this butterfly transfer, Canadian TC acquires its special shares in Canadian DC through a three-party exchange arrangement between Canadian TC, Forco 2 and Foreign DC, although it is not done this way for ITA reasons.

Foreign DC is then distributed up the chain to Foreign Pubco. Foreign Pubco then drops Foreign DC into a new subsidiary (Foreign TC) of a newly-formed LLC subsidiary of Foreign Pubco (New LLC – to which other significant foreign assets already have been contributed) pursuant to a three-party exchange agreement under which Foreign Pubco transfers Foreign DC directly to Foreign TC, Foreign TC issues shares to New LLC, and New LLC issue units to Foreign Pubco. Both this triangular exchange and the previous one are expressed to occur as “permitted exchanges” in accordance with the formula in (b)(iii) of the s. 55(1) definition.

As preliminary transactions to a butterfly distribution by DC, which is owned by a non-resident subsidiary (Foreign Sub 1) of a non-resident publicly-traded corporation (Foreign Pubco), each common share of DC will be changed into one redeemable retractable non-voting DC special share and one DC New Common Share.

Permitted exchanges/Three-Party Share Exchange

Foreign Sub 1 will concurrently make the following transfers of its shares of DC:

(i) transfer all the DC Special Shares to TC, a newly-incorporated private corporation subsidiary of Foreign Sub 1 (para. 126(a)) in consideration for the issue of common shares of TC; and

(ii) transfer all the DC New Common Shares to Foreign Sub 15, a newly-incorporated LLC subsidiary of Foreign Spinco 1 which, in turn will be a non-Canadian subsidiary of Foreign Sub 1 (para. 126(b)).

In connection with the transfer in (ii) above, Foreign Sub 1, Foreign Sub 15, and Foreign SpinCo 1 will enter into a three-party agreement (the "Three-Party Share Exchange"), whereby:

(a) Foreign Sub 15 will agree to pay the purchase price for the DC Common Shares transferred to it by Foreign Sub 1 by issuing membership interests in the capital of Foreign Sub 15 to Foreign SpinCo 1 having an aggregate FMV at that time equal to the aggregate FMV of the DC Common Shares so transferred to it by Foreign Sub 1 as described in [para. (b) below]...;

(b) Foreign Sub 1 will pay the purchase price for the Foreign SpinCo 1 Common Shares issued to it by Foreign SpinCo 1 as described in [para. (c) below], by transferring all of the DC Common Shares to Foreign Sub 15; and

(c) Foreign SpinCo 1 will agree to pay the purchase price for the membership interests in Foreign Sub 15 by issuing common shares to Foreign Sub 1 having an aggregate FMV at that time equal to the aggregate FMV of the membership interests in Foreign Sub 15 so issued by Foreign Sub 15 to Foreign SpinCo 1 described in para. (a) above.

The ruling letter states that, immediately before the butterfly "distribution" by DC described below, the common shares of Foreign Spinco 1 (viewed as the "acquiror") owned by Foreign Sub 1 (viewed as the "participant") will have a fair market value that accords with the formula in (b)(iii) of the "permitted exchange" definition (para. 130). Immediately before that "distribution", the common shares of Foreign Spinco 1 (viewed as the "acquiror") owned by Foreign Sub 1 (viewed as the "participant") also will have a fair market value that accords with the formula in (b)(iii) of the "permitted exchange" definition (para. 131).

The incorporation on March 15 by a purchaser of a corporation for the purpose of purchasing the assets of another corporation (the vendor) caused the "safe-income determination time" to occur, as this was a trigger under the s. 55(1) definition. On April 4 of that year, the vendor corporation sold its assets at FMV to the new purchasing corporation. Since this occurred after the safe-income determination time, the taxable income from the sale was not included in computing safe income – so that if the vendor then paid a dividend out of the asset sale proceeds, it would be recharacterized as a capital gain because of the lack of safe income.

(a)

Does CRA agree with this result, notwithstanding that the asset sale had already been fully taxed? CRA responded:

Assuming that the incorporation of the corporation is part of the same series of transactions that may create an increase in the total direct interest in a corporation of an unrelated person, we agree that the "safe-income determination time" defined in subsection 55(1) could be the time after that first increase in interest.

However, practical solutions to these types of technical issues exist and therefore the CRA does not consider that a flexible approach is necessary in the[se] circumstances … .

(b)

Is the safe income from the sale of the assets lost or will it be considered in a future computation of safe income? CRA responded:

If the safe income from the sale of the assets is not included in safe income for the purposes of the dividend paid following the sale, this safe income is generally not lost and may be used in the subsequent payment of dividends to the extent that such subsequent dividends are not part of the same series of transactions as the sale of the assets.

In addition, it should be noted that, depending on the facts and circumstances of a particular situation, for example in situations of a total sale of assets of a corporation followed by a winding-up dividend pursuant to subsection 88(2), the CRA would be prepared to consider, after a detailed analysis of a file, that the subject matter of the dividend would not fall within paragraph 55(2.1)(b).

Having regard to the concern that the safe-income determination time is no later than the time immediately before the earliest dividend paid as part of a “series,” which is broadly defined in s. 248(10) and Copthorne, CRA stated:

In a recent ruling, the CRA took the view that regular, recurring annual dividends would not, in the circumstances of the ruling request, be part of a series of transactions. Accordingly, a ruling confirmed that the safe income determination time in respect of the first and second annual dividends will be immediately before each such dividend.

CRA went on to confirm 2016-0633961E5 (respecting recapture of depreciation realized on sale before safe-income determination time being included in safe income.)

Background

The equal and unrelated (corporate) shareholders of Holdco (a Canadian-controlled private corporation) wish to accommodate the purchase of shares of Holdco by Holdco's subsidiary (Opco), so that Opco may in turn sell those Holdco shares to an Opco key employee on an earnout basis and with the key employee’s purchase being governed by the s. 7 rules. (This arrangement cannot be accommodated by issuing treasury shares of Holdco directly to the key employee on an earnout basis as the governing Business Corporations Act requires that shares are to be fully-paid on issuance.) Under the ruled-upon transactions:

1. The Holdco shareholders transfer a portion of their Holdco common shares on a s. 85(1) rollover basis to Opco in consideration for preferred shares of Opco bearing a cumulative dividend which tracks the payment of the earnout payments described below (presumably giving rise to a significant increase in Opco under s. 55(3)(a)(ii) or (v));
2. The key employee immediately purchases those Holdco common shares from Opco (perhaps also described in s. 55(3)(a)(ii) or (v)) in consideration for five annual instalments, with each annual instalment based on the most recent year’s earnings (plus, in the case of the first instalment, the opening shareholders’ equity), with adjustments to the purchase price on any IPO or business acquisition; and
3. Each instalment payment after its receipt by Opco is dividended (as the "Earnout Tracking Dividends") by Opco to the Holdco shareholders on the tracking preferred shares.

Dividend Policy

In addition, the directors of Holdco and its subsidiaries have adopted a policy of paying dividends approximating but not exceeding their cumulative income up to the dividend payment time (including such dividends from subsidiaries) minus income taxes thereon. The proposed transactions commence with paying the dividends (the “First Annual Dividends”) that were already recorded as dividends payable at the end of an initial taxation year, and both declaring and paying (at the same time) dividends in respect of the interim period to date (the “Interim Income Dividends”). Furthermore, further such dividends (the “Second Annual Dividends) will be declared and paid as soon as practicable after the end of the next such taxation year. All such dividends will be designated as eligible dividends. The Dividend Policy would have been adopted irrespective of the other proposed transactions, and the Key Employee was prepared to acquire the Holdco common shares regardless of whether the Dividend Policy was implemented, on the basis that he would still be able to obtain financing for such purchases, even if he did not receive dividends on his purchased Holdco shares.

Rulings

S. 55(2) will not apply to the receipt of the First Annual Dividends, Interim Income Dividends or Second Annual Dividends, provided that their full amount does not exceed the amount of safe income on hand that could reasonably be considered to contribute to the capital gain that could be realized on a disposition at FMV, immediately before the dividend, of the shares of the corporation on which the dividend was received at the safe income determination time for the transaction, event or series of transactions that includes the receipt of the dividend. The safe-income determination time in respect of each Second Annual Dividend will be the time that is immediately before the time the first of those Second Annual Dividends are paid and the safe income determination time in respect of all of the First Annual Dividends and the Interim Income Dividends will not be later than the time that is immediately before the earlier time that the first of such dividends is paid.

S. 55(2) will apply to an Earnout Tracking Dividend that is received by a corporation resident in Canada. The safe income determination time for the Earnout Tracking Dividends will be immediately before the time the first of the Interim Income Dividends is paid.

Two brothers (A and B), and their cousins (C and D, who were brothers) each held 50% of the shares of a holding company ("ABco" and ) ("CDco)" for portfolio investments and for the holding by each of 50% of the shares of Opco. An inter vivos trust (the “Trust”), holding 600 shares of Xco (a CCPC with a bond portfolio) with a nominal ACB and PUC of $600 and an FMV of $1,200,000, distributed those shares equally to its “Beneficiaries” (A, B, C and D – as well as E and F, who were brothers and cousins of the others). By virtue of an election by the trust pursuant to s. 107(2.001), s. 107(2.1) applied to this distribution, so that Trust realized deemed proceeds of $1,200,000 (resulting in a taxable capital gain of $99,950 being allocated to each Beneficiary under s. 104(21)), each Beneficiary was deemed to have acquired 100 shares at a cost of $200,000, and each Beneficiary disposed of the beneficiary’s capital interest in the Trust for proceeds of $100, which under s. 107(1)(a) had a deemed ACB equal to the cost amount of the distributed shares of $100 – so that no gain was realized on the disposition of each such capital interest.

A and B (and C, D, E and F) each then transferred to ABco (or to CDco) their 100 Xco common shares in exchange for a term note for $200,000 (equaling their ACB) bearing interest at 6% payable in equal instalments on the 12^th, 18^th and 26^th month after such transfer. After the term notes of ABco and CDco were paid in full, Xco would be wound up and all of its property distributed pro rata to ABco and CDco, so that Xco would realize deemed proceeds pursuant to s. 69(5)(a) and ABco and CDco would have a deemed FMV cost pursuant to s. 69(5)(b).

CCRA indicated that although s. 84(2) would not apply, it appeared that the dividends resulting from the winding-up of Xco and the distribution of Xco property to ABco and CDco could technically give rise to the application of s. 55(2), to the extent that one of the purposes of the transaction or series of transactions was to significantly reduce the portion of the capital gain that, but for the dividend, would have been realized on the disposition of an Xco share at FMV immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by a corporation after 1971 and before the "safe income determination time" in respect of the series of transactions. In this regard, CCRA indicated that the "safe income determination time" could be established as the time after the s. 107(2.1), given that such Xco, the "dividend payer," was to persons who were unrelated persons immediately before the particular time and, thus, would be an event described in s. 55(3)(a)(iii).