2017 Ruling 2016-0674681R3 - Sequential Split-Up Butterfly -- summary under Distribution

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.