2017 Ruling 2016-0646891R3 - Pipeline and subsequent Split-up butterfly -- summary under Subsection 84(2)

Background

As a result of the death of A, the estate of A acquired A’s Class A common shares of Predecessor1, exchanged such shares for Class B common shares and Class D redeemable preferred shares, received a stock dividend from Predecessor1 of Class E redeemable preferred shares, and received redemption proceeds for its Class D preferred shares (giving rise to a deemed dividend and a s. 164(6) carryback). Predecessor1 then amalgamated with its subsidiary (Predecessor2) to form DC, whose main assets comprised marketable securities (and is not anticipated to have any business property for butterfly purposes), and which has an RDTOH and CDA balnce. Pursuant to A’s will, the residue of the Estate (including the Class B common shares and Class E preferred shares) is transferred to Grandchild1 Trust, Grandchild2 Trust and Grandchild3 Trust.

Proposed transactions

1. Each Grandchild1 Trust transfers its Class B common shares and Class E preferred shares under s. 85(1) to newly-incorporated TC1, TC2 or TC3, as the case may be in consideration for Class A common shares of the TC.
2. After XX has elapsed, DC will transfer under s. 85(1) equal portions of its two types of property to TC1, TC2 and TC3 in consideration for the assumption of liabilities and in consideration for non-voting redeemable retractable “Butterfly Shares.”
3. TC1, TC2 and TC3 redeem the Butterfly Shares for Notes and select their first taxation years to end on that day.
4. After at least XX has elapsed since the above transactions, DC will be wound-up, so that the respective redemption notes will be assigned to the TCs and be extinguished.
5. To the extent that there is a CDA balance in its CDA, DC will elect under s. 83(2) respecting portions of the winding-up dividends to treat them as capital dividends, and TC1, TC2 and TC3 will elect under s. 83(2) on the proportion of such separate dividend described in s. 88(2)(b)(iv).
6. To the extent it has a positive GRIP balance, DC will designate, pursuant to s. 89(14), to treat 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 timely notifying TC1, TC2 and TC3 in writing.
7. Following receipt of the dividend refund to which it will become entitled, DC will immediately transfer the cash received on the dividend refund in the form of a dividend to each of TC1, TC2 and TC3 in the same proportions as described above, and then be dissolved.
8. Subsequently, TC1, TC and TC3 may gradually sell their remaining investment, provided that the sale of their remaining investment does not result in an acquisition of property in the circumstances described in s. 55(3.l)(c) and transfer the proceeds to TC1, TC2, and TC3 over a period of at least one year. The amount paid in any quarter of that year on a class of shares will not exceed XX% of the PUC of such class of shares of TC1, TC2 and TC3.

Rulings

Including re s. 84.1 and s. 55(3.1).