2018 Ruling 2017-0714411R3 - Butterfly Reorganization -- summary under Distribution

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