2018 Ruling 2017-0733011R3 - Split-up Butterfly -- summary under Distribution

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.