2019 Ruling 2018-0758411R3 - Multi-wing split-up net asset butterfly -- summary under Distribution

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.