15 January 1990 Ministerial Correspondence 59274 F - Transfer of Property Prior to Butterfly Transaction

January 15,1990

Dear Sirs:

Re:  Section 55 of the Income Tax Act (the "Act")

We are writing in response to your letter of December 19, 1989, in which you requested confirmation of your current understanding of the Department's position on a particular aspect of section 55 of the Act, as set out by Mr. Robert J.L. Read at the Fortieth Tax Conference held in Vancouver in November 1988 in a paper entitled "Section 55:  A Review of Current Issues".  You believe that this position is no longer relevant.

The particular aspect of the paper with which you are concerned, and which is described on page 18:22 of the 1988 Conference Report, pertains to the transfer of a property by a (parent) corporation to a wholly-owned subsidiary (the "controlled corporation ") in consideration for shares of the controlled corporation.  The (parent) corporation would also be the "particular corporation" as referred to in paragraph 55(3)(b) of the Act, and in the context of this paragraph, the Department considered the transfer to the controlled corporation to be part of an indirect transfer of the property of the "particular corporation" to a transferee.  Consequently, the Department took the position that the transfer of the property would not comply with paragraph 55(3)(b) of the Act unless the controlled corporation was wound up following the transfer of its shares to the transferee.

The confirmation you request is that the above excerpt from the 1988 Conference Report no longer reflects the current position of the Department on this issue.  More particularly, and in the context of a situation with which you are concerned, land has been transferred to a wholly owned subsidiary corporation ("Landco") by a corporation (the "particular corporation") in contemplation of a butterfly transaction described under paragraph 55(3)(b) of the Act.  You request additional confirmation that, in order to successfully carry out the proposed butterfly transaction, the wind-up of Landco will not be required following the transfer of its shares to a transferee referred to in paragraph 55(3)(b).

Our Comments

The position of the Department as set out in the excerpt from the 1988 Conference Report referred to above reflected a concern that a transfer of property prior to a butterfly transaction could be used to recharacterize one type of property to another type, with the result that a transferee's interest in each type of property of the particular corporation would be altered.  Since this concern is now allayed by the "look-through approach", also discussed in the 1988 Conference Report, we agree that the comments on page 18:22 of the Report are superfluous and may be ignored.

In the context of the butterfly transaction that you propose to carry out, we also agree that there would be no need to wind up Landco following the transfer of its shares.  We would however, point out that, in order to ensure that the transferee referred to above received its proportionate interest in each type of property of the particular corporation, it would be necessary to "look-through" the shares of Landco held by the particular corporation.  You will appreciate of course, that this is only an opinion and is not a ruling, and in consequence, is not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch