2021 Ruling 2020-0863171R3 - Gross basis split-up Butterfly -- summary under Distribution

Background

DC owns four rental properties (Properties 1, 2, 3 and 4) which generate business income rather than being a specified investment business by virtue of having more than five full-time employees. It is held by two holding companies: Holdco1, owned by members of the AB family (i.e., by the estate of AB and children of AB); and Holdco2, owned by members of the AB family (i.e., by the estate of AB and children of AB); and Holdco2, owned by members of the CD family (i.e., by CD, the brother of AB, children and the spouse of CD, and a CD holding company).

Proposed transactions

1. There will be a preliminary transfer by DC of registered title to its 4 properties to newly-incorporated nominee corporations held by the respective Holdcos.
2. DC will increase the PUC of its common shares by the lesser of (a) the safe income on hand attributable to the common shares at that time and (b) the aggregate of (i) its pre-1972 CSOH and (ii) an amount sufficient to trigger a refund of its RDTOH balance at that time, if any. The principal purpose will be to increase the ACB of the DC common shares, so as to eliminate or reduce the capital gain that would otherwise arise by virtue of an amount equaling DC’s pre-1972 CSOH not be treated as a dividend on the winding-up distribution from DC in 7 below pursuant to s. 88(2)(b)(ii), and instead being treated as “proceeds of disposition” under para. (i) of the definition.
3. DC may submit a request to the relevant Tax Services Office to have a change of taxation year end, if there is a material balance of RDTOH, such that the steps below giving rise to dividends occur in its following taxation year.
4. Each of Holdco1 and Holdco2 will transfer its common shares of DC to a corporation newly-formed by it (TC1 or TC2) on a s. 85(1) rollover basis in consideration for common shares.
5. DC (which will have not investment property) will transfer simultaneously to each of TC1 and TC2 on a s. 85(1)rollover basis 50% of its cash or near-cash and business property, on a gross FMV basis (such that immediately following such transfers the FMV of each type of property so received by TC1 and TC2 will be equal to or will approximate 50% of the FMV of that particular type of property of DC immediately before such transfers) in consideration for the assumption of liabilities and the issuance of redeemable preferred shares. As a result TC1 will become the beneficial owner of Property2, Property3 and Property4 and TC2 will become the beneficial owner of Property1.
6. TC1 and TC2 will each redeem the preferred shares held by DC for a demand, non-interest bearing promissory note.
7. Immediately thereafter, the shareholders of DC (being TC1 and TC2) will resolve to wind-up and dissolve DC and, pursuant to the winding-up, the two notes owing by TC1 and TC2 will be distributed to TC1 and TC2, respectively, and be cancelled.
8. To the extent that DC has GRIP at the time of the winding-up, DC will designate a portion of the winding-up dividend referred to in s. 88(2)(b)(iii) to be an eligible dividend.
9. Any tax refund that DC is entitled to will be distributed pro rata to each of TC1 and TC2.
10. DC will be dissolved.

Rulings

Including re non-application of s. 55(3.1) or s. 80 and application of Reg. 1100(2.2).