11. X and Y, two unrelated individuals, each own 50 per cent of each class of the issued capital stock of Opco. A single wing butterfly reorganization is undertaken whereby 50 per cent of each type of Opco's property is transferred to a holding company owned by Y. Following this reorganization 100 per cent of all of the issued and outstanding shares of Opco are owned by X.
i) Do the provisions of subsection 249(4) apply?
ii) Would your response be different if the two parties were related?
iii) Would paragraph 256(7)(a) apply to deem the control of Opco not to have been acquired?
DEPARTMENT'S POSITION
1) The word "control" as expressed in subsection 249(4) is not defined in the Act. Nevertheless, it is the Department's view, as outlined in paragraph 13 of IT-64R2 , that the word "control" generally means the right of control that rests in ownership of such number of shares as to give a majority of the voting power in the corporation. In this particular case, before the butterfly reorganization neither individual controls the particular corporation through a majority shareholding. It is assumed that they are dealing at arm's length and that there are no agreements, options, or similar arrangements which gives one shareholder de facto control of Opco. As such, the transfer of property by Opco to Y's holding company pursuant to the provisions of paragraph 55(3)(b) of the Act, followed by the obligatory purchase of shares previously held by Y, will result in X having acquired control. As a result, subsection 249(4) will apply in this particular case.
2) Related persons are deemed to not deal with each other at arm's length pursuant to paragraph 251(1) (a) of the Act. Therefore, the related persons, as a group, control the particular corporation immediately before the single wing butterfly. Upon redemption of the shares of Opco previously held by Y, X will be considered to have acquired control of the particular corporation.
3) The provisions of paragraph 256(7) (a) apply to situations "where shares of a particular corporation have been acquired by a person". In this instance, X has not acquired shares, as contemplated by paragraph 256(7) (a), such that the exempting provisions of paragraph 256(7) (a) would not apply.
Prepared by: P. Diguer