CRA provided standard rulings for a one-wing split-up butterfly respecting the “Transferor,” which computed the income from its business (presumably, a farming business) under s. 28(1) and in which two brothers, A and B (survivors of their father, C), were both actively involved. They hold the common shares, and the estate of C and their mother hold preferred shares.
As provided for in the shareholders agreement, the transactions were to commence with the Transferor paying a capital dividend to the estate of C equal to the excess of the proceeds received by it on the policy on the life of C over the adjusted cost basis of the policy, with the Transferor then redeeming the preferred share held by the estate for its redemption value.
A will then transfer his common shares of the Transferor to a newly incorporated “Transferee” on a s. 85(1) rollover basis for shares of the Transferee. There then will be a pro rata spin-off of the two types of property of the Transferor (cash and near cash assets, and business property) on a net asset basis to the Transferee using the usual cross-redemption/note mechanics.
CRA implicitly regarded the cash distribution of the life insurance proceeds to the estate as being separate and apart from the pro rata distribution occurring on the butterfly. It provided its usual ruling that the strict requirements of s. 85(1)(e) could be ignored, so that there could be a pro rata division of the UCC of the depreciable property, rather than disproportionate UCC going to the Transferee.