2023 Ruling 2022-0958601R3 - Post Butterfly Transactions -- summary under Paragraph 55(3.1)(c)

Background

Xco is a corporation holding cash and shares of Yco. (Yco's other shareholders are management employees and their holding company. ) The shareholders of Xco are:

• Aco Amalco, Dco Amalco and Eco Amalco. Which are owned respectively by three unrelated individuals (A, D and E) or their respective family or spouse’s trust;
• A Son Company, which is owned by A’s son (“A Son) and trusts for his spouse or family; and
• AA Co, which is an unrelated third party.

The Xco shares now held by Dco Amalco and Eco Amalco were, prior to the successive butterfly transactions described in 2020-0848061R3 (the “Sequential Butterflies”), held by a single corporation (KL Amalco which, in turn, was a successor by amalgamation to “Kco”), whose shareholders were Dco and Eco (essentially with the same ownership as that of Dco Amalco and Eco Amalco). However, in the third butterfly described in 2020-0848061R3, a pro rata portion of the assets of KL Amalco were spun-off to a transferee corporation (TC5) formed by Eco, and Eco and TC5 then amalgamated to form Eco Amalco, and Dco Amalco was formed by the amalgamation of Dco and a successor or by amalgamation of KL Amalco.

Aco Amalco was the successor by amalgamation to an historical owner of Xco shares (Aco).

Proposed transactions

1. Dco Amalco will acquire Xco shares of Eco Amalco for two promissory notes.
2. Yco will pay cash dividends to its shareholders.
3. Xco will repurchase shares of Dco Amalco for cash, a promissory note and preferred shares of Xco.
4. Xco will use share subscription proceeds received from A Son Company to repay the promissory notes in 1.
5. Dco Amalco will repay the promissory note in 3.
6. Xco will redeem the preferred shares issued by it in 3.

Representation

The Proposed Transactions will not be completed in contemplation of, or as part of the series of transactions or events that includes, the Sequential Butterflies. Each of the Proposed Transactions would have occurred regardless of whether the Sequential Butterflies were completed, with modifications required, and the Sequential Butterflies would have occurred regardless of whether the Proposed Transactions were subsequently implemented. The Proposed Transactions do not benefit from the Sequential Butterflies and the Sequential Butterflies will not be impacted in any manner whatsoever by the Proposed Transactions.

Purpose

At the time of the Sequential Butterflies, Xco was a stable self-sustaining investment for Dco Amalco and Eco Amalco and there was no intent to significantly change the nature of its activities or to make significant capital investments. Xco has seen growth in its business, permitting it to start considering making significant new investments in business opportunities. Dco Amalco and Eco Amalco are not interested in pursuing these significant new investment opportunities and the purpose of the proposed transactions is to enable Dco Amalco and Eco Amalco to exit their investment in Xco.

Ruling

Re the proposed transactions not causing s. 55(3.1) to apply to deny the s. 55(3)(b) exception to the relevant dividends arising on the Sequential Butterflies.