2023 Ruling 2022-0957491R3 F - Butterfly Reorganization -- summary under Distribution

Background

Transferor is a holding company holding near-cash and investment property including shares of a public corporation (Corporation). Its preferred shares are held by the estate of the deceased parent (Parent) of Child and 2 and its Class A common shares are held by an inter vivos trust (the Trust). The beneficiaries of the estate are two respective testamentary trusts for the children (Child 1 and 2) of Parent. The beneficiaries of the Trust are Child 1 and 2 and their respective children and any corporation controlled by any such beneficiary.

Completed pipeline transaction

The estate had engaged in a pipeline transaction under which it transferred its shares of a predecessor of Transferor (Holdco) to a newly-incorporated corporation (Newco) in consideration for a note (the Estate Note), and preferred shares, of Newco, with Newco subsequently being amalgamated with Holdco so as to bump the shares of Corporation pursuant to s. 87(11). A portion of the Estate Note was then repaid and distributed by the estate to the two testamentary trusts, from them to Child 1 and 2, and by Child 1 and 2 to their respective new wholly-owned holding companies, viz., Child 1 Holdco and Child 2 Holdco.

Proposed transactions

1. The estate will distribute on a s. 107(2) rollover basis in equal shares to the two testamentary trusts its preferred shares of Transferor, and the Estate Note.
2. Each such testamentary trust will distribute on a s. 107(2) rollover basis the assets so received by it to Child 1 or 2 in satisfaction of all or part of the capital interest of the child in such trust.
3. Each child will transfer the assets so received by her or him to Child 1 Holdco, or Child 2 Holdco, on a s. 85(1) rollover basis, in consideration for a note and preferred shares of the respective Child Holdco, with the PUC of such preferred shares being determined in accordance with s. 84.1(1)(a).
4. Similarly, the Trust will distribute on a s. 107(2) rollover basis in equal shares to the two children its common shares of Transferor, and a note owing to it by Transferor (the Trust Note), with each child then transferring the assets so received by her or him to Child 1 Holdco, or Child 2 Holdco, on a s. 85(1) rollover basis in consideration for a note and preferred shares of the respective Child Holdco, with the PUC of such preferred shares being determined in accordance with s. 84.1(1)(a).
5. Transferor will transfer a pro rata portion of its two types of property to Child 1 Holdco and Child 2 Holdco on a s. 85(1) rollover basis in consideration in each case for preferred shares of the respective Holdco and the assumption of ½ of the Estate Note and Trust Note, so that the two notes will be extinguished by operation of law.
6. Each such Holdco will redeem the preferred shares issued as described immediately above for a note (Note 1 or 2).
7. The first taxation years of each of Child 1 Holdco and Child 2 Holdco will occur at the end of the day on which the above redemptions occur.
8. On the following day, the winding-up of Transferor will be authorized and the Transferor’s assets, namely Note 1 and Note 2, will be distributed to Child 1 Holdco and Child 2 Holdco, respectively, with the result that the two Notes are extinguished by operation of law.
9. To the extent that Transferor has a positive balance in its CDA immediately prior to the distribution of its property on winding-up, it will make the s. 83(2) election so that the portion of the winding-up dividend deemed under s. 88(2)(b)(i) to be a separate dividend will be deemed to be a capital dividend to the extent of Transferor's CDA balance immediately prior to such distribution of its property on winding-up. The subsection 83(2) election will be made in the prescribed manner.
10. A similar GRIP designation will be made in accordance with s. 89(14) regarding the portion of the winding-up dividend deemed under s. 88(2)(b)(iii), based on the Transferor’s GRIP balance at the end of that taxation year.
11. Once Transferor has received the dividend refund resulting from the winding-up dividend and its notices of assessment for the winding-up taxation year from CRA and the ARQ, Transferor will apply for dissolution, and file the required tax returns up to the date of dissolution.
12. Since Transferor will receive a dividend refund arising from the winding-up dividend, Child 1 Holdco and Child 2 Holdco will have Part IV tax payable to the extent provided for in s. 186(1)(b).
13. Immediately following its winding-up and prior to its dissolution, Transferor will not own or acquire any property, other than the receipt of the dividend refund, and will not carry on any business.

Rulings

Including re ss. 55(2), 88(2) and 84.1.