2024 Ruling 2024-1008821R3 F - Multi-wings split-up net asset butterfly 55(3)(b) -- summary under Distribution

Background

The common shares and non-voting Class C preferred shares of the distributing corporation (DC) are held by two sisters and its Class E voting non-participating shares are held by three brothers. DC has cash and a stock market portfolio, held as long-term investments.

Completed transactions

The two transferee corporations (TC1 and TC2) were incorporated without the issuance of shares.

DC declared a capital dividend on its common shares (intending to clear out its capital dividend account) and paid it by issuing demand notes.

Proposed transactions

1. One of the sisters will transfer, on a s. 85(1) rollover basis, her common and Class C shares, and her three brothers will transfer their Class C shares, of DC to TC1 in consideration for Class A voting participating shares, and non-voting preferred shares, respectively, of TC1.
2. The other sister will transfer, on a s. 85(1) rollover basis, her common and Class C shares of DC to TC2 in consideration for Class A voting participating shares of TC1.
3. The cash and near cash assets of DC (described as including “cash (including cash, if any, in investment accounts managed by investment advisors), accounts receivable (including income taxes receivable), certificates of deposit and similar short-term investments, marketable securities (other than those held as portfolio investments)”) and DC’s investment property (i.e., its portfolio of listed shares) will be transferred under s. 85(1) on a pro rata (and net FMV) basis to TC1 and TC2 in consideration for the assumption of liabilities (including the CDA note owing to the respective sister) and for non-voting preferred shares.
4. The preferred shares of each TC will be redeemed for a note.
5. Each TC will end its first fiscal period.
6. DC will be wound-up into TC1 and 2 (and then dissolved) with each TC being liable for Pt. IV tax under s. 186(1)(b) and the resulting dividend refund to DC also being distributed by it) and with the excess of the winding-up dividend over the amount deemed by ss. 88(2)(b)(i) and 83(2) to be a capital dividend being deemed to be a taxable dividend under s. 88(2)(b)(iii) (which in turn will be designated as an eligible dividend to the extent of the positive GRIP balance). As a result of the distribution of the notes issued on the redemptions in 4, they will be extinguished by operation of law.

Rulings

Including re s. 55(3)(b).