2024 Ruling 2023-0998291R3 F - Multi-wings split-up net asset butterfly 55(3)(b) -- summary under Distribution

Background

The distributing corporation (DC), which was owned by a divorced couple (Shareholder 1 and Shareholder 2), held net cash assets and two Canadian rental properties (Immovable 1 and Immovable 2).

Proposed transactions

In order to effect a multi-wing split-up net asset butterfly:

1. Each Shareholder formed a transferee corporation (TC1 and TC2, respectively), and transfers the applicable portion of his or her shares of DC, being common shares, to TC1 or TC2, as the case may be, on a s. 85(1) rollover basis in consideration for Class A common shares of TC1 or TC2, respectively.
2. DC then transfers cash or near-cash assets (“Cash”) to TC1 in consideration for the assumption of liabilities equal to the amount of such Cash, including an assumption of the portion of a shareholder advance owing by DC to Shareholder 1, and transfers Immovable 1 (being an investment-type property) to TC1 in consideration for the issuance by TC1 of Class E preferred shares and the assumption of mortgage debt and of the balance of the shareholder advance owing to Shareholder 1. The agreed amount in the s. 85(1) election respecting the transfer of the land portion of Immovable 1 are likely to be higher than its cost amount given the quantum of liabilities to be assumed and allocated to such land portion, thereby giving rise to a capital gain and an addition to the NERDTOH and CDA accounts of DC.
3. DC simultaneously makes a transfer of Cash and Immovable 2 to TC2 on a mirror basis.
4. The Class E preferred shares are then redeemed by DC in consideration for the issuance of demand promissory notes.
5. TC1 and TC2 then establish their first fiscal period end.
6. DC then is wound up pursuant to s. 88(2) into TC1 and TC2. On the winding up, its only assets, being the two notes from 4 above, and a subsequently-received dividend refund, are transferred to TC1 and TC2, so that such notes are extinguished by operation of law. Pursuant to ss. 88(2)(b)(i) and 83(2), a portion of the winding-up dividend may be considered as a separate dividend paid out of the CDA of DC.
7. Each of TC1 and TC2 is to be liable for Part IV tax in respect of the winding-up dividend pursuant to s. 186(1)(b).

Rulings

Include butterfly rulings.