CRA considered transactions in which, during the second year of conventional pipeline transactions, the Newco ("Corporation 2") was split between the estate beneficiaries under a butterfly reorg:
- The shares of the opco (“Corporation 1”), whose ACB was stepped up on death, are sold by the estate to its newly-incorporated Corporation 2 for high-PUC prefs (rather than the more usual note);
- after the wind-up of Corporation 2 into Corporation 1 a year later under s. 88(1), the shares (both common and pref) of Corporation 1 are distributed to the two beneficiaries;
- two months later, there is a split-up butterfly of Corporation 2 between the two newcos (Corporations 3 and 4) of the two beneficiaries, so that Corporations 3 and 4 between them continue to carry on the business which previously was carried on by Corporations 1 and 2. In the meantime during the year following the winding up of Corporation 1, there is no bulk redemption (“rachat massif”) of the prefs of Corporation 2 or the successor prefs of Corporations 3 and 4.
After concluding that s. 84(2) likely would not apply, CRA turned to the butterfly rules, and stated (TaxInterpretations translation):
We could argue that all the transactions related to the implementation of the pipeline structure, the winding-up of Corporation 1 and the dividends resulting from the redemptions occurring as part of the butterfly transaction would be part of the same series of transactions. Included in the transactions, there would be two distributions (as defined in subsection 55(1))…: the first distribution on the winding-up of Corporation 1…and the second on the butterfly transaction itself.
For purposes of paragraph 55(3.1)(b), there would be two distributing corporations…for purposes of determining if the dividends received in the course of the transactions for dividing the business between Corporation 3 and Corporation 4 came within the paragraph 55(3)(b) exception.
…[T]he distribution consisting of the winding-up of Corporation 1 into Corporation 2 would not need to come within the exception provided by paragraph 55(3)(b) because by virtue of paragraph 88(1)(d.1), such distribution would not generate an intercorporate dividend which was subject to subsection 55(2). However, none of the events stipulated in paragraph 55(3.1)(b) could occur in the course of the series taking into account that Corporation 1 and Corporation 2 should be the distributing corporations for purposes of determining if dividends received in the course of the transactions for dividing the business between Corporation 3 and Corporation 4 would come within the paragraph 55(3)(b) exception.
Furthermore, in addition to establishing if paragraph 55(3)(b.1) applied taking into account two distributing corporations and two transferee corporations, it would be necessary to examine if paragraphs 55(3.1)(a) , (c) and (d) applied to the transactions in the series taking into account one distributing corporation, namely Corporation 2, and two transferee corporations.