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Butterflies in the Valley
Peter Rogers, CGA
September 5, 2013
Section 55 Overview
• Anti-avoidance provision to prevent capital gains
stripping via tax free inter-corporate dividends
•...
When Subsection 55(2) Applies
Applies when all four of the following conditions are met:
1. A dividend is received by a co...
Four Exceptions to 55(2)
• “Part IV Tax”
• The “Safe Income”
• “Paragraph 55(3)(a) Related Person”
• “Paragraph 55(3)(b) B...
Safe Income
• For a dividend to qualify as paid from safe income it
must reasonably be attributed to:
– income earned or r...
Concept of Safe Income
Structure Sale
Mr. A
Holdco
ACo
$5,000 Safe Dividend
Section 85
Rollover
Holdco sells the shares of...
55(3)(a) Related Persons
Special Rules
• For the purpose of 55(3)(a) “Unrelated Person”
defined by 55(3.01)(a) to be a per...
Paragraph 55(3)(a) Related
Person Exception
None of the five following conditions apply:
• Subparagraph 55(3)(a)(i)
A disp...
Paragraph 55(3)(a) Related
Person Exception (cont’d)
• Subparagraph 55(3)(a)(iii)
A disposition of shares of the dividend ...
Paragraph 55(3)(a) Related
Person Exception (cont’d)
• Subparagraph 55(3)(a)(v)
A significant increase in the total of all...
Illustration #1 - 55(3)(a)
Current Structure
Daughter Parent Son
Opco
(CCPC)
Property
FMV $2M
Proposal – Butterfly son’s i...
Illustration #1 (cont’d)
Daughter Parent Son
Opco Sonco
50%
NV Com
100%
V Pfd
100%
V Pfd
100%
NV Com
Property
FMV $1.5M
Pr...
Illustration #1 (cont’d)
Final Structure
Daughter Parent Son
Opco Sonco
• 55(3)(a) not applicable as conditions in 55(3)(a...
Illustration #1 (cont’d)
Alternative Structure
Daughter Parent Son
Opco Sonco
Property
FMV $1M
Property
FMV $1M
• 55(3)(a)...
Illustration #1 (cont’d)
Alternative Structure
55(4) Risk
• 55(4) deems persons not to be related if one of the
main purpo...
Illustration # 2
Current Structure
A
Holdco
Opco
Investment
Assets
100%
FMV $1.5M
100%
FMV $1M
FMV $500K
Illustration # 2 (cont’d)
Consider: Butterfly the Investment Assets to
Newco
17
A
Holdco
Opco
Newco
Pfd
FMV/ACB = $500K
Co...
Illustration # 2 (cont’d)
Consider: Butterfly the Investment Assets
to Newco
• 55(3)(a) does not apply if done in
contempl...
Illustration # 3 - Basic Split-Up Butterfly
Current Structure
Facts:
1. A and B are unrelated
persons
2. Business 1 and 2 ...
Illustration # 3 - Opco rolls assets to
Aco and Bco pursuant to Section 85
Opco
Aco Bco
$1M
Business 1
$1M
Business 2
Illustration # 3 - Basic Split-Up
Butterfly Final Position
B
Business 2
A
Business 1
Aco Bco
100% 100%
Illustration # 4 - Basic Spin-Off Butterfly
Current Structure
A B
Opco
Business 1 Business 2
50% 50%
FMV $1M FMV $1M
Illustration # 4 - Basic Spin-Off Butterfly
Roll 50% of Opco Shares to Newco under
Section 85
50%
A
Opco
25%25%
50%
B
Newc...
Illustration # 4 - Basic Spin-Off Butterfly
Opco transfers assets of Business 2 to
Newco
BA
Opco Newco
$1M
Business 1
$1M
...
Illustration # 4 - Basic Spin-Off Butterfly
Final Structure
BA
Opco Newco
Business 2Business 1
50% 50% 50% 50%
FMV $1M FMV...
55(3)(b) - Butterfly
• Maintain continuity of ownership (i.e. no cashing out)
• Pro-rata asset distribution test
Cash and...
55(3)(b) - Butterfly
Pro-Rata Test – continued:
– Gross asset Butterfly
Liabilities allocated pro-rata
– Net asset Butter...
Butterfly Rules
• 55(3.1)(a) pre-butterfly restrictions
• 55(3.1)(b) restrictions on shares of a DC & TC
• 55(3.1)(c) TC p...
55(3.1)(a) Butterfly Rules
Butterfly rules – paragraph 55(3)(b) & subsection 55(3.1)
1. Paragraph 55(3.1)(a). Denies the B...
55(3)(b) Butterfly Rules
Paragraph 55(3.1)(b) prohibits
• A specified shareholder from selling shares of a TC or DC to an
...
55(3)(c)&(d)Butterfly Rules
Paragraph 55(3.1)(c) and (d):
• 55(3.1)(c) denies the Butterfly Exemption to a dividend
receiv...
Illustration # 5 - 55(3)(b)
Current Structure
Opco
Daughter Parent Son
US Subco
Bldg 1 Bldg 2
50% NV
Com
FMV $1.2M
100% V
...
Illustration #5 – 55(3)(b)
Daughter Parent Son
100% NV Com FMV
$366,500
(7.33%)
100%
Opco
Dtrco Sonco
US Subco
V pfd
NV Co...
Daughter Parent Son
Opco
Dtrco Sonco
Building 1 Building 2
US Subco
100% 50%
NV Com
100%
V Pfd
50%
NV Com
100%
100%
Illust...
Butterfly Issues
• Circle RDTOH
• Share Valuation
• Provincial Sales Tax
• Property Transfer Tax
• Asset Valuation
• Part ...
Typical Butterfly Split-Ups
• Investment holding companies
• Real estate
• Family farms
• Divisible business (i.e. geograp...
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Peter Rogers, CGA Sept 5, 2013 presentation

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Peter Rogers, CGA at Leed Advisors Inc presents on Butterfly Transactions and Corporate Restructuring

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Peter Rogers, CGA Sept 5, 2013 presentation

  1. 1. Butterflies in the Valley Peter Rogers, CGA September 5, 2013
  2. 2. Section 55 Overview • Anti-avoidance provision to prevent capital gains stripping via tax free inter-corporate dividends • Subsection 55(2): – Re-characterizes otherwise tax free inter- corporate dividends into capital gains – Deemed dividends on share redemptions deemed to be proceeds of disposition
  3. 3. When Subsection 55(2) Applies Applies when all four of the following conditions are met: 1. A dividend is received by a corporation resident in Canada; 2. The dividend is a taxable dividend as defined by 89(1); 3. The dividend is deductible 112(1), 112(2), or 138(6); and 4. Either of the following: a) the purpose test, or b) the results test
  4. 4. Four Exceptions to 55(2) • “Part IV Tax” • The “Safe Income” • “Paragraph 55(3)(a) Related Person” • “Paragraph 55(3)(b) Butterfly”
  5. 5. Safe Income • For a dividend to qualify as paid from safe income it must reasonably be attributed to: – income earned or realized, – by any corporation, – throughout the holding period of a share, and – ending at the “safe income determination time”
  6. 6. Concept of Safe Income Structure Sale Mr. A Holdco ACo $5,000 Safe Dividend Section 85 Rollover Holdco sells the shares of ACo for $20,000
  7. 7. 55(3)(a) Related Persons Special Rules • For the purpose of 55(3)(a) “Unrelated Person” defined by 55(3.01)(a) to be a person not related to the dividend recipient • 55(5)(e)(i) deems siblings not to be related • 55(e)(iv) a person and a trust are not related unless the person is related to each beneficiary
  8. 8. Paragraph 55(3)(a) Related Person Exception None of the five following conditions apply: • Subparagraph 55(3)(a)(i) A disposition of property to an unrelated person for proceeds of disposition less than fair market value • Subparagraph 55(3)(a)(ii) A significant increase in the direct interest in any corporation by an unrelated person. (Exception: Sale of shares at FMV)
  9. 9. Paragraph 55(3)(a) Related Person Exception (cont’d) • Subparagraph 55(3)(a)(iii) A disposition of shares of the dividend paying corporation to an unrelated person (also 10% attribution rule excluding shares of the dividend recipient) • Subparagraph 55(3)(a)(iv) A disposition of shares of the dividend recipient to an unrelated person after the dividend was received (also 10% attribution rule)
  10. 10. Paragraph 55(3)(a) Related Person Exception (cont’d) • Subparagraph 55(3)(a)(v) A significant increase in the total of all direct interests in the dividend paying corporation by unrelated persons
  11. 11. Illustration #1 - 55(3)(a) Current Structure Daughter Parent Son Opco (CCPC) Property FMV $2M Proposal – Butterfly son’s interest to Sonco 50% NV Com 50% NV Com 100% V Pfd
  12. 12. Illustration #1 (cont’d) Daughter Parent Son Opco Sonco 50% NV Com 100% V Pfd 100% V Pfd 100% NV Com Property FMV $1.5M Property FMV $500K
  13. 13. Illustration #1 (cont’d) Final Structure Daughter Parent Son Opco Sonco • 55(3)(a) not applicable as conditions in 55(3)(a)(ii) and (v) are met • Need to qualify as a 55(3)(b) Butterfly 100% NV Com 100% V Pfd 100% NV Com
  14. 14. Illustration #1 (cont’d) Alternative Structure Daughter Parent Son Opco Sonco Property FMV $1M Property FMV $1M • 55(3)(a) applies 100% NV Com 100% V Pfd 100% V Pfd 100% NV Com
  15. 15. Illustration #1 (cont’d) Alternative Structure 55(4) Risk • 55(4) deems persons not to be related if one of the main purposes of one or more transactions is to cause persons to be related to avoid 55(2)
  16. 16. Illustration # 2 Current Structure A Holdco Opco Investment Assets 100% FMV $1.5M 100% FMV $1M FMV $500K
  17. 17. Illustration # 2 (cont’d) Consider: Butterfly the Investment Assets to Newco 17 A Holdco Opco Newco Pfd FMV/ACB = $500K Com Com Investment assets
  18. 18. Illustration # 2 (cont’d) Consider: Butterfly the Investment Assets to Newco • 55(3)(a) does not apply if done in contemplation of a sale of Opco
  19. 19. Illustration # 3 - Basic Split-Up Butterfly Current Structure Facts: 1. A and B are unrelated persons 2. Business 1 and 2 are active businesses 3. Opco is a CCPC A B Opco Business 1 Business 2 50% 50% FMV $1M FMV $1M
  20. 20. Illustration # 3 - Opco rolls assets to Aco and Bco pursuant to Section 85 Opco Aco Bco $1M Business 1 $1M Business 2
  21. 21. Illustration # 3 - Basic Split-Up Butterfly Final Position B Business 2 A Business 1 Aco Bco 100% 100%
  22. 22. Illustration # 4 - Basic Spin-Off Butterfly Current Structure A B Opco Business 1 Business 2 50% 50% FMV $1M FMV $1M
  23. 23. Illustration # 4 - Basic Spin-Off Butterfly Roll 50% of Opco Shares to Newco under Section 85 50% A Opco 25%25% 50% B Newco 50%
  24. 24. Illustration # 4 - Basic Spin-Off Butterfly Opco transfers assets of Business 2 to Newco BA Opco Newco $1M Business 1 $1M Business 2 50% 50%
  25. 25. Illustration # 4 - Basic Spin-Off Butterfly Final Structure BA Opco Newco Business 2Business 1 50% 50% 50% 50% FMV $1M FMV $1M
  26. 26. 55(3)(b) - Butterfly • Maintain continuity of ownership (i.e. no cashing out) • Pro-rata asset distribution test Cash and new cash assets Investment assets Business assets • Act is silent regarding liabilities • Tax accounts ignored for the Pro-rata test
  27. 27. 55(3)(b) - Butterfly Pro-Rata Test – continued: – Gross asset Butterfly Liabilities allocated pro-rata – Net asset Butterfly Net liabilities against assets to which they most relate
  28. 28. Butterfly Rules • 55(3.1)(a) pre-butterfly restrictions • 55(3.1)(b) restrictions on shares of a DC & TC • 55(3.1)(c) TC post butterfly restrictions • 55(3.1)(d) DC post butterfly restrictions
  29. 29. 55(3.1)(a) Butterfly Rules Butterfly rules – paragraph 55(3)(b) & subsection 55(3.1) 1. Paragraph 55(3.1)(a). Denies the Butterfly Exemption if property becomes property of the DC in contemplation of a distribution with certain exceptions including: – Related part transactions – A sale of property at FMV for cash or non-convertible debt
  30. 30. 55(3)(b) Butterfly Rules Paragraph 55(3.1)(b) prohibits • A specified shareholder from selling shares of a TC or DC to an unrelated person • An acquisition of control of a DC otherwise than by a permitted transaction. • Acquiring shares of a DC in contemplation of a butterfly other than by a permitted transaction or from a related person – 55(3.2) provides special rules for the purposes of 55(3.1)(b)
  31. 31. 55(3)(c)&(d)Butterfly Rules Paragraph 55(3.1)(c) and (d): • 55(3.1)(c) denies the Butterfly Exemption to a dividend received by a TC where the TC disposes of distributed property to a person unrelated to the transferee corporation • Subparagraph 55(3.1)(d) is a mirror provision to 55(3.1)(c) that applies to a DC
  32. 32. Illustration # 5 - 55(3)(b) Current Structure Opco Daughter Parent Son US Subco Bldg 1 Bldg 2 50% NV Com FMV $1.2M 100% V Pfd FMV $2.6M 50% NV Com FMV $1.2M FMV $1M FMV $4M FMV $1M
  33. 33. Illustration #5 – 55(3)(b) Daughter Parent Son 100% NV Com FMV $366,500 (7.33%) 100% Opco Dtrco Sonco US Subco V pfd NV Com FMV $833,500 (16.67%) NV Com FMV $833,500 (16.67%) NV Com FMV $366,500 (7.33%) 100%
  34. 34. Daughter Parent Son Opco Dtrco Sonco Building 1 Building 2 US Subco 100% 50% NV Com 100% V Pfd 50% NV Com 100% 100% Illustration # 5 - 55(3)(b) Final Restructure
  35. 35. Butterfly Issues • Circle RDTOH • Share Valuation • Provincial Sales Tax • Property Transfer Tax • Asset Valuation • Part IV.ITax • Part VI.I Tax • 15(1) Benefit • Debt Forgiveness
  36. 36. Typical Butterfly Split-Ups • Investment holding companies • Real estate • Family farms • Divisible business (i.e. geographical etc.)

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