Inability to effect post-spin-off freeze in favour of TC family trust if any unrelated beneficiaries (p. 9)
- Dad and Son, who are the 50-50 shareholders of Opco, effect a split-up butterfly in favour of Dadco and Sonco. However, as part of the same series, Son freezes Sonco in favour of Son Trust but retains control of Sonco.
- If even one of the beneficiaries of the trust was not related to Son (e.g., a nephew or cousin), Son Trust would be deemed pursuant to s. 55(5)(e)(ii) and (iii) not to be related to Sonco, so that the freeze would result in an increase in interest described in s. 55(3)(a)(ii) or (v), i.e., the s. 55(3)(a) exemption would not be available.
Inapplicability of s. 55(3.1)(b)(i) exception if post-butterfly freeze by TC entails only a subscription by trust for common shares (pp. 10-11)
- Brother and Sister, who are 50-50 shareholders of DC, and who, by virtue of s. 55(5)(e)(i), are deemed to be unrelated, effect a split-up butterfly in favour of their respective TCs. In this context, s. 55(3.1)(b)(i) relevantly provides that, except in specific carve-out situations, any person who disposes of property within the butterfly series must be related to the acquirer of the property.
- Furthermore, s. 55(3.1)(b)(i)(C) establishes a continuity rule requiring that where property is disposed of within the butterfly series in succession (i.e., where there is a disposition of property, substituted property, or of any further substituted property in a continuous sequence), the final acquirer in that chain must be related to the original vendor at the start of the succession.
- If the TC of Brother effects an estate freeze in favour of a trust, it would appear that s. 55(3.1)(b) would not apply because the trust would subscribe for shares rather than receiving them in substitution for other shares - and that this could be the case even if some of the beneficiaries of the trust were not related persons.
Need for workaround if butterfly was preceded by distribution of DC out of trust (p. 11)
- Suppose that before the butterfly, all the shares of DC were owned by Dad Trust, and that the shares of DC were rolled out to the two beneficiaries, being Brother and Sister, as the first step in the butterfly split-up between their TCs.
- If Brother TC then acquires the common shares of Brother as part of a freeze transaction, such exchange would be part of a succession, so that the s. 55(3.1)(b)(i)(C) continuity rule would apply, and the acquisition by Brother TC would violate the s. 55(3.1)(b) rule since such acquiror (Brother TC) would not be related (pursuant to s. 55(5)(e)(iii)) to the vendor (Dad Trust) at the beginning of the succession.
- A workaround would involve Brother freezing directly as part of the butterfly, so that Brother would transfer his common shares of DC to Brother TC in exchange for frozen preferred shares of Brother TC, with new shareholders then subscribing for common shares of Brother TC, but not so as to acquire control of Brother TC (which would violate s. 55(3.1)(b)(ii).)
Email this Content