Butterfly Reorganization Leading To Third-Party Tax Liability

Introduction – Eyeball Networks Inc. v the Queen and Butterfly Reorganization

A butterfly reorganization is a method of separating a corporation - through its assets - into two or more separate corporations. This often occurs where two or more shareholders wish to go their separate ways and, therefore, they divvy up the assets of the corporation. A butterfly reorganization can also be carried out by a single shareholder who has two different businesses in a corporation with a view of separating each business is into a separate corporation. This is typically referred to as a single wing butterfly. In particular, a butterfly reorganization allows shareholders to separate their businesses into two or more corporations on a tax-deferred basis under section 85 of Canada's tax act, while avoiding the deemed capital gain that might otherwise be triggered pursuant to subsection 55(2) of the Act. Under subsection 55(3) of the Income Tax Act. a butterfly reorganization is