In Eyeball Networks Inc. v R, 2019 TCC 150, the court held that section 160 applied to a transferee corporation (the new operating company or “TC”) that had received property from a distributing corporation (the old operating company or “DC”) as part of a related party butterfly. TC received the property at a time when DC owed income tax. The Court concluded section 160 applied to TC because “a setoff constitutes a transfer of property, and … the [DC] note had a nominal FMV [at the time of the setoff]”. Apparently, no expert evidence was called regarding the value of the notes issued by DC and TC as part of the butterfly.
The authors criticize the decision for its characterization of the legal consequences of a setoff (as constituting a transfer of property) and because a “cash cycle” (a daylight loan ) would appear to address concerns about the “nominal value” of the DC note, which implies that the concerns were misplaced to begin with.
The taxpayer has appealed the decision (A-308-19).
Ashvin R. Singh and Ryan W. Antonello, “Section 160 in a Butterfly Reorganization” (August 2019) 27:8 Canadian Tax Highlights