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A Corporate Divorce Alternative When The Butterfly Won’t Fly
A company in dire straits can potentially attain success by dividing itself into two separate entities and should be considered by corporations and practitioners alike. In addition to making good business sense, a divisive reorganisation, or "corporate divorce", can be structured to benefit both parties from a tax perspective. In other words, a corporate divorce does not need to be a painful experience.
Taxand Canada briefly examines the well-known butterfly transactions, but will primarily focus on an alternative method, the "McMullen Method" and its tax benefits, which was approved by the Tax Court of Canada in recent years.
The McMullen decision illustrates that butterfly transactions are not the only means to a corporate divorce, however, businesses using alternative methods should proceed with caution during the planning stages. For instance, the General Anti-Avoidance Rule (GAAR) could apply if even one of the transactions in a series of transactions is an avoidance transaction. Nevertheless, if the divorce is executed for a genuine business purpose, it could breathe new life into a dying business, while providing tax benefits for all parties involved.
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