Corporate Divorce: Butterfly Transactions in Family-Owned Enterprises


By Chantal M. Cattermole and Kyle Gough

When spouses that co-own a family business decide to divorce, dividing the family business between them can be a complex and emotional experience. In some cases, the spouses may wish to go their separate ways while ensuring they are compensated for their interest in the family business. In other cases, one or both of the spouses may wish to see the business continue on, potentially for the benefit of their children and grandchildren. In any event, the spouses likely want to keep their costs and tax liability as low as possible.

Enter the butterfly transaction. A butterfly transaction, otherwise known as a “corporate divorce”, is a form of corporate reorganization where the assets of a business are divided amongst its shareholders on a tax-deferred basis. Such a transaction can be used by separating spouses to divide their family business in a way that achieves their desired outcomes while also reducing their immediate tax burden. This article provides a brief overview of the tax structure of a butterfly transaction under the Income Tax Act (Canada) (“ITA”) and discusses two types of transactions that may be implemented by separating spouses. It then discusses the potential benefits of butterfly transactions in the context of family businesses, before providing some notes of caution to be considered prior to attempting such a strategy.

Butterfly Transactions under the ITA

If a family-owned corporation were to dispose of its assets outright to separating spouses, the corporation and/or the spouses could face an immediate tax liability in the form of capital gains tax or dividend tax. Butterfly transactions, on the other hand, make use of section 85 of the ITA to prevent the realization of a capital gain on the disposition of assets. More specifically, section 85(1) allows a taxpayer to transfer property to a taxable Canadian corporation on a tax-deferred basis provided that the requirements of section 85 are met including that a joint election is filed with CRA.

Butterfly transactions usually consist of the same steps, though there is variation depending on whether the transaction is a single-wing or double-wing butterfly.

Single-Wing Butterfly

In a single-wing butterfly, one spouse receives a portion of the corporation’s assets, whereas the corporation and the other spouse retain the remaining assets. This form of butterfly transaction is particularly useful in the context of a divorce where one spouse wishes to continue on with the business.

To illustrate, imagine Spouse A and Spouse B are each equal owners of FamCo, a family business they have operated together since becoming spouses. The parties intend to divorce, and Spouse A wants to receive compensation for their interest in FamCo while Spouse B wants to retain their interest while also continuing to operate the business post-separation. To effect a single-wing butterfly transaction, Spouse A would begin by incorporating a new corporation called ACo and transferring Spouse A’s shares in FamCo to ACo in exchange for shares in ACo. Spouse A and ACo would jointly elect to have section 85(1) apply to the transaction so that Spouse A realizes no gain on the disposition of the FamCo shares. FamCo would then transfer 50% of its assets to ACo in exchange for preferred shares of ACo. FamCo and ACo would jointly elect to have subsection 85(1) also apply to this transfer so FamCo realizes no gain on the transfer of assets to ACo. The shares held by FamCo in ACo are subsequently redeemed by ACo, while FamCo concurrently repurchases its shares held by ACo for cancellation. This may be effected by way of countervailing promissory notes which are immediately cancelled.

As a result, Spouse A exits the family business and is compensated for their FamCo shareholdings and Spouse B continues to run FamCo.

Double-Wing Butterfly

In a double-wing butterfly, each spouse receives a portion of the corporation’s assets and the corporation ceases to exist. This option is better suited for spouses who wish to wind-up the business and move forward with new opportunities. Though the steps in a double-wing butterfly are similar  to those described above, Spouse B does not continue to retain ownership of the family business through FamCo itself. Rather, Spouse B incorporates another corporation, BCo and there is a concurrent transfer of shares and property between FamCo and BCo mirroring the transfers between FamCo and ACo described above. Both spouses exit the family business and are compensated for their FamCo shareholdings through their respective corporations.

Benefits of a Butterfly Transaction

Butterfly transactions offer numerous benefits in the family business context. The primary advantage is that it allows spouses to go their separate ways in both life and in business. The spouses are not forced to continue working together to ensure they receive some compensation for all they have invested into the family business. In a single-wing butterfly specifically, one spouse is able to walk away with compensation while the business is kept intact for the rest of the family’s sake.

Additionally, the spouses are able to exit the business without triggering immediate capital gains tax. A capital gain is calculated by deducting the cost of an asset from the proceeds received upon its sale. 50% of the capital gain is then included in a taxpayer’s income for tax purposes. Spouses can take advantage of butterfly transactions when they are going through divorce proceedings to reduce their costs and potential tax liability. Ultimately, a properly implemented butterfly transaction provides an amicable, family-centered business succession and tax solution to spouses looking to separate.

A Word of Caution

While butterfly transactions are advantageous in the family business context, spouses should still take caution when considering them. The above provides a very high-level illustration of how butterfly transactions may be structured but there are various technical rules in the ITA that need to be considered in determining the appropriate steps and structure. The transaction itself is complex and taxpayers should seek legal and tax expertise if they are considering this form of tax planning.

Furthermore, a butterfly transaction by itself does not relieve spouses from other obligations they may have to each under British Columbia’s family law regime. For example, there is always the risk that a spouse exiting the family business could claim spousal support from future business income, even when they have already been compensated for their shareholdings. In Nicholl v. Nicholl, 2020 BCCA 173, the husband and wife separated after 22 years of marriage. The couple had agreed to utilize a butterfly transaction to transfer half the value of a family business to a holding company incorporated by the wife. The parties also entered into a separation agreement containing standard provisions providing for a full release, including of spousal support claims.

The wife later brought an application seeking compensatory spousal support on the basis that the husband’s reported income did not factor in future income from the business. The husband argued this would allow the wife to make a “double recovery,” in that she would receive one-half of the value of the business and a share of its future income. The BC Court of Appeal found that the husband’s argument of double-recovery was unfounded since the business at issue was an “income-producing asset” whose value did not diminish upon payment to the wife of her share of the business, nor was the company’s ability to produce income affected. Further, the Court found that the risk assumed by the husband in carrying on the business was already factored into the valuation of the business upon separation, and therefore should not be considered again to discount the income he received from the company that would normally be available for support purposes. As can be seen from this case, there may be additional family law obligations arising in any particular spousal relationship, and spouses should seek advice from a family law expert as to such obligations in the event of a separation, particularly when a business is involved.


While spouses who wish to undertake a butterfly transaction should proceed with some level of caution, this form of corporate reorganization is still an effective way to split up a family business. Butterfly transactions allow co-owner spouses to split amicably, to defer capital gains tax liability, and to ensure the family business remains intact for generations to come.

The above information is not intended to be legal advice. Given the complexity of butterfly transactions and the associated risks of improperly implementing such a transaction, we strongly recommend reaching out to Chantal Cattermole or any member of Clark Wilson LLP’s Family Office or Family Law group for further information and guidance if you or someone you know is contemplating this kind of corporate reorganization.