This tool is found in the Digitizer(Advanced) toolbar, or under the right-click Digitizer menu under the submenu Crop/ Combine/ Split Functions.
This tool can cut one area feature shape out of another area shape, either adjusting the second areas outer boundary or making the selected area feature become an island (or hole) within the second area.
First select the area(s) to be cut from another area/ made
into an island. Then choose this button or locate this option in the digitizer right click menu.
The cursor will indicate to select the Parent feature. Left-click in the area
feature that you would like to cut the selected area(s) out of. The 'parent'
area feature is the feature to cut the selected area feature from.
To cut area features from overlapping areas in selected area features, right click and select the Cut Selected Area(s) from all Overlapping Areas (Add Islands) option. This will create an island or hole from the area of overlap between the selected area features.