2015 Ruling 2014-0558831R3 - No-type of property spin-off butterfly -- summary under Distribution

Background

DC is a public corporation all of whose multiple-voting (common) shares (“DC MVS”) and some of whose subordinate-voting (common) shares (“DC SVS”) are held by (Canadian-resident) DC Shareholder. DC is managed pursuant to the “MSA” by Manageco (a taxable Canadian corporation owned by Manageco Principal. The MSA may be renewed from year to year at Manageco’s option. The current normal-course issuer bid of DC is a continuation of a succession of previous one-year normal-course issuer bids.

Proposed or completed transactions

1 to 5 occur preliminarily to the spin-off by DC of Divisions 2 and 3 to newly-incorporated Spinco under a Plan of Arrangement, whose steps are described in 6 to 16:

1. Various reorganization transactions were implemented to eliminate cross-ownership interests and inter-company payables/receivables between Division 1 (which will be retained by Amalco) and Division 2 and Division 3 (which latter two Divisions will be transferred to Spinco), to simplify DC’s corporate structure (and do so in a manner that is tax neutral, to the extent possible, in countries other than Canada) and to consolidate Divisions 2 and 3 into one entity with the appropriate capital structure. These are not summarized as DC is a specified corporation, so that s. 55(3.1)(a) did not apply.
2. The DC MSA will be restated to provide inter alia that the base fee amount under the long term incentive arrangement contained therein “will be divided in respect of the Division 1 Segment and the Division 2 and 3 Segment based on the ratio of the Net Fair Market Value of the common shares in the capital stock of Newco [to hold Divisions 2 and 3, as described below] to the Net Fair Market Value of all property owned by DC immediately before the Distribution;”
3. DC will transfer Division 2 and Division 3 to a newly-incorporated taxable Canadian corporation (“Newco”) by transferring all its shares and debt of various subsidiaries, certain intangible property; and its interest in all contracts pertaining to Division 2 and Division 3 (including the DC MSA relating to the Division 2 and 3) in consideration for shares and the “Newco Internal Note” of Newco and the assumption of liabilities. For purposes of s. 85(1)(d)(i), the reference therein to DC’s cumulative eligible capital in respect of its business immediately before the disposition shall be interpreted to mean a pro rata proportion of DC’s cumulative eligible capital in respect of its business immediately before the transfer to Newco represented by the transferred eligible capital property in respect of the business (based on the relative “fair market value at that time or the amount of the cumulative eligible capital that is attributable to” the transferred eligible capital property relative to that of all of DC’s eligible capital property in respect of the business.)
4. Concurrently with the transfer of assets from DC to Newco in 3, Manageco will divide its existing management services business into two separate businesses, and in connection therewith: Manageco will transfer (i) the portion of its management business that is referable to Division 1 (including the benefits and obligations of the DC MSA as it relates to Divisions 1) and (ii) the portion thereof that is referable to Divisions 2 and Division 3 (including the benefits and obligations of the DC MSA as it relates to Divisions 2 and 3), to two newly-incorporated subsidiaries (“Manageco Sub 1” and “Manageco Sub 2”), respectively, in consideration for common shares. In the case of transferred eligible capital property, the elected amount will be the least of the amounts described in ss. 85(1)(d)(i), (ii) and (iii).
5. Newco will borrow from arm’s length persons and repay the Newco Internal Note in cash and by assuming a portion of the “DC Notes.”
6. DC shares held by those dissenting will be transferred to DC for an entitlement to receive their fair value.
7. Each holder of a DC stock option will dispose of pro rata portions (based on the relative FMV of the Newco shares) of its option to Spinco and DC in consideration for the grant of replacement options. Such issuance by Spinco will be in anticipation of the transfer of all of the common shares of Newco to Spinco in 10 and will form part of the non-share consideration therefor.
8. DC shareholders will exchange: (a) each DC MV Share (after having had their number of votes per share changed by article of amendment) for one DC New MV Share (with identical terms, subject to the rights of the DC MV Shares) and one non-voting redeemable retractable DC MV Special Share with a fixed-dollar (non-formulaic) s. 191(4) specified amount and with a liquidation priority for the redemption amount; and (b) each DC SV Share (also following a votes-per share amendment) for one DC New SV Share (with identical terms, subject to the rights of the DC SV Shares) and one non-voting redeemable retractable DC SV Special Share with a fixed-dollar (non-formulaic) s. 191(4) specified amount and with a liquidation priority for the redemption amount. The stated capital of the exchanged shares will be apportioned to the shares received therefor based on their relative FMV.
9. Each participant will transfer each DC MV Special Share and DC SV Special Share for one Spinco MV Share and one Spinco SV Share.
10. DC will transfer the common shares of Newco to Spinco for Spinco Special Shares, with an FMV equal to the FMV of the Newco common shares minus that of the Spinco replacement stock options and with a fixed-dollar (non-formulaic) s. 191(4) specified amount, with an s. 85(1) election being made.
11. Spinco will redeem its Spinco Special Shares for a note, and designate the resulting deemed dividend as an eligible dividend.
12. Spinco will redeem its Special Shares for a note, and designate the resulting deemed dividend as an eligible dividend.
13. Each will repay its note by transferring the other note to the other.
14. Spinco will wind-up Newco.
15. DC will acquire all of the shares (and options to acquire shares) of a Canadian subsidiary (“DC Sub 1”) held by minority shareholders in consideration for DC New SV Shares and/or cash.
16. DC and DC Sub 1 will amalgamate.
17. Subsequently to the Plan of Arrangement, Spinco will elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.

Purposes

“The use of Newco simplifies the distribution process, as it allows DC to transfer only a single asset on the Distribution (i.e., the shares of Newco), rather than transferring the operating assets of Division 2 and Division 3 individually.”

Rulings

Including application of s. 7(1.4) to 7, s. 86(1) to 8, s. 85.1(1) to 9 (provided no s. 85(1) election filed), s.55(3)(b) to deemed dividends in 11 and 12, and non-application of s. 80 to 13. The restatement of the DC MSA in 2 will not result in a disposition by any person of its rights under the DC MSA.