2013 Ruling 2012-0459781R3 - Cross border butterfly -- summary under Distribution

Overview

This was a cross-border butterfly of a Canadian spin business (already packaged into a subsidiary of DC) by DC to TC, an indirect subsidiary of Foreign SpinCo, before Foreign SpinCo was distributed up the chain for inclusion in the assets of New Foreign PubCo, which would then be dividended by the current parent (Foreign PubCo) to its public shareholders. DC was the product of a prior amalgamation of two corporations carrying on the Canadian spin and keep businesses, respectively. Rather than using the usual 3-party exchange in order to avoid the application of s. 55(3.2)(h) (see Desjardins and Diksic), here a 4-party exchange was contemplated, i.e., including both the immediate non-resident parent (Foreign SpinCo Sub) and non-resident grandparent (Foreign SpinCo) of TC in a circular exchange of consideration. In the context of this 4-party share exchange, the increase in the paid-up capital in respect of the shares of TC issued to Foreign SpinCo Sub occurred "by virtue of the disposition" of the special shares of DC by its foreign parent to TC. Accordingly, s. 212.1(1)(b) (now, s. 212.1(1.1)(b)) applied to grind the PUC of those shares to an amount equal to the PUC of the DC special shares. The butterfly ruling was conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TC shares or DC special shares. As in, for example, 2014-0530961R3, there was provision for a second stage transfer of cash by DC to TC if (contrary to expectation, as it was anticipated that, after applying the usual consolidated look through rules, including to foreign subsidiaries, there would be only business property) that was required to satisfy the requirements under the butterfly rules for a pro rata distribution of property of DC.

Current structure

Foreign Sub 5, which was an indirect wholly-owned Canadian subsidiary of Foreign PubCo, wholly-owned A Co. B Co was the result of an amalgamation of H Co and I Co. H Co was a wholly-owned subsidiary of Foreign Sub 4 (Foreign Sub 5) and whose business activities were substantially related to the Keep Business (also carried on by Foreign PubCo), and I Co was a wholly-owned subsidiary of A Co whose business activities were substantially related to the Spin Business. This amalgamation was not entered into in contemplation of the distribution in 5.

Pre-proposed transactions

A Co and B Co amalgamated to form DC, and DC transferred all its assets relating to the Canadian Spin Business to newly-incorporated DC Sub under s. 85(1) in consideration for shares and the assumption of liabilities. Foreign Sub 3 (the parent of Foreign Sub 5) incorporated Foreign SpinCo, which incorporated Foreign SpinCo Sub, which incorporated TC as a Canadian unlimited liability company.

Proposed transactions

1. Foreign Sub 4 will distribute its DC Common Shares.
2. Foreign Sub 3 will transfer the DC Common Shares to Foreign Sub 5 in exchange for an additional membership interest.
3. Under a s. 86 reorganization, the DC Common Shares will be exchanged for DC New Common Shares carrying X votes per share, and for non-voting redeemable retractable noncumulative DC Special Shares.
4. Foreign Sub 5 will transfer the DC Special Shares to TC. As part of this transfer, Foreign Sub 5, Foreign SpinCo, Foreign SpinCo Sub, and TC will enter into a four-party transfer agreement (the “Four-Party Share Exchange”) (which will be effective after the (undescribed) transfer of the Foreign Spin Business to Foreign SpinCo) whereby: (a) TC will agree to pay the purchase price for the DC Special Shares transferred to it by Foreign Sub 5 by issuing TC Common Shares to Foreign SpinCo Sub having a stated capital equal to the FMV of the DC Special Shares; (b) Foreign Sub 5 will agree to pay the purchase price for the Foreign SpinCo Common Shares issued to it by Foreign SpinCo in (c) below by transferring all of the DC Special Shares to TC; (c) Foreign SpinCo will agree to pay the purchase price for the Foreign SpinCo Sub Common Shares issued to it in (d) below by issuing Foreign SpinCo Common Shares to Foreign Sub 5; and (d) Foreign SpinCo Sub will agree to pay the purchase price for the TC Common Shares issued to it by TC in (a) above by issuing Foreign SpinCo Sub Common Shares to Foreign SpinCo.

5. DC will transfer the “Distribution Property” (i.e., the DC Sub Common Shares) under s. 85(1) to TC in consideration for the issuance of TC Preferred Shares and (if applicable) the assumption of certain DC liabilities. Although it is anticipated that DC will only have net business property (based on applying the usual consolidated look-through approach to determining the net FMV of each of the three types of property of DC), should DC have cash and near-cash property at the time of such transfer (the “transfer time”), the transfer of any cash and near-cash property by DC to TC in this step will occur no later than XX days after the transfer time but will nonetheless be considered to have been Distribution Property transferred to TC at the transfer time for s. 55 purposes.

6. TC will redeem all the TC Preferred Shares, and DC will redeem all the DC Special Shares, in each case, in consideration for issuing a promissory note.

7. Each promissory note in 6 will be set off against the other.

8. All of the interest in Foreign SpinCo will be distributed up the chain from Foreign Sub 5 to Foreign Sub 3, from Foreign Sub 3 to Foreign Sub 2 (but with Foreign Sub 2 then contributing all of its interest in Foreign SpinCo to New Foreign Sub 2, so that what thereafter is distributed is the interest in New Foreign Sub 2), from Foreign Sub 2 to Foreign Sub 1, and from Foreign Sub 1 to Foreign PubCo.

9. Foreign PubCo will transfer all of its interest in New Foreign Sub 2 to New Foreign PubCo.

10. Foreign PubCo will distribute all of its interest in New Foreign PubCo to its shareholders as a dividend-in-kind.

    Rulings

    The increase in the paid-up capital in respect of the shares of TC issued to Foreign SpinCo Sub in 4(a) was reduced by s. 212.1(1)(b) (now, s. 212.1(1.1)(b) to the PUC of DC Special Shares acquired by TC. The butterfly ruling was conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TC shares or DC Special Shares. Other standard rulings.