2016 Ruling 2015-0616291R3 - Cross-Border Butterfly -- summary under Distribution

Background

All of the common shares of Canadian DC are owned by Forco 2 which, in turn, is wholly-owned by Forco 1 which, in turn, is wholly-owned by Foreign Pubco. The business operations carried on by Canadian DC include the Canadian DC Spin Business, and real property of Canadian DC is shared by the Canadian DC Spin Business and other business operations. Canadian DC has an interest-bearing term loan receivable from a Canadian sister corporation (Canco 1), that is repayable in equal annual instalments and that was used to finance an acquisition by a predecessor of Canco 1 and that is prepayable at Canco 1’s option (the “Canco 1 Loan”). Canadian DC has subleased portions of particular properties, each of which as to its balance is used Canadian DC’s businesses, to arm’s length sublessees for lower rents than what Canadian DC pays. Canadian DC holds 3 of the quotas in the capital of Forco 3 and the balance are held by Forco 1 – and otherwise does not hold any shares or units. Canadian DC is the head entity in cash pooling arrangements with Canadian affiliates (each a “Cash Pooling Participant”) and a financial institution and holds the bank account in which the cash of the various Cash Pooling Participants is pooled.

Proposed transactions

1. Foreign Pubco will incorporate Foreign Spinco, New LLC and Foreign Holdco 1, Foreign Holdco 1 will incorporate Foreign Holdco 2, and the foreign members of the Pubco Group will directly or indirectly transfer the assets of the Foreign Spin Business to New LLC or Foreign Holdco 1 (or a direct or indirect subsidiary of Foreign Holdco 1).
2. Foreign Pubco will transfer the shares of Foreign Holdco 1 to New LLC for additional units or by way of a capital contribution.
3. With a view to the “First Three-Party Share Exchange” in 4 below, Forco 2 will incorporate Foreign DC, Foreign DC will incorporate Canadian TC and the existing common shares of Canadian DC will be exchanged under s. 86 for non-voting redeemable and retractable “Canadian DC Special Shares,” as well as for “Canadian DC New Common Shares.”
4. Pursuant to the agreement between Forco 2, Canadian TC and Foreign DC for the “First Three-Party Share Exchange,” Forco 2 will transfer the Canadian DC Special Shares to Canadian TC and it will be further agreed that
   
   1. Canadian TC will acquire such Canadian DC Special Shares in consideration for issuing Canadian TC Common Shares to Foreign DC;
   2. Forco 2 will transfer all of the Canadian DC Special Shares to Canadian TC in consideration for the issuance in c; and
   3. Foreign DC will issue units to Forco 2 in consideration for the issuance in a. (There is no Canadian tax reason for transferring the Canadian DC Special Shares to Canadian TC by way of the First Three-Party Share Exchange rather than in consideration for Canadian TC Common Shares.)
5. Canadian DC will transfer the Canadian DC Spin Business assets (the “Distribution Property”) to Canadian TC in consideration for the assumption of certain liabilities and the issuance of Canadian TC Special Shares, with a joint s. 85(1) election being made - and with s. 20(24) payments made by it treated as part of the property so distributed.
6. Immediately before the transfer in 5 , the FMV of the Foreign DC units of Forco 2 will approximate the formula set out in s. (b)(iii) of the definition of “permitted exchange” in s. 55(1) on the assumption that Forco 2 is the participant, Canadian DC is the distributing corporation and Foreign DC is the acquiror.
7. For the purposes of determining that there has been a pro rata distribution of each of the three-types-of property:
   
   1. following the allocation of current liabilities to each cash or near-cash property on a pro rata basis, any remaining net FMV of any accounts receivable (including HST/GST/QST receivables and accounts receivable owing from non-arm’s length persons), inventories and prepaid expenses of Canadian DC will be reclassified as business property and excluded from the cash or near-cash property, to the extent that such property will be collected, sold or used in the ordinary course of the business to which such property relates;
   2. amounts receivable by Canadian DC under the cash pooling arrangement will be considered cash or near-cash property and any amounts payable by it thereunder will be considered current liabilities allocable solely to cash (if the cash pool account is in a negative balance position, due to outstanding cheques or otherwise, that negative balance can be offset against any other bank account that is in a positive position);
   3. the quotas of Forco 3 owned by Canadian DC will be considered investment property;
   4. the portion of loans or advances (including the Canco 1 Loan) that is due within the next [12] months, as well as loans and advances with no fixed terms of repayment will be considered cash or near cash assets, and the balance of any such term loans (including the Canco 1 Loan) will be considered investment property;
   5. the real properties of Canadian DC, including its leasehold interests which are subject to the subleases, will be considered business property;
   6. any amount collected from customers and recorded as deferred revenue will not be considered a liability provided it does not represent a true legal liability capable of quantification;
   7. any net pension plan asset (i.e., actuarial plan assets in excess of actuarial plan liabilities) of Canadian DC will not be considered property of Canadian DC, but any net pension liability (i.e. actuarial plan liabilities in excess of actuarial plan assets for a registered pension plan will be considered a legal liability capable of quantification;
   8. any liability that is related to an unregistered retirement plan or similar post-employment arrangement (e.g., supplemental retirement or health care plan) will be disregarded where the amounts are dependent on future events;
   9. In the event that Canadian DC has cash or near-cash property (“cash”) at the time of the transfer in 5, then no later than XX days thereafter, Canadian DC will transfer cash as is required to ensure that the net FMV of the cash of Canadian DC transferred to Canadian TC will approximate the ratio of (a) the aggregate FMV of the Canadian DC Special Shares owned by Canadian TC immediately before the transfer, to (b) the aggregate FMV of all the issued and outstanding shares of Canadian DC immediately before the transfer - and such transfer will be considered to have been occurred as part of the transfer in 5.
   10. To the extent that current liabilities of Canadian DC are allocated to more than one type of property of Canadian DC (for example, as a result of the reclassification in 7(a)) and all or a portion of those liabilities are assumed by Canadian TC in 5, Canadian TC will have the option to allocate those current liabilities to any such corresponding type of property of Canadian TC, provided that the amount so allocated to a particular type of property of Canadian TC does not exceed the amount allocated to that same type of property by Canadian DC;
   11. Since the Canco 1 Loan (transferred in 5) will be considered to be both an investment, and cash and near cash asset, Canadian DC and Canadian TC will jointly agree on the portion of thereof that is of each property type of property, provided that the amount of the transferred Canco 1 Loan considered to be a particular type of property of Canadian TC does not exceed its amount that is considered to be of that type by Canadian DC;
8. Canadian TC will redeem all of the outstanding Canadian TC Special Shares held by Canadian DC for a non-interest-bearing promissory note, payable on demand, and Canadian DC will accept the note as full payment of such redemption consideration.
9. Canadian DC will redeem all of the outstanding Canadian DC Special Shares held by Canadian TC for note on a similar basis.
10. The two notes will be set-off.
11. Forco 2 will distribute the units of Foreign DC to Forco 1 as a dividend and a return of share premium, and Forco 1 will, in turn, distribute them to Foreign Pubco as a dividend.
12. Prior to the “Second Three-Party Share Exchange” in 13, New LLC will incorporate Foreign TC and subscribe a nominal amount for ordinary shares.
13. Under the “Second Three-Party Share Exchange,” Foreign Pubco will transfer the Foreign DC units to Foreign TC in the following manner:
    
    1. Foreign TC will agree to pay to acquire Foreign DC units from Foreign Pubco in consideration for issuing Foreign TC shares to New LLC;
    2. Foreign Pubco will agree to transfer the Foreign DC units to Foreign TC in consideration for being issued New LLC units; and
    3. New LLC will agree to issue units to Foreign Pubco as the purchase price for the Foreign TC Common Shares issued to it.
14. Immediately before the transfer by Foreign DC to Foreign TC in 13, the FMV of the units of New LLC owned by Foreign Pubco will approximate the formula set out in s. (b)(iii) of the definition of “permitted exchange” in s. 55(1) on the assumption that Foreign Pubco is the participant, Foreign DC is the distributing corporation and New LLC is the acquiror.
15. Foreign DC will be wound-up into Foreign TC so that the shares of Canadian TC will be distributed to Foreign TC.
16. Foreign Pubco will transfer the units of New LLC to Foreign Spinco for cash and shares of Foreign Spinco.
17. Through a series of transactions, the shares of Foreign TC will be transferred to an indirect subsidiary of New LLC.
18. Foreign Pubco will distribute the Foreign Spinco shares pro rata to its shareholders.

Rulings

Include that the described transactions will not cause s. 55(3.1) to deny the s. 55(3)(b) exemption.