2017 Ruling 2017-0699201R3 - Cross-border Butterfly -- summary under Distribution

Current Structure

Foreign Parentco, which is governed by the laws of (foreign) Country 1 and has two classes of issued and outstanding shares (Class A and B common shares) which are identical other than the differing votes per shares. There are American depositary receipts for the shares. Foreign Shareholder is the only significant shareholder, whose representatives are a minority on the Foreign Parentco board. Foreign Parentco holds all the ordinary shares of Foreign Subco 2 and Foreign Subco 1 (a holding company in Country 2) and all the common shares of Foreign Spinco and (after giving effect to 4 below) of DC. Foreign Spinco wholly-owns Foreign Spinco Sub (which, like Foreign Spinco, is governed by the laws of Country 1).

DC (before 2 below) carried on the Canadian Transferred Businesses and carries on the Canadian Retained Businesses. DC rents the “Industrial Property” to an arm’s-length tenant which, due to an encumbrance, has a nil fair market value (“FMV”). DC has no subsidiaries other than Newco, which it incorporated for nominal consideration. DC was formed on the vertical short-form amalgamation of a buyco which had acquired all the shares of the subsidiary for cash from an arm’s length vendor.

Completed Transactions

1. The above structure reflects the transfer by Foreign Subco 1 of all of its shares of Foreign Subco 2 to Foreign Parentco in exchange for Foreign Parentco Foreign Parentco’s shares of Foreign Subco 4.
2. DC transferred (DC Transfer 1) the Canadian Transferred Business (which included the accounts receivable, trade receivables, inventories, prepaid expenses and business assets) to Newco in consideration for the assumption of liabilities, the issuance of a promissory note (Newco Debt) and the issuance of common shares, with a s. 85(1) election being filed.
3. Foreign Spinco Sub subscribed for one common share of TCo (governed by Act 1, the same as for DC) on its incorporation.
4. The above structure reflects the transfer by Foreign Subco 2 of all of its common shares of DC to Foreign Parentco as a dividend.
5. The above structure also reflects the transfer by Foreign Parentco of all its common shares of Foreign Spinco Sub to Foreign Spinco for notes that were then capitalized as equity.

Proposed Transactions

6. Prior to the implementation of the Canadian butterfly transactions, Foreign Spinco and Foreign Spinco Sub will acquire, through a series of stock sales, asset sales and other transfers, worldwide assets of the Transferred Businesses (other than the Canadian Transferred Businesses) from Foreign Parentco and/or its wholly-owned subsidiaries.
7. DC will: (a) reorganize its capital by amending its articles of association to create a new class of common shares (DC New Common Shares) containing more than one vote per share and a new class of redeemable retractable non-cumulative non-voting preferred shares (DC Special Shares); and (b) exchange (DC Share Exchange) each issued and outstanding DC Common Share for one DC New Common Share and one DC Special Share. The aggregate PUC of the (existing) DC Common Shares will be apportioned between the DC New Common Shares and the DC Special Shares in proportion to the relative aggregate FMV of such shares.
8. Following the DC Share Exchange, in the context of a four-party share exchange (Four-Party Share Exchange), pursuant to an agreement among Foreign Parentco, Foreign Spinco Sub, Foreign Spinco and TCo:

(a) TCo will agree to pay the purchase price for the DC Special Shares transferred to it by Foreign Parentco on the Four-Party Share Exchange, by issuing TCo Common Shares to Foreign Spinco Sub, which are agreed to be issued in respect of the disposition by Foreign Parentco of the DC Special Shares to TCo; the amount added to the stated capital of the TCo Common Shares will equal the FMV of the DC Special Shares rather than the lesser amount under s. 212.1(1.1)(b) “is simply a matter of convenience, in terms of executing the necessary corporate resolutions to effect these steps”;

(b) Foreign Parentco will agree to pay the purchase price for the common shares of Foreign Spinco issued to it in (c) below by transferring all of its DC Special Shares to TCo;

(c) Foreign Spinco will agree to pay the purchase price for the common shares of Foreign Spinco Sub issued to it by Foreign Spinco Sub in (d) below (which issuance is agreed to be in respect of the disposition by Foreign Parentco of the DC Special Shares to TCo) by issuing Foreign Spinco common shares to Foreign Parentco; and

(d) Foreign Spinco Sub will agree to pay the purchase price for the TCo Common Shares issued to it by TCo, by issuing Foreign Spinco Sub common shares to Foreign Spinco.

As a result of the four-party exchange, TCo (wholly-owned by Foreign Spinco Sub) will own all the DC Special Shares.

9. DC will become legally obligated to make the DC Cash Transfer and to transfer the Newco Common Shares and a loan receivable (the DC Receivable) from Newco to TCo in consideration for the assumption of a portion of the debt, owing by DC to a non-resident indirect subsidiary of Foreign Parentco, equal in amount to the DC Receivable and, respecting the transferred Newco share and DC Cash Transfer, for the assumption of liabilities and the issuance of TCo Preferred Shares. This is expected to entail the transfer of two types of property (business and cash and near cash), given that the Industrial Property has a nil FMV. These two types of property will be determined after giving effect to the reclassification of net receivables as business property). An s. 85(1) election will be made.
10. The DC Cash Transfer will occur within XX days of the transfer in 10 above to the extent necessary to ensure that there has been a proportionate transfer to TCo of the cash or near cash assets of DC determined under the consolidated look-through approach.
11. DC Special Shares owned by TCo and the TCo Preferred Shares owned by DC will be redeemed, with the resulting notes set off.
12. Foreign Parentco will contribute all of the DC New Common Shares to Foreign Subco 2.
13. Foreign Parentco will distribute all of the Foreign Spinco shares (after steps to effectively convert them to Class A and B shares) to its shareholders as a special dividend.

Rulings

Include standard rulings re non-application of s. 55(2) due to s. 55(3)(b) conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TCo shares or DC special shares.