CRA ruled on a cross-border butterfly which entailed assets of the “Transferred Business” being transferred indirectly to a wholly-owned non-resident subsidiary (Foreign Spinco) of a non-resident public company (Foreign Parentco) or to a wholly-owned non-resident subsidiary of Foreign Spinco (Foreign Spinco Sub) – with a view to the shares of Foreign Spinco being dividended out to the shareholders of Foreign Parentco at the transactions’ completion. One of the indirect assets of Foreign Parentco was a Canadian corporation (DC) which held the Canadian portions of both the Transferred Business and the “Retained Business” – hence the need for a cross-border butterfly.
Preliminary transactions included the drop-down of the Canadian Transferred Business by DC to a Newco and the transfer of DC by its direct holder (Foreign Subco 2, a non-resident subsidiary of DC) to DC.
Following a s. 86 reorganization of DC to exchange its existing common shares for special and new common shares, there then is a four-party exchange under which Foreign Parentco transfers its special shares of DC to a newly-formed Canadian sub of Foreign Spinco Sub (TCo), TCo issues common shares to Foreign Spinco Sub, Foreign Spinco Sub issues shares to Foreign Spinco and Foreign Spinco issues shares to Foreign Parentco.
On the butterfly distribution, DC transfers Newco to TCo in consideration for preferred shares and the assumption of liabilities, following which there is a cross-cancellation of the shareholdings between DC and TC, so that TC becomes an indirect wholly-owned subsidiary of Foreign Spinco.
Foreign Parentco had first acquired direct ownership of 100% of DC in order that the ensuing exchange by Foreign Parentco of its shares of DC for shares of Foreign Spinco under the four-party exchange arrangement would qualify as a “permitted exchange.” The ruling letter stated:
The reason for Foreign Subco 2’s transfer of all of its DC Common Shares to Foreign Parentco, as described in 4 is to have Foreign Parentco own all of the issued and outstanding shares of DC, so that Foreign Parentco’s transfer of its DC Special Shares to TCo in exchange for the Foreign Spinco common shares on the Four-Party Share Exchange will qualify as a “permitted exchange” (as defined in subsection 55(1)). This is because Foreign Parentco will own all of the issued and outstanding shares of Foreign Spinco immediately after the Four-Party Share Exchange and immediately before the DC Transfer 2. ...
The purpose of the Four-Party Share Exchange is to allow the DC Special Shares to be transferred by Foreign Parentco to TCo and the Foreign Spinco common shares to be received by Foreign Parentco on a “permitted exchange,” as defined in subsection 55(1).