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.”
Following a s. 86 exchange by Foreign Parentco of its old common shares of DC for new common shares and “DC Special Shares”, and before the butterfly distribution to a Canadian subsidiary of Foreign Spinco Sub (TCo), there is a four-party exchange under which Foreign Parentco transfers its DC Special Shares 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. 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) as “simply a matter of convenience, in terms of executing the necessary corporate resolutions to effect these steps”. CRA ruled:
[T]he provisions of paragraph 212.1(1.1)(b) will apply to reduce the aggregate PUC of the TCo Common Shares that TCo issued to Foreign Spinco Sub on the Four-Party Share Exchange, to an amount equal to the aggregate PUC, immediately before the transfer, of the DC Special Shares so transferred by Foreign Parentco to TCo, as described in Paragraph 32(b)