US Pubco (a US-listed corporation) will package (pursuant to a Canadian butterfly) one of its businesses into a new US corporation (US Pubco Spinco), and spin out all of the common shares of US Pubco Spinco to its common shareholders, including the Canadian-resident individual taxpayer, pursuant to an exchange offer (the Exchange Transaction), pursuant to which its shareholders will be provided with the option to exchange their US Pubco shares for US Pubco Spinco shares on a pro rata basis. The disposition by the Taxpayer of common shares of US Pubco is an essential condition to receipt of the shares of US Pubco Spinco.
If the Taxpayer accepts the offer and participates in the Exchange Transaction, will s. 86.1 apply, given that the transaction will not occur as dividend in kind of the US Pubco Spinco common shares?
CRA indicated that s. 86.1(1)(a) did not accommodate an exchange (here, a disposition of US Pubco shares in consideration for Spinco shares) so that this was not an eligible distribution contemplated by s. 86.1.