2024 Ruling 2023-0987001R3 - Public Spin-Off Butterfly -- summary under Subsection 55(3.02)

Background

DC2 is a public corporation wholly-owning DC1 (also a taxable Canadian corporation.) DC2 wishes to split into two publicly listed companies: DC2 and SpinCo. To that end, various assets held in corporate or partnership form will be transferred directly or indirectly to a Newco 1 subsidiary of DC1, which will effect a butterfly spin-off of Newco 1 to SpinCo Sub. DC2 will in turn effect a butterfly spin off SpinCo Sub to SpinCo pursuant to a plan of arrangement.

Completed transaction

DC1 transferred various shares to Newco 1, and various partnership interests to Newco 2, and transferred Newco 2 to Newco 1, all on a s. 85(1) rollover basis, such that DC1 wholly-owned Newco 1 and Newco 1 wholly-owned Newco 2.

Proposed transactions

1. There will be a s. 86 exchange by DC2 of its common shares of DC1 for new DC1 common shares and special shares.
2. DC2 will transfer on a s. 85(1) rollover basis all its DC1 special shares to a corporation newly-incorporated by it (SpinCo Sub) in exchange for SpinCo Sub common shares.
3. DC1 will transfer its shares of Newco 1 to SpinCo Sub on a s. 85(1) rollover basis in consideration for SpinCo Sub special shares.
4. The DC1 special shares and the SpinCo Sub special shares will be redeemed for notes, which will be settled by each creditor transferring its note to the debtor.
5. Each dissenting shareholder may be entitled to be paid the fair value for its shares of DC2.
6. There will be a s. 86 exchange by each DC2 shareholder other than a dissenting shareholder (a “participant”) of its common shares of DC2 for new DC2 common shares and special shares.
7. The new DC2 common shares will outside of the plan of arrangement “be listed for trading on Exchange 1 and Exchange 2 (subject to standard listing conditions imposed by Exchange 1 and Exchange 2 in similar circumstances), and for greater certainty, such listing will be effective before the DC2 Distribution [in 11 below].”
8. Employees who will be retained by the DC2 group will have any of their stock options exchanged for new options with a reduced exercise price, and those transferred to the SpinCo group will have their options exchanged for options to acquire that number of SpinCo shares equal to the number of DC2 shares covered by their old options multiplied by the Exchange Ratio (based on the VWAP for the 5-day trading period before the Effective Date of the Arrangement (or such other trading period that is acceptable to Exchange 1) in the case of a DC2 common share and for the equivalent period beginning on the Effective Date in the case of a SpinCo common share). Comparable adjustments will be made for DSUs, RSUs and ESUs.
9. Each participant will transfer (generally on a s. 85.1 rollover basis if on capital account and no gain or loss is reported) all its DC2 special shares to SpinCo (recently -incorporated by DC2) in exchange for the same number of SpinCo common shares.
10. The new DC2 common shares will outside of the plan of arrangement “be listed for trading on Exchange 1 and Exchange 2 (subject to standard listing conditions imposed by Exchange 1 and Exchange 2 in similar circumstances), and for greater certainty, such listing will be effective before the DC2 Distribution [in 11 below].”
11. DC2 will transfer its shares of SpinCo Sub to SpinCo on a s. 85(1) rollover basis in consideration for SpinCo Sub common shares.
12. The DC2 special shares and the SpinCo special shares will be redeemed for notes, which will be settled by each creditor transferring its note to the debtor.
13. Each participant will exchange each new DC common share held by the participant for one DC2 common share under s. 51. The DC common shares will continue to be listed on the two exchanges.
14. Pursuant to the post-amble in the definition of “public corporation” in s. 89(1), SpinCo will elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.

Additional information

Under the Arrangement Agreement:

DC2 and SpinCo will:

a. covenant and agree with and in favour of each other that for a period of time after the Effective Date to be agreed upon, they will not (and they will ensure that their respective subsidiaries will not) take any action or enter into any transaction that could cause the transactions contemplated in the Plan of Arrangement or by the Arrangement Agreement to be taxed in a manner that is inconsistent with the rulings provided in this letter without obtaining another tax ruling or an opinion of a nationally recognized accounting firm or law firm that such action or transaction will not have such effect; and

b. agree to indemnify each other for losses suffered or incurred as a result of or in connection with a breach or non-compliance with the covenant described in item (a) above.

Rulings

Including re ss. 86, 55(3)(b), 7(1.4) and 256(7)(a)(i)(E).