2023 Ruling 2022-0943871R3 - Cross-border spin-off butterfly -- summary under Subclause 55(3.1)(b)(i)(A)(II)

Background

Foreign Pubco, the non-resident and publicly traded parent of the group, held DC (a taxable Canadian corporation, or “TCC”) through four stacked non-resident corporations (Forco 4, holding Forco 3, holding Forco 2, holding Forco 1). However, Foreign Services (a non-resident subsidiary held by Foreign Pubco through a wholly-owned subsidiary, namely, Foreign Holdco), held a percentage of the shares of Forco 3 and of Forco 4. Foreign Services held Foreign XX which, in turn, jointly owned Sub 1 with DC (as common shareholders).

Completed transactions

Foreign Services incorporated Foreign Spinco and Foreign Spinco incorporated TC (a TCC).

Proposed transactions

1. After preliminary transactions to create and eliminate debt between Foreign XX and Foreign Services, Foreign Services will contribute the stock of Foreign XX and other assets to Foreign Spinco for common shares.
2. Sub 1 will make a PUC distribution of (in the case of Foreign XX) cash and (in the case of DC) a note owing to it by DC and cash, so that the DC Note will be extinguished.
3. Pursuant to a s. 86 reorganization of its capital, Forco 1 will exchange each of its DC common shares for one DC new common share and one DC preferred share, with the stated capital of the “old” common shares apportioned between the DC new common and preferred shares in proportion to their relative aggregate FMV.
4. The DC new common and preferred shares of Forco 1 will be distributed up the chain to Forco 2, then Forco 3.
5. Forco 3 will distribute those shares to Forco 4 and Foreign Services in proportion to their respective ownership interests.
6. Forco 4 will distribute the shares so received by it to Foreign Services.
7. Pursuant to a three-party transfer agreement between Foreign Services, TC and Foreign Spinco (is expressed to occur as a “permitted exchange” in accordance with the formula in (b)(iii) of the s. 55(1) definition), Foreign Services will transfer its DC preferred shares to TC for a purchase price equal to their FMV as follows:
   (a) TC will agree to pay the purchase price for the DC preferred shares transferred to it by Foreign Services by issuing TC common shares to Foreign Spinco, having an FMV equal to that of the DC preferred shares so transferred to it by Foreign Services;
   (b) Foreign Services will agree to pay the purchase price for the Foreign Spinco common shares issued to it in (c) below by transferring all of the DC preferred shares to TC; and
   (c) Foreign Spinco will agree to pay the purchase price for the TC common shares issued to it by issuing common shares to Foreign Services having an FMV equal to that of the TC common shares issued to it.
8. DC will transfer all its assets relating to Spin Business (being the shares of Sub 1) to TC in consideration for the assumption of certain liabilities of DC and the issuance of TC preferred shares. Quite detailed guidance is provided on the types-of-property analysis, but it is noted that it is anticipated that DC will have only business property.
9. DC and TC will redeem the preferred shares held by each in the other for notes, and the notes will be set off.
10. After loan advance and repayment transactions, Foreign Services will distribute all of its common shares of Foreign Spinco to Foreign Holdco, which will distribute them to Foreign Pubco, which will distribute them to its shareholders.

Additional information

At no time, during the course of the series of transactions that includes the ruled-upon dividends, will 10% or more of the FMV of the shares of Foreign XXXXXXXXXX or of Foreign Spinco be derived from any of the shares of DC or TC.

The shares of DC will not be taxable Canadian property.

Rulings

Including that

• On the three-party share exchange, s. 212.1(1.1)(a) will not apply to deem a dividend to be paid by TC, or to be received by Foreign Services and s. 212.1(1.1)(b) will apply such that the amount added to the PUC of the TC common shares on such exchange will not exceed the PUC, immediately before the exchange, of the DC preferred shares transferred to TC;
• The s. 55(3)(b) exception will apply (premised inter alia on satisfaction of the 10% test referred to above).
• For the purposes of s. 55(3.1)(b)(i)(A)(II), in determining whether 10% or more of the FMV of the Foreign Spinco common shares is derived from shares of TC or DC “any indebtedness of Foreign Spinco that is not a secured debt and that is not a debt related to a particular property will be considered to reduce the FMV of each property of Foreign Spinco pro rata in proportion to the relative FMV of all property of Foreign Spinco.”