CRA has ruled on a relatively straightforward cross-border butterfly. Before the distribution of the shares of Foreign Spinco (holding the business to be spun-off) by its parent (Foreign Services) up the chain for distribution by Foreign Pubco to its shareholders, it was necessary for the Canadian spin business carried on through a Canadian subsidiary (Subco 1) of a Canadian subsidiary (DC) of Foreign Services to be transferred in a butterfly spin-off to a new Canadian subsidiary (TC) of Foreign Spinco.
As with other cross-border butterflies, it was required, in order to avoid Foreign Spinco becoming a deemed transferee corporation at any time in the series as a result of becoming a shareholder of DC, to accomplish the transfer of DC preferred shares to TC pursuant to a three-corner agreement among Foreign Services, Foreign Spinco and TC, i.e.:
1) Foreign Services transfers the DC preferred shares directly to TC as consideration for the shares of Foreign Spinco issued in step 3;
2) TC issues common shares to Foreign Spinco as consideration for those DC shares; and
3) As consideration for the TC shares, Foreign Spinco issues shares to Foreign Services.
DC then spins off the relevant business assets (the Subco 1 shares) to TC, and the two cross pref shareholdings are redeemed for notes, which are set-off.
Also, as in other cross-border butterflies, the shares of Foreign Spinco were effectively required by s. 55(3.1)(b)(i)(A)(II) to at no time in the series derive 10% or more of their FMV from the Canadian spin business (or the shares of TC). In this regard, CRA ruled that, 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.”