Ruling for spin-off butterfly by CCPC contemplated that leased land was business property – and accepted that a stated capital distribution can be paid by set-off

A Canadian corporation ("DC") which was a Canadian-controlled private corporation but which nonetheless appeared to have a wide shareholder base effected a spin-off butterfly under a Plan of Arrangement of two of its smaller businesses (carried on in its subsidiary "Subco 1") so that Subco 1 ended up being held by DC’s shareholders in a separate CCPC (Spinco). Compliance with the requirement for a pro rata distribution under the spin-off of each of the three types of property was eased by a finding that some land close to the business premises of Subco 1, which was leased to third parties, nonetheless was business property – on the basis of some sort of symbiotic redacted relationship between the third party’s and Subco 1’s business.

The reorganization started off in the usual manner with a s. 86 reorg under which the DC shareholders exchanged their old common and preferred shares for special "butterfly" shares and new common shares. The new common shares’ attributes were accepted as being different from those of the old shares on the basis of a more restricted right to receive stock dividends and on the basis of a right of the holders to receive quarterly financial statements. (This may have resulted from CRA prodding, as there is an inserted paragraph number for this.)

The stated capital of the special butterfly shares subsequently was reduced to an amount corresponding to that of the preferred shares issued by Spinco to DC in consideration for acquiring Subco 1. The stated purpose for this was to ensure that on the subsequent cross-redemption of the two shareholdings, the two deemed dividends would be equal to each other, so that the s. 186(1)(b) Part IV tax liability owing each way would be matched by an equal dividend refund "such that each of DC and Spinco will not have any net tax liabilities (i.e., as a result of each corporation's Part IV tax liabilities exceeding such corporation's dividend refund)."

A preliminary step for distributing a small portion of DC’s retained business from Subco 1 to DC involved Subco 1 selling that business on a taxable basis for a note (as it was not worth the bother to do this step as a preliminary butterfly), and then setting that note off against amounts that became owing by Subco 1 to DC as a result of a stated capital and dividend distribution.

Neal Armstrong. Summaries of 2014 Ruling 2014-0533601R3 under s. 55(1) – distribution, s. 86(1), s. 186(1) and s. 84(1).