CRA allocates upper tier debt on a pro rata basis in a cross-border butterfly for purposes of applying the 10% limitation rule in s. 55(3.1)(b)(i)(A)(II)

In connection with a spin-off by a non-resident public company (Foreign PubCo) of its shares of a non-resident subsidiary (Foreign Spinco), there will be a butterfly split-up of an indirect Canadian subsidiary (DC) indirectly holding Canadian portions of the two businesses in question, so that the Canadian transferee corporation (TC) of DC will be a subsidiary of Foreign Spinco.  In connection with the  s. 55(3.1)(b)(i)(A)(II) rule, which requires that at all times less than 10% of the fair market value of the shares of Foreign Spinco be derived from shares of DC or TC, CRA indicated that any indebtedness of Foreign SpinCo 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.  As with other cross-border butterflies, there will be a three-party share exchange agreement - see 2013 CTF Annual Roundtable, Q. 11.

CRA did not rule, one way or the other, that a preliminary share capital reorganization of DC, under which the old common shares will be exchanged for special butterfly shares and new common shares with the same attributes as the old common shares except for the prior rights of the butterfly shares, will qualify under s. 86.  For purposes of categorization of the types of property of DC, current and non-current pension liabilities will reduce cash or near-cash, or business, assets respectively.

Neal Armstrong.  Summaries of 2013 Ruling 2013-0491651R3 under s. 55(1) – distribution, s. 55(3.1)(a), s. 55(3.1)(b)(i) and s. 86(1).