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

Where on a foreign spin-off by a non-resident public company (Foreign Pubco) of its shares of a non-resident subsidiary (Foreign Spinco), there has been a butterfly distribution of one of the two businesses in question by an indirect Canadian subsidiary (Canco) to a transferee corporation (TCo) that will be retained by Foreign Pubco, with Canco indirectly being included in what is spun-off, CRA will require that the 10% limitation in s. 55(3.1)(b)(i)(A)(II) be complied with, so that at all times less than 10% of the fair market value of the shares of Foreign Spinco is derived from the shares of Canco.

CRA has ruled that if Foreign Spinco borrows money from a third party following the butterfly reorganization and before the spin-off, such debt will be considered to reduce the fair market value of the assets of the holding companies for Canco, and the other assets of Foreign Spinco, on a pro rata basis for these purposes, even if there is no logical connection between the use of that borrowing and the shares of Canco.

Neal Armstrong.  Summary of 2012 Ruling 2011-0425441R3 under s. 55(3.1)(b)(i) (also discussed below).