CRA rules on deductibility of interest on money lent by TC to DC immediately after the butterfly

For redacted reasons, a public company (Old Pubco) wishes to interpose a new holding company (New Pubco) between it and its shareholders under a s. 85.1 exchange, and spin-off most of its non-resident subsidiaries to a new sister Canadian corporation (Newco) which also will be a wholly-owned subsidiary of New Pubco.

Since this reorganization does not satisfy the s. 55(3)(a)(ii) test (as the public increases their direct interest in New Pubco), this reorganization must qualify as a butterfly, and CRA so ruled (on the basis that it is a no type-of property butterfly under s. 55(3.02)).

Interest on money borrowed by Old Pubco from New Pubco to pay down debt will be deductible (subject to the more usual limitations) provided that this borrowing does not exceed the paid-up capital of the Old Pubco shares which are redeemed by Newco.  CRA has taken a similar approach to the deductibility of interest on debt of a distributing corporation which was not assumed by the transferee corporation on a butterfly (2012 Ruling 2011-0431101R3).

Neal Armstrong.  Summaries of 2013 Ruling 2013-0490341R3 under s. 20(1)(c) and s. 55(1) - distribution.