CRA rules on an already-completed cross-border butterfly (with targeted s. 86.1 treatment) which entailed TC and Foreign Spinco initially being fiscally transparent in order to achieve Code spin-off treatment

In connection with a spin-off by a U.S. public company (Foreign PubCo) of a U.S. subsidiary (Foreign Spinco) to which one of its businesses was transferred, there was a butterfly split-up of an indirect Canadian subsidiary (DC) directly and indirectly holding Canadian portions of the two businesses in question, so that the Canadian transferee corporation (TCo) of DC was a subsidiary of Foreign Spinco.

In order that the butterfly transactions could qualify as a tax-free spin-off for Code purposes, TC (a ULC) and Foreign Spinco (an LLC) initially were fiscally transparent for Code purposes – then TC elected to be fiscally regarded in order that it could qualify for Treaty benefits and the Foreign Spinco became a C-corp in order that its spin-off could comply with Code rules.

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 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.  There was provision for a second stage transfer of cash by DC to TC if that was required to satisfy the requirements under the butterfly rules for a pro rata distribution of property of DC.

CRA also gave a somewhat apodictic ruling respecting qualification of the spin-off of the Foreign Spinco shares as an eligible distribution for s. 86.1 purposes.

As with other cross-border butterflies, there was a three-party share exchange agreement - see 2013 CTF Annual Roundtable, Q. 11. By the issuance of the rulings, all of the transactions were completed.

Neal Armstrong.  Summaries of 2014 Ruling 2014-0530961R3 under s. 55(1) – distribution, s. 55(3.1)(b)(i) and s. 86.1.