Ruling addresses complications of combining a split-up butterfly of DC with a Code s. 355 indirect spin-off of DC by non-resident public parent

In order for a non-resident publicly-traded corporation to distribute two of its three businesses to its shareholders as a dividend-in-kind (so that it effectively was converted into three publicly traded corporations), it was necessary for one of its indirect Canadian subsidiaries (DC - which was a direct subsidiary of Foreign Sub 1) to effect a butterfly reorganziation under which: a portion of its assets were butterflied to a new Canadian subsidiary of Foreign Sub 1 (TC); the equity of DC (in the form of new common shares issued on the usual preliminary s. 86 reorganization) was transferred indirectly to Foreign Spinco 1; and the shares of Foreign Spinco 1 (along with those of Foreign Spinco 2, which held the second business) were then distributed to the public.   In light of the fact that the shares of Foreign Spinco 1 were to be disposed of by a specified shareholder of DC (Foreign Sub 1) to persons who are not related to Foreign Sub 1 (the public), it was necessary to give a representation in the ruling letter that the fair market value of the Foreign Spinco 1 common shares was not, at any time, during the course of the series of transactions derived 10% or more from the new common shares of DC.

The  mechanics for transferring the new common shares of DC indirectly to Foreign Spinco 1 (involving a three-party circular back scratching arrangement) did not dovetail at all well with the "permitted exchange" definition - but CRA was accommodating.

The letter contemplates that DC likely would have only one type of (net) property.  This result was facilitated not only through reclassification of any net ordinary-course trade receivables, inventories and prepaids as business assets, but also by treating a leasehold interest that DC was subleasing to a third party as business property rather than investment property.

DC received a comfort letter in the spring respecting the application of the proposed debt dumping rules (relating to the fact that it was to transfer some foreign subsidiaries to TC, thereby giving rise to a deemed dividend).  This point now appears to be addressed by the relief in draft s. 212.3(18)(a)(i) (respecting non-arm's length acquisitions of subject corporations.)

Neal Armstrong  Summaries of 2012 Ruling 2011-0431101R3 under s. 55(1) - distribution, and permitted exchange; s. 55(3.1)(b)(i); s. 20(1)(c).