A cross-border butterfly used a 4-party exchange

CRA has now published a ruling issued four years ago on a relatively simple cross-border butterfly of a Canadian spin business (already packaged into a subsidiary of DC) by DC to TC, an indirect subsidiary of Foreign SpinCo, before Foreign SpinCo was distributed up the chain for inclusion in the assets of New Foreign PubCo, which would then be dividended by the current parent (Foreign PubCo) to its public shareholders. Ironically, DC was the product of a prior amalgamation of two corporations carrying on the Canadian spin and keep businesses, respectively.

Rather than using the usual 3-party exchange in order to avoid the application of s. 55(3.2)(h) (see Desjardins and Diksic), here a 4-party exchange was contemplated, i.e., including both the immediate non-resident parent (Foreign SpinCo Sub) and non-resident grandparent (Foreign SpinCo) of TC in a circular exchange of consideration. In the context of this 4-party share exchange, the increase in the paid-up capital in respect of the shares of TC issued to Foreign Spinco Sub occurred "by virtue of the disposition" of the special shares of DC by its foreign parent to TC. Accordingly, s. 212.1(1)(b) (now, s. 212.1(1.1)(b)) applied to grind the PUC of the shares issued by TC to an amount equal to the PUC of the DC special shares.

The butterfly ruling was conditional on the Foreign SpinCo shares never deriving 10% or more of their fair market value from the TC shares or DC special shares.

As in, for example, 2014-0530961R3, there was provision for a second stage transfer of cash by DC to TC if (contrary to expectation, as it was anticipated that, after applying the usual consolidated look through rules, including to foreign subsidiaries, there would be only business property) that was required to satisfy the requirements under the butterfly rules for a pro rata distribution of property of DC.

Neal Armstrong. Summary of 2013 Ruling 2012-0459781R3 under s. 55(1) – distribution.