CRA rules on a public company butterfly spin-off involving successive s. 86 and 51 exchanges

CRA ruled on a butterfly spin-off by a listed Canadian corporation (DC) of its indirect interest in a foreign project to a “SpinCo” to be held by its shareholders, with most of the steps to occur pursuant to a plan of arrangement. A few points that may be of interest:

The “old” common shares of DC were to be split into “new” common shares (bearing 2 votes per share) and preference shares pursuant to a s. 86 reorganization, with the DC shareholders then transferring their preference shares to SpinCo for SpinCo common shares under s. 85.1. However, immediately before the effective set-off of the notes owing by DC and SpinCo to each other as a result of the subsequent butterfly mechanics, the “new” DC common shares were to be converted under s. 51 back into “old” common shares, so that there was no need to deal with the exchange regarding a listing of the “new” common shares.

SpinCo, pursuant to the definition of “public corporation” in s. 89(1), was to elect in its federal return to be a public corporation from the beginning of the year until the time that its common shares were listed on the exchange.

The application of s. 7(1.4) to the exchange of employee incentive securities required a determination of the relative FMV of the shares of DC pre-butterfly exchange to that of its shares and of SpinCo immediately after the butterfly exchange. To this end, the FMV of pre-butterfly DC common shares was to be based on their VWAP on the exchange for the five business days immediately prior to the Effective Date of the Arrangement, and the FMV of the DC Common Shares and the SpinCo Common Shares immediately after the butterfly exchange was to be determined by their VWAP on the exchange for the five business days beginning on the Effective Date.

The completed pre-butterfly transactions included DC acquiring all the shares of a Canadian corporation that were not already held by it pursuant to a plan of arrangement.

Neal Armstrong. Summary of 2023 Ruling 2022-0958241R3 under s. 55(3.02).