CRA rules on successive butterflies to effect the creation of a 2nd public corporation

CRA ruled on butterfly spin-off transactions to effect the split-up of DC2, a public corporation, into two publicly listed companies: DC2 and SpinCo. There were to be two successive butterflies since the subsidiaries to be transferred to SpinCo started off as subsidiaries of a wholly-owned subsidiary of DC2, namely, DC1. Accordingly, such subsidiaries were to be first dropped under s. 85(1) into a Newco subsidiary of DC1, then Newco was to be spun-off by DC1 to a newly-formed subsidiary of DC2 (SpinCo Sub) under a butterfly, and then DC2 was in turn to effect a butterfly spin-off pursuant to a plan of arrangement of SpinCo Sub to SpinCo (now held by the DC2 shareholders).

DC1 was a “specified wholly-owned corporation” so that, pursuant to s. 55(3.02), and like DC2, it was not subject to the types-of-properties strictures on its butterfly spin-off.

The ruling letter provides that the Arrangement Agreement was to state:

DC2 and SpinCo will:

a. covenant and agree with and in favour of each other that for a period of time after the Effective Date to be agreed upon, they will not (and they will ensure that their respective subsidiaries will not) take any action or enter into any transaction that could cause the transactions contemplated in the Plan of Arrangement or by the Arrangement Agreement to be taxed in a manner that is inconsistent with the rulings provided in this letter without obtaining another tax ruling or an opinion of a nationally recognized accounting firm or law firm that such action or transaction will not have such effect; and

b. agree to indemnify each other for losses suffered or incurred as a result of or in connection with a breach or non-compliance with the covenant described in item (a) above.

Neal Armstrong. Summary of 2024 Ruling 2023-0987001R3 under s. 55(3.02).