On a spin-off through a dividend-in-kind, Spinco will take responsibility for Parent’s Part XIII remittance obligation

A Canadian public company with non-capital losses (Pubco) will be spinning off a Newco (holding non-strategic assets) to its shareholders.  To avoid a shareholders' meeting, this will be accomplished through a dividend-in-kind.

In order to eliminate the Part XIII remittance obligation of Pubco, it "will cause Newco" to repurchase the requisite portion of the shares distributed by Pubco to non-resident shareholders, with the repurchase proceeds then appropriated by Newco for remittance to the Receiver General.  This is magical as neither s. 215(6) nor a plan of arrangement would give Newco the authority to expropriate the non-residents' shares or the proceeds thereof.  (Although Newco is relieving Pubco’s Part XIII obligation, there likely is no shareholder benefit as in theory Part XIII tax is an obligation of the non-resident dividend recipients rather than the payer – although no ruling was requested on this point.)

It gets odder.  In the preliminary transactions to pre-package Newco for distribution, Pubco will subscribe nominal cash for common shares of Newco, and then drop down the non-strategic assets for interest-bearing notes and for Newco preferred shares whose redemption amount is nominal but would increase on any application of a price adjustment clause.  The amount of the taxable dividend to the shareholders is minimized by only the Newco common shares being distributed.  Thus, a new enterprise (Newco) could face massive dilution of its common shareholders on application of a price adjustment clause.

Neal Armstrong.  Summaries of 2013 Ruling 2013-0488291R3 under s. 52(2) and General Concepts - Effective Date.