CRA cross-border butterfly ruling letter contemplates two successive permitted exchanges and comments on property-type issues

A recently-released 2016 ruling letter - respecting the spin-off by a foreign public company (Foreign Pubco) of a newly-formed non-resident subsidiary (Foreign Spinco) – describes the butterflying of the Canadian spin business of Canadian DC (which is a direct sub of “Forco 2” and indirect sub of Foreign Pubco) to Canadian TC (which is the child of Foreign DC and a grandchild of Forco 2.) Immediately before this butterfly transfer, Canadian TC acquires its special shares in Canadian DC through a three-party exchange arrangement between Canadian TC, Forco 2 and Foreign DC, although it is not done this way for ITA reasons.

Foreign DC is then distributed up the chain to Foreign Pubco. Foreign Pubco then drops Foreign DC into a new subsidiary (Foreign TC) of a newly-formed LLC subsidiary of Foreign Pubco (New LLC – to which other significant foreign assets already have been contributed) pursuant to a three-party exchange agreement under which Foreign Pubco transfers Foreign DC directly to Foreign TC, Foreign TC issues shares to New LLC, and New LLC issue units to Foreign Pubco. Both this triangular exchange and the previous one are expressed to occur as “permitted exchanges” in accordance with the formula in (b)(iii) of the s. 55(1) definition.

The ruling letter includes detailed guidance respecting the classification of the transferred and retained property of Canadian DC amongst the three types of property (cash and near cash, investment and business property) and the identification of liabilities to be netted against them, including:

• Positive and negative balances under cash pooling arrangements are to be determined on a net basis and treated as cash or near cash.
• 100% of properties rented by Canadian DC that are majority-used in its Canadian businesses are treated as business assets notwithstanding that portions of the properties are subleased to third parties at a loss.
• Canadian DC and Canadian TC can decide between themselves as to what portion of a term loan receivable by Canadian DC from another Canadian affiliate (that is to be included in the property transferred to Canadian TC) is to be treated as a cash and near cash asset, as contrasted to an investment asset – and there also is flexibility to balance out the property-type mix respecting the allocation of liabilities to net receivable balances.
• Deferred revenue obligations or liabilities under supplemental retirement plans will not be treated as liabilities, and net pension plan assets will not be considered as property; whereas net pension plan liabilities will be treated as liabilities.

Neal Armstrong. Summary of 2016 Ruling 2015-0616291R3 under s. 55(1) – distribution.