CRA rules on a cross-border butterfly

CRA has ruled on a relatively straightforward cross-border butterfly. Before the distribution of the shares of Foreign Spinco (holding the business to be spun-off) by its parent (Foreign Services) up the chain for distribution by Foreign Pubco to its shareholders, it was necessary for the Canadian spin business carried on through a Canadian subsidiary (Subco 1) of a Canadian subsidiary (DC) of Foreign Services to be transferred in a butterfly spin-off to a new Canadian subsidiary (TC) of Foreign Spinco.

As with other cross-border butterflies, it was required, in order to avoid Foreign Spinco becoming a deemed transferee corporation at any time in the series as a result of becoming a shareholder of DC, to accomplish the transfer of DC preferred shares to TC pursuant to a three-corner agreement among Foreign Services, Foreign Spinco and TC, i.e.:

1) Foreign Services transfers the DC preferred shares directly to TC as consideration for the shares of Foreign Spinco issued in step 3;

2) TC issues common shares to Foreign Spinco as consideration for those DC shares; and

3) As consideration for the TC shares, Foreign Spinco issues shares to Foreign Services.

DC then spins off the relevant business assets (the Subco 1 shares) to TC, and the two cross pref shareholdings are redeemed for notes, which are set-off.

Also, as in other cross-border butterflies, the shares of Foreign Spinco were effectively required by s. 55(3.1)(b)(i)(A)(II) to at no time in the series derive 10% or more of their FMV from the Canadian spin business (or the shares of TC). In this regard, CRA ruled that, for the purposes of s. 55(3.1)(b)(i)(A)(II), in determining whether 10% or more of the FMV of the Foreign Spinco common shares is derived from shares of TC or DC “any indebtedness of Foreign Spinco that is not a secured debt and that is not a debt related to a particular property will be considered to reduce the FMV of each property of Foreign Spinco pro rata in proportion to the relative FMV of all property of Foreign Spinco.”

Neal Armstrong. Summary of 2023 Ruling 2022-0943871R3 under s. 55(3.1)(b)(i)(A)(II).