Canada: Spinoff Techniques Revisited

Last Updated: March 7 2013
Article by Peter W. Vair

There has been a trend for a number of years for many public companies to seek to dispose of business operations that are outside of their core business or which otherwise are more appropriately owned by a separate public company, for example because their true value is not being reflected as part of a conglomerate1.  One way of doing this would be to arrange for an arm's length sale of the business to be disposed of (referred to herein as the "non-core business") and distribute the net proceeds of the sale to the corporation's shareholders (except to the extent that any of such proceeds are considered necessary to support the core business(es)).  However, proceeding in this manner has at least three disadvantages:

  1. the process of finding a buyer willing to pay an acceptable price may be time consuming and expensive;
  2. such a sale and distribution generally leaves both the corporation and the shareholders exposed to tax depending upon the tax basis of the business that is sold and the share capital accounts for tax purposes; 
  3. shareholders of the corporation who wish to continue to invest in the non-core business are denied the opportunity to do so otherwise than by investing in the acquirer corporation which may not be feasible.

As an alternative to the third party sale, a corporation (referred to herein as "Pubco") may effect some manner of spinoff of the business in a way that minimizes the tax cost to Pubco and the shareholders and allows the shareholders to continue to hold their pro rata interest in the corporation ("Subco") which owns the business to be disposed of.2 Two ways in which such a spinoff may be accomplished, and which have been pursued in the past number of years by corporations in Canada, are the "butterfly" spinoff transaction and the distribution by way of dividend in kind or reduction of capital of the shares of the subsidiary which is to be spun off. The spinoff butterfly transaction is subject to a number of complex technical rules which must be met before, as part of, and after the butterfly spinoff.  Details of these rules are outside the scope of this article which is intended merely to set out the essential structure of a public butterfly transaction where all such rules are complied with.  The public spinoff butterfly is usually accomplished by a court mandated arrangement under the applicable corporate law statute (the "Arrangement").  Under the Arrangement the shareholders of Pubco transfer to a Canadian Newco shares of Pubco having a value equal to the value of the shares of Subco, on a rollover basis, for equity of Newco, and through a series of transactions which give rise to no immediate tax under the Income Tax Act (Canada) (the "Act"), Pubco transfers the shares of Subco to Newco for redeemable and retractable preferred shares ("Newco Preferred Shares"), also on a rollover basis.  The shareholdings between Pubco and Newco are cancelled by way of issuance of demand non-interest bearing promissory notes to redeem/repurchase the inter-company shares for their fair market value, in the case of Newco to Pubco to redeem the Newco Preferred Shares, and in the case of Pubco, to Newco to repurchase/redeem the Pubco shares.  The issuance of the promissory notes gives rise to tax-free inter-corporate dividends, and the promissory notes are satisfied by way of set-off.  The equity in Newco is listed on an appropriate stock exchange such that upon completion of the Arrangement the shareholders of Pubco will hold shares in Pubco which continues to own the core business, and shares in the new public company, Newco, which owns all of the shares of Subco, which carries on the business that has been spun off.

The advantage of the spinoff butterfly transaction is that if carried out in accordance with the rules of the Act no tax is payable by Pubco or the shareholders.  If desired an advance income tax ruling should be available from the Canada Revenue Agency (CRA) in respect of the proposed spinoff.

The disadvantages of a spinoff butterfly transaction include the fact that Pubco does not receive any actual proceeds for the business disposed of plus the fact that the spinoff process may be relatively costly and will involve delays particularly where an advance income tax ruling is sought.

A dividend in kind of the shares of Subco to the shareholders of Pubco can be accomplished quickly and generally should not require the approval of the shareholders.3 However, under this option Pubco will be deemed to dispose of the shares of Subco for their fair market value with possible resulting capital gain, and the shareholders will be considered to receive a taxable dividend in an amount equal to the fair market value of the shares of Subco which they receive.

Where Pubco elects to sell Subco to a third party and distribute the after-tax proceeds to its shareholders, an alternative to paying a dividend is to distribute the net proceeds of sale as a reduction of capital of Pubco, to the extent that there is meaningful paid-up capital in the shares of Pubco, and rely upon the exception in subsection 84(4.1) of the Act for public company distributions of capital in the course of a reorganization, which provision will be amended by the October 24, 2012 draft Technical Amendments (the "Technical Amendments")4.  The Technical Amendments provide an exception to the general rule that a distribution by way of reduction of capital by a public company to its shareholders is deemed to be a taxable dividend.  The Technical Amendments will expand the situations where a distribution by way of reduction of capital is not deemed to be a dividend, to include such a distribution where the distribution can reasonably be considered to be derived from proceeds realized from a transaction that did not occur in the ordinary course of the distributing corporation's business, and such proceeds were derived from a transaction that occurred no more than 24 months before such distribution.

Spinoff by Rights Offering

A fourth way of accomplishing a public company spinoff is by way of a rights offering.  In that situation rights ("Rights") to purchase Subco common shares ("Subco shares") at a specified price would be issued pro rata to the shareholders of Pubco.  Typically the Rights would have a fairly short expiry period consistent with their purpose.  Where Subco is a public company a portion of whose common shares trade on a North American stock exchange, there will already be a public profile for Subco as well as a trading value for its shares.  While this undoubtedly helps to make a Rights offering for shares of a Subco a success, a Rights offering for a private subsidiary should also be viable.  In either case the Rights must be issued pursuant to a prospectus containing the usual detailed disclosure provided by that document.   

A spinoff reorganization effected by Rights offering has certain advantages over the other three methods in the appropriate circumstances as follows:

(a) by disposing of the Subco shares through the exercise of Rights, Pubco receives payment of the exercise price of such Rights, potentially resulting in significant cash proceeds to be applied to its core business and to pay any taxes arising from the disposition; 

(b) shareholders of Pubco are given the opportunity to fully maintain their pro rata indirect investment in Subco by exercising their Rights at a fair price;

(c) if by their terms the Rights are short-term and exercisable for a price that is equal to or greater than the fair market value of the shares of Subco at the time of their issuance, the shareholders of Subco may have little or no income inclusion as a result of the receipt of the Rights. 

A major disadvantage from the point of view of Pubco is that the disposition of the shares of Subco pursuant to the exercise of the Rights and the payment of the exercise price will be a taxable disposition and therefore the "spinoff by rights offering" may only be attractive to Pubco where Pubco either has a relatively high cost base in the shares of Subco, or has available tax shelter, to shelter any resulting capital gain, for example shelter in the form of net capital losses.  In such a case, the Rights offering if successful will provide Pubco with liquid proceeds for the Subco shares within a fairly short time frame.  In order to ensure that Pubco receives a minimum amount for the Subco shares, or to ensure the complete disposition of the Subco shares, Pubco may enter into some form of backup commitment ("Backup Commitment").  Such a Backup Commitment is a commitment to acquire from Pubco any Subco shares for which the Rights expire unexercised, at the exercise price stipulated in the Rights.  Typically the Backup Commitment would be with a related corporation forming part of the same corporate group.

The disadvantage for the shareholders is that they must pay in cash the full fair market value of the shares of Subco acquired on the exercise of the Rights.

Canadian Tax Consequences

Where a Canadian corporation such as Pubco distributes to the holders of its common shares Rights to acquire shares of a second corporation, Subco, on a pro rata basis, such distribution constitutes a taxable shareholder benefit to the extent of the fair market value of the Rights so distributed.  A well-known exception to this rule only applies where the rights are to acquire common shares of the issuer corporation. 

Provided that the exercise price of the Rights is not less than the fair market value of the Subco shares for which the Rights are exercisable, the fair market value of the Rights should generally be negligible given the short period within which they must be exercised before they expire.  The actual exercise of such a Right to acquire Subco shares is deemed not to be a disposition in the case of a person who holds the Rights as capital property, pursuant to subsection 49(3) of the Act. Any amount required to be included in computing income as a result of the receipt of the Rights will be included in computing the cost to the Rights holder of the Subco shares acquired on exercise.

Subject to the potential inclusion in their income of a relatively limited amount in respect of the issuance of the Rights, a Rights offering as described above provides the common shareholders of Pubco with the opportunity to retain their pro rata underlying interest in Subco and its business by way of exercise of the Rights and payment of the exercise price. Following exercise of the Rights the holder will own publically traded securities of two corporations: the Subco shares acquired on exercise of the Rights and the holder's residual interest in the common shares of Pubco.

To the extent Rights are exercised, such a Rights offering will provide Pubco with consideration for its Subco shares which it would not have received under the alternatives of a butterfly transaction or a dividend-in-kind transaction.  However, it must be noted that without a Backup Commitment such as described above that ensures the ultimate disposition of all of the Subco Shares held by Pubco, including those for which Rights expire unexercised, Pubco is not able to guarantee the complete disposition of its interest in Subco, which may be a significant drawback depending on the circumstances.


1.Recent examples include: (1)  the spinoff by ConocoPhillips of all of its common shares of Phillips 66 effective April 30, 2012, whereby the "downstream" business of Phillip 66, including crude oil refining and petrochemicals manufacturing and processing, was spun off to the shareholders on a tax-free basis for U.S. purposes pursuant to a private letter ruling from the IRS; (2) Kraft Foods Inc. spinoff of its North America grocery business, whereby effective October 1, 2012 each shareholder of Kraft Foods Inc. (KFT) received one share of the North America grocery business corporation, Kraft Foods Group Inc., for every three shares of KFT, and the original company was renamed and carried on, inter alia, the North American snacks and confectionary business; and (3) in Canada, the spinoff by Encana Corporation, a pure-play natural gas company, of Cenovus Energy Inc., an integrated oil company focused on enhanced oil recovery, effective November 30, 2009 pursuant to a Plan of Arrangement approved at the Encana shareholders meeting held on November 25, 2009.

2.It is assumed herein that the business to be spun off is owned by a Canadian corporation either historically or because of a s.85 rollover of such business by Pubco to a Canadian corporation. 

3.See Electrohome Ltd., Re (1998), 40 B.L.R. (2d) 210, 4 C.B.R. (4th) 239 (Ont. Gen. Div. [Commercial List]); Hovsepian v. Westfair Foods Ltd., 37 B.L.R. (3d) 78, 2003 ABQB 641 (Alta. Q.B.).

4.Bill C-28, The Technical Tax Amendments Act, 2012, received first reading in the House of Commons on November 21, 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions