Background
Foreign Parent holds a majority position in Pubco through foreign subsidiaries (Foreign Holdco 2 and Foreign Holdco 1) which, in turn, hold shares of Pubco (being common shares)
- through Foreign Holdco 2, which holds common shares of Pubco, viewed as the “Cross-Border Class 3” or “CBC-3” of Pubco;
- through Canholdco 1, all of whose shares, being common shares, or the “CBC-1,” are held by Foreign Holdco 1,
- through Canholdco 2, whose common shares, held by Foreign Holdco 2, are the “CBC-2” and whose preferred shares are held by Canholdco 1, and
- through Canholdco 3, whose preferred shares are held by Canholdco 1,and whose common shares are held by Canholdco 2.
Pubco is a public corporation that previously elected under s. 261(3) for the U.S. dollar to be its elected functional currency, and that is described in s. 212.3(10)(f). “Opco” is a non-resident subsidiary of Pubco (held through Forco 2 which, in turn was held by a foreign subsidiary (Forco 1) jointly held by Pubco and a Canadian subsidiary of Pubco). Pubco has been funding a major project of Opco mostly through a non-resident subsidiary (Finco) of Pubco that was capitalized by Pubco mostly with mandatorily redeemable preferred shares (MRPS).
Foreign Holdco 2 holds Foreign Holdco 3 and Foreign Holdco 4. Foreign Holdco 3 holds Canco 1 and Canco 2, except that non-voting cumulative redeemable shares of Canco 2 are held by Canco 1.
Recently completed transactions
Opco borrowed U.S. dollars in order to inter alia fund the repayment of loans owing to Finco (directly and by way of repaying loans from Forco 2). Finco, in turn, paid dividends on its common shares and distributions on its MRPS to Pubco, both in U.S. dollars (the “Finco Distributions”). Pubco, in turn, inter alia lent those funds to Canco 1, which subscribed for preferred shares of Canco 2, which effected a return of capital to Foreign Holdco 3 (which repaid indebtedness owing to Foreign Holdco 4).
Rulings
A. The cash from the Finco Distributions constitute receipts of property described in s. (B) of variable A of the s. 212.3(9)(b)(ii) formula.
B. This ruling references the concepts of: “Net PUC Reduction,” respecting a particular CBC, being the sum of amounts determined for such class under s. 212.3(9)(a) regarding an investment for which Finco is the subject corporation, as of the time that is immediately before the time that is immediately before the first Finco Distribution, plus a further specified reduction under s. 212.3(7); “Net US$ PUC Reduction” being the Net PUC Reduction for CBC-1, CBC-2 and CBC-3 determined in U.S. dollars for the sole purpose of determining Pubco’s Canadian tax results (“CTRs”) within the meaning of s. 261(1); and “Net C$ PUC Reduction” CBC -1”,being the Net PUC Reduction for CBC-1, CBC-2 and CBC-3 determined in Canadian dollars for the purpose of determining their respective PUC balances. The Ruling:
Provided that (i) the total amount of the Finco Distributions as determined in US$ is no less than the total of each “Net US$ PUC Reduction in respect of CBC-1, CBC-2 and CBC-3, and that (ii) the C$ equivalent of such amounts of Finco Distributions is no less than the total of each Net C$ PUC Reduction in respect of CBC-1, CBC-2 and CBC-3, the application of subsection 212.3(9) to the Finco Distributions will have resulted, at the time the last Finco Distribution is completed, in the PUC of each of the Relevant CBCs being increased under that subsection by an amount equal to the total of all amounts previously deducted (less amounts previously reinstated) in respect of Investments in Finco, as the Subject Corporation, for the purpose of the maintenance of the relevant PUC accounts of Pubco, CanHoldco 1 and CanHoldco 2, in C$ and in US$.