Initial Target structure
Target, a public corporation incorporated under a Business Corporations Act (the “BCA”), did not carry on business in Canada and held two non-resident subsidiaries (Subco 1 and Subco 2). Only one shareholder of Target (“Specified Shareholder”) was a “specified shareholder” as modified by s. 88(1)(c.2)(iii), a non-resident shareholder but who had not (together with any non-arm’s length person) held 25% or more of any class of shares.
Capitalization of Parent
Assignor, a non-resident corporation whose sole shareholder was a non-resident individual (Mr. B), had agreed to acquire Target pursuant to a Plan of Arrangement. However, Assignor, a BCA corporation (“Parent”) incorporated on behalf of its subsequently-identified co-investor (Partnership 1), and Target agreed that Assignor’s rights and obligations under this agreement would be assigned to and assumed by Parent. Partnership 1 was controlled by a non-resident corporation (“Forco”), by virtue of Forco holding the general partner interest in the partnership that was the general partner of Partnership 1. None of the direct or indirect investors in Partnership 1 had any interest in Target before the Effective Time of the Plan of Arrangement referenced below, and they all dealt at arm’s length with Specified Shareholder.
Partnership 1 subscribed for Class A (voting) common shares (thereby giving it a majority of the voting shares) and non-voting preferred shares of Target, a non-resident trust for Mr. B and his family subscribed for Class A common shares and Class B (non-voting) common shares of Target, and another non-resident individual (Mr. A) dealing at arm’s length with Specified Shareholder subscribed for Class B common shares.
Transfers by Target shareholders
Specified Shareholder transferred Target shares to Parent in consideration for $X and for Class A and Class B common shares. At the Effective Time under the Plan of Arrangement, all the other Target shares were transferred to Parent for cash consideration.
Amalgamation and filings
Immediately thereafter, Parent and Target amalgamated with the same effect as if they were amalgamated under the provisions of the BCA to form Amalco. The Plan of Arrangement provided that the legal existence of Target did not cease and survived the Amalgamation (in order to avoid a disposition of the Subco 1 and/or Subco 2 shares for local tax purposes.) On the amalgamation, the shares of Target were cancelled and those of Parent were not.
The s. 212.3(7)(d)(i) form was filed respecting Parent’s acquisition of the Target Shares by Parent, and then subsequently revised and refiled to reduce the deemed dividend that would otherwise result under s. 212.3(2)(a), and the commensurate reduction of the paid-up capital in respect of the shares of Parent.
In its first tax return, Amalco designated an amount under ss. 87(11) and 88(1)(d) to increase the adjusted cost base of the Subco Shares, taking into account the Reg. 5905(5.4) surplus deduction under s. 88(1)(d)(ii) - C.
Continuation
Pursuant to the BCA, Amalco was then continued into a non-resident jurisdiction as if it had been incorporated under the latter’s laws (the “Continuation”).
Purposes
The transactions eliminate the entirely superfluous Canadian component of the Forco Group structure. As a distribution of the Subco Shares by Amalco to Partnership 1 or another entity of the Forco Group would trigger substantial local tax, there instead is the Continuation, which avoids such taxes. The s. 88(1)(d) bump of the Subco Shares minimizes Canadian taxes upon the Continuation.
Rulings
S. 88(1)(d) ruling with provisos included a statement that the Continuation will not, in and by itself, cause the Subco shares to be ineligible property for purposes of s. 88(1)(c)(vi).