2021 Ruling 2021-0911211R3 - Foreign Takeover -- summary under Adjusted Cost Base

Background

Opco, a taxable Canadian corporation and a subsidiary of another corporation, held all the shares of a non-resident subsidiary (XXXXXXXXXX Holdco), and also had formed Canadian Holdco. Newly-formed Merger Sub1 was non-resident and its shares had a nominal FMV. Merger Sub1 owned all the shares (having a nominal FMV) of Merger Sub2, which also was non-resident.

Completed transactions

1. Pursuant to the Merger Agreement between Target (which dealt at arm’s length with the other parties and Opco), Merger Sub1, and Merger Sub2, Merger Sub2 was merged with and into Target (the “First Merger”), with the separate corporate existence of Merger Sub2 ceasing and Target being the surviving entity and a direct wholly-owned subsidiary of Merger Sub1. By virtue of the First Merger, each common and preferred share of Target was converted into the right to receive the applicable “Merger Consideration,” being the “Share Consideration” (being common shares to be issued by XXXXXXXXXX being the direct (apparently Canadian-resident) parent of Opco – referred to herein as Parent) and the “Cash Consideration.” On the First Merger, each common share of Merger Sub2 was converted into a share of the surviving corporation (being Target). Immediately following the First Merger, Parent was the sole shareholder of Merger Sub1, and Merger Sub1 was the sole shareholder of the surviving corporation (Target), and the former shareholders of Target held either cash or a combination of cash and the Share Consideration.
2. Upon the First Merger occurring, and pursuant to the “Funding Agreement” between Parent, Opco, Merger Sub1 and Merger Sub2:

• Merger Sub1 issued a number of additional common shares (the “Additional Merger Sub1 Shares”) having an agreed FMV equal to the FMV of the aggregate Share Consideration; and
• Parent added to the stated capital account maintained for its common shares an amount equal to the aggregate FMV of the Share Consideration.

3. Immediately following the First Merger, Target merged with and into Merger Sub1, with the separate corporate existence of Target ceasing and Merger Sub1 being the surviving corporation (and a direct wholly-owned subsidiary of Parent). By virtue of the Second Merger, the shares of Merger Sub1 remained outstanding and were held by Parent and each share of Target was cancelled. “No election will be made not to have subsection 87(8) apply in respect of the Second Merger.”
4. Immediately following the Second Merger, Parent transferred, as a contribution of capital, all of the shares of Merger Sub1 to Opco (the “Opco Capital Contribution”). Opco agreed to add an amount equal to the FMV of the shares of Merger Sub1 to the stated capital account maintained for its common shares.
5. Opco immediately thereafter transferred, as a contribution of capital, all of the shares of Merger Sub1 to XXXXXXXXXX Holdco (the “XXXXXXXXXX Holdco Capital Contribution”).
6. XXXXXXXXXX Holdco assumed the indebtedness of Merger Sub1 owing to Opco (being the “Intercompany Debt” borrowed by Merger Sub1 pursuant to the Funding Agreement to pay the aggregate Cash Consideration). This step occurred as a two-step transaction whereunder: (i) XXXXXXXXXX Holdco assumed any indebtedness of Merger Sub1 owing to Opco in consideration of a promissory note issued by Merger Sub1 to XXXXXXXXXX Holdco having a principal amount equal to the indebtedness assumed, and (ii) XXXXXXXXXX Holdco then contributed the promissory note to Merger Sub1 as a contribution of capital.

Rulings

• The cost of the Merger Sub1 shares issued to Parent will equal the FMV of the aggregate Share Consideration, plus the costs incurred by Parent for the purpose of acquiring the Additional Merger Sub1 Shares to the extent such costs are not deductible by it in the year or any subsequent year in computing its income. S. 143.3 will not apply to reduce such ACB.
• On the First Merger, Merger Sub1 disposed of the shares of Merger Sub2 for proceeds of disposition equal to the FMV of the Merger Sub2 shares immediately before the First Merger.
• Parent disposed of the shares of Merger Sub1 to Opco pursuant to the Opco Capital Contribution, for deemed proceeds of disposition equal to their FMV and, for greater certainty, did not thereby realize a gain and was not deemed to have received a dividend as a result of the disposition.
• The Opco Capital Contribution resulted in an increase in the ACB to Parent of its shares in Opco, pursuant to s. 53(1)(c), in an amount equal to the FMV of the aggregate Share Consideration.
• No amount will be included in the income of Opco pursuant to s. 9 or 12(1)(x) in respect of the Opco Capital Contribution.
• Opco did not realize any gain as a result of the transfer by Opco of the Merger Sub1 shares to XXXXXXXXXX Holdco pursuant to the XXXXXXXXXX Holdco Capital Contribution.
• Opco did not realize any gain and was not deemed to have received a dividend, as a result of the transfer by Opco of the XXXXXXXXXX Holdco shares to Canadian Holdco pursuant to the Canadian Holdco Capital Contribution.
• No amount will be included in the income of Canadian Holdco pursuant to s. 9 or 12(1)(x) in respect of the Canadian Holdco Capital Contribution.