After March 28, 2012, Canco (wholly-owned by NRco) acquires all the shares of a non-resident corporation (FA1) for $100, thereby effecting a reduction of the paid-up capital (PUC) on the common shares of Canco by $100.
Subsequently:
- Canco subscribes nominal amount for 100 common shares of a newly-incorporated non-resident subsidiary (“New FA2”), which borrows $100 under a daylight loan and uses that amount to subscribe for 100 common shares of a newly-incorporated non-resident subsidiary (“New FA3”).
- FA1 acquires those New FA3 common shares in consideration for a $100 promissory note, and then distributes those shares to Canco as an in-kind return of capital that is excluded from the application of s. 212.3(2) by s. 212.3(18)(b)(vii).
- Canco contributes the New FA3 common shares to New FA2 under s. 85.1(3) within the s. 212.3(18)(b)(ii) exemption.
- New FA3 is liquidated into New FA2, and the proceeds are used to repay the daylight loan.Does the return-of-capital distribution of the New FA3 shares effect a $100 reinstatement of the PUC of the Canco common shares under s. 212.3(9)? – and, if so, assuming that one or more of the steps was an avoidance transaction, would CRA apply s. 245(2)?
After noting in its oral remarks that s. 212.3(9)(b)(i) essentially describes circumstances where there is an upstream distribution of the investment, and subpara (ii) describes other circumstances where distributions can be traced to the initial investment – in this case, the shares of FA1, CRA indicated that, in its view, the $100 return of capital in the form of the distribution of the shares of FA3 to Canco by FA1 would arguably result in a reinstatement of the $100 of PUC that was initially reduced when Canco invested in the shares of FA1.
Turning to GAAR, CRA in its oral remarks noted that after FA3 had transited through FA! And Canco, Canco then is transferred FA3 to FA2 - so that the situation has returned to the starting point, and there is $100 of paid-up capital in the shares held by Canco through the reinstatement. CRA then concluded:
The CRA is of the view that the series of transactions described above results directly or indirectly in a misuse or abuse of the scheme of section 212.3 in general and paragraph 212.3(9) in particular.