2020 Ruling 2019-0817051R3 - Reorganization -- summary under Paid-Up Capital

Background

Following a pre-closing reorganization, including an amalgamation of Canadian corporations within the same group to form Parent Amalco, all the shares of Parent Amalco (whose paid-up capital or “PUC” exceeded their FMV) were acquired by Foreign Parent pursuant to a plan of arrangement. In addition to Canadian subsidiaries, Parent Amalco held controlled foreign affiliates directly or through a Canadian subsidiary.

Parent Amalco elected to cease to be a public corporation pursuant to s. (c)(i) of the definition of “public corporation” in s. 89(1).

Post-Arrangement Transactions

1. Parent Amalco engaged in various transactions to increase the PUC of its shares of a Canadian subsidiary (“Corporation”) to their adjusted cost base or ACB including transferring a Canadian royalty interest (providing a net smelter return) and shares of four subsidiaries (having, depending on the subsidiary, an FMV higher or lower than their PUC, before giving effect to full s. 111(4)(e) step-ups of the appreciated shares) in consideration for preferred shares with a PUC equal to the s. 85(1) elected amount. For financial statement purposes, the excess of the FMV of the transferred assets over their cost was credited to the Corporation’s contributed surplus account.
2. Parent Amalco continued out from its Canadian governing corporate law and became and was re-domesticated under the corporate laws of another jurisdiction, so that at that time it became a non-resident of Canada for the purposes of the Act and specifically, s. 128.1(4).
3. Corporation amalgamated with some of the corporations transferred to it in 1 above to form Corporation Amalco.

Proposed transactions

Corporation distributes cash to Parent Amalco as a reduction of the PUC of its common shares, with Parent Amalco using a portion of that cash to repay debt owing to a subsidiary.

Representations

Corporation represents that it and any successor will not convert the contributed surplus arising in 1 above into PUC, and that it will not use its retained earnings or contributed surplus in computing its equity amount for s. 18(5) purposes without first obtaining a positive ruling.

Rulings

Including that the above steps to increase the PUC of the shares in the capital of Corporation are effective and that s. 245(2) will not be applied to alter the ruled-upon consequences.