2021 Ruling 2020-0875391R3 - Post-acquisition restructuring -- summary under Subsection 212.1(4)

See Intact and Tryg acquisition of RSA for summary of subject transactions as implemented.

Background

The Taxpayer (a Canadian public corporation with a widely-dispersed shareholder base) and Pubco (a corporation, governed by the laws of (foreign) Country 2 and dealing at arm’s length with the Taxpayer) engaged in transactions to permit the Taxpayer, with the assistance of funding indirectly provided by Pubco, to acquire Target (a public limited company governed by the laws of (foreign) Country 1) so that: the Taxpayer will retain Target’s Canadian, Country 1, and certain other international businesses; Pubco will acquire 100% of Target’s businesses in Country 3 and Country 4; and the Taxpayer and Pubco will initially jointly own Target’s business in Country 2 and Country 5 branch business and subsequently sell them to an arm’s length party. An indirect subsidiary of Target (Country 1 Subco) held Canco 1 and also, through Country 2 Holdco, Country 2 Opco, whose shares are excluded property and which holds a number of branches and subsidiaries in Country 2, Country 3, Country 4 and Country 5).

Completed transactions

1. A Bidco of the Taxpayer, which was indirectly funded by Pubco (in consideration for being issued JV Co shares in 4 below) and directly by the Taxpayer (through subscriptions through intermediate Canadian holding companies), acquired all the shares of Target pursuant to a court-approved Scheme under the laws of Country 1.
2. Country 1 Subco sold all the shares of Country 2 Holdco to JV Co (a newly-established jointly-owned subsidiary of the Taxpayer (through a Canadian holding company subsidiary (“Canada Holdco”)) and Pubco governed by the laws of Country 2, in exchange for common shares of JV Co. The FMV sales price was less than the shares’ ACB.
3. Country 1 Subco sold all of its common shares of JV Co at FMV to Canada Holdco in exchange for the “Internal Note.”
4. Canada Holdco transferred to Pubco the ownership of a portion of its shares of JV Co in satisfaction of its obligation in 1 above.
5. Country 1 Subco sold all the shares of Canco 1 to the Taxpayer in consideration for the “Demand Note” having a principal amount equal to such shares’ FMV.
6. The Taxpayer transferred its Canco 1 shares to a subsidiary (New Canada Holdco) for treasury common shares.
7. Various transactions were effected to distribute and set-off the Internal and Demand Note.

Proposed transactions

Pursuant to the “Demerger”, i.e., the division of Country 2 Opco between Demergerco 1 and Demergerco 2 (i.e., Country 2 limited liability companies formed by Country 2 Holdco and Pubco, respectively):

1. Country 2 Opco will transfer its Country 2 and Country 5 assets and liabilities (including Country 2 subsidiaries) to Demergerco 1, which in turn will issue to Country 2 Holdco, in respect of the shares of Country 2 Opco owned by Country 2 Holdco, shares having an aggregate FMV equal to the net FMV of the property transferred to Demergerco 1.
2. Country 2 Opco will make a transfer of the balance of its assets and liabilities (including Country 3 and 4 subsidiaries) to Demergerco 2, with Demergerco 2 issuing shares of equivalent FMV to Country 2 Holdco.
3. Country 2 Opco will be dissolved.
4. Country 2 Holdco will distribute its shares of Demergerco 1 to JV Co as a dividend in specie.
5. The shares of Demergerco 1 will be sold to an arm’s length purchaser.

Purposes

Including:

The purpose of structuring the funding of the Acquisition in a manner that Pubco would not acquire any equity interest in Bidco was to comply with various anti-trust and regulatory requirements. As a consequence, the conditions of subsection 212.1(4) were satisfied and Pubco did not control Country 1 Subco immediately before the disposition of the shares of Canco 1.

Rulings

Including that:

1. S. 212.1(4) will apply to the transfer of the Canco 1 shares from Country 1 Subco to the Taxpayer in 5 above such that s. 212.1(1.1)(a) will not deem a dividend to be paid by Canco 1 to Country 1 Subco.
2. Ss. 15(1.5)(a)(i) and 15(1.5)(b) and (c) will apply to the Demerger, such that:
3. Country 2 Opco will be deemed to have distributed as a dividend in kind the shares of the Demergerco 1 and Demergerco 2 to Country 2 Holdco in an amount equal to the FMV of those shares;
4. any gain or loss of Country 2 Opco from such distribution of the shares will be deemed to be nil;
5. each property of Country 2 Opco that becomes property of Demergerco 1 and Demergerco on the Demerger will be deemed to be disposed of by Country 2 Opco for proceeds equal to its FMV, with an acquisition at an equivalent cost to Demergerco 1 and Demergerco 2; and
6. s. 15(1)(b) will apply to the dividend in kind such that there will be no s. 15(1) inclusion to Country 2 Holdco.
7. such dividend described will not be included in computing Country 2 Holdco’s FAPI pursuant to A(b) of the definition of FAPI in s. 95(1).
8. The ACB to Country 2 Holdco of its Country 2 Opco shares will be reduced under s. 92(2) by the portion of the dividend in kind that would have been deductible under s. 113(1)(d) in computing the taxable income of Country 2 Holdco if Country 2 Holdco had been a corporation resident in Canada.
9. Description of potential s. 40(3) gain to Country 2 Holdco.
10. Description of neutralization of any taxable capital gain realized by Country 2 Holdco by the excluded property rules.