Background
Canco, which was wholly-owned by Forco 1 (resident in Country 2), held all the shares of a (non-resident) subsidiary (“CFA”) resident in “Country 1” other than for one share held by a nominee shareholder. CFA used the proceeds of loans received from third-party banks and bonds issued in its country of residence (collectively, the “External Debts”) to make loans (the “Debt Funded Loans”) under the same terms and conditions (i.e., tenor, interest rate, and currency) as the External Debts, plus a cross-charged guarantee fee, directly to Finco 1 and Finco 2 (both also resident in Country 1) .
Substantially all the shares of Finco 1 were held by Forco 2 (resident in Country 2), substantially all of whose shares were held by Forco 1. Substantially all the shares of Finco 2, a grandchild subsidiary of Forco 2, were held by Forco 2 through Holdco (also resident in Country 1). Thus, Finco 1 and Finco 2 were specified debtors in respect of Canco.
In most cases, each External Debt was opened on the same day as the subsequent Debt Funded Loan. In some cases, there was a delay of one to five days between the opening dates of the External Debts and the subsequent Debt Funded Loan(s) and in one instance, a delay of 13 days. In all cases, the maturity dates of the External Debts and subsequent Debt Funded Loans were the same.
CFA had also made the “Equity Funded Loans” (funded out of CFA’s retained earnings) to Finco 1 and Finco 2.
Proposed transactions
- Finco 1 and Finco 2 will repay the Equity Funded Loans to CFA using new borrowing from an external bank; and CFA will distribute all or substantially all of the cash so received pro-rata to its shareholders (i.e., substantially to Canco).
- Canco will sell all of its shares of CFA to Forco 1 for cash consideration equal to their fair market value and elect under s. 93(1) to the extent of any capital gain.
Rulings
To the extent that the Equity Funded Loans are fully repaid on or before XXXXXXXXXX, s. 90(8)(a) will apply such that s. 90(6) will not apply to require an amount to be included in Canco’s income in respect of the Equity Funded Loans.
S. 90(7) will apply to the Debt Funded Loans such that:
a) Each Debt Funded Loan is deemed to have been made by the respective arm’s length lender to the Finco 1 or Finco 2 (as applicable) under the same terms and conditions and at the same time as it was made by CFA; and
b) The (actual) Debt Funded Loans and the External Debts are deemed not to have been made. Accordingly, s. 90(6) will not apply to require any inclusion in Canco’s incomes in respect of the Debt Funded Loans.