Principal Issues: Whether the GAAR would apply in 3 scenarios where a Canadian holding company is used to acquire shares of a foreign affiliate?
Position: 1. Possibly. 2 and 3. Yes
Reasons: 1. Not yet considered by the GAAR Committee. 2 and 3. GAAR Committee has determined that the use of the Canadian holding company serves no purpose other than to reduce Part XIII tax otherwise payable.
International Fiscal Association Annual Conference, May 23/24, 2013
Question 4 PUC Planning Prior to Section 212.3
Can the CRA clarify its position on PUC planning prior to the coming into force of section 212.3 in the context of the following hypothetical facts?
NRCo owns Forco. Forco owns 100% of a Canadian operating subsidiary (CanOpco). The paid-up capital (PUC) of the shares of CanOpco is nominal.
NRCo sets up a new Canadian company (CanHoldco), and CanHoldco acquires the shares of Forco for shares of CanHoldco. The PUC of the CanHoldco shares is equal to the FMV of the shares of Forco.
Forco is wound up into CanHoldco, and the shares of CanOpco are transferred to CanHoldco. Subsection 212.1(1) does not apply on the transfer.
CanOpco pays a taxable dividend to CanHoldco in an amount equal to its retained earnings. CanHoldco deducts the dividend from its taxable income under subsection 112(1). CanHoldco pays the same amount to NRCo as a reduction of PUC.
In the context of the above facts, what is the CRA's position on the application of the GAAR if the above planning is carried out:
A. Pre-acquisition i.e. NRCo injects equity into CanHoldco, and CanHoldco acquires Forco from an arm's length vendor (assume CanHoldco can't acquire CanOpco directly because NRCo also wishes to acquire Forco's other assets);
B. Post-acquisition i.e. NRCo acquires Forco from an arm's length vendor, then after a number of months transfers Forco to CanHoldco in exchange for shares of CanHoldco; and
C. Non-acquisition i.e. the NRCo, Forco, CanOpco structure has been in place since the inception of CanOpco's business activities, and NRCo transfers the shares of Forco to CanHoldco in exchange for shares of CanHoldco.
Response
In all three cases, a new Canadian corporation (i.e. CanHoldco) is inserted between NRCo and Forco to establish cross-border PUC reflective of the FMV of the shares of CanOpco to enable surplus of CanOpco to be extracted from Canada without payment of Part XIII withholding tax. As section 212.1 does not apply, for transactions prior to section 212.3, the CRA would consider the application of the GAAR.
The GAAR Committee has determined that the GAAR applies to cases involving "Post-acquisition" and "Non-acquisition" planning as described above. The GAAR will apply to treat the return of PUC paid by CanHoldco to NRCo as a distribution of a taxable dividend subject to Part XIII withholding tax. The GAAR Committee has not recently addressed the "Pre-acquisition" tax planning case described above.
Section 212.3 of the Act (i.e. the "foreign affiliate dumping rules") was enacted by Bill C-45, generally applicable in respect of transactions and events that occur after March 28, 2012. If the acquisition of Forco by CanHoldco in all three scenarios occurred after March 28, 2012, section 212.3 would generally apply.
Sherry Thomson
2013-048377