Background
Profitco is wholly-owned by Lossco, which is wholly owned by Parent. Based on Profitco's audited financial information, it would be in a position to borrow on a subordinated basis in an amount up to $XX (the "Profitco Borrowing Capacity").
Proposed transactions
- Profitco will advance the proceeds of a daylight borrowing to subscribe for non-voting cumulative redeemable retractable preferred shares of Lossco. Parent will agree, in a support agreement with Lossco, to make capital contributions to fund Lossco’s payment of the dividends thereon.
- Lossco will use the proceeds received in 1 to make an advance, evidenced by a promissory note (the “Investment Note”), which will bear interest reflecting the advance’s full subordination.
- Profitco will repay the daylight loan.
On the unwinding:
- Parent will make capital contributions to Lossco to allow Lossco to pay the accrued but unpaid dividends;
- Lossco will redeem the preferred shares by issuing a demand non-interest-bearing promissory note (the “Redemption Note”);
- Profitco will pay the accrued interest; and
- the Redemption Note and Investment Note will be paid by set-off.
Rulings
Including re s. 20(1)(c), s. 55(2), s. 80, GAAR for agreeing provinces and s. 245(2).
Opinion
After giving effect the July 31, 2015 draft amendments, s. 55(2) will not apply to the dividend in 4.