Share cancellation requirement
- The s. 15(1.5)(a) demerger rule does not apply where the shares of the demerging corporation are cancelled, which may be required under the corporate law in some jurisdictions. (pp.35:4-5)
Consequences of application
- If the requirements of s. 15(1.5)(a)(i) are not met, the demerging corporation will be deemed by s. 15(1.5)(a)(ii) to have conferred a benefit, so that if the shareholder is a Canadian-resident corporation, it will not be able to rely on any underlying surplus or basis for an offsetting deduction, and if it is a foreign affiliate, the benefit amount will be FAPI. If the divisive reorganization transactions occurred on a rollover basis under the foreign tax law, no foreign accrual tax (FAT) would be generated. (p.35:5)
Potential generation of hybrid surplus
- Detailed example showing that a demerger of a grandchild FA (FA 2) holding FAs that are excluded property, whose disposition occurs at a gain, generates hybrid surplus (pp.35:5-8)
Undesirability of gain if demerger of top-tier affiliate
- Where the demerger is of a top-tier affiliate whose FMV exceeds the net surplus and the basis in its shares, a gain will result to the Canadian shareholder – so that it may be advantageous to transfer the shares of the top-tier affiliate into a new non-resident holding company under s. 85.1(3) prior to the demerger. (pp.35:9-10)
Quaere whether discretionary trust interests have a nil FMV
- For the purposes of determining the ownership of shares of a corporation resident in Canada (CRIC), the shares owned by a Canadian-resident trust are deemed by draft s. 212.3(26)(b) (in the absence of the anti-avoidance rule in draft s. 212.3(26)(c) applying) to be owned by the trust’s beneficiaries in accordance with their pro rata FMV interests. “It is not at all clear how to value an interest in a discretionary trust. Generally, the consensus view is that, outside the family-law context, discretionary interests may have no value. Will the CRA share this view?” (p.35:12)
Inapplicability of s. 212.3(16) safe harbor for CRIC wholly-owned by individual entrepreneur
- Since “parent” under the expanded FAD rules can now include an individual or a trust, the FAD rules could apply, for example, where an owner-manager who controls a CRIC with a foreign affiliate emigrates abroad, or who dies and whose shares pass to a non-resident estate. The s. 212.3(16) “more closely connected business” test requiring that the officers of the CRIC had and exercised principal decision-making authority in respect of the investment in the foreign affiliate, and that a majority of them were resident and working principally in Canada at the investment time, likely could not be satisfied in the example of the emigrating owner-manager who was the sole decision maker. (pp.35:11, 12)
Issues with upstream loan rules
- Remaining issues with the upstream loan rules include:
- “Surplus deficits in entities above the lending entity remain problematic, even where there is sufficient net surplus within the chain of affiliates.”
- “The 90-day rule does not apply for the purposes of computing the exempt or taxable surplus that can be relied upon for an offsetting deduction under subsection 90(9), whereas the rule would apply if a distribution had actually been made by a foreign affiliate to a shareholder that is a corporation resi-dent in Canada.” (p. 35:23)
Email this Content