Univar – Tax Court of Canada finds that creating a sandwich structure to access s. 212.1(4) was an abuse of the s. 212.1(1) anti-surplus stripping rule

A non-resident's acquisition of the shares of a Netherlands public company indirectly holding the shares of a valuable Canadian sub (Univar Canada) with nominal paid-up capital was structured to effectively step-up the PUC of the shares of Univar Canada to fair market value by using (or, according to V. Miller J, abusing) the pre-2016 version of s. 212.1(4) rule. This was accomplished by setting up a sandwich structure immediately after the acquisition, under which a new Canadian ULC, capitalized with notes and high-PUC shares, held the shares of a U.S. corporation holding Univar Canada – so that such U.S. corporation could distribute the shares of Univar Canada (on a Treaty-exempt basis) to its controlling Canadian purchaser (the ULC) without technically being affected by the s. 212.1(1) deemed dividend rule.

Her analysis in confirming CRA's application of GAAR (to impose Part XIII tax on the value of the notes issued by the Canadian ULC and to grind the PUC of the shares issued by it) was informed by her starting point, which was to state:

Subsection 212.1(4) is placed as an exception within an anti-avoidance section… . [I]t is reasonable to infer that subsection 212.1(4) cannot be used so that it would defeat the very application of section 212.1. …[S]ubsection 212.1(4) is aimed at a narrow circumstance where the purchaser corporation, which is resident in Canada, actually controls the non-resident corporation without manipulating the corporate structure to achieve that control.

She went on to say:

The exception should not apply in the situation where a non-resident owns shares of the Canadian resident purchaser corporation.

so that effectively she regarded the proposed amendments to s. 212.1(4) in their principal aspect as being enacted for greater certainty – and, in fact, she referred to these amendments as evidencing the policy of the old s. 212.1(4) rule (which might be at odds with s. 45(3) of the Interpretation Act – although she cited Water’s Edge as permitting this approach).

Neal Armstrong. Summaries of Univar Holdco Canada ULC v. The Queen, 2016 TCC 159 under s. 212.1(4), s. 245(4) and Statutory Interpretation - Interpretation Act, s. 45(3).