CRA provides s. 55(3)(a) rulings conditional on the U.S. parents receiving, and waiving the right to object to, GAAR assessments to reduce outside Canadian basis that they “paid for” by paying 5% Canadian withholding tax

In connection with a s. 55(3)(a) distribution of a Canadian subsidiary (Canco3) to a sister chain of companies held by U.S. parents, Canco3 redeemed all but one of its common shares held by its immediate Canadian parent in consideration for a promissory note, thereby resulting in a step-up in its outside basis. The proposed transactions required that this additional basis be vapourized (namely, through a subsequent amalgamation which resulted in such note disappearing by operation of law).

Before getting to that vapourization, part of the mechanics for subsequently transferring Canco3 over to the sister chain of U.S. companies entailed the U.S. parent (XXXco1) of the Canadian corporation (Canco1) at the top of the stack above Canco3 transferring a portion of its Class A common shares of Canco1 to a U.S. subsidiary (USco3) of XXXco1, and then having Canco1 pay a stock dividend on its Class A common shares (now held on a pro rata basis by XXXco1 and USco3) consisting of a new class of Class B common shares, so that the existing Class A common shares were diluted down to a nominal value, and the value of the newly issued Class B common shares (now embedding most of the value in the stack) being subject to 5% withholding tax. CRA ruled that s. 15(1.1) would not apply to this stock dividend. However, focusing on the fact that the Class A common shares of Canco1 held by XXXco1 and USco3 still had significant basis notwithstanding that they now had nominal value, CRA ruled that s. 245(2) would apply to deny the tax benefit arising from such ACB to USco3 and XXXco1, and made its rulings conditional on XXXco1 and USco3 receiving a GAAR assessment under s. 152(1.11) to reduce their ACB to a nominal amount and waiving under s. 165(1.2) there right to object thereto.

Finally, s. 212.3(2) rulings were granted based on very extensive representations about arm’s transactions not occurring as part of or before the series.

Neal Armstrong. Summary of 2015 Ruling 2015-0604051R3 under s. 55(3)(a)(iii).