Crius Trust sale is to be accomplished as an asset sale followed by a unit redemption

Crius Energy Trust (the “Trust”) holds its US electricity and natural gas distribution business indirectly through a US corporate subsidiary (“US Holdco”). The shares of US Holdco are held through two Canadian corporate subsidiaries of the Trust; and debt owing by US Holdco (bearing interest at rates up to 11%) is held by a Canadian-resident subsidiary trust of the Trust. These Canadian subsidiaries are intended to be portfolio investment entities.

The equivalent of a sale of the Trust for cash will be accomplished by the shares of the two Canadian subsidiaries and the debt being sold to the purchaser (a subsidiary of Vistra Energy Corp.) for cash, with the cash then being used by the Trust to redeem its units, with the realized capital gains being distributed on the redemption. This produces an efficient result for the resident unitholders, as the distributed capital gains should not reduce the ACB of their units.

The transactions are expected to close in the second quarter of 2019. If the transactions instead occurred in a taxation year of the Trust beginning after the 2019 budget date, draft s. 132(5.3) effectively would impose Trust-level tax on an indeterminate portion of the capital gain on the sale that was distributed and allocated to the redeemed unitholders. Accordingly, it would be necessary to structure the sale differently – e.g., a sale of the subsidiaries for both cash and a note of the purchaser, distributing the resulting capital gain in cash to the unitholders, and then having the unitholders sell their Trust units to the purchaser for cash.

For US purposes, the Trust is treated as a partnership. The gain recognized on the sale of the subsidiaries increases the basis of the US unitholders in the units of the Trust, thereby helping to alleviate from double taxation on the units’ redemption.

Neal Armstrong. Summary of Crius Energy Trust Circular under Spin-Offs & Distributions – REIT sales proceeds distribution.