Tahoe/Rio Alto -- summary under Shares for Shares and Nominal Cash

Overview

Under an Alberta Plan of Arrangement there will be an exchange of all the Rio Alto common shares (other than of dissenters) for Tahoe common shares (together with nominal cash so as to require a joint s. 85(1) election to achieve Canadian rollover treatment), with Tahoe then dropping its Rio Alto shares into a wholly-owned subsidiary ("Subco") and causing their amalgamation in a conventional amalgamation. The share exchange, drop-down and amalgamation are intended to qualify as a Code s. 368(a) reorganization – so that tax deferral (except re the nominal cash) generally will be available for U.S. shareholders who acquired their Rio Alto shares after May 2011, as Rio Alto is believed not to have been a PFIC since then. As the U.S. does not have a Treaty with Peru, U.S. shareholders (unlike Canadian-resident shareholders) will not be exempt from Peruvian tax under the Peruvian equivalent of the taxable Canadian property/FIRPTA rules, and typically will not be entitled to a U.S. foreign tax credit as any gain on their Rio Alto shares would be treated as U.S.-source income.

Rio Alto

An Alberta company listed on the TSX, NYSE, Frankfurt and Lima ("BVL") exchanges with 334M common shares outstanding, of which 2.96% are held by directors and officers and 17.74% by Van Eck Associates accounts. Pervuvian subsidiaries hold a gold oxide mine and a gold-silver project. Rio Alto acquired Shahuindo Gold Limited, formerly Sulliden Gold Corporation ("SGC") on August 5, 2014.

Tahoe

A TSX- and NYSE-listed Canadian-resident corporation that is headquartered in Reno, Nevada and which indirectly produces silver in Guatemala. 39% of its common shares are owned by Goldcorp. Post-merger it will have a market cap of over $3.2B. It will seek a BVL listing. Six of the existing Tahoe members and three Rio Alto nominees will be on its board.

Subco

1860927 Alberta Ltd., a wholly-owned sub of Tahoe.

Plan of Arrangement

The first steps in the Plan of Arrangement will be the cancellation of the Rio Alto rights plan and the transfer of each Rio Alto common share held by a dissenting shareholder to Tahoe, with Tahoe required to pay the fair value therefor. Thereafter:

1. Each outstanding Rio Alto common share will be transferred to Tahoe in exchange for 0.227 of a Tahoe common share and Cdn.$0.001 in cash; and Rio Alto Options (including SGC replacement options) will be exchanged for Tahoe options – provided that in the event that the in-the-money value of such Tahoe options exceeds that of the Rio Alto options, the number of Tahoe common shares which may be acquired on exercise will be reduced.
2. Each Rio Alto common share will be transferred by Tahoe to Subco in consideration for one Subco common share having a stated capital equal to the paid-up capital of the transferred shares (and with the stated capital of the transferred shares then being reduced to $1.00, and Rio Alto filing an election with the CRA to cease to be a public corporation).
3. Rio Alto and Subco will merge to form Amalco (with the same effect as if they had amalgamated under the OBCA except that Subco will survive and Rio Alto will cease to exist), and with the Rio Alto common shares thereby being cancelled and Tahoe receiving one Amalco common share on the amalgamation in exchange for each Subco common share.

Canadian tax consequences

Share exchange. In the absence of an s. 85 election, the exchange of Rio Alto common shares for Tahoe common shares will occur on a non-rollover basis. The deadline for providing an s. 85(1) election form to Tahoe by "Eligible Shareholders" (generally non-exempt residents or partnerships with such a member, and non-residents whose shares are taxable Canadian property) is 60 days after the Effective Date of the Plan of Arrangement. Capital gains/loss treatment will apply to dissenters except re interest.

Non-residents

Standard (non-informative) taxable Canadian property disclosure for non-residents.

U.S. tax consequences

Structuring of merger. The exchange of Rio Alto common shares for Tahoe common shares and cash, the contribution of the Rio Alto shares to Subco and the amalgamation should be treated as a single integrated transaction so that, provided the substantially-all test is satisfied, it should qualify as a reorganization under Code s. 368(a). The substantially-all test, which includes reference to any cash or other assets directly or indirectly transferred by Rio Alto to any Rio Alto shareholder and which for IRS ruling purposes, requires that at least 70% of the gross assets and 90% of the net assets of Rio Alto immediately before the acquisition are acquired by Tahoe, is believed by Tahoe and Rio Alto to be satisfied. The arrangement should qualify as a tax-deferred reorganization under Code s. 368(a) – so that if the PFIC rules do not apply, a U.S. holder should not recognize gain (except based on the amount of nominal cash received).

PFIC rules

Rio Alto believes that it was a PFIC for its tax years ended prior to June 1, 2011, but not thereafter, and Tahoe believes that it is not a PFIC for its current taxable year. On this basis and under proposed retroactive Regulations, a Rio Alto shareholder who has not made a timely and valid QEF election or mark-to-market election with respect to its Rio Alto common shares and who owned Rio Alto shares while it was a PFIC will be required to recognize gain (but not loss) as a result of the Arrangement, regardless of whether it qualifies as a reorganization, based on the fair market of the Tahoe shares (and nominal cash) received, with such gain being subject to tax and interest charges under the PFIC excess distribution regime. However, in the absence of the proposed Regulation becoming final, it is unclear whether the IRS would treat the transaction as being taxable under this or another basis. There can be no assurance that Rio Alto will provide U.S. Holders with the required information (i.e., PFIC annual information statements) in order for QEF elections to be available.

FTC re Peruvian tax

As the U.S. and Peru have not entered into a Treaty, gain recognized by a U.S. Holder on the transfer of Rio Alto Shares pursuant to the Arrangement will be characterized as U.S. source income for purposes of the foreign tax credit rules under the Code. Accordingly, a U.S. Holder generally would not be able to claim a credit for any Peruvian tax paid or withheld with respect to the Arrangement unless, depending on the circumstances, such U.S. Holder has excess foreign tax credit limitation due to other foreign source income that is subject to a low or zero rate of foreign tax.

Peruvian gains tax

Gain under domestic law. Under Peruvian domestic law, the transfer of Rio Alto shares under the Arrangement will qualify as an "indirect transfer" of the shares of a Peruvian company as the fair market value of the shares of the Peruvian subsidiaries represent 50% or more of the fair market value of the Rio Alto Shares, and at least 10% of the Rio Alto Shares will be transferred. However, "in the case of those Rio Alto Shareholders which held Rio Alto Shares on February 15, 2011, they will have the right to "step-up" the cost basis of said shares considering their quotation value at the relevant Stock Exchange on that date."

Canadian Treaty exemption

Under Canada-Peru Tax Convention, Rio Alto Shareholders who are resident or deemed resident in Canada for the purpose of that Treaty will be exempt from Peruvian tax on any gain arising from the exchange.

Tax to U.S. residents

However, Peru does not have a Treaty with the U.S. Non-Treaty "Rio Alto Shareholders will be required to pay a 30% income tax on the capital gain unless the shares of Rio Alto are recorded on the Securities Market Public Registry (Registro Publico del Mercado de Valores) of the Peruvian Superintendence of the Securities Market and the transaction is perfected through the BVL, in which case the rate of tax will be reduced to 5%."