Group working capital management is problematic (p. 1164)
Multinational groups often optimize their cash management by pooling the excess cash balances of group members in a central treasury company, then redistributing this cash to group members as needed. Cash transfers are generally made by way of frequent short-term loans between the group members and the treasury centre. If a CRIC participates in cash-pooling arrangements with its foreign affiliates, any cash-pooling loans to these affiliates could be considered investments subject to the FA dumping rules.
Trade debts can also be problematic…[as well as] factoring arrangements.
Maturity date extension (p. 1159)
Finance has stated that the policy objective of this rule is to treat a term extension as a repayment and reinvestment of the original investment. However, if the original investment is actually repaid, a PUC reinstatement may be obtained by repatriating the investment proceeds to the parent. If paragraph 212.3(10)(e) applies, the same invested funds can trigger two PUC reductions. However, only one PUC reinstatement is available when these funds are ultimately repatriated to the parent. This rule can therefore result in double taxation.
PLOI elections impracticable where cash pooling (p. 1166)
The PLOI filing obligations may cause practical difficulties in the context of the ordinary-course financial arrangements described above. Making a separate election for each debt could be cumbersome, especially if balances fluctuate frequently and accounting systems do not link particular advances to particular repayments….
Deemed control acquisition on acquisition by indirect controller (p. 1154)
…For Example, one non-resident corporation ("NR 1") owns another non-resident corporation ("NR 2"), which owns a CRIC….
The CRIC makes an investment in a foreign affiliate. As part of the same series of transactions, the CRIC's shares are transferred up the ownership chain, from NR 2 to NR 1. When NR 1 acquires the CRIC shares, it becomes the CRIC's direct parent company, and paragraph 212.3(15)(a) no longer applies. The CRIC is controlled by NR 2 at the investment time, and becomes controlled by NR 1 as part of the series that includes the investment. The FA dumping rules could therefore apply twice to the same investment, once from the perspective of NR 1 and once from the perspective of NR 2.
Engagement of rules where investors pool through holding company (p. 1152)
Investments in Canadian corporations are often made by groups of unrelated non-resident investors, such as private equity funds. Before the introduction of the FA dumping rules, these groups often invested through foreign holding companies. Centralizing ownership in a single foreign entity simplified Canadian tax-compliance obligations. However, these holding structures may produce unfavourable results under the new rules.
Consider a situation in which five unrelated non-resident corporations invest in a CRIC through a foreign holding company. Each investor owns 20 percent of the shares of the holding company, which owns all of the CRIC's shares. Since the holding company controls the CRIC, the control test in subsection 212.3(1) is satisfied, even though none of the investors is in a position to control the CRIC.
The control test should produce different results if each non-resident investor holds its CRIC shares directly… .
Non-application to off-shore transactions (pp. 1160-1)
The FA dumping rules generally apply to transactions between a CRIC and a foreign affiliate, rather than transactions between foreign affiliates. Accordingly, there may be opportunities to refinance or redeploy invested funds at the affiliate level without altering the CRIC'S investment in the subject corporation….
Control by general partner (pp. 1152-3)
[P]aragraph 212.3(25)(b)…suggests that when applying the control test in subsection 212.3(1), CRIC shares that are held by a partnership should be allocated to the partners in proportion to their partnership interests. …
If a CRIC owned by a limited partnership is considered to be controlled by the general partner, the FA dumping rules could produce unexpected results. This can be illustrated by a limited partnership in which the general partner holds a 1 percent interest and the remaining 99 percent is held by the limited partners. The partnership holds all of the shares of a CRIC. If the general partner is a non-resident corporation, it could be argued that the control test in subsection 212.3(1) is satisfied, even if the limited partners are Canadian residents or unrelated non-residents. On the other hand, if the general partner is a Canadian corporation, it could be argued that the control test is not satisfied, even if the limited partners are related non-resident corporations.
CRIC held through partnership (p. 1158)
The QSC test may not apply as intended where a Canadian holding structure includes a partnership. The equity percentage concept considers shares that are indirectly held through other corporations, but does not consider shares held through partnerships. While subsection 212.3(25) provides look-through rules for partnerships, these deeming rules apply only for the purposes of section 212.3… .
…If this argument were accepted, a CRIC whose shares were held by a Canadian partnership would have no QSCs, even if the partnership interests were owned by related Canadian corporations….
Irreversibility of deemed dividend (p. 1155)
Unlike a PUC reduction, a deemed dividend cannot be reversed at a later date. In fact, withholding tax may be imposed again when the proceeds of the investment are repatriated from Canada, resulting in double taxation. For this reason, taxpayers making investments that are subject to the FA dumping rules will generally want to ensure that sufficient cross-border PUC is available to prevent a deemed dividend from arising.
PUC grind for unrelated shareholders (p. 1157)
The PUC reduction in paragraph 212.3(2)(b) applies where the PUC of CRIC shares is increased in relation to an investment. This PUC reduction can also apply to shares held by unrelated parties… . Consider the situation where a foreign controlled CRIC acquires the shares of a foreign corporation ("Forco") from unrelated vendors. The consideration paid to the vendors includes CRIC shares, under an earnout arrangement. The acquisition of the Forco shares is an investment by the CRIC. However, the value of the newly issued CRIC shares is not included in computing the deemed dividend under paragraph 212.3(2)(a). Instead, the PUC of these shares is reduced under paragraph 212.3(2)(b). Thus, the share consideration effectively transfers some of the tax burden from the non-resident parent to the vendors.
Insufficient PUC where deferred purchase price (p. 1156)
Timing issues can also occur if a CRIC purchases foreign affiliate shares and payment of all or a portion of the purchase price is deferred until after the acquisition owing to earnouts or price adjustment clauses. If the funds for the purchase are invested in the CRIC only as they are needed, there may be insufficient cross-border PUC at the investment time (the time the shares of the foreign affiliate are acquired by the CRIC).
PUC grind for unrelated shareholders (p. 1156)
The subsection 212.3(7) PUC reduction can effectively transfer part of the tax burden of the FA dumping rules from the parent to unrelated shareholders, even if those shareholders have no influence on the investment decision….