Crius

Structure

A TSX-listed mutual fund trust ("Trust) will hold, through a Canadian Holdco and a US Holdco, one third of the membership units, including a right (as managing member) to appoint the majority of directors, in a US LLC ("Crius Energy LLC" or the "Company"). The Company's business will be the sale of electricity and natural gas to retail and small commercial customers in the US.

Holders (the "pre-offering members") of the securities of two companies ("Regional Energy" a C-Corp., and "Public Power," an LLC - each having about 250,000 customers) will contribute a portion of those securities to the Company in consideration for the issuance to them of membership interests in the Company. The Trust will use the net offering proceeds to subscribe for shares of Cdn Holdco. Cdn Holdco will use such proceeds to subscribe for interest-bearing US-dollar debt (the "US Holdco Notes") and shares of US Holdco, a Delaware "C Corp." US Holdco will use such proceeds to subscribe for its 1/3 interest in the Company, which will use such proceeds to purchase (or cause the redemption of) the balance of the interests in Regional Energy and Public Power. Cdn Holdco will then distribute the US Holdco Notes to the Trust as a distribution of paid-up capital, and the Trust will settle an Ontario trust (the Commercial Trust) with the US Holdco Notes.

Following the closing of the offering, the Company will make a loan to a wholly-owned subsidiary of the Company prior to the merger of that subsidiary with Regional Energy.

Distributions

Monthly.

Management and Trustee

The Administrator (Crius Energy Administrator Inc.) will receive no fees for its services, and its shares will be voted at the direction of the Trust unitholders, as communicated to the Trustee (Computershare). Units under a restricted trust unit plan will vest as to 1/3 on each of the first, second and third annivesary of the date of grant.

Shareholders' agreement

There will be a "Company LLC Agreement" (effectively, a shareholders' agreement) containing various contingent buy-sell obligations and an obligation for the Company to make distributions. Commencing in 2019, the Company will be required to offer to purchase the membership units of the pre-offering members for a price based on five times the Company's consolidated cash flow, plus its consolidated cash, and minus its debt.

Canadian tax treatment

The Trust will not be subject to the SIFT tax, as its only assets will be its Canadian subsidiaries, which will be "portfolio investment entities" as defined in s. 122.1(1) - the Commercial Trust's and Cdn Holdco's only assets will be securities of US Holdco, which will not be a "subject entity." As it will not hold taxable Canadian property, the Trust's declaration of trust does not contain non-resident ownership restrictions.

Distributions of the net interest income of Commercial Trust (and any FX gains realized by it on the US Holdco Notes) will be included in the income of the Trust (before deducting the corresponding income distributions made to Trust unitholders). Return-of-capital payments received by the Trust from Cdn Holdco and Commercial Trust will not be included in its income (but will reduce the adjusted cost base of its investment).

Based on the activities of US Holdco and the Company, and as a consequences of the deductions under s. 113(1) for dividends paid out of exempt surplus, taxable surplus or pre-acquisition surplus, it is anticipated that "Cdn Holdco will not be subject to a material amount of Canadian federal income tax on the dividends received by it on the US Holdco Shares." To the extent that Cdn Holdco is entitiled to a s. 113 deduction with repect to dividends from US Holdco, it generally will be entitled to designate corresponding amounts of taxable dividends paid by it to the Trust as eligible dividends.

US tax treatment

Trust as partnership. The Trust (perhaps having regard to the earnings-stripping rules) will elect to be treated as a partnership for Code purposes (and will be eligible to do so as more than 90% of its gross income will be dividends).

Anti-inversion rules

However, the Trust will be treated as a foreign corporation for purposes of the anti-inversion rules in Code s. 7874. Under this provisions, it may not be subject to tax as a US domestic corporation (under the 80% ownership test) or subject to tax (the "Toll Charge") on an "inversion gain" (under the 60% ownership test) on the basis that it only acquired 1/3 of the interests in the Company (and, thus, only 1/3 of the Company's subsidiaries) - assuming that it did not acquire additional interests therein "as part of the same plan." However, the the Company's pre-offering members could be viewed as holding interests in the Trust if their distribution rights were substantially similar to the Trust distribution rights - in which event, the 80% ownership test under s. 7874 could be met. However, based on various differences in the prospective rights of Trust unitholders and pre-offering members, "the Trust has been advised that the pre-offering members of the Company should not be viewed as holding interests in the Trust for purposes of applying the 80%-ownership test or 60%-ownership test under section 7874."

Commercial Trust

The Commercial Trust will be treated as a corporation resident in Canada; and it is expected that it will be eligible for the benefits of the Canada-US Income Tax Convention (the "Treaty"), so that interest on the US Holdco Note will be exempt from withholding under the Treaty. "If financing transactions that include the US Holdco Notes were treated as part of a conduit financing arrangement, and the participation of the Commercial Trust ignored, interest paid by US Holdco to the Commercial Trust on the US Holdco Notes could be subject to a 30% federal withholding tax...."

US Holdco

US Holdco will be treated as a corporation for Code purposes. The shares of US Holdco are not expected to be US real property interests. US Holdco has been advised that the US Holdco Notes should be treated as debt for Code purposes, so that interest thereon should be deductible subject to the usual limitations, including Code s. 163(j). US Holdco's debt-to-equity ratio initially wil be in excess of 1.5 to 1 - however, note that the Commercial Trust may not be related to US Holdco for s. 163(j) purposes.

Regional Energy dividends

As US Holdco (which will be treated as a partnership for Code purposes) will own more than 20% of the Company, it should be deemed to own more than 20% of the shares of Regional Energy, and should be entitled to an 80% deduction with respect to dividends indirectly received from Regional Energy.

Section 246A provides that the dividends-received deduction for "debt-financed portfolio stock" is reduced to the extent that there is indebtedness directly attributable to investment in the portfolio stock. Although US Holdco is issuing the US Holdco Note, the Trust believes that is is more likely than not that section 246A should not apply in the present situation, as the proceeds of such note are not directly traceable to the investment in the stock of Regional Energy.

US Holdco is expected to make the election under Code s. 1059(c)(4) to have its basis in the shares of Regional Energy considered to be their much higher fair market value, for purposes of determining whether dividends from Regional Energy during the first two years of US Holdco's indirect investment therein are an extraordinary dividend (otherwise potentially giving rise to a negative basis gain).

Company

As a partnership, the Company is not subject to federal income tax. "It is expected that the allocations of such items [e.g., income] under the Company LLC Agreement should be deemed to have substantial effect," so that the amounts of income allocated to US Holdco will be respected. US Holdco will be the tax matters partner.

Regional Energy

Regional Energy will be treated as a corporation. The Regional Energy Notes will be treated as debt, and the interest thereon as deductible, for Code purposes. "This treatment is supported by certain interest rate and debt feasibility studies...."

Public Power

Public Power will not be regarded as an entity separated from the Company for Code purposes.