The safe harbour rule in the revised FAD rules for toeholds is coupled with a treacherous exclusion

The current foreign affiliate dumping rules can apply to an investment of a corporation resident in Canada (a CRIC) in a non-resident corporation even if control of the CRIC by a non-resident corporation is not acquired until subsequently, albeit, as part of the same series of transactions.  The August 16, 2013 draft amendments to the FAD rules now provide a safe harbour where, at the investment time, the non-resident did not have a substantial (25% or greater) equity stake in the CRIC.

This safe harbour is not available inter alia if, in connection with the investment, any person (other than the CRIC or a related person) "has in any material respect the risk of loss or opportunity for gain or profit in respect of a property that can reasonably be considered to relate to the investment."  This exclusion is very broad and might apply, for example, if there were a third-party investor in the foreign subsidiary.  See Example 1-E.  Given the breadth of the series of transactions concept (see Canada Trustco, Copthorne and Groupe Honco), loss of the safe harbour could be problematic.  See Example 1-D.

Neal Armstrong.  Discussion of draft s. 212.3(1)(b)(iii) under Safe Harbour Rule.