Sequencing the acquisition of control on a recapitalization can maximize tax attributes
A Canadian public company (Canco) will be recapitalized so that the provider of debtor-in-possession financing will end up holding 2/3 of the common shares having a fair market value equaling that of the DIP financing provided by it, and most of the balance of 1/3 of the common shares will be received by the holders of the U.S.-dollar bonds, who thereby will recognize a 90% loss in U.S.-dollar terms – or less than that in Canadian-dollar terms.
If the transactions are structured so that the acquisition of control by the DIP financier occurs first (or is deemed to occur first under s. 256(9)), Canco will realize the accrued FX loss on the bonds under s. 111(12). If the bonds are instead settled first, s. 80(2)(k) will effectively prevent realizing an FX loss on the 90% of the bonds that is forgiven, thereby resulting in fewer tax attributes recognized by Canco.
As background to the extension of the debt-parking rules by s. 39(2.01), many Canadian companies had substantial accrued FX gains on their U.S.-dollar debt, particularly debt originally issued in 2001 or 2002, and which matured in 2011 and 2012, when the Canadian dollar had appreciated to around parity.
Neal Armstrong. Summaries of Carrie Aiken and Johnson Tai, "Debt Restructuring Transactions – Issues, Strategies and Trends," 2016 CTF Annual Conference draft paper under s. 80(2)(k), s. 39(2.02) and s. 248(1) - disposition.