Univar – Federal Court of Appeal finds that using old s. 212.1(4) to extract surplus from a non-resident target’s Canadian sub was not abusive

A non-resident's acquisition of the shares of a Netherlands public company (Univar NV) indirectly holding the shares of a valuable Canadian sub (Univar Canada) with nominal paid-up capital was structured to effectively step-up the PUC of the shares of Univar Canada to fair market value by using the pre-2016 version of s. 212.1(4). This was accomplished by setting up a sandwich structure immediately after the acquisition, under which a new Canadian ULC, capitalized with notes and high-PUC shares, held the shares of a U.S. corporation holding Univar Canada – so that such U.S. corporation could distribute the shares of Univar Canada (on a Treaty-exempt basis) to its controlling Canadian purchaser (the ULC) without technically being affected by the s. 212.1(1) deemed dividend rule.

Webb JA noted that the purpose of s. 212.1 “was not to prevent the removal from Canada, by an arm’s length purchaser of a Canadian corporation, of any surplus that such Canadian corporation had accumulated prior to the acquisition of control” since a non-resident could use a Canadian Buyco with full outside basis and paid-up capital to acquire an arm’s-length Canadian target and then extract the target’s surplus. Accordingly, the above transactions were not an abuse of s. 212.1:

The shares of Univar NV were acquired in an arm’s length transaction and, at the time that such shares were acquired, the avoidance transaction was contemplated. Therefore, the avoidance transaction would be part of the series of transactions by which control of Univar Canada was indirectly acquired in an arm’s length transaction. Whether the surplus of the Canadian corporation is removed by completing the alternative transactions described … above or by completing the transactions that were done in this case, the same surplus is removed from Canada.

Neal Armstrong. Summary of Univar Holdco Canada ULC v. Canada, 2017 FCA 207 under s. 212.1(4) and s. 245(4).