CRA confirms the flexibility of the cross-border PUC-restoration rule in s. 212.3(9)(b)(ii)
A majority of the common shares of a Canadian public corporation (Pubco) were held by foreign holdcos (ultimately controlled by Foreign ‘Parent) directly or through “Canholdcos.” Most of Pubco’s assets were investments in foreign affiliates, and the paid-up capital of the various “cross-border classes” of shares (being the Pubco shares held directly by a foreign holdco and the shares held by the foreign holdcos in the Canholdcos) had been previously reduced under s. 212.3(7) as a result of Pubco investing in an offshore Finco which, in turn, financed a large development project of an indirect offshore subsidiary of Pubco (Opco).
Under the ruled-upon transactions, Opco first borrowed U.S. dollars to repay some of the Finco loans (directly and by way of repaying loans from Forco 2). Finco, in turn, inter alia paid dividends on its common shares and “distributions” on its mandatorily redeemable preferred shares to Pubco (the “Finco Distributions”). Pubco, in turn, inter alia lent those funds to a Canadian subsidiary (Canco 1) of one of the foreign holdcos, with Canco 1 subscribing for preferred shares of a Canadian subsidiary (Canco 2) of a second foreign holdcos, with that second Canadian subsidiary effecting a return of capital to its foreign holdco on a class of shares which had not been subject to a s. 212.3(7) grind because this structure was off to the side rather than being “above” Pubco.
CRA ruled that the Finco Distributions were receipts of property described in s. (B) of variable A of the s. 212.3(9)(b)(ii) formula, i.e., they restored the cross-border PUC held in Pubco and in the relevant Canholdcos on the basis that Pubco had received equivalent property as dividends on the shares of the subject corporation (Finco). Thus, it did not matter that:
- The Finco Distributions were sourced from a borrowing beneath the subject corporation rather than being a distribution of sales proceeds or profits;
- Insofar as the Canholdcos were concerned, the Finco Distributions received by Pubco were not distributed up to them but, instead, were distributed in a “sideways” manner; and
- The s. 212.3(9) bump to the PUC of the cross-border classes (in Pubco and the Canholdcos) was banked rather than utilized. (This may have occurred because the transactions under consideration were completed before the rulings were ultimately given.)
That was the easy part. Pubco had previously elected under s. 261(3) for the U.S. dollar to be its elected functional currency. CRA indicated that the PUC of the cross-border classes for both Pubco and the Canholdcos should be computed at the same time in U.S. dollars (on the basis that the entries to the PUC accounts for the cross-border classes held in the Canholdcos were relevant to the Canadian tax results of Pubco) and also in Canadian dollars (see also 2016-0642111C6). CRA then ruled that the full restoration of the cross-border PUC was dependent on the total amount of the Finco Distributions being no less than the previous net grinds to the PUC of the cross-border classes of shares computed both in Canadian and U.S. dollars.