CRA rules on exiting a post-acquisition sandwich structure through using the s. 88(1)(d) bump and a continuance outside Canada

A non-resident partnership and its non-resident co-investors wished to acquire a Canadian public-company target (Target), whose only significant assets were non-resident subsidiaries (Subcos 1 and 2), and then eliminate this sandwich structure through the distribution of the Subcos to them.

Accordingly, they capitalized a Canadian Buyco (Parent), which acquired the shares of Target under a Plan of Arrangement for cash (or, interestingly, in the case of the only shareholder of Target who was a specified shareholder, for a combination of cash and shares of Parent). Parent then amalgamated with Target and the Subco shares were bumped under s. 88(1)(d) – but with the bump amount being reduced by any Subco surpluses described in Reg. 5905(5.4).

So far, this is essentially following the script for a buy, bump and run transaction. However, distributing the bumped Subco shares out of Amalco to the non-residents would have attracted a FIRPTA-style tax in the local tax jurisdictions for the Subcos. This local tax was avoided by continuing Amalco to a jurisdiction of convenience for the non-residents (perhaps, Delaware). The bump minimized the s. 128.1(4) tax on emigration. CRA ruled that the Parent/Amalco paid-up capital, which had been ground under s. 212.3(7)(c), was reinstated under s. 219.1(4) for purposes of computing the s. 219.1 emigration tax.

A further wrinkle in response to the local tax regime was that the amalgamation of Parent and Target was not a conventional amalgamation but one which was specified under the Plan of Arrangement to entail the continued existence of Target. The s. 88(1)(d) bump ruling effectively treated this as a good s. 87(11) amalgamation.

Neal Armstrong. Summaries of 2017 Ruling 2016-0643931R3 under Reg. 5905(5.4), s. 219.1(4) and s. 87(1).