Vistra/Crius -- summary under REIT/LP sales proceeds distribution
Overview
Crius Energy Trust (the “Trust”) holds its US electricity and natural gas distribution business indirectly through a US corporate subsidiary (“US Holdco”). The shares of US Holdco are held through two Canadian corporate subsidiaries of the Trust; and debt owing by US Holdco (bearing interest at rates up to 11%) is held by a Canadian-resident subsidiary trust of the Trust. These Canadian subsidiaries are intended to be portfolio investment entities.
The equivalent of a sale of the Trust for cash will be accomplished by the shares of the two Canadian subsidiaries and the debt being sold to the purchaser (a subsidiary of Vistra Energy Corp.) for cash, with the cash then being used by the Trust to redeem its units, with the realized capital gains being distributed on the redemption. This produces an efficient result for the resident unit holders, as the distributed capital gains should not reduce the ACB of their units.
For US purposes, the Trust is treated as a partnership. The gain recognized on the sale of the subsidiaries increases the basis of the US unitholders in the units of the Trust, thereby helping to alleviate from double taxation on the units’ redemption.
The Trust
An Ontario unit trust and mutual fund trust whose units are TSX-listed. The Crius Group provides electricity and natural gas products to residential and commercial customers in the U.S. There are 56.6M Units outstanding.
Cdn Holdco
An OBCA corporation, wholly owned by the Trust, and holding 100% of the common shares of US Holdco. The articles of Cdn Holdco prohibit it from acquiring or holding any non-portfolio property or property that would cause Cdn Holdco to cease to qualify as a “portfolio investment entity.”
New Cdn Holdco
A B.C. unlimited liability company, wholly owned by the Trust, and holding 100% of the preferred shares of US Holdco.
Commercial Trust
An Ontario unit trust all of whose units are held by the Trust. Its sole function is to own debt of the Trust’s subsidiaries including the US Holdco Notes described below.
US Holdco
A Delaware corporation holding the Crius business through subsidiary LLCs, LPs or corporations.
US Holdco Notes
Pursuant to a Loan Agreement, Cdn Holdco, as the initial lender, and the Commercial Trust, as successor lender, agreed to make certain term loans to US Holdco, to be evidenced by one or more promissory notes to be issued by US Holdco to the lender (the “US Holdco Notes”). The US Holdco Notes consist of US Holdco Note A (US$60.4M), US Holdco Note B (US$46.6), US Holdco Note C (US$87.7M) and US Holdco Note D (US$30.8M), bearing interest at 11.0%, 9.3%, 8.2% and 8.2%, respectively.
Sale Transaction
Under the Transactions, (i) the Purchaser will purchase the (a) the US Holdco Notes, (b) the Cdn Holdco Shares, and (c) the New Cdn Holdco Shares (the “Purchased Securities”) from the Trust and the Commercial Trust in the “Sale Transaction” described below, in consideration for a cash payment equal to the Total Consideration (being C$8.80 multiplied by the aggregate number of Units, deferred trust units and phantom trust units, and (ii) following the closing of the Sale Transaction, the Trust will, pursuant to the Winding-up Transaction (described below), redeem all of its issued and outstanding Units from Unitholders in consideration for the payment of the Per Unit Consideration of C$8.80 per Unit to Unitholders (other than Dissenting Unitholders) in cash, less any applicable withholdings.
Winding-up Transactions
The Winding-up Transaction steps include (i) the cancellation of the deferred trust units for cash consideration, (ii) the redemption by the Commercial Trust of its outstanding trust units (held by the Trust) through the distributions of the sales proceeds for the US Holdco Notes, and (iii) the redemption by the Trust of all of its outstanding Units for C$8.80 per Unit (less any applicable withholding taxes).
Efficient form of transactions
The structure of the Transactions is intended to minimize certain tax inefficiencies that would otherwise have resulted from either a sale of Units or a sale of the US Holdco Shares, and thus maximize the Per Unit Consideration receivable by Unitholders.
Canadian tax considerations
No double taxation to residents holding on capital account
Any net capital gain realized by the Trust under the Sale Transaction (including any net taxable capital gain realized by the Commercial Trust on the sale of the US Holdco Notes that is allocated to the Trust) will be allocated by the Trust to Unitholders whose Units are redeemed pursuant to the Winding-up Transaction. Unitholders resident in Canada will be required to include in their income the taxable portion (50%) of any such capital gain allocated to them; however, they will be entitled to deduct, in determining the proceeds of disposition from the redemption of their Units, all (100%) of such capital gain (i.e., both the taxable and non-taxable portion) allocated to them by the Trust. As a result, no double taxation should result from any capital gain being allocated by the Trust to Unitholders in connection with the redemption of their Units. A distribution of the Trust's income (other than amounts designated by the Trust as taxable capital gains) to a Non-Resident Holder will be subject to Part XIII tax.
Non-residents
Subject to the following paragraph, a Non-Resident Holder will not be subject to Canadian tax in respect of the disposition of the Non-Resident Holder's Units pursuant to the Unit Redemption.
A Non-Resident Holder will be subject to Part XIII withholding to the extent of any income of the Trust (other than amounts designated by the Trust as taxable capital gains) allocated to the Non-Resident Holder in respect of the redemption of the Non-Resident Holder's Units, as discussed above.
US tax considerations
Gain Realized on sale allocated to US unitholders
The Trust should recognize capital gain or loss on (i) the sale of its Cdn Holdco Shares and New Cdn Holdco Shares in the Sale Transaction and (ii) the redemption of its trust units in the Commercial Trust (the "CECT Trust Units") under the Winding-up Transaction (the "CECT Trust Units Redemption") in an amount equal to the difference between the proceeds received by the Trust from the sale of the Cdn Holdco Shares and New Cdn Holdco Shares (including any assumed liabilities, to the extent properly taken into account for U.S. federal income tax purposes) and the CECT Trust Units Redemption and the Trust's adjusted tax basis in those shares and the CECT Trust Units, as applicable. Because the Trust is treated as a partnership for U.S. tax purposes, to the extent the Sale Transaction and CECT Trust Units Redemption results in gain, the Trust itself should not be subject to U.S. federal income tax on such gain, but rather U.S. Holders should be allocated their share of such gain for U.S. federal income tax purposes. Such gain should qualify as long-term capital gain which is generally eligible for a preferential 20% maximum tax rate (plus a 3.8% net investment income tax). As a consequence of this income allocation, each U.S. Holder's adjusted tax basis in its Units will be increased by the amount of such U.S. Holder's income allocation.
Winding-Up Transaction
As part of the Winding-Up Transaction, the Trust will redeem the Units held by each Unitholder in exchange for cash paid in Canadian dollars. A U.S. Holder will recognize gain or loss upon such redemption equal to the difference between the Per Unit Consideration receivable on the redemption of its Units (determined utilizing the US$/C$ spot rate on the date of the redemption) and the U.S Holder's adjusted tax basis in its Units (as described below). Any such loss will be characterized as a capital loss and will be subject to certain limitations. Any such gain realized will be characterized as a short-term capital gain for Units held for 12 months or less, which would be subject to U.S. federal tax at ordinary income tax rates (with a maximum rate of 37%) and long-term capital gain for Units held for more than 12 months, which would be subject to U.S. federal income tax at a maximum 20% tax rate. Such gain may also be subject to an additional 3.8% net investment income tax. Any gain or loss will generally be U.S. source. At the time of the redemption of the issued and outstanding Units, a U.S. Holder generally should have an adjusted tax basis in each of its Units equal to (i) its U.S. dollar cost for such Unit, increased by (ii) the income or gain previously allocated to that Unit by the Trust, including any gain from the Sale Transaction and CECT Trust Units Redemption, but decreased by (iii) deductions and losses allocated to that Unit by the Trust, including any loss from the Sale Transaction, and further decreased by (iv) previous distributions made by the Trust to the U.S. Holder in respect of that Unit.