CRA ruling recharacterizes a levered buyout of a public corporation as a s. 84(2) distribution
A public company (Pubco), with a single class of shares outstanding, had received cash proceeds of the sale of one of its business segments. Rather than using s. 84(2), or ss. 84(4.1)(a) and (b), to distribute the proceeds pro rata to its shareholders, it was proposed that the larger corporate shareholders of Pubco, and the key employees, roll their Pubco shares into a Newco, with Newco using proceeds of a daylight loan to acquire all the remaining Pubco shares for cash and then amalgamating with Pubco - so that Amalco could use the cash proceeds referred to above to repay the daylight loan.
CRA ruled based on “Previous positions and jurisprudence” that notwithstanding this form of a levered buyout, s. 84(2) would apply, so that “each holder of Public Shares having such shares purchased by Newco will be deemed to have received, a dividend to the extent that the amount paid by Newco to each such holder on the Public Share Sale exceeds the amount of PUC attributable to such holder’s shares.”
Neal Armstrong. Summary of 2019 Ruling 2019-0809581R3 under s. 84(2).