CRA provides favourable rulings on the s. 212.1(4) exception and on the s. 15(1.5) demerger rules

The Taxpayer (a Canadian public corporation with a widely-dispersed shareholder base) and Pubco (a corporation, governed by the laws of (foreign) Country 2 and dealing at arm’s length with the Taxpayer) engaged in transactions to permit the Taxpayer, with funding provided by Pubco, to acquire Target (a public limited company governed by the laws of (foreign) Country 1) so that: the Taxpayer will retain Target’s Canadian, Country 1, and certain other international businesses; Pubco will acquire 100% of Target’s businesses in Country 3 and Country 4; and the Taxpayer and Pubco will initially jointly own Target’s business in Country 2 and Country 5 branch business and subsequently sell them to an arm’s length party.

Somewhat curiously, the Target structure was acquired by a Bidco owned exclusively by the Taxpayer but funded in significant part (perhaps as to ½) by Pubco. Shortly after the acquisition by Bidco, there was a transfer of most of the Target holdings to a “JV Co” initially owned by the Taxpayer but with Pubco being transferred ½ of the shares of JV Co in consideration for the Bidco cash funding it had earlier provided. Shortly thereafter, a foreign holding company (Country 1 Subco) for the Canadian corporate structure (Canco 1 and its Canadian subsidiary) that had been retained in the structure still "beneath" the Taxpayer transferred its shares of Canco 1 to the Taxpayer. The “Purposes” of the transactions stated inter alia that:

The purpose of structuring the funding of the Acquisition in a manner that Pubco would not acquire any equity interest in Bidco was to comply with various anti-trust and regulatory requirements. As a consequence, the conditions of subsection 212.1(4) were satisfied and Pubco did not control Country 1 Subco immediately before the disposition of the shares of Canco 1.

Partly in reliance on this statement, CRA ruled that s. 212.1(4) would not apply to this transfer of the Canco 1 shares such that s. 212.1(1.1)(a) would not deem a dividend to be paid by Canco 1 to Country 1 Subco.

Well beneath JV Co was a foreign opco with “keeper” and “non-keeper” businesses (as referred to above), whose assets were excluded property. CRA gave detailed and favourable rulings on the application of the s. 15(1.5) demerger rules to a division of that opco between a Demergerco 2 and Demergerco 1 (which was to be sold).

Neal Armstrong. Summaries of 2021 Ruling 2020-0875391R3 under s. 212.1(4) and s. 15(1.5).