2025 Ruling 2024-1030121R3 - FA Inversion

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Is there a deemed dividend under 212.1? If so, what are the consequences?

Position: Yes, because there are deemed non-arm's length shareholders of the CRIC. Part XIII tax applies to the deemed dividend at a treaty-reduced rate. The net amount is added to exempt surplus.

Reasons: See below.

XXXXXXXXXX 									2024-103012

XXXXXXXXXX, 2025

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and discussions in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in this letter:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a ruling previously issued by the Directorate.

Our understanding of the Facts, Additional Information, Proposed Transactions and the Purpose of the Proposed Transactions is as follows:

DEFINITIONS

Unless otherwise stated:

i. all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C. 1977, c.945, as amended, (the “Regulations”);

ii. all terms and conditions used in this letter that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars, unless otherwise noted; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

In this letter, the following abbreviations, terms and expressions have the meanings specified:

“ACB” means “adjusted cost base”, as defined in section 54;

“Act 1” means the Canada Business Corporations Act, RSC 1985, c. C-44;

“Act 2” means the XXXXXXXXXX;

“Agreed Amount” means the amount agreed on by the transferor and transferee in respect of the transfer of an Eligible Property in a joint election filed pursuant to subsection 85(1);

“Arm’s Length” means arm’s length as determined in accordance with subsection 251(1);

“Canco 1” means XXXXXXXXXX, a corporation governed by Act 2 that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation;

“Canco 2” means XXXXXXXXXX, a corporation governed by Act 2 that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation;

“Canco 3” means XXXXXXXXXX, a corporation governed by Act 2 that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation;

“Canco 4” means XXXXXXXXXX, a corporation governed by Act 2 that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation;

“Cansub” means XXXXXXXXXX, a corporation governed by the XXXXXXXXXX, that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation;

“Cansub Shares” means the common shares of Cansub;

“Capital Property” has the meaning assigned by section 54;

“Controlled Foreign Affiliate” has the meaning assigned by subsection 95(1);

“Cost Amount” has the meaning assigned by subsection 248(1);

“Country 1” means Canada;

“Country 2” means XXXXXXXXXX;

“Country 2 Corporate Law” means the XXXXXXXXXX of Country 2, which became effective XXXXXXXXXX;

“Country 2 Special Law” means the XXXXXXXXXX;

“Country 2 Tax Law”| means the tax legislation of Country 2;

“Country 3” means the XXXXXXXXXX;

Country 3 Tax Law” means the XXXXXXXXXX, as amended;

“CRA” refers to the Canada Revenue Agency;

“Eligible Property” has the meaning assigned by subsection 85(1.1);

“Excluded Property” has the meaning assigned by subsection 95(1);

“Exempt Earnings” has the meaning assigned by subsection 5907(1) of the Regulations;

“Exempt Surplus” has the meaning assigned by subsection 5907(1) of the Regulations;

“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at Arm’s Length and without compulsion to act, expressed in terms of cash;

“Forco” means XXXXXXXXXX, a corporation resident in and governed by the laws of Country 2;

“Foreign Accrual Property Income” or “FAPI” has the meaning assigned by subsection 95(1);

“Foreign Affiliate” has the meaning assigned by subsection 95(1);

“Foreign Parentco” means XXXXXXXXXX, a corporation incorporated in Country 2, governed by the laws of Country 2 and resident in Country 2 for purposes of the Act, Country 2 Tax Law, and the Treaty;

“Foreign Parentco Options” means outstanding employment-related options to acquire Foreign Parentco Shares;

“Foreign Parentco Shares” means the common shares in the share capital of Foreign Parentco, which have an aggregate FMV estimated to be $XXXXXXXXXX;

“Group” means Foreign Parentco and its subsidiaries;

“Minority Canadian Shareholders” means the group of Canadian residents, each of whom owns less than XXXXXXXXXX% of the issued and outstanding Foreign Parentco Shares;

“New Canco” means the new Canadian-resident parent corporation to be formed as described in the Proposed Transactions;

“New Canco Options” means the options to acquire New Canco Shares;

“New Holdco” means Forco’s new Canadian-resident holding corporation to be formed as described in the Proposed Transactions;

“New Subsidiaries” means two new subsidiaries of Cansub, XXXXXXXXXX and XXXXXXXXXX;

“Non-Resident Minority Shareholders” means the group of non-residents, each of whom owns less than XXXXXXXXXX% of the issued and outstanding Foreign Parentco Shares;

“OFSI” means the Office of the Superintendent of XXXXXXXXXX for Canada;

“paid-up capital” (“PUC”) has the meaning assigned by subsection 248(1) and subsection 89(1);

“Paragraph” refers to a numbered paragraph in this letter;

“Proceeds of Disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the transactions described in the Proposed Transactions segment of this letter;

“Regulator” means the Office of the Superintendent of XXXXXXXXXX for Canada;

“Taxable Canadian Corporation” has the meaning assigned by subsection 248(1) and subsection 89(1);

“Taxable Canadian Property” has the meaning assigned by subsection 248(1);

“Taxation Year” has the meaning assigned by subsection 249(1);

“Treaty” means the Agreement Between Canada and XXXXXXXXXX for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and on Capital, signed on XXXXXXXXXX and amended by Protocol of XXXXXXXXXX; and

“Trust” means the XXXXXXXXXX, a trust resident in and governed by the laws of Country 3.

FACTS

Our understanding of the facts, as derived from the Request, is summarized as follows:

Foreign Parentco

1. Foreign Parentco is a corporation that was established under the laws of Country 2 on XXXXXXXXXX, and has a calendar year end.

2. Foreign Parentco is licensed under Country 2 Corporate Law.

3. Foreign Parentco is subject to the general corporate income tax rates applicable to all corporations resident in Country 2 and is not entitled to any special tax benefits under Country 2 Special Law.

4. Foreign Parentco has historically carried on the business of XXXXXXXXXX in Country 2, including XXXXXXXXXX. Foreign Parentco has earned income that is included in Exempt Earnings in respect of Canco 1, Canco 2, Canco 3 and Canco 4.

5. In XXXXXXXXXX, Foreign Parentco transferred its trust and investment activities to New Subsidiaries, each of which was established and is resident in Country 2.

6. There are XXXXXXXXXX foreign subsidiaries in the Group, which are irrelevant to this letter.

7. Foreign Parentco has a single class of shares issued and outstanding. Foreign Parentco has issued and outstanding Foreign Parentco Options.

8. The shareholders of Foreign Parentco owning more than XXXXXXXXXX% of all issued and outstanding Foreign Parentco Shares are as follows:

(a) Canco 1 (XXXXXXXXXX%);

(b) Canco 2 (XXXXXXXXXX%);

(c) Canco 3 (XXXXXXXXXX%);

(d) Canco 4 (XXXXXXXXXX%);

(e) Trust (XXXXXXXXXX%); and

(f) Forco (XXXXXXXXXX%).

9. The remaining Foreign Parentco Shares are held by Minority Canadian Shareholders and Non-Resident Minority Shareholders.

10. All shareholders of Foreign Parentco are unrelated persons for purposes of the Act.

11. All shareholders of Foreign Parentco beneficially own their Foreign Parentco Shares and hold their Foreign Parentco Shares as Capital Property.

Cansub

12. Cansub is a corporation resident in Country 1 and governed by the laws of Act 2.

13. Cansub’s Taxation Year end is XXXXXXXXXX.

14. Cansub and its four Canadian subsidiaries together provide XXXXXXXXXX, and XXXXXXXXXX in Country 1.

15. Cansub has a single class of issued and outstanding shares, the Cansub Shares, all of which are beneficially owned by Foreign Parentco.

16. The Taxpayer represents that the Cansub Shares held by Foreign Parentco do not constitute Taxable Canadian Property.

17. The Taxpayer represents that no Cansub Share is a “term preferred share” (as defined in subsection 248(1)) acquired in the ordinary course of business, a “guaranteed share” (as described in subsection 112(2)), a share where in respect of the share there is a “dividend rental arrangement” (as defined in subsection 248(1)), or a share in respect of which certain security arrangements described in subsection 112(2.3) have been made.

18. The FMV, ACB, and PUC of the Cansub Shares held by Foreign Parentco are currently estimated to be:

		FMV	$XXXXX
		ACB	$XXXXX
		PUC	$XXXXX

ADDITIONAL INFORMATION

19. At the end of the period referred to in paragraph 40(3.3)(b), New Canco will own the Cansub Shares;

PROPOSED TRANSACTIONS

Transfer of Foreign Parentco Shares from Forco to New Holdco

20. Forco will incorporate New Holdco under Act 2. New Holdco will be a corporation governed by Act 2 that will be, at all relevant times and for all purposes of the Act, a Taxable Canadian Corporation.

21. Forco will transfer all of its Foreign Parentco Shares to New Holdco in consideration for XXXXXXXXXX newly issued common shares of New Holdco. The newly issued common shares of New Holdco will have an aggregate FMV equal to the aggregate FMV of Forco’s Foreign Parentco Shares transferred.

Transfer of Foreign Parentco Common Shares to New Canco

22. New Canco will be formed under Act 1. New Canco will be a corporation that will be, at all relevant times and for all purposes of the Act, a Taxable Canadian Corporation.

23. Canco 1, Canco 2, Canco 3, and Canco 4 will each transfer all the Foreign Parentco Shares that they own to New Canco in consideration for common shares of New Canco, respectively, having a FMV equal to the FMV of their Foreign Parentco Shares.

24. Canco 1, Canco 2, Canco 3,and Canco 4 will each transfer their Foreign Parentco Shares to New Canco and each will elect jointly with New Canco under subsection 85(1) to an Agreed Amount equal to the lesser of FMV and the aggregate of (i) the ACB and (ii) an amount that would otherwise result in a capital gain and that will instead be deemed to be a dividend paid by Foreign Parentco as a result of an election described in Paragraph 25.

25. Canco 1, Canco 2, Canco 3 and Canco 4 will each file an election pursuant to subsection 93(1), such that the capital gain that would otherwise be realized by the corporation by virtue of its election filed under subsection 85(1) as described in Paragraph 24 will instead be deemed to be a dividend prescribed to have been paid by Foreign Parentco out of Foreign Parentco’s Exempt Surplus and will be deductible under paragraph 113(1)(a).

26. Simultaneously with the transfers in Paragraph 23, the Minority Canadian Shareholders will each transfer their Foreign Parentco Shares to New Canco in consideration for the issuance of common shares by New Canco having an aggregate FMV equal to the aggregate FMV of the Foreign Parentco Shares transferred.

27. The Minority Canadian Shareholders will each elect with New Canco under subsection 85(1) to transfer their Foreign Parentco Shares at an Agreed Amount equal to the shareholder’s ACB of their Foreign Parentco Shares.

28. Simultaneously with the transfers in Paragraph 23, New Holdco and the Non-Resident Shareholders will each transfer their Foreign Parentco Shares to New Canco in consideration for common shares of New Canco (i.e., issued to New Holdco and the Non-Resident Shareholders), having an aggregate FMV equal to the aggregate FMV of their Foreign Parentco Shares transferred.

29. Immediately after these transfers, all of the Foreign Parentco Shares will be owned by New Canco.

Exchange of Options

30. Foreign Parentco Options will be exchanged for equivalent value New Canco Options. Specifically, the New Canco Options will vest on the same terms as the Foreign Parentco Options and will have exercise prices that make them “in the money” by the same amount as the Foreign Parentco Options.

Distribution of Cansub Shares to New Canco

31. Immediately after the exchange of options described in Paragraph 30, Foreign Parentco will distribute its Cansub Shares as a dividend-in-kind to its sole shareholder, New Canco.

32. New Canco will include in its income under subsection 90(1) the FMV of the shares of Cansub received as the dividend-in-kind, and will claim the maximum deductions available under subsection 113(1).

Transfer of Foreign Parentco Shares to Cansub

33. Immediately after the dividend-in-kind described in Paragraph 31, New Canco will transfer all its Foreign Parentco Shares to Cansub in exchange for common shares of Cansub, having an aggregate FMV equal to the aggregate FMV of the Foreign Parentco Shares transferred.

34. New Canco will jointly elect with Cansub under subsection 85(1) to transfer its Foreign Parentco Common Shares at an Agreed Amount equal to the ACB to New Canco of its Foreign Parentco Common Shares at the time of the transfer.

PURPOSE OF THE PROPOSED TRANACTIONS

The shareholders and management of Foreign Parentco are contemplating the Proposed Transactions for XXXXXXXXXX, the reasons for which will be outlined in an application to the Regulator.

Cansub is currently a XXXXXXXXXX in Canada. The Proposed Transactions will enable Cansub to become a XXXXXXXXXX. In brief, other reasons for the Proposed Transactions are as follows:

(a) Cansub intends to continue to seek acquisitions in Canada, in addition to growing its operations. Canadian acquisition and merger targets are seeking to partner with Canadian enterprises rather than a Country 2 entity. In addition, experience has indicated that providers of growth equity prefer engaging in joint ventures with Canadian entities. Accordingly, the expectation is that transitioning to a Canadian-centric ownership structure will enable Cansub to attract and integrate new shareholders and diversify capital sources over time within the Canadian landscape.

(b) The proposed restructure should also help attract talent, as prospective employees in the Canadian market have shown a strong preference towards holding equity in a Canadian entity.

(c) Cansub’s operation depends on a network of correspondent XXXXXXXXXX. Counterparties favour institutions with direct Canadian parentage.

(d) This proposed reorganization will enhance the effectiveness of XXXXXXXXXX ability to supervise, examine and regulate the entire Cansub group.

The Proposed Transactions will also have an ancillary purpose or effect of improving the tax efficiency of the overall structure going forward because after the Proposed Transactions are completed, and any Canadian tax owing under Part XIII of the Act is paid in respect of the existing accrued surplus in Cansub, Part XIII of the Act will no longer apply to any future distributions of surplus derived from Cansub to Canadian resident shareholders. Canadian withholding tax will continue to apply to any distributions of future Canadian surplus to non-resident shareholder.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Additional Information, Proposed Transactions, and Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our Rulings are as follows:

A. According to paragraph 212.1(1.1)(a), at the time of the distribution of the Cansub Shares as a dividend-in-kind as described in Paragraph 31, Foreign Parentco will be deemed to receive a dividend from Cansub of an amount equal to the excess of the FMV of the distributed shares of Cansub at that moment over the PUC to Foreign Parent of the shares of Cansub distributed (“Deemed Dividend”).

B. Any Deemed Dividend will be a dividend paid by Cansub to Foreign Parentco for purposes of subsection 212(2) and Article X(2) of the Treaty.

C. Any Deemed Dividend will be excluded from the amount determined for the description of A of the definition of FAPI in subsection 95(1) by reason of paragraph (c) thereof.

D. For the purposes of the amount determined for the description of B of the definition of FAPI in subsection 95(1), any Deemed Dividend will be excluded from Foreign Parentco’s proceeds of disposition in computing its taxable capital gain from the disposition of its shares of Cansub by reason of paragraph (k) of the definition of “proceeds of disposition” in section 54.

E. Any capital loss otherwise arising from the disposition by Foreign Parentco of its shares of Cansub will be deemed by subsection 40(3.4) to be nil.

F. Any Deemed Dividend, less the applicable Canadian withholding tax, will be included in computing Foreign Parentco’s exempt surplus in respect of New Canco by virtue of subparagraph (v) of the description of A and subparagraph (iii) of the description of B of the definition of “exempt surplus” in subsection 5907(1) of the Regulations.

The above-noted Rulings are based on the Act and the Treaty in their present form and do not take into account any proposed amendments to the Act or the Treaty which, if enacted, could have an effect on the Rulings provided herein.

Caveats

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Additional Information, and Proposed Transactions, other than those specifically described in the Rulings given above and in particular, without limiting the generality of the foregoing, in respect of:

(a) The FMV of the Foreign Parentco Shares;

(b) The ownership of the Foreign Parentco Shares set out in Paragraphs 9 and 10;

(c) The ACB, PUC and FMV of the Cansub Shares;

(d) The ACB of the Foreign Parentco Shares to Canco 1, Canco 2, Canco 3, Canco 4 or the Minority Canadian Shareholders of Foreign Parentco;

(e) The exempt surplus balances of Foreign Parentco in respect of each of Canco 1, Canco 2, Canco 3, and Canco 4;

(f) Whether Foreign Parentco is a resident of Country 2 for purposes of the Treaty;

(g) Whether the Cansub Shares are Taxable Canadian Property;

(h) Whether any of the Cansub Shares is a “term preferred share” (as defined in subsection 248(1)) not acquired outside the ordinary course of business, a “guaranteed share” (as described in subsection 112(2)), a share where in respect of the share there is a “dividend rental arrangement” (as defined in subsection 248(1)), or a share in respect of which certain security arrangements described in subsection 112(2.3) have been made;

(i) Whether the current shareholders of Foreign Parentco hold their Foreign Parentco Shares as Capital Property;

(j) Whether Foreign Parentco beneficially owns the Cansub Shares; and

(k) The application of subsection 245(2).

The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R12 Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2022 and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before the date that is six months from the date of this letter.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Your truly,

XXXXXXXXXX
Section Manager
for Division Director
Division 30
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch