News of Note

Although the foreign affiliate dumping rules can be avoided, where a Canadian target public company holds most of its assets in foreign affiliates, by the foreign acquirer purchasing the shares of the target shareholders directly (see Effective Energy and Nordgold), cross-border acquisitions are still using Canadian Buycos.  This might make sense if the paid-up capital of the target is low, and there is real potential down the road for using the high stated capital of the Buyco to distribute sales proceeds of the underlying foreign affiliates under the PUC reinstatement rule.

A recent Buyco example is the IMIC plc proposed acquisition of Afferro using a BC subsidiary Buyco.  1/3 of the consideration includes convertible notes of IMIC, but with this being handled so that it does not interfere with the (cross-border) stated capital of shares issued by Buyco to IMIC.

Around 1/3 of the purchase price is being funded by a Seychelles subsidiary of Afferro making a loan to IMIC simultaneously with the acquisition of the Afferro shares by the Buyco.

Neal Armstrong.  Summary of Circular of Afferro Mining Inc. respecting its acquisition by International and Mining Infrastructure Corporation plc under Mergers & Acquisitions – Cross-Border Acquisitions - Inbound – Canadian Buyco.

CRA has released its 2012 ruling that the semi-annual interest on a plain vanilla convertible note was not participating debt interest, so that it was not subject to Part XIII tax when paid to an arm’s length non-resident holder.

Neal Armstrong.  Summary of 2012 Ruling 2011-0418721R3 under s. 212(3) – participating debt interest.

CRA found that credit application fees, which a financing company charged to prospective customers of an equipment vendor before it agreed to factor (on a secured basis) the receivables of the vendor arising on the sale, were taxable.  CRA’s reasoning is suspect.

Neal Armstrong.  Summary of 9 January 2012 Ruling Case Number 112274 under ETA – s. 123(1) – financial service.

The reinstatement rule in the foreign affiliate dumping rules generally provides for the restoration of paid-up capital of a class of shares of a corporation resident in Canada (or a qualifying substitute corporation) when it distributes the foreign affiliate shares (or proceeds thereof) the investment in which gave rise to the previous grind in that PUC or, under the draft FAD amendments released on August 16, 2013, it distributes the proceeds of debt investments which gave rise to such a grind.

This reinstatement rule only applies to the same class of CRIC or QSC shares to which there was a previous grind.  Accordingly, access to reinstatement will be lost if such shares are exchanged for shares of another class or for shares of a related corporation.  See Example 9-D.

This problem has not been fixed in the August 16, 2013 draft amendments.

Neal Armstrong.  Discussion of PUC reinstatement rules under s. 212.3(9).