CRA rules on the unwinding of a sandwich structure

Under a sandwich structure, a Canadian Opco (Cansub) was wholly-owned by Foreign Parentco, which in turn was held by both Canadian shareholders including four Cancos who were unrelated to each other and to whom it was a foreign affiliate, as well as by non-resident shareholders.

The structure was to be unwound essentially by having the shareholders transfer their Foreign Parentco shareholdings to a new Canadian holding company (New Canco). Such a transfer would occur, in the case of the Canadian shareholder transfers, under s. 85(1), with the Cancos electing at an amount that would access the exempt surplus of Foreign Parentco using the s. 93(1) election.

Foreign Parentco would pay a dividend-in-kind of its Cansub shares to New Canco; and New Canco would then transfer its Foreign Parentco shares to Cansub on an s. 85(1) rollover basis.

Rulings included:

• Pursuant to s. 212.1(1.1)(a), Foreign Parentco would be deemed to receive a dividend from Cansub on the payment of the dividend in kind equal to the excess of the FMV of the distributed Cansub shares over their paid-up capital (PUC).
• Such deemed dividend would be treated as a dividend for purposes of Art. X(2) of the applicable treaty.
• Such deemed dividend would be excluded from “A” of FAPI by virtue of the para. (c) exclusion for taxable dividends; and would also be excluded from Foreign Parentco’s proceeds of disposition for purposes of “B” of the FAPI definition by virtue of the exclusion in para. (k) of the proceeds of disposition definition for taxable dividends.
• Such deemed dividend, less the applicable Canadian withholding tax, would be included in computing Foreign Parentco’s exempt surplus in respect of New Canco by virtue of subpara. (v) of A, and subpara. (iii) of B, of the definition of “exempt surplus” in Reg. 5907(1).

Neal Armstrong. Summary of 2025 Ruling 2024-1030121R3 under s. 212.1(1.1)(a).