Continental Gold/CGL Buritica -- summary under New Canadian Holdco

Overview

The common shareholders of Continental Gold (to be renamed CGL Buritica), which is a Bermuda corporation with central management and control in Canada, will transfer all their shares to Continental Holdco (a newly incorporated Ontario corporation) under a Bermujda Scheme of Arrangement for the same number of common shares of Continental Holdco. Taxable resident shareholders can elect under s. 85 to achieve rollover treatment. The transaction fits under the description of a "B" (share-for-share) reorg or a Code s. 351 contribution. However, U.S. shareholders who acquired their shares before 2014 (when Continental Gold ceased to be a PFIC) generally will not be eligible for tax-free exchange treatment unless they made a timely election to hold their Continental Gold shares on a mark-to-market basis or made a "purging election" to recognize gain (and pay U.S. tax) on a deemed sale of their shares at the end of 2013.

Continental Gold

A TSX-listed Bermuda company with a branch office and advanced gold project in Columbia.

Continental Holdco

A wholly-owned subsidiary of Continental Gold, named Continental Gold Inc. It was incorporated on April 27, 2015 under the OBCA in order to participate in the Scheme, and has no assets.

Scheme of Arrangement

1. Each Common Share of Continental Gold will be exchanged for one common share (a "Replacement Share") of Continental Holdco;
2. Continental Gold options will be exchanged for a replacement options issued by Continental Holdco entitling the holder to purchase the same number of Holdco Shares for the same exercise price;
3. Continental Gold will surrender to Continental Holdco for cancellation the initial Holdco common shares that were issued to Continental Gold upon incorporation of Continental Holdco;
4. The name of Continental Gold will be changed from "Continental Gold Limited" to "CGL Buritica Limited."

Canadian tax consequences

Residence. Although the Company is a Bermuda company, the Company has taken the position that it is resident in Canada for purposes of the Tax Act because, under the common law test of corporate residency, its central management and control are located in Canada.

S.85 rollover

An "Eligible Holder" (a resident, a non-resident who is not exempt from Canadian tax in respect of any gain realized on a disposition of the Continental Gold Common Shares or a partnership having such a member) may elect with Continental Holdco under s. 85 respecting the transfer in 1 above by providing completed tax election forms to Continental Holdco within 90 days following the Effective Date and return them to the Eligible Holder within 90 days of receipt thereof. Otherwise, the exchange in 1 occurs on a taxable basis.

U.S. tax consequences

B reorg or s. 351 contribution. If all Common Shares are exchanged for Replacement Shares and no other consideration is paid for the Common Shares and certain other requirements are met, the Scheme would be a transaction described in Code section 368(a)(1)(B) (a "B reorganization"), Code section 351 (a "351 contribution"), or both. Although a B reorganization or a 351 contribution is generally a tax-free exchange for U.S. tax purposes, there are two important exceptions: exchanges of shares in a passive foreign investment company (a "PFIC"); and exchanges of shares by U.S. persons that would own 5% or more of Continental Holdco following the exchange.

PFIC exception and safe harbours

Because Continental was treated as a PFIC in 2013 and earlier taxable years, any U.S. Holder who participates in the Scheme and who held Common Shares while Continental was a PFIC may be subject to U.S. tax, under the PFIC rules, on the Scheme. This is because the tax-free exchange treatment that would otherwise be available under a B reorganization or 351 exchange is generally not eligible upon exchange of PFIC shares due to the "once a PFIC, always a PFIC" rule of Code s. 1298(b)(1). Under this rule, a PFIC shareholder continues to be subject to the PFIC rules even when Continental Gold ceases to meet the PFIC income test or asset test, unless the shareholder has made one of three elections. The first election is to treat the PFIC as a Qualified Electing Fund ("QEF") effective for the first taxable year in which the shareholder holds the PFIC shares. Because the Company has not been providing the information needed to make QEF elections, this exception likely is not available. The second exception is if a shareholder has made a mark-to-market election, in which case there is authority for the "once a PFIC, always a PFIC rule" not to apply to the Scheme as long as the mark-to-market election continues to apply to PFIC. Finally, if a foreign corporation ceases to meet the definition of a PFIC, the shareholder can make a PFIC "purging" election in which the shareholder recognizes gain on a deemed sale of the shares as of the last day of the last taxable year for which the corporation was a PFIC and recognizes the resulting U.S. tax consequences of that election.

Consequences if no PFIC safe harbour

Unless one of these three elections have been made by the shareholder, a shareholder that held Common Shares while it was a PFIC will be treated as exchanging shares in a PFIC for Replacement Shares. In such case, if Continental Holdco is not also a PFIC, then the U.S. Holder will not be eligible for tax-free exchange treatment even if the Scheme otherwise qualifies as a B reorganization or a 351 transfer. Instead, the U.S. Holder is generally subject to the same US tax treatment as if it disposed of the Common Shares subject to the PFIC rules.

5% shareholder exception

Even if the Scheme qualifies as a B reorganization or 351 transfer, a U.S. Holder that would own 5% or more of Continental Holdco following the Scheme must recognize gain (although not loss) on the exchange of Common Shares unless the U.S. Holder enters into a five-year gain recognition agreement with respect to the transferred stock.