29 August revised version of description of intermediary ("secondary") debt (pp. 1134-5)
[T]he revised proposal deletes a requirement in the original proposal that the secondary obligation has been entered into as part of the same series of transactions that includes the creation of the Canco debt. Moreover, the scope of Creditor Party debt that can constitute a secondary obligation is actually greater under the revised proposal compared with the original version, since under the revised version now a secondary obligation will exist if:
- recourse under the Creditor Party debt is limited to the Canco debt in whole or in part;
- the Canco debt was entered into on condition that the Creditor Party debt be entered into; or
- it is merely reasonable to conclude that if the Creditor Party debt did not exist, some or all of the Canco debt would not be outstanding or its terms and conditions would be different.
The last of these is especially troubling because there are many benign circumstances imaginable in which the presence of the Creditor Party debt might conceivably have affected the terms and conditions of the Canco debt in some way or another. As a result, very little nexus between two debts is required to create a secondary obligation, particularly with (1) the removal of the requirement in the original version that the Canco debt and the Creditor Party debt be part of the same series of transactions, and (2) the absence of any materiality threshold for the Creditor Party debt's effect on the terms and conditions of the Canco debt….
De minimis rule in s. 212(3.1)(d)
While Finance is to be commended for trying to accommodate typical multinational group borrowing arrangements, unfortunately the de minimis test as proposed is at best only a partial solution. Fundamentally, the 25 percent de minimis threshold is too low, and the conditions required for another debt owing by a Canco Party to be included in the denominator of the 25 percent test…are too strict:
- the creditor must be Creditor itself, as opposed to any Creditor Party;
- the security interests relating to the different debts must correspond quite closely for a Canco Party debt to be included in the denominator; and
- the different debts must arise under the agreement creating the Canco debt or an agreement that is connected to that agreement.
There is no obvious reason to require such a high degree of interconnectivity between the Canco debt and other Canco Party debts to include the latter in the denominator for purposes of the de minimis test, particularly given how much lower the degree of connectivity is between the Canco debt and the amount owing to Nonresident to create a Creditor Party debt and thereby trigger the rule….
Example of operation of PUC reinstatement rule (p. 1142)
[A] Canadian corporation (Cansub)...originally purchased all of the shares of Foreignco for $100 million. This investment resulted in the PUC of the shares of Canco (a QSC regarding Cansub) automatically being reduced by $100 million under the PUC offset rule. When Cansub later distributes 60 percent of the Foreignco shares to its shareholders and Canco in turn distributes the Foreignco shares it received (48 percent) to Nonresidentco as a return of capital, the value of the shares distributed by Canco is $57.6 million,32 100 percent of which relates to the original $100 million investment. Because Canco is distributing 48 percent of the originally acquired Foreignco shares, $48 million of the originally reduced PUC is available to be reinstated, grossed up to $60 million33 in this case to reflect that Canco bore the entire $100 million PUC reduction even though it only owns 80 percent of Cansub.
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