CRA considers that use of s. 212.1(4) to step-up cross border PUC (or debt) is abusive

A non-resident corporation (NR Target) holding shares of a Canadian sub (CanOpco) with nominal paid-up capital will be prohibited by s. 212.1 from stepping up the cross-border PUC by transferring its CanOpco shares to a new Canadian holding company (CanAc) in consideration for CanAc shares with a high stated capital. However, leaving the general anti-avoidance rule aside, a PUC step-up can be accomplished where, in connection with a purchase of NR Target by an arm’s length buyer (Foreign Parent), Foreign Parent capitalizes its CanAc with the purchase price, NR Target (post-acquisition) sells CanOpco to CanAc for a note (which avoids s. 212.1 because CanAc still controls NR Target, thereby engaging the s. 212.1(4) safe harbour) and NR Target is then distributed to Foreign Parent – so that CanAc now owes the note (which could now be converted into high-PUC shares) "upstairs." If you add the smoking gun that, in fact, CanOpco distributed its surplus to its Canadian parent (CanAc) for distribution offshore under the note, CRA considers that GAAR should be applied. The transactions misuse s. 212.1(4), which provides an exemption from s. 212.1(1) on the premise that there is "no increase in the ability to strip surplus tax-free out of Canada," whereas that is what happened here.

This view is broadly consistent with the CRA comments in a domestic context (on Descarries) that it generally is contrary to the scheme of the Act to directly or indirectly distribute corporate surplus otherwise than as dividends. It also represents a hardening of position from the 2013 IFA Roundtable, Q. 4, where CRA was noncommittal as to whether "pre-acquisition" cross-border PUC planning (somewhat similar to that described above) was subject to GAAR.

Neal Armstrong. Summary of 2 December 2014 CTF Roundtable, Q. 4 under s. 212.1(4).