PUC reinstatement rule in FAD rules may not accommodate distributions of sales proceeds of an indirect FA of a CRIC

The foreign affiliate dumping rules contemplate that the paid-up capital of a Canadian corporation controlled by a non-resident parent (a CRIC), which has been suppressed as a result of making an investment in a foreign affiliate, may be reinstated to the extent that the CRIC makes a capital distribution to the parent of proceeds of the sale of the foreign affiliate received by it "directly or indirectly."

This rule may not work in the situation where the CRIC indirectly invested in the foreign affiliate by purchasing the shares of a Canadian holding company, with the Canadian holding company subsequently selling the foreign affiliate and distributing the proceeds to the CRIC as a dividend.  In this scenario, the CRIC itself will not be receiving proceeds of disposition of the foreign affiliate's shares - although it could be argued that such dividend represents the indirect receipt of such proceeds.  See Example 9-F.

Neal Armstrong and K.A. Siobhan Monaghan.  Discussion of indirect proceeds test in draft s. 212.3(9)(c)(ii) under Distribution of sales proceeds by an indirect CRIC.