CRA finds that circular transactions to effect a s. 212.3(9)(b)(ii) PUC reinstatement abused that provision

Canco (wholly-owned by NRco) acquired all the shares of FA1 for $100, thereby effecting a reduction of the paid-up capital (PUC) of the common shares of Canco by $100.

In order to reinstate that PUC under s. 212.3(9)(b)(ii), Canco has another newly-formed non-resident subsidiary (“New FA2”) use the $100 proceeds of a daylight loan to capitalize a new non-resident sub of it (“New FA3”) with common shares, and sell those New FA3 common shares to FA1 for a $100 promissory note. The reinstatement (which CRA indicated “arguably occurred") is effected by FA1 making a capital distribution of the New FA3 shares to Canco. The daylight loan can now be repaid by Canco contributing the New FA3 common shares to New FA2 under s. 85.1(3), and New FA3 being liquidated into New FA2.

Turning to GAAR, CRA noted the circular nature of the transactions, and concluded that the series of transactions resulted directly or indirectly in a misuse or abuse of the scheme of s. 212.3 in general and s. 212.3(9) in particular.

Neal Armstrong. Summary of 15 September 2020 IFA Roundtable, Q.6 under s. 212.3(9)(b)(ii).