A convertible debenture held by a non-resident could trigger the FAD rules

Suppose that a widely-held private corporation resident in Canada (the “CRIC”) will emigrate from Canada for non-tax reasons. However, a non-resident corporation (“Forco”) that is not a current shareholder had acquired, prior to the emigration, a convertible debenture which, when converted after the emigration, results in Forco having de jure control of the CRIC.

Under s. 212.3(1)(b), the s. 212.3 rules apply to an investment made by the CRIC in a subject corporation if as part of the series of transactions that includes the making of the investment, Forco acquired control of the CRIC and at the time of the “investment”, the Forco shares represented 25% or more of the votes or value of the CRIC – with s. 251(5)(b) rights being taken into account for these purposes. Accordingly, on the conversion of the debentures after the emigration, Forco could be the parent of the CRIC for purposes of the s. 212.3 rules in respect of any investment made during the period in which it held the debentures before the emigration, if the debenture conversion occurred as part of the same series of transactions as that investment.

However, the finding in Eyeball Networks - that the concept of a “series of transactions” applies only when one or more of the transactions within the series is primarily tax driven - could be helpful in this regard.

Neal Armstrong. Summary of Mark Jadd and Daniel Safi, “When a Non-Resident Might Qualify as a “Parent” Under the FAD Rules: A Potential for Retroactive Application?”, International Tax Highlights, Vol. 4, No. 1, February 2025, p. 4 under s. 212.3(1)(b).