2016-0629011R3 PUC reinstatement under 212.3(9)

Principal Issues: PUC reinstatement where one of the relevant corporations is a functional currency tax reporter.

Position: Ruling given based on the particular facts and subject to certain conditions.

Reasons: Application of the Act.

Author: XXXXXXXXXX
Section: 212.3, 261

XXXXXXXXXX                                                                                                          2016-062901

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted Corporations (“Taxpayers”). The rulings requested were subsequently modified and this letter reflects such modified request. We also acknowledge various e-mails and telephone conversations in this respect. However, the information you have provided to us only forms part of this ruling letter to the extent described herein.

In general terms, you are asking us to rule on a situation involving the application of the Paid-Up Capital reinstatement rule of subsection 212.3(9) where previous Paid-Up Capital reductions were made to Cross-Border Classes of Corporations Resident in Canada and “qualifying substitute corporations”, within the meaning of subsection 212.3(4), taking into consideration that one of the Corporations Resident in Canada has the US$ as its Elected Functional Currency.

You have represented to us that, to the best of your knowledge, none of the issues involved in this ruling request are:

(i) dealt with in a previously filed information or tax return of any of the Taxpayers or of a related person or partnership;

(ii) being considered by a tax services office or a tax centre in connection with a previously filed tax return of any of the Taxpayers or of a related person;

(iii) under objection by any of the Taxpayers or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate in connection with any of the Taxpayers or a related person.

Unless otherwise stated, all references herein to statutory provisions are to the Act.

Definitions

In this letter, unless otherwise stated, the following terms have the meaning specified below:

(a) “Act” means the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended to the date hereof. Unless otherwise stated, all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

(b) “Adjusted Cost Base” or “ACB” has, by virtue of subsection 248(1), the meaning assigned by section 54;

(c) XXXXXXXXXX;

(d) “Business Number” or “BN” has the meaning assigned by subsection 248(1);

(e) “C$” means the Canadian dollar or Canadian dollars, depending on the context;

(f) “Canadian Tax Results” or “CTRs” has the meaning assigned by subsection 261(1);

(g) “Canco 1” means XXXXXXXXXX, as more fully described in Paragraph 11;

(h) “Canco 2” means XXXXXXXXXX, as more fully described in Paragraph 12;

(i) “CanHoldco 1” means XXXXXXXXXX, as more fully described in Paragraphs 13 to 16, and is one of the Taxpayers;

(j) “CanHoldco 2” means XXXXXXXXXX, as more fully described in Paragraphs 17 to 20, and is one of the Taxpayers;

(k) “CanHoldco 2 Subscription” has the meaning ascribed to it in Paragraph 64;

(l) “CanHoldco 3” means XXXXXXXXXX, as more fully described in Paragraphs 21 to 24;

(m) “CanSub” means XXXXXXXXXX, as more fully described in Paragraph 42;

(n) “CBCA” means the Canada Business Corporations Act, R.S.C., 1985, c. C-44, as amended to the date hereof;

(o) “Controlled Foreign Affiliate” or “CFA” has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1);

(p) “Corporation” has the meaning assigned by subsection 248(1);

(q) “Corporation Resident in Canada” or “CRIC” refers to such term as it is used in section 212.3;

(r) “CRA” means the Canada Revenue Agency;

(s) “Cross-Border Class” or “CBC” has the meaning assigned by subsection 212.3(4);

(t) “CBC-1” means the common Shares of CanHoldco 1;

(u) “CBC-2” means the common Shares of CanHoldco 2;

(v) “CBC-3” means the common Shares of Pubco;

(w) “Elected Functional Currency” or “EFC” has the meaning assigned by subsection 261(1);

(x) “Equity Interest” has the meaning assigned by subsection 93.2(1);

(y) “FA Dumping Rules” has the meaning ascribed to it in Paragraph 57;

(z) “Finco” means XXXXXXXXXX, as more fully described in Paragraphs 33 to 41;

(aa) “Finco Advances” has the meaning ascribed to it in Paragraph 59;

(bb) “Finco Advances-2012/2013” has the meaning ascribed to it in Paragraph 60;

(cc) “Finco Advances-2016” has the meaning ascribed to it in Paragraph 61;

(dd) “Finco Capital Contribution” has the meaning ascribed to it in Paragraph 68;

(ee)  “Finco Distribution” or “Finco Distributions” has the meaning ascribed to it in Paragraph 84;

(ff) “Finco Indirect Investment” has the meaning ascribed to it in Paragraph 66;

(gg) “Finco Upstream Loan” or “Finco Upstream Loans” has the meaning ascribed to it in Paragraph 84;

(hh) “Forco 1” means XXXXXXXXXX, as more fully described in Paragraphs 43 to 46;

(ii) “Forco 2” means XXXXXXXXXX, as more fully described in Paragraphs 47 to 50;

(jj) “Foreign Accrual Property Income” or “FAPI” has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1);

(kk) “Foreign Affiliate” or “FA” has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1);

(ll) “Foreign Country 1” means XXXXXXXXXX;

(mm) “Foreign Country 2” means XXXXXXXXXX;

(nn) “Foreign Country 3” means XXXXXXXXXX;

(oo) “Foreign Holdco 1” means XXXXXXXXXX, as more fully described in Paragraphs 4 and 5;

(pp) “Foreign Holdco 2” means XXXXXXXXXX, as more fully described in Paragraphs 6 and 7;
 
(qq) “Foreign Holdco 3” means XXXXXXXXXX, as more fully described in Paragraphs 8 and 10;

(rr) “Foreign Holdco 4” means XXXXXXXXXX, as more fully described in Paragraphs 9 and 10;

(ss) “Foreign Parent” means the XXXXXXXXXX, as more fully described in Paragraphs 1 to 3;

(tt) “Foreign Parent Group” means Foreign Parent and entities over which Foreign Parent has de jure control;

(uu)  “Investment” has the meaning assigned by subsection 212.3(10);

(vv) “MRPS” means the mandatorily redeemable preferred shares issued by Finco described in Paragraph 35;

(ww) “MRPS Exchanges” has the meaning ascribed to it in Paragraph 62;

(xx) “MRPS Exchanges-2012/2013” has the meaning ascribed to it in Paragraph 63;

(yy) “Net Borrowed Funds” has the meaning ascribed to it in Paragraph 78;

(zz) “Net PUC Reduction” means, regarding any particular Relevant CBC, the sum of (i) the total of all amounts each of which is the amount determined for such class of Shares under paragraph 212.3(9)(a) in respect of an Investment for which Finco is the Subject Corporation, as of the time that is immediately before the time that is immediately before the first Finco Distribution, plus (ii) the amount by which the PUC of that particular Relevant CBC was reduced under subsection 212.3(7) because of the US$XXXXXXXXXX (corresponding to C$XXXXXXXXXX) advanced by Pubco to Finco described in Paragraph 61;

(aaa) “Net C$ PUC Reduction” has the meaning ascribed to it in Paragraph 76;

(bbb) “Net US$ PUC Reduction” has the meaning ascribed to it in Paragraph 77;

(ccc) “Non-Resident” has the meaning assigned by subsection 248(1);

(ddd) “Non-Resident Corporation Without Share Capital” has the meaning assigned by subsection 93.2(1);

(eee) “Opco” means XXXXXXXXXX, as more fully described in Paragraphs 51 to 54;

(fff) “Paid-Up Capital” or “PUC” has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1);

(ggg) “Paragraph” refers to a numbered paragraph in this letter;

(hhh) “Private Corporation” has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1);

(iii)  “Project” means the XXXXXXXXXX, as more fully described in Paragraphs 54 and 55;

(jjj) “XXXXXXXXXX Financing” has the meaning ascribed to it in Paragraph 56;

(kkk)  “Pubco” means XXXXXXXXXX, as more fully described in Paragraphs 25 to 32, and is one of the Taxpayers;

(lll) “Pubco Group” means Pubco and entities over which Pubco has de jure control;

(mmm) “Public Corporation” has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1);

(nnn) “Recently Completed Transactions” means the transactions set out in Paragraphs 78 to 105;

(ooo) “Regulations” means the Income Tax Regulations, C.R.C., c. 945, promulgated under the Act, as amended to the date hereof;

(ppp) “Relevant CBC” or “Relevant CBCs” means any or all of the CBCs, as the case may be, that have to be considered in applying subsection 212.3(7) in respect of an Investment made by a CRIC in Finco at a particular time before the date of the first Finco Distribution;

(qqq) “Relevant Spot Rate” or “RSR” has the meaning assigned by subsection 261(1);

(rrr) “Share” has the meaning assigned by subsection 248(1);

(sss) “Subject Corporation” refers to such term as it is used in section 212.3;

(ttt) “Taxable Canadian Corporation” has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1);

(uuu) “Treaty 1” means XXXXXXXXXX;

(vvv) “Treaty 2” means XXXXXXXXXX;

(www) “Treaty 3” means XXXXXXXXXX;

(xxx) “US$” means the United States dollar or United States dollars, depending on the context; and

(yyy) XXXXXXXXXX.

Facts – Relevant Entities

A. Foreign Parent

1. Foreign Parent is a Non-Resident Corporation governed by the laws of XXXXXXXXXX.

2. The outstanding common Shares of Foreign Parent are primarily listed on the XXXXXXXXXX.

3. Foreign Parent Group is a XXXXXXXXXX, through Foreign Parent’s subsidiaries. Foreign Parent does not carry on business in Canada for the purpose of the Act. Foreign Parent Group’s XXXXXXXXXX.

B. Foreign Holdco 1

4. Foreign Holdco 1 is a Non-Resident Corporation governed by the laws of XXXXXXXXXX, all of the issued and outstanding Shares of which are owned by Foreign Parent.

5. Foreign Holdco 1 does not carry on business in Canada for the purposes of the Act.

C. Foreign Holdco 2

6. Foreign Holdco 2 is a Non-Resident Corporation governed by the laws of XXXXXXXXXX, all of the issued and outstanding common Shares of which are owned by Foreign Parent.

7. As of the date hereof, Foreign Holdco 2 owns approximately XXXXXXXXXX% of the issued and outstanding common Shares of Pubco, as depicted in the table referred to at Paragraph 32. It does not carry on business in Canada for the purposes of the Act.

D. Foreign Holdco 3, Foreign Holdco 4, Canco 1 and Canco 2

8. Foreign Holdco 3 is a XXXXXXXXXX established under the laws of Foreign Country 3. It is a Non-Resident Corporation all of the issued and outstanding Shares of which are owned by Foreign Holdco 2.

9. Foreign Holdco 4 is a Non-Resident Corporation governed by the laws of XXXXXXXXXX, all of the issued and outstanding Shares of which are owned by Foreign Holdco 2.

10. Foreign Holdco 3 and Foreign Holdco 4 do not carry on business in Canada for the purposes of the Act.

11. Canco 1 is at all relevant times a Private Corporation and a Taxable Canadian Corporation, which is governed by the CBCA, all of the issued and outstanding Shares of which are owned by Foreign Holdco 3.

12. Canco 2 is at all relevant times a Private Corporation and a Taxable Canadian Corporation, which is governed by the CBCA. Except for the class XXXXXXXXXX Shares, all of the issued and outstanding Shares of Canco 2 are owned by Foreign Holdco 3, including common class XXXXXXXXXX Shares having a total stated capital of approximately C$XXXXXXXXXX. The class XXXXXXXXXX common Shares carry one vote per Share, are entitled to the same dividend (rateably) as the class XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX Shares of Canco 2, and on liquidation are entitled to an amount equal to the stated capital of such class of Shares plus to share rateably in the remaining property of the Corporation. The class XXXXXXXXXX Shares are all owned by Canco 1, having a total stated capital of approximately US$XXXXXXXXXX (denominated in US$). The class XXXXXXXXXX Shares do not carry any voting rights, are entitled to a preferential cumulative dividend per annum, redeemable at the option of the issuer, and on liquidation are entitled to an amount equal to the stated capital of such class of Shares plus any declared and unpaid dividends.

E. CanHoldco 1

13. CanHoldco 1 is at all relevant times a Private Corporation and a Taxable Canadian Corporation, which is governed by the CBCA. Its financial and taxation year end is XXXXXXXXXX. CanHoldco 1 has not made any election under subsection 261(3).

14. CanHoldco 1’s head office address is XXXXXXXXXX and its mailing address is XXXXXXXXXX. Its BN is XXXXXXXXXX and it is served by the XXXXXXXXXX Taxation Centre. XXXXXXXXXX.

15. The only issued and outstanding Shares of CanHoldco 1 are a single class of common Shares, all of which are owned by Foreign Holdco 1.

16. As of the date hereof, CanHoldco 1 owns approximately XXXXXXXXXX% of the issued and outstanding common Shares of Pubco, XXXXXXXXXX.

F. CanHoldco 2

17. CanHoldco 2 is at all relevant times a Private Corporation and a Taxable Canadian Corporation, which is governed by the XXXXXXXXXX. Its financial and taxation year end is XXXXXXXXXX. CanHoldco 2 has not made any election under subsection 261(3).

18. CanHoldco 2’s head office address is XXXXXXXXXX and its mailing address is XXXXXXXXXX. Its BN is XXXXXXXXXX and it is served by the XXXXXXXXXX Taxation Centre. XXXXXXXXXX.

19. CanHoldco 2 has two classes of Shares issued and outstanding, being common Shares, all of which are owned by Foreign Holdco 2, and preferred Shares, all of which are owned by CanHoldco 1.

20. As of the date hereof, CanHoldco 2 owns approximately XXXXXXXXXX% of the issued and outstanding common Shares of Pubco, which it acquired from treasury on XXXXXXXXXX and XXXXXXXXXX, as further described in Paragraphs 64 and 67 XXXXXXXXXX.

G. CanHoldco 3

21. CanHoldco 3 is at all relevant times a Private Corporation and a Taxable Canadian Corporation, which is governed by the XXXXXXXXXX. Its financial and taxation year end is XXXXXXXXXX. CanHoldco 3 has not made any election under subsection 261(3).

22. CanHoldco 3’s head office address is XXXXXXXXXX and its mailing address is XXXXXXXXXX.  Its BN is XXXXXXXXXX and it is served by the XXXXXXXXXX Taxation Centre. XXXXXXXXXX.

23. CanHoldco 3 has two classes of Shares issued and outstanding, being common Shares, all of which are owned by CanHoldco 2, and preferred Shares, all of which are owned by CanHoldco 1.

24. As of the date hereof, CanHoldco 3 owns approximately XXXXXXXXXX% of the issued and outstanding common Shares of Pubco, which it acquired from treasury on XXXXXXXXXX, as further described in Paragraph 67 XXXXXXXXXX.

H. Pubco

25. Pubco is at all relevant times a Public Corporation and a Taxable Canadian Corporation, which is governed by the XXXXXXXXXX. Its financial and taxation year end is XXXXXXXXXX.

26. Pubco’s head-office and mailing address is XXXXXXXXXX.  Its BN is XXXXXXXXXX and it is served by the XXXXXXXXXX Taxation Centre and the XXXXXXXXXX Tax Services Office.

27. Pubco has a single class of issued and outstanding Shares, being common Shares that are listed and traded on the XXXXXXXXXX.

28. In XXXXXXXXXX, CanHoldco 1 purchased XXXXXXXXXX Pubco common Shares XXXXXXXXXX. This purchase brought Foreign Parent Group’s total shareholdings in Pubco from approximately XXXXXXXXXX% to approximately XXXXXXXXXX% (XXXXXXXXXX% owned by Foreign Holdco 2 and XXXXXXXXXX% owned by CanHoldco 1), and resulted in Pubco being controlled by Foreign Parent from that time forward. The remainder of Pubco’s Shares continue to be widely held.

29. Prior to XXXXXXXXXX, Pubco was XXXXXXXXXX. Since XXXXXXXXXX, Pubco’s XXXXXXXXXX. All or substantially all of the XXXXXXXXXX carried on by members of the Pubco Group are performed outside Canada by FAs of Pubco. As a result, at all relevant times after XXXXXXXXXX Pubco’s Shares have been “shares of the capital stock of another corporation resident in Canada” described in paragraph 212.3(10)(f), i.e. shares of a corporation whose properties derive more than 75% of their value from shares of its FAs.

30. A valid election was made by Pubco resulting in the US$ being its EFC starting on XXXXXXXXXX.

31. XXXXXXXXXX.

32. XXXXXXXXXX.

I. Finco

33. Finco is XXXXXXXXXX established under the laws of Foreign Country 1. Finco is a Corporation that is a resident of Foreign Country 1 for the purposes of the Act and Treaty 1.

34. All the Shares of Finco are (and at all relevant times after XXXXXXXXXX, have been) owned by Pubco, through a branch in Foreign Country 1 that was put in place for Foreign Country 1 tax reasons. Finco is a FA and a CFA of Pubco for the purposes of the Act.

35. The authorized Share capital of Finco consists of common Shares and MRPS. The general attributes of the MRPS are as follows:

a. subject to the option of the holder described at e. below to cause an earlier redemption, Finco has a mandatory redemption duty at the end of XXXXXXXXXX from the date of issuance of the MRPS assuming that the MRPS are neither converted nor redeemed by the holder. The redemption price of the MRPS is equal to the face value of the redeemed MRPS increased by the share premium (if any) attached to each MRPS and the capital contribution (if any) connected to the MRPS;

b. the MRPS do not carry a dividend entitlement;

c. the MRPS carry full voting rights;

d. the MRPS are convertible into a fixed value of Finco common Shares (1) at any time, at the option of the holder and (2) at any time after the XXXXXXXXXX anniversary of the date on which the relevant MRPS are issued, at the option of the issuer. The MRPS are convertible into a fixed number of common Shares (as estimated at their par value on the conversion date) equal to the par value of the MRPS converted, the share premium (if any) attached to the MRPS converted and capital contribution (if any) connected to the MRPS converted;

e. notwithstanding the automatic redemption date described in a. above, the MRPS are redeemable before the maturity date (i.e., XXXXXXXXXX) at the option of the holder with prior notice; and

f. in case of dissolution of Finco, the rights of the MRPS holders to receive redemption proceeds are subordinated to any debt obligations issued by Finco and are senior to the holders of the common Shares.

36. Under Foreign Country 1 corporate law, amounts received by Finco on the issuance of the MRPS are allocated to XXXXXXXXXX.

37. As of the time immediately prior to the Recently Completed Transactions, Pubco held a total of XXXXXXXXXX MRPS of Finco at a par value of US$XXXXXXXXXX per Share. At that time, US$XXXXXXXXXX was included in the share capital account, US$XXXXXXXXXX was included in the legal reserve account and US$XXXXXXXXXX was included in the share premium account, in respect of the Finco MRPS, all of which are owned by Pubco.

38. For Foreign Country 1 tax purposes, the MRPS are considered debt rather than equity of Finco. However, for all other domestic law purposes in Foreign Country 1 (including under the Foreign Country 1 corporate law governing Finco), the MRPS are considered equity of Finco.

39. Finco’s role is to finance (directly or indirectly) Opco’s operations within the scope of the so-called “recharacterization rules” in paragraph 95(2)(a), XXXXXXXXXX.

40. As of the time immediately prior to the Recently Completed Transactions, Opco owed Finco a total amount of approximately US$XXXXXXXXXX (US$XXXXXXXXXX of principal and accrued interest of US$XXXXXXXXXX), which loans and accrued interest were repaid as part of the Recently Completed Transactions. As of the time immediately prior to the Recently Completed Transactions, Forco 2 owed Finco a total amount of approximately US$XXXXXXXXXX (US$XXXXXXXXXX of principal and accrued interest of US$XXXXXXXXXX) some of which was repaid as part of the Recently Completed Transactions.

41. As of XXXXXXXXXX, Finco’s “exempt surplus” balance, as defined in subsection 5907(1) of the Regulations, was approximately US$XXXXXXXXXX, and Pubco’s ACB in the Shares of Finco was approximately US$XXXXXXXXXX.

J. CanSub & Forco 1

42. CanSub is at all relevant times a Private Corporation and a Taxable Canadian Corporation, which is governed by the XXXXXXXXXX, all the issued and outstanding Shares of which are owned by Pubco.

43. Forco 1 is a XXXXXXXXXX established under the laws of Foreign Country 3, and is a Non-Resident Corporation Without Share Capital that is a resident of Foreign Country 3 for the purposes of the Act and Treaty 3.

44. All of the Equity Interests in Forco 1 have identical rights and obligations, determined without reference to proportionate differences in all of those rights and obligations, and are owned, directly or indirectly, by Pubco. Pubco directly owns XXXXXXXXXX% of the Equity Interests in Forco 1 and the remaining XXXXXXXXXX% is owned by CanSub. Forco 1 is a FA and a CFA of Pubco and CanSub for the purposes of the Act.

45. The activities of Forco 1 are limited to holding equity in and providing financing to Forco 2.

46. Under the domestic tax law of Foreign Country 3, Forco 1 is viewed as a corporation and by virtue of the fact that it is established under the laws of Foreign Country 3, it is normally subject to Foreign Country 3's corporate tax on its worldwide profits at a top rate of XXXXXXXXXX%, subject to any available exemptions.

K. Forco 2

47. Forco 2 is a XXXXXXXXXX established under the laws of Foreign Country 3. It is a Non-Resident Corporation that is resident in Foreign Country 3 for the purposes of the Act and Treaty 3.

48. All of the Shares of Forco 2 are owned by Forco 1. Forco 2 is a FA and a CFA of Pubco and CanSub for the purposes of the Act.

49. The activities of Forco 2 are limited to holding equity in and providing equity and debt financing to Opco. As of the time immediately prior to the Recently Completed Transactions, Opco owed Forco 2 a total amount of approximately US$XXXXXXXXXX (US$XXXXXXXXXX of principal and accrued interest of US$XXXXXXXXXX), some of which was repaid as part of the Recently Completed Transactions.

50. Under the domestic tax law of Foreign Country 3, Forco 2 is viewed as a corporation and by virtue of the fact that it is established under the laws of Foreign Country 3, it is normally subject to Foreign Country 3's corporate tax on its worldwide profits at a top rate of XXXXXXXXXX%, subject to any available exemptions.  XXXXXXXXXX.

L. Opco

51. Opco is a body corporate established under the laws of Foreign Country 2. Opco is a Non-Resident Corporation that is resident in Foreign Country 2 for the purposes of the Act and Treaty 2.

52. Through wholly-owned non-Canadian subsidiaries, Pubco owns XXXXXXXXXX% of the Shares of Opco, XXXXXXXXXX% of which are directly owned by Forco 2, with the other XXXXXXXXXX% being owned by an entity that is wholly-owned by XXXXXXXXXX. Opco is a FA and a CFA of Pubco and CanSub for the purposes of the Act.

53. As of the time immediately prior to the Recently Completed Transactions, the aggregate outstanding balance of loans extended by subsidiaries of Pubco (including Finco) to Opco was approximately US$XXXXXXXXXX, consisting of US$XXXXXXXXXX in principal and accrued interest of US$XXXXXXXXXX (see Paragraphs 40 and 49).

54. Opco is in the business of XXXXXXXXXX in Foreign Country 2. Opco’s principal asset is the “Project”, which is located in Foreign Country 2 in XXXXXXXXXX.

55. XXXXXXXXXX.

56. XXXXXXXXXX

Facts – Application of the FA Dumping Rules to Previous Transactions

57. The “FA Dumping Rules” were announced in the 2012 Federal Budget. These rules, primarily set out in section 212.3, apply generally to transactions and events that occur after March 28, 2012. They have been subject to various modifications before and after their initial enactment on December 14, 2012.

58. For the period March 29, 2012 to the date on which the last Finco Distribution occurred, no CRIC that is part of the Foreign Parent Group or of the Pubco Group made any Investments in Finco (as the Subject Corporation) except the Investments made by Pubco, CanHoldco 2 and CanHoldco 3 referred to in Paragraphs 59 to 68.

A. Finco Advances

59. Since XXXXXXXXXX, Pubco has made a series of regular cash advances to Finco (the “Finco Advances”), which Finco in turn used to make loans, directly and indirectly through Forco 2, to Opco in order to finance the Project.

60. For the period March 29, 2012 to December 31, 2013, Pubco made numerous Finco Advances (the “Finco Advances-2012/2013”), all of which were Investments made by a CRIC in Finco under paragraph 212.3(10)(c).

61. For the period XXXXXXXXXX to the date hereof, Pubco made a total of US$XXXXXXXXXX of cash advances to Finco (the “Finco Advances-2016”) in order for it to pay its day-to-day expenses. Of this total amount, US$XXXXXXXXXX (corresponding to C$XXXXXXXXXX) was transferred to Finco on XXXXXXXXXX, with the balance having been transferred prior to the first Finco Distribution. All of these advances were Investments made by a CRIC in Finco under paragraph 212.3(10)(c).

B. MRPS Exchanges

62. XXXXXXXXXX year in XXXXXXXXXX, the Finco Advances were exchanged for MRPS of Finco (the “MRPS Exchanges”). These exchanges occurred by way of Pubco subscribing for MRPS using its receivables arising from Finco Advances as payment for such MRPS. In each case, a relatively small portion of the relevant amount was added to the share capital and legal reserve accounts of the MRPS, with the balance added to the share premium account of the MRPS.

63. All the Finco Advances-2012/2013 were subject to MRPS Exchanges on various occasions during the 2012 and 2013 calendar years (the “MRPS Exchanges-2012/2013”). These exchanges were Investments made by a CRIC in Finco under paragraph 212.3(10)(a), that either were not subject to subsection 212.3(2) based on the application of the version of paragraph 212.3(18)(d) in force at the relevant time, or were transactions allowing for PUC reinstatement under subsection 212.3(9) and also being subject to subsection 212.3(2).

C. Subscriptions for Pubco’s Shares

64. On XXXXXXXXXX, CanHoldco 2 subscribed for Pubco common Shares from treasury in the amount of US$XXXXXXXXXX (corresponding to C$XXXXXXXXXX; the “CanHoldco 2 Subscription”). This subscription constituted an indirect acquisition by a CRIC (CanHoldco 2) under paragraph 212.3(10)(f).

65. Pubco used no less than US$XXXXXXXXXX (corresponding to C$XXXXXXXXXX) of the funds received from the CanHoldco 2 Subscription to itself make further Investments in its FAs within 90 days of the date of the CanHoldco 2 Subscription and as part of the same series of transactions that included the CanHoldco 2 Subscription. This portion of the CanHoldco 2 Subscription was not subject to subsection 212.3(2) based on the application of subparagraph 212.3(18)(c)(v), as this amount represented direct Investments made by a CRIC (Pubco) in its FAs (including Finco) under subsection 212.3(10) (other than one described in paragraph 212.3(10)(f)) and those direct Investments by Pubco were themselves subject to subsection 212.3(2). To the extent those direct Investments by Pubco were made in Finco, they are included within the Finco Advances-2012/2013.

66. Based on an estimate of the respective fair market values of Pubco’s FAs as of the CanHoldco 2 Subscription date, the allocation of the remaining C$XXXXXXXXXX of the CanHoldco 2 Subscription resulted in paragraph 212.3(2)(a) being considered to apply in respect of Finco, as to XXXXXXXXXX% of this amount (i.e. C$XXXXXXXXXX; the “Finco Indirect Investment”), and in respect of Forco 1, as to the remaining XXXXXXXXXX% (i.e. C$XXXXXXXXXX).

67. In XXXXXXXXXX, CanHoldco 2 and CanHoldco 3 subscribed for XXXXXXXXXX and XXXXXXXXXX Pubco common Shares in consideration for C$XXXXXXXXXX and C$XXXXXXXXXX, respectively.  Immediately following such subscriptions, CanHoldco 2’s and CanHoldco 3’s ownership of Pubco common Shares represented approximately XXXXXXXXXX% and XXXXXXXXXX%, respectively, of the outstanding common Shares of Pubco. The entirety of these Investments made by CRICs were not subject to subsection 212.3(2) based on the application of subparagraph 212.3(18)(c)(v) because Pubco made directly (and indirectly through CanSub) corresponding Investments in Forco 1 under paragraph 212.3(10)(b) which were themselves subject to subsection 212.3(2).

D. Finco Capital Contribution

68. In XXXXXXXXXX, Pubco transferred US$XXXXXXXXXX in cash to Finco as a capital contribution in respect of the MRPS of Finco (the “Finco Capital Contribution”). The entire amount of this capital contribution was added to the share premium account relating to the MRPS. Finco in turn used these funds to make loans directly, and indirectly through Forco 2, to Opco in order to finance the Project. This capital contribution was an Investment made by a CRIC in Finco under paragraph 212.3(10)(b).

E. Application of the FA Dumping Rules

69. CBC-1, at all relevant times after March 28, 2012, CBC-2, from XXXXXXXXXX, and CBC-3, at all relevant times after March 28, 2012, are the only Relevant CBCs in respect of Investments made by CRICs in Finco to the date hereof.

70. For the period March 29, 2012 to the date on which the last Finco Distribution occurred, various other transactions occurred that involved the application of the FA Dumping Rules in respect of Subject Corporations other than Finco (consisting of numerous FAs of Pubco but primarily Forco 1), and resulted in adjustments to the PUC balances of CBC-1, CBC-2 and CBC-3 at various times.

71. For the period March 29, 2012 to the date on which the last Finco Distribution occurred, and without taking into consideration the Finco Distributions, the only transactions that have had an impact on the PUC balances of CBC-1, CBC-2 and CBC-3 with regard to the application of the FA Dumping Rules in respect of Finco as the Subject Corporation are the Finco Advances-2012/2013, the Finco Advances-2016, the MRPS Exchanges-2012/2013, the Finco Indirect Investment and the Finco Capital Contribution, which means that the net adjustments to those PUC balances resulting from these transactions, excluding the Finco Distributions, is equal to the total of all Net PUC Reductions in respect of each of these Relevant CBCs at the time that is immediately after the last Finco Distribution.

72. No elections have been made by any member of the Foreign Parent Group or the Pubco Group in regard to coming-into-force rules or alternative versions of any portion of section 212.3.

Underlying Assumptions

73. The PUC of CBC-1, CBC-2 and CBC-3 are CTRs of each of the shareholders of the relevant issuer Corporation. Thus, from the perspective of the Foreign Parent Group, and because none of CanHoldco 1, CanHoldco 2 nor CanHoldco 3 has made an election under subsection 261(3), the PUC balance of CBC-1, CBC-2 and CBC-3 has to be maintained in C$ starting on the first issuance of Shares of each of those classes. In determining the PUC of a class of Shares the legal stated capital account of which is maintained in a foreign currency, all entries to that account have to be converted to their C$ equivalent using the RSR for the day on which the transaction that gives rise to the particular entry arises.

74. The PUC of each of CBC-1, CBC-2 and CBC-3 is also a CTR in respect of their respective issuer Corporation. As such, the maintenance of the PUC balance generally has to be done in the way mentioned above. However, further to the election made by Pubco resulting in the US$ being its EFC starting on XXXXXXXXXX, Pubco has to convert all the entries made before that time to the CBC-3 PUC account from the C$ to the US$ using the RSR on XXXXXXXXXX. Afterwards, the PUC balance of that class of Shares has to be maintained in US$, and all entries to that account made in a currency other than the US$ have to be converted to their US$ equivalent using the RSR for the day on which the transaction that gives rise to the particular entry arises. The maintenance of the CBC-3 PUC balance in US$ is only relevant for the purposes of determining Pubco’s own CTRs, and doesn’t alter the requirement for Pubco to maintain the CBC-3 PUC balance in C$ for all other purposes.

75. The fact that Pubco has the US$ as its EFC starting on XXXXXXXXXX also requires, for the sole purpose of determining Pubco’s CTRs, the conversion of the following amounts from the C$ to the US$ using the RSR on XXXXXXXXXX: (1) all entries to the PUC account of CBC-1 and CBC-2 on or before XXXXXXXXXX, and (2) any adjustment made under the Act in respect of those classes of Shares before that time, including PUC reductions and PUC reinstatements resulting from the application of subsections 212.3(7) and 212.3(9). Afterwards, CBC-1 and CBC-2 PUC balances have to be maintained in US$ essentially as mentioned above, for the sole purpose of determining Pubco’s CTRs. Again, this doesn’t alter the requirement for Pubco, CanHoldco 1 and CanHoldco 2 to maintain their PUC balance in C$ for all other purposes.

76. For the purpose of maintaining the PUC balance of each of CBC-1, CBC-2 and CBC-3 in C$, the Net PUC Reduction in respect of each of these Relevant CBCs has to be accounted for taking into account the relevant C$ amounts (“Net C$ PUC Reduction”).

77. For the purpose of maintaining the PUC balance of each of CBC-1, CBC-2 and CBC-3 in US$, for the sole purpose of determining Pubco’s CTRs, the Net PUC Reduction in respect of each of these Relevant CBCs has to be accounted for taking into account the relevant US$ amounts (“Net US$ PUC Reduction”).

Recently Completed Transactions

78. Between XXXXXXXXXX, Opco borrowed a total amount of approximately US$XXXXXXXXXX, less fees and expenses (US$XXXXXXXXXX; “Net Borrowed Funds”), secured by all of Opco’s property. XXXXXXXXXX.

In this regard the following transactions occurred in the order in which they are described below.

A. XXXXXXXXXX Transactions

79. Opco drew US$XXXXXXXXXX of the Net Borrowed Funds and used the funds to repay existing intra-group loans and advances as follows:

a. to Finco, for a total amount of approximately US$XXXXXXXXXX, of which Finco received US$XXXXXXXXXX net of US$XXXXXXXXXX in Foreign Country 2 withholding tax; and

b. to Forco 2, for a total amount of approximately US$XXXXXXXXXX, of which Forco 2 received US$XXXXXXXXXX net of US$XXXXXXXXXX in Foreign Country 2 withholding tax.

80. Forco 2 used the US$XXXXXXXXXX it received from Opco to repay loans owing to Finco, giving Finco a total amount of US$XXXXXXXXXX.

81. From the total of US$XXXXXXXXXX received by Finco as described in Paragraphs 79 and 80, Finco purchased from Forco 2 US$XXXXXXXXXX of loans owing to it from Opco.

82. Forco 2 used the US$XXXXXXXXXX funds received from Finco to make the following interest-bearing loans:

a. Loans to Pubco for a total amount of approximately US$XXXXXXXXXX (XXXXXXXXXX%); and

b. Loans to CanSub for a total amount of approximately US$XXXXXXXXXX (XXXXXXXXXX%).

83. CanSub used the US$XXXXXXXXXX it received from Finco to effect a return of capital to Pubco on its Shares, such that Pubco received all US$XXXXXXXXXX.

84. Using the US$XXXXXXXXXX remaining from the steps described above, Finco paid dividends on its common Shares in the amount of US$XXXXXXXXXX to Pubco and made US$XXXXXXXXXX of distributions on its MRPS to Pubco (together with the US$XXXXXXXXXX distribution referred to in Paragraph 100, collectively referred to as the “Finco Distributions” or individually as a “Finco Distribution”). Contemporaneously, Finco made US$XXXXXXXXXX of interest-bearing loans to Pubco (together with the US$XXXXXXXXXX loan referred to in Paragraph 92 and the US$XXXXXXXXXX loan referred to in Paragraph 100, collectively referred to as the “Finco Upstream Loans” or individually as a “Finco Upstream Loan”).

85. Pubco in turn used all the funds received from Finco (US$XXXXXXXXXX), Forco 2 (US$XXXXXXXXXX) and CanSub (US$XXXXXXXXXX) to make interest bearing loans to Canco 1 on arm’s length terms and conditions.

86. The total amount of approximately US$XXXXXXXXXX loaned from Pubco to Canco 1 described in Paragraph 85 was used by Canco 1 to subscribe for class XXXXXXXXXX preferred Shares of Canco 2.
 
87. Canco 2 used all of the funds it received from the subscription to its class XXXXXXXXXX preferred Shares described in Paragraph 86 to effect a return of capital on its class XXXXXXXXXX Shares held by Foreign Holdco 3. 

88. Foreign Holdco 3 used the funds received from Canco 2 described in Paragraph 87 to repay indebtedness it owed to Foreign Holdco 4.

89. Foreign Holdco 4 invested all the funds received from Foreign Holdco 3 described in Paragraph 88 XXXXXXXXXX.

B. XXXXXXXXXX Transactions

90. Opco drew US$XXXXXXXXXX of the Net Borrowed Funds and used the funds to repay existing intra-group loans and advances from Forco 2, of which Forco 2 received a slightly lower amount due to a small amount of Foreign Country 2 withholding tax being paid.

91. Forco 2 used the funds received from Opco described in Paragraph 90 to repay amounts owing to Finco.

92. Using all the funds received from Forco 2 described in Paragraph 91, Finco made interest-bearing loans to Pubco.

93. Pubco in turn used all the funds received from Finco described in Paragraph 92 to make interest bearing loans to Canco 1 on arm’s length terms and conditions.

94. The amount loaned from Pubco to Canco 1 described in Paragraph 93 was used by Canco 1 to subscribe for class XXXXXXXXXX preferred Shares of Canco 2.

95. Canco 2 used all of the funds it received from the subscription to its class XXXXXXXXXX preferred Shares described in Paragraph 94 to effect a return of capital on its class XXXXXXXXXX Shares held by Foreign Holdco 3. 

96. Foreign Holdco 3 used the funds received from Canco 2 described in Paragraph 95 to repay indebtedness it owed to Foreign Holdco 4.

97. Foreign Holdco 4 invested all the funds received from Foreign Holdco 3 described in Paragraph 96 XXXXXXXXXX.

C. XXXXXXXXXX Transactions

98. Opco drew US$XXXXXXXXXX of the Net Borrowed Funds and used the funds to repay existing intra-group loans and advances from Forco 2 of which Forco 2 received US$XXXXXXXXXX net of US$XXXXXXXXXX in Foreign Country 2 withholding tax.

99. Forco 2 used the funds received from Opco described in Paragraph 98 to repay amounts owing to Finco.

100. Using the funds received from Forco 2 described in Paragraph 99, Finco made US$XXXXXXXXXX of distributions on its MRPS to Pubco. Contemporaneously, Finco made US$XXXXXXXXXX of interest-bearing loans to Pubco.

101. Pubco in turn used all the funds received from Finco described in Paragraph 100 to make interest bearing loans to Canco 1 on arm’s length terms and conditions.

102. The amount loaned from Pubco to Canco 1 described in Paragraph 101 was used by Canco 1 to subscribe for class XXXXXXXXXX preferred Shares of Canco 2.

103. Canco 2 used all of the funds it received from the subscription to its class XXXXXXXXXX preferred Shares described in Paragraph 102 to effect a return of capital on its class XXXXXXXXXX Shares held by Foreign Holdco 3.

104. Foreign Holdco 3 used the funds received from Canco 2 described in Paragraph 103 to repay indebtedness it owed to Foreign Holdco 4.

105. Foreign Holdco 4 invested all the funds received from Foreign Holdco 3 described in Paragraph 104 XXXXXXXXXX.

Purpose of the Recently Completed Transactions

106. The purpose of the Recently Completed Transactions is commercial in nature, XXXXXXXXXX.
 
107. XXXXXXXXXX, Pubco has determined that for commercial reasons XXXXXXXXXX is to extract these amounts from Foreign Country 2 as repayments of existing intra-group loans and advances, resulting in Finco receiving most of these Net Borrowed Funds.

108. While the total amount to be loaned and distributed by Finco to Pubco described in Paragraphs 84, 92 and 100 (US$XXXXXXXXXX) was determined entirely with reference to commercial considerations, the portion of that total that is the Finco Distributions was determined with reference to what was necessary to achieve a full reinstatement of the Net C$ PUC Reduction and the Net US$ PUC Reduction in respect of each of CBC-1, CBC-2 and CBC-3.

109. More particularly, such loans of the relevant funds from Pubco to Canco 1 described in Paragraphs 85, 93 and 101 allow Foreign Parent to benefit from favourable consolidated balance sheet treatment, XXXXXXXXXX.

110. Foreign Parent and Pubco have the common objective of supporting Opco and securing the Project’s success. XXXXXXXXXX.

111. From Pubco’s perspective, this course of action also benefits it by relieving it from the burden of the guarantee fee otherwise owing by it and Opco to Foreign Parent for the period of time that such cash remains with Foreign Parent. To the extent that amounts XXXXXXXXXX are deposited by Pubco with Canco 1 as described in Paragraphs 85, 93 and 101 and remain on deposit (i.e., within the group of entities that are wholly-owned by Foreign Parent), no guarantee fee is payable by Opco or Pubco to Foreign Parent.

Additional Information & Representations

A. Generalities

112. Subsection 90(6) will apply to the loans described in Paragraph 82, subject to the exceptions provided by subsection 90(8). The interest paid to Forco 2 in respect of these loans will constitute FAPI to Forco 2 and will be subject to Canadian withholding tax.

113. For Canadian income tax purposes, the portion of the Finco Distributions consisting of US$XXXXXXXXXX of dividends on Finco common Shares will be paid out of the exempt surplus of Finco in respect of Pubco. The balance of the Finco Distributions consisting of US$XXXXXXXXXX, as described in Paragraphs 84 and 100, constitute distributions of portions of the share premium attached to the MRPS under Foreign Country 1 corporate law, and are made pro rata on all of the MRPS issued and outstanding at the time of the distributions. As such, they are deemed to be dividends under subsection 90(2), and Pubco intends to elect under paragraph 5901(2)(b) of the Regulations for them to be deemed to be paid out of the pre-acquisition surplus of Finco in respect of Pubco.

114. Subsection 90(6) will apply to the Finco Upstream Loans, subject to the exceptions provided by subsection 90(8). The interest paid to Finco in respect of these loans will constitute FAPI to Finco and will be subject to Canadian withholding tax.

115. On XXXXXXXXXX, Finco made certain changes to the terms of the MRPS, as follows:

a. removal of Finco’s option to convert the MRPS to common Shares (as described in d.(2) of Paragraph 35);

b. addition of an obligation that the payment of the redemption price be made in cash or other financial assets (i.e., not shares); and

c. restriction of the voting rights of the MRPS to matters affecting the MRPS.

B. Further Anticipated Transactions

116. By the end of XXXXXXXXXX, Pubco and Finco intend to convert the Finco Advances-2016 into capital contributions in respect of the MRPS of Finco under Foreign Country 1’s corporate law. The entire amount of these capital contributions will be added to the share premium account relating to the MRPS. These conversions will be considered to be Investments made by a CRIC in Finco under paragraph 212.3(10)(b), resulting in the application of subsection 212.3(2), but will also give rise to a PUC reinstatement under subsection 212.3(9).

117. Opco will require substantial funds at various times over the next few years XXXXXXXXXX. It is anticipated that all of the funds that are the subject of the Recently Completed Transactions will be required for this purpose, and likely more.

118. The precise steps by which funds will move down the chain to Opco are not known with certainty at this time and will depend on future changes in facts and laws.

119. XXXXXXXXXX

120. XXXXXXXXXX

121. XXXXXXXXXX

122. XXXXXXXXXX

123. XXXXXXXXXX

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Underlying Assumptions, Recently Completed Transactions, Purpose of the Recently Completed Transactions and Additional Information & Representations, we rule as follows, in reliance on such statements, and subject to the comments below:

A. The cash from the Finco Distributions constitute receipts of property described in clause (B) of variable A of the formula in subparagraph 212.3(9)(b)(ii).

B. Provided that (i) the total amount of the Finco Distributions as determined in US$ is no less than the total of each Net US$ PUC Reduction in respect of CBC-1, CBC-2 and CBC-3, and that (ii) the C$ equivalent of such amounts of Finco Distributions is no less than the total of each Net C$ PUC Reduction in respect of CBC-1, CBC-2 and CBC-3, the application of subsection 212.3(9) to the Finco Distributions will have resulted, at the time the last Finco Distribution is completed, in the PUC of each of the Relevant CBCs being increased under that subsection by an amount equal to the total of all amounts previously deducted (less amounts previously reinstated) in respect of Investments in Finco, as the Subject Corporation, for the purpose of the maintenance of the relevant PUC accounts of Pubco, CanHoldco 1 and CanHoldco 2, in C$ and in US$.

As the initial ruling request was received XXXXXXXXXX, the above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA.

Comments

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or made any determination in respect of any tax consequences relating to the Facts, Underlying Assumptions, Recently Completed Transactions, Purpose of the Recently Completed Transactions or Additional Information & Representations described herein other than those specifically described in the Rulings given above and, in particular, without limiting the generality of the foregoing, in respect of:

(a) whether any election, notification or form referred to herein has been validly and timely filed or made;

(b) any amount of PUC referred to herein (except with respect to the operation of subsection 212.3(9) as specifically described in Ruling B) including, for greater certainty, the amount of previous PUC entries (including PUC reductions or PUC reinstatements arising under subsections 212.3(7) and 212.3(9), respectively), either in C$ or in US$;

(c) the ACB or fair market value of any property referred to herein, or the reasonableness or fair market value of any amount referred to herein, including any fees or expenditures;

(d) the conversion of any amounts referred to herein to C$ or to US$ or the amount of any tax account of any corporation referred to herein;

(e) any tax consequences under provincial law or that relate to the provincial allocation of income relating to the Recently Completed Transactions;

(f) the characterization of any entity or financial instrument referred to herein;

(g) the potential application of subsection 15(1), 56(2) or 246(1) to any of the transactions referred to herein;

(h) the tax consequences relating to any of the MRPS Exchanges;

(i) the potential application of subsection 212.3(6) or 247(2) to any of the Recently Completed Transactions; or

(j) whether the payment of any guarantee fees by Pubco to Foreign Parent, as described in Paragraph 56, would constitute Investments made by a CRIC in a Subject Corporation under paragraph 212.3(10)(b).

An invoice for our fees in connection with this ruling request will be sent to you under separate cover.

Yours truly,

XXXXXXXXXX
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

Table
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