TCC applies the GAAR to treat post-takeover steps as a cross-border surplus strip

 In Univar Holdco Canada ULC v. The Queen, 2016 TCC 159, a UK private equity firm (CVC) acquired all the shares of Univar NV (a Netherlands public corporation) in 2007.  Before the takeover, and in order to obtain the desired debt funding, CVC agreed with the banks that certain post-takeover steps would be taken to achieve the “most efficient tax structure” and “extraction structure” (see paragraphs 18 and 19).  These post-acquisition steps included establishing a new company in Canada (Holdco) to acquire the shares of the US parent (US Parent) of the existing Canadian company (Canco) in the Univar group.  The acknowledged purpose of this step was to allow US Parent to then subsequently sell the shares of Canco to Holdco, thereby accessing a specific exception in Canada’s cross-border surplus-stripping rule (s. 212.1(1) being the main rule; s. 212.1(4) being the exception).  The simple result was to substantially increase the cross-border debt and share capital (PUC) at the Holdco level, i.e., up to the fair market value of the underlying shares of Canco, free of any deemed dividend and withholding tax in Canada. 

The CRA applied the general anti-avoidance rule in s. 245 (the GAAR) to deny this tax benefit.  The CRA further reassessed to (1) deem a dividend to be paid by Holdco in the amount of the cross-border debt, resulting in withholding tax of $29.4 million, and (2) reduce the PUC the shares of Holdco down to the PUC of the underlying shares of Canco (see paragraph 42).  This reassessment mirrored the result that might have obtained if US Parent had simply sold the shares of Canco to Holdco in the first instance. 

• The TCC agreed with the CRA.  The post-acquisition transactions resulted in abusive tax avoidance under the GAAR because “…they circumvented the application of the anti-avoidance rule in s. 212.1 in a manner that ‘frustrated or defeated the object, spirit or purpose’ of s. 212.1 in general and s. 212.1(4) in particular” (see paragraph 5). 
• To conclude otherwise would mean that any foreign-controlled group, whether acquired by a third party or not, could reorganize its corporate structure to interpose a new Canadian company at the right location and thereby ensure that s. 212.1 (1) would never apply.  Such a result could not have been Parliament’s intent when it enacted the exception in s. 212.1(4) (see paragraph 93).
• The federal government’s budget in March 2016 announced a change to s. 212.1(4), to specifically prevent the kind of steps that were taken in this case.  The TCC found support in this change, saying the “…amendment does not retroactively change the law but simply amends the subsection while embodying its underlying rationale as it existed at the time of the transactions in this appeal” (see paragraph 97).