Univar Holdco Canada Ulc V. Canada - The Relevance Of Alternative Transactions, Subsequent Amendments And Finance Commentary To The Gaar Analysis

On October 13, 2017, the Federal Court of Appeal released its decision in Univar Holdco Canada ULC v. Canada, 2017 FCA 207. The Federal Court of Appeal overturned the decision of the Tax Court of Canada, 2016 TCC 159, and held that GAAR did not apply to the transactions at issue.

Facts

In 2007, CVC Capital Properties ("CVC"), an arm's length UK corporation, acquired the shares of Univar NV, a Netherlands public corporation. Univar NV owned the shares of Univar North American Corporation ("UNAC"), a US corporation. UNAC, in turn, owned the shares of Univar Canada Ltd., a Canadian corporation.

After the acquisition by CVC of Univar NV, Univar Holdco Canada ULC ("Univar ULC"), a Canadian corporation, was formed. The American parent corporation of Univar ULC lent $589,262,400 to Univar ULC and contributed $302,436,000 by way of equity. Univar ULC used the funds to acquire the shares of Univar Canada Ltd. from UNAC at a price equal to their fair market value of $891,698,400.

Prior to the transactions, the amount that could be extracted tax-free from Univar Canada Ltd. by UNAC was limited to the paid-up capital for income tax purposes of the shares, being $911,729).

Following the transactions, the amount that could be extracted tax-free from Univar Canada Ltd. to Univar ULC, and then from Univar ULC to its American parent corporation was increased to $891,698,400.

Section 212.1 of the Income Tax Act (Canada) (the "ITA") is a specific anti-avoidance provision that prevents a non-resident person (which includes a corporation) from indirectly extracting the accumulated surplus of a Canadian corporation in a non-arm's length disposition to another Canadian corporation. Generally speaking, section 212.1 operates by converting a capital gain (which could be exempt from taxation in Canada as a result of a tax treaty) into a deemed dividend (which is subject to withholding tax pursuant to subsection 212(2) of the ITA) to the extent that the amount paid for the shares acquired exceeds the paid up capital of the shares. At the time of the transactions at issue, subsection 212.1(4) provided an exception where the non-resident corporation (i.e., the vendor) was controlled by the purchaser corporation immediately before the disposition.

The tax result of the transactions was to increase the amount of retained earnings/surplus that could be taken out of Canada without incurring withholding tax. The parties relied on the exception in subsection 212.1(4) of the...