US/ Canada cross-border tax planning could be impacted by the recent finalization of Section 385 regulations by the IRS and Treasury Department. Because most of these new rules apply with an effective date reaching back to April 5, 2016, it is imperative that Canadian companies with U.S. activities assess their potential impact and develop a strategy for managing their exposure to these rules.

1. Osler Hoskin & Harcourt LLP
October 25-November 2, 2016
Financing Across Borders
The impact of the Final Section 385 Regulations

2. On October 13, 2016, the U.S. Treasury released final intercompany
debt regulations that were first proposed on April 4, 2016
Source: Preamble to the finalized Section 385 Regulations
When the checks and balances of the market are
removed, as they are when related corporations transact,
there are often few practical economic or legal forces that
constrain the choice between employing debt or equity.
In these circumstances, the financing choice thus can be
determined solely on the basis of income tax
considerations, which often favor debt. The absence of
market forces operating among related corporations can,
in addition to influencing internal financing decisions,
create incentives for corporations that do not require
financing to incur debt solely for tax-related reasons.
While [tax arbitrage opportunities using intra-group debt]
have been a longstanding problem, their associated
economic and revenue costs appear to have
increased in recent years.
- U.S. Treasury
2

3. Agenda
I. Background
II. Overview of New Rules
III. Application of New Rules to Canadian Companies
IV.Practical Takeaways
3

4. Background
Debt Equity
• Interest deductions
• No U.S. withholding tax on interest
paid to Canada (Treaty)
• Repayment of principal generally not
subject to U.S. tax (for both borrower
and lender)
• No deduction for dividends
• Dividends subject to 5% to 15% U.S.
withholding tax to Canada (Treaty)
• Repayment of debt recharacterized as
equity is frequently treated as a dividend in
the related party context
Why the difference between debt and equity matters
4

5. Background
1. Intent of the parties
2. Identity between creditors and shareholders
3. Extent of participation in management by the holder of the instrument
4. Ability of the corporation to obtain funds from outside sources
5. The “thinness” of the capital structure in relation to debt
6. The risk involved
7. Formal indicia of the arrangement
8. Relative position of the debtholder as to other creditors regarding the payment
of interest and principal
9. Voting power of the holder of the instrument
10. The provision of a fixed interest rate
11. A contingency on the obligation to repay
12. The source of the interest payments
13. The presence or absence of a fixed maturity date
14. A provision for redemption by the corporation
15. A provision for redemption at the option of the holder
16. The timing of the advance with reference to the organization of the corporation
Historical 16-factor test for distinguishing debt from equity
5

6. U.S. Treasury first proposed these regulations on April 4, 2016
Imposing documentation requirements as a prerequisite
for debt treatment
Treat debt issued in three “bad” transactions as per se
stock (the “general rule”)
Treat debt issued with a principal purpose of funding the
“bad” transactions as per se stock (the “funding rule”)
Treat debt issued within a 6-year period of (the 3 years
before or after) the “bad” transactions as per se stock
(the “per se funding rule”)
• Documentation Rule
• Per Se Stock Rules
• Bifurcation Rule Commissioner may treat an instrument as partly debt
and partly stock under “general federal tax principles”
6

7. Overview of the New Rules
Source: Preamble to the finalized Section 385 Regulations
“Many of the comments expressed concern that the
proposed regulations would impose compliance
burdens and result in collateral consequences that
were not justified by the stated policy objectives of the
proposed regulations.
In response to the comments received, the final and
temporary regulations substantially revise the
proposed regulations to achieve a better balance
between minimizing the burdens imposed on taxpayers
and fulfilling the important policy objectives of the
proposed regulations.”
- U.S. Treasury
7

8. Comparison to April 4, 2016 proposed regulations
8
Bifurcation Rule
The bifurcation rule has been removed
Foreign Issuers
Debt issued by non-U.S. issuers is
generally excluded
Per Se Stock Rule Exceptions & Exclusions
• New “short-term debt exception” from the funding rule
• Expanded the earnings and profits exclusion
• New “qualified contribution” reduction rule
• Removal of the cliff effect from the $50 million exception
• Added specific carve-outs for certain transactions
Exclusion for Financial Institutions
The per se stock rule no longer applies to certain highly
regulated financial companies on the basis that these
companies are already subject to regulatory scrutiny
Documentation Rule (timing)
• Extended the period for “timely”
prepared documentation
• Only applies to debt instruments
issued on or after 1/1/18
Per Se Stock Rule
The basic architecture of the per se stock
rule (including the per se funding rule)
remains intact
Documentation Rule
Documentation requirement remains a
general prerequisite for debt treatment
Rules that are
new or were
significantly
modified
Rules that
were left
largely
unchanged

9. Foundational Concepts
Expanded Group: An affiliated group as defined in Section 1504(a) with the following
modifications:
a) Includes corporations held directly or indirectly (through application of modified Section
318(a) rules)
b) Modifies the ownership test to 80 percent vote or value (i.e., not vote and value).
Covered Member: Any member of an Expanded Group that is a domestic U.S. corporation.
Debt Instrument: Any interest that would be treated as a debt instrument under Section 1275,
but for the 385 regulations.
Covered Debt Instrument: A Debt Instrument issued after April 4, 2016 that is issued by a
Covered Member that is not an excepted regulated financial company or a regulated insurance
company. Exclusions:
a) Qualified dealer debt instrument – A debt instrument issued to or acquired by an expanded
group member that is a dealer in securities in the ordinary course of its business (and to the
extent that certain other requirements are met).
b) Excluded statutory or regulatory debt instrument – Various instruments expressly treated as
debt under the Code (e.g., Section 636 production payments)
9

10. Foundational Concepts [continued]
Excepted Regulated Financial Company: Among the 17 enumerated inclusions:
• A regulated bank holding company
• A national bank
• An insured depository institution
Controlled Partnerships: Treated as aggregates under the final rules.
Deemed Transfer: Occurs pursuant to which an Expanded Group lender is deemed to transfer
debt to the actual partner, matching income and deductions.
• A registered broker or dealer
• A swap dealer
• A small business investment company.
Also includes expanded group subsidiaries of such entities.
10

11. Foundational Concepts
Is the issuer a U.S.
corporation issuing
the debt instrument
to an EG member?
Common Law
Debt/Equity
Analysis
Documentation
Rule
Common Law
Debt/Equity
Analysis
Per Se
Analysis
Yes
No
1 2 3
11

12. The “Documentation Rule” – Policy Concerns
• Timely documentation requirements are too stringent and "impossible to satisfy
without an expense to taxpayers far in excess of any benefit to be achieved“
• Per se stock treatment is "too harsh"; the penalty of mandatory stock treatment
"would often be substantially disproportionate to the failure to comply“
• Broader exemptions requested for debt that "lacks earnings-stripping potential"
“The lack of… guidance, combined with the sheer volume of financial records
taxpayers produce in the ordinary course of business, makes it difficult to identify
the documents that will ultimately be required to support such a characterization …
such that forensic accounting expertise is required to isolate and evaluate relevant
information. [T]he ability of the Commissioner to administer the Code efficiently
with respect to related party interests is impeded.”
Proposed
Preamble
Comments
Final
Preamble
“The Treasury Department and the IRS have determined that the [Documentation
Rules] further important tax administration purposes. Moreover, the Treasury
Department and IRS have determined that the presence or absence of
documentation evidencing the four indebtedness factors is more than a ministerial
issue to be policed with a fine or penalty. These factors are substantive evidence of
the intent to characterize [debt instrument] as indebtedness for federal tax
purposes”.
12

13. The “Documentation Rule”
Documentation Rule: If an "expanded group instrument" (EGI) does not comply
with the documentation requirements of 1.385-2 within provided time limits, then,
unless an exception applies, the EGI will be treated as stock for all U.S. federal
income tax purposes.
Key Scoping Concepts:
1. Foreign Issuers excluded
• "EGI" is an instrument issued in the form of debt (and certain intercompany payables/receivables
that are recorded as debt in intercompany accounts) that is issued by a member of the EG and
held by another member of the EG or a "controlled partnership".
• An EGI is subject to the Documentation Rule only if it is issued by a "Covered Member" (i.e., a
U.S. corporation).
2. Small Issuers excluded
• This rule only applies to related party groups if a publicly traded company is in the group; or if any
financial statement (consolidated or standalone) within the last three years shows:
• Total assets > $100m; or
• Total revenue > $50m
3. Hybrid instruments reserved
• i.e. instruments not issued in the form of debt, such as repos.
4. Delayed effective date
• Applies to debt instruments issued (or deemed issued) on or after 1/1/2018.
13

14. The “Documentation Rule” – What needs to be Documented?
Taxpayer must prepare and maintain documentation evidencing the following "factors":
1. An unconditional obligation to pay a sum certain
• Generally satisfied with documentation of the arrangement in debt "form" payable on demand or one
or more fixed dates.
• One writing may support multiple EGIs (e.g., a revolver, cash pool agreement, omnibus agreement)
subject to prescribed requirements.
2. Creditor's Rights
• Typically include right to trigger an EOD, acceleration for non-payment.
• Local law rights may be taken into account.
3. Reasonable expectation of ability to repay
• Must establish that "issuer's financial position supported a reasonable expectation that the issuer
intended to, and would be able to, meet its obligations pursuant to the terms" of the instrument;
ability to refinance now clearly taken into account.
• Taxpayer may perform an "annual credit analysis" to support multiple EGIs (subject to limitations).
4. Actions evidencing debtor-creditor relationship
• Must document payments of interest and principal.
• If there is any EOD on the debt, must document evidence of the holder's "reasonable exercise of the
diligence and judgment of a creditor”.
• If the holder refrains from enforcing creditor rights, must produce evidence to support that decision as
being consistent with the reasonable exercise of the diligence and judgment of a creditor.
14

15. The “Documentation Rule” – Deadlines Relaxed
Under the proposed regulations, taxpayers were subject to very strict 30-day or 45-day
deadlines for satisfying the documentation requirements.
The Final Regulations significantly ease these timing constraints.
Issuer's U.S. Federal Income Tax Return
• Under the final regulations, documentation is treated as prepared on a timely
basis if it is in place no later than the time for filing the issuers tax return (including
extensions) for the taxable year (that includes the "relevant date“).
• In general a "relevant date" includes the date of issuance, the date of certain
deemed re-issuances, the date a debt instrument becomes an EGI subsequent to
its issuance, and the date of an EOD.
15

16. The “Documentation Rule” – Exceptions/Relaxation
The following exceptions from Per Se treatment are available:
1. Highly Compliant Taxpayers
• If an EGI issued by a covered member would otherwise be treated as stock under the Per Se rule but
the taxpayer shows that the EG is "highly compliant" with the documentation requirements, then the
EGI is not automatically treated as stock – instead, the EGI is presumed, subject to rebuttal, to be stock.
• Presumption may be rebutted if taxpayer "clearly establishes that there are sufficient common law
factors present to treat the EGI as indebtedness…"
• An EG is highly compliant if for a taxable year if:
• The average "issue price" of all "undocumented EGIs" is less than 10% to total issue price of all
EGIS outstanding (tested quarterly); or
• If no undocumented EGI has an issue price in excess of (a) $100M, the total number of
undocumented EGIs is less than 5% of the total number of all EGIS outstanding (tested
quarterly), or (b) $25M, the total number of undocumented EGIS is less than10% of the total
number of all EGIs outstanding.
• For purposes of these tests, only count EGIs issued by a U.S. corporation.
2. Reasonable Cause
• If noncompliance is attributable to a reasonable cause, such failure will not be taken into account
under the Documentation Rule.
3. Taxpayer Discovery and Remedy of Ministerial or non-Material Failure or Error
• Protection against foot faults if detected by taxpayer.
16

17. The “Per Se Stock Rule” – Policy Concerns
Preamble to Final Regulations (2016):
“Comments requested that proposed §1.385-3 be withdrawn or
thoroughly reconsidered before being finalized…the Treasury Department
and the IRS decline to adopt the alternative approaches suggested by
comments and have determined that the general approach of proposed
§1.385-3, including the per se funding rule, should be retained. However,
based on comments received, the Treasury Department and the IRS have
determined that it is appropriate to make significant modifications to the
scope…”
“…the final and temporary regulations are more narrowly focused on
purported debt instruments that do not finance new investment. The
Treasury Department and the IRS have determined that, when this factor,
along with the relatedness factor, is present, the purported debt
instrument should be treated as stock without regard to whether the
issuer is over leveraged…”
17

18. “Per Se Stock Rule”: General Rule
A covered debt instrument is treated as stock if it is issued by a U.S. corporation to a
member of the U.S. corporation’s expanded group in the following “bad” transactions:
1
2
3
In a distribution;
In exchange for stock of a member of the same expanded group; or
In exchange for property in an asset reorganization.
Items 2 and 3 are included as “bad” transactions because the IRS and Treasury are of the view
that they can operate “…as a device to convert what otherwise would be a distribution into a sale
or exchange transaction without having any meaningful non-tax effects”.
In response to very strong public comment pushback on these comments, the IRS and Treasury
noted that they “continue to view the transactions described in [2 and 3 above] as sufficiently
economically similar to distributions such that they should be subject to the same rules….”.
18

19. “Per Se Stock Rule”: General Rule [Continued]
A covered debt instrument is treated as stock to the extent it is issued by a U.S.
corporation to a member of the U.S. corporation’s expanded group in the following
“bad” transactions:
2 In exchange for stock of a member of the same expanded group:
Public
Canco
USS
1) USS Note
for Canco
stock
Facts
• Public Canco wants to acquire UST as a sub in its
United States group in exchange for Canco shares
• USS issues the USS Note to Public Canco in exchange
for Canco stock
• USS immediately transfers the Canco stock to UST’s
shareholders in exchange for all of the UST stock.
Note: “Killer B” rules do not apply here.
UST
Public
2) Canco
stock for UST
stock
+
_
19

20. “Per Se Stock Rule”: Funding Rule
The Funding Rule: The Funding Rule “addresses transactions that, when viewed together,
present similar policy concerns as the transactions that are subject to the general rule”
(Proposed Regs Preamble). More specifically, the Funding Rule treats debt as stock if it is
treated as funding one of the three “bad” transactions under the “per se funding rule” or
the “principal purpose rule”:
1
2
3
A distribution of cash or property on stock held by another group member
(other than in an exempt distribution)
An acquisition of stock of a group member (other than an acquisition in an
exempt exchange)
An acquisition of property from a group member in an asset reorganization
20

21. “Per Se Stock Rule”: Funding Rule [continued]
Public Comments related to the funding rule were highly critical. The following soundbites
were taken from the Final Preamble:
“…comments recommended that
the regulations adopt a tracing
approach to connect a funding
with a distribution or acquisition…
[m]ultiple comments suggested
eliminating the per se funding rule
entirely…”
Entirely Replace the Per Se Rule
“The Treasury Department and the
IRS continue to be of the view that,
because money is fungible, an
objective rule is an appropriate way
to attribute a distribution or
acquisition, in whole or in part, to a
funding…..[m]ore fundamentally,
however, because money is fungible,
a taxpayer’s particular purpose for a
particular borrowing is largely
meaningless.”
“In adopting a per se funding rule
based on the fungibility of money,
the Treasury Department and IRS
recognize that all outstanding debt,
regardless of how much time has
transpired between the issuance and
the distribution or acquisition, could
be treated as funding a distribution
or acquisition.”
Taxpayers’ purposes are meaningless Fungibility of money
21

22. “Per Se Stock Rule”: Funding Rule [Continued]
The Per Se Funding Rule: An instrument issued within the 3 years before or after one of the
“General Rule” transactions is treated as funding such transaction for purposes of the
Funding Rule. This was originally formulated as a “non-rebuttable presumption” in the
proposed regulations.
EGIs issued during this time are caught by the per se rule
Date of funding
transaction
-36
months
+36
months
Note: Transactions occurring prior to April 5, 2016 are not considered for the
Funding Rule (so we will be working with a truncated “look-back” period
until 2019).
22
The Principal Purpose Rule: An instrument issued outside the per se period is treated as a
“bad transaction” if it is issued with a principal purpose of funding such transaction.

23. “Per Se Stock Rule”: Funding Rule [Continued]
• The 72-month non-rebuttable presumption (the formulation of the per se funding rule in the
proposed regulations) attracted particularly scathing reviews from public commentators.
• Despite this harsh reception, the preamble concludes that “…the Treasury Department and
the IRS have determined that, because money is fungible, an objective set of rules using a
fixed time period and various stacking rules is the most administrable approach to determine
whether a debt instrument funded a distribution or acquisition.
• The IRS noted that, most of the comments requesting a shorter testing period were focused
on compliance burdens. In response to this the IRS belies that the combined effect of:
• The additional of numerous exceptions (including an exception for short-term debt instruments”
• An enhanced E&P exception
• Allowing certain capital contributions to be taken into account
Will have an effect that will “substantially narrow” the scope of this rule and focus it more sharply on
non-ordinary course debt instruments and extraordinary distributions and acquisitions.
• IRS and Treasury believe that the 72 month testing period “is a reasonable testing period that
appropriately balances the need for an administrable rule and the fact that transactions
involving indebtedness are inextricably linked due to the fungibility of money.”
23

24. Qualified short-term debt exception
1
2
3
Ordinary course loans
Interest-free loans
Deposits with a qualified cash pool header
4
5
270-Day Test
Specified Current Assets Test
Qualified short-term debt exception: The following debt instruments are excluded
from the Funding Rule.
24

25. Qualified short-term debt exception
1
2
3
Ordinary course loans
Interest-free loans
Deposits with a qualified cash pool header
4
5
270-Day Test
Specified Current Assets Test
Instruments issued as consideration for the acquisition of property other than
money in the ordinary course of the issuer’s trade or business and that are
reasonably expected to be repaid within 120 days of issuance.
25

26. Qualified short-term debt exception
1
2
3
Ordinary course loans
Interest-free loans
Deposits with a qualified cash pool header
4
5
270-Day Test
Specified Current Assets Test
Interest-free loans that do not have OID and do not (and are not required to have)
imputed interest under Sections 483, 7872 and 482.
This category is limited in application because most loans are subject to imputed
interest rules.
26

27. Qualified short-term debt exception
1
2
3
Ordinary course loans
Interest-free loans
Deposits with a qualified cash pool header
4
5
270-Day Test
Specified Current Assets Test
A demand deposit received by a qualified cash pool header pursuant to a cash-management
arrangement.
A “qualified cash pool header” is a member of the EG (or certain others) that has as a principal purpose
managing a cash management arrangement for participating EG members, and maintains deposits in
excess of loans to participating EG members. Limitations apply to what the qualified cash pool header
may do with any excess cash.
The “principal purpose” test may preclude entities that perform other functions
27

28. Qualified short-term debt exception
1
2
3
Ordinary course loans
Interest-free loans
Deposits with a qualified cash pool header
4
5
270-Day Test
Specified Current Assets Test
Loans issued with an at-the-market or below-the-market interest rate pursuant to a revolving
credit agreement (or with a term no longer than 270 days), provided that the issuer is a net
borrower for no more than 270 days during the taxable year (or 270 consecutive days over
consecutive tax years).
The determination of “net borrower” position excludes ordinary course and interest-free loans
Inadvertent failure to satisfy the 270-day test may be disregarded if taxpayer maintains written
due diligence procedure to prevent such failures.
28

29. Qualified short-term debt exception
1
2
3
Ordinary course loans
Interest-free loans
Deposits with a qualified cash pool header
4
5
270-Day Test
Specified Current Assets Test
Loans issued with an at-the-market or below-the-market interest rate, but only to the extent
(together with any ordinary course, interest-free or 270-day loans) not exceeding the amount
expected to be necessary to finance short-term financing needs during the course of the
issuer’s normal operating cycle.
Short-term financing needs calculated by reference to the maximum “specified current assets”
(assets reasonably expected to be realized in cash or sold in the ordinary course of business)
amount expected to be reflected on the balance sheet during the subsequent 90-day period
(or, if longer, the issuer’s normal operating cycle).
29

30. Exceptions to the Per Se Stock Rule
Osler, Hoskin & Harcourt LLP – New York | Taxation
Acquisitions of affiliate stock are not
caught by the Per Se Stock Rule if the
acquisition results from a transfer of
property in exchange for stock, and 50%
of the vote and value of the affiliate from
whom the stock was acquired are owned
by the funded party for 3 years following
the issuance (or if presumption to
relinquish control rebutted).
Acquisitions of expanded group
stock are not caught by the Per Se
Stock Rule if such stock is delivered
to employees, directors, or
independent contractors as
consideration for services rendered
to a member of the expanded group.
Distributions or acquisitions
deemed to occur under transfer
pricing adjustments pursuant to
Section 1.482-1(g) are not caught
by the Funding Rule.
1 Funded Subsidiary and Other Exclusions
50% Subsidiary Stock Compensatory Stock Acquisitions Transfer Pricing Adjustments
Acquisitions of expanded group stock by a dealer in securities operating in
the ordinary course of the dealer’s business of dealing in securities are
not caught by the Per Se Stock Rule, if:
• The dealer accounts for the stock as securities held primarily for sale to
customers in the ordinary course of business
• The dealer disposes of the stock within a period of time consistent with
holding the stock for the ordinary course of business
• The dealer does not sell or transfer the stock to a person in the same
expanded group, other than in a sale that in turn satisfies this “Securities
Dealer” exception
Securities Dealer
Certain deemed acquisitions of
expanded group stock that
would result in a “cascading”
set of recharacterizations are
not caught by the Funding Rule,
provided that they are not part
of a plan to prevent the
application of the Funding Rule.
Anti-Cascade Rules
30

31. Exceptions to the Per Se Stock Rule [Continued]
The amount of “bad” transactions under the Per Se Stock Rule is
reduced by the earnings and profits of the covered member
accumulated in taxable years ending after April 4, 2016 and certain
capital contributions of property to the covered member in exchange
for stock made during the applicable per se period.
Certain exceptions and limitations apply to the calculation of earnings,
including in the case of a change of control of the covered member. This
would require that corporations keep an “expanded group earnings
account” that is separate from its normal U.S. tax E&P calculations.
Qualified contributions must have the effect of increasing the capital
and aggregate fair market value of the covered member. There is an
extensive list of excluded property.
The Per Se Stock Rule does not
apply to the extent that the
aggregate issue price of all
Expanded Group debt that would
be recharacterized as equity under
the Per Se Stock Rule does not
exceed $50 million. If the $50m
threshold exceeded, only the excess
would be treated as stock.
“Cliff” effect removed. This
exception may help address de
minimis inadvertent errors.
2 3
Reductions for Expanded Group Earnings
and Qualified Contributions
Threshold Exception
31

32. - Special documentation rules for revolvers/cash pooling
385 Summary
Section 385
Final and
Temporary
Regulations
Per Se Rule
Documentation
Rule
- Applies only to large issuers
- Applies to debt issued on or after Jan 1, 2018
- Rebuttable presumption for “highly compliant” taxpayers
- Applies (currently) only to non-hybrid debt
- Qualified short-term debt exception (Temp)
- Subsidiary stock issuance and other exclusions
- Reductions for post-April 4 earnings and profits and
certain qualified contributions
- $50m threshold exception for all expanded group debt
- Applies to debt issued on or after April 5, 2016
- Transitional relief – tainted debt is not recharacterized
until 1/19/2017
32

33. 385 in the International Context
385 and U.S. Tax Treaties
• Limitation on Benefits (LOB) considerations
• Article X (Dividends) considerations
• Article IX (Associated Enterprises) considerations
385 and BEPS
• Action Item 4 (Limiting Base Erosion Involving Interest
Deductions and other Financial Payments)
• Action Item 2 (Neutralize the effects of Hybrid Mismatch
arrangements)
33

34. Examples
34

35. Application of new rules to Canadian companies
Ground Rules: Unless otherwise indicated, the following assumptions apply to the examples
below:
1
2
3
All notes are financed or refinanced after April 4, 2016.
All entities have no earnings and profits in post-April 4, 2016 taxable years and
none of the entities have issued any stock in a qualified contribution.
All notes are issued in the form of debt for US federal income tax purposes.4
There is already an outstanding intercompany debt with an issue price of $50m
within the expanded group that would be re-characterized as equity under the Per
Se Stock Rule but for the $50m threshold exception.
5 The transactions are not part of a plan and would not be stepped together under
the Step Transaction Doctrine.
6 All entities have a calendar taxable year.
35

36. Example 1 – Luxembourg financing structure
CanCo
USCo
1) USCo
Note
Facts
• On June 7, 2016, the USCo Note is refinanced
• In 2017, USCo makes a $100 distribution to CanCo
Analysis
The $100 distribution by USCo to Canco in 2017 is a "bad"
transaction, and $100 of the USCo Note is recharacterized as equity
under the per se funding rule on the date that the distribution occurs.
What if USCo makes an upstream loan in lieu of a dividend?
Analysis: Assuming that the upstream loan is properly characterized
as debt under the common law debt/equity analysis, the USCo Note
would not be recharacterized as a result of the upstream loan.
What if USCo has $50 of E&P in 2017?
Analysis: Only $50 of the USCo Note would be recharacterized.
What if USCo has an earnings deficit of $100 in 2018?
Analysis: Assuming that USCo has $50 of E&P in 2017 and earnings
deficit of $100 in 2018, it is currently unclear whether the earnings
deficit in 2018 could cause more than $50 of the USCo Note to be
recharacterized. Presumably this would not be an appropriate result.
LuxCo2) $100
2016 E&P: $0
2015 E&P: $300
+
_
36

37. Example 2 – Ordinary Rule E&P Exception
CanCo
USCo
1) $100 note distribution
on June 5, 2017
2) $100 cash distribution
October 5, 2017
2017 E&P: $100
CanCo
USCo
1) $100 cash distribution
on June 5, 2017
2) $100 note distribution
October 5, 2017
2017 E&P: $100
Scenario A Scenario B
Analysis
Under the proposed regulations, it appeared that Scenario A was eligible
for the current year E&P exception but Scenario B was not.
Under the final regulations, the note should be recharacterized as equity in
both cases.
37

38. Example 3 – Group debt exceeds $50m threshold
CanCo
US Co 3US Co 1 US Co 2
$49m loan
distribution
+
_
+
_
$5m SPA paid
with a note
Facts
• Assuming no other expanded affiliate debt (i.e., $50m threshold
intact prior to the steps below)
• US Co 3 distributes a $49m note to CanCo
• US Co 1 purchases all of US Co 2 stock with a $5m note
Analysis
Under the proposed regulations, both notes would be
recharacterized as equity. Under the final regulations, only $4m of
the cross-border debt is recharacterized as equity.
38

39. Example 4 – Upstream loan
Facts
• Public CanCo pays annual distributions to
shareholders
• USCo has excess cash, so it loans cash to
CanCo
• CanCo in turn makes a return of capital
distribution to Public Canco to fund this
year’s distribution
Analysis
• Under the proposed regulations, the
distribution in (2) would have caused (1) to
be recharacterized as equity, which would
then have caused the loan from Luxco to
USCo to be recharacterized as equity.
• Under the final regulations, no loan would
be recharacterized here.
Public
CanCo
CanCo
USCo
1) Loan
2)
Distribution
+
_
LuxCo
+
_Loan to USCo
39

40. Example 5 – Third party acquisitions
FAIT
USCo
+
_
USCo note
UST
UST
Shareholders
Cash
Fact Scenario A
• FAIT advances cash to USCo in exchange for USCo note
• USCo purchases UST shares for cash
FAIT
USCoUST
USCo note
+
_
UST
Shareholders
Cash
Fact Scenario B
• FAIT purchases UST shares for cash
• FAIT transfers UST shares to USCo in exchange for USCO note (in a 304
transaction)
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Analysis
This example illustrates that the ordering of the steps matters. Economically,
the two scenarios reach the same result. However, the note would not be
recharacterized under Fact Scenario A but would be recharacterized under
Fact Scenario B.

41. Example 6 – FIRPTA
Facts
• In year 2017, FIRPTA Co 2 borrows $100m from LuxCo
• In Year 2018, FIRPTA Co 2 has $400m of E&P and makes a distribution to CanCo of $475m
• In Year 2019, CanCo contributes FIRPTA Co 1 to FIRPTA Co 2 in exchange for common shares of FIRPTA Co 2
Analysis
In 2018, $75m of the FIRPTA Co 2 loan is recharacterized as equity. As a result, Luxco is deemed to own preferred non-voting equity in FIRPTA Co 2. In 2019,
the contribution by Canco of FIRPTA Co 1 to FIRPTA Co 2 would not qualify as a nonrecognition transaction under Section 351 of the Code because Canco will
not have the requisite Section 368(c) control over FIRPTA Co 2 (which requires that Canco own at least 80% of the total voting power of FIRPTA Co 2 and at
least 80% of the value of all non-voting classes of stock of FIRPTA Co 2)
CanCo
FIRPTA Co 2 LuxCoFIRPTA Co 1
$100m loan to
FIRPTA Co 2
_ +
NIB
Loan
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42. Example 7– Private Equity (continuing issues)
Private
Equity fund
USCo 1 UKCo CanCo
Lux USCo 2
U.S. Real
Estate
1. Under the finalized regulations, USCo 1, UKCo, and CanCo are not members of an expanded group (although the IRS has “reserved” on
the key issue – downward attribution of ownership).
2. Although the IRS had requested comments on whether “leveraged blockers” like UsCo 1 should be caught by these rules, the final
regulations declined to do so. However, the IRS is continuing to study these structures in the context of the 385 rules.
_
+
_
+
_+
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43. Example 8 – Continuing Issues
1. Canadian Banks – or lenders to Canadian-based borrowers with U.S. activities – will be significant stakeholders in the 385
compliance of those borrowers
Bank _
+
$1B Loan
CanCo
Lux USCO+ _
$1B Intercompany
Loan
$1B Capital
Contribution
+
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44. Other Rules
• Ordering/timing rules
• Consolidated group
• Partnerships/disregarded entities
• Successor/Predecessor
• Anti-abuse rule
• No affirmative use [reserved]
• Tax consequences of a deemed exchange
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45. Practical takeaways
Osler, Hoskin & Harcourt LLP – New York | Taxation
1
2
3
Scope
Impact
Management
– The reach of these rules remains very broad, but with important exceptions
– The impact of these rules can be harsh
– These rules can, in many cases, be managed with focused coordination
between tax, treasury, and other internal functions
45