2013-0498551R3 Loss Consolidation

Principal Issues: Is the loss utilization arrangement acceptable?

Position: Yes

Reasons: meets our published position

Author: XXXXXXXXXX
Section: 20(1)(c)

XXXXXXXXXX
                                                                                                                                                  2013-049855

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re:  XXXXXXXXXX (“Parent”)|
       XXXXXXXXXX (“Lossco”)

Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayers.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues contained herein are:

(i)   dealt with in an earlier return of Parent, Lossco or a related person;

(ii)  being considered by a tax services office or a taxation centre in connection with a tax return already filed by Parent, Lossco or a related person;

(iii) under objection by Parent, Lossco or a related person;

(iv)  the subject of a previous ruling issued by the Income Tax Rulings Directorate to Parent, Lossco or a related person; or

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

Except as otherwise noted, all statutory references in this advance income tax ruling are references to the provisions of the Act.  Unless otherwise noted, all references to currency are to Canadian dollars.
Definitions:
(a)   “Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1 as amended to the date hereof;
(b)   “affiliated persons” has the meaning assigned by subsection 251.1(1);
(c)   XXXXXXXXXX;
(d)   XXXXXXXXXX;
(e)   “CRA” means the Canada Revenue Agency;
(f)   “dividend rental arrangement” has the meaning assigned by subsection 248(1);
(g)   XXXXXXXXXX;
(h)   XXXXXXXXXX;
(i)   “Lossco” means XXXXXXXXXX;
(j)   “Lossco Additional Preferred Shares” means the additional Preferred Shares to be issued by Lossco to Parent as described in 15 below;
(k)   “Lossco Initial Preferred Shares” means the initial Preferred Shares to be issued by Lossco to Parent as described in 15 below;
(l)   “Lossco Preferred Shares” means the Lossco Initial Preferred Shares and the Lossco Additional Preferred Shares or either of them;
(m)   “non-capital loss” has the meaning assigned by subsection 111(8);
(n)   “Parent” means XXXXXXXXXX;
(o)   “Parent Additional Loans” means the additional loans made by Lossco to Parent as described in 13 below;
(p)   “Parent Initial Loans” means the initial loans made by Lossco to Parent as described in 13 below;
(q)   “Parent Loans” means the Parent Initial Loans and the Parent Additional Loans or either of them;
(r)   “Preferred Shares” means shares of the capital stock of Lossco as defined in 12 below;
(s)   XXXXXXXXXX;
(t)   “Proposed Transactions” means the transactions described in 12 to 20 below;
(u)   “public corporation” has the meaning assigned by subsection 89(1);
(v)   XXXXXXXXXX;
(w)   “related” has the meaning assigned by section 251;
(x)   XXXXXXXXXX;
(y)   XXXXXXXXXX; and
(z)   “taxable Canadian corporation” has the meaning assigned by subsection 89(1).

Facts:
1.    Parent is a XXXXXXXXXX.  It is a taxable Canadian corporation, a public corporation, XXXXXXXXXX.
2.    Parent’s registered address is XXXXXXXXXX.  Its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office.  Parent’s taxation year-end is XXXXXXXXXX.
3.    Lossco is an indirect wholly-owned subsidiary of Parent.  Lossco was formed by amalgamation under the federal laws of Canada.  Lossco is a taxable Canadian corporation, XXXXXXXXXX.
4.    Lossco’s registered address is XXXXXXXXXX.  Its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office.  Lossco’s taxation year-end is XXXXXXXXXX. 
5.    As at XXXXXXXXXX, Lossco had a balance of non-capital loss carryforwards of $XXXXXXXXXX, as reported on its tax return filed for the taxation year ending XXXXXXXXXX.  These losses were incurred in Lossco’s taxation years ending XXXXXXXXXX and were incurred pursuant to transactions entered into in the ordinary course of Lossco’s business.
6.    Lossco has a permanent establishment in each of the provinces and territories listed below and, for its taxation year ending XXXXXXXXXX, its provincial/territorial income was allocated (or would be allocated if it had taxable income) as follows:
XXXXXXXXXX
7.    The unconsolidated financial statements of Lossco for its fiscal year ended XXXXXXXXXX indicate that Lossco had:
(a)   assets of approximately $XXXXXXXXXX;
(b)   liabilities of approximately $XXXXXXXXXX; and
(c)   total shareholder’s equity of approximately $XXXXXXXXXX.
8.    Parent’s taxable income for its three prior taxation years was as follows:
Taxation Year Ending    Taxable Income

XXXXXXXXXX              $XXXXXXXXXX
XXXXXXXXXX              $XXXXXXXXXX
XXXXXXXXXX              $XXXXXXXXXX

9.    It is expected that Parent will be able to fully utilize the interest paid or payable on the Parent Loans made to it against its income for its taxation year ending XXXXXXXXXX.
10.   Parent has a permanent establishment in each of the provinces and territories listed below and, for its taxation year ending XXXXXXXXXX, its provincial/territorial income was allocated as follows:
XXXXXXXXXX
11.   The consolidated financial statements of Parent for its fiscal year ended XXXXXXXXXX indicate that Parent and its subsidiaries had:
(a)   assets of approximately $XXXXXXXXXX;
(b)   liabilities of approximately $XXXXXXXXXX;
(c)   total shareholder’s equity of approximately $XXXXXXXXXX; and
(d)   subordinated debt of approximately $XXXXXXXXXX, capital trust securities of approximately $XXXXXXXXXX and preferred share liabilities of approximately $XXXXXXXXXX.
Proposed Transactions:
12.   Lossco’s share capital will be reorganized so as to create a new class of non-voting, cumulative dividend, redeemable, retractable preferred shares, issuable in series (the “Preferred Shares”).  The cumulative dividends payable on the Preferred Shares will be calculated by reference to the redemption/retraction price of the Preferred Shares at a rate for a particular series equal to the interest rate on the Parent Loans, the proceeds of which were used to acquire such series of Preferred Shares, plus a small spread of approximately XXXXXXXXXX%.  Dividends on the Preferred Shares will be payable quarterly in arrears, except that (i) the first dividend may, if the proposed transactions are entered into on a day other than the first day of a particular quarter, be payable at the end of the next quarter that begins after the day the proposed transactions are entered into, and (ii) the last dividend (which may also be the first dividend if the proposed transactions are entered into after the first day of the third quarter) may, if the proposed transactions are unwound (as described in 18 below) prior to XXXXXXXXXX, be payable upon the unwinding of the proposed transactions.  The terms of the Preferred Shares will provide that the payment of the redemption or retraction price may be satisfied, at Lossco’s option, either by (i) cash payment or (ii) the delivery of indebtness of the holder of the shares having an aggregate principal amount equal to the redemption or retraction price.
13.   On a particular day to be determined by Lossco, Lossco will make a series of loans to Parent (the “Parent Initial Loans”).  On one or more other days determined by Lossco, Lossco will make a series of additional loans to Parent (the “Parent Additional Loans”).  The aggregate of the Parent Loans will not exceed $XXXXXXXXXX.  The Parent Loans will constitute unsubordinated indebtedness of Parent and will be repayable by Parent at any time without penalty.
14.   Simple interest will accrue on each of the Parent Loans and will be calculated at a rate of approximately XXXXXXXXXX% per annum.  The interest on each of the Parent Loans will be paid quarterly, except that (i) the first interest payment may, if the proposed transactions are entered into on a day other than the first day of a particular quarter, be made at the end of the next quarter that begins after the day the proposed transactions are entered into, and (ii) the last interest payment (which may also be the first interest payment if the proposed transactions are entered into after the first day of the third quarter) may, if the proposed transactions are unwound (as described in 18 below) prior to XXXXXXXXXX, be made upon the unwinding of the proposed transactions.
15.   Parent will use the total proceeds received by it from the Parent Initial Loans to subscribe, on the same day the proceeds are received, for Preferred Shares in the capital of Lossco having an aggregate redemption/retraction price equal to the subscription price therefor (the “Lossco Initial Preferred Shares”).  Parent will use the total proceeds received by it on a particular day from the Parent Additional Loans made on that day to subscribe, on the same day the proceeds are received, for Preferred Shares in the capital of Lossco having an aggregate redemption/retraction price equal to the subscription price therefor (the “Lossco Additional Preferred Shares”).  A separate series of Preferred Shares may be used on each different day Preferred Shares are issued.  XXXXXXXXXX.
16.   Subject to the applicable solvency test, Lossco will pay dividends equal to the amount of the dividends payable by it on the Lossco Preferred Shares.
17.   Parent will pay interest on the Parent Loans when due and payable.
18.   Prior to the end of Parent’s taxation year ending XXXXXXXXXX, the following transactions will occur on one or more days:
(a)   Lossco will pay the balance of any accrued and unpaid dividends on the Lossco Preferred Shares that will be redeemed under 18(c) below;
(b)   Parent will pay the balance of any accrued and unpaid interest on such portion of the Parent Loans that will be cancelled under 18(d) below;
(c)   Lossco will redeem all or a portion of the Lossco Preferred Shares held by Parent for their aggregate redemption amount and will deliver to Parent, as  payment of the redemption amount, Parent Loans having an aggregate principal amount equal to the redemption amount;
(d)   The delivery of the Parent Loans as payment of the redemption amount, as described in 18(c) above, will result in Parent’s obligations under the applicable Parent Loans being discharged and cancelled.
19.   The transactions described in 18 above will result in, on or prior to XXXXXXXXXX, the payment of all accrued dividends on the Lossco Preferred Shares, the payment of all accrued interest on the Parent Loans, the redemption of all Lossco Preferred Shares and the repayment of all Parent Loans.
20.   The loss consolidation arrangement described in 12 to 19 above are anticipated to be undertaken in the taxation year of Parent and Lossco ending on XXXXXXXXXX. 
Other Representations:
21.   The Lossco Preferred Shares which will be issued as described in 15 above, will not, at any time during the implementation of the Proposed Transactions described in 12 to 19 above, be:
(a)   the subject of any undertaking that is referred to in XXXXXXXXXX;
(b)   the subject of a dividend rental arrangement;
(c)   the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(d)   issued for consideration that is or includes:
(i)   an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or
(ii)  any right of the type described in subparagraph 112(2.4)(b)(ii).
22.   Parent and Lossco are affiliated persons and are related to each other.
23.   XXXXXXXXXX.
Purpose of the Proposed Transactions:
24.   The purpose of the Proposed Transactions is to effect a tax consolidation of Parent and Lossco. 
Rulings Given:
Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we rule as follows:
A.    Provided that Parent has a legal obligation to pay interest on the Parent Loans and that the Lossco Preferred Shares continue to be held by Parent for the purpose of gaining or producing income, in computing its income for a taxation year, Parent will be entitled to deduct,  pursuant to paragraph 20(1)(c) of the Act, the lesser of (i) the interest on the Parent Loans as described in 17 and 18(b) above, paid in the year or payable by in respect of the year (depending on the method regularly followed by Parent in computing its income for the purposes of the Act) or (ii) a reasonable amount in respect thereof.
B.          The dividends received (or deemed to be received) by Parent on the Lossco Preferred Shares held by it as described in 16 and 18(a) above will be taxable dividends that will, pursuant to subsection 112(1) of the Act, be deductible in computing its taxable income for the taxation year in which the dividends are received (or deemed to be received), and for greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4) of the Act.
C.          Neither Part IV.1 nor Part VI.1 of the Act will apply to the dividends described in Ruling B because the dividends will be excepted dividends within the meaning assigned by section 187.1 of the Act and excluded dividends within the meaning assigned by subsection 191(1) of the Act.
D.          The provisions of subsections 15(1), 56(2), and 246(1) of the Act will not apply as a result of the Proposed Transactions in and by themselves.
E.    The delivery of Parent Loans to Parent in satisfaction of the redemption amount of the Preferred Shares as described in 18(c) above will not give rise to any forgiven amount within the meaning of subsection 80(1) of the Act.
F.          Subsection 245(2) of the Act will not be applied, as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions, other than those described in 18 and 19 above, are completed by XXXXXXXXXX.  The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comments:

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a)   the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

(b)   the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein; or

(c)   any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.

Yours truly,     

XXXXXXXXXX
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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