2015-0589611E5 loss consolidation arrangements

Principal Issues: Whether loss consolidation arrangements can be undertaken among related but not affiliated parties; whether a lossco needs a source of income to cover dividend payments other than interest paid by a profitco; whether a commitment letter is required.

Position: Yes; yes in some situations; often representations are sufficient.

Reasons: Previously published positions.

Author: Friedlander, Lara G.
Section: 20(1)(c), 245

XXXXXXXXXX
                                                2015-058961
                                                Lara Friedlander

August 19, 2015

Dear XXXXXXXXXX:

Re:  Loss Consolidations

This is in response to your letter dated May 8, 2015 and your email of June 30, 2015 concerning our policy relating to advance income tax rulings on standard loss consolidation transactions.

You have asked whether it is the Canada Revenue Agency’s (“CRA’s”) position that loss consolidation arrangements are permitted amongst related parties that are not affiliated. You have also enquired if it matters whether or not a “lossco” has any source of funds to cover dividend payments other than the interest income paid by a “profitco”.  Lastly, you would like to know if the CRA requires a commitment letter issued by a third party to confirm that the proposed transactions are commercially plausible.

Our Comments

With respect to your first question regarding the CRA’s position on whether loss consolidation arrangements are permitted amongst related parties that are not affiliated, Income Tax Folio S3-F6-C1 describes particular types of loss consolidation arrangements in paragraphs 1.71 to 1.75.  Paragraph 1.71 of that Folio indicates that such loss consolidation arrangements could be undertaken by parties that are related but not affiliated (as well as parties that are both related and affiliated and parties that are affiliated but not related).  We confirm that our position has not changed since the last update of that Folio.

In addition, you have asked if it matters whether or not a “lossco” has other source of funds to cover dividend payments other than the interest income paid by a “profitco”.  Income Tax Technical News No. 30 (May 21, 2004) states:  “While we have not reached the point where we would state that C.R.B. Logging [C.R.B. Logging Co. Ltd. v. The Queen, [1999] 2 C.T.C. 2279 (T.C.C.), aff’d at [2000] 4 C.T.C. 157 (F.C.A.)] is no longer good law, we have provided rulings on some upstream shareholding situations.  The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary”.  Accordingly, in upstream shareholding situations, the CRA will generally ask for a representation that the issuer of the shares will have other assets from which the dividends will be funded. 

Lastly, with regard to whether the CRA requires a commitment letter issued by a third party to confirm that the proposed transactions are commercially plausible, typically the CRA will request a representation relating to borrowing capacity.  In some cases, such as situations where the amount of the debt is substantial, CRA may request a signed letter from a director or other documentation.

We trust that these comments will be of assistance.

Yours truly,

G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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