2015-0610671C6 2015 CTF Q.6(b) Loss Consolidation and Section 55

Principal Issues: Can the CRA confirm that standard in-house loss consolidation arrangements would not be caught by the "one of the purposes" tests?

Position: In-house loss consolidations designed only to move losses between related or affiliated corporations on which rulings were favourably issued in the past would not be considered to have a purpose described in proposed subsection 55(2.1). An indication that such purpose is absent is that any ACB created in the loss consolidation is eliminated on the unwind.

Reasons: See response

Author: Ton-That, Marc
Section: 55(2.1)

2015 CTF Annual Conference
CRA Roundtable

Question 6(b): Loss Consolidations and Section 55

A standard loss consolidation arrangement that has been sanctioned by the CRA in several Rulings is the “preferred share debt loop”.  Section 55 can now apply where “one of the purposes” of the payment or receipt of the dividend is to effect a significant reduction in the FMV of any share OR a significant increase in the cost of property of the dividend recipient immediately after the dividend.  There are good arguments that the proposed rules should not impact standard in-house loss consolidation structures. First of all, it is unlikely that the amount of the dividends paid each year will be significant.  In addition, the sole purpose of the dividend is simply to accommodate the loss consolidation arrangement, so there is a strong argument that the “one of the purposes” test would not be met.  Finance has also indicated that it is not the intent of the new rules to create issues for the normal cash movement of funds within Canadian corporate groups or conventional loss consolidation structures. 

Can the CRA confirm that standard in-house loss consolidation arrangements would not be caught by the “one of the purposes” tests?

CRA Response:

Yes, in-house loss consolidations that were only designed to move losses between related or affiliated corporations and on which we have ruled favourably in the past would not be considered to have a purpose described in proposed subsection 55(2.1).  An indication that such purpose is absent in similar loss consolidations is that any ACB that is created in the loss consolidation is eliminated on the unwind of the loss consolidation structure.

This was confirmed in the opinion provided by the CRA on the non-application of proposed subsection 55(2.1) in rulings recently issued on loss consolidation transactions.

Marc Ton-That
2015-061067
November 24, 2015

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