2016-0640371R3 Standard Loss Consolidation

Principal Issues: Whether a lossco will be entitled to apply its non-capital losses against the interest income generated as part of the loss consolidation transactions and whether profitcos will be entitled to deduct the corresponding interest expense.

Position: Yes.

Reasons: Conforms to our requirements for such rulings.

Author: XXXXXXXXXX
Section: 245; 20(1)(c); 112(1); 55(2)

XXXXXXXXXX                2016-064037

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re:    Advance Income Tax Ruling Request
    XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”).  We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Taxpayers, none of the issues involved in the ruling request is:

i.    in an earlier return of any of the Taxpayers or a related person;

ii.    being considered by a tax services office or a tax centre in connection with a tax return already filed by any of the Taxpayers or a related person;

iii.    under objection by any of the Taxpayers or a related person;

iv.    before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

v.    the subject of a ruling previously issued by the Directorate to any of the Taxpayers or a related person.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars.

DEFINITIONS:

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

“affiliated persons” has the meaning assigned by subsection 251.1(1);

“CBCA” means the Canada Business Corporations Act (Canada), and where applicable, its predecessor statutes;

XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

XXXXXXXXXX;

“Foreign Authority” means the XXXXXXXXXX, which is the XXXXXXXXXX in Foreign Country;

“Foreign Country” means XXXXXXXXXX;

XXXXXXXXXX;

“Foreign XXXXXXXXXX

“Lossco” means XXXXXXXXXX;

“Lossco Loan 1” means the interest bearing loan to be made by Lossco to Profitco 1 as described in Paragraph 32 below;

“Lossco Loan 2” means the interest bearing loan to be made by Lossco to Profitco 2 as described in Paragraph 32 below;

“Lossco Loan 3” means the interest bearing loan to be made by Lossco to Profitco 3 as described in Paragraph 32 below, and together with Lossco Loan 1 and Lossco Loan 2, the “Lossco Loans”;

“Newco 1” means the corporation to be incorporated under the CBCA, as described in Paragraph 29;

“Newco 2” means the corporation to be incorporated under the CBCA, as described in Paragraph 29;

“Newco 3” means the corporation to be incorporated under the CBCA, as described in Paragraph 29; and together with Newco 1 and Newco 2, the “Newcos”;

“Newco 1 Common Shares” means the common shares to be issued by Newco 1 to Lossco and has the meaning assigned in Paragraph 29;

“Newco 2 Common Shares” means the common shares to be issued by Newco 2 to Lossco and has the meaning assigned in Paragraph 29;

“Newco 3 Common Shares” means the common shares to be issued by Newco 3 to Lossco and has the meaning assigned in Paragraph 29, and together with Newco 1 Common Shares and Newco 2 Common Shares, the “Newco Common Shares”;

“Newco 1 Loan” means the non-interest bearing loan to be made by Newco 1 to Lossco, as described in Paragraph 34 below;

“Newco 2 Loan” means the non-interest bearing loan to be made by Newco 2 to Lossco, as described in paragraph 34 below;

“Newco 3 Loan” means the non-interest bearing loan to be made by Newco 3 to Lossco, as described in paragraph 34 below; and together with Newco 1 Loan and Newco 2 Loan, the “Newco Loans”;

“Newco 1 Preferred Shares” means the preferred shares to be issued by Newco 1 to Profitco 1 as described in Paragraph 33;

“Newco 2 Preferred Shares” means the preferred shares to be issued by Newco 2 to Profitco 2 as described in Paragraph 33;

“Newco 3 Preferred Shares” means the preferred shares to be issued by Newco 3 to Profitco 3 as described in Paragraph 33; and together with Newco 1 Preferred Shares and Newco 2 Preferred Shares, the “Newco Preferred Shares”.

“noncapital loss” has the meaning assigned by subsection 111(8);

“paid-up capital” has the meaning assigned by subsection 89(1);

“Parent” means XXXXXXXXXX;

“Payment Period” means a calendar XXXXXXXXXX;

“Profitco 1” means XXXXXXXXXX;

“Profitco 2” means XXXXXXXXXX;

“Profitco 3” means XXXXXXXXXX, and together with Profitco 1 and Profit 2, the “Profitcos”;

“Proposed Transactions” means the transactions described in paragraphs 29 to 41;

“related persons” has the meaning assigned by section 251;

“Subsidiary” means XXXXXXXXXX;

“Subsidiary Loan” means the loan made by Subsidiary to Lossco, the principal amount of which will equal the aggregate principal amounts of the Lossco Loans, as described in paragraph 31 below;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

“Treaty” means the XXXXXXXXXX.

FACTS: 

1.    Parent, through its subsidiary corporations, is a global provider of XXXXXXXXXX.

2.    Parent is a corporation incorporated under the laws of Foreign Country, a non-resident of Canada for purposes of the Act and a resident of Foreign Country for the purposes of the Treaty.  Parent is XXXXXXXXXX.  There have been no acquisitions of control of Parent or of any of its subsidiary corporations that are participants to the Proposed Transactions, including direct or indirect parent corporations of such subsidiary corporations, and there are no planned acquisitions of such corporations, including Parent.

3.    The consolidated financial statements of Parent for its fiscal year ended XXXXXXXXXX indicate that Parent and its accounting consolidated group had:

i.    total assets of approximately XXXXXXXXXX$XXXXXXXXXX;

ii.    total liabilities of approximately XXXXXXXXXX$XXXXXXXXXX; and

iii.    total equity of approximately XXXXXXXXXX$XXXXXXXXXX.

4.    Subsidiary is an indirect wholly-owned subsidiary of Parent. Subsidiary is a corporation incorporated under the laws of Foreign Country, a non-resident of Canada for purposes of the Act and a resident of Foreign Country for purposes of the Treaty. Subsidiary is XXXXXXXXXX. Subsidiary is the parent corporation of directly and indirectly owned subsidiaries and other entities that collectively XXXXXXXXXX.

5.    Profitco 1 is an indirect whollyowned subsidiary of Subsidiary. Profitco 1 has been a subsidiary of Subsidiary since XXXXXXXXXX.  Profitco 1 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX.  Its tax centre is XXXXXXXXXX Tax Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Profitco 1’s taxation yearend for purposes of the Act is XXXXXXXXXX. Profitco 1, which is part of the XXXXXXXXXX of Subsidiary, which is part of the Parent corporate group, XXXXXXXXXX, which is also part of the Parent corporate group.

6.    Profitco 1’s taxable income for its XXXXXXXXXX prior taxation years for which tax returns have been filed with the CRA is as follows:

Taxation Year Ending    Taxable Income / (loss)

XXXXXXXXXX            XXXXXXXXXX

7.    It is expected that Profitco 1 will be able to fully utilize the deductions resulting from interest paid or payable on the Lossco Loan 1 either against its income for a current taxation year in which the Proposed Transactions are undertaken or by carrying back any non-capital loss for that taxation year to be deducted against its taxable income for one or more of its XXXXXXXXXX prior taxation years.

8.    Profitco 1’s standalone financial statements for its fiscal year end XXXXXXXXXX, indicate that Profitco 1 has assets of $XXXXXXXXXX.

9.    Profitco 1 has a permanent establishment XXXXXXXXXX.

10.    All of the issued and outstanding common shares of Profitco 2 are directly owned by Profitco 1. Profitco 2 has been a subsidiary of Profitco 1 since XXXXXXXXXX. Profitco 2 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX.  Its tax centre is the XXXXXXXXXX Tax Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Profitco 2’s taxation year-end for purposes of the Act is XXXXXXXXXX.

11.    Profitco 2 is XXXXXXXXXX. Profitco 2 is regulated by the XXXXXXXXXX. Profitco 2 will seek XXXXXXXXXX approvals to enter into the Proposed Transactions.

12.    Profitco 2’s taxable income for its XXXXXXXXXX prior taxation years for which tax returns have been filed with the CRA is as follows:

Taxation    net Income For    XXXXXXXXXX    Taxable    Taxable Income
Year Ending    Tax Purposes            dividend

XXXXXXXXXX

13.    It is expected that Profitco 2 will be able to fully utilize the deductions resulting from interest paid or payable on the Lossco Loan 2 either against its income for a current taxation year in which the Proposed Transactions are undertaken or by carrying back any non-capital loss for that taxation year to be deducted against its taxable income for one or more of its XXXXXXXXXX prior taxation years.

14.    Profitco 2’s standalone financial statements for its fiscal year end XXXXXXXXXX, indicate that Profitco 2 has assets of $XXXXXXXXXX.

15.    Profitco 2 has a permanent establishment in each of the provinces and territories listed below and, for its taxation year ending XXXXXXXXXX, its gross revenue for purposes of Part IV of the Regulations was allocated as follows:

Province/Territory    Gross Revenue

XXXXXXXXXX            XXXXXXXXXX

16.    In the prior XXXXXXXXXX years, the provincial allocation of the taxable income of Profitco 2 has been as follows:

Province/
Territory    XXXXXXXXXX

XXXXXXXXXX    XXXXXXXXXX

Total    100.0%    XXXXXXXXXX

It is expected that the provincial allocations of taxable income for the taxation years ending XXXXXXXXXX will be comparable with prior years.

17.    On XXXXXXXXXX, Profitco 2 and Lossco entered into the transactions that were the subject matter of the XXXXXXXXXX, which is a loss consolidation transaction. These transactions were unwound on XXXXXXXXXX in accordance with the XXXXXXXXXX.

18.    On XXXXXXXXXX, Profitco 2 entered into the transactions that were the subject matter of the XXXXXXXXXX, which is also a loss consolidation transaction.

19.    On XXXXXXXXXX, Profitco 2 entered into the transactions that were the subject matter of the XXXXXXXXXX, which is also a loss consolidation transaction.

20.    Profitco 3 has been an indirect subsidiary of Subsidiary since its incorporation on XXXXXXXXXX. Profitco 3 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX.  Its tax centre is the XXXXXXXXXX Tax Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Profitco 3’s taxation year-end for purposes of the Act is XXXXXXXXXX. XXXXXXXXXX.

21.    Profitco 3’s taxable income for its XXXXXXXXXX prior taxation years for which tax returns have been filed with the CRA is as follows:

Taxation Year Ending    Taxable Income / (loss)

XXXXXXXXXX            XXXXXXXXXX

22.    It is expected that Profitco 3 will be able to fully utilize the deductions resulting from interest paid or payable on the Lossco Loan 3 either against its income for a current taxation year in which the Proposed Transactions are undertaken or by carrying back any non-capital loss for that taxation year to be deducted against its taxable income for one or more of its XXXXXXXXXX prior taxation years.

23.    Profitco 3’s standalone financial statements for its fiscal year end XXXXXXXXXX, indicate that Profitco 3 has assets of $ XXXXXXXXXX.

24.    Profitco 3 has a permanent establishment XXXXXXXXXX.

25.    All of Lossco’s issued and outstanding common shares are directly owned by Profitco 1. Lossco was incorporated on XXXXXXXXXX with Subsidiary as its sole shareholder. On XXXXXXXXXX, Subsidiary transferred all of the issued and outstanding common shares of Lossco to XXXXXXXXXX, a resident of Foreign Country for tax purposes and a non-resident of Canada for the purposes of the Act. XXXXXXXXXX then transferred all of the common shares of Lossco to Profitco 1 on the same date. Lossco is governed by the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX, its tax centre is the XXXXXXXXXX Taxation Centre, and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Lossco’s taxation yearend for purposes of the Act is XXXXXXXXXX.

26.    At XXXXXXXXXX, Lossco had non-capital losses available for carry forward of $XXXXXXXXXX, which may be summarized as follows:

Taxation year ending:    Noncapital losses

XXXXXXXXXX            XXXXXXXXXX

Total                $XXXXXXXXXX

27.    Lossco’s financial statements for its fiscal year-end XXXXXXXXXX, indicate that Lossco has assets of $XXXXXXXXXX.

28.    Lossco has a permanent establishment XXXXXXXXXX.

PROPOSED TRANSACTIONS

29.    Lossco will incorporate each of the Newcos under the CBCA. The Newcos will be taxable Canadian corporations. The taxation year-ends of the Newcos for purposes of the Act will be XXXXXXXXXX. Lossco will subscribe for common shares of each of the Newcos (the “Newco Common Shares”) on incorporation for an aggregate subscription price payable to each Newco of $XXXXXXXXXX. Lossco will hold the Newco Common Shares as capital property. Newcos will not carry on any business other than the proposed loss consolidation and their activities will be limited to investing the proceeds received upon issuance of the respective Newco Preferred Shares, as described in Paragraph 33, in the respective Newco Loans to Lossco, as described in Paragraph 34. The Newcos will not be XXXXXXXXXX. The authorized share capital of Newcos will consist of two classes of shares: common shares and preferred shares (the “Newco Preferred Shares”).

30.    The Newco Preferred Shares will be non-voting, cumulative dividend paying, redeemable, retractable preferred shares and dividends will be paid monthly. The cumulative dividends payable on each of the classes of Newco Preferred Shares will be calculated as a percentage of the redemption/retraction price of the respective Newco Preferred Shares, which is equal to the interest rate on the respective Lossco Loans plus a small spread of XXXXXXXXXX%. The cumulative dividends payable on the Newco Preferred Shares will be as follows:

i.    XXXXXXXXXX% annually on Newco 1 Preferred Shares;

ii.    XXXXXXXXXX% annually on Newco 2 Preferred Shares; and

iii.    XXXXXXXXXX% annually on Newco 3 Preferred Shares.

31.    On a particular day to be determined by Subsidiary and Lossco, Subsidiary will make the Subsidiary Loan to Lossco. The principal amount of the Subsidiary Loan will equal the aggregate principal amounts of the Lossco Loans. The Subsidiary Loan will be repayable on demand and will not bear interest. The Subsidiary Loan will be in the principal amount of $XXXXXXXXXX. Subsidiary will source the funds for the Subsidiary Loan from its working capital.

32.    Lossco will use the proceeds received by it from the Subsidiary Loan to make the following Lossco Loans:

i.    the Lossco Loan 1 will be advanced to Profitco 1 with a principal amount of $XXXXXXXXXX, bearing interest at a rate of XXXXXXXXXX% per annum;

ii.    the Lossco Loan 2 will be advanced to Profitco 2 with a principal amount of $XXXXXXXXXX, bearing interest at a rate of XXXXXXXXXX% per annum; and

iii.    the Lossco Loan 3 will be advanced to Profitco 3 for a principal amount of $XXXXXXXXXX, bearing interest at a rate of XXXXXXXXXX% per annum.

Interest on the Lossco Loans will be computed daily and paid monthly. The interest rate on the Lossco Loans was determined based on a review of interest rates in third party debt instruments XXXXXXXXXX. Lossco’s recourse under the Lossco Loans will be limited to amounts received by the Profitcos in respect of the Newco Preferred Shares.

33.    The Profitcos will use the proceeds from the Lossco Loans as follows:

i.    Profitco 1 will subscribe for the Newco 1 Preferred Shares for $XXXXXXXXXX, which will have an aggregate redemption price and stated capital equal to $XXXXXXXXXX;

ii.    Profitco 2 will subscribe for the Newco 2 Preferred Shares for $XXXXXXXXXX, which will have an aggregate redemption price and stated capital equal to $XXXXXXXXXX; and

iii.    Profitco 3 will subscribe for the Newco 3 Preferred Shares for $XXXXXXXXXX, which will have an aggregate redemption price and stated capital equal to $XXXXXXXXXX.

34.    The Newcos will use the proceeds from the Newco Preferred Shares as follows:

i.    Newco 1 will make the Newco 1 Loan to Lossco. The principal amount of the Newco 1 Loan will equal the principal amount of the Lossco Loan 1.

ii.    Newco 2 will make the Newco 2 Loan to Lossco. The principal amount of the Newco 2 Loan will equal the principal amount of the Lossco Loan 2.

iii.    Newco 3 will make the Newco 3 Loan to Lossco. The principal amount of the Newco 3 Loan will equal the principal amount of the Lossco Loan 3.

Lossco will secure its obligations under each Newco Loan by granting a security interest to the applicable Newco in the corresponding Lossco Loan.

35.    Lossco will use the proceeds from the Newco Loans to repay the Subsidiary Loan to Subsidiary.

36.    All of the transactions described in Paragraphs 29 to 35 will take place on the same day.

37.    Prior to the start of each Payment Period, Lossco will make a contribution of capital to each of the Newcos in an amount equal to the accrued dividends payable at the end of the Payment Period by each of the Newcos on their respective Newco Preferred Shares held by the Profitcos. No shares will be issued by the Newcos with respect to these contributions of capital and no amount will be added to the stated capital of any class of shares of the Newcos, or for greater certainty, to the paid-up capital of any class of shares of the Newcos. For accounting purposes, the amount of the contributions of capital will be recorded as contributed surplus.  The contributions of capital will not be treated as income of the Newcos under applicable accounting standards.  Lossco will not claim any deduction in computing income in respect of any capital contribution made to the Newcos.

38.    Each of the Newcos will pay all accrued and unpaid dividends on their respective Newco Preferred Shares held by Profitcos in cash at the end of the Payment Period from the contributions of capital received under Paragraph 37.

39.    Upon receipt of the payments of dividends described in Paragraph 38, each of the Profitcos will pay all accrued and unpaid interest due and payable on their respective Lossco Loans to Lossco in cash, pursuant to the terms of respective Lossco Loans.

40.    The following transactions will occur within XXXXXXXXXX years to unwind the loss consolidation arrangement between Lossco and Profitcos:

i.    Lossco will contribute capital to the Newcos, in cash, equal to the amount of the accrued and unpaid dividends on the Newco Preferred Shares.

ii.    Using the capital received from Lossco, the Newcos will pay, in cash, the balance of the accrued and unpaid dividends on the Newco Preferred Shares to their respective Profitcos.

iii.    Each respective Profitco will pay in cash to Lossco all accrued and unpaid interest in respect of the relevant Lossco Loan;

iv.    Lossco will repay each of the Newco Loans by assigning the Lossco Loans to the respective Newcos in full satisfaction of the principal amounts due under the respective Newco Loans;

v.    Newcos will redeem the Newco Preferred Shares held by the respective Profitcos in consideration for a non-interest bearing demand promissory note issued by the respective Newcos (the “Newco Notes”). The Newco Notes will have a principal amount and fair market value equal to the redemption price and the fair market value of the respective Newco Preferred Shares redeemed; and

vi.    Each of the respective Newcos and Profitcos will set-off the amounts due under the respective Lossco Loans against the amounts due under the respective Newco Notes as payment in full of each of these obligations.

For greater certainty, the arrangements between Lossco and each of the Profitcos may be unwound at different times, provided that each arrangement will be unwound within XXXXXXXXXX years.

41.    Following the completion of the transactions described in Paragraph 40, the Newcos will be wound up into Lossco. Lossco, as sole shareholder of the Newcos immediately before the winding-up, will pass a resolution authorizing and requiring each Newco to be wound up into Lossco. In addition, a general conveyance of the remaining assets of each Newco and assumption of liabilities of each Newco, if any, will be executed between each Newco and Lossco. Each Newco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.

ADDITIONAL INFORMATION

42.    The expected interest deductions, taxable income and carry back of non-capital losses of Profitco 1 as a result of the Proposed Transactions are as follows (all amounts are in $ XXXXXXXXXX):

Taxation        Taxable        Interest        Carry back of
year ending:    income/Loss        deductions -    non-capital
            before the        Proposed        losses to prior
            Proposed        Transactions    taxation years
            Transactions

XXXXXXXXXX        XXXXXXXXXX        XXXXXXXXXX        XXXXXXXXXX

43.    The estimated tax refund of federal and provincial income taxes to Profitco 1 as a result of the Proposed Transactions is as follows (all amounts are in $ XXXXXXXXXX):

Province    XXXXXXXXXX

XXXXXXXXXX    XXXXXXXXXX

44.    The expected interest deductions, taxable income and carry back of non-capital losses of Profitco 2 as a result of the transactions that are the subject matter of the XXXXXXXXXX and the Proposed Transactions are as follows (all amounts are in $ XXXXXXXXXX):

Taxation        Taxable        Interest        Carry back of
year ending:    income/Loss        deductions -    non-capital
            (after prior    Proposed        losses to prior
            Loss            Transactions    taxation years
            consolidation
            and before the
            Proposed
            Transactions)

XXXXXXXXXX        XXXXXXXXXX        XXXXXXXXXX        XXXXXXXXXX

45.    The estimated tax refund of federal and provincial income taxes to Profitco 2 as a result of the Proposed Transactions is as follows (all amounts are in $ XXXXXXXXXX):

Province    XXXXXXXXXX

XXXXXXXXXX    XXXXXXXXXX

46.    The expected interest deductions, taxable income and carry back of noncapital losses of Profitco 3 as a result of the Proposed Transactions are as follows (all amounts are in $ XXXXXXXXXX):

Taxation        Taxable        Interest        Carry back of
year ending:    income/Loss        deductions -    non-capital
            (before Proposed    Proposed        losses to prior
            Transactions)    Transactions    taxation years

XXXXXXXXXX        XXXXXXXXXX        XXXXXXXXXX        XXXXXXXXXX

47.    The estimated tax refund of federal provincial income taxes to Profitco 3 as a result of the Proposed Transactions is as follows (all amounts are in $ XXXXXXXXXX):

Province    XXXXXXXXXX

XXXXXXXXXX    XXXXXXXXXX

OTHER REPRESENTATIONS

48.    The Newco Preferred Shares will not at any time during the implementation of the Proposed Transactions be:

(a)    the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;

(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).

49.    Profitcos and Lossco are affiliated persons and related persons. Profitco 1 and Lossco have been affiliated with each other at all times since Lossco was incorporated on XXXXXXXXXX.  Profitco 2 has been affiliated with Lossco at all times after it was acquired by Parent on XXXXXXXXXX.  Profitco 3 has been affiliated with Lossco since Profitco 3 was incorporated on XXXXXXXXXX.

50.    None of the Profitcos or Lossco is a XXXXXXXXXX as defined in subsection XXXXXXXXXX.

51.    Lossco is not, and none of the Profitcos is, a XXXXXXXXXX.  Each of the Profitcos and Lossco is a XXXXXXXXXX within the meaning assigned by subsection 248(1). None of the Profitcos will acquire the respective Newco Preferred Shares in the ordinary course of its business. Lossco is not a “XXXXXXXXXX” as defined in subsection XXXXXXXXXX or a XXXXXXXXXX as defined in subsection XXXXXXXXXX. 

52.    There is no intention for any of the Profitcos to generate a significant loss carryforward balance as a result of the Proposed Transactions (having regard to the expected carryback of losses to prior taxation years), and the Taxpayers will seek to unwind the individual arrangements at times that are intended to prevent any significant loss carry-forward balances.

53.    The payment of dividends on the Newco Preferred Shares have no purpose other than the purpose described under the heading “Purpose of the Proposed Transactions”.

54.    The Proposed Transactions will be legally effective.

55.    At the time of the Proposed in Transactions, Lossco will have the financial capacity to make the capital contributions to Newcos as described in Paragraph 37.

56.    At the time it is required to pay the dividends on the Newco Preferred Shares as described in Paragraph 38 and at the time it is required to redeem the Newco Preferred Shares as described in Paragraph 40, each Newco will have the financial capacity to satisfy the applicable solvency and liquidity test under the CBCA. 

57.    At all times, Profitcos will have the solvency and liquidity to service the Lossco Loans.

58.    Each of the Newco Preferred Shares will be term preferred shares.

59.    Each of the Lossco Loans will be term loans with a maturity date not later than XXXXXXXXXX years after the date each such Lossco Loan is advanced.  Each of the respective Profitcos will have the right to prepay its obligations under the respective Lossco Loans without penalty.

60.    Each of the Newco Loans will be demand loans.

61.    Lossco and each respective Profitco will enter into a unanimous shareholders agreement in respect of each of the Newcos authorizing Lossco to invest any cash on hand in the respective Newcos from time to time on behalf of Newcos until such time as required by Newcos to meet their obligations under the terms of the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS 

The purpose of the Proposed Transactions is to effect a tax consolidation of Profitcos and Lossco by causing Lossco to earn interest income on the Lossco Loans, thus permitting Lossco to utilize its noncapital loss carry forwards, and to have each of the Profitcos incur interest expense to reduce its income for its current taxation year, and to the extent this creates non-capital losses for any of the Profitcos, to carry back the noncapital losses to reduce its taxable income from prior taxation years.

The purpose of both the payment and the receipt of the dividends on each of the Newco’s Preferred Shares, as described in Paragraph 38, is to provide a reasonable return on the Newco Preferred Shares issued by the Newcos to their respective Profitcos. Furthermore, the purpose of the dividends is not to reduce the fair market value or capital gain of any share, nor to increase the total cost amounts of properties of the Profitcos.

RULINGS PROVIDED

Provided that

(a)    the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information, Other Representations and the Purposes of the Proposed Transactions,

(b)    the Proposed Transactions are completed in the manner described above, and

(c)    there are no other transactions which may be relevant to the rulings requested, 

we rule that:

A.    Provided that the particular Profitco has a legal obligation to pay interest on the particular Lossco Loan, and the particular Newco Preferred Shares continue to be held by the particular Profitco for the purpose of gaining or producing income therefrom, the particular Profitco will be entitled pursuant to paragraph 20(1)(c) to deduct, in computing its income for a taxation year, the lesser of: (i) the interest paid or payable in respect of the particular Lossco Loan for that taxation year (depending on the method regularly followed by the particular Profitco in computing its income for the purposes of the Act); and (ii) a reasonable amount in respect thereof.

B.    The dividends received (or deemed to be received) by the particular Profitco in respect of the particular Newco Preferred Shares in a taxation year will be taxable dividends that will be deductible in computing the taxable income of the particular Profitco for the taxation year in which the dividends are received pursuant to subsection 112(1), 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).

C.     Provided that the purpose of the dividends in Paragraph 38 is what is described in the “Purposes of the Proposed Transactions” above and the Proposed Transactions are undertaken in the manner described above, subsection 55(2) will not apply in respect of the dividends described in Paragraph 38 above.

D.    Each of the Profitcos will be entitled to carryback to its prior taxation years the noncapital losses that are expected to arise as a result of the deductions described in Ruling A above, subject to any applicable restrictions in section 111.

E.    The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply as a result of entering into the Proposed Transactions, in and by themselves.

F.    The settlement of the Newco Loans, the Lossco Loans and the Newco Notes as described in Paragraph 40 will not give rise to any “forgiven amount” for purposes of section 80.

G.    None of the Profitcos will be subject to Part IV tax with respect to any dividends received from the Newcos except to the extent that paragraph 186(1)(b) applies to impose such tax.

H.    The receipt by the Newcos of capital contributions from Lossco as described in Paragraph 37 will not be included in the income of the Newcos.

I.    The provisions of subsection 88(1) will apply to the winding-up of the Newcos into Lossco as described in Paragraph 41, such that:

i.    Each Newco will be deemed, pursuant to paragraph 88(1)(a), to have disposed of its assets for an amount equal to the cost amount to the respective Newco immediately before the winding-up;

ii.    Lossco will be deemed, pursuant to paragraph 88(1)(b), to have disposed of each of the Newcos’ common shares that it owns for proceeds of disposition equal to the greater of the amounts described in subparagraphs 88(1)(b)(i) and (ii); and

iii.    Lossco will be deemed, pursuant to paragraph 88(1)(c), to have acquired the assets of the Newcos that are distributed to Lossco on the winding-up for an amount equal to the proceeds of disposition to the respective Newco.

J.    Subsection 245(2) will not be applied as a result of entering into the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

K.    The general anti-avoidance provision of a province with which the Government of Canada has entered into a tax collection agreement will not be applied, as a result of the Proposed Transactions, in and by themselves, to determine the tax consequences confirmed in the rulings given above, in respect of a taxation year in respect of which such a tax collection agreement is in effect.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions, excluding those described in paragraphs 40 and 41, are commenced on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter 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 reasonableness or fair market value of any fees or expenditures referred to herein;

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

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

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section 
Reorganizations Division 
Income Tax Rulings Directorate
 

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