2017-0711071R3 Use of subsidiary losses & ITCs after wind-up

Principal Issues: Can losses and ITCs of a subsidiary be claimed by a parent on a winding-up as a result of a two-step loss acquisition where the loss business carried on by the subsidiary and the shares of the subsidiary are acquired in separate transactions.

Position: Yes.

Reasons: Consistent with prior positions.

Author: XXXXXXXXXX
Section: Subsections 88(1) & (1.1)

XXXXXXXXXX                                                                                                                 2017-071107

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX (BN XXXXXXXXXX)
        XXXXXXXXXX (BN XXXXXXXXXX)
        XXXXXXXXXX (BN XXXXXXXXXX)

        Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers.  We also acknowledge the information provided in subsequent letters, e-mails and telephone discussions (XXXXXXXXXX).  The information that you provided in such correspondence and in the telephone discussions form part of this letter only to the extent described herein.

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

(i)   dealt with in an earlier tax return of the taxpayers or a person related to the taxpayers;

(ii)  being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a person related to the taxpayers;

(iii) under objection by the taxpayers or a person related to the taxpayers;

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

(v)   the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, (the "Act") as amended and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this ruling, and in all correspondence relating hereto, the following terms and expressions have the following meaning:

(a)   “Asset Sale Agreement” means the asset sale agreement referred to in Paragraph 8;

(b)   “BCA1” means XXXXXXXXXX;

(c)   “BCA2” means XXXXXXXXXX;

(d)   “BCA3” means XXXXXXXXXX;

(e)   “CCAA” means the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended;

(f)   “Continued Lossco Business” has the meaning ascribed in Paragraph 13 hereof;

(g)   “Court” means the XXXXXXXXXX;

(h)   “CRA” means the Canada Revenue Agency;

(i)   “forgiven amount” has the meaning provided in subsection 80(1);

(j)   “GP” means XXXXXXXXXX, a company incorporated under BCA3;

(k)   “ITCs” means the investment tax credits that were generated by the Lossco Business;

(l)   “Lossco” means XXXXXXXXXX (formerly known as XXXXXXXXXX), a company incorporated under BCA1;

(m)   “Lossco Business” means the business carried on by Lossco as described in Paragraph 3;

(n)   “Lossco Business LP” means XXXXXXXXXX, a limited partnership formed under the XXXXXXXXXX pursuant to a limited partnership agreement between Taxpayer and GP;

(o)   “Lossco Group” has the meaning ascribed in Paragraph 5;

(p)   “Lossco Location” means XXXXXXXXXX;

(q)   “Lossco NOLs” means the non-capital losses that were generated by the Lossco Business;

(r)   “LuxembourgCo” means XXXXXXXXXX, a corporation formed under the laws of Luxembourg.

(s)   “Monitor” means XXXXXXXXXX;

(t)   “New Investor Group” has the meaning ascribed in Paragraph 7;

(u)   “NOLs” means non-capital losses as such term is defined in subsection 111(8);

(v)   “Numberco” means XXXXXXXXXX, a company incorporated under BCA2;

(w)   “Paragraph” means a numbered paragraph in this letter;

(x)   “private corporation” has the meaning assigned by subsection 89(1);

(y)   “Proposed Transactions” are the transactions described under the section entitled “Proposed Transactions”;

(z)   “Share Purchase Agreement” means the share purchase agreement to be entered into between Numberco and Taxpayer;

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

(bb)  “Taxpayer” means XXXXXXXXXX who operates through Lossco Business LP the XXXXXXXXXX;

(cc)  “X LP” has the meaning ascribed in Paragraph 12; and

(dd)  “Y LP” has the meaning ascribed in Paragraph 12.

FACTS

1.    Lossco was incorporated under the BCA1 on XXXXXXXXXX.  Lossco is a private corporation and a taxable Canadian corporation and is a resident of Canada for the purposes of the Act.  Lossco's business number is XXXXXXXXXX, tax services office is XXXXXXXXXX and tax service center is XXXXXXXXXX.

2.    Currently, all of the issued and outstanding shares of Lossco are held by Numberco.  Numberco was incorporated under BCA2 on XXXXXXXXXX and is a private corporation, a taxable Canadian corporation and a resident of Canada for the purposes of the Act.  Numberco's business number is XXXXXXXXXX, tax services office is XXXXXXXXXX and tax service center is XXXXXXXXXX.

3.    Since XXXXXXXXXX and until XXXXXXXXXX, Lossco carried on the business of owning and operating XXXXXXXXXX (referred to herein as the "XXXXXXXXXX") which XXXXXXXXXX (the “Lossco Business”).

4.    As of its XXXXXXXXXX fiscal year-end, the Lossco NOLs totalled $XXXXXXXXXX and ITCs totalled $XXXXXXXXXX. As of the end of its XXXXXXXXXX fiscal year end, the Lossco NOLs totalled $XXXXXXXXXX and ITCs totalled $XXXXXXXXXX.

5.    On XXXXXXXXXX, because of deteriorating market conditions, Lossco, with other closely held companies (collectively the "Lossco Group"), namely XXXXXXXXXX, filed for insolvency protection under the CCAA.  On the same day, pursuant to an initial order of the Court, Monitor was appointed to oversee the CCAA process.

6.    Subsequent to the CCAA filing, various restructuring alternatives were considered with Monitor in order to achieve the best compromise with the creditors and avoid bankruptcy for a successfully CCAA emergence. It was determined that the best outcome was for the Lossco Group to, indirectly, sell all of its assets (and certain liabilities) which consisted primarily of XXXXXXXXXX on a going concern basis to the highest bidder.  In that context, Monitor initiated a formal process to solicit offers for the sale of the Lossco Group's assets, which included the Lossco Business.

7.    An investor group formed of XXXXXXXXXX and some third party lenders (the "New Investor Group") offered to acquire all of the assets of the Lossco Group and submitted the highest bid.

8.    On XXXXXXXXXX, the Court approved the plan for the Lossco Group to sell all of its assets to newly formed entities held by Taxpayer which in turn was indirectly held by New Investor Group pursuant to an agreement made between the parties (the “Asset Sale Agreement”).  On XXXXXXXXXX, the closing of the sale took place and all of the XXXXXXXXXX were sold and, as part of the sale, Lossco sold the Lossco Business to Lossco Business LP, one of the newly formed entities held by the Taxpayer. The Lossco Business was operated by Lossco without interruption until the sale.

9.    Taxpayer, incorporated under the BCA2, is a private corporation and a taxable Canadian corporation and a resident of Canada for purposes of the Act.  Taxpayer's business number is XXXXXXXXXX, tax services office is XXXXXXXXXX and tax service center is XXXXXXXXXX.  All of the issued and outstanding shares of the Taxpayer are held by LuxembourgCo., a corporation formed under the laws of Luxembourg.  The shares of LuxembourgCo were held indirectly by members of the New Investor Group.  Currently, the shares of LuxembourgCo are indirectly held by some members of the New Investor Group as XXXXXXXXXX have sold their equity interest proportionately to XXXXXXXXXX. 

10.   Taxpayer is the sole limited partner of Lossco Business LP having a XXXXXXXXXX% interest in Lossco Busisness LP who acquired the Lossco Business.

11.   Lossco Business LP's general partner is GP, having a XXXXXXXXXX% interest in XXXXXXXXXX. GP is a private corporation and a taxable Canadian corporation and is a resident of Canada for the purposes of the Act.  GP is wholly owned by the Taxpayer.

12.   Taxpayer is also the limited partner of XXXXXXXXXX (“X LP”) and XXXXXXXXXX (“Y LP”), which respectively acquired the XXXXXXXXXX pursuant to the Asset Sale Agreement, having a XXXXXXXXXX% interest in each of those limited partnerships.

13.   Since the closing of the sale contemplated in the Asset Sale Agreement, Taxpayer, through its limited partnership interest in Lossco Business LP, without interruption, has carried on the Lossco Business at the Lossco Location for profit or with a reasonable expectation of profit with most of the same employees as were employed by Lossco (the "Continued Lossco Business"). Taxpayer also owns and operates XXXXXXXXXX, namely the XXXXXXXXXX through its respective limited partnership interests in X LP and Y LP.

13A.  The Taxpayer, through X LP and Y LP which respectively own the XXXXXXXXXX, earn income from the XXXXXXXXXX.

ADDITIONAL INFORMATION

14.   At the time the Lossco Business was purchased by Lossco Business LP, the Lossco Group was owned by XXXXXXXXXX, all of whom were citizens of XXXXXXXXXX and non-residents of Canada.  At all relevant times, the Lossco Group was controlled by XXXXXXXXXX. XXXXXXXXXX ceased to have any ownership interest in the Lossco Group in XXXXXXXXXX.  XXXXXXXXXX is currently the Lossco Group’s sole remaining owner.  XXXXXXXXXX, LLC which is controlled by XXXXXXXXXX, is also a member of the XXXXXXXXXX and, indirectly, owns approximately a XXXXXXXXXX% interest in the Taxpayer.

15.   Each member of the XXXXXXXXXX (other than XXXXXXXXXX which is controlled by XXXXXXXXXX) was a direct or indirect holder of debt issued by the Lossco Group.  Such debts were secured by assets of the Lossco Group, including security on the assets of the Lossco Business.

16.   The consideration for the purchase of the Lossco Business by Lossco Business LP was paid indirectly by way of set-off against debts owed by the Lossco Group, whether directly or indirectly, to the New Investor Group.

17.   Lossco is not related to and deals at arm’s length with the Taxpayer, the GP and Lossco Business LP.

18.   Lossco Business LP acquired all or substantially all of the assets used by Lossco in the operation of the Lossco Business.  Lossco is currently inactive and has been inactive for a few years with no assets.

19.   Except for when Lossco was acquired by Numberco from XXXXXXXXXX, Lossco has never been subject to an acquisition of control prior to the date hereof.

20.   The Continued Lossco Business will continue to be carried on by the Taxpayer, through Lossco Business LP, for profit or with a reasonable expectation of profit throughout any taxation year in which the Lossco NOLs will be used to offset the income generated by the Continued Lossco Business and/or the ITCs will be used to offset the tax on such income.

PROPOSED TRANSACTIONS

21.   Pursuant to a Share Purchase Agreement, Taxpayer will purchase all of the issued and outstanding shares of Lossco for nominal consideration.

22.   Lossco will be wound up and subsequently dissolved in accordance with the provisions of the BCA1.  It is not expected that any assets would be transferred to the Taxpayer.

PURPOSE OF THE PROPOSED TRANSACTIONS

23.   The proposed transactions are to permit the Taxpayer to utilize Lossco NOLs and ITCs against future income generated by the Continued Lossco Business, the XXXXXXXXXX and income generated from other similar businesses.

24.   The proposed transactions would put the Taxpayer in the same position as if it had purchased all of the issued shares of Lossco, which in the circumstances of the CCAA process, was not possible at the time the Asset Sale Agreement was entered into.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A.    Provided that the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply after the winding-up of Lossco into Taxpayer, described in Paragraph 22, has been completed to permit Taxpayer to deduct the non-capital losses of Lossco in computing its taxable income for a taxation year commencing after the commencement of the winding-up, subject to the limitations in paragraph 88(1.1)(e) and section 111.

B.    For purposes of computing the Taxpayer’s ITCs at the end of any taxation year ending after Lossco is wound up as described in Paragraph 22, subparagraph 88(1)(e.3)(i) shall apply to deem the amounts that were included in computing Lossco’s ITCs in a taxation year (the “expenditure year”) to be included in computing the Taxpayer’s ITCs in its taxation year in which the expenditure year ended, subject to the adjustments in clauses 88(1)(e.3)(ii)(A) to (C).

For greater certainty, the acquisition of the Lossco Business from Lossco by the Lossco Business LP in a separate transaction completed years prior to the Proposed Transactions as more particularly described herein; the fact that Lossco has since been inactive with no assets; and the fact that the Taxpayer carries on the Continued Lossco Business through Lossco Business LP, shall not, in and by themselves, cause: (i) the Taxpayer to fail to satisfy the requirement of paragraph 88(1.1)(b); or (ii) the Continued Loss Business to not be treated as the same as the Lossco Business for purposes of paragraph 88(1.1)(e) and subclause 88(1)(e.3)(i)(C)(I).

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R7 issued on April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form 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

Unless otherwise expressively confirmed, nothing in this ruling should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

a)    the FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein, including the amount paid for the shares of Lossco, described in Paragraph 21;

b)    the outstanding balance of various tax accounts such as RDTOH, GRIP, non-capital losses, or CDA for any of the corporate entities described herein;

c)    whether the settlement of the debts due from Lossco Group gave rise to any income or gain or any forgiven amount for Lossco or should otherwise have reduced Lossco’s NOLs;

d)    whether the requirements of paragraphs 88(1.1)(a), (b) or (e) or subclause 88(1)(e.3)(i)(C)(I) are satisfied, except as expressly provided herein; and

e)    any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, proposed transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Yours truly,

XXXXXXXXXX
for Division Director
Reorganizations Division
Income Tax Rulings Directorate

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018