2018-0765041R3 Supplemental Ruling

Principal Issues: Changes to the facts and proposed transactions in advance income tax ruling.

Position: The rulings in files 2015-056473 and 2015-062209 will continue to be valid.

Reasons: The changes do not affect our conclusions.

Author: XXXXXXXXXX
Section: 20(1)(c), 112, 245

XXXXXXXXXX
                                                                                                                                                              2018-076504

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:  Advance Income Tax Ruling Request – supplement to file 2015-056473
        XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you advised us of certain changes to the facts and the proposed transactions as they were described in the Advance Income Tax Ruling dated XXXXXXXXXX (2015-056473) subsequently modified by the letter issued by the Canada Revenue Agency (“CRA”) on XXXXXXXXXX (2015-062209) (referred collectively to as the “Original Ruling”) on behalf of the above‑referenced taxpayers. You have requested an extension of the time before the unwinding of the loss consolidation arrangement as described in the Original Ruling.

Unless otherwise stated, terms used in this letter have the meaning given to them in the Original Ruling.

Amended facts and proposed transactions

As a result of your letter, the following amendments are made to the Legal Entities, Facts and Proposed Transactions sections of the Original Ruling:

1.    Paragraph (c) in the section entitled Legal Entities is amended to read as follows:

(c)   “Canco2” means XXXXXXXXXX, a direct and indirect wholly‑owned subsidiary of Parent, XXXXXXXXXX, that is a taxable Canadian corporation. Canco2’s business number is XXXXXXXXXX;

2.    The second sentence in Paragraph 1 is amended to read as follows:

The organization owns or operates XXXXXXXXXX.

3.    Paragraph 3 is amended to read as follows:

XXXXXXXXXX. On XXXXXXXXXX, the closing price of the common stock of Parent was USD XXXXXXXXXX.

Consolidated revenues of Parent for the year ended XXXXXXXXXX totaled USD XXXXXXXXXX. The consolidated financial results of Parent for its XXXXXXXXXX quarterly report indicate that Parent and its subsidiaries had:

(a)  assets of approximately USD XXXXXXXXXX;

(b)  liabilities of approximately USD XXXXXXXXXX; and

(c)  total equity of approximately USD XXXXXXXXXX which includes non­controlling interests and retained earnings.

On XXXXXXXXXX, the total market value of all of Parent’s outstanding shares was approximately USD XXXXXXXXXX.

4.    The last sentence in Paragraph 5 is amended as follows:

The taxation year of Canco1 ends on XXXXXXXXXX.

5.    Paragraph 6 is amended to read as follows:

The non-consolidated balance sheet of Canco1 as at XXXXXXXXXX is summarized as follows:

(a)   assets of approximately CAD XXXXXXXXXX;

(b)   liabilities of approximately CAD XXXXXXXXXX which includes: (i) CAD XXXXXXXXXX advance from affiliates, and (ii) CAD XXXXXXXXXX pension and other benefit obligations; and

(c)  total equity of approximately CAD XXXXXXXXXX.

6.    Paragraph 7 is amended to read as follows:

As at XXXXXXXXXX, the aggregate non-capital loss of Canco1 is CAD XXXXXXXXXX. More specifically, the non-capital loss was incurred in XXXXXXXXXX and is not restricted by the acquisition of control rules in subsections 111(5) and 88(1.1). Also, Canco1 has a SR&ED pool balance of deductible expenditures of CAD XXXXXXXXXX and an ITC pool balance of CAD XXXXXXXXXX. At the end of its XXXXXXXXXX taxation year, Canco1 had an undepreciated capital cost of depreciable property of CAD XXXXXXXXXX.

7.    Paragraph 8 is amended to read as follows:

Canco1’s taxable income for its four prior taxation years was as follows:

      Taxation Year Ending                   Taxable Income

      XXXXXXXXXX                             CAD XXXXXXXXXX

8.    Paragraph 9 is amended to read as follows:

Canco1 has establishments in XXXXXXXXXX Canadian provinces. Its allocation of income among the provinces in its XXXXXXXXXX taxation year was as follows:

XXXXXXXXXX            XXXXXXXXXX%

After the implementation of the Proposed Transactions, Canco1 will maintain permanent establishments in XXXXXXXXXX and it is expected that the allocation of its income among these provinces will remain similar.

9.    The third sentence of paragraph 11 is amended to read as follows:

In XXXXXXXXXX, Canco2 acquired from Canco1 its XXXXXXXXXX. Canco1 and Canco2 have provided, and will continue to provide, certain financial guarantees in respect of certain of the Parent Affiliated Group’s liabilities.

10.   Paragraph 12 is amended to read as follows:

The taxation year of Canco2 ends on XXXXXXXXXX. It is expected that Canco2 will generate sufficient annual taxable income in XXXXXXXXXX and subsequent taxation years to fully offset its annual share of the interest expense allocated to it as a limited partner of New LP in respect of interest paid or payable by New LP on the New Promise to Pay described in paragraphs 28, 31, 33(iii) and 34(iii) below. More specifically, the taxable income (before the Proposed Transactions) of Canco2 is estimated at CAD XXXXXXXXXX for XXXXXXXXXX, at approximately CAD XXXXXXXXXX in XXXXXXXXXX and approximately CAD XXXXXXXXXX for each of the following taxation years.

Canco2 has a permanent establishments in XXXXXXXXXX.

After the implementation of the Proposed Transactions, Canco2 will maintain permanent establishments in XXXXXXXXXX and it is expected that the allocation of its income among these provinces will be approximately XXXXXXXXXX, in XXXXXXXXXX and subsequent taxation years.

11.   Paragraph 13 is amended to read as follows:

The arm’s-length borrowings of the Parent Affiliated Group as of XXXXXXXXXX amounted to approximately USD XXXXXXXXXX and its cash or cash equivalents on hand was approximately USD XXXXXXXXXX. The Parent Affiliated Group is in a position to increase its arm’s-length borrowings by an amount of USD XXXXXXXXXX.

12.   The introductory paragraph of the Proposed Transactions is amended to read as follows:

The Proposed Transactions described below will be implemented before XXXXXXXXXX. It is proposed that the transactions described in paragraphs 15 to 20 with respect to the creation of the entities will be completed XXXXXXXXXX. The transactions described in paragraphs 21 to 25 will take place over a XXXXXXXXXX period XXXXXXXXXX. Shortly after the implementation of the transactions described in paragraphs 21 to 25, the transactions described in paragraphs 26, 27 and 28 will be implemented. Prior to XXXXXXXXXX, Canco1 will exercise its option to extend the term of the Purchase and Forward Repurchase Agreement (as described in paragraph 28(iv) below) for a period of XXXXXXXXXX. Similarly, prior to the term of the Purchase end Forward Repurchase Agreement in XXXXXXXXXX and XXXXXXXXXX, Canco1 will exercise its option to extend the term of the Purchase and Forward and Repurchase Agreement for a period of XXXXXXXXXX. The parties will take all necessary legal actions to effect the extensions, including, but not limited to, providing any notices required to extend the term of the Canco1 Loan (as described in paragraph 22 below). The unwinding of the loss consolidation arrangement will be executed when jointly determined by Canco1, Canco2, New LP and Newco1, but no later than XXXXXXXXXX.

13.   The last sentence in Paragraph 24 is updated to read as follows:

Thus, the amount of the loss utilization arrangement described in the Proposed Transactions will be CAD XXXXXXXXXX, which is less than the arm’s length borrowing capacity of the Parent Affiliated Group that is currently unused, which amounts to approximately USD XXXXXXXXXX.

14.   The last sentence in Paragraph 27 is updated to read as follows:

The New LP Promise to Pay will be based on, and will not exceed, the amount that the Parent Affiliated Group could borrow from arm’s length lenders of approximately USD XXXXXXXXXX.

15.   The third sentence in Paragraph 43 is amended to read as follows:

No exceptions to Subpart F inclusion would have applied to such items of income.

Amended comments

Based on the amendments described above, we hereby make the following amendment to the Comments sections of the Original Ruling:

16.   Paragraph (g) of Comments is amended to read as follows:

(g)   any transactions contemplated herein that occur after XXXXXXXXXX; or

Other than as noted in the “Amended comments” section of this letter, we hereby confirm that the amended facts and proposed transactions set out above do not affect the rulings given in the Original Ruling and that they will continue to be binding on the CRA, subject to the conditions and limitations stated in the Original Ruling. We also confirm that the opinions given in the Original Ruling are not affected by these amended facts and proposed transactions, but remind you that those opinions are not binding on the CRA.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
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, 2019

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, 2019