2019-0819871R3 Loss Consolidation Involving Canadian Branch

Principal Issues: (1) Whether a US corporation will continue to be the same corporation following its continuance from the XXXXXXXXXX as an unlimited liability company; (2) Whether subsection 87(2.1) will apply in respect of an amalgamation between the continued corporation and its Canadian sister corporation; (3) Whether various benefit rules would apply in respect of the proposed transactions; and (4) whether the federal or provincial GAAR rules would apply in respect of the proposed transactions.

Position: (1) Yes; (2) Yes; (3); No; (4) No.

Reasons: (1) The governing corporate legislation provides for continuance and treats the continued corporation as the same corporation; (2) Meets statutory requirements; (3)/(4) Consistent with previous rulings and CRA positions on loss consolidation transactions.

Author: XXXXXXXXXX
Section: Sections 111 and 245 and subsections 87(2.1), 15(1), 56(2), 69(1), 69(11) and 246(1)

XXXXXXXXXX
                                                                                                                2019-081987

XXXXXXXXXX, 2020

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling Request
        XXXXXXXXXX

This is in reply 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 subsequent correspondence.

We understand that, to the best of your knowledge and that of the Taxpayers involved, none of the proposed transactions or issues involved in this Ruling request are the same or substantially similar to transactions or issues that are:

(i)   in a previously filed tax return of the Taxpayers or a related person and:

a.    is being considered by the CRA in connection with such return;
b.    is under objection by the Taxpayers or a related person; or
c.    is the subject of a current or completed court process involving the Taxpayers or a related person; or

(ii)  the subject of a ruling request previously considered by the Income Tax Rulings Directorate in relation to the Taxpayers or a related person.

This document is based solely on the facts and Proposed Transactions described below. The documentation submitted with your request does not form part of the facts and Proposed Transactions except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

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 the regulations made thereunder (the "Regulations"). All references to monetary amounts are in Canadian dollars.

DEFINITIONS

XXXXXXXXXX;

“Affiliated persons” has the meaning assigned by subsection 251.1(1) read without reference to the definition of “controlled” in subsection 251.1(3);

“Agreeing Province” means a province that has entered into an agreement with the Government of Canada under which the Government of Canada will collect taxes payable under the income tax statute of that province and will make payments to that province in respect of the taxes so collected;

“Amalco” means the corporation to be formed on the amalgamation of Canco1 and USco1 as described in Paragraph 15;

“Canco1” means XXXXXXXXXX;

XXXXXXXXXX;

“Combined Canadian Businesses” has the meaning assigned in Paragraph 15;

“CRA” means the Canada Revenue Agency;

“foreign affiliate” has the meaning assigned in subsection 95(1);

“Foreignco1” means XXXXXXXXXX;

“Foreignco2” means XXXXXXXXXX;

“General Anti-avoidance Provision of an Agreeing Province” means:

(i)   XXXXXXXXXX

(ii)  XXXXXXXXXX

"NCLs" means non-capital losses as such term is defined in subsections 111(8) and (9);

"Paragraph" means a numbered paragraph in this letter;

"private corporation" has the meaning assigned by subsection 89(1);

“Profitco Business” has the meaning assigned in Paragraph 2;

“Proposed Transactions" are the transactions described under the section entitled "Proposed Transactions";

“Related persons” has the meaning assigned by subsection 251(2);

"taxable Canadian corporation" has the meaning assigned by subsection 89(1);

“taxable Canadian property” has the meaning assigned by subsection 248(1);

“Treaty” means the Canada-United States Tax Convention (1980), as amended;

“ULC” means an unlimited liability company;

“US” means the United States of America;

“USco1” means XXXXXXXXXX;

“USco1 Business” has the meaning assigned in Paragraph 4;

“USco1 Canadian Branch” has the meaning assigned in Paragraph 4;

"USco1 NCLs" means the non-capital losses that were generated by the USco1 Business;

“UScorp2” means XXXXXXXXXX; and

“US Parent” means XXXXXXXXXX

Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:

FACTS

1.    USco1 is a corporation that is incorporated under the laws of XXXXXXXXXX and is resident in the US for purposes of the Act.

2.    Canco1 is a corporation incorporated under the XXXXXXXXXX. Canco1 is a private corporation and is a taxable Canadian corporation. Canco1 is in the businesses of XXXXXXXXXX (collectively the “Profitco Business”) and has a XXXXXXXXXX taxation year-end. Canco1 carries on the Profitco Business in Canada. Canco1 does not have any foreign affiliates.

3.    Canco1 is wholly-owned by Foreignco2, a XXXXXXXXXX corporation that is resident in XXXXXXXXXX, and which is in turn wholly-owned by Foreignco1, a XXXXXXXXXX public company that is the group’s ultimate parent.

4.    All of the shares of the capital stock of USco1 are owned by US Parent, a corporation formed under the laws of XXXXXXXXXX. USco1’s business is XXXXXXXXXX (the “USco1 Business”). The USco1 Business is carried on only in Canada through permanent establishments (such establishments referred to herein as the “USco1 Canadian Branch”). USco1 does not own any shares of any corporations. USco1 files T2 corporate income tax returns and all of the profit / loss from the USco1 Business is included in the determination of its taxable income (loss) on an annual basis. USco1 has a XXXXXXXXXX taxation year-end.

5.    All of the shares of the capital stock of US Parent are owned by Foreignco1. US Parent also owns all of the issued and outstanding shares of the capital stock of UScorp2, a corporation resident in the US. UScorp2 carries on business solely in the US.  UScorp2’s business is XXXXXXXXXX.

6.    As at its taxation year ended XXXXXXXXXX, the USco1 Business currently has an NCL carry forward balance of $XXXXXXXXXX. All taxable income (loss) for the USco1 Business in its XXXXXXXXXX taxation year was allocated to the province of XXXXXXXXXX. 

7.    Canco1’s taxable income for its taxation years ending on XXXXXXXXXX was approximately $XXXXXXXXXX. Canco1’s income for the XXXXXXXXXX period ended XXXXXXXXXX was $XXXXXXXXXX. Provincial allocations of taxable income for Canco1 for its XXXXXXXXXX taxation year are as follows:

     XXXX

     Jurisdiction            Provincial
                                   Allocation %

     XXXX                    XXXX

     Total                     XXXX

PROPOSED TRANSACTIONS

The following transactions will be completed in the order described below. 

8.    US Parent will contribute all of the issued and outstanding shares of USco1 to UScorp2. The shares of USco1 do not derive, and have not at any time in the previous XXXXXXXXXX months derived, more than XXXXXXXXXX% of their fair market value, directly or indirectly, from one or any combination of real or immovable property situated in Canada, XXXXXXXXXX or options in respect of, or interests in, any such property, (whether or not it exists). Accordingly, the USco1 shares are not “taxable Canadian property”.

9.    USco1 will continue its existence out of XXXXXXXXXX and continue its existence into XXXXXXXXXX. In the course of the continuance,

(a)   no new class of shares of the continued corporation will be created and no additional shares will be issued by USco1;

(b)   no material change will be made to the rights and conditions attached to the issued and outstanding shares in the capital of USco1;

(c)   USco1’s existence will be preserved; that is, no new corporation will be created;

(d)   USco1's assets and liabilities will remain with USco1;

(e)   USco1 will become a corporation governed by the laws of XXXXXXXXXX as if it had always been incorporated thereunder;

(f)   the continuance will not result in any express or deemed exchange, disposition, redemption, cancellation or re-issuance of the outstanding shares of USco1 under the corporate legislation of either XXXXXXXXXX and

(g)   the aggregate stated capital account for the issued and outstanding common shares of USco1 before the continuance will become the aggregated stated capital account for the outstanding common shares of USco1 after the continuance.

10.   USco1 will continue its existence out of XXXXXXXXXX and continue its existence as a ULC under the XXXXXXXXXX. In the course of the continuance,

(a)   no new class of shares of the continued corporation will be created and no additional shares will be issued by USco1;

(b)   no material change will be made to the rights and conditions attached to the issued and outstanding shares in the capital of USco1;

(c)   USco1's existence will be preserved; that is, no new corporation will be created;

(d)   USco1's assets and liabilities will remain with USco1;

(e)   USco1 will become a corporation governed by the laws of XXXXXXXXXX as if it had always been incorporated thereunder;

(f)   the continuance will not result in any express or deemed exchange, disposition, redemption, cancellation or re-issuance of the outstanding shares of USco1 under the corporate legislation of either XXXXXXXXXX; and

(g)   the aggregate stated capital account for the issued and outstanding common shares of USco1 before the continuance will become the aggregated stated capital account for the outstanding common shares of USco1 after the continuance.

11.   The board of directors of USco1 will take the necessary actions for the continuance to be ratified so that USco1 becomes resident in Canada for purposes of the Act and ceases to be a resident of the US under Article IV of the Treaty.

12.   Uscorp2 will sell all of the shares of USco1 to Foreignco2 for fair market value consideration.

13.   USco1 will amend its articles to change from XXXXXXXXXX.

14.   USco1 will continue out of XXXXXXXXXX and into the Canadian federal jurisdiction to be governed under the XXXXXXXXXX.

15.   Canco1 and USco1 will amalgamate (within the meaning assigned in subsection 87(1) of the Act) to form Amalco. Upon the amalgamation:

(a)   all the property (except amounts receivable from either Canco1 or USco1) of Canco1 or USco1 immediately before the amalgamation will become property of Amalco by virtue of the amalgamation,

(b)   all of the liabilities (except amounts payable to either Canco1 or USco1) of Canco1 or USco1immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation, and

(c)   Foreignco2 will be deemed by subsection 87(1.1) of the Act to have received shares of the capital stock of Amalco by virtue of the amalgamation for purposes of subsection 87(1).

Subsequent to the amalgamation, the USco1 Business and Profitco Business will be carried on by Amalco (the “Combined Canadian Businesses”).

ADDITIONAL INFORMATION

16.   At all relevant times prior to the Proposed Transactions, USco1 and Canco1 are affiliated persons and related to each other and will continue to be affiliated and related to each other throughout the Proposed Transactions.

17.   The USco1 Business will continue to be carried on by Amalco, for profit or with a reasonable expectation of profit throughout any taxation year in which the USco1 NCLs will be used to offset the income generated by the Combined Canadian Businesses.

PURPOSE OF THE PROPOSED TRANSACTIONS

18.   The purpose of the Proposed Transactions is to realize synergies and efficiencies by combining the USco1 Business with the Profitco Business in a manner that preserves the USco1 NCL’s so that those NCLs are available in respect of future taxable income generated by the Combined Canadian Businesses.

19.   The purpose of the contribution by US Parent of the shares of USco1 to UScorp2 is to ensure that US Parent’s status as a holding company for purposes of XXXXXXXXXX (net worth) tax is not jeopardized by the completion of the Proposed Transactions. Such status could otherwise be jeopardized if US Parent were to own the shares of USco1 after it becomes a ULC.

20.   USco1 will be first continued from XXXXXXXXXX. It was determined that the company could not be directly continued from XXXXXXXXXX to a Canadian jurisdiction. Also, USco1 will be first continued into XXXXXXXXXX as a ULC before being continued to a regular XXXXXXXXXX corporation under the XXXXXXXXXX for US tax reasons.

21.   The purpose of the transfer by UScorp2 of the shares of USco1 to Foreignco2 is to avoid split ownership in Amalco, following the amalgamation of USco1 and Canco1.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our Rulings are as follows:

A.    Following the continuance of USco1 first from the XXXXXXXXXX and its subsequent continuance to the XXXXXXXXXX as a ULC, USco1 should be considered to be the same corporation as it was prior to such continuances.

B.    Upon the amalgamation of Canco1 and USco1 as described in paragraph 15 above, the provisions of subsection 87(2.1) will apply to deem Amalco to be the same corporation as, and a continuation of, each of Canco1 and USco1, for the purposes, and subject to the restrictions, described in subsection 87(2.1).  On this basis and subject to the rules contained in section 111, including, for greater certainty, subsection 111(9), the NCL’s of USco1 will be available to be utilized by Amalco.

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

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

The General Anti-avoidance Provision of an Agreeing Province will not be applied, as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above, in respect of a taxation year for which such province was an Agreeing Province.

COMMENTS

Except as expressly stated, the rulings provided herein do not imply acceptance, approval or confirmation of any income tax implications of the facts or Proposed Transactions. For greater certainty, the CRA has not, in the context of issuing this letter, considered, confirmed or made any determination in respect of:

(a)   the country of residence of Foreignco1, Foreignco2, US Parent, USco1 or UScorp2 for purposes of the Act or a particular income tax convention which has entered into force between Canada and another country;

(b)   the application or interpretation of any foreign law or foreign tax considerations, including whether the continuance USco1 to XXXXXXXXXX and to an XXXXXXXXXX ULC under the XXXXXXXXXX would result in any gain or income for foreign tax purposes;

(c)   the PUC of any share, or the ACB or FMV of any property referred to herein;

(d)   any other tax account of any corporation referred to herein;

(e)   the characterization of any share or other property as taxable Canadian property; or

(f)   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.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9 dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions are implemented within twelve months of the date of this letter.

The above rulings are based on the law as it presently reads and does not take into account any future amendments to the Act, whether currently proposed or not.

Yours truly,

XXXXXXXXXX
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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