2020-0847681R3 Loss consolidation arrangement

Principal Issues: Whether the LCA is acceptable.

Position: Yes

Reasons: The proposed transactions fall within CRA's policy position.

Author: XXXXXXXXXX
Section: 20(1)(c), 55(2)

XXXXXXXXXX

                                                                                            2020-084768

XXXXXXXXXX, 2020

Dear XXXXXXXXXX:

Subject: Advance Income Tax Ruling
              XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information provided in correspondence with your firm concerning your request.

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 as 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. being considered by the CRA in connection with such return;

B. under objection by the taxpayers or a related person; or

C. the subject of a current or completed court process involving the taxpayers or a related person; or

ii. XXXXXXXXXX.

Unless otherwise stated all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) as amended (the “Act”).

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

DEFINITIONS

XXXXXXXXXX;

“ACB” has the meaning assigned to “adjusted cost base” by section 54;

“ACo” means XXXXXXXXXX a corporation governed by the XXXXXXXXXX;

“affiliated person” has the meaning assigned by subsection 251.1, 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;

“Amalgamating Companies” has the meaning set out in Paragraph 8;

“Amalgamation” has the meaning set out in Paragraph 8;

“arm’s length” has the meaning assigned by subsection 251(1);

“BCo” means XXXXXXXXXX a corporation governed by the XXXXXXXXXX;

“CBCA” means the Canadian Business Corporations Act, R.S.C. 1985, as amended;

“CCPC” means “Canadian-controlled Private Corporation” as the term is defined in subsection 125(7);

“CRA” means Canada Revenue Agency;

“Canadian Partnership” has the meaning assigned by subsections 248(1) and 102(1);

“Daylight Loan” has the meaning set out in Paragraph 36;

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

“excepted dividend” has the meaning assigned by section 187.1;

“excluded dividend” has the meaning assigned by subsection 191(1);

XXXXXXXXXX;

“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1);

“GP Co” means the corporation to be established under the XXXXXXXXXX as described in Paragraph 33;

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

XXXXXXXXXX;

“guarantee agreement” has the meaning assigned by subsection 112(2.2);

“Holdco” means XXXXXXXXXX, a corporation governed by the XXXXXXXXXX;

“ICA” means XXXXXXXXXX;

XXXXXXXXXX;

“Lossco 1” means XXXXXXXXXX, the corporation formed as a result of the amalgamation of ACo and BCo as described in Paragraph 8;

“Lossco 2” means XXXXXXXXXX, a corporation governed by the XXXXXXXXXX;

“Losscos” means Lossco 1 and Lossco 2;

“Lossco Loan 1” has the meaning set out in Paragraph 38;

“Lossco Loan 2” has the meaning set out in Paragraph 38;

“Lossco Loans” means Lossco Loan 1 and Lossco Loan 2;

“Lossco 2 NIB Loan” has the meaning set out in Paragraph 37;

XXXXXXXXXX;

“New Holdco” XXXXXXXXXX, a corporation governed by the XXXXXXXXXX;

“New LP” means a Canadian limited partnership to be established pursuant to the laws of the province of XXXXXXXXXX;

“New LP Partners” means GP Co, Profitco 1, Profitco 2 and Profitco 3;

“Newco 1” has the meaning set out in Paragraph 27;

“Newco 2” has the meaning set out in Paragraph 28;

“Newcos” means Newco 1 and Newco 2;

“Newco Loan 1” has the meaning set out in Paragraph 42;

“Newco Loan 2” has the meaning set out in Paragraph 43;

“Newco Loans” means Newco Loan 1 and Newco Loan 2;

“Newco Note 1” has the meaning set out in Paragraph 57(f) ;

“Newco Note 2” has the meaning set out in Paragraph 57(g);

“Newco Notes” means Newco Note 1 and Newco Note 2;

“Newco Preferred Shares” means Series 1 Preferred Shares and Series 2 Preferred Shares;

“non-capital losses” has the meaning assigned by subsection 111(8);

XXXXXXXXXX;

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

“Paragraph” means a numbered paragraph in this letter;

“Parent” means XXXXXXXXXX, a corporation governed by the XXXXXXXXXX;

“Parent Group” means Parent and its direct and indirect subsidiaries;

“Partnership Allocation” has the meaning set out in Paragraph 35;

“permanent establishment” has the meaning assigned by Regulation 400(2);

“principal amount” has the meaning assigned by subsection 248(1);

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

“Profitco 1” means XXXXXXXXXX, a corporation governed by the XXXXXXXXXX;

“Profitco 2” means XXXXXXXXXX, a corporation governed by the XXXXXXXXXX;

“Profitco 3” means XXXXXXXXXX, a corporation governed by the XXXXXXXXXX.

“Profitcos” means Profitco 1, Profitco 2 and Profitco 3;

“Proposed Transactions” means the transactions described in Paragraphs 27 to 63;

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

XXXXXXXXXX;

“Series 1 Preferred Shares” has the meaning set out in Paragraph 27;

“Series 2 Preferred Shares” has the meaning set out in Paragraph 28;

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

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

“term preferred share” has the meaning assigned by subsection 248(1).

FACTS

1. Parent is a resident of Canada for purposes of the Act, a CCPC XXXXXXXXXX.

2. ACo was a resident of Canada for purposes of the Act, a taxable Canadian corporation and a CCPC. XXXXXXXXXX. The authorized capital of ACo consisted of an unlimited number of common shares without par value and an unlimited number of Class A, redeemable shares without par value. ACo’s head office was located at XXXXXXXXXX. ACo’s Taxation Centre is XXXXXXXXXX, its Tax Services Office is XXXXXXXXXX and its tax account number isXXXXXXXXXX.

3. ACo had a XXXXXXXXXX taxation year-end and had a non-capital loss carryforward balance as at XXXXXXXXXX of $XXXXXXXXX, generated by year as follows:

    XXXXXXXXXX

4. ACo had permanent establishments in XXXXXXXXXX. ACo’s income for the XXXXXXXXXX taxation year was XXXXXXXXXX.

5. BCo was a resident of Canada for purposes of the Act, a taxable Canadian corporation and a CCPC. XXXXXXXXXX.

6. BCo had a XXXXXXXXXX taxation year-end and had a non-capital loss carryforward balance as at XXXXXXXXXX of $XXXXXXXXXX, generated by year as follows:

    XXXXXXXXXX

7. XXXXXXXXXX.

8. ACo and BCo (the "Amalgamating Companies") amalgamated on XXXXXXXXXX to form Lossco 1 (the "Amalgamation"). The Amalgamation was governed by the XXXXXXXXXX. As part of the Amalgamation, each issued and outstanding common share of the capital stock of ACo and BCo were cancelled without any repayment of capital in respect thereof. Parent received shares of Lossco 1 as a result of the Amalgamation. All authorized but unissued shares of the Amalgamating Companies were cancelled. Lossco 1’s head office is located at XXXXXXXXXX. Lossco 1’s Taxation Centre is XXXXXXXXXX, its Tax Services Office is XXXXXXXXXX and its tax account number is XXXXXXXXXX.

9. Absent the Proposed Transactions, it is estimated that Lossco 1 will generate additional non-capital losses of approximately $XXXXXXXXXX in the XXXXXXXXXX taxation year, $XXXXXXXXXX in the XXXXXXXXXX taxation year and $XXXXXXXXXX in the XXXXXXXXXX taxation year.

10. Lossco 2 is a resident of Canada for purposes of the Act, a taxable Canadian corporation and a CCPC. Lossco 2 is a wholly-owned direct subsidiary of Parent XXXXXXXXXX. The authorized capital of Lossco 2 consists of an unlimited number of Class A shares without par value and an unlimited number of common shares without par value. Lossco 2’s head office is located at XXXXXXXXXX. Lossco 2’s Taxation Centre is XXXXXXXXXX, its Tax Services Office is XXXXXXXXXX and its tax account number is XXXXXXXXXX.

11. Lossco 2 has a XXXXXXXXXX taxation year-end and, but for the Proposed Transactions, has a non-capital loss carryforward balance as at XXXXXXXXXX of $XXXXXXXXXX, generated by taxation year as follows:

    XXXXXXXXXX

12. XXXXXXXXXX.

13. Absent the Proposed Transactions, it is estimated that Lossco 2 will generate non-capital losses of approximately $XXXXXXXXXX in the XXXXXXXXXX taxation year, $XXXXXXXXXX in the XXXXXXXXXX taxation year and $XXXXXXXXXX in the XXXXXXXXXX taxation year.

14. New Holdco is a resident of Canada for purposes of the Act, a taxable Canadian corporation and a CCPC. New Holdco was incorporated on XXXXXXXXXX and is a XXXXXXXXXX. The authorized capital of New Holdco consists of an unlimited number of Class A common shares and an unlimited number of Class B common shares without par value. Parent owns XXXXXXXXXX% of the issued and outstanding common shares of New Holdco. The remaining XXXXXXXXXX% of the common shares of New Holdco are held by Profitco 1. New Holdco has a XXXXXXXXXX taxation year-end.

15. Profitco 1 is a resident of Canada for purposes of the Act, a taxable Canadian corporation and a CCPC. Profitco 1 is a wholly-owned direct subsidiary of Holdco and its primary business is XXXXXXXXXX. Profitco 1 is XXXXXXXXXX. The authorized capital of Profitco 1 consists of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX each and XXXXXXXXXX redeemable preferred shares with a par value of $XXXXXXXXXX each. Profitco 1 has a XXXXXXXXXX taxation year-end. Profitco 1's head office is located at XXXXXXXXXX. Profitco 1's Taxation Centre is XXXXXXXXXX, its Tax Services Office is XXXXXXXXXX and its tax account number is XXXXXXXXXX.

16. XXXXXXXXXX.

17. Profitco 1 has permanent establishments in XXXXXXXXXX. The provincial allocation of Profitco 1 for the XXXXXXXXXX taxation year is as follows:

XXXXXXXXXX

18. Profitco 1's taxable income was $XXXXXXXXXX in its XXXXXXXXXX taxation year. In the absence of the Proposed Transactions, it is expected that Profitco’s taxable income will be $XXXXXXXXXX in its XXXXXXXXXX taxation year. As a result of the XXXXXXXXXX, Profitco 1 has $XXXXXXXXXX of non-capital losses. These non-capital losses are anticipated to be utilized against taxable income earned in the XXXXXXXXXX taxation year. The estimated taxable income is anticipated to be $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX for the XXXXXXXXXX taxation year, XXXXXXXXXX taxation year and XXXXXXXXXX taxation year, respectively.

19. Profitco 2 is a resident of Canada for purposes of the Act, a taxable Canadian corporation and a CCPC. Profitco 2 became a wholly-owned direct subsidiary of New Holdco on XXXXXXXXXX and its primary business is XXXXXXXXXX. Profitco 2 is an XXXXXXXXXX. The authorized capital of Profitco 2 consists of an unlimited number of common shares with no par value. Profitco 2 has a XXXXXXXXXX taxation year-end. Profitco 2's head office is located at XXXXXXXXXX. Profitco 2's Taxation Centre is XXXXXXXXXX, its Tax Services Office is XXXXXXXXXX and its tax account number is XXXXXXXXXX.

20. Profitco 2 has permanent establishments in XXXXXXXXXX. The provincial allocation of Profitco 2 for the XXXXXXXXXX taxation year is as follows:

XXXXXXXXXX

21. Profitco 2's taxable income was XXXXXXXXXX in the XXXXXXXXXX taxation year. In the absence of the Proposed Transactions, it is expected that Profitco 2’s taxable income will be $XXXXXXXXXX in the XXXXXXXXXX taxation year. For the XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX taxation years, the estimated taxable income is anticipated to be $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX, respectively.

22. Profitco 3 is a resident of Canada for purposes of the Act, a taxable Canadian corporation and a CCPC. Profitco 3 was incorporated on XXXXXXXXXX and is a wholly-owned direct subsidiary of New Holdco. Its primary business is XXXXXXXXXX. The authorized capital of Profitco 3 consists of an unlimited number of common shares without par value. Profitco 3 has a XXXXXXXXXX taxation year-end. Profitco 3's head office is located at XXXXXXXXXX. Profitco 3's Taxation Centre is XXXXXXXXXX, its Tax Services Office is XXXXXXXXXX and its tax account number is XXXXXXXXXX.

23. Profitco 3 has permanent establishments in XXXXXXXXXX. Profitco’s income for the XXXXXXXXXX taxation year was XXXXXXXXXX% allocable to XXXXXXXXXX% allocable to XXXXXXXXXX.

24. Profitco 3's taxable income was $XXXXXXXXXX in its XXXXXXXXXX taxation year. Absent the Proposed Transactions, Profitco 3 expects to generate a non-capital loss of $XXXXXXXXXX in the XXXXXXXXXX taxation year. For the XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX taxation years, the estimated taxable income is anticipated to be $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX, respectively.

25. Holdco is a resident of Canada for purposes of the Act, a taxable Canadian corporation and a CCPC. Holdco has a XXXXXXXXXX taxation year-end. The authorized capital of Holdco consists of an unlimited number of common shares without par value. Parent owns XXXXXXXXXX% of the issued and outstanding common shares of Holdco. The remaining XXXXXXXXXX% of the common shares of Holdco are held by Minority Shareholder.

26. XXXXXXXXXX

PROPOSED TRANSACTIONS

27. Newco 1 will be incorporated under the XXXXXXXXXX. Newco 1 will be a taxable Canadian corporation. Newco 1's fiscal and taxation year-end will be XXXXXXXXXX. The authorized capital of Newco 1 will consist of two classes of shares, common shares and preferred shares (the "Series 1 Preferred Shares").

28. Newco 2 will be incorporated under the XXXXXXXXXX. Newco 2 will be a taxable Canadian corporation. Newco 2's fiscal and taxation year-end will be XXXXXXXXXX. The authorized capital of Newco 2 will consist of two classes of shares, common shares and preferred shares (the "Series 2 Preferred Shares").

29. The Newco Preferred Shares will be non-voting and redeemable and retractable for the amount for which they were issued.

30. Upon incorporation of the Newcos, Lossco 1 will subscribe for XXXXXXXXXX common shares of Newco 1 for $XXXXXXXXXX and Lossco 2 will subscribe for XXXXXXXXXX common shares of Newco 2 for $XXXXXXXXXX. The Newcos will not carry on any business and their activities will be limited to investing the proceeds received upon the issuance of the Newco Preferred Shares to New LP, described in Paragraphs 40 and 41, and making non-interest bearing loans to the Losscos, as described in Paragraphs 42 and 43. XXXXXXXXXX.

31. Dividends on the Series 1 Preferred Shares will accrue on a daily basis and will be payable annually in arrears on XXXXXXXXXX. The dividend rate, expressed as a percentage of the amount for which a Series 1 Preferred Shares were issued, will be equal to the sum of XXXXXXXXXX% plus the interest rate on Lossco Loan 1, estimated to be XXXXXXXXXX%.

32. Dividends on the Series 2 Preferred Shares will accrue on a daily basis and will be payable annually in arrears on XXXXXXXXXX. The dividend rate, expressed as a percentage of the amount for which a Series 2 Preferred Shares were issued, will be equal to the sum of XXXXXXXXXX% plus the interest rate on Lossco Loan 2, estimated to be XXXXXXXXXX%.

33. GP Co will be incorporated under the XXXXXXXXXX with authorized capital consisting of common shares. GP Co will be a taxable Canadian corporation. GP Co's fiscal and taxation year-end will be XXXXXXXXXX. Upon incorporation of GP Co, Parent will subscribe for XXXXXXXXXX common share of GP Co for $XXXXXXXXXX. GP Co will not carry on any business and its activities will be limited to acting as the general partner of New LP.

34. New LP will be formed under the laws of the province of XXXXXXXXXX and will be a Canadian Partnership. GP Co will be the general partner of New LP. Through its general partner interest, GP Co will control New LP. The Profitcos will be the limited partners of New LP. New LP's activities will be limited to investing the loan proceeds received from the Losscos, described in Paragraph 38, in the Newco Preferred Shares, as described in Paragraphs 40 and 41. The fiscal and taxation year-end of New LP will be XXXXXXXXXX.

35. On the formation of New LP, GP Co will acquire a general partnership interest for $XXXXXXXXXX and the Profitcos will acquire limited partnership interests in New LP for, in aggregate, $XXXXXXXXXX. The entitlement to distributions and the allocation of income from New LP will be apportioned to the New LP Partners in proportion to each partner's ownership percentage at the end of its fiscal period (the "Partnership Allocation"). Based on contributions to New LP described in this paragraph, each of the New LP Partner's percentage ownership interest in New LP will be approximately as follows:

  GP Co                   XXXXXXXXXX%
  Profitco 1              XXXXXXXXXX%
  Profitco 2              XXXXXXXXXX%
  Profitco 3              XXXXXXXXXX%

36. Lossco 1 will borrow funds from an unrelated arm's length XXXXXXXXXX on a "daylight loan" basis (the "Daylight Loan"). The interest rate on the Daylight Loan will be a commercial arm's length rate and the terms will be customary for this type of loan. The interest rate is estimated to be XXXXXXXXXX% per annum. The principal amount of the Daylight Loan is estimated to be $XXXXXXXXXX. The principal amount of the Daylight Loan will not exceed the amount that Lossco 1 could reasonably be expected to borrow from an arm's length XXXXXXXXXX and will not cause Lossco 1 to contravene any debt covenants. Lossco 1 will fund any fees or costs associated with the Daylight Loan with existing cash or by borrowing externally and will not be borrowing from any of its affiliates in the Parent Group.

37. Lossco 1 will use a portion of the proceeds of the Daylight Loan to make an interest-free demand loan to Lossco 2 (the "Lossco 2 NIB Loan"). The principal amount of the Lossco 2 NIB Loan is estimated to be $XXXXXXXXXX.

38. Using the remaining proceeds from the Daylight Loan, Lossco 1 will make a demand loan with a principal amount of $XXXXXXXXXX to New LP (the “Lossco Loan 1”). Using the proceeds from the Lossco 2 NIB Loan, Lossco 2 will make a demand loan with a principal amount of $XXXXXXXXXX to New LP (the “Lossco Loan 2”). Each of the Lossco Loans will be interest bearing at a rate estimated to be XXXXXXXXXX% per annum. Interest on the Lossco Loans will be computed daily. Interest on the Lossco Loans will be payable annually on XXXXXXXXXX.

39. The estimated interest rate on each of the Lossco Loans are arm’s length, commercial interest rates. The aggregate principal amount of the Lossco Loans will not exceed the amount that the Profitcos could reasonably be expected to borrow from an arm’s length XXXXXXXXXX and will not cause the Profitcos or New LP to contravene any debt covenants in existence.

40. New LP will use the total proceeds received from the Lossco Loan 1 to subscribe for Series 1 Preferred Shares of Newco 1 having an aggregate redemption amount and fair market value equal to the total amount of the subscription proceeds. The full amount of the subscription proceeds will be added to the stated capital of the Series 1 Preferred Shares and will form part of the permanent capital of Newco 1. The paid-up capital of each Series 1 Preferred Share issued will be equal to its redemption amount.

41. New LP will use the total proceeds received from the Lossco Loan 2 to subscribe for Series 2 Preferred Shares of Newco 2 having an aggregate redemption amount and fair market value equal to the total amount of the subscription proceeds. The full amount of the subscription proceeds will be added to the stated capital of the Series 2 Preferred Shares and will form part of the permanent capital of Newco 2. The paid-up capital of each Series 2 Preferred Share issued will be equal to its redemption amount.

42. Newco 1 will use the total proceeds received from the Series 1 Preferred Share subscription, described in Paragraph 40, to make a non-interest bearing loan to Lossco 1 (the "Newco Loan 1").

43. Newco 2 will use the total proceeds received from the Series 2 Preferred Share subscription, described in Paragraph 41, to make a non-interest bearing loan to Lossco 2 (the "Newco Loan 2").

44. Lossco 2 will use the total proceeds received from the Newco Loan 2 to repay the Lossco 2 NIB Loan.

45. Lossco 1 will use the total proceeds received from the Newco Loan 1, and the repayment of the Lossco 2 NIB Loan, to repay the Daylight Loan.

46. Lossco 1 and Newco 1 will enter into a capital support agreement. The agreement will provide for the contribution of capital by Lossco 1 to Newco 1 in a manner that allows Newco 1 to satisfy its dividend obligations on the Series 1 Preferred Shares.

47. Lossco 2 and Newco 2 will enter into a capital support agreement. The agreement will provide for the contribution of capital by Lossco 2 to Newco 2 in a manner that allows Newco 2 to satisfy its dividend obligations on the Series 2 Preferred Shares.

48. All of the transactions described in Paragraphs 36 to 47 will take place on the same day and in the order described.

49. Subsequent to the transactions described in Paragraphs 36 to 47, on or about XXXXXXXXXX of each fiscal year until the loss consolidation arrangement is unwound as described in Paragraph 57, while the Lossco Loan 1 is outstanding, Lossco 1 will make a contribution of capital to Newco 1 in an amount equal to the accrued dividends payable, as at that time, on the Series 1 Preferred Shares. No shares will be issued by Newco 1 with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Newco 1, and, for greater certainty, to the paid-up capital of any class of shares of Newco 1.

50. Subsequent to the transactions described in Paragraphs 36 to 47, on or about XXXXXXXXXX of each fiscal year until the loss consolidation arrangement is unwound as described in Paragraph 57, while the Lossco Loan 2 is outstanding, Lossco 2 will make a contribution of capital to Newco 2 in an amount equal to the accrued dividends payable, as at that time, on the Series 2 Preferred Shares. No shares will be issued by Newco 2 with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Newco 2, and, for greater certainty, to the paid-up capital of any class of shares of Newco 2.

51. For accounting purposes, the amount of the contributions of capital as described in Paragraphs 49 and 50, will be recorded as contributed surplus and will not be income of the Newcos pursuant to International Financial Reporting Standards. Lossco 1 and Lossco 2 will not, at any time, claim a capital loss in respect of the capital contributions made to the Newcos.

52. Immediately, upon receipt of the contributions of capital for a particular fiscal year, described in Paragraphs 49 and 50, the Newcos will pay all dividends on the Newco Preferred Shares that are accrued and unpaid as at that time.

53. Immediately, upon receipt of the payment of the dividends for a particular fiscal year, described in Paragraph 52, New LP will pay all interest on the Lossco Loans that is accrued and unpaid as at that time, pursuant to the terms of the Lossco Loans.

54. New LP will have nominal or no operating expenses other than interest expense on the Lossco Loans. Consequently, except as noted immediately following, no further reference to these other nominal expenses need be made. For greater certainty, each year the amount of dividend income earned on the Newco Preferred Shares will exceed the aggregate, in that particular year, of the amount of interest accrued on the Lossco Loans, plus the nominal amount of any other expenses incurred by New LP. As such, each year during which this loss consolidation arrangement is in place, New LP will have net income computed in accordance with subsection 96(1).

55. New LP will receive dividends on the Newco Preferred Shares. Such dividends will be taxable dividends that will be included in the income allocated under subsection 96(1) to the New LP Partners in accordance with their respective Partnership Allocation in New LP.

56. Any amount of the Newco Preferred Share dividend received by New LP in excess of the interest expense incurred on the Lossco Loans will be distributed to each of the New LP Partners no sooner than XXXXXXXXXX of the following year in accordance with the New LP Partners' Partnership Allocation percentages.

57. On or before XXXXXXXXXX the following transactions will be undertaken to unwind the transactions outlined at Paragraphs 36 to 47:

(a) Lossco 1 will make a contribution of capital to Newco 1 in an amount equal to the accrued dividends payable, as at that time, on the Series 1 Preferred Shares. No shares will be issued by Newco 1 with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Newco 1, and, for greater certainty, to the paid-up capital of any class of shares of Newco 1.

(b) Lossco 2 will make a contribution of capital to Newco 2 in an amount equal to the accrued dividends payable, as at that time, on the Series 2 Preferred Shares. No shares will be issued by Newco 2 with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Newco 2, and, for greater certainty, to the paid-up capital of any class of shares of Newco 2.

(c) Immediately, upon receipt of the contributions of capital, described in Paragraphs 57(a) and (b), the Newcos will pay all dividends on the Newco Preferred Shares that are accrued and unpaid as at that time.

(d) Immediately, upon receipt of the payment of the dividends, described in Paragraph 57(c), New LP will pay all interest on the Lossco Loans that is accrued and unpaid as at that time, pursuant to the terms of the Lossco Loans.

(e) Immediately after the proposed transactions in Paragraph 57(d), any amount of the Newco Preferred Share dividend received by New LP in excess of the interest expense incurred on the Lossco Loans and the original subscription amounts made by the New LP Partners as described in Paragraph 35 will be distributed to each of the New LP Partners in accordance with the New LP Partners' Partnership Allocation percentages.

(f) Immediately after the proposed transactions in Paragraphs 57(a) to (e), Newco 1 will redeem the Series 1 Preferred Shares held by New LP in consideration for a non-interest bearing promissory note issued by Newco 1 (the "Newco Note 1"). The Newco Note 1 will have a principal amount and fair market value equal to the redemption amount and fair market value of the Series 1 Preferred Shares redeemed;

(g) Immediately after the proposed transactions in Paragraphs 57(a) to (e), Newco 2 will redeem the Series 2 Preferred Shares held by New LP in consideration for a non-interest bearing promissory note issued by Newco 2 (the "Newco Note 2"). The Newco Note 2 will have a principal amount and fair market value equal to the redemption amount and fair market value of the Series 2 Preferred Shares redeemed;

(h) New LP will repay Lossco Loan 1 by assigning the Newco Note 1 to Lossco 1 in full satisfaction of the amount due under Lossco Loan 1. Lossco Loan 1 will be cancelled;

(i) New LP will repay Lossco Loan 2 by assigning the Newco Note 2 to Lossco 2 in full satisfaction of the amount due under Lossco Loan 2. Lossco Loan 2 will be cancelled;

(j) Upon the repayment of Lossco Loan 1, and Lossco Loan 2, New LP will no longer have any liabilities;

(k) The Losscos and the Newcos will agree to set off an amount due under the Newco Loans against the amount due under the Newco Notes as payment. The obligations under the Newco Loans and the Newco Notes will be cancelled.

58. All of the transactions described in Paragraph 57 will take place on the same day and in the order described.

59. On the same day as described in Paragraph 58, on the full unwind of the loss consolidation arrangement, GP Co will cause New LP to be dissolved such that it will cease to exist. On the dissolution, New LP will distribute a proportionate interest in all of the property it owns to GP Co as general partner, and the Profitcos as limited partners, in proportion to their respective partnership ownership percentages as reflected in Paragraph 35. New LP should not have any property at the time of its dissolution.

60. Subsequent to the full unwind of the loss consolidation arrangement and subsequent to the dissolution of New LP, GP Co will commence winding-up into Parent, Newco 1 will commence winding-up into Lossco 1, and Newco 2 will commence winding-up into Lossco 2 in accordance with the provisions of the XXXXXXXXXX.

61. Parent, as sole shareholder of GP Co, will pass resolutions authorizing and requiring GP Co to be wound-up into Parent. Parent will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolutions are passed.

62. Lossco 1, as sole shareholder of Newco 1, will pass resolutions authorizing and requiring Newco 1 to be wound up into Lossco 1. Lossco 1 will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolutions are passed.

63. Lossco 2, as sole shareholder of Newco 2, will pass resolutions authorizing and requiring Newco 2 to be wound up into Lossco 2. Lossco 2 will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolutions are passed.

ADDITIONAL INFORMATION

64. At the time of the Proposed Transactions, Lossco 1, Lossco 2, New LP and the Newcos will have the financial capacity to satisfy the applicable solvency test and liquidity test under their respective governing statutes to service any debt issued as part of the Proposed Transactions.

65. At the time of the Proposed Transactions, Lossco 1 and Lossco 2 will have the financial capacity, including accessing their leverage capacity, to make the capital contributions to Newco 1 and Newco 2 described in Paragraphs 49, 50 and 57(a) and (b). Lossco 1 and Lossco 2 may obtain the funds to make the capital contributions to Newco 1 and Newco 2 by borrowing from one or more of their affiliates.

66. At the time of the Proposed Transactions, the Newcos will have the financial capacity to satisfy the applicable solvency test and liquidity test under the XXXXXXXXXX required to pay the dividends on the Newco Preferred Shares described in Paragraphs 52 and 57(c).

67. Control of GP Co, the Losscos and Profitcos has not been acquired by any person or group of persons during any preceding taxation year that is relevant for the purpose of applying subsection 111(5) of the Act to the Proposed Transactions.

68. The Losscos and Profitcos are affiliated persons and related persons. The Losscos, Profitco 1 and Profitco 3 have been related persons to each other since their respective formation. XXXXXXXXXX. GP Co and the Newcos will be affiliated persons and related persons with respect to the Losscos, and each of the Profitcos. The Losscos, Profitcos, Newcos and GP Co will be, during the implementation of the Proposed Transactions, related persons and affiliated persons. The structure will be dismantled before the contemplated maturity in the manner described in Paragraph 57 if any entity previously mentioned in this paragraph ceases to be affiliated following an acquisition of control by a non-affiliated third party.

69. Pursuant to subsection 186(2), for purposes of Part IV of the Act, Lossco 1 should be considered to control Newco 1 and Lossco 2 should be considered to control Newco 2.

70. The Profitcos, the Losscos and Holdco are XXXXXXXXXX.

71. The Newco Preferred Shares will be term preferred shares.

72. Neither New LP nor any of the New LP Partners will acquire or be considered to acquire the Newco Preferred Shares in the ordinary course of business.

73. The Newco Preferred Shares will not, at any time during the implementation of the Proposed Transactions described herein, be:

(a) the subject of any undertaking that is a guarantee agreement as contemplated in subsection 112(2.2);

(b) the subject of a dividend rental arrangement as contemplated in subsection 112(2.3);

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a);

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

74. There is no intention for any Profitco to generate a significant loss carry forward balance as a result of the Proposed Transactions (having regard to the expected carry back of losses to prior taxation years), and the Taxpayers will seek to unwind the arrangements at a time that is intended to prevent any significant loss carry-forward balance.

75. The Proposed Transactions are not being undertaken to facilitate the use of any non-capital losses of the Losscos that would otherwise have expired.

76. The dividends paid on the Newco Preferred Shares to New LP, as described in Paragraphs 52 and 57(c) have no purpose other than the purpose described under the heading “Purpose of the Proposed Transactions”.

77. The Proposed Transactions will be legally effective.

PURPOSE OF THE PROPOSED TRANSACTIONS

78. The purpose of the Proposed Transactions is to effect a tax consolidation of the Losscos and the Profitcos by causing the Losscos to earn interest income on the Lossco Loans, thus permitting them to utilize their non-capital loss carry forwards, and to have the Profitcos being attributed interest expense thereby allowing the Profitcos to reduce their income for the taxation years while this Ruling letter remains in effect. The purpose of the tax consolidation is not to shift income to a lower rate province. Any shift of income between provinces will be incidental to the Proposed Transactions.

79. The purpose of both the payment and the receipt of the dividends on the Newco Preferred Shares, described in Paragraphs 52 and 57(c), is to provide a reasonable return on the Newco Preferred Shares issued by Newco 1 and Newco 2 to New LP. Furthermore, the purpose of the dividends is not to reduce the fair market value or capital gain of any shares, nor to increase the total cost amounts of properties of New LP.

80. XXXXXXXXXX.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and the Purpose of the Proposed Transactions, and further provided that the Proposed Transactions are completed in the manner described above and there are no other transactions which may be relevant to the rulings requested, we rule as follows:

A. Provided that New LP has a legal obligation to pay interest on the Lossco Loans and New LP continues to hold the Newco Preferred Shares it acquires in the manner described in Paragraphs 40 and 41 for the purpose of gaining or producing income from property, New LP will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year (depending on the method regularly followed by New LP in computing its income for the purposes of the Act), the lesser of: (i) the interest paid or payable on the Lossco Loans in respect of that taxation year; and (ii) a reasonable amount in respect thereof.

B. No amount will be included in the income of the Newcos pursuant to section 9, paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital to be made by the Losscos as described in Paragraphs 49, 50 and 57(a) and (b).

C. The dividends received by New LP in respect of the Newco Preferred Shares in a particular year will be taxable dividends and, pursuant to subsection 112(1), an amount equal to the amount of those dividends that is allocated to a New LP Partner will be deductible in computing the taxable income of the New LP Partner for the year in which the dividends are received and allocated by New LP to the New LP Partner in accordance with subsection 96(1). 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).

D. Part IV of the Act will not apply to the dividends described in Ruling C.

E. Subsections 103(1) and 103(1.1) will not apply to re-determine the allocation of any income or loss of New LP from the manner described in Paragraph 35.

F. The provisions of subsections 15(1), 56(2), 69(1), 69(11), 69(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

G. Provided that the only purpose of the dividends in Paragraphs 52 and 57(c) 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 received by New LP in respect of the Newco Preferred Shares as described in Paragraphs 52 and 57(c) above.

H. 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.

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

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R10 dated September 29, 2020, and are binding on the CRA provided that the proposed transactions, as described in Paragraphs 27 to 48, are entered into on or before XXXXXXXXXX, the proposed transactions related to the payment of interest and dividends and to the windup, as described in Paragraphs 49 to 63, are entered into 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 ruling 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 ACB of any property or the paid up capital of any shares referred to herein;

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

(c) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;

(d) the application or non-application of a general anti-avoidance provision of any province that is not an Agreeing Province; or

(e) 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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