2020-0869891R3 Supplemental Ruling

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

Position: The rulings in file 2019-081829 will continue to be valid

Reasons: The changes do not affect our conclusions

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

XXXXXXXXXX                                                                                                          2020-086989

XXXXXXXXXX, 2020

Re:  Advance Income Tax Ruling Request – supplement to file 2019-081829
       XXXXXXXXXX

 We are writing in response to your letter of XXXXXXXXXX.

 In your letter, you advised us of a proposed amalgamation pursuant to subsection 87(1) of the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) as amended (the “Act”) between XXXXXXXXXX (“Profitco”) and XXXXXXXXXX (“Profitco Sister”). As a result of this amalgamation, there are changes to the facts, proposed transactions, additional information and rulings as they were described in the Advance Income Tax Ruling dated XXXXXXXXXX (2019-081829) (referred to as the “2019 Ruling”) on behalf of the above‑referenced taxpayers.

Unless otherwise stated, terms used in this letter have the meaning given to them in the 2019 Ruling.

Unless otherwise stated, all statutory references are to the Act.

Additional and Amended definitions, facts and proposed transactions

As a result of your letter, the following amendments are made to the Definitions, Facts, Proposed Transactions, Additional Information and Rulings sections of the 2019 Ruling:

1.    The definition “Amalco” is added in the section entitled Definitions to read as follows:

“Amalco” means the corporation resulting from the horizontal amalgamation of Profitco and Profitco Sister as further described in paragraphs 7.3 and 15.1;

2.    The definition “Profitco Sister” is added in the section entitled Definitions to read as follows:

“Profitco Sister” means XXXXXXXXXX, the corporation described in paragraph 7.1.

3.    The following definition in the section entitled Definitions is amended to replace “Profitco” with “Amalco”, as a result of the amalgamation as described in paragraph 15.1, as follows:

“Lossco Affiliated Group” means Lossco, Amalco and Newco;

4.    Paragraph 6 is amended to read as follows:

The taxation year of Profitco ends on XXXXXXXXXX. Profitco’s taxable income for its taxation year XXXXXXXXXX is in the amount of $XXXXXXXXXX. Profitco taxable income for its taxation year XXXXXXXXXX is XXXXXXXXXX. As of XXXXXXXXXX, Profitco had a non-capital losses balance of $XXXXXXXXXX. Absent the loss consolidation arrangement, it is expected that Profitco will be taxable in its fiscal year ending on XXXXXXXXXX.

5.    Paragraph 7.1 is added to read as follows:

Profitco Sister is a taxable Canadian corporation. Profitco Sister is a wholly-owned subsidiary of Lossco incorporated under the XXXXXXXXXX, business number: XXXXXXXXXX. Profitco Sister’s head office is located at XXXXXXXXXX.

6.    Paragraph 7.2 is added to read as follows:

The taxation year of Profitco Sister ends on XXXXXXXXXX. Profitco Sister’s taxable income for its XXXXXXXXXX taxation year is in the amount of $XXXXXXXXXX. Profitco Sister’s taxable income for its XXXXXXXXXX taxation year is in the amount of $XXXXXXXXXX. As of XXXXXXXXXX, Profitco Sister had a non-capital losses balance of $XXXXXXXXXX. It is expected that Profitco Sister will XXXXXXXXXX in its fiscal year ending on XXXXXXXXXX.

 Profitco Sister’s income is approximately XXXXXXXXXX.  

7.    Paragraph 7.3 is added and reads as follows:

Profitco intends to amalgamate with Profitco Sister on XXXXXXXXXX, through a horizontal amalgamation pursuant to subsection 87(1) and paragraph 87(1.1)(b) to form Amalco. It is expected that Amalco will continue to be profitable following the amalgamation. 

8.    Paragraph 15.1 is added and reads as follows:

On XXXXXXXXXX, Profitco and Profitco Sister will amalgamate pursuant to subsection 87(1) and paragraph 87(1.1)(b) as described in paragraph 7.3. Following this amalgamation, the Profitco Loan will be payable by Amalco and the Newco Preferred Shares will be held by Amalco.

9.    Subparagraph 16(c) is amended to replace all references to “Profitco” with “Amalco”, as a result of the amalgamation as described in paragraph 15.1, as follows:

Amalco will pay the accrued and unpaid interest on the Profitco Loan.

10.   Subparagraph 17(a) is amended to replace all references to “Profitco” with “Amalco”, as a result of the amalgamation as described in paragraph 15.1, as follows:

Newco will redeem the Newco Preferred Shares held by Amalco for an amount equal to their aggregate redemption amount;

11.   Subparagraph 17(b) is amended to replace all references to “Profitco” with “Amalco”, as a result of the amalgamation as described in paragraph 15.1, as follows:

As payment for the redemption of the Newco Preferred Shares, Newco will deliver the Lossco Loan to Amalco.

12.   Paragraph 20.1 is added and reads as follows:

Lossco, Profitco and Profitco Sister are related persons to each other.

13.   Paragraph 20.2 is added and reads as follows:

Lossco and Amalco will be related persons to each other.

14.   Paragraph 20.3 is added and reads as follows:

Lossco, Profitco and Profitco Sister are affiliated persons to each other.

15.   Paragraph 20.4 is added and reads as follows:

Lossco and Amalco will be affiliated persons to each other.

16.   Paragraph 24 is amended to replace all references to “Profitco” with “Amalco”, as a result of the amalgamation as described in paragraph 15.1, as follows:

The purpose of the Proposed Transactions is to effect a tax consolidation of Amalco and Lossco by causing Lossco to earn interest income, thus permitting Lossco to utilize its non-capital loss carry forwards, and to have Amalco incur interest expense to reduce its income for its current taxation year, and to the extent this creates non-capital losses for Amalco, to carry back the non-capital losses to reduce its taxable income from prior taxation years in which Lossco and Amalco were affiliated or related persons.

17.   Paragraph 25 is amended to read as follows:

The only purpose of both the payment and the receipt of the dividends on Newco’s Preferred Shares described in Paragraph 16 is to provide a reasonable return on the Newco Preferred Shares issued by Newco to Profitco and subsequently held by Amalco. More specifically, none of the purposes of the dividends is to reduce the fair market value or capital gain of any share, nor to increase the total cost amounts of properties of Profitco or Amalco.

18.   Ruling A is amended to replace all references to “Profitco” with “Amalco”, as a result of the amalgamation as described in paragraph 15.1, as follows:

Provided that Amalco has a legal obligation to pay interest on the Profitco Loan, and the Newco Preferred Shares continue to be held by Amalco for the purpose of gaining or producing income therefrom, Amalco 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 Profitco Loan for that taxation year (depending on the method regularly followed by Amalco in computing its income for the purposes of the Act); and (ii) a reasonable amount in respect thereof;

19.   Ruling C is amended to replace all references to “Profitco” with “Amalco”, as a result of the amalgamation as described in paragraph 15.1, as follows:

Dividends received by Amalco on the Newco Preferred Shares, as described above, will be taxable dividends and such dividends will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of the recipient corporation for the year in which the dividends are received by Amalco and, for greater certainty such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4) of the Act;

20.   Ruling F is amended to replace all references to “Profitco” with “Amalco”, as a result of the amalgamation as described in paragraph 15.1, as follows:

Part VI.1 will not apply to the dividends received by Amalco on the Newco Preferred Shares as described in Paragraph 16, as the dividends will be excluded dividends;

We hereby confirm that the amended facts and proposed transactions set out above do not affect the rulings given in the 2019 Ruling and that they will continue to be binding on the CRA, subject to the conditions and limitations stated in the 2019 Ruling.

Yours sincerely,

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

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