2021-0895511R3 Loss consolidation arrangement

Principal Issues: Whether Lossco would be entitled to apply existing non-capital losses and other tax attributes that are not restricted by a “loss restriction event” against the interest income that would be generated as part of particular loan that would be made under the loss consolidation transaction and whether the accompanying interest expense would be deductible by Profitco.

Position: Yes.

Reasons: The proposed transactions conform to our requirements for these types of loss consolidation rulings, in this case on the basis that the entities involved are related and affiliated. The proposed transactions would be legally effective and commercially plausible.

Author: XXXXXXXXXX
Section: 20(1)(c), 55(2), 112, 245

XXXXXXXXXX                                                                2021-089551

XXXXXXXXXX, 2022

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
    XXXXXXXXXX

We are writing in response 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 described in this letter is the same or substantially similar to transactions or issues that was:

(i) dealt 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;

c. 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.

The Taxpayers have also confirmed that the proposed transactions described herein will not result in the Taxpayers or any person related to the Taxpayers being unable to pay any of their outstanding tax liabilities.

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 AND ABREVIATIONS

In this letter, the parties involved in the Proposed Transactions (described below) are designated as follows:

“ACO” means XXXXXXXXXX, as described in Paragraph 7 below;

“BCO” means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX and amalgamated with CCO on XXXXXXXXXX, as described in Paragraph 7 below;

“CCO” means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX and continued under the XXXXXXXXXX on XXXXXXXXXX, as described in Paragraph 8 below;

“Lossco” means XXXXXXXXXX, the corporation resulting from the vertical amalgamation of BCO and CCO undertaken on XXXXXXXXXX in accordance with the XXXXXXXXXX, as described in Paragraph 9(vii) below;

“Profitco” means XXXXXXXXXX, as described in Paragraph 1 below;

“Profitco Affiliated Group” means Profitco and its subsidiaries, as described in Paragraph 2 below.

In this letter, the following abbreviations, terms and expressions have the meanings described below:

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

“affiliated” has the meaning assigned by section 251.1, read without reference to the definition of “controlled” in subsection 251.1(3);

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

XXXXXXXXXX;

“Daylight Loan” means the loan made by an unrelated and arm’s length financial institution to Profitco described in Paragraph 15 below;

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

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

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

“financial intermediary corporation” has the meaning assigned by subsection 191(1);

“FMV” means fair market value;

“GAAR” means the “general anti-avoidance rule” provided for in section 245;

“ITC” means investment tax credit, as defined in subsection 127(9);

“Loss Consolidation Arrangement” means the transactions described in Paragraphs 15 to 20 below;

“loss restriction event” has the meaning assigned by subsection 251.1(2);

“Lossco Preferred Shares” means the preferred shares described in Paragraph 13 below;

“Lossco PS Redemption Amount” has the meaning established in Paragraph 13(c) below;

“low rate income pool” or “LRIP” has the meaning assigned by subsection 89(1);

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

XXXXXXXXXX;

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

“Paragraph” means a numbered paragraph in this letter;

“Profitco Loan” means the interest-bearing loan described in Paragraph 17 below;

“Proposed Transactions” means the transactions described in Paragraphs 15 to 21 below;

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

“specified financial institution” has the meaning assigned by subsection 248(1);

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

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

XXXXXXXXXX;

“undepreciated capital cost” or “UCC” has the meaning assigned by subsection 13(21).

FACTS

1. Profitco is a taxable Canadian corporation and a widely held publicly traded company. The authorized capital of Profitco consists of an unlimited number of common shares, which are listed on the XXXXXXXXXX. Profitco has a XXXXXXXXXX taxation year-end.

2. Profitco is the corporate parent of a group of Canadian and non-Canadian corporations (“Profitco Affiliated Group”) XXXXXXXXXX. Profitco carries on its business directly and through a number of subsidiaries within the Profitco Affiliated Group. More particularly, Profitco XXXXXXXXXX.

3. The consolidated revenues of Profitco for the year ended XXXXXXXXXX totaled approximately $XXXXXXXXXX. The consolidated financial statements of Profitco for its fiscal year ended XXXXXXXXXX indicate that Profitco and its subsidiaries had:

(a) assets of approximately $XXXXXXXXXX;

(b) liabilities of approximately $XXXXXXXXXX; and

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

On XXXXXXXXXX, the FMV of Profitco’s shares traded on the XXXXXXXXXX was approximately of $XXXXXXXXXX. The arm’s length borrowings of the Profitco Affiliated Group currently amount to approximately to $XXXXXXXXXX and is comprised of XXXXXXXXXX. Consequently, the Profitco Affiliated Group is in a position to increase its current arm’s length borrowings by an amount of more than $XXXXXXXXXX.

4. Profitco’s taxable income for its three prior taxation years was as follows:

XXXXXXXXXX

$XXXXXXXXXX

A portion of Profitco’s taxable income comes from interest-bearing loans to CCO. The interest on the loans were included in Profitco’s income and deducted from CCO’s income.

5. Profitco has permanent establishments in XXXXXXXXXX and the provincial allocation of Profitco for its XXXXXXXXXX taxation years was approximately XXXXXXXXXX. Profitco expects to earn income in future taxation years without considering the Loss Consolidation Arrangement.

6. It is expected that Profitco will generate sufficient taxable income in its taxation year ending XXXXXXXXXX and onwards to fully offset the interest paid or payable on the Profitco Loan. The taxable income, excluding the interest deduction to be incurred as part of the Loss Consolidation Arrangement, of Profitco for its taxation year ending XXXXXXXXXX and the following years is projected to be of approximately $XXXXXXXXXX for its XXXXXXXXXX taxation year, $XXXXXXXXXX for its XXXXXXXXXX taxation year and $XXXXXXXXXX for its XXXXXXXXXX taxation year.

7. ACO is a taxable Canadian corporation and is a wholly owned subsidiary of Profitco. Prior to the reorganization described in Paragraph 9 below, ACO owned all the issued and outstanding shares of BCO, a taxable Canadian corporation and a XXXXXXXXXX. ACO acquired all the issued and outstanding shares of BCO on XXXXXXXXXX as part of an arm’s length transaction.

8. Before the reorganization described in Paragraph 9 below, CCO was a wholly owned subsidiary of Profitco. CCO was a taxable Canadian corporation XXXXXXXXXX.

9. Throughout the financial years XXXXXXXXXX, Profitco and its subsidiaries implemented several restructuring initiatives XXXXXXXXXX. Among these initiatives, BCO and CCO, two wholly owned subsidiaries of Profitco, have combined their activities by executing the following transactions XXXXXXXXXX:

(i) ACO undertook a reorganization of capital for the purposes of section 86 such that its shareholder, Profitco, obtained preferred shares of ACO having a redemption price equal to the FMV of BCO’s shares transferred by ACO to CCO in Paragraph 9(iii) below;

(ii) Profitco transferred the preferred shares of ACO to CCO in exchange for common shares of CCO. The transfer occurred on a tax-deferred basis in accordance with the provisions of subsection 85(1);

(iii) ACO transferred all its shares of BCO to CCO in exchange for preferred shares of CCO. The transfer occurred on a tax-deferred basis in accordance with the provisions of subsection 85(1);

(iv) ACO redeemed its preferred shares acquired by CCO in Paragraph 9(ii) above and issued a promissory note to CCO in payment of the aggregate redemption price of the preferred shares so redeemed. Subsection 55(2) did not apply to the deemed dividend received by CCO by virtue of the application of paragraph 55(3)(a);

(v) CCO redeemed its preferred shares issued to ACO in Paragraph 9(iii) above and issued a promissory note to ACO in payment of the aggregate redemption price of the preferred shares so redeemed. Subsection 55(2) did not apply to the deemed dividend received by ACO by virtue of the application of paragraph 55(3)(a);

(vi) The promissory notes issued in Paragraphs 9(iv) and 9(v) above were set off against each other and cancelled; and

(vii) CCO was continued under the XXXXXXXXXX and was subsequently amalgamated with BCO pursuant to a short-form vertical amalgamation on XXXXXXXXXX to form Lossco. The taxation year of Lossco will end on XXXXXXXXXX. The tax consequences resulting from the amalgamation of CCO with BCO were determined in accordance with the provisions of section 87.

10. Further to the reorganization described in Paragraph 9 above, all of the common shares of Lossco are held by Profitco. Lossco is a wholly owned subsidiary of Profitco and a taxable Canadian corporation. Lossco is XXXXXXXXXX.

11. Lossco currently operates XXXXXXXXXX.

12. The tax attributes of BCO and CCO as of XXXXXXXXXX, available for Lossco for its XXXXXXXXXX taxation year and after, are the following:

	BCO	CCO	Total
NCL	XXXXXXXXXX	XXXXXXXXXX	XXXXXXXXXX
ITC	XXXXXXXXXX	XXXXXXXXXX	XXXXXXXXXX
UCC	XXXXXXXXXX	XXXXXXXXXX	XXXXXXXXXX

NCL of $XXXXXXXXXX were incurred in taxation years ending prior to the acquisition of control of BCO by ACO and, therefore, were subject to a loss restriction event and are subject to the restrictions set out in subsection 111(5).

NCL of $XXXXXXXXXX are not subject to any loss restriction event and may be deducted in computing the taxable income of Lossco, which will include the interest income earned by Lossco as a result of the Loss Consolidation Arrangement.

Lossco has permanent establishments in XXXXXXXXXX. The projected provincial allocation factor for the purpose of allocating taxable income for Lossco for its XXXXXXXXXX taxation year is expected to be XXXXXXXXXX which is comparable to the provincial allocation of CCO. Without considering any interest income to be earned by Lossco as a result of the Loss Consolidation Arrangement, Lossco expects to earn income in future taxation years, but not enough to utilize, in the foreseeable future, all of its tax attributes that are not subject to a loss restricted event, as these tax attributes are described above. To that extent, Lossco, without considering the interest income to be earned as part of the Loss Consolidation Arrangement, is projected to incur a loss of $XXXXXXXXXX for its taxation year ending March 31, XXXXXXXXXX and to have a taxable income of $XXXXXXXXXX and $XXXXXXXXXX respectively for its XXXXXXXXXX and XXXXXXXXXX taxation years.

13. Lossco’s authorized share capital notably includes an unlimited number of class B preferred shares (the “Lossco Preferred Shares”), none of which are currently issued and outstanding. The rights and restrictions of the Lossco Preferred Shares are as follows:

(a) Non-voting;

(b) Non-participating;

(c) Redeemable at the option of the holder and retractable at the option of Lossco for an amount equal to XXXXXXXXXX per Lossco Preferred Share (the “Lossco PS Redemption Amount”), plus the amount of all accrued and unpaid dividends on such Lossco Preferred Shares;

(d) Right to receive, in priority to the holders of the common shares of Lossco, fixed and cumulative dividends accruing daily at an annual rate of XXXXXXXXXX% calculated on the Lossco PS Redemption Amount. Among others, the board of director of Lossco is entitled to declare part of the cumulative dividend for any year notwithstanding that such dividend for such year is not declared in full; and

(e) In the event of the liquidation or dissolution of Lossco, the right to the payment, in priority to the holders of the common shares of Lossco, of an amount equal to the Lossco PS Redemption Amount, plus the amount of all accrued but unpaid dividends on such Lossco Preferred Shares.

PROPOSED TRANSACTIONS

14. All the transactions described in Paragraphs 15 to 18 below will take place on the same day and in the order described, and within the time limitations specified in this letter.

15. Profitco will borrow an amount of $XXXXXXXXXX from an unrelated and arm’s length financial institution on a daylight loan basis (the “Daylight Loan”). The Daylight Loan will have arm’s length commercial terms customary for this type of loan.

16. Profitco will use all of the proceeds of the Daylight Loan to subscribe to XXXXXXXXXX Lossco Preferred Shares having an aggregate Lossco PS Redemption Amount and FMV 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 Lossco Preferred Shares and will form part of the permanent capital of Lossco. The PUC and ACB of each Lossco Preferred Shares issued will be equal to its Lossco PS Redemption Amount.

17. Lossco will use all of the proceeds received on the subscription of the Lossco Preferred Shares by Profitco to make an interest-bearing loan to Profitco (the “Profitco Loan”). The Profitco Loan will have the following features:

(i) principal amount of $XXXXXXXXXX;

(ii) simple interest accruing daily at an annual fixed rate that is a commercial arm’s length rate of XXXXXXXXXX% per annum;

(iii) interest payable on XXXXXXXXXX of each year;

(iv) term of one year, with a prepayment option at any time at the discretion of Profitco;

(v) Profitco will have the option to extend the maturity date of the Profitco Loan for successive periods of 1 year. The Profitco Loan would then be payable upon Lossco’s demand during the extension period(s);

(vi) the Profitco Loan will be nonrecourse. It shall be repayable exclusively by delivering the Lossco Preferred Shares or with the cash coming from the redemption or the retraction of the Lossco Preferred Shares (i.e., recourse will be limited to the Lossco Preferred Shares). Similarly, Lossco’s recourse for interest payments on the Profitco Loan will be limited to amounts received as dividends on the Lossco Preferred Shares;

(vii) in the event of default on the Profitco Loan, Profitco will repay the Profitco Loan by delivering the Lossco Preferred Shares to Lossco;

(viii) the Lossco Preferred Shares will be pledged by Profitco to Lossco as collateral for the Profitco Loan. Accordingly, possession of the share certificates representing the Lossco Preferred Shares will remain with Lossco in its capacity as secured creditor, but Profitco will receive all dividends and Lossco PS Redemption Amount on the Lossco Preferred Shares. Unless and until the security is realized, all such payments on the Lossco Preferred Shares must be applied immediately to service the Profitco Loan.

18. Profitco will use the proceeds of the Profitco Loan to repay the Daylight Loan.

19. On XXXXXXXXXX, Lossco will, subject to any applicable solvency tests, pay the accrued and unpaid dividends on the Lossco Preferred Shares to Profitco. Lossco will, to the maximum extent possible, designate such dividends as eligible dividends in accordance with subsection 89(14).

20. Immediately upon receipt of the payment of the dividends for a particular year, Profitco will pay the accrued interest on the Profitco Loan to Lossco.

21. The Loss Consolidation Arrangement described in this letter may be partially or fully unwound at any time upon agreement of Lossco and Profitco (e.g., in the event that Lossco’s NCL that have not been subject to a loss restriction event have been fully utilized and that the utilization of its UCC has been maximized) and, in any event, will be fully unwound upon the XXXXXXXXXX anniversary of the issuance of the Profitco Loan (e.g., after the expiration of the XXXXXXXXXX extension period, as applicable) in the following manner:

(i) Lossco will, subject to any applicable solvency tests, pay the accrued and unpaid dividends on the Lossco Preferred Shares to Profitco. Lossco will, to the maximum extent possible, designate such dividends as eligible dividends in accordance with subsection 89(14);

(ii) Immediately upon receipt of the payment of the dividends, Profitco will pay the accrued interest on the Profitco Loan to Lossco;

(iii) Profitco will repay all or a portion of the Profitco Loan by delivering to Lossco a number of Lossco Preferred Shares having an aggregate FMV (e.g., the aggregate Lossco PS Redemption Amount of the Lossco Preferred Shares to be so delivered) equal to the amount to be repaid on the Profitco Loan. Alternatively, Lossco may redeem all or a portion of its Lossco Preferred Shares held by Profitco for a cash consideration equal to the aggregate Lossco PS Redemption Amount of the Lossco Preferred Shares to be so redeemed, which cash consideration will be used by Profitco to repay all or a portion, as applicable, of the Profitco Loan to Lossco.

ADDITIONAL INFORMATION

22. The Tax Centre at which each taxpayer in respect of which this Ruling is requested files its income tax returns, as well as its respective tax account number are as follows:

XXXXXXXXXX

23. The management of Profitco confirms that the amount of the Daylight Loan is within the Profitco Affiliated Group’s borrowing capacity and does not exceed the amount that the Profitco Affiliated Group could borrow from arm’s length lenders.

24. Based on current financial projections, Profitco will have the financial capacity to serve the interest on the Profitco Loan from its own cash flow. Lossco will have the capacity to pay the cumulative dividends on the Lossco Preferred Shares to Profitco from sources of income other than the interest earned on the Profitco Loan.

25. Profitco and Lossco are affiliated persons and related persons and will remain affiliated and related to each other throughout the period during which the Loss Consolidation Arrangement is in place.

26. Profitco and Lossco’s respective LRIP balance as at the date hereof is XXXXXXXXXX.

27. The Lossco Preferred Shares, which will be issued as described in Paragraph 16 above, will not be, at all relevant times throughout the Loss Consolidation Arrangement described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;

(b) the subject of a dividend rental arrangement;

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

(d) issued for consideration that is or that 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).

28. None of Profitco and Lossco is or will be a specified financial institution or a financial intermediary corporation.

29. The specific terms and conditions of the Lossco Preferred Shares and Profitco Loan that will be used in the Loss Consolidation Arrangement are to protect Profitco’s assets from the potential claims of creditors of Lossco.

30. The NCL and other tax attributes of Lossco that will be used by Lossco as part of the Proposed Transactions are NCL and other tax attributes that are not to be restricted by the provisions related to a loss restriction event.

PURPOSE OF PROPOSED TRANSACTIONS

31. The sole purpose of the Proposed Transactions is to achieve a tax consolidation of Lossco and Profitco by causing Lossco to earn interest income on the Profitco Loan, thus permitting Lossco to use its NCL, considering subsection 87(2.1), or other tax attributes that are not restricted by virtue of a loss restriction event, and to have Profitco to deduct interest expense and to reduce its taxable income.

32. For greater certainty, the purpose of both the payment and the receipt of the dividends on the Lossco Preferred Shares as described in Paragraph 19 above is to provide a reasonable return on such Lossco Preferred Shares. More specifically, none of the purposes of the dividends to be received as part of the maintenance of the Loss Consolidation Arrangement is to reduce the FMV or capital gain of any share, nor to increase the total cost amounts of any properties in respect of Lossco or Profitco.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, Additional Information and the purpose of the Proposed Transactions, 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 that:

A. Provided that Profitco has a legal obligation to pay interest on the Profitco Loan and Profitco continues to hold the Lossco Preferred Shares for the purpose of gaining or producing income from property, Profitco will, pursuant to paragraph 20(1)(c) and subsection 20(3), be entitled to deduct, in computing its income for a taxation year, the lesser of:

(i) the interest paid or payable on the Profitco Loan in respect of that taxation year (depending on the method regularly followed by Profitco in computing its income for the purposes of the Act); and

(ii) a reasonable amount in respect thereof.

B. Dividends received by Profitco on the Lossco Preferred Shares described in Paragraph 19 above will be taxable dividends and such dividends will be deductible pursuant to subsection 112(1) in computing the taxable income of Profitco for the year in which the dividends are received, 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).

C. Provided the only purpose of the payment and receipt of the dividends on the Lossco Preferred Shares is as described in Paragraphs 31 and 32 above, the provisions of subsection 55(2) will not apply to the dividends, if any, referred to in Ruling B, and received by Profitco on the Lossco Preferred Shares.

D. Part IV, Part IV.1 and Part VI.1 will not apply to the dividends described in Ruling B.

E. The settlement of the Profitco Loan as described in Paragraph 21(iii) above will not give rise to any “forgiven amount” for the purposes of section 80.

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

G. 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 above.

The general anti-avoidance provision of a province with which the Government of Canada has entered into a tax collection agreement will not be applied, as a result of the Proposed Transactions, in and by themselves, to determine the tax consequences confirmed in the rulings given above, in respect of a taxation year in respect of which such a tax collection agreement is in effect.

The above Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R11 dated April 1st, 2021, and are binding on the CRA provided that the Proposed Transactions described in Paragraphs 15 to 18 above are commenced and entered into on or before XXXXXXXXXX, and the rest of the Proposed Transactions as described in this letter. The above Rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the Rulings provided herein.

OTHER COMMENTS

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

a) the FMV or ACB of any property or the PUC of any shares referred to herein;

b) the amount of any NCL, net capital loss, UCC, ITC 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) subject to Ruling H, the application or non-application of a general anti-avoidance provision of any province; and

e) any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the Rulings given above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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