2022-0949231R3 Loss Consolidation Ruling

Principal Issues: Whether a particular loss consolidation arrangement is acceptable. In this arrangement, Lossco obtains a daylight loan from a third party and uses the proceeds to make an interest bearing loan to NewLossco. NewLossco uses the proceeds to invest in preferred shares of Newco. The main issues are whether Lossco would be entitled to apply existing non-capital losses against the interest income received on the loan; and whether NewLossco would be entitled to deduct the interest expense paid on the loan and the dividends received on the Newco Preferred Shares.

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), 112, 80, 245

XXXXXXXXXX                                                                2022-094923

XXXXXXXXXX, 2022

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request – Supplement to file 2020-087076
XXXXXXXXXX

We are writing in response to your email of XXXXXXXXXX wherein you submitted a request to make certain changes to the proposed transactions as they were described in the Advance Income Tax Ruling dated XXXXXXXXXX (2020-087076) (referred to as the “Original Ruling”) on behalf of the above‑referenced taxpayers.

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

As a result of your request, the following amendments are made to the Original Ruling:

PROPOSED TRANSACTIONS

1. The “Re” line on Page 1 is amended by replacing the reference to XXXXXXXXXX. Following the amendment, the amended portion of page 1 will read as follows:

XXXXXXXXXX

2. The definition of “Canadian Parent” is struck.

3. The definition of “Profitco” is amended by replacing the reference to XXXXXXXXXX. Following the amendment, the definition of “Profitco” will read as follows:

“Profitco” means XXXXXXXXXX, the corporation described in Paragraph 3;

4. The contents of Paragraph 2 is struck and replaced with “Reserved”.

5. Paragraph 3 is amended to replace the reference to “Canadian Parent” with “Lossco” and make related changes to reflect the taxation year end and activities of XXXXXXXXXX. Following the amendment, paragraph 3 will read as follows:

Profitco is a taxable Canadian corporation and a wholly owned subsidiary of Lossco. Profitco’s principal business activities are XXXXXXXXXX. Profitco has a taxation year-end of XXXXXXXXXX. Profitco’s registered address is XXXXXXXXXX. Profitco files its return with the XXXXXXXXXX and is served by the XXXXXXXXXX.

6. Paragraph 4 is amended to reflect the provincial allocation of XXXXXXXXXX for its taxation year ending in XXXXXXXXXX. Following the amendment, paragraph 4 will read as follows:

Profitco operates through permanent establishments in a number of XXXXXXXXXX jurisdictions. The provincial allocation for Profitco’s XXXXXXXXXX taxation year was approximately as follows:

XXXXXXXXXX

7. Paragraph 5 is amended to reflect the facts of XXXXXXXXXX. Following the amendment, paragraph 5 will read as follows:

As at Profitco’s taxation year ending XXXXXXXXXX, Profitco has a loss carry forward balance of approximately $XXXXXXXXXX. Profitco projects improved financial performance driven by XXXXXXXXXX. As a result, Profitco expects to earn sufficient taxable income from its activities in its taxation years ending XXXXXXXXXX to apply its non-capital losses as well as the non-capital losses generated as part of the Proposed Transactions. In particular, Profitco’s forecasted net income for tax purposes for taxation years ending in XXXXXXXXXX are as follows:

XXXXXXXXXX

8. Paragraph 9 is amended to reflect Lossco’s provincial allocation for XXXXXXXXXX, rather than XXXXXXXXXX. Following the amendment, paragraph 9 will read as follows:

Lossco operates through permanent establishments in a number of XXXXXXXXXX jurisdictions. The provincial allocation for Lossco’s XXXXXXXXXX taxation year was approximately was follows:

  XXXXXXXXXX

9. Paragraph 10 is amended to reflect Lossco’s non-capital losses available for carry forward as of its taxation year ended XXXXXXXXXX, rather than XXXXXXXXXX. Following the amendment, paragraph 10 will read as follows:

Lossco has unexpired non-capital losses available to be carried forward of approximately $XXXXXXXXXX as at its taxation year ended XXXXXXXXXX. These losses originate from XXXXXXXXXX. The breakdown of these losses is as follows:

XXXXXXXXXX

10. Paragraph 11 is amended to remove the reference to expected losses in XXXXXXXXXX. Following the amendment, paragraph 11 will read as follows:

Lossco anticipates earning taxable income in XXXXXXXXXX, which it will offset with existing non-capital losses. Lossco’s forecasted net income/loss for tax purposes for the next two taxation years is as follows:

    XXXXXXXXXX

11. Paragraph 29 is amended to reflect a new unwinding procedure. Following the amendment, paragraph 29 will read as follows:

On or before XXXXXXXXXX of the calendar year that follows the year in which the steps in Paragraph 28 are completed:

a. Newco will transfer its NewLossco Common Shares to Profitco in exchange for preferred shares of Profitco with a FMV equal to the FMV of the NewLossco Common Shares transferred. Newco and Profitco will jointly elect in a prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the NewLossco Common Shares transferred will be the lesser of the FMV of those shares and $XXXXXXXXXX, being the ACB of such shares. Profitco will add to its stated capital account in respect of the preferred shares issued to Newco an amount equal to the PUC to Newco of the NewLossco Common Shares. The PUC to Newco of the NewLossco Common Shares will be $XXXXXXXXXX.

b. Lossco, as sole shareholder of Newco, will pass a resolution authorizing and requiring Newco to be wound up into Lossco pursuant to subsection 88(1). Effective as of the making of such resolution, Newco’s assets will be transferred to Lossco and Lossco will assume Newco’s liabilities. It is expected that Newco will be formally dissolved before the end of the first taxation year of Lossco commencing after the commencement of the winding-up of Newco.

c. Immediately following the commencement of the wind-up of Newco, Profitco, as sole shareholder of NewLossco, will pass a resolution authorizing and requiring NewLossco to be wound up into Profitco pursuant to subsection 88(1). Effective as of the making of such resolution, NewLossco’s assets will be transferred to Profitco and Profitco will assume NewLossco’s liabilities. It is expected that NewLossco will be formally dissolved before the end of the first taxation year of Profitco commencing after the commencement of the winding-up of NewLossco.

ADDITIONAL INFORMATION

12. Paragraph 30 is amended to remove the reference to “Canadian Parent”. Following the amendment, paragraph 30 will read as follows:

Ultimate US Parent, Profitco, US Parent, Eco, Lossco, Newco Capco and NewLossco will be, at all relevant times, related persons and affiliated persons for the purposes of the Act. The Loss Consolidation Arrangement will be unwound in the manner described in Paragraphs 28 and 29 of the Proposed Transactions if any entity previously mentioned in this Paragraph ceases to be affiliated and/or related.

13. The contents of Paragraph 45 is struck and replaced with “Reserved”.

PURPOSE OF THE PROPOSED TRANSACTIONS

14. The following new paragraph 53 is added after paragraph 52:

The Proposed Transaction described in paragraph 28(a) has no purpose.

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

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

Yours sincerely,

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

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