2023-0973911R3 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 Profitco. Profitco uses the proceeds to invest in preferred shares of an existing corporation, Numberco, which also has a loss carryforward balance. 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 Profitco would be entitled to deduct the interest expense paid on the loan and the dividends received on the Numberco 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                                                                2023-097391

XXXXXXXXXX, 2023

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request

XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, as amended by letters dated 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. 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

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

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

“affiliated person” 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);

“BCA1” means XXXXXXXXXX;

“BCA2” means XXXXXXXXXX;

“Bco” means XXXXXXXXXX, the corporation described in Paragraph 4;

“CRA” means Canada Revenue Agency;

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

“Daylight Loan” means a loan made by a third party financial institution to Lossco, as described in Paragraph 33;

“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);

“FMV” or “fair market value” means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act, expressed in terms of cash;

“financial institution” has the meaning assigned by subsection 190(1);

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

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

“IB Loan” means, in the singular, the interest bearing loan made by Lossco to Profitco described in Paragraph 34 and, in the plural, all of the IB Loans resulting from the transactions described in Paragraph 37(a);

“
IB Note” means the promissory note described in Paragraph 37(a);

“Implementation Date” means XXXXXXXXXX;

“Intercompany Debts” means the debts existing between Lossco as creditor and Numberco as debtor, as described in Paragraph 14;

“Lossco” means XXXXXXXXXX, the corporation described in Paragraph 5;

“Loss Consolidation Arrangement” means the transactions described in Paragraphs 32 to 42;

“NIB Loan” means, in the singular, the non-interest bearing loan described in Paragraph 36 and in the plural, all of the NIB Loans resulting from the transactions described in Paragraph 37(c) ;

“NIB Note” means the demand non-interest bearing promissory note described in Paragraph 37(c);

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

“Numberco” means XXXXXXXXXX, the corporation described in Paragraph 13, which, as described in Paragraph 30, will be continued under the BCA1 and converted to an unlimited liability company with the legal name XXXXXXXXXX (or such other legal name as may be selected and permitted);

“Numberco Capitalization” mean the contribution of capital described in Paragraph 39(a);

“Numberco Preferred Shares” means the preferred shares of Numberco described in Paragraph 31;

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

“Paragraph” means a numbered paragraph in this letter;

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

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

“Profitco” means XXXXXXXXXX, the corporation described in Paragraph 9;

“Proposed Transactions” means the transactions described in Paragraphs 29 to 42;

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

“Redemption Amount” of a Numberco Preferred Share has the meaning described in Paragraph 35;

“Rulings” means the advance income tax rulings labelled “A” to “K” in this letter;

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

“stated capital” means the amount of capital determined in respect of a class or series of shares in accordance with the governing legislation of the corporation;

“substantial interest” has the meaning assigned by subsection 191(2);

“Solvency Capitalization” means the contribution of capital described in Paragraph 29;

“Support Agreement” means the agreement described in Paragraph 39(a);

“taxable Canadian corporation” has the meaning assigned by subsections 89(1) and 248(1);

“taxable dividend” has the meaning assigned by subsections 89(1) and 248(1);

“Tax Collection Agreement” is an agreement that has been entered into between a province and the Government of Canada;

“taxable preferred share” has the meaning assigned by subsection 248(1);

“Taxpayers” mean the entities described on page 1 of this letter;

“Ultimate Parent” means XXXXXXXXXX, the corporation described in Paragraph 1; and

XXXXXXXXXX.

FACTS

Entities

1. Ultimate Parent is a non-resident corporation resident in XXXXXXXXXX, the common shares of which are widely held and listed on the XXXXXXXXXX under the symbol “XXXXXXXXXX”. Ultimate Parent’s market capitalization was approximately $XXXXXXXXXX.

2. The borrowing capacity of Ultimate Parent exceeds the $XXXXXXXXXX borrowing required to complete the Proposed Transactions. As of XXXXXXXXXX Ultimate Parent’s XXXXXXXXXX credit rating is XXXXXXXXXX.

3. Aco is a non-resident corporation resident in XXXXXXXXXX and an indirect wholly owned subsidiary of Ultimate Parent.

4. Bco is a taxable Canadian corporation and a wholly owned subsidiary of Aco.

5. Lossco is a taxable Canadian corporation, the principal business activity of which is the XXXXXXXXXX. Aco and Bco collectively hold all the issued and outstanding shares of Lossco. Lossco has a taxation year-end of XXXXXXXXXX. Lossco’s registered address is XXXXXXXXXX.

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

XXXXXXXXXX

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

XXXXXXXXXX

8. Prior to the implementation of the Proposed Transactions and before the application of Lossco’s existing non-capital losses, Lossco anticipates it will generate taxable income in its taxation years ending in XXXXXXXXXX, as described in Paragraph 18.

9. 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.

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

XXXXXXXXXX

11. Profitco has a loss carryforward balance of $XXXXXXXXXX from its taxation years ending in XXXXXXXXXX. Profitco has an additional $XXXXXXXXXX in losses available to it as of XXXXXXXXXX, as a result of the XXXXXXXXXX Loss Consolidation Structure, described below.

12. Prior to the implementation of the Proposed Transactions and before the application of Profitco’s existing non-capital losses, Profitco anticipates generating taxable income in its taxation years ending in XXXXXXXXXX, as described in Paragraph 23.

13. Numberco is a taxable Canadian corporation operating solely in the province of XXXXXXXXXX. Lossco holds all of Numberco’s issued and outstanding shares (being XXXXXXXXXX common shares). As of XXXXXXXXXX, Lossco’s adjusted cost base in such Numberco shares is $XXXXXXXXXX and the paid-up capital is $XXXXXXXXXX. Numberco’s taxation year-end is XXXXXXXXXX. Numberco’s business number is XXXXXXXXXX.

14. Numberco’s principal business activity was XXXXXXXXXX. Numberco had an interest in XXXXXXXXXX, the principal business of which was XXXXXXXXXX. Numberco’s partnership activity was funded by a U.S. dollar denominated debt of $XXXXXXXXXX currently held by Lossco (estimated to be equal to $XXXXXXXXXX Canadian dollars as of XXXXXXXXXX), and a Canadian dollar denominated debt of $XXXXXXXXXX currently held by Lossco (together the “Intercompany Debts”).

15. Numberco has unexpired non-capital losses of $XXXXXXXXXX from its taxation years ending in XXXXXXXXXX.

XXXXXXXXXX Loss Consolidation Structure and Taxable Income Forecasts

16. In XXXXXXXXXX, Lossco and Profitco implemented a loss consolidation arrangement in accordance with Advance Income Tax Ruling Doc. No. XXXXXXXXXX (the “XXXXXXXXXX Loss Consolidation Structure”).

17. Under the XXXXXXXXXX Loss Consolidation Structure, Lossco earned interest income of approximately $XXXXXXXXXX in is taxation year ending in XXXXXXXXXX, and interest income of approximately $XXXXXXXXXX in its taxation year ending in XXXXXXXXXX. As part of the structure, a newly incorporated NewLossco generated a loss carryforward balance of $XXXXXXXXXX, and was wound up into Profitco on XXXXXXXXXX.

18. Prior to the implementation of the Proposed Transactions and before the application of Lossco’s existing non-capital losses, Lossco’s forecasted net income for tax purposes for its taxation years ending in XXXXXXXXXX is as follows:

XXXXXXXXXX

19. Lossco expects to apply its existing non-capital losses to reduce its forecasted taxable income for its taxation year ending in XXXXXXXXXX.

20. As a result of the Proposed Transactions, Lossco expects to earn additional interest income of approximately $XXXXXXXXXX in its taxation year ending in XXXXXXXXXX, and $XXXXXXXXXX in its taxation year ending in XXXXXXXXXX. Taking into account the forgoing, Lossco’s revised forecasted net income for tax purposes for its taxation years ending in XXXXXXXXXX is as follows:

XXXXXXXXXX

21. Lossco expects to apply its existing non-capital losses to reduce its revised forecasted taxable income for its taxation year ending in XXXXXXXXXX.

22. Lossco expects to apply its existing non-capital losses to reduce its revised taxable income for its taxation year ending in XXXXXXXXXX to $XXXXXXXXXX, at which point Lossco expects to have fully used its non-capital loss carryforward balance.

23. Prior to the implementation of the Proposed Transactions, and before the application of Profitco’s existing non-capital losses and the losses from the XXXXXXXXXX Loss Consolidation Structure, Profitco’s forecasted net income for tax purposes for its taxation years ending in XXXXXXXXXX is as follows:

XXXXXXXXXX

24. As a result of the Proposed Transactions, Profitco expects to deduct interest expense of approximately $XXXXXXXXXX in its taxation year ending in XXXXXXXXXX, and $XXXXXXXXXX in its taxation year ending in XXXXXXXXXX.

25. In respect of its XXXXXXXXXX taxation year, Profitco expects to reduce its income by i) the application of its existing loss carryforward balance; and ii) the application of losses generated as part of the Proposed Transactions, carried back from taxation year ending in in XXXXXXXXXX. This will result in expected taxable income of $XXXXXXXXXX in respect of the XXXXXXXXXX taxation year.

26. In respect of its XXXXXXXXXX taxation year, Profitco expects to reduce its income by i) the interest expense generated as part of the Proposed Transactions and ii) the application of the losses from the XXXXXXXXXX Loss Consolidation Structure. This will result in a loss of approximately ($XXXXXXXXXX). Profitco expects to carryforward this loss to reduce its income in the XXXXXXXXXX taxation year, and XXXXXXXXXX taxation year.

27. In respect of its XXXXXXXXXX taxation year, Profitco expects to reduce its income by the i) interest expense generated as part of the Proposed Transactions; and ii) the application of losses generated by the Proposed Transactions, carried forward from its taxation year ending in XXXXXXXXXX. This is expected to result in XXXXXXXXXX taxable income for Profitco’s XXXXXXXXXX taxation year.

28. In respect of its XXXXXXXXXX taxation year, Profitco expects to reduce its income by the application of losses generated by the Proposed Transactions, carried forward from its taxation year ending in XXXXXXXXXX. This is expected to result in $XXXXXXXXXX taxable income for Profitco’s XXXXXXXXXX taxation year. Profitco expects to have fully utilized its existing non-capital loss carryforward balance, as well as the losses generated under the XXXXXXXXXX Loss Consolidation Structure and the Proposed Transactions, by the end of its taxation year ending in XXXXXXXXXX.

PROPOSED TRANSACTIONS

Pre-Implementation Transactions

29. Lossco will make a contribution of capital to Numberco (“Solvency Capitalization”) in an amount that is at least sufficient to satisfy any solvency requirements under the BCA1 in respect of the Proposed Transactions. The Solvency Capitalization amount is currently estimated to be $XXXXXXXXXX. No shares will be issued by Numberco with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Numberco, or for greater certainty, to the paid-up capital of any class of shares of Numberco. For accounting purposes, the amount of the Solvency Capitalization will be recorded as contributed surplus. The Solvency Capitalization will not be income to Numberco pursuant to U.S. Generally Accepted Accounting Principles or Accounting Standards for Private Enterprises.

30. Numberco will be continued from the BCA2 to the BCA1 and converted to an unlimited liability corporation under the BCA1.

31. In connection with the continuance and conversion, Numberco’s articles will be amended to authorize Numberco to issue an unlimited number of Numberco Preferred Shares. The Numberco Preferred Shares will have the following attributes:

a. non-voting;

b. non-participating;

c. redeemable at the option of the issuer and retractable at the option of the holder, subject to applicable law, at any time for an amount equal to the cash amount for which they were issued and all declared or unpaid dividends and any accrued dividends, which have not been declared and paid, up to but excluding the date fixed for such redemption or retraction (the “Redemption Amount”); and

d. entitlement to a cumulative dividend, calculated daily and accruing by reference to the Redemption Amount of the Numberco Preferred Shares, at a rate which is equal to the interest rate provided under the IB Note for the IB Loans plus 0.0001% per annum.

Implementation of the Loss Consolidation Arrangement

32. The steps described in Paragraphs 34 to 37 below are expected to occur on the same day (the “Implementation Date”).

33. Lossco will borrow $XXXXXXXXXX from an arm’s length financial institution by way of a daylight overdraft loan agreement (the “Daylight Loan”) on arm’s length commercial terms customary for this type of loan.

34. Lossco will use the proceeds received from the Daylight Loan to make an interest bearing loan to Profitco under the terms described in Paragraph 37(a) (each an “IB Loan”).

35. Profitco will use all of the proceeds received from the IB Loan to subscribe for Numberco Preferred Shares having an issue price equal to the amount of such borrowing. The aggregate Redemption Amount, FMV and stated capital of the Numberco Preferred Shares issued will be equal to the aggregate subscription price of the Numberco Preferred Shares at the time of issuance.

36. Numberco will use all of the proceeds received from the issuance of Numberco Preferred Shares to make a non-interest bearing demand loan to Lossco (each a “NIB Loan”).

37. The transactions described in Paragraphs 34 to 36 will be repeated an additional three times, such that once such transactions are completed:

a. The aggregate amount of the IB Loans made to Profitco will equal $XXXXXXXXXX, which loans will be aggregated in a promissory note issued by Profitco with a principal amount of $XXXXXXXXXX and having the following terms and conditions (the “IB Note”):

i. Simple interest will accrue on the principal amount due under the IB Note and will be calculated daily at an annual fixed rate equal to an estimated arm’s length rate, presently estimated to be XXXXXXXXXX% per annum. The interest on the principal amount due under the IB Note will be paid on or before the earlier of: (a) the end of Profitco’s second taxation year following the taxation year in which Profitco incurred interest on the principal amount due under the IB Note and (b) immediately before the transaction described in Paragraph 41;

ii. Lossco’s recourse against Profitco to obtain repayment of the amounts due under the IB Note will be limited to the Numberco Preferred Shares owned by Profitco;

iii. The IB Note will provide Profitco with a right to prepay the principal amount and any interest that may have accrued at any time without penalty; and

iv. The IB Note will provide Lossco with the right to demand the repayment of the principal amount and any interest that may have accrued at any time without penalty; and

b. The aggregate number of Numberco Preferred Shares issued will have an aggregate Redemption Amount and FMV of $XXXXXXXXXX at the time of issuance.

c. The aggregate amount of the NIB Loans made to Lossco as described under Paragraph 36 will equal $XXXXXXXXXX, which loans will be aggregated in a promissory note issued by Lossco to Numberco with a principal amount of $XXXXXXXXXX (the “NIB Note”). The NIB Note will provide Lossco with a right to prepay the principal amount at any time without penalty.

38. Lossco will use all of the proceeds received from the last NIB Loan to repay the Daylight Loan in full to the arm’s length financial institution.

Maintenance

39. The following transactions will occur immediately before the transaction in Paragraph 41, in immediate sequence when jointly determined by Lossco, Numberco and Profitco:

a. In accordance with an agreement entered into by Lossco, Numberco and Profitco in advance of the implementation of the transactions described in Paragraphs 32 to 38 (the “Support Agreement”), Lossco will make a contribution of capital to Numberco (“Numberco Capitalization”) in an amount that is at least sufficient to satisfy any accrued and unpaid dividends on the Numberco Preferred Shares. No shares will be issued by Numberco with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Numberco, or for greater certainty, to the paid-up capital of any class of shares of Numberco. For accounting purposes, the amount of the contributions of capital will be recorded as contributed surplus. The contributions of capital will not be income to Numberco pursuant to U.S. Generally Accepted Accounting Principles or Accounting Standards for Private Enterprises;

b. Using the proceeds of the Numberco Capitalization, Numberco will pay to Profitco the accrued and unpaid dividends on the Numberco Preferred Shares.

c. Profitco will pay to Lossco the accrued and unpaid interest on the principal amount due under the IB Note.

40. At the time of the steps described in Paragraph 31, Lossco will have the financial capacity, including accessing its leverage capacity, to finance the steps in Paragraph 39.

Unwind of the Loss Consolidation Arrangement

41. On or before XXXXXXXXXX from the Implementation Date, and immediately following the completion of the steps described in Paragraph 39, the structure will be unwound in the following manner:

a. Numberco will redeem all of the Numberco Preferred Shares held by Profitco for an amount equal to their aggregate Redemption Amount, which is equal to their FMV.

b. As payment of the Redemption Amount for the redemption of the Numberco Preferred Shares, Numberco will transfer and assign the NIB Note to Profitco which, for greater certainty, will have a principal amount equal to the aggregate Redemption Amount payable. Profitco will accept the NIB Note in full payment of the Redemption Amount.

c. Each of Lossco and Profitco will agree that the IB Note will be set-off against the NIB Note and its obligations thereunder will be satisfied and extinguished in full.

42. Immediately following the completion of the steps described in Paragraph 41, and in any event no later than November 30 of the calendar year in which the transactions described in Paragraph 41 are undertaken, Lossco, as sole shareholder of Numberco, will pass a resolution authorizing and requiring Numberco to be wound up into Lossco pursuant to subsection 88(1). Effective as of the making of such resolution, Numberco’s assets will be transferred to Lossco and Lossco will assume Numberco’s liabilities. It is expected that Numberco will be formally dissolved before the end of the taxation year of Lossco in which the winding-up of Numberco is commenced. The Intercompany Debts described in Paragraph 14 will be deemed to be settled upon the winding up of Numberco, for an amount equal to the cost amount of the Intercompany Debts under ITA 80.01(4). An election will be made by Lossco to this effect.

ADDITIONAL INFORMATION

43. Ultimate Parent, Aco, Bco, Lossco, Profitco and Numberco 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 41 and 42 of the Proposed Transactions if any entity previously mentioned in this Paragraph ceases to be affiliated and/or related.

44. None of the entities described in this letter have been subject to an acquisition of control and no such acquisitions are anticipated in the future.

45. The interest rate on the IB Note is a commercial rate, and the terms of the IB Note are commercial terms.

46. Profitco anticipates generating taxable income in its XXXXXXXXXX taxation year and in each of its subsequent three taxation years. Profitco expects to generate a non-capital loss carryforward balance in its taxation year ending in XXXXXXXXXX as a result of the XXXXXXXXXX Loss Consolidation Structure and the interest expense generated under the Proposed Transactions. Profitco expects to carry forward the expected XXXXXXXXXX loss to its taxation years ending in XXXXXXXXXX.

47. Lossco will undertake steps to ensure that the interest income earned by Lossco under the Proposed Transactions will not exceed an amount that could be fully sheltered with Lossco’s non-capital losses.

48. Profitco will be a specified financial institution. However, Profitco will not acquire or be considered to have acquired the Numberco Preferred Shares in the ordinary course of its business.

49. At no time during the implementation of the Proposed Transactions will the Numberco Preferred Shares be:

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 as defined in subsection 248(1);

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 includes:

i. an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (if the Act were read without reference to paragraph 251(5)(b)); or

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

50. The dividends to be paid by Numberco and received by Profitco on the Numberco Preferred Shares, as described in Paragraph 39(b), have no purpose other than the purposes described under the heading “Purposes of the Proposed Transactions”.

51. Profitco will not be a “financial intermediary corporation” as that term is defined in subsection 191(1).

52. The Numberco Preferred Shares will be taxable preferred shares. However, dividends received by Profitco on the Numberco Preferred Shares, as described in Paragraph 39(b), will be excepted dividends within the meaning assigned by section 187.1 and excluded dividends within the meaning assigned by subsection 191(1).

53. At the relevant times:

a. Numberco will have the financial capacity to satisfy the applicable solvency test and liquidity test under corporate law to pay the dividends on the Numberco Preferred Shares described in Paragraph 39(b), and to redeem the Numberco Preferred Shares as described in Paragraph 41(a).

b. Profitco will have the solvency and liquidity to service the amounts due under the IB Note as described in Paragraph 37(a).

54. None of the entities described in this Ruling Request will, at any time, claim a capital loss in respect of its investment in Numberco.

55. Profitco and Lossco are not financial institutions as defined under subsection 190(1) for purposes of Part VI tax.

56. The cost amount of each Intercompany Debt will be equal to the principal amount of each debt.

57. The Proposed Transactions will be legally effective.

PURPOSE OF THE PROPOSED TRANSACTIONS

58. The Proposed Transactions will enable Lossco to earn interest income on the IB Note and thus will enable Lossco to effectively utilize its non-capital losses already incurred and the non-capital losses that are otherwise anticipated to be incurred in taxation years covered by the present ruling request and to permit Profitco to effectively utilize such non-capital losses.

59. The purpose of the Proposed Transactions is not to shift income between provinces and any such shift of income between provinces will be incidental to the Proposed Transactions.

60. The purpose of both the payment and the receipt of the dividends on each of the Numberco Preferred Shares, is to provide a reasonable return on the Numberco Preferred Shares issued by Numberco to Profitco and to fund the interest payments by Profitco on the IB Note. Furthermore, the purpose of the dividends is not to reduce the fair market value or capital gain of any share, nor to increase the total cost amounts of properties of Profitco.

61. The Proposed Transactions are not being undertaken to refresh non-capital losses or facilitate the use of such losses in a taxation year after the taxation year in which the losses would have otherwise expired in the hands of Lossco.

62. The reason that Numberco will be continued under the BCA1 is to enable its conversion into an unlimited liability company in order that it be treated as a disregarded entity for XXXXXXXXXX. tax purposes.

RULINGS

Provided that

a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the Purposes of the Proposed Transactions,

b) the Proposed Transactions are completed in the manner described above, and

c) there are no other transactions which may be relevant to the Rulings requested,

we rule as follows:

A. Provided that Profitco has a legal obligation to pay interest on the IB Note and that Profitco continues to hold the Numberco Preferred Shares for the purpose of gaining or producing income from business or property, Profitco will be entitled, pursuant to paragraph 20(1)(c), to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by in computing its income for purposes of the Act) in respect of the year on the IB Note; or (ii) a reasonable amount in respect thereof.

B. No amount will be included in the income of Numberco pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital made by Lossco to Numberco pursuant to the Solvency Capitalization, as described in Paragraph 29.

C. No amount will be included in the income of Numberco pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital made by Lossco to Numberco pursuant to the Support Agreement, as described in Paragraph 39(a).

D. Dividends received by Profitco on the Numberco Preferred Shares as described 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), (2.2), (2.3) or (2.4).

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

F. The provisions of subsection 55(2) will not apply to the dividends received by Profitco on its Numberco Preferred Shares, as described in Paragraph 39(b) above.

G. Provided that the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply after the winding-up of Numberco into Lossco, as described in Paragraph 42, has been completed to permit Lossco to deduct the non-capital losses of Numberco in computing its taxable income for a taxation year commencing after the commencement of the winding-up, subject to the limitations in paragraph 88(1.1)(e) and section 111.

H. The settlement of the IB Note and the NIB Note, as described in Paragraph 28(d) will not give rise to any capital gain or any “forgiven amount”.

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

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

K. 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 tax collection agreement is in effect.

The above Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions described in Paragraphs 29 to 38 above are commenced and entered into on or before XXXXXXXXXX, and the Proposed Transactions described in Paragraphs 39 to 42 are entered into on or before XXXXXXXXXX.

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 fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein, or the outstanding balance of various tax accounts for any of the corporate entities described herein;b) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

c) the reasonableness or fair market value of any fees or expenditures referred to herein;

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

e) the calculation and tax treatment of any foreign exchange gains or losses;

f) Subject to Ruling K, the application or non-application of a general anti-avoidance provision of any province;

g) the application of the proposed Excessive Interest and Financing Expenses Limitation rules contained in draft legislation released on August 4, 2023 to the Proposed Transactions; and

h) any other tax consequence relating to the Facts, Proposed Transactions, or any transaction or event taking place either prior to or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the Ruling(s) given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Yours truly,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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