Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Interest Deductibility
Position: OK
Reasons: Standard Ruling on Loss consolidation
XXXXXXXXXX
XXXXXXXXXX 2000-000898
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge receipt of your letter dated XXXXXXXXXX and our numerous telephone discussions.
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed, and none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.
In this letter "the Act" means the Income Tax Act, RSC 1985, Fifth Supplement, c.1, as amended from time to time.
Facts
1. XXXXXXXXXX ("Parent") is a corporation incorporated pursuant to the laws of XXXXXXXXXX. Parent is a taxable Canadian corporation and a private corporation and is a resident of Canada. Parent's business number is XXXXXXXXXX and its fiscal period and taxation year ends on XXXXXXXXXX.
2. XXXXXXXXXX ("Subco") is a corporation incorporated pursuant to the laws of XXXXXXXXXX. Subco is a taxable Canadian corporation and a private corporation and is a resident of Canada. Subco's business number is XXXXXXXXXX and its fiscal period and taxation year ends on XXXXXXXXXX.
3. All of the issued and outstanding common shares of Subco are owned by Parent.
4. Parent is in the business of XXXXXXXXXX. Parent has a non-capital loss carry forward of $XXXXXXXXXX. Parent expects to earn a profit for its XXXXXXXXXX and subsequent taxation years.
5. Subco is in the business of XXXXXXXXXX. Subco has a non-capital loss carry forward of $XXXXXXXXXX. Although the company expects to be profitable in the long-term, it is anticipated that Subco will incur losses for the next few years.
Proposed Transactions
6. Subco will amend its articles to create a new class of preferred shares which will have the following principal attributes:
a) issuable for $XXXXXXXXXX per share (the "Redemption Price");
b) retractable at the option of the holder, and redeemable at the option of Subco, for the Redemption Price plus accrued and unpaid dividends;
c) non-voting;
d) cumulative dividends at a rate of XXXXXXXXXX% annually; and
e) the amount added to the stated capital account maintained by Subco in respect of the class shall be the amount paid on subscription.
7. Parent will enter into a day-light loan in the amount of $XXXXXXXXXX (the "Bank Loan") with an arm's length financial institution on commercial terms. The Bank Loan is an amount that Parent will be able to service out of the cash flow from its operations and along with the interest rate are amounts that are within Parent's normal ability to borrow funds from an arm's length party.
8. Parent will use the $XXXXXXXXXX to subscribe for XXXXXXXXXX of the the new class of preferred shares (the "Preferred Shares") of Subco.
9. Subco will use the $XXXXXXXXXX to make a loan to Parent (the "Loan") on a demand basis, bearing interest at XXXXXXXXXX%.
10. Parent will use the $XXXXXXXXXX to repay the Bank Loan..
11. Once Subco's losses have been utilized, Subco will demand repayment of the outstanding principal amount of the Loan and any accrued and unpaid interest.
12. On the same date that Subco demands payment of the Loan, Parent will retract the Preferred Shares.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to consolidate income and losses within a group of related taxable Canadian corporations by enabling Subco to earn sufficient interest income so as to use the non-capital losses it has incurred or will otherwise incur and to permit Parent to have corresponding interest deductions that will reduce its income otherwise determined.
The Preferred Shares will not be acquired by Parent in the ordinary course of its business. There will be no security agreements or other arrangements respecting the Preferred Shares.
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 provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Provided that Parent has a legal obligation to pay interest on the Loan described in paragraph 9 above, in computing its income for a taxation year, Parent will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act, the lesser of the interest paid or payable in respect of that year on the Loan or a reasonable amount in respect thereof to the extent that the borrowed funds continue to be used for the purpose of gaining or producing income (other than income which would be exempt).
B. Dividends received or deemed to be received by Parent on the Preferred shares will be included in Parent's income for the taxation year of Parent in which the dividends are received pursuant to subsection 82(1) of the Act, and will be deductible in computing the taxable income of Parent for that taxation year pursuant to subsection 112(1) of the Act. The deduction under subsection 112(1) will not be denied by any of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act.
C. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, as to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on the Agency provided the proposed transactions described in paragraphs 6 through 10 are completed before XXXXXXXXXX. Also, these rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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