6 December 2000 External T.I. 2000-0056275 - LEVERAGED BUYOUTS

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: What affect does the decision in the CRB Logging case have on our loss utilization positions?

Position: None

Reasons: We would not have ruled favourably on the CRB Logging scenario thus no changes are required.

TEI Conference
December , 2000

Question 18

Leveraged Buy-Outs

At the 1999 Canadian Tax Foundation Conference, Agency representatives responded to questions (copies of the questions and responses are reproduced verbatim below) concerning C.R.B. Logging Co. Limited v. The Queen, 99 D.T.C. 840. At the 2000 Canadian Tax Foundation Conference, Agency representatives made additional comments in respect of the recent appellate decision in the same case. (See case docket #A-242-99, September 13, 2000). It was unclear from the more recent remarks, however, whether the Agency's position has changed in light of the Federal Court of Appeal's confirmation of the Tax Court's decision. Please advise whether there has been any change in the Agency's responses in respect of the following.

Q. Some practitioners view this case [C.R.B. Logging Co. Limited v. The Queen] as representing a change in your practice of providing favourable rulings on loss utilization transactions. Is this so?

A. No, this case does not represent a change in either our rulings practice or our policy. In this situation, we would not have ruled favourably for the same reasons that Judge Sarchuk concluded that the borrowing transaction did not satisfy paragraph 20(1)(c). Specifically, the Court said:

"There could be no realistic expectation of dividend income from the preferred shares because Meager had no income source of substance independent of the existence of C.R.B.'s business. The true purpose of the May 1988 loan was to enable Meager to finance its purchase of the Tyee and Pemberton shares and thereby to indirectly acquire C.R.B.. In essence, C.R.B. financed its own acquisition."

We agree with the conclusion that the borrowing transaction did not satisfy the direct use rule, and would not have ruled favourably.

Q. You have told us that you have received many inquiries which refer to one or two particular published rulings, with the basic question being how is the C.R.B. situation different. What answer have you been giving? Do you intend to change your approach to ruling on loss utilization transactions?

A. In the rulings we have given to date, there was potentially a source of income to which the share issuer could look to fund the dividend payments. This is distinct from Judge Sarchuk's finding in CR B that the closed nature of the income flow made it virtually impossible for C.R.B. to receive dividends that did not originate from its own business activities."

We will continue to rule as we have been as long as there is an independent source of income which can reasonably be considered sufficient to fund the dividends to be paid to the borrower. In other words, it is business as usual.

Q. Does this business as usual comment extend as well to Interpretation Bulletin IT-315 dealing with interest expense in the leveraged buyout scenario?

A. We have no intention at this time to revise Interpretation Bulletin IT-315.

Author: Christine Savage
Division: Financial Industries Division
Phone Number: 957-8957