2008 Ruling 2007-0259901R3 - Loss utilization

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.

Principal Issues: Standard loss-consolidation within an affiliated corporate group.

Position: Acceptable.

Reasons: Consistent with similar previous rulings and tax policy.

XXXXXXXXXX 								2007-025990

XXXXXXXXXX , 2008

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , wherein you request an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge additional information you provided to us during various telephone conversations (XXXXXXXXXX) in connection with your ruling request.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired, and

(v) the subject of a previous ruling issued to the taxpayers or a related person by the Income Tax Rulings Directorate.

Our understanding of the facts, proposed transactions, other representations and the purpose of the proposed transactions are as follows.

DEFINITIONS

In this letter, the following terms or expressions have the meanings specified:

(a) "Act" means the Income Tax Act (Canada), RSC 1985 (5th supp.), c.1, as amended to the date hereof, and, unless otherwise indicated, all statutory references are to the Act;

(b) "A Co" means XXXXXXXXXX;

(c) "A Co Loan 1" and "A Co Loan 2" mean loans made by Parent to A Co described in 8 and 14 below;

(d) "affiliated persons" has the meaning assigned by subsection 251.1(1);

(e) "arm's length" has the meaning assigned by subsection 251(1);

(f) "CBCA" means the Canada Business Corporations Act, and, where applicable, its predecessor statutes;

(g) "CRA" means Canada Revenue Agency;

(h) "Daylight loan 1" and "Daylight loan 2" mean the loans made to Parent described in 7 and 13 below;

(i) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(j) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(k) "non-capital loss" has the meaning assigned by subsection 111(8);

(l) "Newco" means XXXXXXXXXX, a corporation incorporated under XXXXXXXXXX as described in 5 below;

(m) "Parent" means XXXXXXXXXX;

(n) "Parent Affiliated Group" means Parent, A Co and their subsidiaries;

(o) "Parent Loan 1" and "Parent Loan 2"mean loans made by Parent to Newco described in 10 and 16 below;

(p) "Preferred Shares Series 1" and "Preferred Shares Series 2" means shares of the capital stock of Newco issued as described in 6 and 12 below;

(q) "public corporation" has the meaning assigned by subsection 89(1);

(r) XXXXXXXXXX

(s) "related" has the meaning assigned by section 251;

(t) "specified financial institution" has the meaning assigned by subsection 248(1); and

(u) "taxable Canadian corporation" has the meaning assigned by subsection 89(1).

FACTS

1. Parent is governed by the XXXXXXXXXX and is a public corporation and a taxable Canadian corporation whose shares are listed on a prescribed stock exchange within the meaning of Part XXXII of the Income Tax Regulations. XXXXXXXXXX Parent and its subsidiaries and affiliated corporations currently employ approximately XXXXXXXXXX professionals and have offices in Canada, the United States, XXXXXXXXXX. Parent's consolidated revenues for the year ended XXXXXXXXXX totaled more than $XXXXXXXXXX with consolidated net earnings amounting to approximately $XXXXXXXXXX . Parent is serviced by the XXXXXXXXXX Tax Services Office and files its income tax return at the XXXXXXXXXX Taxation Centre.

2. The fiscal period of Parent ends on XXXXXXXXXX. As at XXXXXXXXXX, Parent had non-capital losses of $XXXXXXXXXX and expects to sustain additional losses in its XXXXXXXXXX taxation years. Such losses of Parent are, and will be, caused principally by the interest expense on its arm's length borrowings. In XXXXXXXXXX, Parent implemented a domestic in-house loss consolidation transactions which is described in the ruling letters 2006-018032 which have been wound-up. Parent only has a permanent establishment in XXXXXXXXXX.

3. A Co is a wholly-owned subsidiary of Parent incorporated under the XXXXXXXXXX, and is a taxable Canadian corporation. XXXXXXXXXX A Co only has a permanent establishment in XXXXXXXXXX. A Co's fiscal period ends on XXXXXXXXXX. It is expected that A Co will have sufficient income for tax purposes to fully utilize the interest paid or payable on the A Co Loan described in 8 and 14 below. A Co is serviced by the XXXXXXXXXX Tax Services Office and files its income tax return at the XXXXXXXXXX Taxation Centre.

4. The consolidated financial statements of Parent for its year ended XXXXXXXXXX indicate that Parent and its subsidiaries had:

(a) assets of approximately $XXXXXXXXXX;

(b) liabilities of approximately $XXXXXXXXXX; and

(c) shareholder's equity of approximately $XXXXXXXXXX which includes retained earnings and cumulative currency translation adjustments.

The arm's length borrowings of the Parent Affiliated Group currently amount to approximately to $XXXXXXXXXX. Parent Affiliated Group is in a position to increase its current arm's length borrowings by an amount of not less than $XXXXXXXXXX.

5. Parent incorporated a corporation ("Newco") under the XXXXXXXXXX. Newco is a taxable Canadian corporation. Newco's taxation year end will be XXXXXXXXXX. Newco does not carry on any business and its activities are limited to investing the proceeds received upon the issuance of its Preferred Shares to A Co as described in 9 below, in the non-interest bearing loan to Parent as described in 10 below.

6. The authorized capital of Newco consists of two classes of shares, common shares and non-voting, cumulative dividend, redeemable, retractable preferred shares (the "Preferred Shares Series 1"). The cumulative dividends payable on the Preferred Shares Series 1 will be calculated daily by reference to the redemption/retraction price of the Preferred Shares Series 1 at a rate equal to the interest rate on the A Co Loan 1 plus a small spread. Dividends will be payable annually in arrears on the XXXXXXXXXX. The common shares of Newco have been issued to Parent for $XXXXXXXXXX .

7. On XXXXXXXXXX, Parent borrowed $XXXXXXXXXX on a "daylight loan" basis from an arm's-length financial institution (the "Daylight loan 1").

8. On XXXXXXXXXX, Parent used the proceeds received from the Daylight Loan 1 to make a loan of $XXXXXXXXXX to A Co (the "A Co Loan 1"). The interest on the A Co Loan 1 is calculated daily (not compound) at a rate equal to the rate of interest charged on Parent's current debts plus XXXXXXXXXX%. The interest on the A Co Loan 1 will be paid annually on the XXXXXXXXXX.

9. On XXXXXXXXXX, A Co used the proceeds received from the A Co Loan 1 to subscribe for Preferred Shares Series 1 in Newco having an aggregate redemption/retraction price equal to the amount contributed.

10. On XXXXXXXXXX, Newco used the proceeds received from the Preferred Shares Series 1 subscriptions described in paragraph 9 above to make a demand, interest-free loan to Parent in an amount equal to such proceeds (the "Parent Loan 1").

11. On XXXXXXXXXX, Parent used the proceeds received from Parent Loan 1 to repay the Daylight Loan 1.

PROPOSED TRANSACTIONS

12. Newco's authorized capital will be modified to authorize a new series of nonvoting, cumulative dividend, redeemable, retractable preferred shares (the "Preferred Shares Series 2"). The cumulative dividends payable on the Preferred Shares Series 2 will be calculated daily by reference to the redemption/retraction price of the Preferred Shares Series 2 at a rate equal to the interest rate on the A Co Loan 2 plus a small spread.

13. Parent will borrow in total an amount of $XXXXXXXXXX on a "daylight loan" basis from an arm's-length financial institution (the "Daylight loan 2").

14. Parent will use the total proceeds received from the Daylight Loan 2 to make a loan of $XXXXXXXXXX to A Co ("A Co Loan 2 "). Simple interest will accrue on the A Co Loan 2 and will be calculated daily at a rate equal to the rate of interest charged on Parent's current debts plus XXXXXXXXXX%. The interest on the A Co Loan 2 will be paid annually on the XXXXXXXXXX.

15. A Co will use the total proceeds received from the A Co Loan 2 to subscribe for Preferred Shares Series 2 in Newco having an aggregate redemption/retraction price equal to the total contributed amounts.

16. Newco will use the total proceeds received from the Preferred Shares Series 2 subscriptions described in 15 above to make a demand, interest-free loan to Parent (the "Parent Loan 2").

17. Parent will use the total proceeds received from Parent Loan 2 to repay the Daylight Loan 2.

18. On the XXXXXXXXXX, while A Co Loan 1 and A Co Loan 2 are outstanding, Parent will make a capital contribution to Newco in an amount equal to the dividend payable by Newco on that day on the Preferred Shares Series 1 and Preferred Shares Series 2 held by A Co. No share will be issued by Newco with respect to the contribution of capital and no amount will be added to the issued and paid-up capital of Newco. The amount of this contribution of capital, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital, if any, will not be income of Newco pursuant to generally accepted accounting principles.

19. Upon receipt of the capital contribution described in 18 above, Newco will, subject to the applicable solvency test, pay a dividend to A Co equal to the amount of the dividend payable by Newco on its Preferred Shares Series 1 and Preferred Shares Series 2. A Co will use the dividend proceed to pay the interest required as described in 14 above.

20. The following transactions will occur on XXXXXXXXXX to unwind the loss consolidation arrangement:

(a) Parent will make a contribution of capital to Newco in an amount equal to the amount of any accrued and unpaid dividends on Preferred Shares Series 1 and Preferred Shares Series 1 of Newco held by A Co. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the issued and paid-up capital of Newco. The amount of capital contribution, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital, if any, will not be income to Newco pursuant to generally accepted accounting principles.

(b) Parent will borrow $XXXXXXXXXX on a daylight loan basis (the "New Daylight Loan"). Parent will use these funds to pay the Parent Loan 1 and the Parent Loan 2 to Newco.

(c) Newco will use the funds ($XXXXXXXXXX + the amount of the contribution of capital, if any) received through step (a) and (b) above, to redeem Preferred Shares Series 1 and Preferred Shares Series 2 held by A Co (including any accrued dividends).

(d) A Co will pay the balance of any accrued and unpaid interest on the A Co Loan 1 and the A Co Loan 2.

(e) A Co will use $XXXXXXXXXX from the proceeds from the redemption of Preferred Shares Series 1 and Preferred Shares Series 2 received through step (c) to repay the A Co Loan 1 and the A Co Loan 2.

(f) Parent will use the $XXXXXXXXXX received on the repayment of the A Co Loan 1 and the A Co Loan 2 to pay the New Daylight Loan.

21. Parent will cause Newco to be wound-up within XXXXXXXXXX days after all Preferred Shares Series 1 Preferred Shares Series 2 are redeemed and the A Co Loan 1, the A Co Loan 2, the Parent Loan 1 and the Parent Loan 2 are repaid.

22. The loss consolidation arrangement described in paragraphs 5 to 21 above will be undertaken in the taxation years following XXXXXXXXXX until such time that Parent will cease to generate non-capital losses caused principally by the interest expense on its indebtedness.

OTHER REPRESENTATIONS

23. The Preferred Shares Series 2 of Newco which will be issued as described in 10 above, will not be, at any time during the implementation of the proposed transactions described in 10 to 19 above:

(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 includes:

A) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

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

24. Parent, Newco and A Co are affiliated persons and are related to each other.

25. None of Parent, Newco and A Co is or will be a financial intermediary corporation. Parent, Newco and A Co are related to a particular corporation described in paragraph (d) of the definition specified financial institution. By reason only of the proposed transactions described herein, A Co will not be considered to have acquired the Preferred Shares Series 2 of Newco in the ordinary course of the business carried on by it.

PURPOSE OF THE PROPOSED TRANSACTIONS

26. The purpose of the proposed transactions is to effect a tax consolidation of Parent and A Co by causing Parent to earn interest income on the A Co Loan 2, thus permitting a netting of its interest deduction on its indebtedness and to have A Co incur an interest expense to reduce its taxable income.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule as follows:

A. Provided that A Co has the legal obligation to pay interest on the A Co Loan 2 and the Preferred Shares Series 2 of Newco continue to be held by A Co, A Co will be entitled to deduct, in computing its income for a taxation year, the amount of the interest paid, as described in 19 above, in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c).

B. No amount will be included in the income of Newco pursuant to section 9, paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital made by Parent as described in 18 and 20(a) above.

C. The dividends received by A Co (or deemed to be received) on its Preferred Shares Series 2 of Newco as described in 19 and 20(c) above will be taxable

dividends that will, pursuant to subsection 112(1), be deductible in computing the taxable income of A Co for the taxation year in which the dividends are received, and for greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), or 112(2.4).

D. The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply as a result of the proposed transactions in and by themselves.

E. Subsection 245(2) will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions described in 10 to 17 above are completed by 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 which, if enacted into law, could have an effect on the rulings provided herein.

COMMENTS

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

(a) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

(b) the application or non-application of the general anti-avoidance provisions of any province; and

(c) 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,

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch