CRA permits warehousing of new losses in a thinly-capitalized Newco in a loss-shifting transaction

Losses typically are transferred from a parent (Lossco) to a subsidiary (Profitco) in a no-incest jurisdiction through a triangular circling of funds: Lossco makes an interest-bearing loan to Profitco; Profitco subscribes for pref of a Newco subsidiary of Lossco; Newco makes a non-interest-bearing loan to Lossco; and Newco services the dividends on the pref through capital contributions from Lossco.

Here however, Profitco is itself a public corporation which does not want to show additional debt on its balance sheet.  Accordingly, the above triangular transactions will be used to transfer losses to a newly-incorporated special-purpose subsidiary of Lossco ("A Co"), with A Co only being transferred to Profitco and wound-up into it after the loss generation transactions have been unwound.

No representation was given that A Co could borrow even a nickel on its own covenant.  Also, CRA was fine with the accumulated dividends and interest under the triangular arrangement not being funded and serviced until immediately before the triangular arrangement is unwound.

Neal Armstrong.  Summary of 2013 Ruling 2012-0472291R3 under s. 111(1)(a).