CRA rules on non-triangular partly-completed loss shift from lossco parent to profitco sub

Lossco wished to transfer its non-capital losses to its wholly-owned subsidiary, Profitco. Rather than engaging in the conventional form of triangular loss-shifting transactions, Profitco used the proceeds of an interest-bearing loan from Lossco to subscribe for preferred shares of a newly-formed subsidiary, which lent the proceeds in a non-interest-bearing loan back to Lossco. These transactions already had occurred. CRA ruled inter alia respecting the interest deduction to Profitco and the non-application of s. 12(1)(x) to the capital contributions made by Lossco to Newco to fund the pref dividend payments, and opined that s. 55(2) as it is to be amended by the July 31, 2015 draft legislation did not apply.

The unwind also is elegant: Newco delivers the non-interest-bearing loan to Profitco as the redemption proceeds for the preferred shares, and the two loans are set-off.

Neal Armstrong. Summary of 2015-0582101R3 under s. 111(1)(a).