CRA rules on loss shift from public Lossco to its SFI Profitco sub through creation, drop-down and wind-up of new Lossco

CRA provided standard rulings (including provincial GAAR rulings) on proposed transactions for the transfer of losses from a public Lossco to its direct subsidiary Profitco, which was a specified financial institution. The mechanics entailed Lossco incorporating a “NewLossco” and a “Newco”, and then using proceeds of a daylight loan to fund NewLossco with an interest-bearing loan, with NewLossco subscribing for prefs of Newco and Newco making a non-interest-bearing loan back to Lossco. The dividends on the prefs were to be annually funded by Lossco pursuant to a “capital support agreement.”

Once this triangular loss-shifting arrangement was unwound (on a cashless basis), NewLossco would be dripped down into Profitco under s. 85(1), and wound up into Profitco. A representation is made that:

The Proposed Transactions are not being undertaken to refresh non-capital losses or facilitate the use of such losses in a taxation year after the taxation year in which the losses would have otherwise expired in the hands of Lossco.

The representations respecting the amounts involved not being commercially unrealistic did not seem to be especially stringent.

Neal Armstrong. Summary of 2020 Ruling 2019-0819971R3 under s. 111(1)(a).