CRA rules on using a Newco as a holding tank for the transfer of losses in order to avoid a direct loss shift transaction with a public company
A published ruling letter concerns a Lossco holding all of the voting common shares of a profitable public company (Opco) that has publicly-traded non-voting shares outstanding. Opco does not wish to engage in loss-shifting transactions that would entail it incurring an interest-bearing loan. Instead, Lossco engages in transactions to shift losses to a newly-incorporated subsidiary (ACo), with Aco then being transferred under s. 85(1) to Opco, and wound-up under s. 88(1.1) into Opco.
Regarding the mechanics of the loss shift, the interest on the loan by Lossco to ACo, as well as the dividends on the corresponding preferred shares held by Aco in a Newco subsidiary of Lossco, are allowed to accumulate until the time of unwinding the structure, at which point Lossco makes a cash capital contribution to Newco to fund the payment of such dividend arrears whose payment, in turn, funds the payment of the interest owing by Aco – but the loss shifting transactions otherwise are unwound on a cashless basis.
This ruling letter is very similar to 2012-0472291R3.
Neal Armstrong. Summary of 2020 Ruling 2019-0835141R3 under s. 111(1)(a).