CRA rules on a transfer of losses to a Profitco with a different functional currency
CRA ruled on transactions for the transfer of losses by Lossco to Profitco (a Canadian sister) by using standard triangular transactions - through Lossco subscribing for interest-bearing debt of (its new subsidiary) Newco 2, which subscribes for cumulative preferred shares of its sister, Newco 1, which makes a non-interest-bearing loan to Lossco, which at year end funds the dividend obligation of Newco 1 through a capital contribution – with the transactions then being unwound and with Newco 2 then being sold to Profitco so that Profitco can access the Newco 2 losses through winding-it up pursuant to s. 88(1.1). Essentially the same transactions would be repeated (using further Newcos) in subsequent years until the Lossco losses were used up.
Profitco had made a functional currency election. The rulings included a ruling as to the application of s. 261(16)(a) to the wind-up of Newco into Profitco, including regarding Newco 2 being deemed to have elected Profitco’s tax reporting currency for its second short taxation year (of less than one day ending with its dissolution) and regarding the non-application of the avoidance rule in s. 261(18) and the stop-loss rule in s. 262(21).
The ruling letter also included a representation that proposed s. 18.2(4) will not apply to limit the deductibility of the interest on the interest-bearing debt used in the triangular transactions as Lossco and Newco 2 were eligible group corporations in respect of one another and will elect to treat the interest payment under such debt as excluded interest.
Neal Armstrong. Summary of 2023 Ruling 2022-0949841R3 under s. 111(1)(a).