CRA rules on a loss-consolidation transaction which avoided loans to the regulated Profitcos through the use of a partnership

CRA ruled on loss consolidation transactions involving a parent with losses and three indirect “Profitco” subsidiaries. The transactions did not entail direct interest-bearing loans to the Proficos, which were regulated entities. Instead, the Profitcos would become limited partners of a newly-formed LP (with a parent newly-formed subsidiary as the GP), which would receive an interest-bearing loan from the parent and subscribe for dividend-bearing preferred shares of a Newco subsidiary of the parent, with the preferred dividends being funded with annual cash contributions to Newco by the parent. Although the LP would in fact generate a thin profit, the Profitcos would take s. 112(1) deductions for their share of the LP’s dividend income.

Neal Armstrong. Summary of 2022 Ruling 2021-0910431R3 under s. 111(1)(a).