CRA rules on a triangular loss consolidation involving circling a daylight loan 4 times, a non-recourse interest-bearing note and a 1 b.p. spread for the preferred dividends

CRA ruled on a triangular loss-shifting transaction between Lossco and its subsidiary, Profitco, under which Lossco used a daylight loan to make an interest-bearing loan (pursuant to the “IB Note”) to Profitco, who subscribed for preferred shares of its sister, “Numberco,” who made a non-interest-bearing loan to Lossco. There was to be one daylight loan whose proceeds would be circled four times as described above, before it was repaid. The Numberco preferred shares were to bear a cumulative dividend at a rate 1 b.p. above the rate of simple interest on the IB Note. Recourse under the IB Note was to be limited to the Numberco preferred shares.

These transactions would be unwound on a cashless basis, and Numberco would then be wound-up into Lossco.

Neal Armstrong. Summary of 2023 Ruling 2023-0973911R3 under s. 111(1)(a).