Income Tax Severed Letters

Principal Issues: Whether a particular loss consolidation arrangement is acceptable. In this arrangement, Lossco obtains a daylight loan from a third party bank and uses the proceeds to make an interest bearing loan to NewLossco, which uses the proceeds to invest in preferred shares of Newco. NewLossco will incur a loss carryforward balance which will be made available to Profitco when NewLossco is wound-up into Profitco. The main issues are whether Lossco would be entitled to apply existing non-capital losses against the interest income received on the loan; and whether NewLossco would be entitled to deduct the interest expense paid on the loan and the dividends received on the Newco preferred shares.

Position: Yes.

Reasons: The proposed transactions conform to our requirements for these types of loss consolidation rulings, in this case on the basis that the entities involved are related and affiliated. The proposed transactions would be legally effective and commercially plausible.