2000 Ruling 1999-0013983 - LOSS UTILIZATION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1. Is property leasing property?

2. Is interest on loan used to repay loan used to pay a dividend deductible?

3. Does GAAR apply in respect of loss utilization arrangement?

4. Does 15(1) apply in respect of an interest free loan between sister corporations that is used to fund a loan to the parent?

Position:

1. No
2. Yes
3. No
4. No

Reasons:

1. BCO will XXXXXXXXXX. Position is similar to that of full-service boat charters vs. bare-boat charters.

2. Bank Loan is used to pay a dividend that will not exceed retained earnings thus interest on the Bank Loan would be deductible. 20(3) is, therefor, applicable to the refinancing of the Bank Loan.

3. Although the only reasons for entering into the transactions are to obtain tax benefits, since they are undertaken to utilize losses within an affiliated group they are not considered to result in a misuse or abuse.

4. All of the corporations are resident in Canada thus there is no imputed benefit under 80.4. With respect to interest free loans, 15(1) is only applicable to the extent that 80.4 imputes a benefit.

XXXXXXXXXX
XXXXXXXXXX 							1999-001398
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance income tax ruling request, XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.

We understand that, to the best of your knowledge and that of the taxpayers involved none of the issues involved in the ruling request

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate;

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated

In this ruling:	"ACO" refers to XXXXXXXXXX
		"BCO" refers to XXXXXXXXXX
		"CCO" refers to XXXXXXXXXX 

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. The taxpayers' and the related corporations' names and Business Numbers are as follows:

Company Name
Business Number
XXXXXXXXXX
XXXXXXXXXX
ACO
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
CCO
To be incorporated
BCO
Newly incorporated

2. XXXXXXXXXX is located at the following address and its taxation year-end is XXXXXXXXXX:

XXXXXXXXXX
XXXXXXXXXX

3. Other than XXXXXXXXXX, all of the above companies are located at the following address and have taxation year-ends XXXXXXXXXX:

XXXXXXXXXX
XXXXXXXXXX

4. The tax services office and the taxation centre where each of the above companies' tax return is filed is the XXXXXXXXXX Taxation Centre.

5. XXXXXXXXXX, BCO and CCO (in the case of CCO, will be) are taxable Canadian corporations within the meaning of subsection 89(1).

6. ACO, a wholly owned subsidiary of XXXXXXXXXX, is a XXXXXXXXXX, a wholly owned subsidiary of ACO, is in the XXXXXXXXXX business and XXXXXXXXXX.

7. BCO, a wholly owned subsidiary of ACO, was incorporated on XXXXXXXXXX.

8. Prior to XXXXXXXXXX, ACO owed XXXXXXXXXX more than $XXXXXXXXXX. ACO repaid $XXXXXXXXXX of that loan. XXXXXXXXXX then provided a non-interest bearing loan to BCO to fund the XXXXXXXXXX loan to BCO is secured by the XXXXXXXXXX.

9. BCO is in the business of
XXXXXXXXXX

10.

XXXXXXXXXX

11. In accordance with the Income Tax Regulations, XXXXXXXXXX, the capital cost of the XXXXXXXXXX will be added to BCO's CCA schedule under XXXXXXXXXX and be depreciated at a rate of XXXXXXXXXX%. The CCA for the initial year of acquisition will be computed in accordance with regulations 1100(2) and (3).

12. After the initial year, BCO expects to generate a small operating profit as reflected in the projected financial statements enclosed with your request. As such, the tax losses that will be generated in BCO after the initial year will be primarily due to the amount of CCA claimed.

13. As at XXXXXXXXXX, ACO and XXXXXXXXXX have the following balances:

ACO's interest bearing loans receivable (at prime)		$XXXXXXXXXX
ACO's non-interest bearing loan receivable			$XXXXXXXXXX
ACO's cash and short term deposits 				  XXXXXXXXXX
XXXXXXXXXX cash and short term deposits		  XXXXXXXXXX
XXXXXXXXXX loan receivable from BCO (approx.)	$XXXXXXXXXX 

14. The accounting records for ACO and XXXXXXXXXX are done on a consolidated basis. The accounts are only deconsolidated at the end of the year for income tax purposes.

15. Because non-consolidated financial statements are not prepared until the companies' taxation year-ends, the following balances are from the companies' XXXXXXXXXX financial statements and constitute the most recent available information on these accounts:

ACO's due to XXXXXXXXXX				$ XXXXXXXXXX
ACO's retained earnings					$ XXXXXXXXXX
XXXXXXXXXX retained earnings				$ XXXXXXXXXX 

The above retained earnings were computed on an unconsolidated basis and do not include any appraisal surplus and profits resulting from non-arms-length transactions that transform appraisal surplus to retained earnings either on a taxable, non-taxable or tax deferred basis.

Proposed Transactions

16. XXXXXXXXXX will incorporate CCO and transfer to CCO, in accordance with the provisions of subsection 85(1), its shares in ACO. The purpose of CCO is to allow the consolidation of the ACO group without having to include the operations of XXXXXXXXXX (a separately managed active company).

17. ACO will borrow $XXXXXXXXXX from an arm's length financial institution (the "Bank Loan") and use the proceeds from the Bank Loan to declare and pay dividends to CCO in the amount of $XXXXXXXXXX.

18. CCO will use the proceeds from ACO's dividend to lend to BCO (the "CCO Loan") by way of a demand non-interest bearing loan, secured by BCO's loan receivable from ACO (see paragraph 19 below).

19. ACO will borrow $XXXXXXXXXX from BCO to repay its Bank Loan. The loan from BCO (the "BCO Loan") will be payable on demand, unsecured and interest bearing.

20. The interest rate on the BCO Loan will be the XXXXXXXXXX prime rate plus one per cent based on the fact that the loan is unsecured. It is intended that the rate charged represent a commercial market rate for such loans from an arm's length third party lender.

21. From time to time, excess cash in BCO will either be used to declare and pay dividends to ACO, to repay its loan to CCO and/or repay its loan to XXXXXXXXXX.

22. From time to time, the companies may decrease (or even eliminate) the inter-company loans in circumstances where the interest income generated in BCO is expected to be greater than the amount required to offset its expected losses (and any loss carryforwards) for the year.

Purpose of Proposed Transactions

The purpose of the proposed transactions is to ensure that ACO is in the same net position for tax purposes as it would have been had it owned XXXXXXXXXX directly instead of through BCO. The proposed transactions involve a series of loans through the inter-corporate group and a payment of dividends such that BCO is able to earn interest income that can offset potential losses and ACO is able to incur fully deductible interest expense. As it is not advisable for ACO to own XXXXXXXXXX directly, the proposed transactions are intended to consolidate the profits of ACO and the losses of BCO.

Rulings requested and given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

We confirm that

A. The provisions of subsection 20(3) will be applicable on the use of the proceeds of the BCO loan to repay the Bank Loan.

B. Provided that

i the dividend paid by ACO to CCO as described in paragraph 18 does not exceed ACO's retained earnings at the time the dividend is paid, and

ii the interest is paid or becomes payable in a year by ACO pursuant to a legal obligation to pay interest on the BCO loan,

the interest will be deductible by ACO pursuant to paragraph 20(1)(c).

C. Subsection 245(2) will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

D. Subsections 15(1) and 56(2) will not be applicable to the transactions described herein.

Other comments

As you did not request any rulings with respect to the transactions described in paragraph 16, nothing in this advance income tax ruling should be construed as implying that we are ruling on those transactions.

You requested that we confirm that BCO can include the cost of XXXXXXXXXX in "XXXXXXXXXX" and claim CCA at the rate of XXXXXXXXXX% declining balance in accordance with the Income Tax Regulations, XXXXXXXXXX. As the purchase of XXXXXXXXXX is a completed transaction, we are unable to provide such a ruling.

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch