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: Group Loss Utilization Scheme
Position: Similar to prior rulings, ie 952626, 972734
Reasons: No new issues
XXXXXXXXXX 2000-002949
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX ("XXXXXXXXXX/Aco") - XXXXXXXXXX
XXXXXXXXXX ("XXXXXXXXXX/Dco") - XXXXXXXXXX
XXXXXXXXXX ("XXXXXXXXXX Bco") - XXXXXXXXXX
XXXXXXXXXX ("XXXXXXXXXX/Cco") - XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in the requested rulings is being considered by a tax services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.
The above-noted corporations file their corporate income tax returns at the XXXXXXXXXX Taxation Centre. XXXXXXXXXX/Dco, XXXXXXXXXX/Bco and XXXXXXXXXX/Cco deal with the XXXXXXXXXX Tax Services Office. XXXXXXXXXX/Aco deals with the XXXXXXXXXX Tax Services Office.
DEFINITIONS
In this letter unless otherwise expressly stated:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "affiliated persons" has the meaning assigned by subsection 251.1(1);
(c) "CBCA" means Canada Business Corporations Act;
(d) XXXXXXXXXX;
(e) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(f) "excepted dividends" has the meaning assigned by section 187.1;
(g) "excluded dividends" has the meaning assigned by subsection 191(1);
(h) "forgiven amount" has the meaning assigned by subsection 80(1) or 80(1.1);
(i) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(j) "Newco" means the new corporation as described in paragraph 6 below;
(k) "non-capital loss" has the meaning assigned by subsection 111(8);
(l) XXXXXXXXXX
(m) "Proposed Transactions" m;eans the transactions described in paragraphs 6 to 15 below;
(n) "public corporation" has the meaning assigned by subsection 89(1);
(o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(p) "taxable dividend" has the meaning assigned by subsection 89(1).
FACTS
1. XXXXXXXXXX/Aco was incorporated in XXXXXXXXXX and is governed by the CBCA. It is a public corporation and a taxable Canadian corporation. XXXXXXXXXX/Aco has a XXXXXXXXXX taxation year end. As at XXXXXXXXXX/Aco had accumulated non-capital losses of approximately $XXXXXXXXXX. It is anticipated that the accumulated non-capital losses of XXXXXXXXXX/Aco could amount to approximately $XXXXXXXXXX and $XXXXXXXXXX as at XXXXXXXXXX and XXXXXXXXXX respectively.
2. XXXXXXXXXX/Bco was incorporated in XXXXXXXXXX as part of transactions which were the subject of advance income tax ruling XXXXXXXXXX dated XXXXXXXXXX, 1999, as amended by letter dated XXXXXXXXXX, 1999. XXXXXXXXXX/Bco is a taxable Canadian corporation and is governed by the CBCA. XXXXXXXXXX /Aco holds XXXXXXXXXX% of XXXXXXXXXX/Bco's issued and outstanding common shares.
XXXXXXXXXX/Bco has a XXXXXXXXXX year-end.
3. XXXXXXXXXX/Cco is a taxable Canadian corporation and is governed by the CBCA. XXXXXXXXXX/Aco directly owns a number of Class XXXXXXXXXX shares of XXXXXXXXXX/Cco representing XXXXXXXXX % of the votes and XXXXXXXXXX% of the total equity. The balance of the Class XXXXXXXXXX shares are held by XXXXXXXXX /Bco. XXXXXXXXXX/Cco is a management holding corporation and has a XXXXXXXXXX year-end.
4. XXXXXXXXXX Dco is a taxable Canadian corporation and is governed by the CBCA. XXXXXXXXXX/Cco holds XXXXXXXXXX % of XXXXXXXXXX/Dco's issued and outstanding common shares. The authorized and issued share capital of XXXXXXXXXX/Dco also includes XXXXXXXXXX preferred shares with a stated value of $XXXXXXXXXX. These shares are currently held by parties that are not related to XXXXXXXXXX/Aco.
XXXXXXXXXX
5. XXXXXXXXXX/Dco has a XXXXXXXXXX year-end. XXXXXXXXXX/Dco's taxable income reported for its XXXXXXXXXX taxation years was approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively. XXXXXXXXXX/Dco's estimated taxable income for its XXXXXXXXXX and XXXXXXXXXX taxation years is expected to be approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively.
PROPOSED TRANSACTIONS
6. XXXXXXXXXX/Aco will incorporate a new corporation ("Newco") under the XXXXXXXXXX. Newco will be a taxable Canadian corporation. Newco will have XXXXXXXXXX year-end.
The authorized share capital of Newco will consist of an unlimited number of common shares without nominal or par value and redeemable and retractable preferred shares (the "Newco Preferred Shares").
The Newco Preferred Shares will have rights and restrictions described as follows:
(a) the shares will be non-participating and non-voting;
(b) entitled to an annual cumulative dividend rate, applied to the redemption amount of the shares (as described in paragraph 9 below), equal to the prime lending rate of XXXXXXXXXX/Dco's leading banker, in force at the time of the determination of the dividend rate, plus XXXXXXXXXX%. The dividend rate will be determined at the time of the Proposed Transactions, and subsequently, at the beginning of each taxation year;
(c) redeemable at any time at the option of the holder or Newco for cash or by delivering a financial asset of Newco (including the XXXXXXXXXX/Aco Demand Loan issued under paragraph 10 below) for an amount equal to the aggregate of the fair market value of the consideration for which the shares were issued and any unpaid dividends.
The Newco Preferred Shares will also be redeemable by setting off amounts owing under the XXXXXXXXXX/Dco Demand Loan against the redemption price of the Newco Preferred Shares in circumstances where Newco becomes the holder of the XXXXXXXXXX/Dco Demand Loan as described in paragraph 10 below. The terms of the XXXXXXXXXX/Aco Demand Loan and the XXXXXXXXXX/Dco Demand Loan described in paragraph 8 below will provide that if XXXXXXXXXX/Dco becomes the holder of the XXXXXXXXXX/Aco Demand Loan, the XXXXXXXXXX/Aco Demand Loan can, at the option of either XXXXXXXXXX/Aco or XXXXXXXXXX/Dco, be set off against the XXXXXXXXXX/Dco Demand Loan.
XXXXXXXXXX/Aco will subscribe for one common share of Newco for $XXXXXXXXXX on incorporation.
7. XXXXXXXXXX/Aco will borrow an amount not to exceed $XXXXXXXXXX on a daylight basis from an arm's length financial institution (the "Daylight Loan").
8. XXXXXXXXXX/Aco will lend the proceeds from the Daylight Loan to XXXXXXXXXX/Dco on a demand basis (the "XXXXXXXXXX/Dco Demand Loan"). The XXXXXXXXXX/Dco Demand Loan will bear interest at a rate equal to the prime lending rate of XXXXXXXXXX/Dco's leading banker in force at the time of the determination of the interest rate. The interest rate will be determined at the time of the Proposed Transactions, and subsequently, at the beginning of each taxation year. The interest will be payable annually in arrears.
The terms of the XXXXXXXXXX/Dco Demand Loan will provide that repayment may be settled in cash or by delivering a financial asset of XXXXXXXXXX/Dco (including the XXXXXXXXXX /Aco Demand Loan described in paragraph 10 below).
XXXXXXXXXX/Dco has the financial capacity to pay the interest on the XXXXXXXXXX/Dco Demand Loan from its own cash flow (calculated as its net accounting income before depreciation and taxes). XXXXXXXXXX has provided confirmation, in a letter dated XXXXXXXXXX, that XXXXXXXXXX/Dco has the ability to borrow up to an additional amount of $XXXXXXXXXX with a guarantee from XXXXXXXXXX/Aco.
9. XXXXXXXXXX/Dco will use the proceeds of the XXXXXXXXXX/Dco Demand Loan to subscribe for Newco Preferred Shares having a redemption amount equal to the principal amount of the XXXXXXXXXX/Dco Demand Loan.
Dividends on the Newco Preferred Shares will be paid on an annual basis. The dividends will be funded by share subscriptions made by XXXXXXXXXX/Aco as described in paragraph 12 below.
10. Newco will lend the proceeds from the subscription of the Newco Preferred Shares to XXXXXXXXXX/Aco on an interest-free demand basis (the "XXXXXXXXXX/Aco Demand Loan"). The terms of the XXXXXXXXXX/Aco Demand Loan will allow XXXXXXXXXX/Aco to repay the XXXXXXXXXX/Aco Demand Loan by assigning the XXXXXXXXXX/Dco Demand Loan to Newco.
11. XXXXXXXXXX/Aco will use the proceeds from the XXXXXXXXXX/Aco Demand Loan to repay the Daylight Loan.
12. XXXXXXXXXX/Aco will agree to subscribe for common shares of Newco on an annual basis equal to the amount of dividends to be paid by Newco on the Newco Preferred Shares as long as such preferred shares are outstanding and provided that XXXXXXXXXX/Dco is not prohibited as a matter of law from paying dividends at the time XXXXXXXXXX/Aco makes such share subscriptions. XXXXXXXXXX/Aco will not be required to make such share subscriptions where Newco is no longer paying dividends to XXXXXXXXXX/Dco or, except for the first year where such share subscriptions are to be made by XXXXXXXXXX/Aco, where XXXXXXXXXX/Dco did not pay the dividends described in paragraph 14(a) below to XXXXXXXXXX /Cco in respect of the immediately preceding period.
13. Newco will use the amount received as subscription proceeds in paragraph 12 above to pay dividends on the Newco Preferred Shares to XXXXXXXXXX/Dco on an annual basis. XXXXXXXXXX/Dco will in turn use the dividends received from Newco to pay interest to XXXXXXXXXX/Aco on the XXXXXXXXXX/Dco Demand Loan.
14. In order to reflect the fact that XXXXXXXXXX/Aco's non-capital losses will be effectively used by XXXXXXXXXX /Dco, the following payments will be made on an annual basis:
(a) a special dividend will be paid by XXXXXXXXXX/Dco on its common shares to XXXXXXXXXX/Cco. The amount of the special dividend will reflect the estimated time utilization of the non-capital losses of XXXXXXXXXX/Aco and other considerations and is estimated for the purposes of this ruling to be no more than XXXXXXXXXX% of the amount of the non-capital losses utilized in the year;
(b) XXXXXXXXXX/Cco will in turn pay a special dividend on its Class XXXXXXXXXX shares held by XXXXXXXXXX/Aco and XXXXXXXXXX/Bco in a total amount equal to the dividend received from XXXXXXXXXX/Dco under paragraph 14(a) above; and
(c) XXXXXXXXXX/Bco will in turn pay a special dividend on its common shares held by XXXXXXXXXX/Aco in an amount equal to its share of the dividend paid by XXXXXXXXXX/Cco in paragraph 14(b) above.
15. Once sufficient income has been earned by XXXXXXXXXX/Aco to utilize any losses that may otherwise be incurred in the current year and all or a portion of its non-capital losses carried forward or at any time prior to that time:
(a) Newco will pay the balance of any accrued and unpaid dividends on the Newco Preferred Shares redeemed under paragraph 15(c) below;
(b) XXXXXXXXXX/Dco will pay the balance of any accrued and unpaid interest on the portion of the XXXXXXXXXX/Dco Demand Loan settled under paragraph 15(c) below;
(c) Newco will redeem all or a portion of the Newco Preferred Shares held by XXXXXXXXXX/Dco by assigning a corresponding amount of the XXXXXXXXXX/Aco Demand Loan to XXXXXXXXXX/Dco;
(d) XXXXXXXXXX/Dco will repay all or a portion of the XXXXXXXXXX/Dco Demand Loan equal to the amount of Newco Preferred Shares redeemed under 15(c) above by setting off the amount owing to XXXXXXXXXX/Aco with a corresponding amount of the XXXXXXXXXX/Aco Demand Loan and such portions of the XXXXXXXXXX/Aco Demand Loan and the XXXXXXXXXX/Dco Demand Loan will be cancelled; and
(e) once all of the Newco Preferred Shares held by XXXXXXXXXX/Dco have been redeemed and all of the XXXXXXXXXX/Aco Demand Loan has been assigned to XXXXXXXXXX/Dco as described under paragraph 15(c) and (d) above, Newco will be wound up into XXXXXXXXXX/Aco pursuant to XXXXXXXXXX.
16. XXXXXXXXXX/Aco, XXXXXXXXXX/Dco, XXXXXXXXXX/Bco, XXXXXXXXXX/Cco and Newco are neither specified financial institutions nor financial intermediary corporations.
17. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) is or will be subject to a guarantee agreement.
18. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).
19. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) is or will be subject to a dividend rental agreement.
20. XXXXXXXXXX/Aco and XXXXXXXXXX/Dco are "affiliated persons" for purposes of the Act.
PURPOSE OF THE PROPOSED TRANSACTIONS
21. The overall purpose of the Proposed Transactions is to enable XXXXXXXXXX/Aco to earn sufficient interest income, over a period of time, so as to utilize its accumulated non-capital losses.
22. In order to undertake the Proposed Transactions in a legally effective manner, it is necessary to incorporate Newco (described in paragraph 6 above) to enable XXXXXXXXXX/Dco to hold an interest in Newco Preferred Shares (described in paragraph 9 above). Under subsection 30(1) of the CBCA, XXXXXXXXXX/Dco is precluded from acquiring and holding shares in XXXXXXXXXX/Aco.
RULINGS
Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:
A. The dividends received by:
(i) XXXXXXXXXX/Dco on the Newco Preferred Shares described in paragraph 13;
(ii) XXXXXXXXXX/Cco on the XXXXXXXXXX/Dco common shares described in subparagraph 14(a);
(iii) XXXXXXXXXX /Aco and XXXXXXXXXX/Bco on the XXXXXXXXXX /Cco Class XXXXXXXXXX shares described in subparagraph 14(b); and
(iv) XXXXXXXXXX/Aco on the XXXXXXXXXX/Bco common shares described in subparagraph 14(c)
will be taxable dividends, that will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).
B. Part IV.1 of the Act will not apply to the dividends described in Ruling A above because the dividends will be excepted dividends.
C. Part VI.1 of the Act will not apply to the dividends described in Ruling A above because the dividends will be excluded dividends.
D. Provided that XXXXXXXXXX/Dco has a legal obligation to pay interest on the XXXXXXXXXX/Dco Demand Loan issued in the transaction described in paragraph 8 above, and provided that the Newco Preferred Shares described in paragraphs 6 and 9 above, continue to be held by XXXXXXXXXX/Dco for the purpose of producing income (other than income which will be exempt), XXXXXXXXXX/Dco will be entitled to deduct, in computing its income for a taxation year, the interest paid or payable (depending on the method regularly followed by XXXXXXXXXX/Dco in computing its income for purposes of the Act) or a reasonable amount in respect of that taxation year pursuant to paragraph 20(1)(c).
E. No amount will be included in the income of Newco pursuant to section 9 and paragraph 12(1)(c) in respect of the subscription for Newco common shares by XXXXXXXXXX/Aco described in paragraph 12 above.
F. The set-off of all or any part of the XXXXXXXXXX/Aco Demand Loan against the corresponding amount of the XXXXXXXXXX/Dco Demand Loan described in subparagraph 15(d) above will not give rise to a forgiven amount.
G. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Ruling A above, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the Proposed Transactions.
H. The provisions of subsection 88(1) will apply to the winding-up of Newco into XXXXXXXXXX/Aco described in paragraph 15(e) above.
I. The provisions of subsections 15(1), 56(2), 69(1), 69(4) 69(11) and 246(1) will not be applied as a result of the Proposed Transactions, in and by themselves.
J. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX except for the transactions described in paragraphs 12, 13, 14 and 15.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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