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: Affiliated group loss utilization scheme
Position: Similar to prior rulings issued
Reasons: Similar to ATR 44
XXXXXXXXXX 2000-003887
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX ("XXXXXXXXXX/Profitco"); XXXXXXXXXX
XXXXXXXXXX (XXXXXXXXXX/Lossco"); XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge our various telephone conversations.
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.
XXXXXXXXXX/Profitco and XXXXXXXXXX/Lossco file their corporate income tax returns at the XXXXXXXXXX Taxation Centre and deal 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 Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause 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 subsections 80(1) and 80(1.1);
(i) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(j) "non-capital losses" has the meaning assigned by subsection 111(8);
(k) "public corporation" has the meaning assigned by subsection 89(1);
(l) "subsidiary controlled corporation" has the meaning assigned by subsection 248(1);
(m) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(n) "taxable dividend" has the meaning assigned by subsection 89(1).
FACTS
1. XXXXXXXXXX ("XXXXXXXXXX/Parentco") was incorporated in XXXXXXXXXX and is governed by the CBCA. It is a public corporation and a taxable Canadian corporation. XXXXXXXXXX/Parentco owns directly XXXXXXXXXX common shares of XXXXXXXXXX ("XXXXXXXXXX/Holdco"), representing all of the issued and outstanding XXXXXXXXXX common shares, which shareholding represents XXXXXXXXXX% of the issued and outstanding voting common shares of XXXXXXXXXX/Holdco.
2. XXXXXXXXXX/Profitco is a public corporation and a taxable Canadian corporation. XXXXXXXXXX/Profitco became a subsidiary controlled corporation of XXXXXXXXXX/Holdco pursuant to a series of transactions which were the subject of an advance income tax ruling (#XXXXXXXXXX) dated XXXXXXXXXX, 1999, as amended by letter dated XXXXXXXXXX, 1999.
3. XXXXXXXXXX.
4. XXXXXXXXXX/Profitco has a XXXXXXXXXX taxation year end and generates taxable income on an annual basis. Federal taxable income reported by XXXXXXXXXX/Profitco for its XXXXXXXXXX taxation years was approximately $XXXXXXXXXX and $XXXXXXXXXX respectively. XXXXXXXXXX/Profitco's estimated federal taxable income for its XXXXXXXXXX and following years is expected to increase steadily.
5. XXXXXXXXXX/Profitco and XXXXXXXXXX /Holdco are parties to a tax loss consolidation transaction for which an advance income tax ruling has been issued (#XXXXXXXXXX) dated XXXXXXXXXX, 2000.
6. XXXXXXXXXX/Lossco was incorporated on XXXXXXXXXX, under the CBCA under the name of XXXXXXXXXX.
7. The authorized share capital of XXXXXXXXXX/Lossco consists of an unlimited number of common shares. All of the issued and outstanding common shares of XXXXXXXXXX/Lossco are held by XXXXXXXXXX ("XXXXXXXXXX/Subco"), a wholly-owned subsidiary of XXXXXXXXXX/Profitco.
8. From its date of incorporation until XXXXXXXXXX, all of the common shares of XXXXXXXXXX/Lossco were owned by XXXXXXXXXX/Parentco. On XXXXXXXXXX, the shares of XXXXXXXXXX/Lossco were transferred by XXXXXXXXXX/Parentco to XXXXXXXXXX/Subco for cash consideration.
9. XXXXXXXXXX/Profitco intends to wind-up XXXXXXXXXX/Subco in the year XXXXXXXXXX, and would thereafter be the direct owner of the common shares of XXXXXXXXXX/Lossco.
10. XXXXXXXXXX.
11. XXXXXXXXXX/Lossco is a taxable Canadian corporation and has a XXXXXXXXXX taxation year end. As at XXXXXXXXXX/Lossco has accumulated Non-Capital Losses of approximately $XXXXXXXXXX. It is anticipated that XXXXXXXXXX/Lossco will incur operating losses in its XXXXXXXXXX taxation years.
PROPOSED TRANSACTIONS
12. XXXXXXXXXX/Lossco will file articles of amendment under the CBCA to create a new class of shares ("XXXXXXXXXX/Lossco Preferred Shares"), which will be non-participating, non-voting, with an annual cumulative dividend rate equal to the prime lending rate of XXXXXXXXXX/Profitco's leading banker XXXXXXXXXX determined at the time of the proposed transactions and subsequently, at the beginning of each taxation year applied to the stated capital of the shares. The XXXXXXXXXX/Lossco Preferred Shares will be redeemable at any time at the option of the holder or XXXXXXXXXX/Lossco for cash or by setting off the amount owing on redemption against financial assets of XXXXXXXXXX/Lossco (including the XXXXXXXXXX/Profitco Demand Loan issued under paragraph 14 below). The redemption amount will be equal to the aggregate of the cash amount for which the shares were issued and any unpaid dividends.
13. XXXXXXXXXX/Profitco will borrow up to $XXXXXXXXXX from an arm's-length financial institution ("the Bank Loan"). XXXXXXXXXX/Profitco will use the Bank Loan proceeds to subscribe for XXXXXXXXXX/Lossco Preferred Shares having an aggregate redemption amount and stated capital equal to such proceeds. Regular dividends will be paid on the XXXXXXXXXX/Lossco Preferred Shares on an annual basis. The dividends may be funded with interest income earned by XXXXXXXXXX/Lossco on the XXXXXXXXXX/Profitco Demand Loan described in paragraph 14 below.
XXXXXXXXXX has provided confirmation, in a letter dated XXXXXXXXXX, that XXXXXXXXXX/Profitco has the ability to raise up to $XXXXXXXXXX in the form of a demand loan with appropriate terms and conditions.
14. XXXXXXXXXX/Lossco will lend the proceeds from the issuance of the XXXXXXXXXX/Lossco Preferred Shares, described in paragraph 13 above, to XXXXXXXXXX/Profitco on a demand basis (the "XXXXXXXXXX/Profitco Demand Loan"). The XXXXXXXXXX/Profitco Demand Loan will bear interest at a rate equal to the prime lending rate of XXXXXXXXXX/Profitco's leading banker. 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 and in advance of repayment of the XXXXXXXXXX/Profitco Demand Loan. The terms of the XXXXXXXXXX/Profitco Demand Loan will provide that repayment may be made in cash or with the XXXXXXXXXX/Lossco Preferred Shares.
15. XXXXXXXXXX/Profitco will use the XXXXXXXXXX/Profitco Demand Loan proceeds to repay the Bank Loan.
16. Once sufficient income has been earned by XXXXXXXXXX/Lossco to utilize all or a portion of its non-capital losses:
(a) XXXXXXXXXX/Profitco will pay the balance of any accrued and unpaid interest on such portion of the XXXXXXXXXX/Profitco Demand Loan that will be cancelled under 16(c) below;
(b) XXXXXXXXXX/Lossco will pay the balance of any declared and unpaid dividends on the XXXXXXXXX/Lossco Preferred Shares that will be redeemed under 16(c) below; and
(c) XXXXXXXXXX/Lossco will redeem all or a portion of the XXXXXXXXXX/Lossco Preferred Shares held by XXXXXXXXXX/Profitco and set off the amount owing on redemption with a corresponding amount of the XXXXXXXXXX/Profitco Demand Loan and such portion of the XXXXXXXXXX/Profitco Demand Loan will be cancelled.
17. None of the XXXXXXXXXX/Lossco Preferred Shares referred to herein:
(a) is, or will be, the subject of a guarantee agreement;
(b) is, or will be, the subject of a dividend rental arrangement; or
(c) has been, or will be, acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).
18. XXXXXXXXXX/Profitco and XXXXXXXXXX/Lossco are affiliated persons for purposes of the Act.
PURPOSE OF THE PROPOSED TRANSACTIONS
19. The purpose of the proposed transactions is to enable XXXXXXXXXX/Lossco to earn sufficient income, over a period of time, so as to utilize its accumulated non-capital losses and losses that will be incurred in XXXXXXXXXX.
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 XXXXXXXXXX/Profitco, as described in paragraph 13 above, on the XXXXXXXXXX/Lossco Preferred Shares 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), (2.2), (2.3) or 112(2.4).
B. Part IV.1 of the Act will not apply to the dividends described in paragraphs 13 and 16(b) above because the dividends will be excepted dividends.
C. Part VI.1 of the Act will not apply to the dividends described in paragraphs 13 and 16(b) above because the dividends will be excluded dividends.
D. Provided that XXXXXXXXXX/Profitco has a legal obligation to pay interest on the XXXXXXXXXX/Profitco Demand Loan issued in the transaction described in paragraph 14 above, and the XXXXXXXXXX/Lossco Preferred Shares, described in paragraphs 12 and 13 above, continue to be held for the purpose of gaining or producing income (other than income which will be exempt), XXXXXXXXXX/Profitco will be entitled to deduct, in computing its income for a taxation year, interest paid or payable (depending on the method regularly followed by XXXXXXXXXX/Profitco 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. The set-off of all or any part of the XXXXXXXXXX/Profitco Demand Loan against a corresponding amount owing by XXXXXXXXXX/Lossco on the redemption of XXXXXXXXXX/Lossco Preferred Shares, as described in paragraph 16(c), will not give rise to a forgiven amount.
F. The provisions of subsection 15(1), 56(2), 69(4), 69(11) and 246(1) will not be applied as a result of the proposed transactions, in and by themselves.
G. 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 paragraph 16.
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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