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 ISSUE:
Loss Consolidation. Taxpayer seeking certainty in light of the decision in C.R.B. Logging Co. Ltd v. The Queen, 99 DTC (TCC).
Position:
Favorable ruling given.
REASON:
The facts in the present case can be distinguished from the fact pattern in C.R.B. Logging Co. Ltd v. The Queen, 99 DTC (TCC). In particular, the issuer of the preferred shares had sources of income other than the target company such that there did not exist an income flow of a "closed nature" as was the case in CRB.
Moreover, we have previously provided favorable rulings in similar situations (see for example # 991085, # 992400, # 972734 and # 971058).
XXXXXXXXXX 2000-005236
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved:
i) none of the issues involved in the requested ruling is being considered by any district Tax Services Office or Taxation Centre of the Agency in connection with a tax return already filed, and
ii) none of the issues involved in the requested ruling is the subject of any notice of objection or is under appeal.
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.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. XXXXXXXXXX (hereinafter "Parentco") was incorporated under the laws of XXXXXXXXXX, does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada within the meaning of the XXXXXXXXXX Parentco is a resident of XXXXXXXXXX with its head office located at XXXXXXXXXX. Parentco is a publicly held company that is listed on the XXXXXXXXXX Stock Exchange.
XXXXXXXXXX.
2. XXXXXXXXXX (hereinafter "XXXXXXXXXX") was incorporated under the laws of XXXXXXXXXX, does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada within the meaning of the XXXXXXXXXX has authorized and issued share capital consisting of XXXXXXXXXX ordinary shares. All the issued and outstanding shares of XXXXXXXXXX are held by Parentco. XXXXXXXXXX offices are located at XXXXXXXXXX.
XXXXXXXXXX One of the stated objectives for the acquisition of Holdco (see paragraph 7) was the merger of its operations with the operations of XXXXXXXXXX as outlined in the XXXXXXXXXX (the "Circular") provided to the shareholders of Holdco.
Projections XXXXXXXXXX, prepared in connection with a valuation of XXXXXXXXXX in XXXXXXXXXX, forecast substantial growth, year over year, in sales and profit such that it is anticipated that XXXXXXXXXX profits in each of its fiscal years ending in XXXXXXXXXX, inclusively, will exceed XXXXXXXXXX.
3. XXXXXXXXXX (hereinafter "A Co") was incorporated under the laws of XXXXXXXXXX, does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada within the meaning of the XXXXXXXXXX . All the issued and outstanding shares of A Co are held by Parentco.
4. XXXXXXXXXX (hereinafter "B Co") was incorporated under the laws of XXXXXXXXXX , does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada within the meaning of the XXXXXXXXXX. All the issued and outstanding shares of B Co are held by A Co.
5. XXXXXXXXXX (hereinafter "Callco") was incorporated under the Canada Business Corporation Act ("CBCA") on XXXXXXXXXX. Callco is a private corporation and a taxable Canadian corporation. Callco's authorized share capital is comprised of an unlimited number of common shares. B CO owns all XXXXXXXXXX issued and outstanding common shares of Callco. The expressions "private corporation" and "taxable Canadian corporation" as referred to here and subsequently have the meanings assigned by subsection 89(1) of the Act.
6. XXXXXXXXXX (hereinafter "Exchangeco") was incorporated under the CBCA on XXXXXXXXXX. Exchangeco is a public corporation and a taxable Canadian corporation. Exchangeco's authorized share capital includes an unlimited number of common shares, an unlimited number of non-voting (with respect to Exchangeco) exchangeable shares (the "Exchangeable Shares") and an unlimited number of XXXXXXXXXX preferred shares. Callco owns all XXXXXXXXXX issued and outstanding common shares in Exchangeco. The expression "public corporation" as referred to here and subsequently has the meaning assigned by subsection 89(1) of the Act.
The Exchangeable Shares are shares in the share capital of Exchangeco. However, the Exchangeable Shares are structured to be the economic equivalent of Parentco common shares. The Exchangeable Shares allow existing Canadian Holdco shareholders to participate in the future performance of Parentco in a tax efficient manner through holding a Canadian security.
7. XXXXXXXXXX (hereinafter "Holdco") is a public corporation and a taxable Canadian corporation. Exchangeco owns all the issued and outstanding shares in Holdco.
8. XXXXXXXXXX (hereinafter "Opco") is a taxable Canadian corporation. Opco has authorized share capital consisting of XXXXXXXXXX common shares and an unlimited number of XXXXXXXXXX common shares. Holdco owns all XXXXXXXXXX issued and outstanding XXXXXXXXXX common shares of Opco.
XXXXXXXXXX.
9. Exchangeco acquired all the outstanding common shares of Holdco that were owned by the public by means of a plan of arrangement approved by the Superior Court of Justice (XXXXXXXXXX) on XXXXXXXXXX. The consideration for the acquisition of all the shares of Holdco by Exchangeco consisted of:
(i) Cash of $XXXXXXXXXX;
(ii) XXXXXXXXXX common shares of Parentco having a market value of $XXXXXXXXXX; and
(iii) XXXXXXXXXX Exchangeable Shares of Exchangeco.
10. B Co has a $XXXXXXXXXX Canadian dollar convertible note receivable ("Acquisition Debt") from Callco. The convertible note has the following terms: XXXXXXXXXX.
Callco will withhold 10% of the gross interest paid on the Acquisition Debt, and remit the withholding tax to the Agency within 15 days after the end of the month in which the interest was paid pursuant to section 215 of the Act.
The funds from the Acquisition Debt were used by Callco to acquire common shares in Exchangeco, which in turn acquired the common shares in Holdco.
11. As a result of interest charges related to the Acquisition Debt, it is anticipated that Callco will incur losses in its XXXXXXXXXX and subsequent taxation years. Opco is expected to earn a profit in its XXXXXXXXXX and subsequent taxation years.
Proposed Transactions
12 B Co will cause a new company ("Prefco") to be incorporated under the XXXXXXXXXX Business Corporation Act. The authorized share capital of Prefco will consist of:
(a) an unlimited number of common shares; and
(b) an unlimited number of XXXXXXXXXX preferred shares. The cumulative dividends payable on the preferred shares will be calculated daily by reference to the redemption/retraction price of the share at a rate equal to the Canadian prime rate + XXXXXXXXXX basis points. Dividends will be payable annually in arrears on or before the year-end.
Prefco will be a private corporation and a taxable Canadian corporation. Prefco's taxation year end will be XXXXXXXXXX.
On incorporation B Co will acquire common shares of Prefco for nominal consideration.
13. Parentco will contribute all of its shares in XXXXXXXXXX to A Co for additional common shares in A Co.
14 A Co will contribute all of its shares in XXXXXXXXXX to B Co for additional common shares in B Co.
15. B Co will contribute all its shares in XXXXXXXXXX to Callco. As sole consideration for the XXXXXXXXXX shares, Callco will issue additional common shares to B Co. The paid up capital of the common shares issued by Callco to B Co will be equal to the fair market value of the XXXXXXXXXX shares received by Callco.
16. Callco will borrow an amount (the "Principal Amount") on a "daylight loan" basis from an arm's length institutional lender or Parentco (the "Daylight Loan"). It is anticipated that the Principal Amount of the Daylight Loan will be $XXXXXXXXXX.
17. Callco will use the proceeds received from the Daylight Loan to make a loan to Opco (the "Target Loan") in an amount equal to the Principal Amount. Interest will be calculated on the Target Loan at a rate of approximately the Canadian prime rate + XXXXXXXXXX basis points.
The interest expected to be received by Callco in its taxation year ending XXXXXXXXXX and later years on the Target Loan will be sufficient to offset the losses expected to be incurred by Callco as a consequence of its interest payments on the Acquisition Debt.
18. Opco will use the proceeds from the Targetco Loan to subscribe for preferred shares in Prefco having an aggregate redemption/retraction price equal to the Principal Amount.
19. The authorized share capital of Callco will, in accordance with the relevant provisions of the CBCA, be amended to include an unlimited number of cumulative, non-voting, redeemable, retractable preferred shares. The cumulative dividends payable on the preferred shares will be calculated daily by reference to the redemption/retraction price of the share at a rate equal to the Canadian prime rate + XXXXXXXXXX basis points. Dividends will be payable annually in arrears on or before the year-end.
20. Prefco will subscribe for preferred shares in Callco having an aggregate redemption/retraction price equal to the Principal Amount.
21. Callco will use the proceeds resulting from the Prefco preferred shares subscription to repay the Daylight Loan.
22. On or before the last day of each year, Prefco will pay a dividend on its preferred shares to Opco. These dividend payments will be funded by the payment of dividends by Callco to Prefco on Callco's preferred shares held by Prefco.
To the extent that, on the date dividends are to be paid on Callco's preferred shares, Callco does not have sufficient cash on hand, or sufficient earnings to legally pay a dividend, the following options are available:
(a) XXXXXXXXXX will pay a dividend on its common shares (to the extent legally allowed) to Callco; or
(b) Opco will pay a dividend (to the extent legally allowed) on its common shares to Holdco. Holdco will pay a dividend (to the extent legally allowed) on its common shares to Exchangeco. Exchangeco will pay a dividend (to the extent legally allowed) on its common shares to Callco; or
c) B Co will contribute additional funds to Callco in the form of contributed surplus.
Callco would then be able to pay dividends on its preferred shares to Prefco, and Prefco would then be able to pay dividends on its preferred shares to Opco.
23. A Debt Decreasing Transaction may be entered into in circumstances where the interest income on the Target Loan is expected to be greater than the amount required to offset Callco's expected loss for the year. The need for a Debt Decreasing Transaction could arise for numerous reasons including a partial repayment of the Acquisition Debt. A Debt Decreasing Transaction will be implemented through the following steps:
(a) Callco will borrow an amount on a "daylight loan" basis (the "New Daylight Loan"). Callco will use these funds to redeem preferred shares held by Prefco.
(b) Prefco will use the proceeds from the redemption to redeem preferred shares held by Opco.
(c) Opco will use the proceeds from the redemption of the preferred shares to pay down the Target Loan.
(d) Callco will use the funds received on the repayment of the Target Loan to repay the New Daylight Loan.
Purpose of the Proposed Transactions
24. The purposes of the proposed transactions are as follows:
(a) Consolidate profit and losses within an affiliated group by enabling Callco to earn
sufficient interest income on the Target Loan in order to eliminate losses that it would otherwise incur on the Acquisition Debt. Effectively, the proposed transactions permit the application of interest charges with respect to Callco debt against income of Opco.
(b) The loan made by Callco to Opco in the amount of $XXXXXXXXXX dollars, will result in the cost of the acquisition debt of Holdco, Opco and its subsidiaries to be in Opco.
(c) XXXXXXXXXX.
25. (a) The address and corporate account number of the each of the parties to the transactions described herein are as follows:
Callco
Account number: XXXXXXXXXX
address: XXXXXXXXXX
Exchangeco
Account number: XXXXXXXXXX
address: XXXXXXXXXX
Holdco
Account number: XXXXXXXXXX
address: XXXXXXXXXX
Opco
Account number: XXXXXXXXXX
address: XXXXXXXXXX
XXXXXXXXXX
Account number: N/A
address: XXXXXXXXXX ,
b) Callco, Exchangeco, Holdco and Opco are served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Taxation Centre.
Rulings
Provided that the above description of facts, proposed transactions, purpose of the proposed transaction and other information are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose thereof, and provided further that the proposed transactions are completed in the manner described above, we confirm that:
A. Provided that Opco has a legal obligation to pay interest on the Target Loan and provided that the Preferred Shares of Prefco continue to be held for the purpose of gaining or producing income (other than income which would be exempt), Opco will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c) of the Act.
B. Subsection 18(6) will not be applied to deem the Target Loan to be a debt incurred by Opco to B Co.
C. Subsection 245(2) of the Act 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.
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the Agency has:
a) Agreed that interest paid by Callco or Opco on any loan except as specifically set out in ruling A above, is deductible in computing income under paragraph 20(1)(c) of the Act;
b) Reviewed or accepted the amount of the retained earnings of, the contributed surplus contributed by specified non-resident shareholders to, or the paid-up capital of the shares of, Callco or Opco or otherwise attempted to determine whether subsection 18(4) would deny a deduction in respect of interest paid on a loan other than a loan referred to in Ruling A above; or
c) Agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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