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: Loss Utilization. Taxpayer seeking certainty in light of the decision in C.R.B. Logging Co. Ltd. v. The Queen, 99 DTC (FCA).
Position: Favourable ruling given.
Reasons: The facts in the present case can be distinguished from the fact pattern in C.R.B. Logging Co. Ltd. v. The Queen.
XXXXXXXXXX 2001-006970
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
We are writing in response to your correspondence of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein are:
(i) dealt with in an earlier return of either of the taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of either of the taxpayers or a related person;
(iii) under objection by either of the taxpayers or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
DEFINITIONS
(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 or subparagraph is a reference to the relevant provision of the Act;
(b) "ACO" means XXXXXXXXXX;
(c) "BCO" means XXXXXXXXXX;
(d) "CCO" means XXXXXXXXXX;
(e) "DCO" means XXXXXXXXXX;
(f) "ECO" means XXXXXXXXXX;
(g) "Mr. X" means XXXXXXXXXX.
STATEMENT OF FACTS
1. ACO was incorporated under the XXXXXXXXXX. ACO's business number is XXXXXXXXXX. ACO files its T2 corporation income tax returns with the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Taxation Services Office.
2. ACO is a Canadian-controlled private corporation ("CCPC") and a taxable Canadian corporation ("TCC") as defined in subsection 125(7) and subsection 89(1), respectively. ACO's head office is located at XXXXXXXXXX.
3. As of the date hereof, ACO's share capital comprises unlimited common shares and unlimited preferred class A shares. There are currently XXXXXXXXXX common shares outstanding and XXXXXXXXXX preferred class A shares outstanding. All of the common shares are owned by DCO and all the preferred class A shares are owned by CCO.
4. BCO was incorporated under the XXXXXXXXXX. BCO's business number is XXXXXXXXXX. BCO files its T2 corporation income tax returns with the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Taxation Services Office.
5. BCO is a TCC as defined in subsection 89(1) and a CCPC as defined in subsection 125(7). BCO's head office is located at XXXXXXXXXX.
6. As of the date hereof, BCO's share capital comprises unlimited common shares and unlimited preference shares. There are currently XXXXXXXXXX common shares outstanding and XXXXXXXXXX preference shares outstanding. ACO owns XXXXXXXXXX common shares (XXXXXXXXXX%), CCO owns XXXXXXXXXX common shares (XXXXXXXXXX%) and the remaining common shares (XXXXXXXXXX%) are owned by arm's length parties. All preference shares are non-voting and are owned by arm's length parties.
7. CCO was incorporated under the XXXXXXXXXX . CCO's business number is XXXXXXXXXX. CCO files its T2 corporation income tax returns with the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Taxation Services Office.
8. CCO is a TCC as defined in subsection 89(1) and a CCPC as defined in subsection 125(7).
9. As of the date hereof, CCO's share capital comprises eight share classes with the following number of shares outstanding as follows: common (XXXXXXXXXX), class A (XXXXXXXXXX), class C (XXXXXXXXXX), class D (XXXXXXXXXX), class E (XXXXXXXXXX) and classes F, G, and H (XXXXXXXXXX each). The common shares are the only voting shares. XXXXXXXXXX common shares are owned by DCO and XXXXXXXXXX common shares are owned by ECO.
10. DCO was incorporated under the XXXXXXXXXX DCO's business number is XXXXXXXXXX. DCO files its T2 corporation income tax return with the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Taxation Services Office.
11. DCO is a TCC as defined in subsection 89(1) and a CCPC as defined in subsection 125(7).
12. As of the date hereof, DCO's share capital comprises unlimited common shares and unlimited class A shares. There are currently XXXXXXXXXX common shares outstanding and XXXXXXXXXX class A shares outstanding. Mr. X controls DCO.
13. ECO was incorporated under the XXXXXXXXXX ECO's business number is XXXXXXXXXX . ECO files its T2 corporation income tax returns with the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Taxation Services Office.
14. ECO is a TCC as defined in subsection 89(1) and a CCPC as defined in subsection 125(7).
15. As of the date hereof, ECO's share capital is comprised of XXXXXXXXXX authorized common shares. There is currently XXXXXXXXXX common share outstanding. Mr. X controls ECO.
16. ACO, BCO, CCO, DCO and ECO have taxation years ending on XXXXXXXXXX.
17. ACO, BCO, CCO, DCO and ECO are all controlled, either directly or indirectly, by Mr. X. As such, all of these companies are related pursuant to section 251.
18. BCO is a profitable enterprise that carries on active business in Canada and, through subsidiaries, in countries around the world. BCO's consolidated financial statement net income for XXXXXXXXXX. BCO's projected consolidated financial statement net income for XXXXXXXXXX.
19. BCO's current practice is to pay annual dividends on its common shares. Based on past practice, but dependent upon operating results, BCO expects to pay dividends of $XXXXXXXXXX in each of the XXXXXXXXXX taxation years. As such, ACO expects to receive $XXXXXXXXXX in dividends from BCO in each of its XXXXXXXXXX taxation years.
20. Based on current agreements in place between Canadian chartered banks, US banks and BCO and its related companies, $XXXXXXXXXX in excess of the currently outstanding borrowings of BCO and its related companies can be borrowed by BCO without contravening current borrowing agreements, including the default of any bank covenants.
21. ACO currently owns common shares in BCO as well as other income producing assets. As at XXXXXXXXXX, the net book value of these assets is approximately $XXXXXXXXXX. The net book value of assets, besides the investment in BCO, is approximately $XXXXXXXXXX.
22. ACO's adjusted cost base, as defined in section 54, of its common share investment in BCO is $XXXXXXXXXX.
23. ACO has been profitable by earning income from dividends, interest on loans and rent on real property. In XXXXXXXXXX, ACO had financial statement net income of $XXXXXXXXXX, respectively. The financial statement net income for XXXXXXXXXX is approximately $XXXXXXXXXX.
24. Commencing in the XXXXXXXXXX taxation year, ACO may incur various expenditures which based on the income earned by its existing assets will result in non-capital losses. XXXXXXXXXX.
PROPOSED TRANSACTIONS
25. ACO will amend its articles of incorporation by creating another class of preferred share capital (the "New Preferred Shares"). The New Preferred Shares will be non-voting, cumulative dividend, redeemable and retractable. The cumulative dividends payable on the New Preferred Shares will be calculated daily by reference to the redemption/retraction price of the New Preferred Shares at a rate equal to XXXXXXXXXX percent and will be payable XXXXXXXXXX (the "dividend payment dates").
The New Preferred Shares will not be, at any time during the implementation of the proposed transaction:
- the subject of any undertaking that is referred to in subsection 212(2.2) as a guarantee agreement,
- the subject of a dividend rental arrangement as the term is defined in subsection 248(1),
- issued for consideration that is or includes: (i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) or (ii) any right of the type described in subparagraph 112(2.4)(b)(ii).
26. BCO will borrow $XXXXXXXXXX on a "daylight loan" basis from an arm's length institutional lender (the "Daylight Loan").
27. BCO will use the money borrowed as described in paragraph 26 above, to purchase $XXXXXXXXXX of New Preferred Shares of ACO.
28. ACO will loan $XXXXXXXXXX (the "Intercompany Debt") to BCO. The debt will have the following characteristics:
a. it will have a XXXXXXXXXX year term with provision to extend;
b. the interest rate on the Intercompany Debt will be calculated daily by reference to the principal amount of the Intercompany Debt at a rate of XXXXXXXXXX percent and will be payable XXXXXXXXXX;
c. the principal will be repayable by BCO any time before maturity and without penalty to BCO;
d. the principal will be repayable by BCO by delivery of New Preferred Shares; and
e. it will be subordinated to any bank indebtedness.
29. BCO will use all of the funds received on the Intercompany Debt to repay the Daylight Loan.
30. The interest to be received by ACO on the Intercompany Debt will create taxable income sufficient to offset the losses that were otherwise expected to be incurred by ACO and allow it to deduct the charitable donations that it plans to make in the XXXXXXXXXX and future taxation years.
31. On or before each dividend payment date, ACO will pay a dividend on its New Preferred Shares to BCO. These dividend payments will be funded by dividends received on share investments, interest on loans made (including the Intercompany Debt) and rent received on the lease of real property. To the extent that, on the date dividends are to be paid on the New Preferred Shares, ACO does not have sufficient cash on hand, or sufficient earnings to legally pay a dividend, CCO will contribute additional funds to ACO in the form of contributed surplus.
PURPOSE OF THE TRANSACTIONS
32. The purpose of the proposed transactions is to consolidate the profit and losses within a related group by enabling ACO to earn sufficient interest income on the Intercompany Debt in order to eliminate losses that it would otherwise incur in XXXXXXXXXX and subsequent taxation years and to allow it to claim deductions in respect of its charitable donations. BCO will be able to reduce its income otherwise determined with the corresponding interest deduction.
RULINGS GIVEN
Provided the above statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided the proposed transactions are completed in the manner described above, we confirm the following:
A. Provided that BCO has a legal obligation to pay interest on the Intercompany Debt and provided that the New Preferred Shares continue to be held for the purpose of gaining or producing income (other than income which would be exempt), BCO will be entitled to deduct in computing its income for a taxation year, the lesser of the interest paid or payable on the Intercompany Debt in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c).
B. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, so as to redetermine the tax consequences confirmed in ruling A above.
These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R4 issued by the Canada Customs & Revenue Agency on January 29, 2001 and are binding upon the Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Income Tax Act and Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Nothing in this ruling should be construed as confirmation, express or implied, that the Agency has:
(a) Agreed that interest paid by BCO 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; or
(b) Agreed to any other tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 2001
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© Sa Majesté la Reine du Chef du Canada, 2001
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