2001 Ruling 2001-0095183 - 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: Group Loss Utilization Scheme

Position: Similar to prior rulings

Reasons: No new issues

XXXXXXXXXX 2001-009518

XXXXXXXXXX, 2001

Dear Sirs:

Re: XXXXXXXXXX ("PARENT")
XXXXXXXXXX ("PROFITSUB")
Request for 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.

To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling is under objection or appeal or is being considered by any tax services office or taxation centre of the Canada Customs and Revenue Agency in connection with any income tax return already filed.

The above-mentioned corporations deal with the XXXXXXXXXX Tax Services Office. PARENT files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and PROFITSUB files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

DEFINITIONS

In this letter, the following terms have the meaning specified:

(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) XXXXXXXXXX;

(c) "CBCA" means the Canada Business Corporations Act;

(d) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(e) "excepted dividends" has the meaning assigned by section 187.1;

(f) "excluded dividends" has the meaning assigned by subsection 191(1);

(g) "forgiven amount" has the meaning assigned by subsection 80(1) or 80(1.1);

(h) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(i) "Newco" means the new corporation as described in paragraph 4 below;

(j) "non-capital loss" has the meaning assigned by subsection 111(8);

(k) "paid-up capital" has the meaning assigned by subsection 89(1);

(l) XXXXXXXXXX;

(m) "Proposed Transactions" means the transactions described in paragraphs 4 to 12 below;

(n) "specified financial institution" has the meaning assigned by subsection 248(1);

(o) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(p) "taxable dividend" has the meaning assigned by subsection 89(1); and

(q) "term preferred share" has the meaning assigned by subsection 248(1).

FACTS

1. PARENT is a taxable Canadian corporation and is governed by XXXXXXXXXX . PARENT, in addition to being the ultimate parent of the XXXXXXXXXX group as described in paragraphs 2 and 3 below, is also in the business of XXXXXXXXXX. PARENT has a XXXXXXXXXX taxation year-end. PARENT is expected to incur significant non-capital losses for the XXXXXXXXXX taxation year, mainly due to the XXXXXXXXXX and the significant capital cost allowance made available as a result of its capital additions during the prior years.

2. XXXXXXXXXX ("SUBCO") is a taxable Canadian corporation and is a wholly-owned subsidiary of PARENT. SUBCO is engaged in managing and financing investments within the XXXXXXXXXX corporate group. SUBCO has a XXXXXXXXXX taxation year-end.

3. PROFITSUB is a taxable Canadian corporation and is governed by the CBCA. PROFITSUB is a wholly-owned subsidiary of SUBCO and is in the business of XXXXXXXXXX. PROFITSUB has a XXXXXXXXXX taxation year-end. In the XXXXXXXXXX taxation year, PROFITSUB is expected to generate a significant operating profit and hence taxable income.

PROPOSED TRANSACTIONS

4. PARENT will incorporate a new corporation ("Newco") under the XXXXXXXXXX. Newco will be a taxable Canadian corporation. Newco will have a XXXXXXXXXX taxation 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 the following rights and restrictions:

(a) they will be non-participating and non-voting;

(b) they will be entitled to an annual cumulative dividend rate, applied to the redemption amount of the shares (as described in paragraph 7 below), equal to the prime lending rate of PROFITSUB'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. For greater certainty, at any particular time during the period that the preferred shares are outstanding, their dividend rate will exceed the interest rate payable at that time on the PROFITSUB Demand Loan;

(c) they will be redeemable at any time at the option of the holder or Newco for cash or by delivering a financial asset of Newco (including the PARENT Demand Loan issued under paragraph 8 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; and

(d) the redemption price of the Newco Preferred Shares could also be satisfied by setting off amounts owing under the PROFITSUB Demand Loan against the unpaid redemption price of the Newco Preferred Shares in circumstances where Newco becomes the holder of the PROFITSUB Demand Loan as described in paragraph 8 below. The terms of the PARENT Demand Loan and the PROFITSUB Demand Loan described in paragraph 6 below will provide that if PROFITSUB becomes the holder of the PARENT Demand Loan, the PARENT Demand Loan can, at the option of either PARENT or PROFITSUB, be set off against the PROFITSUB Demand Loan.

PARENT will subscribe for one common share of Newco for $XXXXXXXXXX on incorporation.

5. PARENT will borrow an amount not to exceed $XXXXXXXXXX on a daylight basis from an arm's length financial institution (the "Daylight Loan").

6. PARENT will lend the proceeds from the Daylight Loan to PROFITSUB on a demand basis (the "PROFITSUB Demand Loan"). The PROFITSUB Demand Loan will bear interest at a rate equal to the prime lending rate of PROFITSUB'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 PROFITSUB Demand Loan will provide that repayment may be settled in cash or by delivering a financial asset of PROFITSUB (including the PARENT Demand Loan described in paragraph 8 below). Based on PROFITSUB's financial projections, it has the financial capacity to pay the interest on the PROFITSUB Demand Loan from its own cash flow (calculated on its net accounting income before depreciation and taxes). In addition, the XXXXXXXXXX has provided confirmation, in a letter dated XXXXXXXXXX which was attached to your request for this advance income tax ruling, that PROFITSUB has the ability to borrow up to an additional amount of $XXXXXXXXXX.

7. PROFITSUB will use the proceeds of the PROFITSUB Demand Loan to subscribe for Newco Preferred Shares having a redemption amount and paid-up capital equal to the principal amount of the PROFITSUB Demand Loan. Dividends on the Newco Preferred Shares will be paid on an annual basis. The dividends will be funded by capital contributions made by PARENT as described in paragraph 10 below.

8. Newco will lend the proceeds from the subscription of the Newco Preferred Shares to PARENT on an interest-free demand basis (the "PARENT Demand Loan"). The terms of the PARENT Demand Loan will allow PARENT to repay the PARENT Demand Loan by assigning the PROFITSUB Demand Loan to Newco.

9. PARENT will use the proceeds from the PARENT Demand Loan to repay the Daylight Loan.

10. PARENT will agree to make contributions of capital to the common share capital of Newco on an annual basis equal to the amount of the dividends to be paid by Newco on the Newco Preferred Shares as long as such preferred shares are outstanding. PARENT will not be required to make such contributions of capital where Newco is no longer paying dividends to PROFITSUB.

11. Newco will use the amount received as contribution of capital in paragraph 10 above to pay dividends on the Newco Preferred Shares to PROFITSUB on an annual basis. PROFITSUB will in turn use the dividends received from Newco to fund payments of interest to PARENT on the PROFITSUB Demand Loan.

12. Once PARENT has decided to unwind the Proposed Transactions in whole or in part:

(a) Newco will pay the balance of any accrued and unpaid dividends on the Newco Preferred Shares to be redeemed under paragraph 12(d) below;

(b) PROFITSUB will pay the balance of any accrued and unpaid interest on the portion of the PROFITSUB Demand Loan to be settled under paragraph 12(e) below;

(c) PARENT will borrow funds on a daylight basis from an arm's length financial institution to repay all or a portion of the PARENT Demand Loan held by Newco;

(d) Newco will use the proceeds from the full or partial repayment of the PARENT Demand Loan under paragraph 12(c) above to redeem a corresponding amount of the Newco Preferred Shares held by PROFITSUB;

(e) PROFITSUB will use the proceeds from the redemption of all or a portion of the Newco Preferred Shares under paragraph 12(d) above to repay a corresponding amount of the PROFITSUB Demand Loan held by PARENT;

(f) PARENT will use the proceeds from the repayment of the PROFITSUB Demand Loan under paragraph 12(e) above to repay the daylight loan referred to in paragraph 12(c) above; and

(g) once all of the Newco Preferred Shares held by PROFITSUB have been redeemed and all of the PARENT Demand Loan and the PROFITSUB Demand Loan have been repaid as described in paragraphs 12(c) to (f) above, Newco will be wound up into PARENT pursuant to XXXXXXXXXX.

ADDITIONAL INFORMATION

13. PROFITSUB is a specified financial institution by virtue of being related to XXXXXXXXXX, a corporation that is incorporated under the laws of XXXXXXXXXX.

14. 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.

15. 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).

16. 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 arrangement.

PURPOSE OF THE PROPOSED TRANSACTIONS

17. The overall purpose of the Proposed Transactions is to enable PARENT to earn sufficient interest income, over a period of time, so as to utilize the non-capital losses that it would otherwise incur in the current year.

18. In order to undertake the Proposed Transactions in a legally effective manner, it is necessary to incorporate Newco (described in paragraph 4 above) to enable PROFITSUB to hold an interest in Newco Preferred Shares (described in paragraph 7 above). Under subsection 30(1) of the CBCA, PROFITSUB is precluded from acquiring and holding shares in PARENT.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purposes of the Proposed Transactions we confirm the following:

A. The dividends received by PROFITSUB on the Newco Preferred Shares described in paragraph 11 above 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 dividends are received and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) and 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. Provided that PROFITSUB has a legal obligation to pay interest on the PROFITSUB Demand Loan issued in the transaction described in paragraph 6 above, and provided that the Newco Preferred Shares described in paragraph 4 above continue to be held by PROFITSUB for the purpose of producing income (other than income which will be exempt), PROFITSUB 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 PROFITSUB in computing its income for purposes of the Act) on the PROFITSUB Demand Loan in respect of that taxation year pursuant to paragraph 20(1)(c).

D. 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.

E. The provisions of subsection 88(1) will apply to the winding-up of Newco into PARENT described in paragraph 12(g) above.

F. No amount will be included in the income of Newco pursuant to section 9, paragraph 12(1)(c) and paragraph 12(1)(x) in respect of the contributions of capital described in paragraph 10 above.

G. 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.

H. 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.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could affect the rulings provided herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the Proposed Transactions are completed by XXXXXXXXXX.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch