2002 Ruling 2002-0139053 - LOSS CONSOLIDATION

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Loss consolidation. Taxpayer seeking certainty on deductibility of interest on funds borrowed as part of a loss consolidation scheme within a related group.

Position: Favourable rulings given.

Reasons: We have previously provided rulings in similar situations.

XXXXXXXXXX 								2002-013905

XXXXXXXXXX, 2002

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 the above-noted taxpayers. We also acknowledge the information provided during our telephone conversation (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 the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer 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) "CBCA" means the Canada Business Corporations Act, as amended;

(c) "A Co" means XXXXXXXXXX, a corporation incorporated under the CBCA;

(d) "B Co" means XXXXXXXXXX, a corporation incorporated under the CBCA;

(e) "A Co XXXXXXXXXX" means XXXXXXXXXX;

(f) "Parentco" means XXXXXXXXXX, which directly owns XXXXXXXXXX% of the issued and outstanding shares of each of A Co and B Co. Parentco is a public company currently listed on the XXXXXXXXXX Stock Exchange.

(g) "B Co Note" means the promissory note to be issued by B Co in favour of A Co on the loan of $XXXXXXXXXX from A Co to B Co that will take place as part of proposed transactions described herein;

(h) "A Co Note" means the promissory note to be issued by A Co in favour of B Co on the redemption of the issued and outstanding preferred shares held by B Co.

(i) "Non-Capital Losses" has the meaning assigned by subsection 111(8) of the Act.

(j) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

STATEMENT OF FACTS

1. A Co has been a wholly-owned subsidiary of Parentco since incorporation. A Co was incorporated on XXXXXXXXXX.

2. On XXXXXXXXXX, A Co acquired from A Co XXXXXXXXXX . all of its business assets for $XXXXXXXXXX Parentco financed XXXXXXXXXX% of the transaction by contributing additional capital to A Co.

3. A Co is engaged in XXXXXXXXXX.

4. As at the end of its last fiscal year ending XXXXXXXXXX, the non-capital loss balance of A Co was $XXXXXXXXXX which is made up of non-capital losses of $XXXXXXXXXX from the XXXXXXXXXX fiscal year and $XXXXXXXXXX from the XXXXXXXXXX fiscal year.

5. A Co's address is XXXXXXXXXX.

6. A Co's tax affairs are administered by the XXXXXXXXXX Taxation Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

7. B Co is a taxable Canadian corporation incorporated in XXXXXXXXXX under the CBCA.

8. B Co's address is XXXXXXXXXX.

9. XXXXXXXXXX.

10. B Co has been taxable for the past XXXXXXXXXX fiscal years and it is expected that it will be taxable for the fiscal year ended XXXXXXXXXX. Its taxable income was $XXXXXXXXXX for the XXXXXXXXXX fiscal year, $XXXXXXXXXX for the XXXXXXXXXX fiscal year and $XXXXXXXXXX for the XXXXXXXXXX fiscal year.

PROPOSED TRANSACTIONS

11. A Co will file a request to amend its articles of incorporation in order to be authorized to issue an unlimited number of new preferred shares ("A Co Preferred Shares").

12. The A Co Preferred shares will have the following rights and restrictions:

a) the shares will be non-voting;

b) the shares will be entitled to an annual cumulative dividend of XXXXXXXXXX% and will have preference over the common shares for the payment of dividends;

c) the shares will be redeemable at any time for an amount equal to the amount for which they were issued;

d) and the shares will be retractable at any time for an amount equal to the amount for which they were issued.

13. B Co will borrow an amount of $XXXXXXXXXX on a "daylight loan" ("B Co Daylight Loan") basis from Parentco, its parent company. The loan will be non-interest bearing. The principal amount of the B Co Daylight Loan will be $XXXXXXXXXX.

14. B Co will use the proceeds from the B Co Daylight Loan to subscribe for A Co Preferred Shares, having an aggregate redemption and retraction value equal to $XXXXXXXXXX.

15. A Co will use the proceeds from the share issuance to make a demand loan to B Co in an amount equal to $XXXXXXXXXX. B Co will issue a promissory note to A Co that will bear interest of XXXXXXXXXX% per year ("B Co Note").

16. B Co will use the proceeds resulting from the issuance of the B Co Note to repay the B Co Daylight Loan to Parentco.

17. B Co will make the interest payments on the B Co Note held by A Co.

18. On receipt of the interest payments on the B Co Note, A Co will pay dividends on the A Co Preferred Shares held by B Co.

19. Payments of dividends and interest will be made annually.

20. Once sufficient income has been generated in A Co to fully utilize its non-capital losses, A Co will redeem its issued and outstanding A Co Preferred Shares from B Co for a promissory note equal to $XXXXXXXXXX ("A Co Note") and the B Co Note and the A Co Note will be settled at their principal amounts and the two notes will be cancelled simultaneously.

21. Each of A Co and B Co will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note(s) issued by it as part of the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to consolidate profits and losses within a corporate group enabling A Co to earn sufficient interest income on the B Co Note in order to eliminate losses.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Provided that the A Co Preferred Shares continue to be held for the purpose of gaining or producing income from property (other than income that would be exempt), B Co is entitled to deduct for a taxation year pursuant to subsection 20(3) and paragraph 20(1)(c) of the Act the lesser of the interest paid or payable on such portion of the funds borrowed pursuant to the B Co Note as described in paragraph 15 of the Proposed Transactions which are used by B Co to repay the B Co Daylight Loan.

B. Dividends received by B Co on the A Co Preferred Shares as described above will be taxable dividends and such dividends will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of the recipient corporation 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) or 112(2.4) of the Act. None of the dividends referred to above will be subject to tax under Parts IV.1 and VI.1 of the Act.

C. On the redemption of the A Co Preferred Shares:

(a) no dividend will be deemed to be paid by A Co and received by B Co by virtue of subsection 84(3) of the Act; and

(b) B Co will not realize a gain on the disposition of the A Co Preferred Shares by virtue of paragraph 40(1)(a) of the Act.

D. 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 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 B Co on any loan except as specifically set out in the ruling 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,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch