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 -utilization within a corporate group
Position TAKEN: Acceptable
Reasons: Meets the technical requirements of the Act, including 20(1)(c), and is not an abuse of the Act as per Finance's technical notes to section 245.
XXXXXXXXXX 2002-016240
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX and further to telephone conversations of XXXXXXXXXX and further to additional information provided on XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above named corporations. In general terms, the transactions described herein involve the use of losses within a group of affiliated corporations.
To the best of your knowledge and that of the taxpayers involved, none of the issues involved contained herein is:
(i) in an earlier return of one of the taxpayers or of a person related to them;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one of the taxpayers or a related person;
(iii) under objection by one of the taxpayers, or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously issued by the Directorate.
DEFINITIONS
In this letter, the following terms have the meanings specified:
"Act" means the Income Tax Act, R.S.C. 1985 (5 Supp.) c. l, as amended to the date hereof;
"A Co" means XXXXXXXXXX, the corporation described in paragraphs 18 to 21;
"A Co Note I" means the promissory note described in paragraph 34;
"Adjusted cost base" has the meaning assigned by section 54 of the Act;
"Arm's length" has the meaning assigned by section 251 of the Act;
"B Co" means XXXXXXXXXX, a corporation created under the XXXXXXXXXX Business Corporations Act on XXXXXXXXXX. It is a taxable Canadian corporation and a subsidiary wholly-owned corporation of C Co;
"B Co Preferred Shares" means the shares of B Co's capital stock described in paragraph 24;
"CCRA" means the Canada Customs and Revenue Agency;
"C Co" means XXXXXXXXXX , the corporation described in paragraphs 1 to 7;
"C Co Note II" means the promissory note described in paragraph 26;
"D Co" means XXXXXXXXXX , the corporation described in paragraph 8 to 12;
"D Co Class B Common Shares" means the common shares of D Co described in paragraph 11;
"D Co Preferred Shares" means the preferred shares of D Co described in paragraph 11;
"D Co Note I" means the promissory note described in paragraph 23;
"FMV" represents fair market value, which means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;
"I Co" means XXXXXXXXXX, the corporation described in paragraphs 13 to 17;
"I Co Class A Common Shares" means the common shares of I Co described in paragraph 14;
"I Co Common Shares" means the common shares of I Co described in paragraph 14;
"I Co Note II" means the promissory note described in paragraph 31;
"I Co Preferred Shares" means the preferred shares of I Co described in paragraph 33;
"Non-capital losses" has the meaning assigned by subsection 111(8) of the Act;
"Private corporation" has the meaning assigned by subsection 89(1) of the Act;
"Public corporation" has the meaning assigned by subsection 89(1) of the Act;
"Subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act;
"Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
"Taxable dividend" has the meaning assigned by subsection 89(1) of the Act.
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1. C Co (XXXXXXXXXX) is located at XXXXXXXXXX. C Co is serviced by the XXXXXXXXXX Services Taxation Office and files its returns at the XXXXXXXXXX Taxation Centre.
2. C Co is a public corporation and a taxable Canadian corporation. XXXXXXXXXX C Co is traded on the XXXXXXXXXX Stock Exchange under the symbol XXXXXXXXXX.
3. C Co was incorporated under the XXXXXXXXXX Business Corporation Act on XXXXXXXXXX.
4. As of XXXXXXXXXX, C Co had XXXXXXXXXX common shares issued and outstanding, representing all of its issued and outstanding shares.
5. As at XXXXXXXXXX, no single shareholder or any related group owned more than XXXXXXXXXX% of the issued and outstanding shares of C Co.
6. As at XXXXXXXXXX, the balance of non-capital losses of C Co amounted to $XXXXXXXXXX, which were realized in the following years:
XXXXXXXXXX.
7. C Co's taxation year-end is XXXXXXXXXX.
8. D Co (XXXXXXXXXX) is located at XXXXXXXXXX and is serviced by the XXXXXXXXXX Services Taxation Office and files its tax return at the XXXXXXXXXX Taxation Centre.
9. D Co is a taxable Canadian corporation that is governed by the XXXXXXXXXX Business Corporation Act. D Co was formed by statutes of amalgamation, on XXXXXXXXXX, from the amalgamation of XXXXXXXXXX.
10. D Co is a subsidiary wholly-owned corporation of C Co and D Co's year-end is XXXXXXXXXX.
11. The authorized share capital of D Co consists of:
a) An unlimited number of Common Shares and Class B Common Shares. The Common Shares and Class B Common Shares are participating shares and entitled to XXXXXXXXXX votes per share respectively;
b) An unlimited number of preference shares, without par value, non-voting, without preference or priority in the payment of dividends, redeemable, retractable and entitled to an annual cumulative dividend of XXXXXXXXXX% for the amount of their stated capital.
12. As at XXXXXXXXXX, D Co had XXXXXXXXXX Class B common shares issued and outstanding, representing all of its issued shares.
13. I Co (XXXXXXXXXX) is located at XXXXXXXXXX. I Co is serviced by the XXXXXXXXXX Services Taxation Office and files its return at the XXXXXXXXXX Taxation Centre.
14. I Co was incorporated on XXXXXXXXXX and is governed by the XXXXXXXXXX Business Corporation Act. It is a taxable Canadian corporation. It currently has two classes of shares: Class A Common Shares and Common Shares. Only the Class A Common Shares are issued and outstanding. The Common Shares and the Class A Common Shares are participating shares. Each Common Share is entitled to one vote and each Class A Common Share is entitled to XXXXXXXXXX votes.
15. I Co is a subsidiary wholly-owned corporation of C Co.
16. XXXXXXXXXX.
17. I Co's taxation year-end is currently XXXXXXXXXX.
18. A Co (XXXXXXXXXX) is located at XXXXXXXXXX, is serviced by the XXXXXXXXXX Services Taxation Office and files its income tax return at the XXXXXXXXXX Taxation Centre.
19. A Co is a taxable Canadian corporation that is governed by the XXXXXXXXXX Business Corporation Act. A Co was incorporated on XXXXXXXXXX.
20. A Co is a subsidiary wholly-owned corporation of C Co. XXXXXXXXXX.
21. A Co's taxation year-end is currently XXXXXXXXXX.
PROPOSED TRANSACTIONS
C Co, D Co. and B Co Plan
22. C Co will borrow $XXXXXXXXXX, bearing interest from an arm's length financial institution (the "Bank"). The amount of $XXXXXXXXXX has been established by the management of C Co based on the availability of their credit facilities and borrowing capacity. Further, the credit agreement with the Bank supports that C Co could commercially borrow these funds.
23. C Co will lend $XXXXXXXXXX to D Co in exchange for a XXXXXXXXXX% interest bearing promissory note ("D Co Note I").
24. D Co will subscribe for B Co Preferred Shares for a total amount of $XXXXXXXXXX. B Co Preferred Shares are non-voting, non-participating, and redeemable at the option of the holder and entitled to a cumulative dividend of XXXXXXXXXX% of the capital invested per year.
25. The aggregate redemption and retraction value, the fair market value and the adjusted cost base and the paid-up capital of the B Co Preferred Shares issued will be $XXXXXXXXXX.
26. B Co will use the amount received in the transaction described in paragraph 24 to make a non-interest bearing loan of $XXXXXXXXXX to C Co. This loan will be evidenced by a promissory note bearing no interest ("C Co Note II").
27. Upon receipt of the loan from B Co, C Co will repay the Bank loan received in paragraph 22 above.
28. Annually, C Co will subscribe for additional B Co Common Shares. The number of shares subscribed for and the amount paid in consideration of the subscription will be determined by the value of the annual dividend payable on the B Co Preferred Shares. The proceeds of the subscription will be used for the payment of the annual dividend on the B Co Preferred Shares.
29. Upon receipt of the annual dividends on the B Co Preferred Shares, D Co. will pay the accrued interest on D Co Note I.
C Co, D Co and I Co plan
30. C Co will exchange Class B Common Shares of D Co for Preferred Shares having a redemption and retraction amount of $XXXXXXXXXX and Common Shares. The aggregate FMV of the D Co Preferred Shares and D Co Common Shares will be equal to the FMV of the Class B Common Shares immediately before the exchange. The exchange will be completed under subsection 85(1) of the Act.
31. On the same day as the transaction described in paragraph 30, C Co will transfer, at FMV, the Preferred Shares in D Co to I Co. As consideration, I Co will issue one common share and a XXXXXXXXXX% interest-bearing promissory note ("I Co Note II") to C Co equal to the FMV of the Preferred Shares ($XXXXXXXXXX). The exchange will be completed under subsection 85(1) of the Act.
32. Upon receipt of the annual dividends on the D Co Preferred Shares, I Co will pay the accrued interest on the I Co Note II.
C Co, A Co, and I Co plan
33. C Co will exchange the Class A Common Shares of I Co for I Co Preferred Shares and Common Shares having an aggregate FMV equal to the FMV of the Class A Common Shares immediately before the share exchange. The Preferred Shares ($XXXXXXXXXX) will be non-voting, non-participating, redeemable at the option of the holder and entitled to an annual cumulative dividend at XXXXXXXXXX%, payable quarterly. The exchange will be completed under subsection 85(1) of the Act.
34. On the same day as the transaction described in paragraph 33, C Co will transfer the I Co Preferred Shares to A Co. As consideration, A Co will issue one common share and a XXXXXXXXXX% interest-bearing promissory note ("A Co Note I") to C Co equal to the FMV of the I Co Preferred Shares ($XXXXXXXXXX ). The exchange will also be completed under subsection 85(1) of the Act.
35. Upon receipt of the annual dividends on the I Co Preferred Shares, A Co will pay the accrued interest on the A Co Note I.
Proposed unwind of the C Co, D Co and B Co plan
36. XXXXXXXXXX years after the implementation of the previous paragraphs (22 to 35), C Co will borrow $XXXXXXXXXX dollars from the Bank.
37. On the same day as the transaction described in paragraph 36, C Co will use the proceeds of the loan to repay the C Co Note II.
38. On the same day as the transaction described in paragraph 36, B Co will redeem all of its B Co Preferred Shares issued to D Co for a total redemption price of $XXXXXXXXXX, which will represent the aggregate redemption value, the fair market value, the paid-up capital and adjusted cost base of the B Co Preferred Shares.
39. On the same day as the transaction described in paragraph 36, D Co will use the proceeds of the above redemption to repay the $XXXXXXXXXX D Co Note I to C Co.
40. On the same day as the transaction described in paragraph 36, C Co will use the proceeds received from D Co in paragraph 39 above to repay the loan to the Bank.
41. C Co will cause B Co to be wound up under subsection 88(1) of the Act and dissolved on the same date.
Proposed unwind of the C Co, D Co and I Co plan
42. On the same day as the transaction described in paragraph 36, C Co will borrow $XXXXXXXXXX from the Bank and use the proceeds of the loan to subscribe for additional Common Shares of D Co.
43. On the same day as the transaction described in paragraph 36, D Co will redeem the Preferred Shares issued to I Co for a total redemption price of $XXXXXXXXXX, which will represent the aggregate redemption value, the fair market value, the paid-up capital and adjusted cost base of the D Co Preferred Shares.
44. On the same day as the transaction described in paragraph 36, I Co will use the proceeds of the above redemption to repay the $XXXXXXXXXX I Co Note II to C Co.
45. C Co will use the proceeds received from I Co in the transaction described on paragraph 44 above to repay the loan from the Bank.
Proposed unwind of the C Co, A Co and I Co plan
46. On the same day as the transaction described in paragraph 36, C Co will borrow $XXXXXXXXXX from the bank and use the proceeds of the loan to subscribe for additional Common Shares of I Co.
47. On the same day as the transaction described in paragraph 36, I Co will redeem the Preferred Shares issued to A Co for a total redemption price of $XXXXXXXXXX, which will represent the aggregate redemption value, the fair market value, the paid-up capital and adjusted cost base of the I Co Preferred Shares.
48. On the same day as the transaction described in paragraph 36, A Co will use the proceeds of the above redemption to repay the $XXXXXXXXXX A Co Note I to C Co.
49. C Co will use the proceeds received from A Co in paragraph 48 above to repay the loan from the Bank.
Other representations
50. None of the proposed transactions (described in paragraphs 22 to 35) will have a significant impact on any outstanding tax liabilities of the taxpayers identified other than the earning of interest income by C Co to fully utilize its non-capital losses and the corresponding interest expense for A Co, I Co and D Co.
51. None of the losses (if any) realized by A Co, I Co or D Co as a consequence of the interest paid on the A Co Note I, I Co Note II, or the D Co Note I, will be carried back by A Co, I Co or D Co respectively, to taxation years ending before the time of the acquisition of control by C Co. Further, the proposed transactions (described in paragraphs 22 to 35) are not undertaken to create a loss carry-forward period for C Co beyond its original carry-forward period.
52. None of the corporations involved in the proposed transactions (described in paragraphs 22 to 35) are specified financial institutions as defined by subsection 248(1) of the Act.
53. None of the corporations involved in the proposed transaction (described in paragraphs 22 to 35) has or will have entered into a "dividend rental arrangement" as defined by subsection 248(1) of the Act.
54. None of the shares to be issued as part of the proposed transactions (described in paragraphs 22 to 35) will be issued or acquired as part of a transaction or a series of transactions of the type described in subsection 112(2.5) of the Act.
PURPOSE OF THE PROPOSED TRANSACTIONS
55. The purpose of the proposed transactions is to consolidate profits and losses within a related group enabling C Co to earn sufficient interest income to eliminate losses that it would otherwise incur/expire in its XXXXXXXXXX and/or subsequent taxation years.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purpose of the proposed of the proposed transactions, and provided that the transactions are completed as proposed, we rule as follows:
A. Provided that the B Co Preferred Shares, the D Co Preferred Shares and the I Co Preferred Shares continue to be held for the purpose of gaining or producing income from property, the interest paid or payable on the D Co Note I of $XXXXXXXXXX and the I Co Note II of $XXXXXXXXXX and the A Co Note I of $XXXXXXXXXX, will be deductible by D Co, I Co and A Co respectively, pursuant to paragraph 20(l)(c) of the Act to the extent that such amount does not exceed a reasonable amount.
B. Dividends received by D Co on the B Co Preferred Shares as described in paragraph 29 above, dividends received by I Co on the D Co Preferred Shares as described in paragraph 32 above and dividends received by A Co on the I Co Preferred Shares as described in paragraph 35 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 subsections 112(2.3) or 112(2.4) of the Act.
C On the redemption of the B Co Preferred Shares, the D Co Preferred Shares and the I Co Preferred Shares:
(a) No dividends will be deemed to be received by D Co on the redemption of the B Co Preferred Shares, no dividends will be deemed to be received by I Co on the redemption of the D Co Preferred Shares, and no dividends will be deemed to be received by A Co on the redemption of the I Co Preferred Shares pursuant to subsection 84(3) of the Act; and
(b) No gain or loss will be realized by D Co on the redemption of the B Co Preferred Shares, no gain or loss will be realized by I Co on the redemption of the D Co Preferred Shares and no gain or loss will be realized by A Co on the redemption of the I Co Preferred Shares by virtue of paragraph 40(1)(a) of the Act.
D. The provisions of subsection 15(1) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 22 to 35 above, in and by themselves.
E. 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 forth in Information Circular 70-6R5 dated May 17, 2002 issued by the CCRA, and are binding provided the proposed transactions other than the proposed unwind described in paragraphs 36 to 49 above, are completed by XXXXXXXXXX.
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,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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