2003 2002-0179811 - 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 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.

Position: Favourable rulings.

Reasons: No new issues - within the law and tax policy.

XXXXXXXXXX 2002-017981

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you requested certain modifications to the advance income tax ruling issued to the above-noted taxpayers on XXXXXXXXXX, 2002 (our file number 2002-016458 and referred to as the "Previous Ruling"). You indicate that the modifications to the Previous Ruling are necessary as a result of new information arising after the Previous Ruling was issued. You also confirm that none of the proposed transactions described in the Previous Ruling have been entered into.

Further to your request, this letter cancels and replaces the Previous Ruling in its entirety. You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request:

(a) is in an earlier return of the taxpayer or a related person;

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

(c) is under objection by the taxpayer or a related person;

(d) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

DEFINITIONS

In this letter, unless otherwise indicated, all dollar amounts referred to herein are in Canadian dollars and unless otherwise indicated:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act and the regulations thereunder are referred to as the "Regulations";and all monetary amounts are expressed in Canadian dollars;

(b) "adjusted cost base" has the meaning assigned by section 54;

(c) "affiliated persons" has the meaning assigned by subsection 251.1(1);

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

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

(f) "fair market value" means the highest amount price available in an open and unrestricted market between informed prudent parties acting at arm's length;

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

(h) XXXXXXXXXX;

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

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

(k) "public corporation" has the meaning assigned by subsection 89(1);

(l) "refundable dividend tax on hand" has the meaning assigned by subsection 129(3);

(m) "related persons" has the meaning assigned by subsection 251(2);

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

(o) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

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

(r) "taxation year" has the meaning assigned by subsection 249(1).

FACTS

1. XXXXXXXXXX ("Lossco") was incorporated under the CBCA on XXXXXXXXXX and is a taxable Canadian corporation. Lossco's CCRA business number is XXXXXXXXXX. Lossco files its federal income tax returns at the XXXXXXXXXX TC but otherwise deals with the XXXXXXXXXX TSO.

2. XXXXXXXXXX ("Profitco") was incorporated under the XXXXXXXXXX and is a taxable Canadian corporation. As of the date hereof, Profitco's share capital consists of an unlimited number of Class "A" subordinate voting shares, issuable in an unlimited number. All the issued and outstanding shares of Profitco are owned by XXXXXXXXXX ("Canco") such that Profitco is a subsidiary wholly-owned corporation of Canco. Profitco's CCRA business number is XXXXXXXXXX. Profitco files its federal income tax returns at the XXXXXXXXXX TC but otherwise deals with the XXXXXXXXXX TSO.

3. Canco was incorporated under the CBCA and is a taxable Canadian corporation and a public corporation whose shares are publicly traded on the XXXXXXXXXX Stock Exchange. As of the date hereof, XXXXXXXXXX ("Forco1") owns XXXXXXXXXX% of the issued and outstanding voting shares of Canco with the remainder of such shares held by the public.

4. Lossco's authorized share capital consists of an unlimited number of common shares. There are currently XXXXXXXXXX common shares of Lossco issued and outstanding with an aggregate paid-up capital of $XXXXXXXXXX. On incorporation of Lossco, one common share was issued to each of its four founding shareholders listed below. On XXXXXXXXXX, Profitco subscribed for an additional XXXXXXXXXX common shares of Lossco for consideration of $XXXXXXXXXX and, during XXXXXXXXXX, Profitco subscribed for an additional XXXXXXXXXX common shares of Lossco for consideration of $XXXXXXXXXX. Each of the other founding shareholders made similar share subscriptions to those by Profitco such that there was never any change in each shareholder's ownership percentage of Lossco at any time. Consequently, its four founding shareholders currently own the common shares of Lossco as follows:

Shareholder
# of common shares
Country of Residence

Profitco
XXXXXXXXXX
Canada
Forco1
XXXXXXXXXX
United States
XXXXXXXXXX ("Forco2")
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX ("Forco3")
XXXXXXXXXX
XXXXXXXXXX

Profitco's aggregate adjusted cost base and aggregate paid-up capital attributable to its XXXXXXXXXX common shares of Lossco is $XXXXXXXXXX.

5. All the issued and outstanding shares of Forco1, Forco2 and Forco3 are owned by XXXXXXXXXX ("Foreign Parent"). Foreign Parent is organized under the laws of XXXXXXXXXX. Consequently, Foreign Parent directly controls each of Forco1, Forco2 and Forco3, and indirectly controls each of Lossco, Canco and Profitco. Accordingly, each of the above corporations are related persons and affiliated persons in relation to each other.

6. Lossco carries on active business operations in Canada in XXXXXXXXXX its four shareholders and related companies related to their businesses. The assets of Lossco consist of cash, accounts receivable, XXXXXXXXXX equipment, furniture and fixtures and intangible assets. Lossco does not own real property or any other property the value of which is derived principally from real property.

7. Profitco carries on an active business in Canada and in the United States. Profitco is a XXXXXXXXXX.

8. Profitco and Lossco both have taxation years that end on XXXXXXXXXX.

9. Lossco has cumulative non-capital losses for tax purposes to XXXXXXXXXX of $XXXXXXXXXX from carrying on its XXXXXXXXXX business described in paragraph 6 above. $XXXXXXXXXX of these non-capital losses were incurred in XXXXXXXXXX and $XXXXXXXXXX were incurred in XXXXXXXXXX. In addition, Lossco is projected to have non-capital losses arising from its operations for its fiscal period which ended in XXXXXXXXXX and for its current fiscal period ending in XXXXXXXXXX.

10. No dividends have been declared or paid by Lossco since its incorporation.

11. Other than the share transactions described in paragraph 4 above, there have been no other transactions involving the shares of Lossco or any other reorganization transactions involving Lossco since its incorporation.

12. The current fair market value of all the issued and outstanding common shares of Lossco is $XXXXXXXXXX.

PROPOSED TRANSACTIONS

13. Profitco, Forco1, Forco2 and Forco3 will incorporate a new corporation ("Newco") under the CBCA with the authorized share capital consisting of an unlimited number of common shares and an unlimited number of voting, XXXXXXXXXX% cumulative, redeemable, retractable, Class B shares. Newco will be a taxable Canadian corporation.

14. Profitco, Forco1, Forco2 and Forco3 will each subscribe for 25% of Newco's common shares. The aggregate subscription price for all of Newco's common shares will be equal to the fair market value of Lossco's net assets and will be paid in cash. Immediately following this share subscription, each shareholder's proportionate shareholding in Newco will equal that shareholder's proportionate shareholding in Lossco.

15. Forco 2 will acquire all the shares of Lossco held by Forco 3 for fair market value consideration. This transaction is being undertaken for XXXXXXXXXX tax planning reasons and does not result in a Canadian income tax advantage.

16. Profitco will acquire all the shares of Lossco held by each of Forco1 and Forco2 (collectively referred to as the "non-resident vendors") and as sole consideration therefor, Lossco will issue to each non-resident vendor a promissory note with a fair market value equal to the fair market value of the Lossco shares so acquired from the particular non-resident vendor. Lossco will become a subsidiary wholly-owned corporation of Profitco. The non-resident vendors will comply with the requirements of section 116. For greater certainty, the aggregate paid-up capital of the shares of Lossco that Profitco will acquire from each non-resident vendor will not be less than the fair market value of the particular promissory note that is issued by Profitco as consideration for such shares.

17. Lossco will then sell all of its business assets (the "Transferred Property") to Newco for consideration consisting of cash, the assumption of debts owing by Lossco at the time of such transfer and a number of newly issued Class B shares of Newco that have a fair market value equal to the aggregate fair market value of the Transferred Property less the aggregate fair market value of the non-share consideration paid by Newco. Where a particular asset included in the Transferred Property is an eligible property, Lossco and Newco will jointly elect under subsection 85(1), in prescribed form and manner and within the time specified by subsection 85(6), an agreed amount such that no gain or loss will arise to Lossco on any such transfer. For greater certainty, for the purposes of each election, the agreed amount will not exceed the FMV of the transferred property, nor will it be less than the amount permitted under paragraph 85(1)(b). For the purposes of each election, no portion of Lossco's liabilities assumed by Newco will be treated as being assumed in consideration for the transfer of a particular property to the extent that the principal amount of such liabilities assumed by Newco would exceed the agreed amount under subsection 85(1) in respect of that transfer.

The amount to be added to the stated capital of the Class B shares, for the purposes of the CBCA, that will be issued by Newco as consideration for the Transferred Property, as described above, will not exceed the amount by which the aggregate cost amounts to Newco of such Transferred Property (as determined under subsection 85(1) where relevant) immediately after their acquisition exceeds the aggregate amount of any non-share consideration paid by Newco in respect of such transfers. For greater certainty, the stated capital addition will not exceed the maximum amount that could be added to the paid-up capital of such shares, having regard to subsection 85(2.1).

18. Newco will then redeem the Class B shares issued to Lossco as described in paragraph 17 above for cash consideration equal to their fair market value.

19. Following completion of the proposed transactions described above, Lossco will be wound-up into Profitco under subsection 88(1) and the business formerly carried on by Lossco will continue to be carried on by Newco.

ADDITIONAL INFORMATION

20. None of the above defined corporations are specified financial institutions.

21. None of the issued shares referred to herein (including the Class B shares to be issued by Newco as described in the proposed transactions described above) are or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is a guarantee agreement;

(b) the subject of a dividend rental arrangement;

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(d) 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).

22. Newco is not expected to have a refundable dividend on hand balance at the time it redeems its class B shares as described in paragraph 18 above nor is Newco expected to generate such a balance from the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

23. The purpose of the proposed transactions is:

a) to reorganize the XXXXXXXXXX business carried on by Lossco by reconstituting it in a new entity which, by eliminating the current significant accounting deficit, will improve financial reporting, and allow such business to be carried on by Newco with a fresh start; and

b) to effect a consolidation of Profitco and Lossco, thereby enabling Profitco to utilize Lossco's 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 set forth below.

A. Profitco will not be considered to have acquire control of Lossco for purposes of subsection 249(4) nor will subsections 111(5) to (5.3) apply to Lossco as a result of Profitco's acquisition of the common shares of Lossco as described in paragraph 16 above.

B. Provided the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply to the wind-up of Lossco into Profitco described in paragraph 19 above such that, for the purposes of computing Profitco's taxable income under Part I or tax payable under Part IV for any taxation year commencing after the commencement of the winding-up, any remaining portion of the non-capital loss from Lossco's business incurred in XXXXXXXXXX and in its current fiscal period ending in XXXXXXXXXX, if any, (each referred to as a "loss year"), referred to in paragraph 9 above, will be deemed, for Profitco's taxation year in which Lossco's particular loss year ended, to be a non-capital loss of Profitco from carrying on Lossco's business that was not deductible by Profitco in computing its taxable income for any taxation year that commenced before the commencement of the winding-up.

For greater certainty, for the purposes of subsection 88(1.1) Lossco will not be considered to have been wound-up until it has been formally dissolved.

C. The amount of any deemed dividend received by Lossco as a result of the redemption by Newco of its class B shares as described in paragraph 18 above, will be a taxable dividend that will be deductible by Lossco pursuant to subsection 112(1) in computing its taxable income for the year in which the dividend is received. 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).

D. By virtue of subsection 186(2) and paragraph 186(4)(a) Lossco will be connected to Newco. Consequently, provided that Newco is not entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to have paid the dividend referred to in Ruling C above, Lossco will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

E. 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 described above, then, by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividend described in Ruling C above. For greater certainty, the proposed transactions described herein, in and by themselves, will not be considered to result in any disposition to or significant increase of an interest by any person or partnership who was not an unrelated person described in any of subparagraphs 55(3)(a)(i) to (v).

F. As a result of the proposed transactions described above, in and by themselves, subsection 245(2) will not apply to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX. These 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 into law, could have an effect on the rulings provided herein.

Other Comments:

Nothing in this letter should be construed as implying that the CCRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) the amount of any non-capital loss or any other amount of any corporation referred to herein; or

(c) any other tax consequence relating to the facts or proposed transactions or any transaction or event taking place either prior to the proposed transactions or subsequent to the proposed transactions, whether described in this letter or not other than those specifically described in the rulings given above.

Yours truly,

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