2003 Ruling 2003-0000483 - 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-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 								2003-000048

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above named corporations. In addition, additional information was provided (XXXXXXXXXX) during a telephone conversation of XXXXXXXXXX. 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;

"B Co." means XXXXXXXXXX, a wholly-owned Canadian subsidiary of A Co;

"CCRA" means the Canada Customs and Revenue Agency;

"Non-capital losses" has the meaning assigned by subsection 111(8) of the Act;

Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. XXXXXXXXXX.

2. A Co. is a publicly traded corporation listed on the XXXXXXXXXX Stock Exchange.

3. XXXXXXXXXX.

4. A Co. has credit facilities comprised of a $XXXXXXXXXX revolving line expiring XXXXXXXXXX, and a $XXXXXXXXXX revolving line expiring XXXXXXXXXX. On any of its anniversaries, A Co. may request that the XXXXXXXXXX facility be extended for an additional year. As of XXXXXXXXXX, A Co. has not drawn on these operating lines.

5. XXXXXXXXXX.

6. A Co. purchased XXXXXXXXXX% of the outstanding common shares of B Co. from an unrelated third party on XXXXXXXXXX.

7. B Co. is engaged in the business of XXXXXXXXXX.

8. The tax affairs of both A Co. and B Co. are serviced by CCRA through the XXXXXXXXXX Taxation Services Office and the corporate returns are filed at the XXXXXXXXXX Taxation Centre.

9. As at the end of its fiscal year ended XXXXXXXXXX, B Co. has a total non-capital loss carry forward balance of $ XXXXXXXXXX which consists of:

	 Year Loss Incurred		Year Loss Expires		Amount of Loss

XXXXXXXXXX

10. A Co. has been consistently taxable for the past XXXXXXXXXX taxation years and it is expected that it will be taxable for the fiscal year ended XXXXXXXXXX.

11. The forecast for B Co. for the XXXXXXXXXX years reflect an estimated Canadian taxable income of $XXXXXXXXXX, respectively, without taking into the account the proposed transaction contemplated described herein.

12. A Co. has investigated restructuring B Co.'s operations into an operating division of A Co and winding up the existing corporation into A Co. A Co. has been advised that due to the nature of B Co.'s product, if B Co. was restructured into a division of A Co., it would be subject to substantial third party product liability. A Co. has elected to protect itself from such claims by not proceeding with wind-up of B Co.

13. The business of B Co., at its XXXXXXXXXX Canadian operating divisions, is virtually unchanged from the nature of the business prior to and at the time of the acquisition. The most current forecast indicates that A Co. acquired and is operating these facilities in anticipation of increased profits from this investment.

XXXXXXXXXX

PROPOSED TRANSACTIONS

14. B Co. will amend its articles of incorporation to authorize the issue of an unlimited number of new preferred shares ("the B Co. Preferred Shares").

15. The B Co. Preferred Shares will have the following rights and restrictions: the shares will be non-voting, entitled to an annual cumulative dividend of XXXXXXXXXX% and will have preference over common shares for the payment of dividends. The shares will be redeemable at any time at the option of B Co. for an amount equal to the amount for which they were issued and any accumulated outstanding dividends.

16. A Co. will subscribe for the purchase of the preferred shares of B Co., having an aggregate value not to exceed $XXXXXXXXXX. A Co. will use cash generated from its steel operations to finalize the purchase of the preferred shares.

17. B Co. will use the proceeds from the preferred share issue to make a demand loan in an amount not to exceed $XXXXXXXXXX to A Co. A Co. will issue a promissory note to B Co. that will bear interest of XXXXXXXXXX% per year ("the A Co. Promissory Note").

18. A Co. will make annual interest payments on the demand note.

19. On receipt of the interest payments on the demand note, B Co. will pay dividends on the B Co. Preferred Shares held by A Co.

20. Once sufficient income has been generated in B Co. to fully utilize its non-capital losses, B Co. will demand payment from A Co. of the principle and any accrued interest on its demand loan, as described in 18 above.

21. Upon receipt of the demand loan payment from A Co., B Co. will redeem its issued and outstanding B Co. Preferred Shares plus any outstanding dividends from A Co.

22. None of the losses (if any) realized by A Co. as a consequence of the interest paid on the A Co. Promissory Note will be carried back by A Co. to taxation years ending before the time of the acquisition of control by A Co. Further, the proposed transactions (described in paragraphs 17 to 22) are not undertaken to create a loss carry-forward period for B Co. beyond its original carry-forward period.

OTHER INFORMATION

23. None of the corporations involved in the proposed transactions are specified financial institutions, as defined in subsection 248(1) of the Act.

24. None of the corporations involved in the proposed transactions has or will have entered into a "dividend rental arrangement", as defined in subsection 248(1) of the Act.

25. None of the shares to be issued as part of the proposed transactions 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

The purpose of the proposed transactions is to consolidate profits and losses within a corporate group enabling B Co. to earn sufficient interest income in order to eliminate losses that it would otherwise 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 continue to be held for the purpose of gaining or producing income from property, the interest paid or payable on the A Co. Promissory Note will be deductible by A Co., 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 A Co. on the B Co. Preferred Shares, as described in paragraph 20 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:

(a) No dividends will be deemed to be received by A Co. on the redemption of the B Co. Preferred Shares, pursuant to subsection 84(3) of the Act; and

(b) No gain or loss will be realized by A Co. on the redemption of the B 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 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 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.

Nothing in this letter should be considered as confirmation by CCRA that B Co., in respect of its non-capital losses described in paragraph 9 above, has met the exceptions described in subsection 111(5) of the Act in respect of the transaction described in paragraph 6 above.

OTHER

On February 18, 2003, as part of the presentation of the Federal budget, the Department of Finance published the following statement concerning the deductibility of interest:

"Recent court decisions have raised uncertainties as to how taxpayers are to treat expenses, in particular interest, in computing income from a business or property for purposes of the Income Tax Act. Most notably, these decisions could lead to inappropriate tax results where a taxpayer derives a tax loss by deducting interest expenses, even if under any objective standard there is no reasonable expectation that the taxpayer would earn any income (as opposed to capital gains), or where the presence or the prospect of revenue (as opposed to income net of expenses) is enough to conclude that an expenditure was incurred "for the purpose of earning income".

Neither of these results is consistent with appropriate tax policy, nor would they have been generally expected under prior law and practice. Therefore legislative amendments to the Income Tax Act will be considered in order to provide continuity in this important area of the law. Before finalizing any proposals, however, the Department of Finance will release them for public consultation, with a general goal of ensuring that they restore continuity with the expected consequences before these recent court decisions."

Yours truly,

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

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