2003 Ruling 2003-0033103 - Loss Utilization in a Related Group

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 in a related group of companies.

Position: The loss utilization is acceptable.

Reasons:

XXXXXXXXXX 2003-003310

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge receipt of your facsimiles as well as the information provided in various telephone conversations.

Throughout this letter, certain corporations will be referred to as follows:

XXXXXXXXXX Profitco
XXXXXXXXXX . Lossco

Profitco and Lossco file their corporate income tax returns at the XXXXXXXXXX Taxation Centre and their tax affairs are administered by the XXXXXXXXXX Tax Services Office. Profitco and Lossco are resident in Canada for the purposes of the Act.

To the best of your knowledge, and that of any of the taxpayers, none of the issues involved in this ruling request is:

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

(ii) under objection by any of the taxpayers or a related person; or

(iii) before the courts.

The taxpayers have represented that the Proposed Transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "Accrued Losses" has the meaning ascribed to it in Paragraph 6 below;

(b) "Act" means the Income Tax Act (Canada), 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;

(c) "cost amount" has the meaning assigned by subsection 248(1);

(d) "CBCA" means the Canada Business Corporations Act and, where applicable, its predecessor statutes;

(e) "CCRA" means the Canada Customs and Revenue Agency;

(f) XXXXXXXXXX.

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

(h) "eligible property" has the meaning assigned by subsection 85(1.1);

(i) XXXXXXXXXX.

(j) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

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

(l) XXXXXXXXXX.

(m) XXXXXXXXXX.

(n) XXXXXXXXXX.

(o) "Newco" means a corporation incorporated by Lossco pursuant to the CBCA as described in Paragraph 7 below;

(p) "Newco Demand Note" has the meaning ascribed to it in Paragraph 12 below;

(q) "Newco Preferred Shares" has the meaning ascribed to it in Paragraph 10 below;

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

(s) XXXXXXXXXX.

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

(u) "Paragraph" means a numbered paragraph in this advance income tax ruling;

(v) "principal amount" has the meaning assigned by subsection 248(1);

(w) "Portfolio" means the portfolio of bonds described in Paragraph 8 below;

(x) "Projected Losses" has the meaning ascribed to it in Paragraph 6 below;

(y) "Proposed Transactions" means the transactions described in Paragraphs 8 to 16 below;

(z) XXXXXXXXXX..

(a.1) "redemption amount" has the meaning ascribed to it in Paragraph 10 below;

(b.1) "Regulations" means the Income Tax Regulations promulgated under the Act XXXXXXXXXX and "prescribed" means prescribed under the Regulations as so defined;

(c.1) XXXXXXXXXX.

(d.1) XXXXXXXXXX.

(e.1) "specified shareholder" has the meaning assigned by subsection 248(1);

(f.1) "subsidiary co
ntrolled corporation" has the meaning assigned by subsection 248(1);

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

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

(i.1) "taxable dividend" has the meaning assigned by subsection 89(1);

(j.1) "taxation year" has the meaning assigned by section 249; and

(k.1) XXXXXXXXXX.

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

FACTS

1. XXXXXXXXXX. Profitco is a subsidiary controlled corporation of Lossco. The authorized capital of Profitco includes common shares and XXXXXXXXXX preferred shares each issuable in one or more series. Only common shares and XXXXXXXXXX preferred shares of Profitco are issued and outstanding. The XXXXXXXXXX preferred shares of Profitco are owned by Lossco and the XXXXXXXXXX preferred shares of Profitco are traded on the XXXXXXXXXX.

2. Lossco was incorporated under the XXXXXXXXXX. Lossco is a taxable Canadian corporation, XXXXXXXXXX. The authorized capital of Lossco includes common shares and XXXXXXXXXX preferred shares, issuable in one or more series. Only common shares of Lossco are issued and outstanding. The common shares of the capital stock of Lossco are listed on the XXXXXXXXXX .

3. Profitco carries on the business of XXXXXXXXXX in Canada XXXXXXXXXX.

4. In addition to carrying on the business of XXXXXXXXXX, Profitco is the parent holding company for several direct and indirect subsidiary wholly-owned or subsidiary-controlled corporations, XXXXXXXXXX.

5. The taxation year end of each of Profitco and Lossco is XXXXXXXXXX.

6. Lossco has incurred the following non-capital losses (the "Accrued Losses"):

Taxation Year

XXXXXXXXXX

In addition, Lossco projects that it will incur the following non-capital losses (the "Projected Losses"):

Taxation Year

XXXXXXXXXX

7. Lossco has incorporated Newco as a new subsidiary wholly-owned corporation of Lossco and subscribed for a nominal amount of common share capital of Newco. The authorized share capital of Newco includes Newco Preferred Shares in addition to common shares. Newco is a taxable Canadian corporation XXXXXXXXXX.

PROPOSED TRANSACTIONS

8. The Portfolio is a portfolio of bonds XXXXXXXXXX and was issued or guaranteed by the government of Canada or a province or municipality or by a corporation. XXXXXXXXXX. At the time of the transfer referred to in Paragraph 9 below, the fair market value of the Portfolio will be approximately $XXXXXXXXXX. The Portfolio XXXXXXXXXX comprises only eligible property. Profitco's cost amount of each bond in the Portfolio will be less than the fair market value thereof.

9. Profitco will transfer the Portfolio to Newco in consideration for the issue by Newco of Newco Preferred Shares. Newco will add to its stated capital account in respect of the Newco Preferred Shares an amount which does not exceed the agreed amount set out in the election to be completed by Profitco and Newco pursuant to section 85 in respect of this transaction as described in Paragraph 11 below.

10. The Newco Preferred Shares will be non-voting preferred shares which are entitled to a fixed preferential non-cumulative dividend at a specified rate and are redeemable at any time at the option of Newco and retractable at any time at the option of the holder for an amount (the "redemption amount") equal to the fair market value of the Portfolio divided by the number of Newco Preferred Shares so issued, plus any declared but unpaid dividends on such share.

11. Profitco and Newco will jointly elect in prescribed form and within the time permitted under section 85, to have the provisions of subsection 85(1) apply to the transfer of the Portfolio by Profitco to Newco, as described in Paragraph 9 above. The agreed amount specified in the election in respect of each eligible property so transferred will be equal to the cost amount of the property to Profitco.

12. Profitco will exercise its right to retract the Newco Preferred Shares and Newco will redeem the Newco Preferred Shares in consideration for the issue by Newco to Profitco of a non-interest-bearing demand note (the "Newco Demand Note") having a principal amount and fair market value equal to the aggregate redemption amount of the Newco Preferred Shares. Accordingly, upon such redemption, Newco will again become a subsidiary wholly-owned corporation of Lossco.

13. Newco will be wound up pursuant to the provisions of the CBCA. On the winding-up, Lossco will receive all of the property of Newco, including the Portfolio, and will assume all of the liabilities of Newco, including the Newco Demand Note. Thereafter, Newco will be dissolved forthwith upon receipt of the applicable regulatory approvals.

14. Lossco will repay the Newco Demand Note in full by transferring the Portfolio to Profitco. The bonds that comprise the Portfolio will be XXXXXXXXXX of Profitco following the transfer.

15. Upon acquiring the Portfolio, as described in Paragraph 14 above, Profitco will treat the Portfolio in the same manner as all of its other investments. Thus, the decision on how long to hold or when to sell each of the specified debt obligations comprising the Portfolio will be made by Profitco's Investments Department predicated on Profitco's business objectives and plans.

16. In the opinion of the external auditors of Profitco and Lossco, under applicable generally accepted accounting principles, the transfers of the Portfolio, described in the Proposed Transactions above, constitute related-party transactions that are not considered to be in the normal course of operations of the relevant transferor and hence should be recorded in the financial statements of the parties to the relevant transaction at the carrying amount of the Portfolio, not the exchanged amount (i.e., the fair market value of the Portfolio).

ADDITIONAL INFORMATION

17. The Proposed Transactions will occur immediately one after the other in the order set out.

18. Each transfer of ownership of the Portfolio described in the Proposed Transactions will be implemented pursuant to an agreement of purchase and sale between the transferor and transferee which will be legally effective and enforceable. In addition, XXXXXXXXXX , the custodian of the Portfolio, will register each transfer of ownership of the Portfolio such that the transferee of the Portfolio will be recorded for all purposes (including in respect of the issuers of bonds comprising the Portfolio and all other interested parties) as the owner of the Portfolio. Accordingly, the transferee will be the only person entitled to enjoy all of the incidents of ownership of the Portfolio until the transferee itself disposes of the Portfolio.

19. None of Profitco, Lossco or Newco is a financial intermediary corporation.

20. None of the Newco Preferred Shares is 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) held on condition that it or property substituted therefor may revert or pass to Profitco or a person to be determined by Profitco. In particular, Newco will acquire the Portfolio from Profitco pursuant to a legally enforceable and effective agreement of purchase and sale which simply contemplates the purchase of the Portfolio by Newco from Profitco for a price equal to the fair market value of the Portfolio. That price will be satisfied by Newco issuing the Newco Preferred Shares to Profitco. The agreement of purchase and sale contains no conditions of any kind relating to the ownership of the Portfolio by Newco. The agreement does not contemplate or require that Profitco exercise its retraction rights with respect to the Newco Preferred Shares or that Newco exercise its right to redeem the Newco Preferred Shares. Nor does the agreement contemplate or require that Newco be dissolved. The agreement also does not contemplate or require that Newco or any other person transfer the Portfolio after Newco acquires the Portfolio pursuant to the agreement. At the time that the Portfolio is transferred by Profitco to Newco, there is no obligation, condition or requirement of any kind for Newco to do anything with the Portfolio. Each of the Proposed Transactions is a separate, self-standing transaction and none is a condition of Newco's holding or ownership of the Portfolio, either as set out in the agreement of purchase and sale pursuant to which Newco acquires the Portfolio or in any other agreement or document relating to the Proposed Transactions.

21. No person is a specified shareholder of Lossco. XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

22. The purpose of the Proposed Transactions is to ensure the orderly utilization of the Accrued Losses of Lossco and to provide for a stream of income in Lossco to absorb the Projected Losses. For financial reporting purposes, Lossco is prohibited from recognizing the tax recovery associated with most of the Accrued Losses and the Projected Losses unless Lossco is able to demonstrate the existence of sufficient taxable income of Lossco against which such losses may be offset within the applicable carryforward period for tax purposes. Therefore, the purpose of the Proposed Transactions is to enable Lossco to earn sufficient taxable income in the XXXXXXXXXX and subsequent taxation years of Lossco to enable Lossco to utilize the Accrued Losses and the Projected Losses and thereby permit Lossco to recognize the related benefit of such utilization for financial reporting purposes. XXXXXXXXXX .

RULINGS GIVEN

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

A. The provisions of subsection 85(1) will apply to the transfer of the Portfolio from Profitco to Newco, as described in Paragraph 9 above, such that:

(a) the agreed amount in respect of each XXXXXXXXXX debt obligation so transferred will be deemed to be Profitco's proceeds of disposition thereof and Newco's cost thereof; and

(b) the cost to Profitco of the Newco Preferred Shares received as consideration for the transfer will be equal to the aggregate of the agreed amounts in respect of each of the XXXXXXXXXX debt obligations comprising the Portfolio.

For greater certainty, paragraph 85(1)(e.2) will not apply to these transfers.

B. As a result of the redemption of the Newco Preferred Shares, described in Paragraph 12 above:

(a) by virtue of paragraphs 84(3)(a) and (b), Newco will be deemed to have paid, and Profitco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the Newco Preferred Shares exceeds the paid-up capital thereof, immediately before such redemption;

(b) the taxable dividend deemed to be received by Profitco, referred to in Ruling B(a) above, will be included in Profitco's income pursuant to paragraph 12(1)(j), and will be deductible by Profitco in computing its taxable income for the taxation year in which such dividend is deemed to have been received XXXXXXXXXX For greater certainty, subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the application of such deduction in respect of such dividends;

(c) the taxable dividend deemed to be received by Profitco, referred to in Ruling B(a) above, will be excluded in computing Profitco's income under section 9;

(d) Profitco will not be subject to Part IV tax under subsection 186(1) in respect of the dividend referred to in Ruling B(a) above;

(e) Profitco will not be subject to Part IV.1 tax under section 187.2 in respect of the dividend referred to in Ruling B(a) above; and

(f) Newco will not be subject to Part VI.1 tax under subsection 191.1 in respect of the dividend referred to in Ruling B(a) above.

C. As a result of the wind-up of Newco, described in Paragraph 13 above:

(a) XXXXXXXXXX ;

(b) the shares of Newco owned by Lossco immediately before the winding-up shall be deemed to have been disposed of by Lossco on the winding-up for proceeds equal to the greater of the amounts determined in subparagraphs 88(1)(b)(i) and (ii); and

(c) pursuant to paragraphs 88(1)(e.2) XXXXXXXXXX Lossco shall be deemed, in respect of each XXXXXXXXXX debt obligation distributed to it on the winding-up, to be the same corporation as, and a continuation of, Newco.

D. XXXXXXXXXX

E. XXXXXXXXXX

F. 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, then, by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Ruling B above. For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

G. The provisions of subsections 15(1) and 56(2) will not be applied to the Proposed Transactions, in and by themselves.

H. Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX .

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 have an effect on the rulings provided herein.

COMMENTS

1. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset, the paid-up capital in respect of any shares referred to herein, or the non-capital losses or net capital losses of any corporation; or

(b) any tax consequences relating to the facts and Proposed Transactions described herein 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

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