2004 Ruling 2004-0081691R3 - Forgive debt; AL transfer of debtor/lossco Canco

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.

Principal Issues: Whether ATR-66 applies

Position: Yes - Parentco creditor, Targetco debtor (which has tax losses), and Acquisition Co are all taxable Canadian corporations

Reasons: Reasons in ATR-66

XXXXXXXXXX
2004-008169
XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX ("Canadian Sub")
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX and your subsequent electronic correspondence, wherein you requested an advance income tax ruling on behalf of the above taxpayers.

To the best of your knowledge and that of the taxpayers involved, the proposed transactions will not impact the ability of the taxpayers involved to pay their existing tax liabilities.

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

(i) dealt with in an earlier return of the taxpayers 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

In this letter, the following definitions are used:

(a) "ACB", or " adjusted cost base", has the meaning in section 54 of the Act;

(b) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof;

(c) "arm's length" has the meaning in section 251 of the Act;

(d) "Arrangement" has the meaning set out in Paragraph 3;

(e) "Canadian Acquisition Co" means a new corporation that Canco will incorporate under the Corporate Act. Canadian Acquisition Co will be a taxable Canadian corporation and a subsidiary wholly-owned corporation of Canco;

(f) "Canadian Sub" means a new corporation as described in Paragraph 11;

(g) "Canadian Sub Debt" has the meaning set out in Paragraph 12;

(h) "Canadian Sub Note" has the meaning set out in Paragraph 12;

(i) "Canadian Target" means XXXXXXXXXX;

(j) "Canadian Target's Debt" has the meaning set out in Paragraph 13;

(k) "Canadian Target's Indebtedness" has the meaning set out in Paragraph 6;

(l) "Canadian Target's Parent" or "Canadian Parent of Canadian Target" means XXXXXXXXXX. Prior to XXXXXXXXXX, XXXXXXXXXX was a public corporation and its shares were listed on the Stock Exchange;

(m) "Canadian Target Shares" means the Class A and Class B common shares and the preferred shares of Canadian Target as described in Paragraph 4;

(n) "Canco" means XXXXXXXXXX. Canco was incorporated under the laws of XXXXXXXXXX. Its corporate tax number is XXXXXXXXXX and it files its annual income tax return at the XXXXXXXXXX TSO. The registered and principal office of Canco is situated at XXXXXXXXXX;

(o) "Canco common shares" mean the common shares of Canco as described in Paragraph 1. The Canco common shares are listed on the Stock Exchange under the stock symbol XXXXXXXXXX;

(p) "capital property" has the meaning in section 54 of the Act;

(q) "CCA" means capital cost allowance;

(r) "CDE" or "Canadian development expense" has the meaning in subsection 66.2(5) of the Act;

(s) "CEE" or "Canadian exploration expense" has the meaning in subsection 66.1(6) of the Act;

(t) "commercial obligation" has the meaning in subsection 80(1) of the Act;

(u) "commercial debt obligation" has the meaning in subsection 80(1) of the Act;

(v) "Corporate Act" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

(w) "cost amount" has the meaning in subsection 248(1) of the Act;

(x) "CRA" means the Canada Revenue Agency;

(y) "Denied Loss" has the meaning set out in Ruling A;

(z) "FEDE" or "foreign exploration and development expenses" has the meaning in subsection 66(15) of the Act;

(aa) "FMV" means fair market value;

(bb) "foreign country" means XXXXXXXXXX;

(cc) "Foreign Grandparent" or "Foreign Grandparent of Canadian Target" means XXXXXXXXXX. As a result of the Arrangement (described in Paragraph 3), the shares of Foreign Grandparent were listed on the Stock Exchange under the symbol XXXXXXXXXX and on the XXXXXXXXXX Stock Exchange;

(dd) "non-resident" has the meaning in subsection 248(1) of the Act;

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

(ff) "principal amount" has the meaning in subsection 248(1) of the Act;

(gg) "Proposed Transactions" means the transactions described in Paragraphs 11 to 14;

(hh) "Provincial Corporate Act" means the Business Corporations Act XXXXXXXXXX;

(ii) "public corporation" has the meaning in subsection 89(1) of the Act;

(jj) "Stock Exchange" means XXXXXXXXXX Stock Exchange;

(kk) "subsidiary wholly-owned corporation" has the meaning in subsection 248(1) of the Act ;

(ll) "tax pools" has the meaning set out in Paragraph 8;

(mm) "taxable Canadian corporation" has the meaning in subsection 89(1) of the Act;

(nn) "TC" means Taxation Centre; and

(oo) "TSO" means Tax Services Office.

STATEMENT OF FACTS

1. Canco is governed by the Corporate Act and is a taxable Canadian corporation and a public corporation.

Canco is authorized to issue an unlimited number of common shares (the "Canco common shares") and XXXXXXXXXX preferred shares, issuable in series. There are no preferred shares outstanding. As at XXXXXXXXXX , there were XXXXXXXXXX Canco common shares issued and outstanding.

Canco, directly and indirectly through its subsidiaries, engages in the acquisition, exploration, development and mining of XXXXXXXXXX .

2. Foreign Grandparent of Canadian Target is a corporation governed by the laws of foreign country and a non-resident of Canada.

3. Canadian Parent of Canadian Target is governed by the Corporate Act and is a taxable Canadian corporation. In XXXXXXXXXX , Canadian Target's Parent became a wholly-owned subsidiary of Foreign Grandparent through a share exchange arrangement involving shareholders of Canadian Target's Parent (the "Arrangement").

4. Canadian Target subsists under the Corporate Act and is a taxable Canadian corporation and a wholly-owned subsidiary of Canadian Target's Parent and an indirect subsidiary of Foreign Grandparent. Canadian Target is authorized to issue an unlimited number of Class A common shares, an unlimited number of Class B common shares and XXXXXXXXXX preferred shares of which there are issued and outstanding and held by Canadian Target's Parent, XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares (collectively, the "Canadian Target Shares").

5. For a number of years, Canadian Target's Parent, inter alia, advanced funds to Canadian Target to finance its operations.

6. As at XXXXXXXXXX , Canadian Target was indebted to Canadian Target's Parent (the "Canadian Target's Indebtedness") in the approximate amount of CDN$XXXXXXXXXX .

7. The Canadian Target's Indebtedness is a capital property of Canadian Target's Parent and a commercial obligation and commercial debt obligation issued by Canadian Target. Canadian Target's Parent has a cost amount in the Canadian Target's Indebtedness equal to the principal amount of the Canadian Target's Indebtedness and Canadian Target's Parent has not claimed a bad debt under section 50 of the Act.

8. As at XXXXXXXXXX , Canadian Target had the following undeducted expenses ("tax pools"):

Canadian Target
Regular			Successor
Non capital losses (see below)	    XXXXXXXXXX
Net capital losses carryforward expire on change of control  XXXXXXXXXX
CEE	  XXXXXXXXXX  XXXXXXXXXX
CDE	  XXXXXXXXXX
FEDE	  XXXXXXXXXX
UCC	      XXXXXXXXXX
Earned depletion 					                               .
         XXXXXXXXXX  

XXXXXXXXXX XXXXXXXXXX

The losses of Canadian Target were realized in the following years and in the following amounts:

	Year of origin	Amount in XXXXXXXXXX
Losses of Canadian Target	XXXXXXXXXX        XXXXXXXXXX
	XXXXXXXXXX        XXXXXXXXXX
	XXXXXXXXXX        XXXXXXXXXX
	XXXXXXXXXX       XXXXXXXXXX
	XXXXXXXXXX       XXXXXXXXXX 

XXXXXXXXXX

9. The principal amount of Canadian Target's Indebtedness is greater than its FMV.

10. Canco and Canadian Target's Parent deal at arm's length with each other.

PROPOSED TRANSACTIONS

11. Canadian Target will incorporate a new corporation, Canadian Sub, under the Provincial Corporate Act, which will be a taxable Canadian corporation. Canadian Target will own all of the issued and outstanding shares of Canadian Sub.

12. Canadian Target's Parent will sell the Canadian Target's Indebtedness to Canadian Sub at FMV for consideration consisting only of a demand non-interest bearing note payable by Canadian Sub (the "Canadian Sub Note"). As a result, Canadian Sub will become indebted to Canadian Target's Parent (the "Canadian Sub Debt") in an amount equal to the principal amount of the Canadian Sub Note.

13. Canadian Sub will wind-up into Canadian Target pursuant to the provisions of the Provincial Corporate Act. As a result of the winding-up, Canadian Target's Indebtedness will be settled without any payment being made by Canadian Target. Also, Canadian Target will be indebted to Canadian Target's Parent in an amount (the "Canadian Target's Debt") equal to the principal amount of the Canadian Sub Note.

Canadian Target will elect, in prescribed form and within the time referred to in paragraph 80.01(4)(c) of the Act, to have the rules in subsection 80.01(4) of the Act apply with respect to the settlement of the Canadian Target's Indebtedness as a result of the winding-up of Canadian Sub.

Pursuant to a share exchange agreement to be entered into among Canco and Canadian Target's Parent, Canadian Target's Parent will agree to sell its Canadian Target Shares and Canadian Target's Debt to Canco for consideration consisting of Canco common shares and warrants having a total FMV at the time of sale equal to the total FMV at that time of the shares of Canadian Target and the Canadian Target's Debt.

Canco will be entitled, under the share exchange agreement, to assign its rights to Canadian Acquisition Co and anticipates that it will do so.

As a result, Canadian Target's Parent will sell the Canadian Target Shares and Canadian Target Debt to Canadian Acquisition Co for Canco common shares and warrants. Canadian Acquisition Co will enter into an agreement with Canco pursuant to which Canco will agree to issue Canco common shares and warrants to Canadian Target's Parent in consideration for Canadian Acquisition Co issuing Canadian Acquisition Co common shares to Canco having a FMV at the time of issue equal to the total FMV at that time of the shares of Canadian Target and Canadian Target's Debt.

The current shareholders of Canco will hold more than XXXXXXXXXX % of the Canco common shares after the purchase so that there will be an acquisition of Canadian Target for purposes of the Act.

PURPOSE OF THE PROPOSED TRANSACTIONS

15. The Proposed Transactions are part of a series of transactions that will permit Canadian Acquisition Co to acquire all of the issued and outstanding shares of Canadian Target. The Proposed Transactions will permit Canadian Acquisition Co to preserve the tax pools of Canadian Target (subject to the application of subsections 66.7(10) and 111(5) of the Act).

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant warranties on page 1 of this advance income tax ruling, as well as 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 set forth below:

A. Paragraph 40(2)(e.1) of the Act will apply to deem any capital loss realized by Canadian Target's Parent on the disposition of the Canadian Target's Indebtedness to Canadian Sub to be nil. The amount of any capital loss otherwise realized on the disposition which is deemed to be nil is referred to as the "Denied Loss".

B. The amount of the Denied Loss will be added in computing the adjusted cost base of the Canadian Target's Indebtedness to Canadian Sub pursuant to paragraph 53(1)(f.1) of the Act so that the cost amount to Canadian Sub of the Canadian Target's Indebtedness will be equal to the principal amount of such indebtedness.

C. Subsection 80.01(4) of the Act will apply to deem the Canadian Target's Indebtedness owing by Canadian Target to Canadian Sub immediately prior to the winding-up ("that time") to have been settled by payment of an amount equal to the amount that would be the cost amount to Canadian Target of the Canadian Target's Indebtedness at that time if the definition of cost amount were given the meaning set out in subsection 80.01(4) of the Act.

D. As a result of the Proposed Transactions, in and by themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the Rulings.

CAVEAT

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding provided the Proposed Transactions are completed on or before XXXXXXXXXX .

These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) other than in Rulings B and C, the cost amount, principal amount, or fair market value of any property referred to in this letter;

(ii) the accuracy of any amounts referred to in this letter;

(iii) the GST implications of any of the proposed transactions;

(iv) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
.../cont'd