2004 Ruling 2004-0088541R3 - 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.

Principal Issues: Loss utilization in a related group of companies.

Position: The loss utilization is acceptable.

Reasons: Consistent with our position in previous rulings and with Department of Finance policy.

XXXXXXXXXX 2004-008854

XXXXXXXXXX , 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
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 emails as well as the information provided in various telephone conversations.

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

XXXXXXXXXX . Parentco
XXXXXXXXXX . Lossco
XXXXXXXXXX . Profitco
XXXXXXXXXX . Subco

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

To the best of your knowledge and that of the taxpayers, none of the issues 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 confirmed that the transactions described herein will not result in any taxpayer described herein being unable to pay its 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) "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, subparagraph or clause is a reference to the relevant provision of the Act;

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

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

(d) "BCA" means the Business Corporations Act (XXXXXXXXXX);

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

(f) "Class A Preferred Shares" means the preferred shares of Lossco, as described in Paragraph 12 below;

(g) "Class AA Preferred Shares" means the preferred shares of Subco, as described in Paragraph 14 below;

(h) "Consolidated Note" means the promissory note payable by Subco to Profitco, as described in Paragraph 11 below;

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

(j) "cumulative eligible capital" has the meaning assigned by subsection 14(5);

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

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

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

(n) XXXXXXXXXX;

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

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

(q) "Preferred Shares" means the Class A Preferred Shares and the Class AA Preferred Shares;

(r) "Prime" means the prime rate of interest of a Canadian chartered bank;

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

(t) "proposed transactions" means the transactions described in Paragraphs 9 to 17 below;

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

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

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

FACTS

1. Parentco is a taxable Canadian corporation governed by the laws of XXXXXXXXXX.

2. Lossco is a taxable Canadian corporation governed by the laws of Canada. All of the issued and outstanding shares of Lossco are held by Parentco.

3. Lossco has a XXXXXXXXXX taxation year-end. Lossco has approximately $XXXXXXXXXX of non-capital losses available for carry-forward from its XXXXXXXXXX taxation year, approximately $XXXXXXXXXX of non-capital losses available for carry-forward from its XXXXXXXXXX taxation year, and approximately $XXXXXXXXXX of non-capital losses available for carry-forward from its XXXXXXXXXX taxation year (approximately $XXXXXXXXXX of the non-capital losses available for carry-forward from its XXXXXXXXXX taxation year and $XXXXXXXXXX of the non-capital losses available for carry-forward from its XXXXXXXXXX taxation year are deemed to be non-capital losses of Lossco by virtue of paragraph 88(1.1)(c) on the winding up of XXXXXXXXXX. that commenced in Lossco's XXXXXXXXXX taxation year). Lossco had a cumulative eligible capital balance of approximately $XXXXXXXXXX as at the end of its XXXXXXXXXX taxation year. In the absence of the proposed transactions, Lossco may not be able to substantially utilize its non-capital losses available for carry-forward within the carry-forward period provided by paragraph 111(1)(a) or its deductions under 20(1)(b) in respect of its cumulative eligible capital balance.

4. Profitco is a taxable Canadian corporation governed by the laws of XXXXXXXXXX . All of the issued and outstanding shares of Profitco are held by Parentco.

5. Profitco has a XXXXXXXXXX taxation year-end. In the absence of the proposed transactions, Profitco is expected to generate significant taxable income in its XXXXXXXXXX and subsequent taxation years. It is not anticipated that the proposed transactions will result in non-capital losses being incurred by Profitco in its XXXXXXXXXX or subsequent taxation years.

6. Subco is a taxable Canadian corporation governed by the laws of Canada. All of the issued and outstanding common shares of Subco are held by Profitco.

7. Lossco, Profitco and Subco are affiliated persons.

8. Profitco holds XXXXXXXXXX promissory notes payable by Subco. These XXXXXXXXXX promissory notes have an aggregate principal amount of $XXXXXXXXXX and bear interest at floating rates based on a spread above Prime. Each of these XXXXXXXXXX promissory notes is payable on demand. Subco has the right to repay the whole or any part of the outstanding principal amount of these XXXXXXXXXX promissory notes without notice, penalty or bonus.

PROPOSED TRANSACTIONS

9. Lossco will be continued under the laws of XXXXXXXXXX and the authorized share capital of Lossco will be amended to authorize an unlimited number of Class A Preferred Shares having the terms and conditions described in Paragraph 12 below.

10. The authorized share capital of Subco will be amended to authorize an unlimited number of Class AA Preferred Shares having the terms and conditions described in Paragraph 14 below.

11. All interest that has accrued on the indebtedness represented by the XXXXXXXXXX promissory notes described in Paragraph 8 above will be paid. The evidence of indebtedness represented by the XXXXXXXXXX promissory notes described in Paragraph 8 above will then be cancelled and replaced by a single new promissory note (the "Consolidated Note"). The principal amount of the Consolidated Note will be equal to $XXXXXXXXXX (i.e., the aggregate principal amount of the XXXXXXXXXX promissory notes described in Paragraph 8 above). The Consolidated Note will be payable on demand. Subco will have the right to repay the whole or any part of the outstanding principal amount of the Consolidated Note at any time without notice, penalty or bonus. The Consolidated Note will bear interest at a rate of Prime plus XXXXXXXXXX%, payable annually unless repayment of the Consolidated Note is demanded earlier.

12. When issued, Lossco's Class A Preferred Shares will have an aggregate redemption amount equal to the principal amount of the Consolidated Note and rights and restrictions described as follows:

(a) non-participating and non-voting;

(b) entitled to a cumulative dividend, at a rate applied to the redemption amount of the shares of Prime plus XXXXXXXXXX%. The dividends accruing in a taxation year of Lossco will be payable as described in Paragraph 16 below;

(c) redeemable, in whole or in part, at any time at the option of Lossco for an amount equal to the redemption amount associated with the Class A Preferred Shares redeemed and any unpaid dividends on the Class A Preferred Shares redeemed; and

(d) retractable, in whole or in part, at any time at the option of the holder for an amount equal to the redemption amount associated with the Class A Preferred Shares retracted and any unpaid dividends on the Class A Preferred Shares retracted.

13. Profitco will transfer the Consolidated Note to Lossco in exchange for newly issued Class A Preferred Shares. Profitco and Lossco will jointly elect under the provisions of subsection 85(1) to transfer the Consolidated Note at an agreed amount equal to the principal amount of the Consolidated Note. The stated capital and paid-up capital of the Class A Preferred Shares will equal the principal amount of the Consolidated Note.

14. When issued, Subco's Class AA Preferred Shares will have an aggregate redemption amount equal to the redemption amount of the Class A Preferred Shares and rights and restrictions described as follows:

(a) non-participating and non-voting;

(b) entitled to a cumulative dividend, at a rate applied to the redemption amount of the shares of Prime plus XXXXXXXXXX%. The dividends accruing in a taxation year of Subco will be payable as described in Paragraph 16 below;

(c) redeemable, in whole or in part, at any time at the option of Subco for an amount equal to the redemption amount associated with the Class AA Preferred Shares redeemed and any unpaid dividends on the Class AA Preferred Shares redeemed; and

(d) retractable, in whole or in part, at any time at the option of the holder for an amount equal to the redemption amount associated with the Class AA Preferred Shares retracted and any unpaid dividends on the Class AA Preferred Shares retracted.

15. Profitco will transfer the Class A Preferred Shares to Subco in exchange for newly issued Class AA Preferred Shares. Profitco and Subco will jointly elect under the provisions of subsection 85(1) to transfer the Class A Preferred Shares at an agreed amount equal to the redemption amount of the Class A Preferred Shares. The stated capital and paid-up capital of the Class AA Preferred Shares will equal the stated capital and paid-up capital of the Class A Preferred Shares.

16. On an ongoing basis, dividends on the Class A Preferred Shares will be paid on the same day that interest is paid on the Consolidated Note. Dividends on the Class AA Preferred Shares will be paid on the same day that dividends are paid on the Class A Preferred Shares.

17. Once Profitco or Lossco has decided to unwind the proposed transactions, in whole or in part, at a particular time:

(a) Subco will pay the balance of any accrued and unpaid interest on the Consolidated Note;

(b) Lossco will pay the balance of any accrued and unpaid dividends on the Class A Preferred Shares;

(c) Subco will pay the balance of any accrued and unpaid dividends on the Class AA Preferred Shares; and

(d) Lossco will redeem all or a portion of the Class A Preferred Shares and the amount owing on redemption will be settled by setting off that amount against the corresponding amount of the Consolidated Note.

ADDITIONAL INFORMATION

18. None of the Preferred Shares 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, except as described herein.

PURPOSES OF THE PROPOSED TRANSACTIONS

19. The primary purpose of the proposed transactions is to enable Lossco to earn sufficient interest income, over a period of time, to utilize some or all of its tax attributes.

20. The purpose of the continuance of Lossco into XXXXXXXXXX is to ensure that the proposed transactions may be effectively implemented under the governing corporate law. XXXXXXXXXX.

RULINGS GIVEN

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

A. The dividends received by the holders of the Preferred Shares, as described in Paragraphs 16, 17(b) and 17(c) above, will be taxable dividends that will be deductible pursuant to subsection 112(1) in computing the taxable income of the recipient for the year in which the dividend is received, and, 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).

B. Subsection 245(2) will not apply 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 Revenue Agency provided that the proposed transactions, excluding Paragraphs 16 and 17 above, 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 Revenue Agency has agreed to, reviewed or has made any determination in respect of:

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

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

(c) the provincial income tax implications relating to the allocation of income and expenses under the proposed transactions;

(d) the application or non-application of the general anti-avoidance provisions of any province; and

(e) 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 Planning Branch

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