2004 Ruling 2004-0089181R3 - 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 within a corporate group

Position: Acceptable

Reasons: Meets the technical requirements of the provisions

XXXXXXXXXX                                            2004-008918

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX and further to telephone conversations of XXXXXXXXXX and further to additional information provided requesting an advance income tax ruling on behalf of the above named corporations. In general terms, the transactions described herein involve the use of losses within a group of related corporations.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved contained herein:

(i) is in an earlier return of one of the taxpayers or of a person related to them;

(ii) is 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) is under objection by one of the taxpayers, or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) is 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 (5th Supp.) c.1, as amended to the date hereof;

? "A Co" means XXXXXXXXXX, the corporation described in paragraphs 1 to 4;

? "A Co Note" means the promissory note described in paragraph 14;

? "B Co" means XXXXXXXXXX, the corporation described in paragraphs 5 to 8;

? "B Co Note" means the promissory note described in paragraph 13;

? "C Co" means XXXXXXXXXX described in paragraph 1;

? "Newco" means an entity to be incorporated by A Co, described in paragraph 9;

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

? "Newco Common Shares" means the common shares described in paragraph 9;

? "Newco Preferred Shares" means the preferred shares described in paragraph 9;

? "Public corporation" has the meaning assigned by subsection 89(1) of the Act;

? "Related persons" has the meaning assigned by subsection 251(2) of the Act; and,

? "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

STATEMENT OF FACTS

Facts relating to A Co

1. A Co is situated in XXXXXXXXXX. A Co is serviced by the XXXXXXXXXX District Taxation Office and files its income tax returns at the XXXXXXXXXX Taxation Centre. A Co is a public corporation and a taxable Canadian corporation. Its main assets in Canada consist of investments in two wholly-owned Canadian subsidiaries, B Co and C Co, which are engaged in XXXXXXXXXX segments: XXXXXXXXXX A Co is traded on the XXXXXXXXXX Stock Exchange under the symbol XXXXXXXXXX and on the XXXXXXXXXX. under the symbol XXXXXXXXXX.

2. A Co was incorporated under the Canada Business Corporations Act on XXXXXXXXXX, under the name XXXXXXXXXX.

3. In XXXXXXXXXX, the name of the corporation was changed from XXXXXXXXXX to its present name.

4. As at the end of its last fiscal year ending on XXXXXXXXXX, the balance of non-capital losses of A Co amounted to $XXXXXXXXXX which is the sum of its tax operating losses incurred in the following taxation years:

XXXXXXXXX
      $           XXXXXXXX
XXXXXXXXX
                  XXXXXXXX
XXXXXXXXX
            XXXXXXXX
XXXXXXXXX
                  XXXXXXXX
XXXXXXXXX
                  XXXXXXXX
XXXXXXXXX
                  XXXXXXXX
XXXXXXXXX
           XXXXXXXX 

Total
      $           XXXXXXXX 

Facts relating to B Co

5. B Co is situated in XXXXXXXXXX. B Co is serviced by the XXXXXXXXXX District Taxation Office and files its income tax returns at the XXXXXXXXXX Taxation Centre. B Co is a taxable Canadian corporation incorporated on XXXXXXXXXX, under the Canada Business Corporations Act. B Co is a wholly-owned subsidiary of A Co since incorporation.

6. XXXXXXXXXX.

7. B Co was taxable in XXXXXXXXXX and XXXXXXXXXX and it is expected that it will continue to be taxable in the current fiscal year ended on XXXXXXXXXX and in the future. For the fiscal year ended on XXXXXXXXXX, its taxable income after the application of prior year's non-capital losses of $XXXXXXXXXX was $XXXXXXXXXX. For the fiscal year ended on XXXXXXXXXX, its taxable income was $XXXXXXXXXX.

8. In the foreseeable future, there is a possibility that B Co will be amalgamated with C Co, a wholly-owned subsidiary of A Co, which is also a taxable Canadian corporation.

PROPOSED TRANSACTIONS

9. A new corporation, Newco, will be created under the Canada Business Corporations Act. Newco will be a wholly-owned subsidiary of A Co. The authorized capital of Newco will consist of an unlimited number of common shares ("Newco Common Shares") and an unlimited number of preferred shares, non-voting, non-participating, redeemable at the option of the holder and entitled to an annual cumulative dividend at the rate of prime plus XXXXXXXXXX%, calculated on the capital invested ("Newco Preferred Shares").

10. A Co will subscribe for XXXXXXXXXX Newco Common Shares for a cash consideration of $XXXXXXXXXX.

11. The fair market value, the adjusted cost base and the paid-up capital of the XXXXXXXXXX Newco Common Shares issued in paragraph 10 will be $XXXXXXXXXX.

12. A Co will borrow $XXXXXXXXXX, on a "daylight loan" basis from an arm's length financial institution (the "Bank"). The amount of $XXXXXXXXXX has been established by the management of A Co based on the availability of their credit facilities and borrowing capacity. The principal amount of the loan will be equal to $XXXXXXXXXX.

13. A Co will use the loan received from the Bank to lend $XXXXXXXXXX to B Co. An interest bearing promissory note ("B Co Note") will be issued by B Co to A Co. The management of A Co and B Co, in collaboration with their respective bankers, has concluded that a reasonable interest rate to be charged on the B Co note would be prime rate plus XXXXXXXXXX%. B Co will use the funds resulting from the issuance of the B Co note to subscribe for Newo Preferred Shares for a total amount of $XXXXXXXXXX. The aggregate redemption and retraction value, the fair market value and the adjusted cost base and the paid-up capital of the Newco Preferred Shares issued will be $XXXXXXXXXX.

14. Newco will use the proceeds from the share issuance (in paragraph 13) to make a non interest-bearing loan of $XXXXXXXXXX to A Co. This loan will be evidenced by a promissory note bearing no interest ("A Co Note").

15. Upon the receipt of the funds from Newco, A Co will repay the Bank's "daylight loan" received in paragraph 12.

16. Annually (or more frequently), B Co will pay interest of approximately $XXXXXXXXXX ($XXXXXXXXXX") to A Co, assuming that the prime rate is at 3.75 %.

17. Annually (or more frequently), A Co will subscribe for additional Newco Common Shares to fund the dividend payment to B Co of $XXXXXXXXXX ($XXXXXXXXXX").

18. Annually (or more frequently), Newco will pay dividends of $XXXXXXXXXX to B Co.

UNWIND STRUCTURE

It is expected that the current plan will be unwound in XXXXXXXXXX years and will be unwound in the following manner:

19. A Co will obtain a $XXXXXXXXXX "daylight loan" from the Bank to repay the A Co note.

20. Newco will use the funds received from A Co to redeem all the issued and outstanding Newco Preferred Shares held by B Co.

21. B Co will use the proceeds of the disposition of the Newco Preferred Shares to repay the B Co Note.

22. A Co will use the funds received from B Co to repay the "daylight loan" received in paragraph 19.

Other Representations:

23. None of the corporations involved in the proposed transactions (described in paragraphs 9 to 18) are specified financial institutions as defined by subsection 248(1) of the Act.

24. None of the corporations involved in the proposed transactions (described in paragraphs 9 to 18) has or will have entered into a "dividend rental arrangement" as defined by subsection 248(1) of the Act.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to consolidate profits and losses within a group of related persons, and to the extent that it is possible to enable A Co to earn interest income to eliminate losses otherwise expiring in the near future.

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 Newco Preferred Shares continue to be held for the purpose of gaining or producing income from property, the interest paid or payable on the B Co Note of $40M will be deductible by B 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 B Co on the Newco Preferred Shares as described in paragraph 18 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.

C. On the redemption of the Preferred Shares by Newco:

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

(b) No gain or loss will be realized by B Co on the redemption of the Newco Preferred Shares by virtue of paragraph 40(1)(a) of the Act.

D. The provisions of subsections 15(1) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 9 to 15 above, in and by themselves.

E. 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 Canada Revenue Agency (the "CRA"), and are binding provided the proposed transactions are completed, excluding paragraphs 19 to 22, 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.

Comments:

1. Nothing in this ruling should be construed as implying that the CRA 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,

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