2004 Ruling 2004-0098561R3 - Loss utilization in a related group of companies.

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: The utilization of some of Subco's non-capital losses and expiring provincial investment tax credits is accomplished by a transfer of depreciable industrial property by Parentco to Subco on a tax-deferred basis. Subco will earn additional income to offset these losses and credits from the sale of XXXXXXXXXX produced by the transferred assets. Subco will also enter into a services agreement with Parentco under which Parentco agrees to supply XXXXXXXXXX and certain services to Subco and to operate the transferred assets as agent for and on behalf of Subco for the purposes of producing XXXXXXXXXX for one year. The services agreement will call for Parentco to be compensated for the services and XXXXXXXXXX it provides on a fair market value basis. The XXXXXXXXXX produced by the transferred assets will be sold by Subco to Parentco at market rates.

Position: The loss utilization is acceptable.

Reasons: This type of loss utilization is consistent with similar previous rulings and with Department of Finance policy.

XXXXXXXXXX 		2004-009856

XXXXXXXXXX, 2004

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 and emails as well as the information provided in various telephone conversations.

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

XXXXXXXXXX Parentco
XXXXXXXXXX Subco
XXXXXXXXXX USco

Parentco and Subco (the "taxpayers") file their corporate income tax returns at the XXXXXXXXXX Tax Centre and their tax affairs are administered by the XXXXXXXXXX Tax Services Office. Parentco and Subco 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) an issue in an earlier return of any 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 any of the taxpayers or a related person;

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

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayers confirm that the proposed transactions 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, c.1 (5th Supp.), 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;

(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) "capital property" has the meaning assigned by section 54;

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

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

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

(i) "depreciable property" has the meaning assigned by subsection 13(21);

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

(k) "Fixtures" refers to certain assets described in Paragraph 14 below;

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

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

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

(o) "Premises Lease" refers to the lease described in Paragraph 19 below;

(p) "proposed transactions" means the transactions described in Paragraphs 16 to 22 below;

(q) "public corporation" has the meaning assigned by subsection 89(1);

(r) "Regulations" means the Income Tax Regulations promulgated under the Act;

(s) "Services Agreement" refers to the services agreement described in Paragraph 21 below;

(t) "stated capital" means stated capital under the BCA;

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

(v) "Transferred Assets" refers to certain assets described in Paragraph 14 below;

(w) "undepreciated capital cost" ("UCC") has the meaning assigned by subsection 13(21); and

(x) "wholly owned corporation" has the meaning assigned by subsection 85(1.3).

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

FACTS

1. Parentco carries on an XXXXXXXXXX business, directly for its own account and indirectly through its wholly and partly-owned subsidiaries, in most of the provinces across Canada. Parentco's head office is located in XXXXXXXXXX.

2. The fiscal year for Parentco and its subsidiaries ends on XXXXXXXXXX.

3. Parentco is an indirect subsidiary of USco, a U.S. corporation whose shares are listed on the XXXXXXXXXX Stock Exchange.

4. Parentco was formed by amalgamation on XXXXXXXXXX under the provisions of the CBCA. At the time of the amalgamation, each of the amalgamating companies, each of Subco's predecessor corporations and USco were affiliated persons.

5. XXXXXXXXXX was formed by amalgamation on XXXXXXXXXX under the provisions of the CBCA. At the time of the amalgamation, each of the amalgamating companies, each of Subco's predecessor corporations and USco were affiliated persons.

6. Parentco is both a taxable Canadian corporation and a public corporation.

7. The XXXXXXXXXX group's principal business operations in the Province of XXXXXXXXXX are conducted by its wholly-owned subsidiary, Subco. Subco is a wholly-owned corporation of Parentco. The shares of Subco owned by Parentco are capital property of Parentco.

8. XXXXXXXXXX.

9. Subco was formed by amalgamation on XXXXXXXXXX under the provisions of the BCA. At the time of the amalgamation, each of the amalgamating companies, Parentco and USco were affiliated persons.

10. Subco is a taxable Canadian corporation.

11. USco acquired control of XXXXXXXXXX.

12. As at XXXXXXXXXX, Subco has the following relevant tax pools:

(a) UCC of depreciable property amounting to $XXXXXXXXXX;

(b) non-capital losses amounting to $XXXXXXXXXX; and

(c) XXXXXXXXXX investment tax credits amounting to $XXXXXXXXXX.

The UCC pool is spread across a number of classes. The UCC of depreciable property of class 24 and class 29 owned by Subco at the end of XXXXXXXXXX was nil.

The non-capital losses arose in the XXXXXXXXXX through XXXXXXXXXX taxation years.

The XXXXXXXXXX investment tax credits were earned by Subco as a result of its manufacturing and processing expenditures XXXXXXXXXX. These credits carry forward for seven years. The credits arose in the XXXXXXXXXX through XXXXXXXXXX taxation years. Some of the credits will expire in XXXXXXXXXX.

13. As at XXXXXXXXXX, Parentco has the following relevant tax pools:

(a) UCC of depreciable property amounting to $XXXXXXXXXX; and

(b) non-capital losses amounting to $XXXXXXXXXX.

The UCC pool is spread across a number of classes. The UCC of depreciable property of class 24 and class 29 owned by Parentco at the end of XXXXXXXXXX was nil.

The non-capital losses arose in the XXXXXXXXXX through XXXXXXXXXX taxation years.

14. XXXXXXXXXX.

The assets to be transferred (the "Transferred Assets") will comprise:

(a) XXXXXXXXXX (excepting the Fixtures);

(b) XXXXXXXXXX;

(c) XXXXXXXXXX and

(d) certain other specified depreciable property associated with, and necessary to, the operation of the XXXXXXXXXX.

Many of the assets included in the Transferred Assets are depreciable property, the cost of which was included in class 24 and class 29.

15. Parentco is preparing an estimate of the fair market value of the Transferred Assets which is expected to be in excess of $XXXXXXXXXX.

PROPOSED TRANSACTIONS

16. Parentco will transfer the Transferred Assets to Subco. In consideration for the transfer of the Transferred Assets, Subco will issue common shares in its capital to Parentco. As permitted by the BCA, the common shares issued will have a stated capital equal to the fair market value of the Transferred Assets. For tax purposes, the PUC of the common shares issued will be reduced to the total of the agreed amounts in respect of the Transferred Assets as described in Paragraph 17 below.

17. Parentco and Subco will jointly elect, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each of the Transferred Assets which is an eligible property. The agreed amount specified in each election will be within the limits specified in subsection 85(1). It is Parentco's intention to elect at the minimum permitted amount in respect of each eligible property transferred and that the elected amount in respect of each class 24 or class 29 depreciable property transferred be $XXXXXXXXXX.

18. As a result of the transfer of the Transferred Assets, beneficial ownership, the right to possession and use, and the risk of gain or loss in respect of the Transferred Assets will pass to Subco.

19. Immediately after the transfer of the Transferred Assets, Parentco will lease the buildings in which the XXXXXXXXXX are situated to Subco. The lease agreement will also grant Subco such rights as are necessary to allow Subco to access and use the Transferred Assets. The lease will be for a XXXXXXXXXX-year term, and will require payment of fair market value monthly lease payments, prorated in the event of the lease operating only for a portion of a month. This lease is referred to as the "Premises Lease".

20. Parentco and Subco will carry out all necessary steps to give full effect to the transfer of beneficial ownership of the Transferred Assets to Subco and the Premises Lease, including the following:

(a) The directors of Parentco and Subco will pass resolutions authorizing the transfer of the Transferred Assets and the Premises Lease;

(b) Parentco and Subco will execute enforceable, valid, legally-binding, written agreements relating to the transfer of the Transferred Assets and the Premises Lease. The written agreement relating to the transfer of the Transferred Assets will provide, among other things, that the purchase price will be paid by the issuance of common shares of Subco and that the parties will agree to file the required tax elections. The Premises Lease will specify the buildings leased, the Fixtures, the related access rights and the lease payments; and

(c) Parentco and Subco will, to the extent required, obtain all necessary creditors' authorizations for the transfer of the Transferred Assets and the Premises Lease and, to the extent required under the relevant insurance policies, will notify the insurers of the change in ownership of the Transferred Assets and of the change in possession and access under the Premises Lease.

21. Subco will enter into a written, legally-binding, services agreement (the "Services Agreement") with Parentco under which Parentco agrees to supply XXXXXXXXXX and certain services to Subco and to operate the Transferred Assets as agent for and on behalf of Subco for the purpose of producing XXXXXXXXXX for a XXXXXXXXXX period. The Services Agreement will call for Parentco to be compensated for the services and XXXXXXXXXX it provides on a fair market value basis. The XXXXXXXXXX produced by the XXXXXXXXXX will be sold by Subco to Parentco at market rates. Subco's reasonable expectation will be that its revenue from the sale of XXXXXXXXXX in a given period will exceed its operating costs (including payments under the Premises Lease and the Services Agreement) and the expected economic depreciation of the leased assets in the same period.

22. Parentco will operate the XXXXXXXXXX on behalf of and as agent for Subco under the Services Agreement. Subco will accrue and pay lease and service payments due to Parentco under the Premises Lease and Services Agreement. Parentco will buy the XXXXXXXXXX produced by the XXXXXXXXXX from Subco.

PURPOSE OF THE PROPOSED TRANSACTIONS

23. The purpose of the proposed transactions is to allow Subco to realize income from operating the Transferred Assets which will enable it to utilize some of its non-capital losses and its otherwise expiring provincial income tax credits. The transactions also create the possibility, which may or may not occur, of a transfer-back of the Transferred Assets to Parentco on a full realization basis. This transaction, if it occurred, would result in income to Subco and would increase Parentco's undepreciated capital cost tax pools.

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 by Parentco to Subco of each of the Transferred Assets which are eligible property, as described in Paragraphs 16 and 17 above, such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition of the property and the transferee's cost thereof, and the transferor's cost of the shares received as consideration for the disposition. For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. Pursuant to subsection 1102(14) of the Regulations, each of the Transferred Assets that is depreciable property of a prescribed class or separate prescribed class of Parentco immediately before the property is acquired by Subco, as described in Paragraph 16 above, will be deemed to be property of that same prescribed class or separate prescribed class, as the case may be, of Subco.

C. Provided that the condition specified in paragraph 1100(2.2)(f) of the Regulations is satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included by Subco under paragraph 1100(2)(a) of the Regulations in respect of each of the Transferred Assets that is depreciable property of Parentco that is transferred to Subco, as described in Paragraph 16 above.

D. Provided that the conditions specified in paragraph 1100(2.2)(f) of the Regulations are satisfied, paragraph 1100(2.2)(j) of the Regulations will apply such that each of the Transferred Assets that is depreciable property of Parentco that is transferred to Subco, as described in Paragraph 16 above, and that was depreciable property of Parentco of a class to which paragraph 1100(1)(ta) of the Regulations applied, will, subsequent to their transfer by Parentco to Subco, be deemed:

(a) to be designated property of a class to which paragraph 1100(1)(ta) applies; and

(b) to have been acquired by Subco immediately after the start of Parentco's first taxation year beginning after the year in which Parentco last acquired the property prior to the proposed transactions for the purpose of computing the amount determined under paragraph 1100(1)(ta) of the Regulations for any taxation year of Subco ending after the time of the transfer of the property by Parentco.

E. Subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions described in Paragraphs 16 through 22 above, in and by themselves.

F. 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 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 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; and

(c) any other 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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