2005 Ruling 2005-0117641R3 - 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: A loss utilization within an affiliated group of corporations where profitcos are partners in an LP.

Position: acceptable

Reasons: Paragraph 32 of IT-533

XXXXXXXXXX 							2005-011764

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("A Co")- (XXXXXXXXXX )
XXXXXXXXXX ("LP")

This is in reply to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above named taxpayers. We acknowledge further information supplied in your letters of XXXXXXXXXX and numerous telephone conversations (XXXXXXXXXX). In general terms, the transactions described herein involve the use of losses within a group of related corporations.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues contained in the ruling request herein is:

(a) dealt with in an earlier return of A Co or a related person;

(b) being considered by a tax services office or a taxation centre in connection with a tax return already filed by A Co or a related person;

(c) under objection by A Co or a related person;

(d) before the Courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired, or

(e) the subject of a previous ruling issued by the Income Tax Rulings Directorate of the CRA.

DEFINED TERMS:

In this letter, the following terms have the meanings specified:

? "A Co" means XXXXXXXXXX, the corporation described in paragraphs 1 to 3;

? "A Co Note" means the promissory note described in paragraph 16;

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

? "Affiliated persons" has the meaning assigned by subsection 251.1(1) of the Act;

? "B Co" means XXXXXXXXXX, a wholly owned direct subsidiary of XXXXXXXXXX. B Co is incorporated under the XXXXXXXXXX Companies Act and is a taxable Canadian corporation. The asset of B Co is a participation of XXXXXXXXXX% in LP all the issued and outstanding shares of C Co and advances to A Co;

? "C Co" means XXXXXXXXXX, a wholly owned indirect subsidiary of B Co. C Co is incorporated under the XXXXXXXXXX Companies Act and is a taxable Canadian corporation. The only asset of C Co is a participation of XXXXXXXXXX% in LP;

? "CRA" means the Canada Revenue Agency;

? "D Co" means XXXXXXXXXX which directly or indirectly owns XXXXXXXXXX% of the issued and outstanding shares of A Co, C Co and B Co. D Co is a public company currently listed on a prescribed foreign stock exchange as defined in section 3201 of the Income Tax Regulations;

? "LP" means XXXXXXXXXX, the limited partnership described in paragraphs 4 to 6;

? "LP Note" means the promissory note described in paragraph 11;

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

? "Preferred Shares" means the preferred shares described in paragraph 8;

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

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

STATEMENT OF FACTS:

1. A Co is a taxable Canadian corporation created by the amalgamation of XXXXXXXXXX. A Co is an indirect wholly owned subsidiary of D Co, a corporation non-resident of Canada. A Co is located at XXXXXXXXXX . A Co is serviced by the XXXXXXXXXX District Taxation Office and files its income tax return at the XXXXXXXXXX Taxation Centre.

2. A Co is engaged in XXXXXXXXXX in Canada.

3. 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 operating losses incurred in the following taxation years:

XXXXXXXXXX
	$		XXXXXXX
(Loss subject to subsection 111(5))
XXXXXXXXXX
	$		XXXXXXX 

	$		XXXXXXX 

It is expected that A Co will continue to be in a loss position for the fiscal year ended on XXXXXXXXXX.

4. LP is a limited partnership established pursuant to the laws of XXXXXXXXXX. LP's head office is located at XXXXXXXXXX.

5. The partners of LP are B Co (limited partner with participation of XXXXXXXXXX%) and C Co (general partner, participation of XXXXXXXXXX%) (collectively referred to as the "Partners").

6. The Partners were taxable for the past fiscal year and it is expected that they will be taxable for the fiscal year ended XXXXXXXXXX.

PROPOSED TRANSACTIONS:

7. A Co will file a request to amend its articles of incorporation in order to be authorized to issue an unlimited number of new preferred shares ("Preferred Shares").

8. The Preferred Shares will have the following rights and restrictions:

? The shares will be non-participating and non-voting;

? The shares will be entitled to an annual cumulative dividend of XXXXXXXXXX% and may have preference over the common shares for the payment of dividends;

? The shares will be redeemable at any time for an amount equal to the amount for which they were issued plus all the declared and unpaid dividends; and

? The shares will be retractable at any time for an amount equal to the amount for which they were issued.

9. LP will borrow an amount of $XXXXXXXXXX on a "daylight loan" basis from a third party financial institution (the "Bank"). The principal amount of the loan will be equal to $XXXXXXXXXX. The amount of $XXXXXXXXXX has been established by the management of LP in conjunction with its Bankers as being equal or below the borrowing capacity of LP.

10. LP will use the proceeds resulting from the loan (in paragraph 9) to subscribe for Preferred Shares in A Co, having an aggregate redemption and retraction value equal to $XXXXXXXXXX. The aggregate redemption and retraction value, the fair market value and the adjusted cost base and the paid-up capital of the Preferred Shares issued will be $XXXXXXXXXX.

11. A Co will use the proceeds from the share issuance to make a demand loan to LP in an amount equal to $XXXXXXXXXX. LP will issue a promissory note to A Co that will bear interest of XXXXXXXXXX% per year ("LP Note"). The management of A Co and LP in collaboration with their respective bankers has concluded that a reasonable interest rate to be charged to LP would be XXXXXXXXXX%.

12. LP will use the proceeds resulting from the issuance of LP Note to repay its daylight loan to the Bank.

13. Annually, LP will make the interest payment on the LP Note held by A Co.

14. On receipt of the interest payment on the LP Note, A Co will pay dividends on the Preferred Shares held by LP.

15. Payments of dividends and interest will be made annually.

16. At the earliest of XXXXXXXXXX and the year where the non-capital losses of A Co are fully used:

a) A Co will redeem its issued and outstanding Preferred Shares from LP for a promissory note equal to $XXXXXXXXXX ("A Co Note").

b) The LP Note and the A Co Note will be settled at their principal amounts and the two notes will be cancelled simultaneously.

OTHER REPRESENTATIONS:

17. None of the corporations involved in the proposed transactions are specified financial institutions as defined by subsection 248(1) of the Act;

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

19. None of the shares on which a dividend is declared or paid in the course of the proposed transactions is guaranteed in any way described in subsection 112(2.2) of the Act by a financial institution or a specified person in relation to any such institution;

20. None of the shares to be issued as part of the proposed transactions will be issued or acquired as part of a transaction or series of transactions of the type described in subsection 112(2.5) of the Act;

21. The proposed transactions will not result in any of the taxpayers identified in this ruling being unable to pay their outstanding tax liabilities;

22. There has not been nor will there be any acquisitions of property or dividend paid in contemplation of the proposed transactions (except for the transactions described herein) other than transactions entered into and conducted in the normal course of business;

PURPOSE OF THE PROPOSED TRANSACTIONS:

The purpose of the proposed transactions is to consolidate profits and losses within a group of affiliated persons.

RULINGS GIVEN:

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

A. Provided the Preferred Shares continue to be held for the purpose of gaining or producing income from property, the interest paid or payable on the LP Note will be deductible by LP pursuant to paragraph 20(1)(c) of the Act to the extent that such amount does not exceed a reasonable amount.

B. Dividends received by LP on the Preferred Shares as described in paragraph 14 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 Partners for the year in which the dividends are allocated by LP.

C. On the redemption of the Preferred Shares by A Co:

a) no dividend will be deemed to be paid by A Co and received by LP by virtue of subsection 84(3) of the Act;

b) no gain or loss will be realizable by LP on the disposition of the 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 7 to 15 in and of themselves;

E. Subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to re-determine 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 CRA, and are binding provided the proposed transactions are completed, excluding paragraph 16, 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:

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