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 loss utilization within affiliated group of companies is acceptable.
Position: Yes
Reasons: Previous positions.
XXXXXXXXXX
2005-011806
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
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 additional documents you provided to us on XXXXXXXXXX, and additional information you provided to us during various telephone conversations XXXXXXXXXX) in connection with your ruling request.
In this letter, unless otherwise stated, all references to a statute are to the Income Tax Act (Canada).
DEFINITIONS AND ABBREVIATIONS
In this ruling, the names of the taxpayers, and certain terms and expressions, are replaced respectively by the following names and abbreviations:
XXXXXXXXXX PARENT
XXXXXXXXXX ACO
XXXXXXXXXX BCO
XXXXXXXXXX CCO
XXXXXXXXXX DCO
XXXXXXXXXX ECO
XXXXXXXXXX FCO
XXXXXXXXXX GCO
XXXXXXXXXX HCO
XXXXXXXXXX ICO
XXXXXXXXXX JCO
XXXXXXXXXX KCO
XXXXXXXXXX LCO
XXXXXXXXXX MCO
XXXXXXXXXX PCO
XXXXXXXXXX QCO
XXXXXXXXXX QSCO
XXXXXXXXXX RCO
XXXXXXXXXX SCO
XXXXXXXXXX TCO
New corporation described in paragraph LOSSCO 17 below.
New corporation described in paragraph NEWCO 14 below.
"Adjusted cost base" as defined in section 54. ACB
"Affiliated person" within the meaning of Affiliated person subsection 251.1(1).
"Arm's length" within the meaning assigned Arm's length by subsection 251(1).
"Dividend rental arrangement" within the Dividend rental meaning of subsection 248(1). arrangement.
Fair market value FMV.
"Financial intermediary corporation" within Financial intermediary the meaning of subsection 191(1). corporation.
"Income Tax Act" Act.
"Non-capital loss" within the meaning of Non-capital loss subsection 111(8).
"Paid-up capital" within the meaning of PUC subsection 89(1).
"Public corporation" within the meaning of Public corporation subsection 89(1).
XXXXXXXXXX.
"Specified financial institution" within the meaning Specified financial of subsection 248(1). institution
XXXXXXXXXX.
"Related person" within the meaning of Related subsection 251(2).
"Taxable Canadian corporation" within the TCC meaning of subsection 89(1).
FACTS
1. PARENT is governed by the XXXXXXXXXX. PARENT is a Public corporation, a XXXXXXXXXX and a TCC. PARENT is a management holding corporation, which forms, with its subsidiaries and affiliated corporations, a major international group of corporations engaged in the XXXXXXXXXX through ACO and its subsidiaries, and in the XXXXXXXXXX through BCO and its subsidiaries.
2. The taxation year of PARENT ends on XXXXXXXXXX. At the end of its XXXXXXXXXX taxation year, PARENT had approximately $XXXXXXXXXX of Non-capital losses. The utilization of these Non-capital losses is not restricted by the acquisition of control rules provided in subsections 111(5) and 88(1.1). The Arm's length borrowings of PARENT currently amount to approximately $XXXXXXXXXX, all of which has been used to subscribe for shares of BCO, which used the proceeds to pay a portion of the purchase price for the shares of PCO. The Non-capital losses of PARENT have been caused principally by the interest expenses on its Arm's length borrowings.
PARENT and CCO are Specified financial institution because of paragraph (g) of the definition "Specified financial institution" in subsection 248(1). More specifically, PARENT and CCO are Related to a corporation described in paragraph (d) of the definition "Specified financial institution" in subsection 248(1). PARENT and CCO are Affiliated persons.
3. QCO is XXXXXXXXXX. QSCO is a company that is a wholly-owned subsidiary of QCO XXXXXXXXXX.
4. BCO is a TCC that was incorporated under XXXXXXXXXX by certificate of incorporation on XXXXXXXXXX.
The by-laws XXXXXXXXXX of BCO were enacted on XXXXXXXXXX , and are still in effect.
The articles and by-laws of BCO are as described in the documents provided by XXXXXXXXXX with its letters dated XXXXXXXXXX.
5. BCO is a management holding corporation, which forms with its subsidiaries a group of corporations, engaged in the XXXXXXXXXX. BCO carries on a XXXXXXXXXX through the following group of corporations:
(a) CCO is a wholly-owned subsidiary of DCO and a TCC. DCO is wholly-owned by BCO. CCO, together with its wholly-owned subsidiaries, ECO and RCO, are involved in the XXXXXXXXXX.
(b) XXXXXXXXXX.
(c) XXXXXXXXXX.
(d) XXXXXXXXXX.
(e) XXXXXXXXXX.
(f) XXXXXXXXXX.
(g) XXXXXXXXXX.
6. The authorized share capital of BCO consists of an unlimited number of common shares, and an unlimited number of preferred shares, series A, B, C, D, E and F.
The common shares are without par value and voting (1 vote per share). The holders of common shares are entitled to dividends at the discretion of the directors, and are entitled to receive the remaining property of the corporation upon its winding-up or dissolution.
The preferred shares are without par value and non-voting, except in limited circumstances (XXXXXXXXXX). The preferred shares are redeemable and retractable for a redemption value equal to the FMV of the consideration for which the shares are issued. The holders of the preferred shares are also entitled to cumulative dividends.
7. The issued and outstanding share capital of BCO consists of XXXXXXXXXX common shares, XXXXXXXXXX preferred shares XXXXXXXXXX, XXXXXXXXXX preferred shares XXXXXXXXXX and XXXXXXXXXX preferred shares XXXXXXXXXX.
PARENT currently holds, directly and indirectly through two wholly-owned subsidiaries (SCO and TCO), XXXXXXXXXX common shares of BCO, representing XXXXXXXXXX% of BCO's outstanding common shares. The remaining XXXXXXXXXX common shares (XXXXXXXXXX% of the common shares) of BCO are owned by QSCO. PARENT has de jure control of SCO and TCO for the purposes of the Act. All the preferred shares XXXXXXXXXX are owned by indirect wholly-owned subsidiaries of BCO.
8. On XXXXXXXXXX, a shareholders' agreement (the "Agreement") was entered into by PARENT, QSCO, TCO, SCO and BCO. The Agreement is a unanimous agreement subject to XXXXXXXXXX . The provision of the Agreement is as described in the documents provided by XXXXXXXXXX with its letter dated XXXXXXXXXX.
9. XXXXXXXXXX.
10. CCO is a XXXXXXXXXX and a TCC. CCO is XXXXXXXXXX.
The taxation year of CCO ends on XXXXXXXXXX. The consolidated revenues of CCO for the year ended XXXXXXXXXX was approximately $XXXXXXXXXX, and the consolidated net income was approximately $XXXXXXXXXX for that period.
11. ECO is a wholly-owned subsidiary of CCO. ECO is a TCC and a XXXXXXXXXX. ECO XXXXXXXXXX. RCO is also a wholly-owned subsidiary of CCO. RCO is a TCC and a XXXXXXXXXX. RCO is XXXXXXXXXX.
12. ICO is a XXXXXXXXXX and a TCC. ICO together with its subsidiaries is XXXXXXXXXX.
13. The group of corporations composed of ACO, BCO and its subsidiaries CCO, DCO, ECO, FCO, GCO, ICO, KCO, LCO, MCO and RCO, is in a position to increase its current Arm's length borrowings by an amount in excess of $XXXXXXXXXX.
PROPOSED TRANSACTIONS
14. PARENT will incorporate a new corporation ("NEWCO") under XXXXXXXXXX. NEWCO will be a TCC. The taxation year-end of NEWCO will be XXXXXXXXXX. The activities of NEWCO will essentially be limited to the activities described in the proposed transactions, including the investing of the proceeds received upon the issuance of its preferred shares to LOSSCO as described in paragraph 22 below, in the non-interest bearing loan to PARENT as described in paragraph 23 below.
15. The authorized share capital of NEWCO will consist of an unlimited number of common shares and preferred shares ("Preferred Shares").
The common shares of NEWCO will be without par value and voting (1 vote per share). The holders of common shares will be entitled to dividends at the discretion of the directors, and will be entitled to receive the remaining property of the corporation upon its winding-up or dissolution.
The Preferred Shares of NEWCO will be without par value and non-voting. The Preferred Shares will be redeemable and retractable for a redemption price equal to the FMV of the consideration for which the shares are issued, plus any accrued but unpaid dividends. The holders of Preferred Shares will be entitled to cumulative dividends, calculated daily by reference to the redemption/retraction price of the Preferred Shares at a rate equal to the interest rate on the LOSSCO Loan (as described in paragraph 21 below) plus a small spread. The dividends on the Preferred Shares will be payable XXXXXXXXXX on XXXXXXXXXX.
16. NEWCO will issue common shares of its capital stock to PARENT for a nominal consideration. PARENT will have de jure control of NEWCO for the purposes of the Act.
17. PARENT will incorporate a new corporation ("LOSSCO") under XXXXXXXXXX. LOSSCO will be a TCC. The taxation year-end of LOSSCO will be XXXXXXXXXX. The activities of LOSSCO will be essentially limited to the activities described in the proposed transactions, including the investing of the proceeds received upon the issuance of the LOSSCO Loan to PARENT (as described in paragraph 21 below), in the Preferred Shares of NEWCO as described in paragraph 22 below.
18. The authorized share capital of LOSSCO will be limited to an unlimited number of common shares. The common shares will be without par value and voting (1 vote per share). The holders of common shares will be entitled to dividends at the discretion of the directors, and will be entitled to receive the remaining property of the corporation upon its winding-up or dissolution.
19. LOSSCO will issue common shares of its capital stock to PARENT for a nominal consideration.
NEWCO and LOSSCO will be Specified financial institutions. PARENT will have de jure control of LOSSCO for the purposes of the Act.
20. PARENT will borrow an amount of $XXXXXXXXXX on a "daylight loan" basis from an arm's-length financial institution (the "Daylight loan "). The amount borrowed by PARENT will be based on and will not exceed its borrowing capacity. The interest rate on the Daylight Loan will be a commercial Arm's length rate.
21. PARENT will use the proceeds received from the Daylight Loan to make a loan of $XXXXXXXXXX to LOSSCO (the "LOSSCO Loan"). Simple interest will accrue on the LOSSCO Loan and will be calculated at a rate equal to the commercial market rate applicable to loans to PARENT. The interest rate will be determined at the time the proposed transactions are implemented. The LOSSCO loan will be payable on demand. The interest on the LOSSCO Loan will be paid XXXXXXXXXX on XXXXXXXXXX.
22. LOSSCO will use the proceeds received from the LOSSCO Loan to subscribe for Preferred Shares in NEWCO having an aggregate redemption/retraction price equal to the amount contributed ($XXXXXXXXXX). The PUC and the FMV of the Preferred Shares will be $XXXXXXXXXX. LOSSCO will be entitled to cumulative dividends on its Preferred Shares, calculated daily by reference to the redemption/retraction price of the Preferred Shares at a rate equal to the interest rate on the LOSSCO Loan plus a small spread.
The amount of dividends on the Preferred Shares held by LOSSCO will be sufficient to permit LOSSCO to realize a profit on its investment activities, after the deduction of all its expenses (not only its interest expenses).
23. NEWCO will use the proceeds ($XXXXXXXXXX) received from the Preferred Shares subscription to make a demand, interest-free loan to PARENT in an amount equal to $XXXXXXXXXX (the "PARENT Loan"). The PARENT loan will be payable on demand.
24. PARENT will use the proceeds ($XXXXXXXXXX) received from the PARENT Loan to repay the Daylight Loan of $XXXXXXXXXX.
25. XXXXXXXXXX on XXXXXXXXXX, while the LOSSCO Loan is outstanding, PARENT will make a contribution of capital to NEWCO in an amount equal to the dividend payable by NEWCO on that day on the Preferred Shares held by LOSSCO. No share will be issued by NEWCO with respect to the contributions of capital and no amount will be added to the account of issued and paid-up share capital of NEWCO. The amount of each contribution of capital will be recorded as contributed surplus for accounting purposes. The contributions of capital will not be treated as income of NEWCO pursuant to generally accepted accounting principles.
26. Upon receipt of the contributions of capital described in paragraph 25 above, NEWCO will use the amounts received to pay dividends to LOSSCO equal to the amount of the dividends payable by NEWCO on the issued Preferred Shares of its capital stock.
27. LOSSCO will use the amounts received as dividends from NEWCO to pay to PARENT the interest on the LOSSCO Loan. The interest on the LOSSCO Loan will be paid XXXXXXXXXX on XXXXXXXXXX.
28. The following transactions will occur no later than XXXXXXXXXX to unwind the loss consolidation arrangement:
(a) PARENT will make a contribution of capital to NEWCO in an amount equal to the amount of any accrued and unpaid dividends on the Preferred Shares held by LOSSCO. No share will be issued by NEWCO with respect to the contributions of capital and no amount will be added to the account of issued and paid-up share capital of NEWCO. The amount of this contribution of capital, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital, if any, will not be income of NEWCO pursuant to generally accepted accounting principles.
(b) PARENT will borrow $XXXXXXXXXX on a daylight loan basis from an arm's-length financial institution (the "New Daylight Loan"). PARENT will use these funds to repay the PARENT Loan to NEWCO.
(c) NEWCO will use the funds ($XXXXXXXXXX + the amount of the contribution of capital, if any) received through step (a) and (b) above, to redeem the issued Preferred Shares of its capital stock held by LOSSCO.
(d) LOSSCO will pay the balance of any accrued and unpaid interest on the LOSSCO Loan.
(e) LOSSCO will use $XXXXXXXXXX from the proceeds of the redemption of the Preferred Shares received through step (c) above to repay the LOSSCO Loan.
(f) PARENT will use the funds received ($XXXXXXXXXX) on the repayment of the LOSSCO Loan to repay the New Daylight Loan.
29. Immediately after the proposed transactions described in paragraph 28 above, PARENT will transfer to CCO, all of its common shares of LOSSCO in exchange for one preferred share of CCO (the "Special Share") having a redemption price equal to the FMV of the common shares of LOSSCO so transferred.
CCO will add to its account of issued and paid-up share capital in respect of the Special Share issued to PARENT an amount equal to the ACB to PARENT of the common shares of LOSSCO. PARENT and CCO will file a joint election, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the common shares of LOSSCO to CCO. The amount agreed specified in the election will be equal to the ACB to PARENT of the common shares of LOSSCO. The ACB of the common shares of LOSSCO will be less than their FMV at the time of the disposition.
The FMV of the common shares of LOSSCO will be determined by taking into consideration interest rates, the estimated time of utilization of the Non-capital losses of LOSSCO and other factors.
30. CCO will redeem for cash the Special Share issued to PARENT as described in paragraph 29 above, for an amount equal to its redemption price.
31. Shortly after the transactions described in paragraph 30 above, CCO will cause LOSSCO to be wound-up. The assets of LOSSCO will be distributed to CCO and its liabilities, if any, will be assumed by CCO. LOSSCO will be dissolved within a short period of time.
32. CCO will subscribe for common shares of NEWCO for a nominal consideration. NEWCO will subsequently purchase all its common shares owned by PARENT for a nominal consideration equal to the FMV of the common shares owned by PARENT. PARENT's loss, from the disposition of its common shares of NEWCO, will be deemed to be nil pursuant to subsection 40(3.6). For greater certainty, subsections 40(3.3) and 40(3.4), and paragraph 40(3.6)(b), will not apply with respect to PARENT's loss.
33. CCO will cause NEWCO to be wound-up shortly after the proposed transactions described in paragraph 32 above.
34. The loss consolidation arrangement described in the letter 2001-008504 issued by the Income Tax Rulings Directorate on XXXXXXXXXX, 2001, has been implemented by BCO and CCO. This loss consolidation arrangement is still in place, but will be unwound during the taxation year of CCO that will include the commencement of the winding-up (as described in paragraph 31 above) of LOSSCO into CCO.
35. Based on its existing assets and resources, PARENT will have the ability to make the contributions of capital to NEWCO as described in paragraphs 26 and 28(a) above, without taking into account the interest income which PARENT will earn on the LOSSCO Loan described in paragraph 21 above.
36. None of PARENT, CCO, NEWCO and LOSSCO is or will be a Financial intermediary corporation.
37. The Preferred Shares of NEWCO and the Special Share of CCO, which will be issued as described in paragraphs 22 and 29 above, will not be, at any time during the implementation of the proposed transactions described herein:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as 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 that is or includes:
(i) an obligation of the type described in subparagraph 112(2.4)(b)(i); or
(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).
PURPOSE OF THE PROPOSED TRANSACTIONS
38. The purpose of the proposed transactions is to allow for the consolidation of the non-capital-losses of PARENT and the taxable income of CCO. The loss consolidation will be achieved by a series of transactions, including the transfer of the Non-capital losses of PARENT to LOSSCO, and the subsequent transfer of the Non-capital losses created in LOSSCO to CCO. The typical loss consolidation arrangement could not be implemented because of constraints contained in an indenture relating to CCO and BCO debts. In a typical transfer of losses arrangement, PARENT would have lent to CCO at a stated rate of interest which in turn would have used the borrowed funds to invest directly or indirectly in preferred shares of PARENT.
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. Provided that LOSSCO has a legal obligation to pay interest on the LOSSCO Loan described in paragraph 21 above, and that the Preferred Shares of NEWCO continue to be held by LOSSCO, LOSSCO will be entitled pursuant to paragraph 20(1)(c), to deduct in computing its income for a taxation year, the lesser of (i) the interest paid or payable (depending on the method regularly followed by LOSSCO in computing its income for the purposes of the Act) in respect of the taxation year, or (ii) a reasonable amount in respect thereof.
B. No amount will be included in the income of NEWCO pursuant to section 9, paragraphs 12(1)(c) or 12(1)(x), in respect of the contributions of capital made by PARENT as described in paragraphs 25 and 28(a) above.
C. The dividends received by LOSSCO on the Preferred Shares of NEWCO as described in paragraph 26 above, will be taxable dividends that will be deductible pursuant to subsection 112(1) in computing the taxable income of LOSSCO for the taxation year in which the dividends are received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), or 112(2.4).
D. On the redemption of the Special Share of the capital stock of CCO as described in paragraph 30 above, the amount, if any, by which the amount paid to redeem the share exceeds its PUC immediately before the redemption, will be deemed pursuant to subsection 84(3) to be a dividend paid by CCO to PARENT, and the deemed dividend will be deductible in computing the taxable income of PARENT pursuant to subsection 112(1) for the taxation year in which the dividend is deemed to have been received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), or 112(2.4).
E. Neither Part IV.1 nor Part VI.1 will apply to the dividends described in rulings C and D above because the dividends will be "excepted dividends" within the meaning assigned by section 187.1 and "excluded dividends" within the meaning assigned by subsection 191(1).
F. The dividends described in rulings C and D above will not be subject to tax under XXXXXXXXXX.
G. The provisions of paragraph 85(1)(e.2) will not apply with respect to the transfer of LOSSCO shares to CCO as described in paragraph 29 above.
H. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the deemed dividend described in ruling D above, provided that as part of the series of transactions or events (within the meaning of subsection 248(10)) as part of which the dividend will be received, there is no event described in the subparagraphs 55(3)(a)(i), (ii), (iii), (iv) and (v) which has not been described herein as a proposed transaction..
I. After the winding-up of LOSSCO into CCO as described in paragraph 31 above is completed, the provisions of subsection 88(1.1) will apply to permit CCO to deduct the Non-capital losses of LOSSCO in computing its taxable income for any taxation year commencing after the commencement of the winding-up, to the extent that the requirements in paragraph 88(1.1)(a) and (b) are satisfied and subject to the limitations in paragraph 88(1.1)(e) and section 111.
J. The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply to the proposed transactions, in and by themselves.
K. Subsection 245(2) 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 above.
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.
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 FMV or ACB of any property or the PUC of any shares referred to herein;
(b) the amount of any Non-capital loss 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 other tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
OPINION
The determination of whether PARENT, BCO and CCO are "affiliated persons" under subsection 251.1(1) is a question of fact which can only be made following a review of all the facts and documents in a particular situation, including the by-laws of a corporation and any unanimous shareholders' agreement. Such a determination is a matter for which the local Tax Services Office is responsible. It is nevertheless our opinion that while the proposed transactions will be implemented in the manner described above, the provisions of the Agreement described in paragraph 8 above and the by-laws described in paragraph 4 above will not, in and by themselves, preclude PARENT, BCO and CCO from being "affiliated persons" pursuant to subsection 251.1(1).
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
for Director
Corporate Reorganizations and
Resources Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2005
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2005
Email this Content