2006 Ruling 2005-0121481R3 - Deductible Loss - Foreign Affiliate

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: If a foreign affiliate (Forco) of a Canadian company (Canco) incurred losses in previous years and its shares are transferred to a newly incorporated Canadian subsidiary (Newco) of Canco, will the losses be a "deductible loss" of Forco vis-à-vis Newco under Regulation 5903

Position: In general, yes.

Reasons: In these circumstances, Forco's losses incurred during previous years will be available after the transfer of Forco to Newco.

XXXXXXXXXX  								2005-012148

XXXXXXXXXX, 2006

Attention: XXXXXXXXXX

Dear Sir:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter in which you requested an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence and during our telephone conversations in connection with your request (XXXXXXXXXX).

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Definitions

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

"Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof. Unless otherwise stated, statutory references in this letter are to the Act;

"Canco" means XXXXXXXXXX

"Controlled Foreign Affiliate" has the meaning assigned by subsection 95(1) of the Act.

"Dco" means XXXXXXXXXX.

"Deductible Loss" has the meaning assigned by paragraph F in the definition of FAPI and Regulation 5903.

"FAPI" means "foreign accrual property income" as defined in subsection 95(1) of the Act.

"FAPL" means "foreign accrual property loss" which is the amount determined under Regulation 5903(1)(a) and defined in proposed Regulation 5903(3).

"Forco" means XXXXXXXXXX.

"Forco's Losses" means the losses described below in Paragraph 3 hereof.

"Investment Business" has the meaning assigned by subsection 95(1) of the Act.

"Newco" means XXXXXXXXXX.

"Participating Percentage" has the meaning assigned by subsection 95(1) of the Act.

"Public Corporation" has the meaning assigned by subsection 89(1) of the Act.

"Regulation" means the Income Tax Regulations.

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

"Transaction Time" means XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in this Advance Income Tax Ruling:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer 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 not expired; or

(v) is the subject of a ruling previously issued by this Directorate.

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

Facts

1. Canco is a Taxable Canadian Corporation and a Public Corporation with a taxation year-end of XXXXXXXXXX. Canco is primarily a holding company dedicated to XXXXXXXXXX. Certain of these activities are carried out through wholly or partially owned subsidiaries while others are undertaken through portfolio investment holdings. Canco is controlled by individuals, who are resident in Canada.

2. Canco owns XXXXXXXXXX% of the issued and outstanding shares of Forco and has owned them since XXXXXXXXXX. Forco is a Controlled Foreign Affiliate that is incorporated, resident and carries on business in XXXXXXXXXX. Forco carries on an Investment Business. Forco's taxation year-end is XXXXXXXXXX.

3. During the period that Forco was wholly-owned directly by Canco, Forco incurred certain FAPLs, principally from the disposition of certain Canadian equity securities, that are included in the computation of the Deductible Loss of Forco in respect of Canco ("Forco's Losses").

4. Canco, through Newco, a wholly-owned Canadian subsidiary incorporated in XXXXXXXXXX, holds XXXXXXXXXX% of the shares of Dco, a Taxable Canadian Corporation. XXXXXXXXXX. Among these, Canco has committed itself to transferring its shares in Forco to Newco, such that all entities within the corporate group that may be engaged in XXXXXXXXXX activities, would be held by Newco.

Proposed Transaction

Canco proposes to dispose of all of its shares of Forco to Newco at the Transaction Time for consideration that includes only newly issued shares of Newco. Newco and Canco intend to make any elections necessary under section 85 of the Act such that no gain should result to Canco as a result of this transaction.

Purpose of Proposed Transaction

The purpose of the Proposed Transaction is to permit Canco to fulfill its undertakings as described above in Paragraph 4. Forco will remain a XXXXXXXXXX% Controlled Foreign Affiliate of Canco at all times, and will become a XXXXXXXXXX % Controlled Foreign Affiliate of Newco immediately after the Transaction Time. Newco's Participating Percentage in Forco will become XXXXXXXXXX% for taxation years of Forco ending after the Transaction Time and, as such, all FAPI earned by Forco for taxation years ending after the Transaction Time will be included in computing Newco's income for tax purposes pursuant to section 91(1) of the Act.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transaction, and purpose of the proposed transaction, and provided further that the proposed transaction is carried out as described above, our Ruling is as follows:

We confirm that in determining amount described in element F in the definition of FAPI for Forco in relation to Newco for the taxation year of Forco ended XXXXXXXXXX (the "Relevant Taxation Year"), for the purpose of computing the amount prescribed by subsection 5903(1) of the Regulations to be the Deductible Loss of Forco for the Relevant Taxation Year and the five immediately preceding taxation years, Canco will be "a person described in any of subparagraphs 95(2)(f)(iv) to (vii)" for any such taxation year of Forco provided Canco is a person with whom Newco was not dealing at arm's length at the end of the Relevant Taxation Year.

Nothing in this Advance Income Tax Ruling should be construed as implying that we are ruling on, or have considered, or discussed with you whether the losses of Forco otherwise meet the requirements of subsection 5903(1) of the Regulations or any other tax consequences relating to the facts and proposed transaction described herein except that specifically described in the Ruling given above.

The Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 and is binding on the Canada Revenue Agency provided that the proposed transaction was completed before XXXXXXXXXX.

Opinions

Similarly, under proposed Regulation 5903, as set out in the draft proposals to amend the Act and Regulations dated March 16, 2001, in determining the amount described in element F in the definition of FAPI for Forco in relation to Newco for the Relevant Taxation Year, Canco will be "a person described in any of subparagraphs 95(2)(f)(iv) to (vii)" for the purpose of paragraph 5903(3)(b) of the Regulations for any taxation year of Forco ending before the Relevant Taxation Year provided Canco is a person with whom Newco was not dealing at arm's length at the end of the Relevant Taxation Year.

Yours truly,

XXXXXXXXXX
International Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch