2005 Ruling 2005-0139621R3 - 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

Position: Acceptable

Reasons: Paragraph 32 of IT-533

XXXXXXXXXX 		2005-013962	

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("A Co")
XXXXXXXXXX ("B Co")
XXXXXXXXXX ("C Co")

This is in reply to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above named taxpayers. 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 this ruling request herein is:

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

(c) under objection by A Co, B Co, C 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.

DEFINITIONS

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

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

(b) "A Co" means XXXXXXXXXX, the corporation described in paragraphs 1 to 3;

(c) "A Co Note" means the promissory note described in paragraph 14;

(d) "adjusted cost base" has the meaning assigned by section 54 of the Act;

(e) "B Co" means XXXXXXXXXX, the corporation described in paragraphs 4 to 6;

(f) "B Co Note" means the promissory note described in paragraph 13;

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

(h) "C Co" means XXXXXXXXXX, the corporation described in paragraph 7 to 10;

(i) "C Co Common Shares" means the common shares described in paragraph 10;

(j) "C Co Series B Preferred Shares" means the preferred shares described in paragraph 11;

(k) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

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

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

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

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

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

STATEMENT OF FACTS

1. A Co is a Public corporation and a Taxable Canadian corporation. A Co's main assets are investments in subsidiaries in the business of XXXXXXXXXX. A Co's assets in Canada include two wholly-owned Canadian subsidiaries, B Co, engaged in XXXXXXXXXX, and C Co, a holding corporation. A Co common shares are traded on the XXXXXXXXXX Stock Exchange under the symbol XXXXXXXXXX. A Co is located at XXXXXXXXXX. A Co is serviced by the XXXXXXXXXX Taxation Services Office and files its income tax returns at the XXXXXXXXXX Taxation Center

2. A Co was continued under the Corporations Act (XXXXXXXXXX) on XXXXXXXXXX.

3. As at the end of its 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:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Total
XXXXXXXXXX

It is estimated that the non-capital loss for the taxation year ending on XXXXXXXXXX is $XXXXXXXXXX. This would increase the balance of non-capital losses to $XXXXXXXXXX.

4. B Co is a Taxable Canadian corporation incorporated on XXXXXXXXXX, under the Corporations Act (XXXXXXXXXX). B Co has been a wholly-owned subsidiary of A Co since its incorporation. B Co is located at XXXXXXXXXX. B Co is serviced by the XXXXXXXXXX Taxation Services Office and files its income tax returns at the XXXXXXXXXX Taxation Centre.

5. XXXXXXXXXX.

6. B Co was taxable in XXXXXXXXXX and was taxable in the fiscal year ended on XXXXXXXXXX and is expected to continue to be taxable 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.

7. C Co is a Taxable Canadian corporation incorporated on XXXXXXXXXX, under the Canada Business Corporations Act under the name XXXXXXXXXX. C Co is located at XXXXXXXXXX. C Co is serviced by the XXXXXXXXXX Services Taxation Office and files its income tax returns at the XXXXXXXXXX Taxation Centre.

8. On XXXXXXXXXX, the name of the corporation was changed from XXXXXXXXXX to C Co. C Co has been a wholly-owned subsidiary of A Co since its incorporation.

9. C Co acts as a holding company. C Co has two indirect operating subsidiaries, which are in the business of XXXXXXXXXX.

10. The authorized capital of C Co includes an unlimited number of common shares ("C Co Common Shares"), and an unlimited number of preferred shares issuable in series ("C Co Preferred Shares"). The current issued and outstanding share capital of C Co is comprised of Common Shares and Series A and B of C Co Preferred Shares.

PROPOSED TRANSACTIONS

11. C Co will issue Series B Preferred Shares ("the C Co Series B Preferred Shares") that have the following attributes:

a) non-voting;

b) non-participating;

c) redeemable at the option of the issuer and retractable at the option of the holder, subject to applicable law, at any time for an amount equal to the amount for which they were issued; and

d) entitled to an annual cumulative dividend on the amount for which they were issued at a rate that is XXXXXXXXXX%, payable quarterly.

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 managements of A Co and B Co, in collaboration with their respective bankers, have concluded that a reasonable interest rate to be charged on the B Co Note is XXXXXXXXXX%. B Co will use the funds resulting from the issuance of the B Co Note to subscribe for C Co Series B 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 C Co Series B Preferred Shares issued will be $XXXXXXXXXX until redemption.

14. C Co 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 C Co, A Co will repay the Bank's "daylight loan" described in paragraph 12.

16. Annually (or more frequently), B Co will pay interest of approximately $XXXXXXXXXX per annum ($XXXXXXXXXX x XXXXXXXXXX%) to A Co.

17. C Co will use the dividend it receives from its operating subsidiaries to fund the C Co Series B Preferred Shares dividend payment to B Co of $XXXXXXXXXX ($XXXXXXXXXX x XXXXXXXXXX%).

18. Quarterly, C Co will pay a dividend of $XXXXXXXXXX ($XXXXXXXXXX ÷ XXXXXXXXXX) to B Co.

UNWIND STRUCTURE

As A Co repays the loan that it received from C Co as described in paragraph 14, C Co will use proceeds to invest capital in its operating subsidiaries. If A Co does not repay its loan, it is expected that the current plan will be unwound when the non-capital losses are fully used but no later than XXXXXXXXXX.

The plan will be unwound under the following manner:

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

20. C Co will use the funds received from A Co to redeem the issued and outstanding C Co Series B Preferred Shared referred to in paragraph 13, held by B Co.

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

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

Other Representations:

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

24. 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;

25. 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;

26. 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;

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

28. There has not been nor will there be any acquisitions of property or dividends 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 AND ANALYSIS 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 REQUESTED

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and 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 C Co Series B 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 $XXXXXXXXXX will be deductible by B Co pursuant to paragraph 20(1)(c) of the Act to the extent that such amount does not exceed a reasonable amount.

B. The provisions of subsection 15(1) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 11 to 18, in and of themselves.

C. Dividends received by B Co on the C Co Series B Preferred Shares as described above will be taxable dividends and such dividends will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income for the year in which the dividends are received by B Co.

D. On the redemption of the C Co Series B Preferred Shares by C Co:

a) No dividend will be deemed to be paid by C Co on the C Co Series B Preferred Shares and received by B Co by virtue of subsection 84(3) of the Act;

b) B Co will not realize a gain on the disposition of the C Co Series B Preferred Shares by virtue of paragraph 40(1)(a) of the Act.

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 ruling 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 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:

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 Sector and Exempt Entities Division
Income Tax Ruling Directorate
Policy and Planning Branch