2005 Ruling 2005-0155451R3 - Loss utilization among affiliated 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 Subco's non-capital losses and expiring provincial investment tax credits is accomplished in two stages. In previous ruling 2004-009856, Parentco transferred depreciable industrial property to Subco on a tax-deferred basis which enabled Subco to earn income from the sale of the output from those assets. Approximately one year later, in this ruling, Parentco will repurchase the same assets from Subco at fair market value. This will create income from recapture in Subco that will be sheltered by its non-capital losses and its otherwise expiring provincial investment tax credits. It will also result in an increase in the undepreciated capital cost pools of Parentco which will shelter Parentco's anticipated future income. This scheme will result in a shift of future taxable income primarily from XXXXXXXXXX

Position: The loss utilization is acceptable.

Reasons: This type of loss utilization is consistent with similar previous rulings and with Department of Finance policy. The ruling was issued with a specific limitation with respect to the possible application of provincial anti-avoidance rules and was brought to the attention of the CRA's Provincial Legislative Affairs division for use in their ongoing discussions with the Provinces.

XXXXXXXXXX 									2005-015545

XXXXXXXXXX, 2005

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) except as disclosed in Paragraph 15 of this letter, the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You have also confirmed that the proposed transactions will not affect the ability of the taxpayers to pay their 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 in this letter to a statutory provision is a reference to the relevant provision of the Act;

(b) "adjusted cost base" ("ACB") 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) "depreciable property" has the meaning assigned by subsection 13(21);

(i) "Fixtures" has the meaning assigned in Paragraph 15 below;

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

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

(l) "Paragraph" means a numbered paragraph in this letter;

(m) "Premises Lease" means the lease described in Paragraph 14 below;

(n) "proposed transactions" means the transactions described in Paragraphs 17 to 21 below;

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

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

(q) "Services Agreement" means the agreement described in Paragraph 14 below;

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

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

(t) "Transferred Assets" has the meaning assigned in Paragraph 15 below;

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

(v) "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. 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.

9. Subco is a taxable Canadian corporation and is not a public corporation.

10. USco acquired control of XXXXXXXXXX

11. As at XXXXXXXXXX, Subco had the following relevant tax pools:

(a) UCC of depreciable property: $XXXXXXXXXX

(b) non-capital losses: $XXXXXXXXXX

(c) XXXXXXXXXX investment tax credits: $XXXXXXXXXX

The UCC pool is spread across a number of classes. The UCC of depreciable property of class 24, class 27 and class 29 owned by Subco at the end of XXXXXXXXXX was $XXXXXXXXXX.

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

The XXXXXXXXXX investment tax credits were primarily 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.

12. As at XXXXXXXXXX, Parentco had the following relevant tax pools:

(a) UCC of depreciable property: $XXXXXXXXXX

(b) non-capital losses: $XXXXXXXXXX

The UCC pool is spread across a number of classes. The UCC of depreciable property of class 24, class 27 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.

13. XXXXXXXXXX

14. XXXXXXXXXX

15. XXXXXXXXXX

Subco acquired its interest in the XXXXXXXXXX assets from Parentco on XXXXXXXXXX in transactions which were the subject of Ruling No. 2004-009856, dated XXXXXXXXXX, 2004.

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, class 27 and class 29.

16. Parentco prepared an internal valuation in XXXXXXXXXX to support its determination of the fair market value of the Transferred Assets. This internal valuation was reviewed by the XXXXXXXXXX Tax Services Office as part of their Real-Time Audit of the transactions described in Ruling No. 2004-009856 undertaken in XXXXXXXXXX. The fair market value of the Transferred Assets is expected to be approximately $XXXXXXXXXX.

PROPOSED TRANSACTIONS

17. Subco will transfer the Transferred Assets to Parentco. In consideration for the transfer of the Transferred Assets, Parentco will issue a non-interest-bearing, demand promissory note with a principal amount equal to the fair market value of the Transferred Assets to Subco. Concurrently with the purchase of the Transferred Assets from Subco, Subco will pay Parentco the amounts accrued under the Premises Lease and Services Agreement and Parentco and Subco will enter into mutual releases of their obligations to each other under the Premises Lease and Services Agreement.

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

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

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

(b) Parentco and Subco will execute enforceable, valid, legally-binding written agreements relating to the transfer of the Transferred Assets; and

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

20. After the Transferred Assets have been purchased by Parentco, Subco will, by special resolution in accordance with XXXXXXXXXX the BCA, reduce the stated capital of its common shares by an amount equal to the purchase price of the Transferred Assets owed to it by Parentco and will issue a promissory note in that amount payable to Parentco as a distribution of capital to Parentco. The amount of the stated capital reduction will not exceed either the paid-up capital or the adjusted cost base of the common shares of Subco immediately before the stated capital reduction, and will not exceed the reduction in the paid-up capital of those shares.

21. The obligations of Parentco and Subco under the promissory notes issued in Paragraphs 17 and 20 above will be set-off against each other in full payment of such notes and the notes will be cancelled.

PURPOSE OF THE PROPOSED TRANSACTIONS

22. The purpose of the proposed transactions is to allow Subco to realize income for tax purposes which will enable it to utilize its non-capital losses carried forward from prior years and to increase Parentco's undepreciated capital cost tax pools to enable it to claim capital cost allowance. The proposed transactions will improve the likelihood that Subco will be able to generate sufficient taxable income to utilize its otherwise expiring provincial investment tax credits in XXXXXXXXXX and subsequent years.

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. 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 Subco immediately before the property is acquired by Parentco, as described in Paragraph 17 above, will be deemed to be property of that same prescribed class or separate prescribed class, as the case may be, of Parentco.

B. Provided that the conditions specified in paragraph 1100(2.2)(f) or (g) of the Regulations are satisfied, paragraph 1100(2.2)(h) of the Regulations will apply such that no amount will be included by Parentco under paragraph 1100(2)(a) of the Regulations in respect of a Transferred Asset that is depreciable property of Subco that is transferred to Parentco, as described in Paragraph 17 above.

C. Provided that the condition specified in paragraph 1100(2.2)(g) of the Regulations is satisfied, paragraph 1100(2.2)(j) of the Regulations will apply such that any of the Transferred Assets that are depreciable property of Subco and that were transferred to Subco by Parentco on XXXXXXXXXX and held continuously by Subco since that day, and that are transferred to Parentco as described in Paragraph 17 above, and that were deemed to be depreciable property of Subco of a class to which paragraph 1100(1)(ta) of the Regulations applied, will, subsequent to their transfer to Parentco by Subco,:

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

(b) for the purpose of computing the amount determined under paragraph 1100(1)(a) of the Regulations for any taxation year of Parentco ending after the time of its acquisition of the property from Subco, be deemed to have been acquired by Parentco at the start of the first taxation year of Parentco beginning after the time that Parentco last acquired the property prior to XXXXXXXXXX

D. Subsection 84(4) will not apply to deem Subco to have paid, and Parentco to have received, a dividend on the Subco common shares held by Parentco as a result of the reduction in stated capital described in Paragraph 20 above provided that the distribution of capital by Subco on the reduction of the stated capital of the Subco common shares does not exceed the amount by which the paid-up capital of the Subco common shares has been reduced.

E. Subparagraph 53(2)(a)(ii) will apply to reduce the ACB of the Subco common shares held by Parentco upon the distribution of capital made in respect of the reduction of the stated capital of the Subco common shares, as described in Paragraph 20 above, by the amount of the reduction in the paid-up capital of the Subco common shares.

F. Subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions, in and by themselves.

G. 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;

(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.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch