2006 Ruling 2006-0179471R3 - Utilization of Losses within an affiliated group

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: No new or significant issues.

XXXXXXXXXX 								2006-017947

XXXXXXXXXX , 2006

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX
XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayers or any related person;

(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return by the taxpayers or any related person;

(iii) under objection by the taxpayers or any related person;

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

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayers have also represented that the proposed transactions described herein will not result in the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter, and unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph, clause or subclause is a reference to the relevant provision, and the Income Tax Act Regulations thereunder are referred to as the "Regulations";

(b) "adjusted cost base " has the meaning assigned by section 54;

(c) "affiliated persons" has the meaning assigned by subsection 251.1(1);

(d) "BCA1" means the Canada Business Corporations Act;

(e) "BCA2" means the XXXXXXXXXX;

(f) "BN" means the tax identification number assigned by the CRA to the particular entity;

(g) "Canco" means XXXXXXXXXX;

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

(i) "fair market value" means the highest price amount available in an open and unrestricted market between informed prudent parties acting at arm's length;

(j) "Forco1" means XXXXXXXXXX;

(k) "Forco2" means XXXXXXXXXX;

(l) "Lossco" means XXXXXXXXXX;

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

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

(o) "Paragraph" means a numbered paragraph in this advance tax ruling;

(p) "Profitco" means XXXXXXXXXX;

(q) "Proposed Transactions" means the transactions described in Paragraphs 11 to 12;

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

(s) "related persons" has the meaning assigned by section 251;

(t) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

(v) "taxation year" has the meaning assigned by subsection 249(1).

FACTS

1. Lossco was incorporated under the BCA1 on XXXXXXXXXX and is a taxable Canadian corporation. Lossco's taxation year ends on XXXXXXXXXX. Lossco files its federal returns with the XXXXXXXXXX TC and otherwise deals with the XXXXXXXXXX TSO.

2. Lossco's authorized share capital consists of an unlimited number of preferred and Class A common shares. There are currently only common shares and preferred shares of Lossco issued and outstanding all of which are owned by Forco1. The shares of Lossco have an aggregate paid-up capital of $XXXXXXXXXX.

3. Lossco has been a subsidiary wholly-owned corporation of Forco1 since XXXXXXXXXX. Forco1's aggregate adjusted cost base of its shares of Lossco is $XXXXXXXXXX and the estimated aggregate fair market value of such shares is approximately $XXXXXXXXXX. Forco1 is organized under the laws of XXXXXXXXXX and is not a resident of Canada for the purposes of the Act.

4. Profitco was incorporated under the BCA2 on XXXXXXXXXX . Profitco is a taxable Canadian corporation. Profitco's taxation year ends on XXXXXXXXXX. Profitco files its federal returns with the XXXXXXXXXX TC and otherwise deals with the XXXXXXXXXX XXXXXXXXXX TSO. Profitco's authorized share capital consists of an unlimited number of Class "A" subordinate voting shares all of which are owned by Canco.

5. Canco was incorporated under the BCA1 and is a taxable Canadian corporation and a public corporation whose shares are publicly traded on the XXXXXXXXXX Stock Exchange.

6. Forco2 currently owns approximately XXXXXXXXXX% of all the issued and outstanding shares of Canco with the remainder of such shares held by the general public. Forco1 owns all the issued and outstanding shares of Forco2, such that Forco1 is the ultimate parent of Canco. Forco2 is organized under the laws of the United States and is not a resident of Canada for the purposes of the Act.

7. Lossco carried on active business operations in Canada up to XXXXXXXXXX. Lossco's principal business activities involved the provision of XXXXXXXXXX and related services to Forco1 and other companies related to Lossco. In XXXXXXXXXX, the operations of Lossco were wound down and its real property assets were sold to Profitco for their fair market value. Following the settlement of Lossco's outstanding liabilities in XXXXXXXXXX, the only asset held by Lossco is a residual amount of cash. For greater certainty, Lossco does not own any real property or any other assets the fair market value of which would be derived principally from real property.

8. As at XXXXXXXXXX, Lossco had cumulative non-capital losses available for carry-forward of approximately $XXXXXXXXXX ($XXXXXXXXXX were incurred in XXXXXXXXXX, $XXXXXXXXXX were incurred in XXXXXXXXXX and approximately $XXXXXXXXXX were incurred in XXXXXXXXXX). Lossco's business was carried on solely in the province of XXXXXXXXXX, accordingly 100% of its taxable income (and loss) were allocated to XXXXXXXXXX for provincial income tax purposes.

9. Profitco carries on an active business in Canada and in the United States. Profitco is a XXXXXXXXXX. In XXXXXXXXXX, Profitco was operating mainly in XXXXXXXXXX. The remainder of its operations was in XXXXXXXXXX, as well as in XXXXXXXXXX. Approximately XXXXXXXXXX% of the taxable income for Profitco in XXXXXXXXXX was allocated to its permanent establishments in XXXXXXXXXX, while XXXXXXXXXX% was allocated to its permanent establishments in XXXXXXXXXX. This allocation of income was representative of Profitco's business over the past few years and is expected to remain relatively similar for the next several years.

10. Profitco and Lossco have been related persons since XXXXXXXXXX and, for greater certainty, such corporations have been affiliated persons throughout the period during which Lossco incurred its non-capital losses described in Paragraph 8.

PROPOSED TRANSACTIONS

11. Profitco will acquire the all the issued and outstanding shares of Lossco from Forco1 for consideration equal to their estimated fair market value. As a result of such acquisition Lossco will become a subsidiary wholly-owned corporation of Profitco. Forco1, being a non-resident vendor, will fully comply with all the requirements of section 116.

12. Profitco will resolve to liquidate and dissolve Lossco pursuant to the provisions of the BCA1. In due course, Lossco will file tax returns, and upon receipt of the Certificate of Dissolution, Lossco will be formally dissolved. The winding-up of Lossco into Profitco will take place pursuant to subsection 88(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

13. The purpose of the Proposed Transactions is to effect a consolidation of Profitco and Lossco, thereby enabling Profitco to utilize Lossco's non-capital losses. In the absence of the Proposed Transactions, it would not be likely that Lossco would substantially utilize its non-capital losses within the current carry-forward period provided by paragraph 111(1)(a). In contrast, Profitco is expected to generate significant taxable income in its XXXXXXXXXX and subsequent taxation years, against which the non-capital losses of Lossco will be deducted.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of 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, our rulings are as set forth below.

A. Pursuant to clause 256(7)(a)(i)(B), control of Lossco will be deemed not to have been acquired, on the transfer of Lossco's shares by Forco1 to Profitco described in Paragraph 11, for the purposes of the provisions enumerated in subsection 256(7).

B. After the winding-up of Lossco into Profitco, as described in Paragraph 12, is completed, the provisions of paragraph 88(1.1)(c) will apply to permit Profitco 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.

For greater certainty, for the purposes of subsection 88(1.1), the winding-up of Lossco will not be considered to be completed until it has been formally dissolved.

C. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the consequences confirmed in the rulings given above.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA 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 and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property 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 Proposed Transactions;

(d) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

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