2007 Ruling 2006-0198421R3 - Utilization of Losses - Acquisition Control

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: Availability of losses in a takeover situation where the business of the particular Loss corporation is transferred to a limited partnership and the Loss corporation (and ultimately its successor corporation following one or more amalgamations) is the general partner.

Position: Favourable ruling issued.

Reasons: In accordance with the Act.

XXXXXXXXXX 								2006-019842

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX - Advance Income Tax Ruling Request

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

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

(iii) under objection by the taxpayer 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 taxpayer has also represented that the proposed transactions described herein will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, unless otherwise indicated, all monetary amounts are expressed in Canadian dollars 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 of the Act, and the Income Tax Act Regulations thereunder are referred to as the "Regulations";

(b) "A Co" means XXXXXXXXXX an unlimited liability company formed pursuant to the laws of the Province of XXXXXXXXXX;

(c) "Acquisition Debt" means A Co's $XXXXXXXXXX indebtedness owing to non-resident lenders that was the subject of Advance Income Tax Ruling #2006-019419, as amended by #2006-020401, and was incurred by A Co, in part, to facilitate its purchase of the shares of B Co and R Co described in Paragraph 8;

(d) "Amalgamated Lossco" means the XXXXXXXXXX unlimited liability company formed on the amalgamation of A Co and First Amalco;

(e) XXXXXXXXXX;

(f) "B Co" means XXXXXXXXXX, a corporation formed pursuant to the laws of XXXXXXXXXX;

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

(h) "Canada Topco" means XXXXXXXXXX , an unlimited liability corporation formed under the laws of XXXXXXXXXX;

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

(j) "Code" means the US Internal Revenue Code of 1986, as amended;

(k) "E LP" means the XXXXXXXXXX formed on XXXXXXXXXX under the Partnership Act (XXXXXXXXXX) pursuant to the E LP Agreement;

(l) "E LP Agreement" means the written partnership agreement dated XXXXXXXXXX between T LP as the limited partner and T Co as the initial general partner;

(m) "fair market value" ("FMV") means the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

(n) "First Amalco" means the successor corporation formed on the amalgamation of B Co, R Co and Lossco described in Paragraph 11;

(o) "Lossco" means XXXXXXXXXX;

(p) "Loss Business" means the business operations carried on by Lossco as described in Paragraph 2;

(q) "P Co" means XXXXXXXXXX, an unlimited liability corporation formed pursuant to the laws of XXXXXXXXXX;

(r) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

(s) "Proposed Transactions" means the proposed transactions described in Paragraphs 7 to 14;

(t) "R Co" means XXXXXXXXXX, a corporation formed pursuant to the laws of XXXXXXXXXX;

(u) "related person" ("related") has the meaning assigned by section 251;

(v) "T Co" means XXXXXXXXXX, a corporation formed pursuant to the laws of XXXXXXXXXX which is wholly-owned by the T LP;

(w) "T LP" means the XXXXXXXXXX, a limited partnership between various individuals all of whom are residents of Canada;

(x) "US" means the United States of America;

(y) "US Midco" means XXXXXXXXXX, a US corporation that will elect to be treated as an "S Corporation" under section 1362 of the Code; and

(z) "US Topco" means XXXXXXXXXX, a US corporation that will elect to be treated as an "S corporation" under section 1362 of the Code.

FACTS

1. Lossco is a taxable Canadian corporation that was incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX. Lossco's CRA business number is XXXXXXXXXX and it files its tax returns with the XXXXXXXXXX TC and otherwise deals with the XXXXXXXXXX TSO. Lossco's taxation year ends on XXXXXXXXXX.

2. XXXXXXXXXX.

3. XXXXXXXXXX. Lossco has incurred a non-capital loss for its first taxation year ending XXXXXXXXXX, totalling approximately $XXXXXXXXXX. The estimated amount of Lossco's non-capital loss for its taxation year ending XXXXXXXXXX, is $XXXXXXXXXX. All of Lossco's non-capital losses have been incurred from the carrying on the Loss Business.

4. Prior to XXXXXXXXXX, all of the issued and outstanding shares of Lossco were owned by B Co and R Co, both of which were taxable Canadian corporations. B Co was a holding corporation that was controlled by entities controlled by XXXXXXXXXX and family members related to him. R Co was a holding corporation controlled by entities controlled by XXXXXXXXXX and family members related to him. Neither B Co, nor R Co carried on any business directly and neither corporation had any non-capital losses.

5. All the issued and outstanding shares of A Co are owned by Canada Topco. Canada Topco is a taxable Canadian corporation all the issued and outstanding shares of which are owned by US Midco. All of the issued and outstanding shares of US Midco are owned by US Topco. XXXXXXXXXX.

6. Prior to XXXXXXXXXX, A Co was not related to B Co, R Co or Lossco and A Co dealt at arm's length with B Co, R Co and Lossco.

PROPOSED TRANSACTIONS

The Proposed Transactions described below have been completed.

7. On XXXXXXXXXX E LP was established with T Co as the initial general partner and T LP as the initial limited partner.

8. On XXXXXXXXXX, Lossco transferred all of its assets, including the Original XXXXXXXXXX and the Loss Business, to E LP pursuant to subsection 97(2). As consideration therefor, E LP issued XXXXXXXXXX partnership units (representing approximately XXXXXXXXXX% of all the issued E LP partnership units) to Lossco and assumed all of the liabilities associated with the Loss Business. Lossco also became the general partner of E LP.

9. On XXXXXXXXXX, T LP also subscribed for XXXXXXXXXX limited partnership units of E LP for total subscription proceeds of $XXXXXXXXXX and P Co subscribed for XXXXXXXXXX limited partnership units of E LP for total subscription proceeds of $XXXXXXXXXX. These subscription proceeds, together with the balance of the funds borrowed by A Co under the Acquisition Debt will be used by E LP in the Loss Business (specifically to increase working capital, make leasehold improvements and to pay various legal, financing and transaction costs).

10. On XXXXXXXXXX, A Co purchased all of the shares of B Co and R Co in an arm's length transaction for an aggregate purchase price of $XXXXXXXXXX that A Co financed with a portion of the proceeds A Co received by issuing the Acquisition Debt. As a result of A Co's share acquisitions, A Co acquired control of B Co, R Co and Lossco for the purposes of the Act.

11. On XXXXXXXXXX, B Co, R Co, and Lossco amalgamated under the laws of XXXXXXXXXX to form First Amalco. As the successor to Lossco, First Amalco is the general partner of E LP.

12. On XXXXXXXXXX, First Amalco was continued under the laws of XXXXXXXXXX as XXXXXXXXXX.

13. On XXXXXXXXXX, First Amalco and A Co amalgamated under the laws of XXXXXXXXXX to form Amalgamated Lossco. As the successor to First Amalco, Amalgamated Lossco is the general partner of E LP. XXXXXXXXXX.

14. E LP will continue to operate the Loss Business formerly carried on by Lossco in substantially the same manner and at the same location for profit or with a reasonable expectation of profit. However, in order to ensure the future success of the Loss Business, a new management team has been put in place (with an average over XXXXXXXXXX years of industry experience). The new management team has developed a turnaround strategy that will be implemented in order to address the reasons why the Loss Business has underperformed to date including:

(a) providing sufficient additional working capital and capitalization;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX;

(d) XXXXXXXXXX; and

(e) XXXXXXXXXX.

XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

15. The purposes of the Proposed Transactions are as follows:

(a) To allow A Co (now Amalgamated Lossco), T LP and P Co to acquire and invest in the Loss Business and to operate the Loss Business for profit in a partnership through E LP.

(b) To allow the interest expense on the Acquisition Debt incurred by A Co on the acquisition of Lossco as described in Paragraph 8 to be deducted against a source of income via Amalgamated Lossco's share of the E LP partnership income.

16. The only reason for entering into the New XXXXXXXXXX described in Paragraph 13 was because the parties wanted to extend the term of the Original XXXXXXXXXX . First Amalco did not require the New XXXXXXXXXX to enter into the Proposed Transactions, because, as a successor corporation, it could have retained the rights under the Original XXXXXXXXXX to operate the Loss Business. Amalgamated Lossco could also have continued to operate the Loss Business under the Original XXXXXXXXXX. The only substantive difference between the Original XXXXXXXXXX and the New XXXXXXXXXX is the longer term. In that regard, discussions were held with the XXXXXXXXXX about extending the term of the Original XXXXXXXXXX and then assigning it to E LP or having E LP receive the New XXXXXXXXXX with an extended term. The XXXXXXXXXX advised the parties that it was its preference to issue the New XXXXXXXXXX to Amalgamated Lossco. However, because of the tight time frame for completing the Proposed Transactions, including the intervening amalgamations, it was determined that as an interim measure it would be simpler for Lossco to assign the Original XXXXXXXXXX to E LP as part of the transfer of the Loss Business to E LP. This interim measure allowed the Loss Business to continue operating under the Original XXXXXXXXXX until the amalgamations were completed and the New XXXXXXXXXX was issued.

RULING

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 ruling is set forth below.

A. Provided that the Loss Business, described in Paragraph 2, is carried on by Amalgamated Lossco through E LP for profit or with a reasonable expectation of profit throughout a particular taxation year ending after the acquisition of control of Lossco by A Co, as described in Paragraph 8, and subject to the time limitations set out in paragraph 111(1)(a), the restrictions set out in subsection 111(3), and any other requirements of the Act regarding deductibility of non-capital losses, the non-capital loss of Lossco as determined pursuant to subsection 111(8), will be a non-capital loss of Amalgamated Lossco by reason of subsection 87(2.1) and may be deducted by Amalgamated Lossco under paragraph 111(5)(a) in computing its taxable income for that particular taxation year to the extent of the income earned by Amalgamated Lossco for that particular year from carrying on the Loss Business through E LP.

The above ruling is subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA. The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the ruling 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 cost amount, adjusted cost base or fair market value of any property referred to herein; or

(b) 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, other than those specifically described in the ruling given above.

Yours truly,

XXXXXXXXXX
Industry Sector Specialist
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch