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: Loss utilization within a corporate group.
Position: Acceptable.
Reasons: Previous rulings and proposal meets paragraph 32 of IT-533.
XXXXXXXXXX 2007-022793
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided during our various telephone conversations in connection with your request (XXXXXXXXXX ).
You advise that to the best of your knowledge and that of the taxpayers referred to above, none of the issues involved in the ruling request:
i. is in an earlier return of the taxpayers or a related person;
ii. is being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or a related person;
iii. is under objection by the taxpayers 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 to the taxpayers, other than ruling XXXXXXXXXX , by the Directorate.
Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated.
Our understanding of the relevant definitions, facts, proposed transactions and their purposes is set out below.
DEFINITIONS
a) "Acquisition Co" means XXXXXXXXXX . as described in 13;
b) "Canco" means XXXXXXXXXX .;
c) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c.44, as amended;
d) "Company" means XXXXXXXXXX as described more fully in 2;
e) "Company Debenture" has the meaning assigned in 23;
f) "CRA" means the Canada Revenue Agency;
g) "CCO" means XXXXXXXXXX .;
h) "DCO" means XXXXXXXXXX ;
i) "XXXXXXXXXX Company" means XXXXXXXXXX .;
j) "XXXXXXXXXX LLC" means XXXXXXXXXX ;
k) "XXXXXXXXXX LP" means XXXXXXXXXX as described more fully in 6;
l) "Demand Loan" has the meaning assigned in 24;
m) "ECO" means XXXXXXXXXX .;
n) "FCO" means XXXXXXXXXX .;
o) "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 under no compulsions to act;
p) XXXXXXXXXX
q) "Issued Newco Preferred Shares" has the meaning assigned in 22;
r) XXXXXXXXXX
s) "Loan" has the meaning assigned in 21;
t) "Newco" means a newly-incorporated corporation described in 19;
u) "Newco Common Shares" has the meaning assigned in 19;
v) "Newco Preferred Shares" has the meaning assigned in 19;
w) "Parent" means XXXXXXXXXX . as described more fully in 1;
x) "Proposed Transactions" means the proposed transactions described in 19 to 28;
y) "T" means XXXXXXXXXX ;
z) XXXXXXXXXX ; and
aa) "US LLC" means XXXXXXXXXX .
FACTS
1) Parent is incorporated pursuant to the laws of Canada. Parent is a taxable Canadian corporation and a public corporation. Each class of its issued shares is listed on the XXXXXXXXXX . Parent has a XXXXXXXXXX year-end and files its tax returns through the XXXXXXXXXX Tax Services Office.
2) Company is a XXXXXXXXXX . Company is a taxable Canadian corporation XXXXXXXXXX . All the issued and outstanding common shares of Company are owned by Parent, which controls Company. Certain preferred shares of Company are listed on the XXXXXXXXXX and are owned by unrelated parties. Company has a XXXXXXXXXX year-end and files its tax returns through the XXXXXXXXXX Tax Services Office.
3) Company carries on the business of XXXXXXXXXX . Company reported $XXXXXXXXXX taxable income on its XXXXXXXXXX income tax return.
4) Parent earns income from dividends on the shares it owns of Company and of other subsidiaries. Parent, indirectly through other second tier subsidiaries, holds all the common shares of DCO. XXXXXXXXXX .
5) Parent owns all the issued shares of ECO which is a taxable Canadian corporation. ECO owns all the issued shares of CCO which is a taxable Canadian corporation. CCO owns all the issued shares of XXXXXXXXXX Company which is a XXXXXXXXXX corporation.
6) In XXXXXXXXXX , Parent and its wholly-owned subsidiary, Canco, formed a XXXXXXXXXX limited partnership, XXXXXXXXXX LP, with Parent having a XXXXXXXXXX % partnership interest and Canco having a XXXXXXXXXX % partnership interest.
7) In XXXXXXXXXX , Parent subscribed for $XXXXXXXXXX in common shares of Canco. Parent then made a capital contribution of $XXXXXXXXXX to XXXXXXXXXX LP and Canco made a capital contribution of $XXXXXXXXXX to XXXXXXXXXX LP. The share subscription and capital contribution by Parent were made with funds borrowed from a Canadian bank.
8) XXXXXXXXXX LP has borrowed $XXXXXXXXXX by the issue of debentures to the public in Canada. The issue was completed on XXXXXXXXXX .
9) XXXXXXXXXX LP has incorporated a new limited liability corporation in XXXXXXXXXX , XXXXXXXXXX LLC. XXXXXXXXXX LP subscribed for $XXXXXXXXXX USD in common shares of XXXXXXXXXX LLC.
10) Parent subscribed for the equivalent of $XXXXXXXXXX USD in common shares of ECO, which in turn subscribed for the same amount of common shares of CCO. Parent's subscription was made with funds borrowed from a Canadian bank.
11) CCO has incorporated a new corporation in the United States, FCO. CCO subscribed for $XXXXXXXXXX USD in common shares of FCO.
12) FCO has incorporated a new limited liability corporation in the United States, US LLC. FCO subscribed for $XXXXXXXXXX USD in common shares of US LLC and loaned $XXXXXXXXXX USD to US LLC.
13) US LLC incorporated a linear chain of wholly owned subsidiary corporations in the United States (the "tiered US subsidiaries"). The lowest tiered subsidiary, Acquisition Co, has acquired the T.
14) XXXXXXXXXX LLC has subscribed for $XXXXXXXXXX USD in preferred shares of US LLC using the subscription proceeds it received as described in 9 above.
15) Parent loaned $XXXXXXXXXX USD to US LLC in return for interest bearing notes from US LLC. These loans by Parent were made with funds borrowed from a Canadian bank.
16) Parent repaid $XXXXXXXXXX USD which it owed to XXXXXXXXXX Company. XXXXXXXXXX Company loaned $XXXXXXXXXX USD to US LLC.
17) The funds from the issue of common shares and preferred shares by US LLC in 12 and 14 above, together with the funds borrowed by US LLC in 12, 15 and 16 above, were transferred to Acquisition Co by a series of loans and/or share subscriptions made down through the tiered US subsidiaries. Acquisition Co used the funds toward the purchase of T at a purchase price of $XXXXXXXXXX USD. The purchase was completed on XXXXXXXXXX .
18) T is a XXXXXXXXXX which carries on business as XXXXXXXXXX . The vendor was XXXXXXXXXX .
PROPOSED TRANSACTIONS
19) Parent will incorporate a new corporation ("Newco") under the laws of Canada that will be a taxable Canadian corporation XXXXXXXXXX . Newco will have a XXXXXXXXXX year-end and will be a taxable Canadian corporation. Newco's authorized capital will consist of one class of an unlimited number of common shares (the "Newco Common Shares") and one class of an unlimited number of preferred shares (the "Newco Preferred Shares") which will include the following attributes:
a) the Newco Common Shares will be voting;
b) the Newco Preferred Shares will be:
i) non-voting except where the CBCA otherwise requires a statutory vote;
ii) redeemable at any time by Newco for an amount equal to the amount for which they were issued and any unpaid dividends which may accumulate prior to their redemption;
iii) entitled to an annual cumulative dividend at a rate equal to the interest rate of XXXXXXXXXX % calculated on the amount for which they were issued and will have a preference on dissolution over the Newco Common Shares for the return of their redemption amount plus any unpaid dividends.
20) Parent will subscribe for XXXXXXXXXX Newco Common Shares for $XXXXXXXXXX on the incorporation of Newco. Newco will use the proceeds to acquire publicly traded equities.
21) Parent will borrow an amount not to exceed $XXXXXXXXXX from a Canadian Bank (the "Loan").
22) Parent will use the proceeds from the Loan to subscribe for Newco Preferred Shares (the "Issued Newco Preferred Shares"). The amount to be added to the stated capital account maintained for the Issued Newco Preferred Shares under the CBCA will be equal to the amount of the Loan proceeds paid to Newco as payment in full for the subscription price of the Issued Newco Preferred Shares such that these shares will have an aggregate FMV, paid-up capital and redemption amount equal to the Loan proceeds.
23) Parent will immediately transfer all of the Issued Newco Preferred Shares to Company at a purchase price equal to their FMV. As sole consideration for such transfer, Company will issue a debenture (the "Company Debenture") to Parent that will have a principal amount and FMV equal to the FMV of the Issued Newco Preferred Shares. The Company Debenture will bear interest at XXXXXXXXXX % per annum and will be repayable on the XXXXXXXXXX anniversary date of its issue (subject to the right of prepayment without penalty). The Company Debenture will also provide that Parent's right to repayment will be restricted to having recourse to the Issued Newco Preferred Shares only, and not to any other assets of Company. Company will give Parent a secured interest in the Issued Newco Preferred Shares (and any proceeds from their redemption or sale).
24) Newco will immediately lend the proceeds it receives from Parent on the subscription of the Issued Newco Preferred Shares to Parent on an interest free demand basis (the "Demand Loan").
25) Parent will apply the proceeds from the Demand Loan to repay the Loan from the Canadian Bank referred to in 21 above. The borrowing and repayment of the Loan by Parent will be arranged as a daylight loan.
26) Company will pay interest to Parent on the Company Debenture on an annual basis. Based on Company's financial projections, it will have the financial capacity to honour its obligation to pay such interest on the Company Debenture from its own cash flow. The annual interest payment date on the Company Debenture will be the same as the annual dividend payment date on the Issued Newco Preferred Shares.
27) Parent will agree to, and will make, annual capital contributions on the common share capital of Newco in a total amount equal to the amount of annual dividends to be paid by Newco on the Issued Newco Preferred Shares held by Company for so long as such shares are outstanding. Based on Parent's existing assets and resources, Parent will be able to make the capital contributions to Newco without taking into account the interest income it will receive from Company as described in 26 above. Under general accepted accounting principles, these capital contributions will not be reported as income to Newco in its financial statements. Parent will not be required to make any capital contributions to Newco where Newco is no longer paying dividends to Company on the Issued Newco Preferred Shares.
28) Newco will use the amounts received as capital contributions as described in 27 above to pay dividends on the Issued Newco Preferred Shares to Company on an annual basis.
29) The Issued Newco Preferred Shares will not be, at any time during the implementation of the proposed transactions described herein:
a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
b) the subject of a dividend rental arrangement as that term is defined in subsection 248(1);
c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
d) issued for consideration that is or includes:
i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or
ii) any right of the type described in subparagraph 112(2.4)(b)(ii).
30) Each of Parent and Newco will agree with Company that Newco will be a single purpose company, will have no liabilities and will carry on no activity other than as contemplated in the Proposed Transactions.
31) Company will have the financial capacity to honor the principal amount payable under the Company Debenture.
32) XXXXXXXXXX
You also advise that in your view, neither the acquisition of the Issued Newco Preferred Shares nor the related transactions XXXXXXXXXX Company's business.
PURPOSE OF THE PROPOSED TRANSACTIONS
33) The purpose of the Proposed Transactions is to enable Parent to earn sufficient interest income so that in calculating its income for purposes of the Act, it will be able to utilize the interest expense that it will incur on the borrowings referred to in 7, 8, 10 and 15 above and to utilize its share of losses incurred by XXXXXXXXXX LP as a result of the borrowings referred to in 8 above.
34) XXXXXXXXXX
35) XXXXXXXXXX
36) XXXXXXXXXX
RULINGS REQUESTED
Provided that the preceding statements, including the additional information, 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. The dividends received by Company on the Issued Newco Preferred Shares, as described in 28 above, will be taxable dividends that will be deductible pursuant to XXXXXXXXXX in computing the taxable income of Company for the year in which such dividends are received; and for greater certainty, such deduction will not be precluded by any of subsection XXXXXXXXXX (2.2), (2.3) or (2.4).
B. XXXXXXXXXX
C. Provided that Company has a legal obligation to pay interest on the Company Debenture, as described in 23 above, and Company continues to hold the Issued Preferred Shares, described in 28 above, for the purpose of earning income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy), Company will be entitled, pursuant to paragraph 20(1)(c), to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by Company in computing its income for the purposes of the Act) in respect of the year on the Company Debenture or (ii) a reasonable amount in respect thereof.
D. No amount will be included in the income of Newco pursuant to section 9, or paragraph 12(1)(c) or 12(1)(x) in respect of the capital contributions to Newco described in 27 above.
E. The provisions of subsection 15(1), 56(2), 69(1), or 246(1) will not apply to the Proposed Transactions, in and by themselves.
F. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX . These 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 into law, could have an effect on the rulings provided herein.
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 FMV of any share or other property referred to herein;
b) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;
c) the application or non-application of the general anti-avoidance provisions of any province; or
d) any other tax consequence relating to the facts, Proposed Transactions, other information or any transactions or events, 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 rulings given above.
Yours truly,
XXXXXXXXXX
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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