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: 1. Deduction of interest on debt created to consolidate losses in affiliated corporate group. 2. Application of s. 55(2). 3. Whether loss consolidation transactions acceptable where voting power of controlling party in one of the affiliated corporations is disproportionate to participating equity interest and consideration for the losses is given. 4. Determination of whether corporations are affiliated where partnerships are the direct holders of the control block of shares of one of the corporations.
Position: 1. Interest is deductible. 2. Dividends arising on share redemption will be recharacterized as proceeds as will the dividends paid as part of the loss consolidation, subject to the purpose test in s. 55(2) and the safe income exception. 3. Transactions are acceptable. 4. Corporations are affiliated and related.
Reasons: 1. Meets the requirements of s. 20(1)(c)(ii). 2. Paragraph 55(3.01)(c) problem that is supposed to be remedied by amendments contemplated in April 21, 2005 comfort letter. 3. The affiliation test, for determining if loss consolidation is acceptable, is a de jure control test, which is satisfied in the circumstances. 4. Meets the requirements of a technical affiliation in s. 251.1 and appropriate representations given in respect of the partners of the partnerships to allow for conclusion that a related group of persons controls the corporation.
XXXXXXXXXX 2008-028977
XXXXXXXXXX , 2009
Dear Sir:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
(collectively, the "Taxpayers")
Advance Income Tax Ruling Request
We are writing in response to your letter of XXXXXXXXXX , in which 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, none of the issues involved in this ruling request are:
(i) in an earlier return of the Taxpayers or persons related to the Taxpayers;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayers or persons related to the Taxpayers;
(iii) under objection by the Taxpayers or persons related to the Taxpayers;
(iv) before the courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (hereinafter referred to as the "Act"). Unless otherwise noted, all references to currency are to Canadian dollars.
DEFINITIONS
In this letter, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified:
(a) "affiliated persons" has the meaning assigned by subsection 251.1(1);
(b) "allowable capital loss" has the meaning assigned by section 38;
(c) "BCA" means the Business Corporations Act XXXXXXXXXX ;
(d) "Canadian-controlled private corporation" or "CCPC" has the meaning assigned by subsection 125(7);
(e) "capital property" has the meaning assigned by section 54;
(f) "cost amount" has the meaning assigned by subsection 248(1);
(g) "CRA" means the Canada Revenue Agency;
(h) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(i) "financial intermediary corporation" has the meaning assigned by subsection 191(1);
(j) "fiscal period" has the meaning assigned by section 249.1;
(k) "GPCo 1" means XXXXXXXXXX .;
(l) "GPCo 2" means XXXXXXXXXX .;
(m) "guarantee agreement" has the meaning assigned by subsection 112(2.2);
(n) "Lossco" means XXXXXXXXXX ;
(o) "Lossco Demand Notes" has the meaning assigned in Paragraph 26;
(p) "Lossco Sub" means XXXXXXXXXX .;
(q) "Lossco Sub Preferred Shares" has the meaning assigned in Paragraph 20;
(r) "LP1" means XXXXXXXXXX ;
(s) "LP2" means XXXXXXXXXX ;
(t) XXXXXXXXXX ;
(u) "Newco" means a newly-incorporated corporation described in Paragraph 21;
(v) "Newco II" means a newly-incorporate corporation that may be incorporated in circumstances described in Paragraph 28;
(w) "Newco Class I Common Shares" has the meaning assigned in Paragraph 21;
(x) "Newco Class II Common Shares" has the meaning assigned in Paragraph 21;
(y) "Newco Demand Notes" has the meaning assigned in Paragraph 26;
(z) "non-capital loss" has the meaning assigned by subsection 111(8);
(aa) "Opco" means XXXXXXXXXX .;
(bb) "paid-up capital" has the meaning assigned by subsection 89(1);
(cc) "Paragraph" means a numbered paragraph in this letter;
(dd) "Parentco" means XXXXXXXXXX .;
(ee) "permanent establishment" has the meaning assigned by Part IV of the Income Tax Regulations;
(ff) "Portfolio" has the meaning assigned in Paragraph 10;
(gg) "Proposed Transactions" means the proposed transactions described in Paragraphs 21 to 38.1;
(hh) "public corporation" has the meaning assigned by subsection 89(1);
(ii) "related persons" has the meaning assigned by section 251;
(jj) "safe-income determination time" has the meaning assigned by subsection 55(1);
(kk) "specified financial institution" has the meaning assigned by subsection 248(1);
(ll) XXXXXXXXXX ;
(mm) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(nn) "taxable capital gain" has the meaning assigned by section 38;
(oo) "taxable dividend" has the meaning assigned by subsection 89(1);
(pp) "taxable income" has the meaning assigned by subsection 248(1); and
(qq) "X" means XXXXXXXXXX .
FACTS
1. X is an individual who is a resident of Canada for the purposes of the Act.
2. Parentco is a taxable Canadian corporation and a CCPC. Parentco was incorporated under the BCA. X controls Parentco and is its sole shareholder.
3. GPCo1 is a taxable Canadian corporation and a CCPC. GPCo1 was incorporated under the BCA. X controls GPCo1 and is its sole shareholder.
4. GPCo2 is a taxable Canadian corporation and a CCPC. GPCo1 was incorporated under the BCA. X controls GPCo2 and is its sole shareholder.
5. Opco is a taxable Canadian corporation and a public corporation whose common shares are listed for trading on the XXXXXXXXXX under the symbol "XXXXXXXXXX ". The authorized and issued share capital of Opco consists of approximately XXXXXXXXXX common shares. As at XXXXXXXXXX , Opco had a market capitalization of approximately $XXXXXXXXXX . As at XXXXXXXXXX , Opco had consolidated revenues of approximately $XXXXXXXXXX .
6. Opco is a XXXXXXXXXX across Canada and XXXXXXXXXX . Opco has permanent establishments in XXXXXXXXXX . Opco's principal address is XXXXXXXXXX . Opco files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office. Opco's fiscal period and taxation year ends on XXXXXXXXXX . Opco's most recent taxation year ended on XXXXXXXXXX .
7. Lossco is a taxable Canadian corporation and a public corporation. Lossco has permanent establishments in XXXXXXXXXX . Lossco's address is XXXXXXXXXX . It files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office. Lossco's taxation year-end is XXXXXXXXXX .
8. The authorized and issued share capital of Lossco consists of a class of XXXXXXXXXX , a class of XXXXXXXXXX and a class of XXXXXXXXXX.
9. As at XXXXXXXXXX , Lossco had a market capitalization of approximately $XXXXXXXXXX . Lossco had consolidated revenues of approximately $XXXXXXXXXX in its XXXXXXXXXX fiscal period. Lossco principally XXXXXXXXXX .
10. Lossco Sub is a taxable Canadian corporation. Lossco owns (directly and indirectly) all of the issued and outstanding shares of Lossco Sub.
Lossco Sub's fiscal and taxation year-end is XXXXXXXXXX . Lossco Sub owns investments in XXXXXXXXXX , earns XXXXXXXXXX , and operates XXXXXXXXXX . Lossco Sub also owns a portfolio of XXXXXXXXXX (the "Portfolio"). The fair market value of the Portfolio is approximately $XXXXXXXXXX .
11. Lossco's address is XXXXXXXXXX . Lossco Sub's business number is XXXXXXXXXX . It files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office.
12. GPCo 1 is the general partner of LP1, a limited partnership. Parentco is a limited partner of LP1. The other limited partners of LP1 are taxable Canadian corporations controlled by Parentco.
13. GPCo 2 is the general partner of LP2, a limited partnership. LP1 is the sole limited partner of LP2.
14. XXXXXXXXXX
15. X holds all the shares of and controls each of GPCo 1, GPCo 2 and Parentco. X controls Opco because XXXXXXXXXX .
16. X controls a number of taxable Canadian corporations that collectively hold approximately XXXXXXXXXX % of the issued and outstanding XXXXXXXXXX . X also controls a taxable Canadian corporation that holds all the issued and outstanding XXXXXXXXXX . X therefore controls Lossco.
17. As at XXXXXXXXXX , the balance of Lossco's non-capital losses as filed was approximately $XXXXXXXXXX . The non-capital losses were incurred and expire as follows:
Approximate
Amount of Loss
Year Incurred
Year of Expiry
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
19. Opco and Lossco are affiliated persons since they are both controlled by X.
20. Lossco holds Class 5 preferred shares of Lossco Sub (the "Lossco Sub Preferred Shares") which it received as consideration for the previous transfer of the Portfolio to Lossco Sub. The fair market value of the Lossco Sub Preferred Shares is approximately $XXXXXXXXXX and the adjusted cost base and the paid-up capital of the Lossco Sub Preferred Shares is equal to that fair market value. The Lossco Sub Preferred Shares are non-voting, redeemable, subject to applicable law, at any time at the option of Lossco Sub for an amount equal to the amount for which they were issued plus any accrued and unpaid dividends, and carry a cumulative dividend entitlement at a rate equal to XXXXXXXXXX % per year.
PROPOSED TRANSACTIONS
21. Lossco will incorporate Newco under the BCA. The authorized share capital of Newco will consist of an unlimited number of two classes of common shares (the "Newco Class I Common Shares" and the "Newco Class II Common Shares"). Newco will be a taxable Canadian corporation. Newco will not carry on any business and its activities will be limited to investing in Lossco Sub Preferred Shares as described in Paragraphs 22, 25, and 26. Newco will issue XXXXXXXXXX common shares of Newco to Lossco for $XXXXXXXXXX upon incorporation. Newco will have a XXXXXXXXXX year-end.
22. Lossco will transfer the Lossco Sub Preferred Shares it owns to Newco in exchange for an interest-bearing demand note having a principal amount of approximately $XXXXXXXXXX .
23. Lossco Sub will transfer the Portfolio to Lossco in exchange for an interest-free demand note having a principal amount of approximately $XXXXXXXXXX .
24. Lossco will transfer the Portfolio to Newco in exchange for an interest-bearing demand note having a principal amount of approximately $XXXXXXXXXX .
25. Newco will transfer the Portfolio to Lossco Sub in exchange for additional Lossco Sub Preferred Shares. The Lossco Sub Preferred Shares will have a redemption amount and paid-up capital equal to the principal amount of the interest-bearing demand note of Newco described in Paragraph 24.
26. The transactions described in Paragraphs 23 to 25 will be repeated, with variations in the amount of the Portfolio transferred and the amounts of the notes and Lossco Sub Preferred Shares to be issued, until the aggregate principal amount of both the interest-bearing notes issued by Newco to Lossco (collectively the "Newco Demand Notes") and the aggregate redemption amount of the issued and outstanding Lossco Sub Preferred Shares are approximately $XXXXXXXXXX . The aggregate principal amount of the interest-free demand notes issued by Lossco to Lossco Sub (collectively, the "Lossco Demand Notes") will be approximately $XXXXXXXXXX . An officer of Lossco has provided a letter dated XXXXXXXXXX , which indicates that Lossco could reasonably be expected, in normally functioning debt markets, to borrow $XXXXXXXXXX to finance additional investments based on Lossco's current net asset value and its existing sources of cash flow.
27. The Newco Demand Notes will bear interest at a rate that will be reasonable based on the circumstances, which rate will not be in excess of the rate that would be required by a third party lender. The management of Lossco and Newco has concluded that the interest rate to be charged on the Newco Demand Notes will not exceed XXXXXXXXXX %.
28. It is expected that cash from Lossco Sub's own operations, will be sufficient to satisfy any dividend payments on the Lossco Sub Preferred Shares. In the event of a shortfall, Lossco will incorporate Newco II and subscribe for shares of Newco II in consideration for a cash contribution equal to the amount of the shortfall required by Lossco Sub to fund dividend payments on the Lossco Sub Preferred Shares. Newco II will be a taxable Canadian corporation. With the proceeds from the issuance of shares to Lossco, Newco II will make a cash capital contribution to Lossco Sub in the amount of the shortfall to fund the payment of dividends on the Lossco Sub Preferred Shares. No share will be issued by Lossco Sub with respect to the contribution of capital and no amount will be added to the stated capital account maintained in respect of any class of shares of Lossco Sub, or, for greater certainty, to the paid-up capital of any class of shares of Lossco Sub. The amount of this contribution of capital, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital, if any, will not be income of Lossco Sub pursuant to generally accepted accounting principles and will not increase the fair market value of any shares of Lossco Sub other than the Lossco Sub Preferred Shares held by Newco.
29. The transactions described in Paragraphs 30 to 38 will occur in the following order on or before XXXXXXXXXX (i.e., the last day of the XXXXXXXXXX taxation year of Opco).
30. Lossco Sub will pay the balance of any accrued and unpaid dividends on the Lossco Sub Preferred Shares. It is expected Lossco Sub will have sufficient funds from its own operations to pay the amount of such dividends. In the event that Lossco Sub requires additional funds to fully pay the amount of such dividends, Lossco Sub will receive a capital contribution from Newco II in the manner described in Paragraph 28 to the extent of the shortfall so that the capital contribution, along with the cash from Lossco Sub's own operations, will be sufficient to satisfy the dividend payments on the Lossco Sub Preferred Shares.
31. Newco will pay the balance of any accrued and unpaid interest on the Newco Demand Notes.
32. Lossco Sub will transfer the Portfolio to Newco as consideration for the redemption of a portion of the Lossco Sub Preferred Shares held by Newco having a fair market value equal to the fair market value of the Portfolio at the time of the transfer.
33. Newco will transfer the Portfolio to Lossco in repayment of a portion of the principal amount owing on the Newco Demand Notes.
34. Lossco will transfer the Portfolio to Lossco Sub in repayment of a portion of the principal amount owing on the Lossco Demand Notes.
35. The transactions described in Paragraphs 32 to 34 will be repeated in sequence so long as any portion of the principal amount of the Lossco Demand Notes remains outstanding. When the Lossco Demand Notes have been repaid in full as a consequence of a transfer described in Paragraph 34, the transactions described in Paragraphs 32 and 33 will be repeated one more time, at which point Lossco will hold the Portfolio.
35.1 Lossco will transfer the Portfolio to Lossco Sub in consideration for the issuance of new Lossco Sub Preferred Shares having a fair market value equal to the fair market value of the Portfolio at the time of the transfer. Lossco and Lossco Sub may jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Portfolio to Lossco Sub. The elected amount will be equal to the fair market value of the Portfolio to Lossco at the time of the transfer.
35.2 To the extent that Newco holds Lossco Sub Preferred Shares and Lossco holds Newco Demand Notes, Lossco Sub will transfer the Portfolio (or a portion thereof) to Newco as consideration for the redemption of the remaining Lossco Sub Preferred Shares held by Newco having a fair market value equal to the fair market value of the Portfolio at the time of the transfer. Newco will then transfer the Portfolio (or portion thereof) to Lossco in repayment of the remaining principal amount owing on the Newco Demand Notes. Lossco will then transfer the Portfolio (or portion thereof) in consideration for the issuance of new Lossco Preferred Shares in the manner described in Paragraph 35.1.
35.3 The total adjusted cost base and paid-up capital of the Lossco Sub Preferred Shares issued to Lossco Sub as described in Paragraphs 35.1 and 35.2 will not exceed the total adjusted cost base and paid-up capital of the Lossco Sub Preferred Shares held by Lossco immediately before the commencement of the Proposed Transactions.
36. Opco will subscribe for XXXXXXXXXX Newco Class II Common Shares in consideration for a cash contribution equal to the fair market value of the XXXXXXXXXX Newco Class I Common Shares held by Lossco. The determination of the fair market of the Newco Class I Common Shares and the subscription price for the Newco Class II Common Shares will be a matter of negotiation between Lossco and Opco.
37. Newco will use the proceeds from the share subscription in Paragraph 36 to purchase for cancellation the Newco Class I Common Shares held by Lossco.
38. Newco will commence winding-up into Opco in accordance with the provisions of the BCA.
38.1 In the event that Newco II has been incorporated and has made any capital contribution to Lossco Sub described in Paragraph 28 or 30, Newco II will be wound-up into Lossco within XXXXXXXXXX days of the completion of the Proposed Transactions described in the foregoing Paragraphs.
39. Without taking the Proposed Transactions into account, Lossco's losses from business or property in XXXXXXXXXX (net of any income from business or property sources in that taxation year) will exceed the interest income it will earn in respect of the Newco Demand Notes as a result of the Proposed Transactions.
40. In computing Lossco's taxable income for the taxation year ending XXXXXXXXXX , Lossco will not deduct any amount in respect of its non-capital loss for the taxation year that ended on XXXXXXXXXX , as described in Paragraph 17.
41. None of the Lossco Sub Preferred Shares, the Newco Class I Common Shares and the Newco Class II Common Shares will be, at any time during the implementation of the Proposed Transactions described herein:
(a) the subject of any undertaking that is a guarantee agreement;
(b) the subject of a dividend rental arrangement;
(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).
42. Lossco and Lossco Sub are specified financial institutions and Newco will be a specified financial institution. Lossco and Lossco Sub are not, and Newco will not be, financial intermediary corporations.
43. Lossco, Newco, Lossco Sub, Parentco, GPCo 1 GPCo 2 and Opco are affiliated persons and related persons and will continue to be affiliated and related to each other throughout the Proposed Transactions.
PURPOSE OF THE PROPOSED TRANSACTIONS
44. The purpose of the Proposed Transactions is to consolidate profits and losses within a group of taxable Canadian corporations that are affiliated persons by enabling Lossco to earn sufficient interest income to utilize a portion of its expected XXXXXXXXXX losses from property and to enable Newco to obtain an interest expense deduction to generate a non-capital loss in its XXXXXXXXXX taxation year. The non-capital loss is expected to be used to reduce Opco's taxable income in its taxation year that is expected to end no later than XXXXXXXXXX .
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, additional information, proposed transactions and the purposes of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:
A. Subsection 55(2) will apply to a taxable dividend that Newco receives from Lossco Sub on the Lossco Sub Preferred Shares as described in Paragraph 30, unless none of the purposes of the dividend was to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of the Lossco Sub Preferred Shares immediately before the dividend and that could be reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the relevant safe-income determination time.
B. Subsection 55(2) will apply to the taxable dividend that Lossco is otherwise deemed to receive pursuant to subsection 84(3) as a consequence of the purchase for cancellation of the Newco Class I Common Shares described in Paragraph 37, unless the amount of the reduction to the accrued capital gain on the Newco Common Shares as a consequence of such dividend is wholly attributable to income earned or realized by Newco, determined as of the relevant safe-income determination time.
C. Without considering the winding-up of Newco into Opco as described in Paragraph 38, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).
D. Without considering the application of subsection 55(2), dividends received by Newco on the Lossco Sub Preferred Shares will be taxable dividends that will be deductible pursuant to subsection 112(1) in computing the taxable income of Newco for the taxation year in which the dividends are received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).
E. Newco will not be subject to tax under Part IV.1 in respect of any dividends received from Lossco Sub on the Lossco Sub Preferred Shares by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1.
F. Newco will not be subject to Part IV tax in respect of any dividends received from Lossco Sub on the Lossco Sub Preferred Shares, except to the extent that paragraph 186(1)(b) applies to impose such tax.
G. Lossco Sub will not be subject to tax under Part VI.1 in respect of any dividends paid to Newco on the Lossco Sub Preferred Shares by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
H. Provided that Newco has a legal obligation to pay interest on the Newco Demand Notes, and Newco continues to hold the Lossco Sub Preferred Shares it acquires in the manner described in Paragraphs 22, 25 and 26, for the purpose of gaining or producing income from property, Newco 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 Newco in computing its income for purposes of the Act) in respect of the year on the Newco Demand Notes or (ii) a reasonable amount in respect thereof.
I. On the purchase for cancellation of the XXXXXXXXXX Newco Class I Common Shares described in Paragraph 37, Newco will be deemed to have paid, and Lossco will be deemed to have received, pursuant to subsection 84(3), a dividend equal to the amount by which the amount paid by Newco on the purchase exceeds the paid-up capital of the Newco Class I Common Shares immediately before the purchase, and, without considering the application of subsection 55(2), the amount of such dividend:
(i) will be included in Lossco's income pursuant to section 82 and paragraph 12(1)(j); and
(ii) will be a taxable dividend that will be deductible pursuant to subsection 112(1) in computing the taxable income of Lossco for the taxation year in which the dividend is received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).
J. Pursuant to paragraph 256(7)(a), control of Newco will be deemed not to have been acquired, for the purposes of the provisions enumerated in subsection 256(7), solely because of the Proposed Transactions described in Paragraphs 36 and 37.
K. After the winding-up of Newco into Opco described in Paragraph 38 is completed, the provisions of subsection 88(1.1) of the Act will apply to permit Opco to deduct the non-capital losses of Newco in computing its taxable income for any taxation year of Opco to commence after the commencement of the winding-up, to the extent that the requirements in paragraphs 88(1.1)(a) and (b) are satisfied and subject to the limitations in paragraph 88(1.1)(e) and section 111.
L. Subsections 15(1), 56(2), and 246(1) will not apply to the Proposed Transactions, in and by themselves.
M. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the consequences confirmed in the rulings given above.
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 described in Paragraphs 21 to 38 are completed on or before XXXXXXXXXX and, in the event Newco II is incorporated, the Proposed Transaction described in Paragraph 38.1 is completed on or before XXXXXXXXXX .
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.
A. It is our view that the winding-up of Newco into Opco as described in Paragraph 38 or the winding-up of Newco II into Lossco contemplated in Paragraph 38.1 could cause subsection 55(2) of the Act to apply to the taxable dividends referred to in Rulings A and B. However, we understand that the Department of Finance has issued a letter dated April 21, 2005 (the "comfort letter"), indicating that it was prepared to recommend to the Minister of Finance that situations described in the comfort letter (i.e. essentially where a wholly-owned subsidiary is amalgamated with, or wound-up into, its parent) should not result in a significant increase in the interest of the subsidiary solely as a result of the application of paragraphs 55(3.01)(b) and (c). If such legislation is ever enacted and is effective for the period in which these Proposed Transactions take place, it is possible that subsection 55(2) may not apply to the dividends described in Rulings A and B.
B. If any of the representations provided in Paragraphs 39 and 40 are not reflected in the computation of Lossco's income and taxable income for the taxation year of Lossco that will end on XXXXXXXXXX , it is our view that the non-capital loss for Lossco's taxation year that ended on XXXXXXXXXX , described in Paragraph 17, could be inappropriately "refreshed" as a consequence of the Proposed Transactions, with the result that subsection 245(2) could apply to redetermine the consequences confirmed in Rulings H and K above.
C. Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:
(a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein;
(b) the GST implications of any of the Proposed Transactions;
(c) the amount of any non-capital loss or any other amount of any corporation referred to herein;
(d) the application or non-application of the general anti-avoidance provisions of any province; and
(e) 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 rulings given above, 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,
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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