2008 Ruling 2008-0295751R3 - Supplemental -loss consolidation

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: Are the previous rulings affected by the proposed amendments to Ruling 2007-024347, (without the need for a daylight loan and allowing Newco to survive after the loss consolidation arrangement)?

Position: the previous rulings are not affected

Reasons: Set-offs of notes at redemption have been accepted before.

XXXXXXXXXX 							2008-029575

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX ("Subsidiary") BN XXXXXXXXXX
XXXXXXXXXX ("Parent") BN XXXXXXXXXX )
Newco
Lossco
Supplemental Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX , wherein you request a supplemental ruling with respect to the tax consequences to unwind the loss consolidation arrangement as outlined in paragraph 29 of advance income tax ruling 2007-024347 (the "Original Ruling") dated XXXXXXXXXX , 2007 and is further to the supplemental ruling provided on XXXXXXXXXX , 2008 (the "Supplemental Ruling").

In this letter, all capitalized terms have the meanings specified in the Original Ruling.

Facts:

1. The facts are as described in 1 to 11 and 39 to 44 of the Original Ruling. The transactions proposed in the Original Ruling and described in 12 to 25 of the Original Ruling took place as described in XXXXXXXXXX . The amendments to those transactions proposed in the Supplemental Ruling have not taken place.

Proposed Amendments:

2. Rather than unwinding the loss consolidation arrangement as described in 29 of the Original Ruling, the following transactions will occur no later than XXXXXXXXXX to unwind the loss consolidation arrangement:

Parent will make a contribution of capital to Newco in an amount equal to the amount of any accrued and unpaid dividends on the Preferred Shares held by Lossco. No share will be issued by Newco with respect to the contributions of capital and no amount will be added to the stated capital account of Newco. The amount of this contribution of capital will be recorded as a contributed surplus for accounting purposes. The contribution of capital will not be treated as income of Newco pursuant to generally accepted accounting principles.

(a) Newco will use the funds received on the contribution of capital to pay any accrued and unpaid dividends on the Preferred Shares held by Lossco.

(b) Lossco will use the amount received as dividends from Newco to pay to Parent any accrued and unpaid interest on the Lossco Loan.

(c) Parent will repay the Parent Loan to Newco by assigning the Lossco Loan to Newco.

(d) Newco will redeem the Preferred Shares held by Lossco in exchange for the issuance of a demand promissory note by Newco to Lossco in an amount equal to the redemption/retraction price of the Preferred Shares. Simple interest will accrue on the demand promissory note and will be calculated at a rate equal to the then current commercial market rate.

(e) Newco will demand repayment of the Lossco Loan from Lossco.

(f) Lossco will demand repayment of the demand promissory note issued to it by Newco on the redemption of the Preferred Shares.

(g) Newco and Lossco will agree that the Lossco Loan and the demand promissory note will be repaid by way of set-off of the amount owing to Newco by Lossco under the Lossco Loan and the amount owing to Lossco by Newco under the promissory note. The Lossco Loan and the demand promissory note will be cancelled.

3. Immediately after the Proposed Transactions described in 2 above, the transactions described in 32 to 36 of the Original Ruling will take place as described herein. However, the transactions described in 37 and 38 of the Original Ruling will not take place.

Additional Information:

4. In future taxation years, Parent and Subsidiary may wish to enter into one or more new loss consolidation arrangement(s) similar to the transactions described in the Original Ruling and the Proposed Amendments. It is expected that Newco will be involved in such loss consolidation arrangement(s).

5. Parent will eventually dispose of its common shares in the capital of Newco in such a manner that Parent's loss from such disposition will be deemed to be nil pursuant to subsection 40(3.6) of the Act. For greater certainty, subsections 40(3.3) and 40(3.4) and paragraph 40(3.6)(b) of the Act will not apply with respect to Parent's loss from the disposition of the common shares of Newco.

Purpose of the Proposed Transaction:

6. The purpose of the Proposed Amendments is to achieve greater administrative efficiency and flexibility by (i) allowing Parent to unwind the loss consolidation arrangement without the need for the New Daylight Loan, and (ii) allowing Parent, Newco and other affiliates of Parent to enter into one or more future loss consolidation arrangement(s) similar to the transactions described in the Original ruling and the Proposed Amendments without the need to incorporate a "new Newco".

Ruling Given:

We confirm that the Original Ruling will continue to be binding on the CRA provided that the Proposed Amendments described above are completed by XXXXXXXXXX . We note that if any of the facts or Proposed Transactions are changed from those presented in the Original Ruling, the Original Ruling may not be binding on the CRA unless you request a supplemental ruling prior to the implementation of the Proposed Amendments.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch