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: Is loss consolidation scheme acceptable?
Position: Yes
Reasons: Within established procedures
XXXXXXXXXX 2008-029959
XXXXXXXXXX , 2009
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX
We are replying to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling with respect to the above-noted taxpayers (the “Taxpayers”). We also acknowledge the additional information provided to us in your letter of submission dated XXXXXXXXXX .
This letter is based solely on the facts and proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
To the best of your knowledge, and that of the Taxpayers, none of the issues involved in this advance income tax ruling request are:
(i) in an earlier return of any of the Taxpayers or a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of any of the Taxpayers or a related person;
(iii) under objection by any of the Taxpayers or a 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 to any of the Taxpayers by the Income Tax Rulings Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (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.
Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:
Definitions
(a) “arm’s length” has the meaning assigned by section 251;
(b)XXXXXXXXXX
(c) “Company” means XXXXXXXXXX ., as described more fully in 2 below;
(d) “Company Note” has the meaning assigned in 13 below;
(e) “Demand Loan” has the meaning assigned in 14 below;
(f) “eligible dividend” has the meaning assigned by subsection 89(1);
(g) “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;
(h) “financial institution” has the meaning assigned by subsection 142.2(1);
(i) “financial intermediary corporation” has the meaning assigned by subsection 191(1);
(j) “Initial Lender” means a “bank” or “credit union” as defined by subsection 248(1);
(k) “Issued Newco Preferred Shares” has the meaning assigned in 12 below;
(l) “Loan” has the meaning assigned in 11 below;
(m) “Newco” means a newly-incorporated corporation described in 9 below;
(n) “Newco Common Shares” has the meaning assigned in 9 below;
(o) “Newco Preferred Shares” has the meaning assigned in 9 below;
(p) “Non-Capital Loss” has the meaning assigned by section 111;
(q) “Paid-up Capital” has the meaning assigned by subsection 89(1);
(r) “Parent” means XXXXXXXXXX ., as described more fully in 1 below;
(s) “principal amount” has the meaning assigned by subsection 248(1);
(t) “Proposed Transactions” means the transactions described in 9 to 19 below;
(u) “public corporation” has the meaning assigned by subsection 89(1);
(v) “restricted financial institution” has the meaning assigned by subsection 248(1);
(w) “specified financial institution” the meaning assigned by subsection 248(1); and,
(x) “taxable Canadian corporation” has the meaning assigned by subsection 89(1).
Facts
1. Parent was initially incorporated under the laws of XXXXXXXXXX and subsequently, in XXXXXXXXXX , was continued into XXXXXXXXXX . Parent is a taxable Canadian corporation and a public corporation. Its sole class of issued shares is listed on the XXXXXXXXXX Stock Exchange. Parent has a XXXXXXXXXX year-end and files its tax returns through the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.
2. Company is incorporated pursuant to the laws of XXXXXXXXXX . Company is a taxable Canadian corporation. All of the issued and outstanding shares of Company are owned by Parent, which controls Company. Company has a XXXXXXXXXX year-end and files its tax returns through the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.
3. Company carries on the business of XXXXXXXXXX
4. Parent is principally a holding company that, indirectly through its subsidiaries, is XXXXXXXXXX .
5. Parent purchased all of the shares of Company in exchange for a combination of shares of Parent and non-share consideration in a transaction that closed on XXXXXXXXXX , resulting in an acquisition of control of Company by Parent, and a deemed taxation year-end and a new taxation year of Company pursuant to the provisions of subsection 249(4) of the Act.
6. Parent’s Non-Capital Losses as of XXXXXXXXXX , are $XXXXXXXXXX . Its Non-Capital Losses by year of origin are as follows:
Year of Origin Amount
Non-Capital Losses XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
Total XXXXXXXXXX
7. Company’s taxable income for its year ended XXXXXXXXXX , was $XXXXXXXXXX (i.e., for the sole taxation year since control of Company was acquired by Parent as outlined in 5 above).
8. Parent and Company have permanent establishments solely within the province of XXXXXXXXXX . Furthermore, all of Parent’s losses and all of Company’s income have been and will be allocated to XXXXXXXXXX for provincial tax purposes.
Proposed Transactions
9. Parent will incorporate a new corporation (“Newco”) under the 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:
(i) the Newco Common Shares will be voting;
(ii) the Newco Preferred Shares will be:
A. non-voting except where the XXXXXXXXXX requires a vote;
B. redeemable at any time by Newco for an amount equal to the amount for which they were issued and any accrued but unpaid dividends which may accumulate prior to their redemption; and
C. entitled to an annual cumulative dividend at a rate of XXXXXXXXXX % calculated on the amount for which they were issued and a preference on dissolution over the Newco Common Shares for the return of their redemption amount plus any accrued but unpaid dividends.
10. Parent will subscribe for XXXXXXXXXX Newco Common Shares for $XXXXXXXXXX on the incorporation of Newco.
11. Parent will borrow an amount not to exceed $XXXXXXXXXX from an arm’s length Initial Lender (the “Loan”).
12. 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 XXXXXXXXXX of Newco maintained for the Issued Newco Preferred Shares under the XXXXXXXXXX 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.
13. 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 promissory note (the “Company Note”) to Parent that will have a principal amount and FMV equal to the FMV of the Issued Newco Preferred Shares. The Company Note will bear interest at XXXXXXXXXX % per annum and will be repayable no later than the XXXXXXXXXX anniversary date of its issue. (The loan repayment will be subject to the right of prepayment without penalty and it is anticipated that most of the loan will be repaid within XXXXXXXXXX years of commencement of the loss consolidation with an estimated repayment schedule of: XXXXXXXXXX .)
14. 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”).
15. Parent will apply the proceeds from the Demand Loan to repay the Loan from the Initial Lender. The borrowing and repayment of the Loan by Parent will be arranged as a daylight loan.
16. Company will pay interest to Parent on the Company Note 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 Note from its own cash flow. The annual interest payment date on the Company Note will be the same as the annual dividend payment date on the Issued Newco Preferred Shares.
17. 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 and anticipated 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 16 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.
18. Newco will use the amounts received as capital contributions as described in 17 above to pay dividends on the Issued Newco Preferred Shares to Company on an annual basis.
19. Subsequent to the utilization of the Non-Capital Losses of Lossco and no later than the XXXXXXXXXX anniversary date of the issue of the Company Note, Parent, Newco and Company will unwind the structure created by the Proposed Transactions.
20. The Issued Newco Preferred Shares will not be, at any time during the implementation of the Proposed Transactions,:
(i) the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;
(ii) the subject of a dividend rental arrangement as that term is defined in subsection 248(1);
(iii) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(iv) issued for consideration that is or includes:
A. 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
B. any right of the type described in subparagraph 112(2.4)(b)(ii).
21. 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. Furthermore, Newco should never become insolvent.
22. For the purposes of the Act, Parent will not, at any time, include the disposition of its investment in Newco in the calculation of its capital losses.
23. Based on Parent’s existing assets and resources, Parent has the borrowing capacity to render the Loan to be made by the Initial Lender commercially viable.
24. Based on Company’s existing and anticipated assets and resources, Company will have the financial capacity to honour the amounts payable under the Company Note.
25. None of Parent, Company, or any corporation to which either is a related person for purposes of the Act, is a financial institution, a specified financial institution, a restricted financial institution or a financial intermediary corporation.
26. It is expected that dividends paid to Company by Newco would be designated as eligible dividends.
27. In the event Company has Non-Capital Losses for any taxation years in which it may deduct interest payable on the Company Note in computing its income, no amount in respect of such Non-Capital Losses will be deducted by Company in computing its taxable income for a taxation year ending after the end of the last taxation year of Parent in which the Non-Capital Loss for Parent's XXXXXXXXXX taxation year, described in 6 above, may be deducted in computing Parent's taxable income in accordance with paragraph 111(1)(a) had Parent not previously deducted such loss.
Purpose of the Proposed Transactions
28. The purpose of the Proposed Transactions is:
(i) to enable Parent to earn interest income from Company such that for purposes of the Act, Parent,
A. in determining its income, will have income against which it can make use of its deductions permitted by the Act, and
B. in determining its taxable income, will be able to make use of its Non-Capital Loss carryovers from prior taxation years to the extent permitted by the provisions of the Act; and
(ii) to enable Company to incur interest payable to Parent such that, for purposes of the Act, Company,
A. in determining its income, will be able to deduct the interest payable to Parent, including to create a Non-Capital Loss in its XXXXXXXXXX taxation year,
B. in determining its taxable income for its XXXXXXXXXX and XXXXXXXXXX taxation years, to enable Company to make use of its XXXXXXXXXX Non-Capital Loss carryover to the extent permitted by the provisions of the Act, and
C. in determining its taxable income for its taxation years commencing after XXXXXXXXXX and ending before the end of the last taxation year of Parent in which the Non-Capital Loss for Parent's XXXXXXXXXX taxation year, described in 6 above, may be deducted in computing Parent's taxable income in accordance with paragraph 111(1)(a) had Parent not previously deducted such loss, to enable Company to make use of its XXXXXXXXXX Non-Capital Loss carryover to the extent permitted by the provisions of the Act.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:
A. Provided that Company has a legal obligation to pay interest on the Company Note, as described in 13 above, and Company continues to hold the Issued Preferred Shares described in 13 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 Note or (ii) a reasonable amount in respect thereof.
B. 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 as described in 17 above.
C. The dividends received by Company on the Issued Newco Preferred Shares, as described in 18 above, will be taxable dividends that will be deductible pursuant to subsection 112(1) 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 subsections 112(2.1), (2.2), (2.3) or (2.4).
D. None of the provisions of subsections 15(1), 56(2), 69(1) or 246(1) will apply to the Proposed Transactions, in and by themselves.
E. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions, excluding 19 above, are entered into 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 which, if enacted, could have an effect on the ruling provided herein.
Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination or ruling in respect of:
(a) the Fair Market Value or adjusted cost base of any property or the Paid-up Capital of any shares referred to herein;
(b) the amount of any Non-Capital Loss or any other amount of any corporation referred to herein;
(c) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;
(d) the application or non-application of the general anti-avoidance provisions of any province; nor,
(e) any tax consequences in relation to any facts or Proposed Transactions referred to herein other than those specifically described in the rulings given.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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