2009 Ruling 2009-0317831R3 - 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: Is the Loss Consolidation arrangement acceptable?

Position: Yes

Reasons: meets published positions

XXXXXXXXXX 								2009-031783

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

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

This is in reply to your letter of XXXXXXXXXX , wherein you request an advance income tax ruling on behalf of the above-named taxpayers. In general terms, the transactions described herein involve the use of losses within an affiliated group of corporations. We acknowledge additional information that you provided in subsequent correspondence.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request herein are:

(i) dealt with in an earlier return of Parent, Subsidiary or a related person;
(ii) being considered by a tax services office or a taxation centre in connection with a tax return already filed by Parent, Subsidiary or a related person;
(iii) under objection by Parent, Subsidiary or a related person;
(iv) the subject of a previous ruling issued by the Income Tax Rulings Directorate to the taxpayers or a related person; or
(v) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired.

Definitions:

Unless otherwise noted, (i) all references herein to sections or components thereof are references to the Income Tax Act, (the "Act") as amended, or the Income Tax Regulations (the "Regulations"), as appropriate, and (ii) all references to monetary amounts are in Canadian dollars.

In addition, unless otherwise noted, the following terms have the meanings ascribed to them below:

(a) "affiliated persons" has the meaning assigned by subsection 251.1(1);

(b) "arm's length" has the meaning assigned by subsection 251(1);

(c) XXXXXXXXXX

(d) "CBCA" means the Canada Business Corporations Act (Canada), and where applicable, its predecessor statutes;

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

(f) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(g) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(h) "non-capital loss" has the meaning assigned by subsection 111(8);

(i) "Newco" is a new corporation to be incorporated under the laws of XXXXXXXXXX as described in 11 below;

(j) "Newco Additional Preferred Shares" means the additional shares of the capital stock of Newco to be issued by Newco to Subsidiary as described in 15 below;

(k) "Newco Initial Preferred Shares" means the initial shares of the capital stock of Newco to be issued by Newco to Subsidiary as described in 15 below;

(l) "Newco Preferred Shares" means the Newco Initial Preferred Shares and the Newco Additional Preferred Shares or either of them;

(m) "Parent" means XXXXXXXXXX ;

(n) "Parent Additional Loans" means the additional loans made by Newco to Parent as described in 16 below;

(o) "Parent Initial Loans" means the initial loans made by Newco to Parent as described in 16 below;

(p) "Parent Loans" means the Parent Initial Loans and the Parent Additional Loans or either of them;

(q) "Preferred Shares" means shares of the capital stock of Newco as defined in 12 below;

(r) "public corporation" has the meaning assigned by subsection 89(1);

(s) "related persons" has the meaning assigned by section 251;

(t) "specified financial institution" has the meaning assigned by subsection 248(1);

(u) "Subsidiary" means XXXXXXXXXX .;

(v) "Subsidiary Additional Loans" means the additional loans made by Parent to Subsidiary as described in 13 below;

(w) "Subsidiary Initial Loans" means the initial loans made by Parent to Subsidiary as described in 13 below;

(x) "Subsidiary Loans" means the Subsidiary Initial Loans and the Subsidiary Additional Loans or either of them;

(y) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(z) XXXXXXXXXX .

Facts:

1. Parent is a XXXXXXXXXX "taxable Canadian corporation" XXXXXXXXXX . Parent's fiscal year-end is XXXXXXXXXX .

2. XXXXXXXXXX . Parent's executive offices are situated at the XXXXXXXXXX. Its taxation centre is the XXXXXXXXXX Taxation Centre and its tax services office is the XXXXXXXXXX Tax Services Office.

3. Subsidiary is a direct wholly-owned subsidiary of Parent. Subsidiary has been a subsidiary of Parent since XXXXXXXXXX. Subsidiary is a "taxable Canadian corporation" within the meaning of subsection 89(1), XXXXXXXXXX Its registered address is XXXXXXXXXX , its taxation centre is the XXXXXXXXXX Taxation Centre and its tax services office is the XXXXXXXXXX Tax Services Office. Subsidiary's fiscal year end is XXXXXXXXXX . Subsidiary carries on XXXXXXXXXX businessXXXXXXXXXX .

4. As at XXXXXXXXXX , Parent had a balance of non-capital loss carryforwards of approximately $XXXXXXXXXX . These losses were incurred in Parent's taxation year ending XXXXXXXXXX .

5. XXXXXXXXXX

6. The consolidated financial statements of Parent for its fiscal year ended XXXXXXXXXX indicate that Parent and its subsidiaries had:

(a) assets of approximately $XXXXXXXXXX ;
(b) liabilities of approximately $XXXXXXXXXX ; and
(c) shareholders' equity of approximately $XXXXXXXXXX .

7. Subsidiary's taxable income for its three prior taxation years was as follows:

Taxation Year Ending Taxable Income
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX

8. It is expected that Subsidiary will be able to fully utilize the interest paid or payable on the Subsidiary Loans made to it either against its income for its current taxation year or by carrying back any loss for its current taxation year against its taxable income for its three prior taxation years.

9. Subsidiary has a permanent establishment in XXXXXXXXXX and, for its taxation year ending XXXXXXXXXX , its gross revenue and salary and wages, for purposes of Part IV of the Regulations, was allocated as follows:

Province/Territory Gross Revenue Salary and Wages
XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX

10. Subsidiary's tax return for its fiscal year ended XXXXXXXXXX , indicates that Subsidiary had assets of approximately $XXXXXXXXXX .

Proposed Transactions:

11. Parent will incorporate Newco under the laws of XXXXXXXXXX . Newco will be a taxable Canadian corporation. The taxation year-end of Newco will be XXXXXXXXXX . Newco will not carry on any business and its activities will be limited to lending the proceeds received upon the issuance of the Newco Preferred Shares to Parent as Parent Loans as described below.

12. The authorized capital of Newco will consist of two classes of shares, namely a class of common shares and a class of non-voting, cumulative dividend, redeemable preferred shares, issuable in series (the "Preferred Shares"). The cumulative dividends payable on the Preferred Shares will be calculated by reference to the redemption price of the Preferred Shares at a rate for a particular series equal to the interest rate on the Subsidiary Loan the proceeds of which were used to acquire such series of Preferred Shares plus a small spread. Dividends will be payable XXXXXXXXXX . Parent will acquire the common shares of Newco for $XXXXXXXXXX .

13. On a particular day to be determined by Parent, Parent will make a series of loans to Subsidiary (the "Subsidiary Initial Loans"). On one or more other days determined by Parent, Parent may make a series of additional loans to Subsidiary (the "Subsidiary Additional Loans"). Subject to XXXXXXXXXX , the aggregate of the Subsidiary Loans will not exceed $XXXXXXXXXX .

14. Simple interest will accrue on each of the Subsidiary Loans and will be calculated daily at a rate equal to XXXXXXXXXX % per annum. The interest on each of the Subsidiary Loans will be paid XXXXXXXXXX .

15. Subsidiary will use the total proceeds received by it from the Subsidiary Initial Loans to subscribe for a series of Preferred Shares in the capital of Newco having an aggregate redemption price equal to the subscription price therefor (the "Newco Initial Preferred Shares"). Subsidiary will use the total proceeds received by it on any particular day from the Subsidiary Additional Loans made on that day to subscribe for a series of Preferred Shares in the capital of Newco having an aggregate redemption price equal to the subscription price therefor (the "Newco Additional Preferred Shares"). A separate series of Preferred Shares will be used on each different day Preferred Shares are issued.

16. Newco will use the total proceeds received on the issuance of the Newco Initial Preferred Shares to make a series of demand, interest-free loans to Parent (the "Parent Initial Loans"). Newco will use the total proceeds received on the issuance of the Newco Additional Preferred Shares to make a series of demand, interest-free loans to Parent (the "Parent Additional Loans").

17. On each day on which interest is payable on a Subsidiary Loan, while a Subsidiary Loan is outstanding, Parent will make a capital contribution to Newco in an amount equal to the dividends payable by Newco on that day on the Newco Preferred Shares held by Subsidiary. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the issued and paid-up capital of Newco. The amount of each 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 Newco pursuant to generally accepted accounting principles.

18. Upon receipt of the capital contribution described in 17 above, Newco will, subject to the applicable solvency test, pay dividends equal to the amount of the dividends payable by it on the Newco Preferred Shares.

19. Subsidiary will use the amounts received as dividends from Newco, as discussed in 18 above, to pay to Parent interest on the Subsidiary Loans made to it, when due and payable.

20. The following transactions will occur on one or more days on or prior to XXXXXXXXXX :

(a) Parent will make a contribution of capital to Newco in an amount equal to the amount of any accrued and unpaid dividends on the series of Newco Preferred Shares the proceeds of which were used to make a loan to Parent described below. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the issued and paid-up capital of Newco. The amount of the capital contribution, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital, if any, will not be income to Newco pursuant to generally accepted accounting principles.

(b) Parent will repay the loan through a series of loan repayments.

(c) Newco will redeem the series of Newco Preferred Shares the proceeds of which were used to make the loan to Parent referred to in (b) above (including any accrued dividends) or will pay the accrued dividends on and then redeem such series of Newco Preferred Shares.

(d) Subsidiary will pay accrued and unpaid interest on and repay the Subsidiary's loan from Parent the proceeds of which were used to acquire such series of Newco Preferred Shares.

21. The transactions described in 20 above will result in, on or prior to XXXXXXXXXX , the payment of all accrued dividends on the Newco Preferred Shares, the payment of all accrued interest on the Subsidiary Loans, the redemption of all Newco Preferred Shares and the repayment of all Parent Loans and Subsidiary Loans.

22. Parent will cause Newco to be wound-up after all the Newco Preferred Shares have been redeemed and all the Parent Loans and Subsidiary Loans have been repaid.

23. It is anticipated that the loss consolidation arrangement described in 11 to 19 above will be undertaken in each future taxation year of Parent and Subsidiary and then similarly unwound prior to the end of each future taxation year until Parent has utilized all of its non-capital loss carryforwards.

Other Representations:

24. The Newco Preferred Shares which will be issued as described in 15 above, will not be, at any time during the implementation of the proposed transactions described in 11 to 21 above:

(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;
(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:

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).

25. Parent, Newco and Subsidiary are affiliated persons and are related to each other.

26. XXXXXXXXXX

27. It is expected that dividends paid to Subsidiary by Newco would be designated as eligible dividends.

Purpose of the Proposed Transactions:

28. The purpose of the proposed transactions is to effect a tax consolidation of Parent and Subsidiary by causing Parent to earn interest income on the Subsidiary Loans, thus permitting Parent to utilize its non-capital loss carry-forwards and to have Subsidiary incur interest expense to reduce its taxable income and to create non-capital losses that may be carried-back and used to reduce its taxable incomes from prior taxation years. Where Subsidiary has non-capital losses for any taxation year in which it may deduct interest payable on the Subsidiary Loans in computing its income, no amount in respect of such non-capital losses will be deducted by Subsidiary 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 losses for Parent's XXXXXXXXXX taxation year, described in 5 above, may be deducted in computing Parent's taxable income in accordance with paragraph 111(1)(a) had Parent not previously deducted such loss.

Rulings Given:

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule as follows:

A. Provided that the interest paid or payable by Subsidiary on the Subsidiary Loans is reasonable and is paid pursuant to a legal obligation to pay interest and that the Preferred Shares of Newco continue to be held by Subsidiary for the purpose of producing income from property, Subsidiary will be entitled to deduct, in computing its income for a taxation year, pursuant to paragraph 20(1)(c) of the Act, the interest paid or payable by it in respect of the taxation year on each Subsidiary Loan to the extent such amount does not exceed a reasonable amount.

B. No amount will be included in the income of Newco pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) of the Act in respect of the contributions of capital made by Parent as described in 17 and 20(a) above.

C. The dividends received (or deemed to be received) by Subsidiary on Newco Preferred Shares held by it as described in 18 and 20(c) above will be taxable dividends that will, pursuant to subsection 112(1) of the Act, be deductible in computing its taxable income for the taxation year in which the dividends are received (or deemed to be received), and for greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4) of the Act.

D. Neither Part IV.1 nor Part VI.1 of the Act will apply to the dividends described in Ruling C because the dividends will be excepted dividends within the meaning assigned by section 187.1 of the Act and excluded dividends within the meaning assigned by subsection 191(1) of the Act.

E. The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) of the Act will not apply as a result of the proposed transactions in and by themselves.

F. Subsidiary will be entitled to carry back to its prior years the non-capital losses that are expected to arise as a result of the deductions described in Ruling A above, subject to any applicable restrictions set out in section 111 of the Act.

G. Subsection 245(2) of the Act will not be applied, as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

H. XXXXXXXXXX

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 are completed 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 rulings provided herein.

Comments:

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination 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, net capital loss or any other amount of any corporation referred to herein; or

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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