2011 Ruling 2011-0392171R3 - XXXXXXXXXX

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: Whether losses of a predecessor corporation will be available to offset income from the amalgamated entity's business after an amalgamation and whether certain "debt capitalization" transactions completed in advance of the amalgamation violate the GAAR.

Position: Subsection 111(5) will not apply to prevent the amalgamated entity from using the predecessor's losses after the amalgamation against income from its XXXXXXXXXX business. The GAAR will apply to deny the tax benefit associated with the debt capitalization transaction.

Reasons: The amalgamated entity will carry on the business of its predecessors throughout the year as required by paragraph 111(5)(a) and the income of the amalgamated entity from carrying on its business meets the similarity test in paragraph 111(5)(b). The debt capitalization transactions are essentially the same as transactions that the GAAR committee previously determined resulted in an abuse of section 80.

XXXXXXXXXX
						2011-039217
						XXXXXXXXXX 

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: XXXXXXXXXX

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 taxpayer. We also acknowledge the information provided in subsequent correspondence and various telephone conversations. You have advised us that to the best of your knowledge and that of the taxpayer involved, none of the issues involved in this ruling request are:

	(i)	in an earlier return of the taxpayer or related persons;
      (ii)	being considered by a tax services office or taxation centre in connection
		with a previously filed tax return of the taxpayers or related persons;
	(iii)	under objection by the taxpayers or related persons;
	(iv)	before the Courts; or
      (v)	the subject of a ruling previously issued by the Income Tax Rulings Directorate.

DEFINITIONS and INTERPRETATION

In this ruling, all monetary amounts are expressed in Canadian dollars unless otherwise indicated.

The following terms or expressions have the meaning specified below:

(a) “Act” means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a part, division, subdivision, section, subsection, paragraph, subparagraph or clause is a reference to the corresponding provision of the Act;

(b) “AmalCo” means the corporation, to be formed by the merger of ProfitCo and LossCo as described in Paragraph 20, which will be a taxable Canadian corporation XXXXXXXXXX ;

(c) “AmalCo XXXXXXXXXX Services” means the ProfitCo XXXXXXXXXX Services to be provided by AmalCo to former ProfitCo and LossCo XXXXXXXXXX and customers as described in Paragraphs 23 to 26;

(d) “Amalgamation” means the amalgamation of LossCo and ProfitCo to form AmalCo, as described in Paragraph 20;

(e) XXXXXXXXXX ;

(f) XXXXXXXXXX ;

(g) “CRA” means the Canada Revenue Agency;

(h) XXXXXXXXXX has the meaning assigned by subsection XXXXXXXXXX ;

(i) “Excluded Branches” means up to XXXXXXXXXX LossCo Branches that AmalCo intends to sell or otherwise transfer referred to in Paragraph 26;

(j) “LossCo” means XXXXXXXXXX , a taxable Canadian corporation XXXXXXXXXX ;

(k) “LossCo XXXXXXXXXX ” means the XXXXXXXXXX that were operated by LossCo in XXXXXXXXXX (including XXXXXXXXXX which are operated pursuant to an agreement with XXXXXXXXXX ) that, as described in Paragraph 14, were disposed of prior to the date of the Amalgamation

(l) “LossCo Branches” means all XXXXXXXXXX operated in XXXXXXXXXX by LossCo as described in Paragraph 7, but for greater certainty not the XXXXXXXXXX LossCo XXXXXXXXXX ;

(m) “LossCo Consolidated Branches” means up to four LossCo Branches that AmalCo intends to close as described in Paragraph 25;

(n) “LossCo Continuing Branches” means XXXXXXXXXX LossCo Branches operated by LossCo that are to be operated by AmalCo in their current form and any Excluded Branches and LossCo Consolidated Branches that ProfitCo continues to operate;

(o) “LossCo XXXXXXXXXX Services” means the services described in Paragraph 7;

(p) “LossCo Group” means the group of XXXXXXXXXX that operate using the XXXXXXXXXX trade name, that was primarily developed through business operations in XXXXXXXXXX , which includes LossCo, LossCo Lender and LossCo Shareholder;

(q) “LossCo Shareholder” means XXXXXXXXXX ;

(r) “LossCo Lender” means XXXXXXXXXX ;

(s) “Paragraph” means a numbered paragraph in this advance income tax ruling;

(t) “ProfitCo” means XXXXXXXXXX , a taxable Canadian corporation and a XXXXXXXXXX;

(u) “ProfitCo Branches” means the XXXXXXXXXX ProfitCo operates throughout XXXXXXXXXX ;

(v) “ProfitCo XXXXXXXXXX” means the services described in Paragraph 2;

(w) “Subject Transactions” means the transactions described in Paragraphs 14 to 28; and

(x) “taxable Canadian corporation” has the meaning assigned by subsection 89(1).

FACTS

1. ProfitCo was formed by amalgamation under the XXXXXXXXXX. ProfitCo is the successor corporation from the amalgamation of the former XXXXXXXXXX and XXXXXXXXXX XXXXXXXXXX in XXXXXXXXXX . Both the XXXXXXXXXX had been in existence for in excess of XXXXXXXXXX years and both organizations had gone through various business combinations with XXXXXXXXXX prior to their amalgamation in XXXXXXXXXX . The authorized share capital of ProfitCo consists of an unlimited number of class A special shares, issuable in series, an unlimited number of class B special shares, issuable in series, and an unlimited number of XXXXXXXXXX . There are no issued and outstanding class B special shares and, as of XXXXXXXXXX , there were XXXXXXXXXX issued and outstanding XXXXXXXXXX and XXXXXXXXXX issued and outstanding class A special shares (in various series) in the capital of ProfitCo. As at XXXXXXXXXX , ProfitCo had share capital (including the XXXXXXXXXX ) of approximately $XXXXXXXXXX and contributed surplus and retained earnings of approximately $XXXXXXXXXX , and had assets of approximately $XXXXXXXXXX . ProfitCo had over XXXXXXXXXX .

2. ProfitCo operates the ProfitCo Branches and XXXXXXXXXX across XXXXXXXXXX . ProfitCo XXXXXXXXXX . Specifically, ProfitCo offers XXXXXXXXXX (the “ProfitCo XXXXXXXXXX Services”).

3. ProfitCo’s mailing address is XXXXXXXXXX and it files its tax return with the XXXXXXXXXX Taxation Centre.

4. LossCo is a XXXXXXXXXX that was incorporated in XXXXXXXXXX under the XXXXXXXXXX by the LossCo Group. LossCo initially acquired most of its assets and deposits as a result of the XXXXXXXXXX acquisition of the business of the XXXXXXXXXX . The authorized share capital of LossCo consists of XXXXXXXXXX class A preference shares, issuable in series, an unlimited number of class B and class C preference shares (each issuable in series) and an unlimited number of XXXXXXXXXX . There are no issued and outstanding class B and class C preference shares in the capital of LossCo and, as of XXXXXXXXXX , there were XXXXXXXXXX issued and outstanding XXXXXXXXXX and XXXXXXXXXX issued and outstanding class A preference shares (in various series) in the capital of LossCo. In addition, LossCo has issued $XXXXXXXXXX of redeemable subordinated debentures maturing XXXXXXXXXX . On its XXXXXXXXXX financial statements, LossCo reported share capital of approximately $XXXXXXXXXX , a deficit of approximately $XXXXXXXXXX and assets of approximately $XXXXXXXXXX .

5. LossCo offers services to XXXXXXXXXX customers XXXXXXXXXX ; LossCo has about XXXXXXXXXX customers and XXXXXXXXXX .

6. LossCo Shareholder, an entity in the LossCo Group, holds non-voting class A preference shares in LossCo and LossCo Lender, which is also an entity in the LossCo Group, has made a $XXXXXXXXXX loan to LossCo (evidenced by the subordinated debentures referred to in Paragraph 4).

7. LossCo operates the XXXXXXXXXX LossCo Branches across XXXXXXXXXX and the XXXXXXXXXX LossCo XXXXXXXXXX in XXXXXXXXXX . LossCo offers XXXXXXXXXX (the “LossCo XXXXXXXXXX Services”).

8. The XXXXXXXXXX LossCo XXXXXXXXXX employ XXXXXXXXXX of XXXXXXXXXX LossCo employees and have accepted less than XXXXXXXXXX % of LossCo’s deposits and hold less than XXXXXXXXXX % of LossCo’s loan assets.

9. LossCo has a XXXXXXXXXX that originates XXXXXXXXXX through XXXXXXXXXX and adjudicates and processes all XXXXXXXXXX and certain XXXXXXXXXX generated in LossCo Branches.

10. LossCo’s mailing address is XXXXXXXXXX and it files its tax returns at the XXXXXXXXXX Taxation Centre.

11. LossCo has approximately $XXXXXXXXXX of unused non-capital losses as of the taxation year ended XXXXXXXXXX and, based on current estimates, will realize approximately $XXXXXXXXXX of additional losses due to its obligation under subsection 256(7) and section 111 to write down its assets to fair market value on the Amalgamation.

12. Both ProfitCo and LossCo are subject XXXXXXXXXX and are subject to XXXXXXXXXX regulation by the province of XXXXXXXXXX . As such ProfitCo and LossCo are regulated by the XXXXXXXXXX .

13. Prior to the occurrence of the Subject Transactions, the XXXXXXXXXX advised LossCo to quickly reorganize its operations by arranging for a business combination with another XXXXXXXXXX .

SUBJECT TRANSACTIONS

14. LossCo arranged to dispose of the LossCo XXXXXXXXXX prior to the date of the Amalgamation through a combination of sales to third parties and closures.

15. Pursuant to approvals from the XXXXXXXXXX and other regulatory authorities and public bodies, as well as approvals from their respective boards of directors, ProfitCo and LossCo amalgamated on XXXXXXXXXX .

16. Prior to the amalgamation, ProfitCo advanced $XXXXXXXXXX to LossCo Shareholder. The set off of this loan satisfied the purchase price referred to in Paragraph 19.

17. LossCo Shareholder used the $XXXXXXXXXX described above and $XXXXXXXXXX of its own funds to subscribe for $XXXXXXXXXX of Class A shares issued by LossCo.

18. Lossco then paid off the $XXXXXXXXXX of subordinated indebtedness that the LossCo Lender held in LossCo.

19. Pursuant to the share purchase agreement and related agreements, one business day before the Amalgamation, ProfitCo purchased all of LossCo Shareholder’s shares in LossCo for $XXXXXXXXXX , subject to adjustment based on final closing values.

20. LossCo and ProfitCo amalgamated under the XXXXXXXXXX to form AmalCo on XXXXXXXXXX . The Amalgamation was executed so that all the property and liabilities of ProfitCo and LossCo immediately before the merger become property and liabilities of AmalCo and that all the shareholders of ProfitCo and LossCo immediately before the merger became shareholders of AmalCo with the intent that subsection 87(1) would apply. As a result of the Amalgamation, each LossCo and ProfitCo XXXXXXXXXX received shares of AmalCo that are substantially similar to the shares currently issued by ProfitCo.

21. AmalCo is a XXXXXXXXXX as defined in subsection XXXXXXXXXX .

22. AmalCo has similar objects to both ProfitCo and LossCo.

23. AmalCo currently offers the ProfitCo XXXXXXXXXX Services to the former LossCo XXXXXXXXXX customers. The ProfitCo XXXXXXXXXX Services are offered by AmalCo using ProfitCo trade names, IT platforms and policies.

24. AmalCo will operate the LossCo Continuing Branches indefinitely. AmalCo will offer the ProfitCo XXXXXXXXXX Services to existing LossCo XXXXXXXXXX customers who transact with the LossCo Continuing Branches.

25. AmalCo will close the LossCo Consolidated Branches. However, AmalCo will, through a ProfitCo branch in a proximate geographic location to each LossCo Consolidated Branch, offer the LossCo XXXXXXXXXX customers who formerly transacted with the LossCo Consolidated Branches the ProfitCo XXXXXXXXXX Services.

26. AmalCo will arrange to transfer or assign the assets and liabilities of the former XXXXXXXXXX customers of LossCo who transacted at Excluded Branches. It is expected that some XXXXXXXXXX customers of those branches may cease to do business with AmalCo.

27. Projections indicate that AmalCo will retain as XXXXXXXXXX customers XXXXXXXXXX of the XXXXXXXXXX estimated Lossco XXXXXXXXXX customers (XXXXXXXXXX %), will retain $XXXXXXXXXX of $XXXXXXXXXX of LossCo’s deposit liabilities (XXXXXXXXXX %) and will retain $XXXXXXXXXX of LossCo’s $XXXXXXXXXX of loans (XXXXXXXXXX %).

28. AmalCo will, as a result of the Amalgamation, employ the current employees of LossCo Continuing Branches and LossCo Consolidated Branches. Additionally, AmalCo will continue employing employees of the Excluded Branches until the Excluded Branches are disposed of through subsequent sales agreements. XXXXXXXXXX

PURPOSES OF SUBJECT TRANSACTIONS

The purposes of the Subject Transactions were:

• to allow ProfitCo to acquire the assets and liabilities of LossCo (other than the assets and liabilities of the LossCo XXXXXXXXXX and the Excluded Branches, the latter of which will be acquired but are expected to be subsequently sold),
• to permit ProfitCo and LossCo to make effective use of their personnel and operational capabilities to permit the profitable operation of the LossCo Continuing Branches and LossCo Consolidated Branches,
• to permit AmalCo to provide XXXXXXXXXX services to XXXXXXXXXX customers of the LossCo Continuing Branches and LossCo Consolidated Branches in a cost effective manner,
• to allow for appropriate arrangements to be made for the ongoing operations of the LossCo XXXXXXXXXX and Excluded Branches, and
• to further strengthen the XXXXXXXXXX by bringing the XXXXXXXXXX capabilities of ProfitCo to the LossCo operations.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions and the purposes of the Subject Transactions, and provided that the Subject Transactions (that have not been completed on the date of this letter) are undertaken in the manner described above, our rulings are set forth below:

A. The operation by AmalCo of the LossCo Continuing Branches and Lossco Consolidated Branches will constitute the carrying on by AmalCo of the business of LossCo for the purposes of subparagraph 111(5)(a)(i).

B. For the purposes of subparagraph 111(5)(a)(ii), the income of AmalCo that is derived from the AmalCo XXXXXXXXXX Services will be considered to be derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services to the LossCo XXXXXXXXXX Services.

C. Subsection 245(2) will apply to determine the tax consequences of the series of transactions described in Paragraphs 16 to 18 such that the repayment of the subordinated debt referred to in Paragraph 18 will be considered a settlement of the subordinated debt for no consideration for the purposes of applying section 80.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency provided that the proposed transactions are completed within six months of the date of this letter. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

In addition, nothing in this letter should be construed as implying that the CRA has agreed to or reviewed:

(a) the determination of the ACB, PUC or FMV of any shares or other property or the UCC of any class of depreciable property referred to herein;

(b) the amount of non-capital losses of LossCo;

(c) the provincial income tax implications relating to the allocation of income and expenses under the proposed transactions; or

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

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
For Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and
Regulatory Affairs Branch