2012 Ruling 2011-0426581R3 - Loss and XXXXXXXXXX tax 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 and XXXXXXXXXX tax credits utilization arrangement acceptable?

Position: Yes.

Reasons: Meets our published position.

XXXXXXXXXX
2011-042658

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, and revised on XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-named taxpayers. You propose an expansion of a loss utilization arrangement into a tax credit utilization transaction involving Parentco and certain other affiliated (and related) companies described herein. In very general terms, the transactions described hereafter involve the modification of an existing loss utilization transaction within an affiliated (and related) group of companies which will allow a corporation to apply unpaid refunds of XXXXXXXXXX tax credits from the current and prior taxation years to the Part I tax liabilities of the corporation in the current and future taxation years. All corporations listed above file their income tax returns at the XXXXXXXXXX Taxation Centre and deal with the XXXXXXXXXX Taxation Services Office.

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 Parentco, Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, Nco, Creditco 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 Parentco, Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, Nco, Creditco or a related person;

(iii) under objection by Parentco, Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, Nco, Creditco or a related person;

(iv) the subject of a previous ruling considered by the Income Tax Rulings Directorate, except as described in 8 below, regarding Parentco, Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, Nco, Creditco, or a related person; nor

(v) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired.

Except as otherwise noted, all statutory references in this request for an advance income tax ruling are references to the provisions of the Act. Unless otherwise noted, all references to currency are to Canadian dollars.

Definitions

(a) “Aco” means XXXXXXXXXX, a subsidiary wholly-owned corporation of Gco;

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

(c) “ACB” has the meaning assigned to “adjusted cost base” by section 54;

(d) “affiliated person” has the meaning of affiliated person assigned by subsection 251.1 (1);

(e) “Arm's Length” has the meaning assigned to arm's length by subsection 251(1);

(f) “Bco” means XXXXXXXXXX, a subsidiary wholly-owned corporation of Gco;

(g) “Canadian Corporation” has the meaning assigned by subsection 89(1);

(h) “Canadian XXXXXXXXXX” has the meaning assigned by subsection XXXXXXXXXX of the Regulations;

(i) “Canadian XXXXXXXXXX tax credit” means the amount provided in subsection XXXXXXXXXX;

(j) XXXXXXXXXX;

(k) “Cco” means XXXXXXXXXX, a subsidiary wholly-owned corporation of XXXXXXXXXX Parentco owns all the common shares of XXXXXXXXXX and the preference shares of XXXXXXXXXX are held by Aco, Bco, Dco, Fco, Hco, Ico, Jco and Kco;

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

(m) “Creditco” means XXXXXXXXXX, an indirect subsidiary of Parentco;

(n) “Creditco Loan” means the loan made to Creditco as described in 11 below;

(o) “Creditco Preferred Shares” means the preferred shares described in 9 below;

(p) “Dco” means XXXXXXXXXX, a corporation whose common shares are owned by XXXXXXXXXX, an indirect subsidiary of Parentco and the preference shares are held by Parentco;

(q) “Demand Loans” means the loans made by Creditco as described in 12 below;

(r) “Eco” means XXXXXXXXXX, a subsidiary wholly-owned corporation of Parentco;

(s) “Fco” means XXXXXXXXXX. The common shares are owned by XXXXXXXXXX, a subsidiary wholly-owned corporation of Parentco and the preference shares are held by Parentco;

(t) XXXXXXXXXX;

(u) “XXXXXXXXXX services tax credit” means the amount provided in subsection XXXXXXXXXX;

(v) “Financial intermediary corporation” has the meaning assigned by subsection 191(1);

(w) “FMV” means fair market value;

(x) “Gco” means XXXXXXXXXX The common shares are owned by Parentco and the preference shares are held by Cco, Dco, Eco and Jco;

(y) “Hco” means a subsidiary wholly-owned corporation of Gco;

(z) “Ico” means a subsidiary wholly-owned corporation of Gco;

(aa) “Jco” means a subsidiary wholly-owned corporation of Dco;

(bb) “Kco” means a subsidiary wholly-owned corporation of Dco;

(cc) “Lco” means a subsidiary wholly-owned corporation of Parentco;

(dd) “Mco” means a subsidiary wholly-owned corporation of Parentco;

(ee) “Nco” means a subsidiary wholly-owned corporation of Parentco;

(ff) “New Daylight Loan” means the loan described in 10 below;

(gg) “Non-Capital Losses” has the meaning assigned by subsection 111(8);

(hh) “XXXXXXXXXXBCA” means the Business Corporations Act (XXXXXXXXXX), as amended;

(ii) XXXXXXXXXX;

(jj) “XXXXXXXXXX tax credit” has the meaning assigned by section XXXXXXXXXX of the XXXXXXXXXX;

(kk) “XXXXXXXXXX services tax credit” has the meaning assigned by section XXXXXXXXXX of the XXXXXXXXXX;

(ll) “XXXXXXXXXX tax credit” has the meaning assigned by section XXXXXXXXXX of the XXXXXXXXXX;

(mm) “Parentco” means XXXXXXXXXX;

(nn) “Prescribed taxable Canadian corporation” has the meaning assigned by subsection 1106(2) of the Regulations;

(oo) “Proposed Transactions” means the transactions described in 9 to 18 below;

(pp) “PUC” means "paid-up capital" and has the meaning assigned by subsection 89(1);

(qq) “Qualified corporation” has the meaning assigned by subsection XXXXXXXXXX;

(rr) “SFI” means "specified financial institution" and has the meaning assigned by subsection 248(1);

(ss) “Subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1);

(tt) “Regulations” means the Income Tax Regulations, Consolidated Regulations of Canada chapter 945;

(uu) “Taxable dividend” has the meaning assigned by subsection 89(1); and

(vv) “Term preferred shares” has the meaning assigned by subsection 248(1).

Facts

1. Parentco, through its subsidiaries, carries on business as a Canadian-based XXXXXXXXXX company with interests in XXXXXXXXXX. Parentco commenced operations on XXXXXXXXXX, pursuant to a statutory plan of arrangement in which it was separated from XXXXXXXXXX, its former parent corporation.

2. Creditco is a taxable Canadian corporation and a prescribed taxable Canadian corporation, and is governed by the laws of the XXXXXXXXXXBCA. Creditco's common shares are owned by XXXXXXXXXX(“ABco”), XXXXXXXXXX(“ACco”), XXXXXXXXXX(“ADco”) and XXXXXXXXXX(“AFco”) Each of ABco., ACco., and ADco. are subsidiary wholly-owned corporations of AFco. Parentco owns all the common shares of AFco. Creditco's preference shares are owned by Aco and Bco.

3. Creditco carries on a Canadian XXXXXXXXXX business specializing in XXXXXXXXXX. Creditco has XXXXXXXXXX employees, all or substantially all of whom are either directly engaged in its Canadian XXXXXXXXXX business or provide administrative support for the Canadian XXXXXXXXXX business. All of Creditco's taxable income is earned in XXXXXXXXXX for the purpose of Part IV of the Regulations.

4. All or substantially all of Creditco's gross revenue is derived from its Canadian XXXXXXXXXX business; all or substantially all of its assets are devoted to its Canadian XXXXXXXXXX business; all or substantially all of its capital is employed in its Canadian XXXXXXXXXX business; and all or substantially all of the time, attention and effort expended by its employees, agents or officers is devoted to its Canadian XXXXXXXXXX business.

5. Creditco has been a Qualified corporation since XXXXXXXXXX and expects to be a qualified corporation in XXXXXXXXXX.

6. As at XXXXXXXXXX, Creditco had a non-capital loss carry forward balance of $XXXXXXXXXX. As at XXXXXXXXXX, Creditco was owed a total of $XXXXXXXXXX of XXXXXXXXXX tax credits in respect of claims made in the taxation years XXXXXXXXXX to XXXXXXXXXX which remained unassessed by the CRA because of the delays associated with obtaining certificates from XXXXXXXXXX and the completion of audits. It is expected that Creditco will continue to generate $XXXXXXXXXX to $XXXXXXXXXX in refundable XXXXXXXXXX tax credits per year.

7. Creditco has a permanent establishment only in XXXXXXXXXX.

8. The Proposed Transactions are similar to transactions that the Income Tax Rulings Directorate has provided rulings on in the past (e.g., document # XXXXXXXXXX) for this taxpayer except that the Proposed Transactions not only involve the utilization of Creditco's non-capital losses but also the XXXXXXXXXX tax credits of Creditco in respect of claims made in the XXXXXXXXXX to XXXXXXXXXX taxation years, and in the current and future taxation years.

Proposed Transactions

9. Creditco's share capital will be amended to create a new category of preferred shares that are redeemable and retractable, non-voting and non-participating, entitled to cumulative dividends calculated daily by reference to the redemption/retraction price at a rate equal to the interest rate on the Demand Loans plus a spread of XXXXXXXXXX basis points (the "Creditco Preferred Shares"). The shares will be redeemable at any time at the option of the holder or Creditco:

(a) for cash for an amount equal to the aggregate of the fair market value of the consideration for which the shares were issued and any unpaid dividends; or

(b) by setting off amounts owing to the shareholder against the redemption price of the Creditco Preferred Shares of $XXXXXXXXXX per share and paying cash equal to any unpaid dividends.

10. Parentco will borrow $XXXXXXXXXX in Canadian dollars within its normal borrowing capacity on a daylight loan basis from an arm's length financial institution (the "New Daylight Loan"). The amount of the New Daylight Loan will not exceed the combined borrowing capacity of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco.

11. Parentco will lend, in Canadian dollars and on a demand basis, the proceeds of the New Daylight Loan received in 10 above to Creditco (the "Creditco Loan"). The terms of the Creditco Loan will be as follows:

(a) the Creditco Loan will be subordinated to external debt; and,

(b) the Creditco Loan will bear interest, payable annually in arrears, at a rate which will be determined based on market rates of interest charged on indebtedness having similar terms and risk at the time the Creditco Loan is granted which is expected to be at XXXXXXXXXX% per annum.

12. Creditco will use the proceeds of the Creditco Loan to make loans to Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco (the "Demand Loans") as follows:.

Company Demand Loans

Aco $XXXXXXXXXX
Bco $XXXXXXXXXX
Cco $XXXXXXXXXX
Dco $XXXXXXXXXX
Eco $XXXXXXXXXX
Fco $XXXXXXXXXX
Gco $XXXXXXXXXX
Hco $XXXXXXXXXX
Ico $XXXXXXXXXX
Jco $XXXXXXXXXX
Kco $XXXXXXXXXX
Mco $XXXXXXXXXX
Nco $XXXXXXXXXX
$XXXXXXXXXX

Each Demand Loan will not result in each respective company exceeding its maximum borrowing capacity. Simple interest at XXXXXXXXXX% will accrue on Demand Loans. Demand Loans will be payable on demand. The interest on the Demand Loans will be paid periodically. The terms of the Demand Loans will be as follows:

(a) the Demand Loans will be subordinated to external debt;

(b) the Demand Loans will bear interest, payable annually in arrears, at a XXXXXXXXXX% interest rate having been determined on market rates of interest charged on indebtedness having similar terms and risk at the time the particular Demand Loan is granted; and

(c) repayment of any of the Demand Loans may be settled in cash or by way of set-off against any redemption required in respect of the Creditco Preferred Shares.

13. Based on the financial projections of Aco, Bco, Cco, Dco, Eco Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco, each company has the financial capacity to pay the interest on the respective Demand Loan from its own cash flow. Each of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco will use the proceeds of their respective Demand Loans to subscribe for Creditco Preferred Shares having an aggregate redemption/retraction price equal to the amount contributed. The dividend rate is expected to be XXXXXXXXXX%. The PUC and the FMV of the Creditco Preferred Shares will be equal to the amount contributed.

14. Creditco will use the proceeds received from the subscription of the Creditco Preferred Shares to repay the Creditco Loan to Parentco.

15. Parentco will use the proceeds received from the repayment of the Creditco Loan to repay the New Daylight Loan.

16. Each of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco will pay interest to Creditco on their respective Demand Loans annually.

17. Creditco will pay annual dividends on the Creditco Preferred Shares.

18. The Proposed Transactions will be unwound in XXXXXXXXXX years. Creditco will require repayment of all or part of the respective Demand Loans and Creditco will be required by Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and/or Nco, as the case may be, to redeem all or part of the Creditco Preferred Shares held by that entity having a fair market value equal to the amount of the Demand Loan to be repaid. As described above, the redemption proceeds will be satisfied by way of set-off of the obligation arising on the redemption against such portion of the Demand Loan being repaid.

Additional Information

19. Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, Nco, Parentco, and Creditco are neither "specified financial institutions" nor "financial intermediary corporations".

20. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) is or will be, at any time during the implementation of the Proposed Transactions described herein:

(a) the subject of a dividend rental arrangement; or

(b) the subject of a guarantee agreement.

21. Creditco is an "affiliated person" of each Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, Nco, and Parentco.

22. The Creditco Preferred Shares will not, at any relevant time, be:

a) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

b) 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).

Purpose of the Proposed Transactions

23. The purpose of the Proposed Transactions is to allow:

(i) Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco to offset taxable income with interest expense created by the Demand Loans;

(ii) Creditco to utilize its non-capital losses to offset the taxable income that would otherwise result from interest income earned on the Demand Loans; and

(iii) Creditco to apply unpaid XXXXXXXXXX tax credits against the Part I tax liabilities of Creditco that result from the interest income earned on the Demand Loans.

Rulings Given

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, 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 Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco, respectively, have a legal obligation to pay interest on the Demand Loans, and that the Creditco Preferred Shares continue to be held by Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco, respectively, for the purpose of gaining or producing income, in computing its respective income for a taxation year, Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco, respectively, will be entitled to deduct, pursuant to paragraph 20(1)(c) of the Act, the lesser of (i) the interest on the Demand Loans, as described in 12 above, paid in the year or payable in respect of the taxation year (depending on the method regularly followed by Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco, respectively, in computing their income for the purposes of the Act) or (ii) a reasonable amount in respect thereof.

B. The dividends received by Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco, respectively, on the Creditco Preferred Shares, as described in 17 above will be taxable dividends that will be deductible pursuant to subsection 112(1) of the Act in computing the taxable income of Aco, Bco, Cco, Dco, Eco, Fco, Gco, Hco, Ico, Jco, Kco, Lco, Mco, and Nco, respectively, for the taxation year in which the dividends are received. 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) of the Act.

C. Provided that Creditco meets the conditions to be a qualified corporation as defined in subsection XXXXXXXXXX, the Proposed Transactions, in and by themselves, will not cause Creditco to cease to be a qualified corporation.

D. Provided that subsection XXXXXXXXXX does not otherwise apply, the Proposed Transactions, in and by themselves, will not cause the provisions of subsection XXXXXXXXXX to apply to Creditco.

E. The provisions of subsections 15(1), 56(2), 69(1), 69(4), and 246(1) of the Act, in and by themselves, will not apply to the Proposed Transactions.

F. Subsection 245(2) of the Act will not be applicable as a result of the Proposed Transactions to redetermine the tax consequences confirmed in the rulings given above.

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, other than those transactions described in 18 above, 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

Unless otherwise confirmed in the above rulings, 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;

(c) the amount of any XXXXXXXXXX tax credits or any tax credit of any corporation referred to herein; nor,

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

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch