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 utilization arrangement acceptable?
Position: Yes.
Reasons: Meets the established positions.
XXXXXXXXXX
2012-043788
XXXXXXXXXX, 2012
Dear Sir:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-named taxpayers. We also acknowledge e-mails and telephone conversations (XXXXXXXXXX) on the subject. In general terms, the Proposed Transactions involve the use of losses within a group of affiliated and related corporations.
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 Aco, Bco 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 Aco, Bco or a related person;
(iii) under objection by Aco, Bco, or a related person;
(iv) the subject of a ruling previously issued by the Income Tax Directorate to Aco, Bco, 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.
All references herein to statutory provisions are to the Act unless otherwise provided. None of the transactions will impact the currently outstanding tax liabilities, if there are any, of the parties to the ruling.
DEFINITIONS
(a) “XXXXXXXXXXBCA” means the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX;
(b) “Aco” means XXXXXXXXXX, the corporation described in 1 below;
(c) “Aco Note” means the demand non interest-bearing promissory note described in 28 below;
(d) “Aco Loan 1” means the interest-bearing loan described in 16 below;
(e) “Aco Loan 2” means the interest free loan described in 20 below;
(f) “Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof. Unless otherwise stated, all statutory references are to the Act and all terms and conditions used herein that are defined in the Act have the meaning given in such definition;
(g) “adjusted cost base” has the meaning assigned by section 54;
(h) “Bco” means XXXXXXXXXX, the corporation described in 2 below;
(i) “Bco Note” means the promissory note described in 26 below;
(j) “Cco” means XXXXXXXXXX, the corporation described in 3 below;
(k) “Cco Loan” means the loan described in 19 below;
(l) XXXXXXXXXX;
(m) “CBCA” means the Canada Business Corporations Act, R.S.C. 1995, c. C-44, as amended;
(n) “Dco” means XXXXXXXXXX, the corporation described in 4 below;
(o) “Eco” means XXXXXXXXXX, the corporation described in 5 below;
(p) “Daylight Loan” has the meaning specified in 25 below;
(q) “Newco” means the corporation described in 22 below;
(r) “Newco Common Shares” means the common shares described in 22 below;
(s) “Newco Preferred Shares” means the preferred shares described in 22 and 23 below;
(t) “non-capital losses” has the meaning assigned by subsection 111(8);
(u) “paid-up capital” has the meaning assigned by subsection 89(1);
(v) “Parentco” means XXXXXXXXXX, the corporation described in 6 below;
(w) “XXXXXXXXXXCA” means the Companies Act, XXXXXXXXXX currently in force;
(x) “refundable dividend tax on hand” has the meaning assigned by subsection 129(3);
(y) “related persons” has the meaning assigned by subsection 251(2);
(z) “SFI” means a specified financial institution, as defined in subsection 248(1);
(aa) “subject corporation” has the meaning assigned by subsection 186(3);
(bb) “taxable Canadian corporation” has the meaning assigned by subsection 89(1);and
(cc) “Ultimate Parentco” means XXXXXXXXXX, the corporation described in 7 below.
FACTS
1. Aco is a taxable Canadian corporation incorporated under the CBCA. Parentco holds all of the issued common shares of Aco. Aco has a taxation year end of XXXXXXXXXX. Aco is a holding company that has interests, directly or indirectly, in companies that are involved in XXXXXXXXXX. Aco provides services to its subsidiaries through its employees. The remainder activities are realized through its subsidiaries which are actively engaged in Canada.
2. Bco is a taxable Canadian corporation incorporated under the XXXXXXXXXXCA. Aco holds all of the issued common shares of Bco. Bco had a taxation year of XXXXXXXXXX. Bco is an XXXXXXXXXX. Bco has XXXXXXXXXX operating subsidiaries located in XXXXXXXXXX.
3. Cco is a taxable Canadian corporation incorporated under the XXXXXXXXXXBCA. Cco is owned by XXXXXXXXXX resident corporations (XXXXXXXXXX%) and one non-resident corporation (XXXXXXXXXX%) none of which are related. Cco has XXXXXXXXXX subsidiaries through which Cco operates in XXXXXXXXXX. Cco services include XXXXXXXXXX.
4. Dco is a company incorporated in XXXXXXXXXX under the XXXXXXXXXX corporate law. Dco is a wholly-owned subsidiary of Ultimate Parentco. Dco is a corporation whose activities include XXXXXXXXXX limited to corporations with whom Dco deals at non-arm’s length. Dco also XXXXXXXXXX.
5. Eco is a taxable Canadian corporation incorporated under the XXXXXXXXXXBCA. Cco holds all of the issued common shares of Eco. Eco has a taxation year of XXXXXXXXXX. Eco is an XXXXXXXXXX. Eco provides services in XXXXXXXXXX.
6. Parentco is a XXXXXXXXXX corporation and is a wholly-owned subsidiary of Ultimate Parentco and its subsidiaries provide XXXXXXXXXX services which include XXXXXXXXXX. Parentco and its subsidiaries also possess know-how in those related areas. Parentco and its subsidiaries generate most of its revenues in XXXXXXXXXX.
7. Ultimate Parentco is a XXXXXXXXXX corporation and a public corporation, the common shares of which are listed on the XXXXXXXXXX under the symbol “XXXXXXXXXX”. Ultimate Parent operates as a XXXXXXXXXX company worldwide. XXXXXXXXXX.
8. Aco is estimated to have non-capital loss carryforwards of approximately $XXXXXXXXXX as of the end of its taxation year ended on XXXXXXXXXX.
9. It is anticipated that Aco will incur additional non-capital losses of approximately $XXXXXXXXXX annually in future taxation years as the result of its financing costs related to its acquisition of Cco.
10. The borrowing capacity of Aco and its subsidiaries exceeds the maximum amount of $XXXXXXXXXX required to complete the Proposed Transactions described in paragraphs 22 to 41. As of XXXXXXXXXX, Aco had an estimated net equity value of $XXXXXXXXXX.
11. Bco has generated taxable income in each of its last XXXXXXXXXX taxation years and it is anticipated that it will continue to do so in the next XXXXXXXXXX taxation years.
12. Aco operates through a permanent establishment in XXXXXXXXXX.
13. Bco operates through permanent establishments in XXXXXXXXXX.
14. It is not believed that Aco or Bco are specified financial institutions (“SFI”) as defined at 248(1).
RELEVANT TRANSACTIONS
15. Aco and the Cco shareholders agreed that Aco acquire all of the Cco shares for an amount equal to $XXXXXXXXXX adjusted by certain elements including a positive adjustment for the closing cash (the “Closing Cash”).
16. On XXXXXXXXXX, Dco made an interest bearing loan of $XXXXXXXXXX to Aco (the “Aco Loan 1”). The Aco Loan 1 is an interest-bearing loan at a floating rate equal to the Banker Acceptance rate (“BACAD”) plus XXXXXXXXXX base points and has repayment terms. It is anticipated that the Aco Loan 1 will be repaid at the end of XXXXXXXXXX years.
17. On XXXXXXXXXX, Bco lent $XXXXXXXXXX to Aco on a temporary basis (“Temporary Loan 2”). On XXXXXXXXXX, Aco borrowed $XXXXXXXXXX, on a “temporary loan” basis (the “Temporary Loan”) from Parentco. On XXXXXXXXXX, the Closing Cash was estimated to be $XXXXXXXXXX by Eco.
18. On XXXXXXXXXX, Aco used the proceeds of the Aco Loan 1 and a portion of the Temporary Loan and Temporary Loan 2 to acquire all of the issued shares of Cco.
19. On XXXXXXXXXX, Eco used part of its excess funds to make an interest free loan of $ XXXXXXXXXX to Cco (the “Cco Loan”).
20. On XXXXXXXXXX, Cco, with the proceeds from the Cco Loan, made an interest free loan of $ XXXXXXXXXX to Aco (the “Aco Loan 2”). On XXXXXXXXXX, Aco repaid the Temporary Loan of $XXXXXXXXXX.
21. Aco, will repay the Temporary Loan using the same format from excess funds from Eco once it is determined by management that the excess funds can be distributed.
PROPOSED TRANSACTIONS
Aco will incorporate a new wholly-owned subsidiary (“Newco”) under the CBCA. Newco will be a taxable Canadian corporation. The authorized share capital of Newco will consist of an unlimited number of common shares (the “Newco Common Shares”) and an unlimited number of preferred shares (the “Newco Preferred Shares”). Newco will not carry on any business and its activities will be limited to acquiring the Aco Note.
22. The Newco Preferred Shares will have the following attributes:
a) non-voting;
b) non-participating;
c) redeemable at the option of the issuer and retractable at the option of the holder, subject to applicable law, at any time for an amount equal to the cash amount for which they were issued. The payment of the redemption or retraction price may be satisfied, at the holder’s option, either by (i) a payment of cash, or (ii) delivery of property having a fair market value at the time of redemption equal to the aggregate redemption amount, or, (iii) the Aco Note to be issued at 28 below, in each case together with an amount in cash equal to all declared and unpaid dividends and any accrued dividends which have not been declared and paid up to but excluding the date fixed for such redemption or retraction and;
d) entitlement to an annual cumulative dividend, calculated daily and accruing by reference to the redemption amount of Newco Preferred Shares at a rate equal to BACAD plus XXXXXXXXXX base points per annum.
23. Aco will subscribe for XXXXXXXXXX Newco Common Shares for nominal consideration of $XXXXXXXXXX.
24. Aco will borrow $XXXXXXXXXX on a “daylight loan” basis from an arm’s length financial institution or from a related entity (the “Daylight Loan”). Aco will obtain a letter from a third party financial institution or related entity confirming the amount of the daylight loan.
25. Aco will use the proceeds of Daylight Loan to make a $XXXXXXXXXX interest bearing loan at the rate equal to BACAD plus XXXXXXXXXX base points per annum to Bco (the “Bco Note”). The Bco Note will be payable on demand. The Bco Note will provide that Aco’s recourse under the Bco Note will be limited to the Newco Preferred Shares (issued at 28 below) (together with all proceeds from such shares) only, and not to any other assets of Bco. As security for the indebtedness evidenced by the Bco Note, Bco will grant Aco a security interest in the Newco Preferred Shares. The Bco Note will also provide that the principal amount may be satisfied at Bco’s option, either by (i) payment of cash, or (ii) delivery of property having a fair market value at the time of repayment equal to the principal amount, (iii) delivery of the Newco Preferred Shares to be issued in 28 below or (iv) by way of set-off against the Aco Note to be issued in 29 below if the Aco Note belongs to Bco at the time of repayment.
Bco will use the proceeds from the Bco Note to subscribe for XXXXXXXXXX of Newco Preferred Shares for a total amount of $XXXXXXXXXX. The aggregate redemption amount, fair market value, adjusted cost base and paid-up capital of the Newco Preferred Shares issued will be $XXXXXXXXXX. The amount of dividends received by Bco on the Newco Preferred Shares will be sufficient to permit Bco to realize a profit on its investment in the Newco Preferred Shares, after the deduction of any interest on the Bco Note and its other related expenses.
26. Newco will use the proceeds from the issuance of the Newco Preferred Shares to make a non interest-bearing loan of $XXXXXXXXXX to Aco. This loan will be evidenced by a demand non interest-bearing promissory note (the “Aco Note”).
27. Aco will use the proceeds from the Aco Note to repay the Daylight Loan of $XXXXXXXXXX.
28. The following transactions will occur when jointly determined by Aco, Bco and Newco:
a) Pursuant to a capital contribution agreement, Aco will make a contribution of capital to Newco in an amount equal to the amount of the accrued and unpaid dividends, if any, on the Newco Preferred Shares. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the stated capital of Newco. The amount of each contribution of capital will be recorded as contributed surplus for accounting purposes. The contribution of capital will not be income to Newco pursuant to generally accepted accounting principles;
b) Newco will pay the accrued and unpaid dividends on the Newco Preferred Shares; and
c) Bco will pay the accrued and unpaid interest on the Bco Note.
The proposed structure will be unwound in the following manner at the earliest of the moment where the Aco Loan 1 is repaid in part or in full;
29. At least XXXXXXXXXX days prior to the moment where Aco is to make a payment on the Aco Loan 1, Aco will send a notice of payment to Newco;
30. At the moment when Aco sends a notice of payment to Newco, Newco will send a notice of redemption to Bco mentioning that Newco will buy back a number of the Newco Preferred Shares for an aggregate redemption amount equal to the forthcoming payment to be made on the Aco Loan 1;
31. After the expiration of the notice of payment sent by Aco and at the moment where Aco is to make a payment on the Aco Loan 1, Aco will also reimburse the Aco Note by the same amount.
32. At the moment when Aco makes a payment on the Aco Note, Newco must redeem a number of Newco Preferred Shares held by Bco for an amount that will provide an aggregate redemption amount equal to the payment made on the Aco Note.
33. The Newco Preferred Shares redemption proceeds will be satisfied by the cash proceeds obtained in 33 above.
34. Bco will repay partially the Bco Note with the proceeds obtained in 35 above.
35. Aco will repay partially the Aco Loan 1 with the proceeds obtained in 36 above.
The proposed structure will be unwound in the following manner at the moment of the final repayment of the Aco Loan 1;
36. Newco will redeem a number of Newco Preferred Shares held by Bco for an amount equal to their aggregate redemption amount.
37. As payment for the redemption of the Newco Preferred Shares, Newco will assign the remaining Aco Note to Bco.
38. The Aco Note and the Bco Note will be satisfied by way of set-off.
39. Aco, as sole shareholder of Newco, will pass a resolution authorizing and requiring Newco to be wound up into Aco pursuant to 88(1). As a consequence, Newco’s assets will be transferred to Aco and Aco will assume Newco’s liabilities.
REPRESENTATIONS
40. Bco will not acquire the Newco Preferred Shares in the ordinary course of its business.
41. None of the corporations involved in the Proposed Transactions has or will have entered into a “dividend rental arrangement” as defined by subsection 248(1) with respect to any of the shares issued for the purposes of completing the Proposed Transactions.
42. None of the shares on which a dividend is declared or paid in the course of the Proposed Transactions is guaranteed in any way described in subsection 112(2.2) by an SFI or a specified person in relation to an SFI.
None of the shares to be issued as part of the Proposed Transactions will be issued or acquired as part of a transaction or series of transactions of the type described in subsection 112(2.5).
43. Aco, Bco and Newco are subject corporations, as defined in subsection 186(3). However, since Newco will not have any refundable dividend tax on hand, no Part IV tax will be payable on the dividends paid by Newco on the Newco Preferred Shares held by Bco.
44. None of the purposes of the dividend described in 30 above is to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized, as determined in accordance with subsection 55(5), by any corporation after 1971 and before the relevant safe-income determination time.
PURPOSE OF THE PROPOSED TRANSACTIONS
48. The purpose of the Proposed Transactions is to consolidate taxable income and non-capital losses within a group of affiliated and related persons. The Proposed Transactions will enable Aco to earn interest income on the Bco Note and permit Bco to effectively utilize Aco’s non-capital losses.
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 Bco has a legal obligation to pay interest on the Bco Note and that the Newco Preferred Shares continue to be held by Bco the purpose of gaining or producing income, in computing its income for a taxation year, Bco will be entitled to deduct, pursuant to paragraph 20(1)(c) of the Act, the lesser of (i) the interest on the Bco Note, as described in 26 above, paid in the year or payable in respect of the year (depending on the method regularly followed by Bco in computing its income for the purposes of the Act) or (ii) a reasonable amount in respect thereof.
B. The provisions of subsections 15(1), 56(2), 69(4), and 246(1) will not apply as a result of the Proposed Transactions, in and by themselves.
C. 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 Aco as described in 30 above.
D. Dividends received by Bco on the Newco Preferred Shares, as described in 30 above, will be taxable dividends and such dividends will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of the recipient corporation for the year in which the dividends are received by Bco and, 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.
E. Subsection 245(2) of the Act will not be applicable as a result of the Proposed Transactions, in and by themselves, to redetermine 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 other than those transactions in 38 to 41 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.
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 provincial income tax implications relating to the allocation of income and expenses under the proposed transactions; 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
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