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: Where the corporation repays the debt with cash after issuing sufficient shares, is there a forgiven amount?
Position: Not in this case
Reasons: No tax benefit envisioned.
XXXXXXXXXX
2012-045039
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 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, CCo 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, CCo, or a related person;
(iii) under objection by ACo, BCo, CCo, or a related person;
(iv) the subject of a ruling previously issued by the Income Tax Directorate to ACo, BCo, CCo, 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) "ACo" means XXXXXXXXXX;
(b) "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;
(c) "AN" means the XXXXXXXXXX;
(d) "XXXXXXXXXXBCA" means the Business Corporations Act, XXXXXXXXXX;
(e) "BCo" means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXXBCA;
(f) "CCo" means the XXXXXXXXXX;
(g) "DLP" means XXXXXXXXXX, of which the general partner is BCo and the sole limited partner is AN;
(h) "Final Agreement" means the XXXXXXXXXX Final Agreement among Canada, XXXXXXXXXX and AN;
(i) "Forgiven Amount" means "forgiven amount" and has the meaning assigned by subsection 80(1) of the Act;
(j) "Group" means ACo, BCo, CCo, and DLP;
(k) "FLG" means XXXXXXXXXX;
(l) "OSR" means own source revenue under the OSRA;
(m) "OSRA" means the own source revenue agreement entered into among AN, Canada, and XXXXXXXXXX, as amended to this date;
(n) "Proposed Transactions" means the transactions described in 58 to 66 below; and,
(o) "Taxation Agreement" means XXXXXXXXXX entered into among Canada, XXXXXXXXXX and AN, as amended to this date.
Facts
1. AN is XXXXXXXXXX which has entered into a treaty with Canada and XXXXXXXXXX, known as the Final Agreement. The Final Agreement was given the force of law by the XXXXXXXXXX.
2. In accordance with the Final Agreement, AN is a legal person with all the powers of a natural person.
3. As contemplated by the Final Agreement, AN entered into the Taxation Agreement with Canada and XXXXXXXXXX. Section XXXXXXXXXX of the Taxation Agreement provides that AN is a public body performing the function of government in Canada for purposes of paragraph 149(1)(c) of the Tax Act, and is a municipality for the purposes of paragraphs 149(1)(d) to (d.6) and subsections 149(1.1) to (1.3) of the Tax Act. Section XXXXXXXXXX of the Taxation Agreement has the force of law pursuant to section XXXXXXXXXX of the XXXXXXXXXX.
4. As a public body performing the function of government in Canada, AN is exempt from income tax.
5. A corporation that is wholly owned by AN is exempt under the Tax Act only if it does not earn more than 10% of its income from activities carried on outside the geographic boundaries of AN. Corporations owned by AN that do not meet this geographical boundaries income test are taxable.
6. Although AN is exempt from income tax, AN has entered into the OSRA with Canada and XXXXXXXXXX.
7. Under the OSRA, federal funding to AN is reduced by the OSR capacity of AN. XXXXXXXXXX:
"XXXXXXXXXX"
8. In determining the amount of tax that would be paid by AN, the OSRA mandates certain assumptions, including the following:
XXXXXXXXXX.
9. Income of taxable corporations owned by AN do not generate own source revenue capacity for AN, since those corporations pay tax instead.
10. For AN, the income tax system (under the Tax Act) and the OSR system (under the OSRA) are functionally equivalent: income earned by a business is either taxed by the Act, or results in an equivalent reduction in federal funding in accordance with the OSRA.
11. The income tax and OSR systems however are not completely equivalent. Some details differ. For example, under the Act, income tax is usually payable throughout the taxation year in instalments and then the balance owing is payable within a few months after the end of the year. Under the OSRA, AN's own source revenue capacity in one fiscal year reduces federal funding to AN in the second subsequent fiscal year.
12. Since the income tax and OSR systems are functionally equivalent for AN, the same issues that arise for taxable corporations arise for AN. In particular, there is a need for careful planning to achieve loss consolidation and effective loss utilization.
13. Under the Act, any non-capital losses of a corporation are trapped in the corporation and are unavailable for use by the shareholders or affiliated corporations, with a few exceptions. Exceptions include wind-ups and amalgamations, and loans from loss making corporations to profit making corporations.
14. The same is true under the OSRA. Any non-capital losses of a corporation owned by AN are trapped in the corporation and are unavailable for use either by AN or by an affiliated corporation, unless there is a wind-up or amalgamation, or a loss consolidation loan is used.
15. Notwithstanding the foregoing, there is an advantage during the transitional period provided for under the OSRA to income being earned in the OSR system. During that transitional period, AN's OSR capacity has been reduced. XXXXXXXXXX.
16. Until now, AN has operated its businesses through both corporations and limited partnerships.
17. The Group is comprised of XXXXXXXXXX wholly owned corporations (one of which has a wholly-owned subsidiary) and one limited partnership.
18. Each member of the Group has filed tax returns on the basis that it is not tax exempt.
19. Due to their non-capital losses, none of the corporations in the Group has paid tax under the Act.
20. According to the XXXXXXXXXX consolidated financial statements for the Group, AN has lent about $XXXXXXXXXX to the Group as a whole.
21. The consolidated financial statements for the Group indicate a cumulative deficit, as of XXXXXXXXXX, of about $XXXXXXXXXX.
22. The financial statements for the year-ended XXXXXXXXXX, have not yet been finalized.
23. BCo operates a XXXXXXXXXX business and other businesses.
24. BCo had a loss of $XXXXXXXXXX for the fiscal year ended XXXXXXXXXX, and a loss of $XXXXXXXXXX for the fiscal year ended XXXXXXXXXX. It has cumulative non-capital losses that expire as follows:
XXXXXXXXXX
25. Bco's XXXXXXXXXX balance sheet indicates that it has a cumulative deficit of $XXXXXXXXXX.
26 BCo's XXXXXXXXXX balance sheet indicates a book value for its assets of $XXXXXXXXXX, comprised mostly of current assets (accounts receivable, inventory and prepaid expenses) and depreciable property (XXXXXXXXXX).
27. BCo owed DLP $XXXXXXXXXX as of XXXXXXXXXX.
28. BCo owed AN $XXXXXXXXXX as of XXXXXXXXXX.
29. The paid-up capital of AN's BCo shares is $XXXXXXXXXX.
30. BCo has a wholly owned subsidiary with a small amount of losses.
31. BCo is also the general partner of DLP.
32. CCo XXXXXXXXXX.
33. CCo had a loss of $XXXXXXXXXX for the fiscal year ended XXXXXXXXXX, and a loss of $XXXXXXXXXX for the fiscal year ended XXXXXXXXXX (it had nominal revenue that year; its loss was mostly due to amortization).
34. CCo's XXXXXXXXXX balance sheet shows a cumulative deficit (for financial purposes) of $XXXXXXXXXX.
35. For tax purposes, CCo has cumulative non-capital losses of $XXXXXXXXXX, which do not start to expire until XXXXXXXXXX.
36. CCo's XXXXXXXXXX balance sheet shows a book value of its assets of $XXXXXXXXXX, comprised of current assets (cash, term deposits and accounts receivable) and depreciable property (computer equipment, leasehold improvements, office equipment, portable buildings, and vehicles).
37. CCo's most significant asset is a XXXXXXXXXX. The XXXXXXXXXX is not indicated as an asset on the balance sheet of CCo, probably because there was no capital cost to CCo for the XXXXXXXXXX. The value of the XXXXXXXXXX is unknown at this time.
38. CCo owed DLP $XXXXXXXXXX as of XXXXXXXXXX.
39. CCo owed AN $XXXXXXXXXX as of XXXXXXXXXX.
40. The paid-up capital of AN's CCo shares is $XXXXXXXXXX.
41. ACo operates a XXXXXXXXXX business.
42. ACo had a profit of $XXXXXXXXXX for the fiscal year ended XXXXXXXXXX, and a loss of $XXXXXXXXXX for the fiscal year ended XXXXXXXXXX.
43. ACo's XXXXXXXXXX balance sheet shows a cumulative deficit (for financial purposes) of $XXXXXXXXXX.
44. For income tax purposes, ACo has cumulative non-capital losses of $XXXXXXXXXX which start expiring in XXXXXXXXXX, as of the end of its XXXXXXXXXX tax year.
45. ACo's XXXXXXXXXX balance sheet indicates an aggregate book value for its assets of $XXXXXXXXXX, comprised of current assets (cash, accounts receivable, inventory and prepaid expenses) and depreciable property (XXXXXXXXXX).
46. The paid-up capital of AN's ACo shares is $XXXXXXXXXX.
47. ACo owed AN $XXXXXXXXXX as of XXXXXXXXXX.
48. The use of corporations for the XXXXXXXXXX businesses does not allow for effective loss consolidation and utilization.
49. FLG plans to restructure each of ACo, BCo and CCo into separate limited partnerships with AN either as the limited partner or as the limited partner of a master limited partnership that in turn would be the limited partner of each of the operating limited partnerships.
50. By operating through limited partnerships, the profits and losses of the Group would be consolidated in AN. Any income net of losses in a year will result in positive OSR capacity to AN, which as explained above in 7, 8 and 9 will reduce the federal funding received by AN by an amount equivalent to the XXXXXXXXXX.
51. Each limited partnership would have a corporate general partner. The corporate general partner would have a nominal interest in the business of the limited partnership. The corporate general partner of each of the limited partnerships would be taxable on its share of the income.
52. To reorganize the Group into partnerships, each member of the Group would transfer its assets to a new limited partnership, following which the member would wind-up and distribute its assets (i.e., its limited partnership interest) to AN, first as a repayment of debts owing to AN, then as a return of capital to AN, and then as a distribution of surplus.
53. On a wind-up, any non-capital loss balance of a member of the Group for Income Tax Act purposes would become a non-capital loss balance of AN for OSR purposes.
54. Given the cumulative non-capital losses of each member of the Group, the value of each member's assets is currently significantly less than the amount owed by each of ACo, BCo, CCo to AN and DLP.
55. Because the principal amount of the debts owing by each member of the Group exceeds the value of the member's assets, FLG is concerned that wind-ups would result in Forgiven Amounts for the Applicants, which would be applied to reduce the tax attributes of the corporations in the order specified in paragraph 80(2)(c) of the Tax Act. In the absence of the Proposed Transactions, such Forgiven Amounts might eliminate the non-capital loss balances of the corporations that would otherwise transfer to AN for OSR purposes.
56. To enable the use of the non-capital losses by AN for OSR purposes, AN, ACo, BCo, and CCo would like to engage in a number of transactions designed to prevent Forgiven Amounts from arising.
57. None of the Proposed Transactions will involve an unrelated or unaffiliated person except that: a bank or the trustee of the XXXXXXXXXX settlement trust ("XXXXXXXXXX Trust") might be involved to make a loan to AN to enable the Proposed Transactions; and third parties will of course be doing business with limited partnerships rather than corporations as a result of the Proposed Transactions.
PROPOSED TRANSACTIONS
58. BCo's subsidiary will wind-up pursuant to subsection 88(1) of the Tax Act.
59. AN will subscribe for additional shares of each of ACo, BCo and CCo in an amount equal to the amount that the particular corporation owes to AN or DLP. AN might use existing funds or might borrow such funds from a bank or from the XXXXXXXXXX Trust, depending on AN's cash flow at the time that these Proposed Transactions are carried out.
60. AN will pay the subscription price for such shares by cash, cheque, electronic transfer or other means of making an actual transfer to the members of the Group.
61. Each of ACo, BCo, and CCo will use the additional capital contribution to repay the amounts owing by it to AN or to DLP. It will make the repayment by way of cash, cheque, electronic transfer or other means of making an actual transfer to AN or to DLP.
62. DLP would use the proceeds of the repayment of the loans to repay loans that it owes to AN. DLP will make the repayment by way of cash, cheque, electronic transfer or other means of making an actual transfer to AN.
63. If AN borrowed the funds as indicated in 59 above to subscribe for additional shares, then it would repay such loans after receiving repayment from the members and from DLP.
64. Each of ACo, BCo, and CCo will transfer their assets and business to a new limited partnership and will elect in accordance with subsection 97(2) of the Tax Act with respect to those transfers.
65. Each of ACo, BCo, and CCo will wind-up and distribute its sole remaining asset, namely its respective limited partnership interest, to AN.
66. After complying with its obligations under the Act, each of ACo, BCo, and CCo will request that it be dissolved by the XXXXXXXXXX registrar of companies.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purposes of the proposed transactions are to restructure the Group so that profits and losses within the Group are consolidated and better utilized, allow each of the corporations to wind-up in such a manner that none of the corporations has a Forgiven Amount; and thereby allow the losses of each of ACo, BCo, and CCo to become the losses of AN for OSR purposes.
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. The Proposed Transactions, in by themselves, will not result in a "Forgiven Amount" as that term is defined in subsection 80(1) of the Act for either of ACo, BCo or CCo.
B. 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 ruling 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 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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