2012 Ruling 2012-0458671R3 - 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.

SUBJECT: Loss Consolidation

Principal Issues: Is the loss utilization arrangement acceptable?

Position: YES

Reasons: meets the established positions

XXXXXXXXXX
2012-045867

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

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. In general terms, the transactions described herein involve the expected use of losses within an affiliated group of 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 Parentco, #Co, Aco, Bco, Cco, Canco 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, #Co, Aco, Bco, Cco, Canco or a related person;

(iii) under objection by Parentco, #Co, Aco, Bco, Cco, Canco 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; nor,

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

Parentco, #Co, Aco, and Canco file their corporate income tax returns at the XXXXXXXXXXTaxation Centre and deal with the XXXXXXXXXX Tax Services Office. Bco files its corporate return at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office, and Cco files its corporate tax return at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Taxation Services Office.

The transactions described herein will not result in any taxpayer described herein being unable to pay its outstanding tax liabilities.

Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended to the date hereof (the "Act").

Definitions

a) "Aco" means XXXXXXXXXX, the corporation described in 15 below;

b) "affiliated persons" has the meaning assigned by subsection 251.1(1) of the Act;

c) "Agreeing Province" means a province that has entered into an agreement with the Government of Canada under which the Government of Canada will collect taxes payable under the income tax statute of that province and will make payments to that province in respect of the taxes so collected;

d) "Bco" means XXXXXXXXXX, the corporation described in 16 below;

e) "capital loss" has the meaning assigned by paragraph 39(1)(b) of the Act;

f) "Canco" means XXXXXXXXXX, the corporation described in 14 below;

g) "Cco" means XXXXXXXXXX, the corporation described in 17 below;

h) CRA" means the Canada Revenue Agency;

i) General Anti-avoidance Provision of an Agreeing Province means:

i) XXXXXXXXXX, as amended to the date of this letter;
ii) XXXXXXXXXX, as amended to the date of this letter;

j) "dividend rental arrangement" has the meaning assigned by subsection 248(1) of the Act;

k) "excepted dividend" has the meaning assigned by section 187.1 of the Act;

l) "excluded dividend" has the meaning assigned by subsection 191(1) of the Act;

m) "investment tax credit" has the meaning assigned by subsection 127(9) of the Act;

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

o) "Parentco" means XXXXXXXXXX, the corporation described in 1 to 5 below;

p) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

q) "related persons" has the meaning assigned by subsection 251(2) of the Act;

r) "specified financial institution" has the meaning assigned by subsection 248(1) of the Act;

s) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

t) "taxable income" has the meaning assigned by subsection 248(1) and subsection 2(2) of the Act; and

u) "#Co" means XXXXXXXXXX, the corporation described in 13 below.

Facts

1. Parentco's taxation year ends on XXXXXXXXXX. Parentco does not have any expiring non-capital loss carryforwards at its taxation year that ended on XXXXXXXXXX. Parentco has claimed full discretionary tax deductions in all of its prior taxation years.

2. Parentco, #Co, and Canco undertook transactions similar to the proposed transaction which was the subject of a ruling previously issued by the Rulings Directorate on XXXXXXXXXX (2009-031261). The previous loss consolidation transactions will be unwound prior to the implementation of the proposed transactions.

3. Parentco is based in Canada but has operations worldwide employing over XXXXXXXXXX employees based in Canada and in the United States.

4. Parentco is a public corporation and a taxable Canadian corporation. The common shares of Parentco are listed on XXXXXXXXXX. The common shares of Parentco are widely held with no person having control of Parentco.

5. Parentco currently carries on its worldwide operations through a number of subsidiary companies. Parentco does not conduct operations directly.

6. XXXXXXXXXX

7. Parentco generates non-capital losses while its Canadian subsidiaries generate substantial taxable income. XXXXXXXXXX.

8. Parentco will obtain an independent financial opinion from its bankers that will indicate the maximum borrowing capacity and interest rates that Canco, Aco, Bco and Cco (collectively, "the Borrowers") would be able to borrow on from an arm's-length lender based on financial projections prepared by management for the companies. No individual company will exceed its respective borrowing capacity. The Borrowers expect to borrow funds at a rate of approximately XXXXXXXXXX% per annum (the "Demand Loan Rate") and have accordingly based the dividend and interest rates attached to the respective preferred shares and promissory notes used for the purposes of this ruling on this rate. At the time of implementing the transactions described below, the Borrowers will adjust the assumed borrowing amounts and rates to reflect the estimated market borrowing terms provided by the above financial opinion.

9. None of the preferred shares referred to below will be acquired by a specified financial institution in the ordinary course of business.

10. No specified financial institution will be obligated to effect an undertaking with respect to the transactions described in this letter which is described in subsection 112(2.2) of the Act.

11. None of the preferred shares referred to below will be subject to a dividend rental arrangement.

12. There will not be any guarantees, covenants or agreements as referred to in paragraph 112(2.4)(a) of the Act to purchase or repurchase any of the preferred shares described below. Furthermore the consideration for which any of the shares are issued will not include an obligation of an unrelated investor to make payments, any portion of which would be required to be included in computing the income of the issuer nor will it include any right to receive payments or property that may revert to the investor.

13. #Co is a taxable Canadian corporation and has a XXXXXXXXXX year end. Its authorized share capital consists of an unlimited number of common shares without par value and an unlimited number of preferred shares. At the time of the proposed transactions, # Co will have XXXXXXXXXX common share issued and outstanding.

14. Canco is a taxable Canadian corporation and has a XXXXXXXXXX year end. Its authorized share capital consists of an unlimited number of common shares without par value and an unlimited number of preferred shares. Canco has XXXXXXXXXX common shares issued and outstanding; it has not issued preferred shares. It is an indirect wholly-owned subsidiary of Parentco.

15. Aco is a taxable Canadian corporation and has a XXXXXXXXXX year end. Its authorized share capital consists of an unlimited number of common shares without par value. Aco has XXXXXXXXXX common shares issued and outstanding. Aco is a direct wholly-owned subsidiary of Parentco.

16. Bco is a taxable Canadian corporation and has a XXXXXXXXXX year end. Its authorized share capital consists of an unlimited number of common shares without par value and an unlimited number of preferred shares. Bco has XXXXXXXXXX common shares issued and outstanding; it has not issued preferred shares. Bco is an indirect wholly-owned subsidiary of Parentco.

17. Cco is a taxable Canadian corporation and has a XXXXXXXXXX year end. Its authorized share capital consists of an unlimited number of common shares without par value. It has XXXXXXXXXX common share issued and outstanding. Cco is an indirect wholly-owned subsidiary of Parentco.

18. Parentco, #Co, Canco, Aco, Bco and Cco are related persons and affiliated persons for purposes of the Act.

19. Parentco currently has a source of income to fund capital contributions required under the proposed transactions described below. Its source of income consists primarily of dividends from other wholly-owned profitable subsidiaries in Canada and the United States.

PROPOSED TRANSACTIONS

20. Parentco will borrow approximately $XXXXXXXXXX on a daylight basis (the "Daylight Loan"). The exact amount of the borrowing under the Daylight Loan has not been determined by Parentco's management but the amount will be under the aggregate borrowing limit indicated by the financial opinion referred to in 8 above.

21. Parentco will use the proceeds of the Daylight Loan to make subordinated interest-bearing loans to the Borrowers (the "Borrowers Demand Loans"). The interest rate will be determined at the time of the proposed transactions (the Borrowers Demand Loans Rate is expected to be at XXXXXXXXXX%), and, subsequently, on an annual basis. Interest will be payable annually in arrears. The loans will be repayable in cash or by delivering a financial asset of Canco, Aco, Bco or Cco, as the case may be, including the Parentco Demand Loan (described below).

22. The Borrowers will use the proceeds from the Borrowers Demand Loans to subscribe for #Co Preferred Shares having a redemption amount and paid-up capital equal to the aggregate of the principal amounts of the Borrowers Demand Loans. The #Co Preferred Shares will pay a dividend rate XXXXXXXXXX% above the interest rate of the Borrowers Demand Loans.

23. #Co will lend the subscription proceeds received from the Borrowers in 22 above to Parentco on an interest-free, demand basis (the "Parentco Demand Loan"). The terms of the Parentco Demand Loan will allow Parentco to repay the loan, in whole or in part, by assigning the Borrowers Demand Loans to #Co.

24. Parentco will use the proceeds of the Parentco Demand Loan to repay the Daylight Loan.

25. Parentco will agree to and will make capital contributions to #Co at least annually in an amount equal to the dividends to be paid by #Co to each of the Borrowers on the #Co Preferred Shares for as long as the preferred shares are outstanding. No shares will be issued by #Co in respect of the contributions of capital. The amount of each capital contribution will be recorded as contributed surplus for accounting purposes.

26. #Co will use the amounts received as capital contributions to pay dividends on the # Co Preferred Shares at least annually.

27. The Borrowers will use the amounts received as dividends from #Co to pay interest on the Borrowers Demand Loans at least annually.

28. In the future, Parentco may unwind a part or all of the proposed structure as follows:

a. Parentco will make capital contributions to the common share capital of #Co equal to the amount of any accrued and unpaid dividends on the #Co Preferred Shares.

b. #Co will declare and pay the balance of any accrued and unpaid dividends on the #Co Preferred Shares.

c. The Borrowers will pay the balance of any accrued and unpaid interest on the Borrowers Demand Loans.

d. #Co will redeem all or a portion of the #Co Preferred Shares held by Canco, Aco, Bco or Cco, as the case may be, and will settle the amount owing on the redemption by assigning a corresponding amount of the Parentco Demand Loan to Canco, Aco, Bco or Cco, as the case may be.

e. Canco, Aco, Bco or Cco, as the case may be, will repay all or a portion of the Borrowers Demand Loans equal to the redemption amount of the #Co Preferred Shares by setting off the Borrowers Demand Loans with a corresponding amount of the Parentco Demand Loan and such portions of both loans will be cancelled.

ADDITIONAL INFORMATION

29. Parentco will not claim at any time a capital loss in respect of the capital contribution to #Co.

30. In the future, approximately XXXXXXXXXX years from the commencement of the proposed transactions, the loss-utilization arrangement will be unwound. Parentco as sole shareholder of #Co will pass a resolution authorizing and requiring #Co to be wound-up into Parentco pursuant to subsection 88(1) of the Act. As a consequence, #Co's assets will be transferred to Parentco and Parentco will assume #Co's liabilities.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to enable Parentco to earn sufficient interest income to offset its non-capital losses that arise as a consequence of not conducting a large part of its business directly, while allowing the Borrowers to deduct interest expense on borrowed money used to acquire #Co Preferred Shares in computing their profits for the year.

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 Canco, Aco, Bco, or CCo, as the case may be, have a legal obligation to pay interest on the Parentco Demand Loan and that the #Co Preferred Shares continue to be held by Canco, Aco, Bco or Cco as the case may be, for the purpose of gaining or producing income, in computing their income for a taxation year, Canco, Aco, Bco or Cco respectively will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act, the lesser of (i) the interest rate on the Parentco Demand Loan, as described in 27 and 28(c) above, paid in the year or payable in respect of the year (depending on the method regularly followed by Canco, Aco, Bco or Cco, respectively in computing their income for the purposes of the Act) or (ii) a reasonable amount in respect thereof.

B. The dividends received (or deemed to be received) by Canco, Aco, Bco or Cco on the #Co Preferred Shares as described in 28(b) and 28(d) 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, 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.

C. No amount will be included in the income of #Co 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 Parentco as described in 28(a) above.

D. The provisions of subsections 15(1), 56(2), and 246(1) of the Act will not apply to any of the proposed transactions described herein.

E. The cancellation of the Borrowers Demand Loan and the Parentco Demand Loan by way of set-off as described in 28(e) above will not give rise to a "forgiven amount" for purposes of section 80 of the Act.

F. The General Anti-avoidance Provision of an Agreeing Province will not be applied, as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above, in respect of a taxation year for which such Province was an Agreeing Province.

G. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied 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 28(d) and 28(e) above, are commenced 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;

(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