2013 Ruling 2013-0483601R3 - 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.

Principal Issues: Is the Loss Consolidation acceptable?

Position: Yes

Reasons: Within established parameters. Similar to past Rulings granted.

XXXXXXXXXX
2013-048360

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: XXXXXXXXXX and XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above noted taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this rulings are:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the taxpayers or a related person;

(iii) under objection by any of the taxpayers or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for an appeal to a higher court has not expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
(Two similar Advance Income Tax Rulings have been given to the taxpayers but in different contexts.)

The taxpayers have also represented that the proposed transactions described herein will not result in any taxpayer described herein as being unable to pay their outstanding tax liabilities.

DEFINITIONS

In this letter, the following terms have the meanings specified:

(a) "adjusted cost base" ("ACB") has the meaning assigned in section 54 of the Act;

(b) "Act" means the Income Tax Act, R.S.C. 1985, C.1 (5th Suppl.) as amended;

(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) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c.44, as amended;

(e) "Profitco Debenture" has the meaning assigned in paragraph 13;

(f) "Facts" means the facts described in this letter under the heading "Facts";

(g) "fair market value" ("FMV") means the highest price available in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsions to act;

(h) "financial intermediary corporation" has the meaning assigned by subsection 191(1) of the Act;

(i) XXXXXXXXXX

(j) XXXXXXXXXX;

(k) "Issued Newco Preferred Shares" has the meaning assigned in paragraph 12;

(l) "Investment Property" has the meaning assigned by subsection 2400(1) of the Regulations to the Act;

(m) XXXXXXXXXX;

(n) XXXXXXXXXX;

(o) "Newco Common Shares" has the meaning assigned in paragraph 9;

(p) "Newco Loan" has the meaning assigned in paragraph 14;

(q) ""Newco Preferred Shares" has the meaning assigned in paragraph 9;

(r) "non-capital losses" has the meaning assigned by paragraph 111(1)(a) of the Act;

(s) "paid up capital" ("PUC") has the meaning assigned by subsection 89(1) of the Act;

(t) "principal amount" has the meaning assigned by subsection 89(1) of the Act;

(u) "Proposed Transactions" means the proposed transactions described in this letter under the heading "Proposed Transactions";

(v) "Public Corporation" has the meaning assigned by subsection 89(1) of the Act;

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

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

(y) "Subscription Receipt Proceeds" has the meaning assigned in paragraph 11;

(z) "taxable dividend" has the meaning assigned by subsection 89(1) of the Act; and

(aa) "taxable Canadian Corporation" has the meaning assigned by subsection 89(1) of the Act.

CORPORATIONS

(a) "XXXXXXXXXX" means a new corporation incorporated under the laws of XXXXXXXXXX (described in paragraph 5);

(b) "XXXXXXXXXX" is a corporation incorporated and tax resident under the laws of XXXXXXXXXX (described in paragraph 6);

(c) "Profitco" means XXXXXXXXXX (described in paragraph 2);

(d) "Newco" means a new corporation incorporated under the CBCA (described in paragraph 9);

(e) "Lossco" means XXXXXXXXXX (described in paragraph 1); and

(f) "XXXXXXXXXX" is a corporation incorporated and tax resident under the laws of XXXXXXXXXX (described in paragraph 6).

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

RELEVANT FACTS

1. Lossco is incorporated pursuant to the laws of Canada, is a taxable Canadian corporation and a public corporation. Each class of its issued shares is listed on the XXXXXXXXXX Stock Exchange. Lossco has a XXXXXXXXXX year end. Lossco is a XXXXXXXXXX company with interests in XXXXXXXXXX through its subsidiaries, including Profitco. Lossco has incurred approximately $XXXXXXXXXX in non-capital losses that remain unused at the end of its XXXXXXXXXX taxation year. These losses will start to expire in XXXXXXXXXX with approximately $XXXXXXXXXX expiring by XXXXXXXXXX.

2. Profitco is a XXXXXXXXXX. The common shares of Profitco are owned by Lossco which controls Profitco. Profitco is a taxable Canadian corporation, XXXXXXXXXX. Profitco has a XXXXXXXXXX year end. Profitco carries on the business of XXXXXXXXXX in Canada and internationally through branch operations.

3. Lossco earns income from dividends on the shares it owns of Profitco and of other subsidiaries and, interest on indebtedness of Profitco.

4. On XXXXXXXXXX, Lossco issued a XXXXXXXXXX (approximately $XXXXXXXXXX Canadian equivalent) XXXXXXXXXX bond, to the XXXXXXXXXX market (the "XXXXXXXXXX Bond").

5. Through a series of linear share subscriptions, capital contributions and inter-company loan transactions, the XXXXXXXXXX Bond proceeds will be received by a new corporation, called XXXXXXXXXX. This new corporation will be an indirect wholly owned subsidiary of Lossco.

6. The XXXXXXXXXX Bond proceeds received by XXXXXXXXXX described in paragraph 5, will be used by it to subscribe for shares of and to make a capital contribution to XXXXXXXXXX, which is also an indirect wholly owned subsidiary of Lossco. XXXXXXXXXX will, in turn, use the subscription proceeds and the capital contribution received by it, together with other funds it will have, to subscribe for shares in, and make capital contributions to its direct wholly owned subsidiary, XXXXXXXXXX.

7. XXXXXXXXXX will use the subscription proceeds and capital contributions received by it from XXXXXXXXXX, together with XXXXXXXXXX's own cash available, to complete the acquisition of the shares in the capital of XXXXXXXXXX at and for a purchase price of XXXXXXXXXX (XXXXXXXXXX $XXXXXXXXXX).

8. The result of the above described steps is ultimately that the proceeds received by Lossco from the issuance of the XXXXXXXXXX Bond, shall through a series of step transactions, be used by Lossco's indirect subsidiary, XXXXXXXXXX, together with XXXXXXXXXX's own funds, to acquire all the shares of XXXXXXXXXX from XXXXXXXXXX for XXXXXXXXXX. XXXXXXXXXX carries on XXXXXXXXXX business.

PROPOSED TRANSACTIONS

9. Lossco will incorporate a new corporation ("Newco") under the CBCA that will be a taxable Canadian Corporation and a specified financial institution. Newco will not be a financial intermediary corporation. Newco will have a XXXXXXXXXX year end and will be a taxable Canadian Corporation. Newco's authorized capital will consist of one class of an unlimited number of common shares (the "Newco Common Shares") and one class of an unlimited number of preferred shares (the "Newco Preferred Shares") which will include the following attributes:

(a) the Newco Common Shares will be voting;

(b) the Newco Preferred Shares:

(i) will be non-voting except where the CBCA otherwise requires a statutory vote,

(ii) will be redeemable at any time by Newco for an amount equal to the amount for which they were issued and any unpaid dividends which may accumulate prior to their redemption; and

(iii) will be entitled to an annual cumulative dividend at a rate which will be greater than the interest rate on the Profitco Debenture and calculated on their redemption amount;

(iv) on dissolution will have a preference over the Newco Common Shares for the return of their redemption amount plus any unpaid dividends which may accumulate prior to the dissolution.

10. Lossco will subscribe for XXXXXXXXXX Newco Common Shares for $XXXXXXXXXX on the incorporation of Newco. Newco will use the proceeds to acquire publicly traded equities.

11. Lossco will borrow $XXXXXXXXXX from a Canadian Bank.

12. Lossco will use the $XXXXXXXXXX borrowed from a Canadian Bank to subscribe for Newco Preferred Shares (the "Issued Newco Preferred Shares"). The amount to be added to the stated capital account maintained for the Issued Newco Preferred Shares under the CBCA will be equal to the subscription price paid to Newco for the Issued Newco Preferred Shares such that these shares will have an aggregate FMV, PUC and redemption amount equal to the said payments.

13. Lossco will immediately sell all of the Issued Newco Preferred Shares to Profitco. As payment, Profitco will issue a debenture (the "Profitco Debenture") to Lossco that will have a principal amount and FMV equal to the FMV of the Issued Newco Preferred Shares. The Profitco Debenture will bear a market interest rate at the time of issue expected to be approximately XXXXXXXXXX% and will be repayable on the XXXXXXXXXX anniversary date of its issue (subject to the right of prepayment without penalty). The Profitco Debenture will also provide that Lossco's right to repayment will be restricted to having recourse to the Issued Newco Preferred Shares only, and not to any other assets of Profitco. Profitco will give Lossco a secured interest in the Issued Newco Preferred Shares (and any proceeds from their redemption or sale).

14. Newco will immediately lend the proceeds it receives from Lossco on the subscription of the Issued Newco Preferred Shares to Lossco on an interest free, payable on demand basis (the "Newco Loan"). Lossco will apply the proceeds from the Newco Loan to repay the $XXXXXXXXXX borrowed from the Canadian Bank in paragraph 11.

15. Profitco will pay interest to Lossco on the Profitco Debenture on an annual basis. Based on Profitco's financial projections, it will have the financial capacity to honour its obligation to pay such interest on the Profitco Debenture from its own cash flow. The annual interest payment date on the Profitco Debenture will be the same as the annual dividend payment date on the Issued Newco Preferred Shares.

16. Lossco will agree with Newco to make, and will make, annual capital contributions on the common share capital of Newco in a total amount equal to the amount of annual dividends to be paid by Newco on the Issued Newco Preferred Shares held by Profitco for so long as any such shares are outstanding. Based on Lossco's existing assets and resources, Lossco will be able to make the capital contributions to Newco without taking into account the interest income it will receive from Profitco as described in paragraph 13. Under general accepted accounting principles these capital contributions will be recorded as contributed surplus and not be reported as income to Newco in its financial statements.

17. Newco will use the amounts received as capital contributions as described in paragraph 16 to pay dividends on the Issued Newco Preferred Shares to Profitco on an annual basis.

ADDITIONAL INFORMATION

18. The Issued Newco Preferred Shares will not be, at any time during the implementation of the proposed transactions described herein:

(1) the subject of any undertaking that is referred to in subsection 112(2.2) of the Act as a "guarantee agreement";

(2) the subject of a dividend rental arrangement as that term is defined in subsection 248(1) of the Act;

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

(4) issued for consideration that is or includes:

(a) 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

(b) any right of the type described in subparagraph 112(2.4)(b)(ii).

19. Each of Lossco and Newco will agree with Profitco that Newco will be a single purpose company, will have no liabilities and will carry on no activity other than as contemplated in the Proposed Transactions.

20. Profitco has and will have (i) the financial capacity to honor the principal amount payable under the Profitco Debenture; and (ii) the financial capacity to pay the interest on the Profitco Debenture from its own cash flow. The interest charged on the Profitco Debenture will not create or increase a non-capital loss in Profitco.

21. The Issued Newco Preferred Shares:

(i) will not be Investment Property of the Profitco,

(ii) will be used or held by the Profitco in the course of carrying on its XXXXXXXXXX business in Canada,

(iii) will not be acquired by the Profitco in the ordinary course of its business.

22. Profitco expects to be subject to Part I taxes after the Proposed Transactions are completed.

23. The Proposed Transactions will not result in any of Lossco, Profitco, or Newco being unable to pay their outstanding tax liabilities.

24. Lossco's annual gross revenue in its XXXXXXXXXX taxation year was allocated to the Province of XXXXXXXXXX and this allocation is not expected to change.

25. For the purposes of Regulation 403 to the Act, Profitco's net premiums in its XXXXXXXXXX taxation year were allocated among the following XXXXXXXXXX as follows:

XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

26. The purpose of the Proposed Transactions is to enable Lossco to earn sufficient interest income so that in calculating its income for purposes of the Act, it will be able to utilize the interest expense that it will incur on the XXXXXXXXXX Bond referred to in paragraph 4 and to utilize its accumulated non-capital losses referred to in paragraph 1.

27. In order to undertake the Proposed Transactions in a legally effective manner, it is necessary to incorporate Newco to enable Profitco to hold an interest in the Issued Newco Preferred Shares. XXXXXXXXXX.

28. XXXXXXXXXX Lossco's subscription for the common shares of Newco will be for $XXXXXXXXXX XXXXXXXXXX. Newco will invest the subscription proceeds in publicly traded equities.

29. XXXXXXXXXX

RULINGS GIVEN

Provided that the preceding statements, including the additional information, constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below:

A. The dividends received by Profitco on the Issued Newco Preferred Shares, as described in paragraph 17, will be taxable dividends that will be deductible pursuant to subsection 138(6) of the Act in computing the taxable income of Profitco for the year in which such dividends are received; and such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act.

B. Provided that Profitco has a legal obligation to pay interest on the Profitco Debenture, as described in paragraph 13, and Profitco continues to hold the Issued Newco Preferred Shares, described in paragraph 12, for the purpose of earning income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy), Profitco will be entitled, pursuant to paragraph 20(1)(c) of the Act, to deduct the interest payable by Profitco in computing its income for the purposes of the Act in respect of the year on the Profitco Debenture.

C. The Issued Newco Preferred Shares will, pursuant to subsection 2401(6) of the Income Tax Regulations, be deemed to be designated insurance property of Profitco so that, as a result, subsection 138(5) of the Act will not apply to restrict the application of paragraph 20(1)(c) of the Act in respect of the interest on the Profitco Debenture referred to in Ruling B.

D. In respect of the capital contributions made by Lossco to Newco as described above:

a. no amount will be included in the income of Newco pursuant to paragraphs 12(1)(c), 12(1)(x), or Section 9 of the Act,

b. no additions will be made to the cost base of the Newco Common Shares owned by Lossco, and

c. no addition will be made to the paid-up capital of any class of shares of Newco.

E. None of subsections 15(1), 56(2), 69(1), 69(4), 69(11) or 246(1) of the Act will apply in regard to the Proposed Transactions, in and by themselves.

F. Subsection 245(2) of the Act will not apply in regard to the Proposed Transactions, in and by themselves, to re-determine the tax consequences sought in any of the preceding ruling requests.

G. The General Anti-avoidance Provisions 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 sought in any of the preceding ruling requests in respect of a taxation year for which such Province is an Agreeing Province.

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 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
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch