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 our published position
XXXXXXXXXX
2013-049635
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: XX ("Parentco") XX ("Finco") XX ("Holdco1") XX ("Holdco2") XX ("Profitco") XX ("Opco")
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 acknowledge information provided during telephone conversations with XXXXXXXXXX on XXXXXXXXXX.
In very general terms, the transactions described herein involve a loss utilization transaction within an affiliated and related group of companies which will permit certain affiliated and related corporations to deduct the losses that would otherwise be incurred by Opco in respect of the use of tax attributes. Opco files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax 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 is:
(i) dealt with in an earlier return of Parentco, Opco, Lossco, Profitco, Newco 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, Opco, Lossco, Profitco, Newco or a related person;
(iii) under objection by Parentco, Opco, Lossco, Profitco, Newco or a related person;
(iv) the subject of a previous ruling issued by the Income Tax Rulings Directorate to Parentco, Opco, Lossco, Profitco, Newco 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 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) "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;
(b) "ACB" means "adjusted cost base" and has the meaning assigned by section 54;
(c) "Affiliated Person" has the meaning assigned by subsection 251.1(1);
(d) "Arm's Length" has the meaning assigned by subsection 251(1);
(e) "Canadian Corporation" has the meaning assigned by subsection 89(1);
(f) "CBCA" means the Canada Business Corporation Act, R.S.C., (1985) c. C-44;
(g) "CRA" means the Canada Revenue Agency;
(h) XXXXXXXXXX;
(i) "Daylight Loan" means the loan described in 15 below;
(j) "Finco" means XXXXXXXXXX, a corporation incorporated under XXXXXXXXXX. Finco is a TCC XXXXXXXXXX. Parentco and its member XXXXXXXXXX are members of Finco;
(k) "FMV" means fair market value;
(l) "Holdco1" means XXXXXXXXXX a corporation governed by the XXXXXXXXXX and a TCC which is a Subsidiary Wholly-Owned Corporation of Parentco;
(m) "Holdco2" means XXXXXXXXXX a corporation governed by the XXXXXXXXXX and a TCC which is a Subsidiary Wholly-Owned Corporation of Holdco 1;
(n) "Interest-free Loan" means the loan made to Opco as described in 18 below;
(o) XXXXXXXXXX;
(p) "Lossco" means a Subsidiary wholly-owned Corporation to be formed by Opco. Lossco will be incorporated under the XXXXXXXXXX, as part of the Proposed Transactions. Lossco will be a TCC;
(q) "Lossco Loan" means the loan made to Lossco as described in 16 below;
(r) "Newco" means a Subsidiary wholly-owned Corporation of Opco incorporated under the XXXXXXXXXX as part of the Proposed Transactions. Newco will be a TCC;
(s) "Newco Preferred Shares" means the preferred shares described in 11 below;
(t) "New Daylight Loan" means the loan described in 23(b) below;
(u) "Non-Capital Losses" has the meaning assigned by subsection 111(8);
(v) "Opco" means XXXXXXXXXX;
(w) "Opco Tax Attributes" means non-capital losses as described in 5 below;
(x) "Parentco" means XXXXXXXXXX a corporation incorporated under XXXXXXXXXX. Parentco is a TCC XXXXXXXXXX;
(y) "Parentco Group" means the XXXXXXXXXX;
(z) "Profitco" means XXXXXXXXXX.
(aa) "Profitco Deemed Dividend" means the deemed dividend described in 27 below;
(bb) "Profitco Preferred Shares" means the preferred shares described in 24 below;
(cc) "Proposed Transactions" means the transactions described in 11 to 28 below;
(dd) "PUC" means "paid-up capital" and has the meaning assigned by subsection 89(1);
(ee) "RFI" means "restricted financial institution" and has the meaning assigned by subsection 248(1);
(ff) "SFI" means "specified financial institution" and has the meaning assigned by subsection 248(1);
(gg) "Subsidiary Wholly-Owned Corporation" has the meaning assigned by subsection 248(1); and
(hh) "TCC" means "taxable Canadian corporation" and has the meaning assigned by subsection 89(1).
Facts
1. Parentco, Finco, Holdco 1, Holdco 2, Newco, Opco, Profitco and Lossco are RFIs. Holdco 2 is a Subsidiary Wholly-Owned corporation of Holdco 1. Holdco 1 is a Subsidiary Wholly-Owned corporation of Parentco.
2. Opco is a corporation governed by the CBCA and a TCC. Opco is a XXXXXXXXXX. Opco is a Subsidiary Wholly-Owned Corporation of Holdco 2;
3. Opco share capital consists of XXXXXXXXXX Class A shares without par value;
4. Opco is in the business of XXXXXXXXXX.
5. At the end of the XXXXXXXXXX taxation year, Opco has approximately $XXXXXXXXXX of unused Non-Capital Losses which will expire from XXXXXXXXXX to XXXXXXXXXX (federal and provincial) (the "Opco Tax Attributes").
6. In the taxation year XXXXXXXXXX, Opco had permanent establishments in XXXXXXXXXX. The provincial allocation of the taxable income is XXXXXXXXXX%, respectively.
7. Profitco is a corporation governed by the XXXXXXXXXX and a TCC. Profitco is a Subsidiary Wholly-Owned Corporation of Holdco 2 and is a XXXXXXXXXX.
8. Profitco authorized share capital is as follows:
Unlimited number of Class A, B, C and D shares without par value, voting, redeemable by mutual agreement, participating, entitled to non-cumulative dividend, subject to the right of the Class E, F, G, H, I and J shares.
Unlimited number of Class E shares without par value, voting, non-participating, redeemable by mutual agreement at an amount agreed upon redemption, with no right to dividend;
Unlimited number of Class F shares without par value, voting, non-participating, retractable at a price equal to the stated capital plus any dividend declared and unpaid and the redemption premium or redeemable by mutual agreement at an amount agreed upon redemption, entitled to a monthly non-cumulative dividend of XXXXXXXXXX%; and
Unlimited number of Class G, H, I and J shares without par value, non-voting, non-participating, retractable at a price equal to the stated capital plus any dividend declared and unpaid and the redemption premium or redeemable by mutual agreement at an amount agreed upon redemption, entitled to a monthly non-cumulative dividend of XXXXXXXXXX;
9. Profitco has permanent establishments XXXXXXXXXX.
10. As of XXXXXXXXXX, the shareholder equity of Profitco has a book value of approximately $XXXXXXXXXX. The FMV of all the issued and outstanding shares of Profitco is expected to be greater than the book value of $XXXXXXXXXX.
Proposed Transactions
11. Opco will incorporate Newco. The taxation year-end of Newco will be XXXXXXXXXX. The activities of Newco will essentially be limited to the activities described in the Proposed Transactions.
The authorized share capital of Newco will consist of an unlimited number of common shares and preferred shares (the "Newco Preferred Shares").
The common shares of Newco will be without par value and voting (1 vote per share). The holders of common shares will be entitled to dividends at the discretion of the directors, and will be entitled to receive the remaining property of the corporation upon its winding-up or dissolution.
The Newco Preferred Shares will be without par value and non-voting. The Newco Preferred Shares will be redeemable and retractable for a redemption price equal to the FMV of the consideration for which the shares are issued, plus any accrued but unpaid dividends. The holders of Newco Preferred Shares will be entitled to cumulative dividends, calculated daily by reference to the redemption/retraction price of the Newco Preferred Shares at a rate equal to the interest rate on Lossco Loan (as defined in 16 below) plus a small spread (XXXXXXXXXX basis points). The dividends on the Newco Preferred Shares will be payable annually.
12. Newco will issue common shares to Opco for a nominal amount.
13. Opco will incorporate Lossco. The taxation year-end of Lossco will be XXXXXXXXXX. The activities of Lossco will be essentially limited to the activities described in the Proposed Transactions.
The authorized share capital of Lossco will consist of an unlimited number of common shares.
The common shares of Lossco will be without par value and voting (1 vote per share). The holders of common shares will be entitled to dividends at the discretion of the directors, and will be entitled to receive the remaining property of the corporation upon its wind-up or dissolution.
14. Lossco will issue common shares to Opco for a nominal amount.
15. Opco will borrow from Finco an amount of money to fund a Lossco Loan sufficient to create enough interest income to use all or substantially all the Opco Tax Attributes (the "Daylight Loan"). The amount of the Daylight Loan and the rate of interest will be determined at the time the Proposed Transactions are implemented. The Daylight Loan will not exceed $XXXXXXXXXX. The rate of interest is expected to be in the XXXXXXXXXX% range. The amount of the Daylight Loan will not exceed the borrowing capacity of the Parentco Group.
16. Opco will use the proceeds of the Daylight Loan to make a loan of the same amount to Lossco (the "Lossco Loan"). Simple interest will accrue on the Lossco Loan and will be calculated at a rate that would not exceed a reasonable commercial arm's length rate. The interest rate will be determined at the time the Proposed Transactions are implemented. The Lossco Loan will be payable on demand. The interest on the Lossco Loan will be paid periodically.
17. Lossco will use the proceeds of the Lossco Loan to subscribe for Newco Preferred Shares, having an aggregate redemption/retraction price equal to the amount contributed, which will correspond to the same amount of the Lossco Loan. The PUC and the FMV of the Newco Preferred Shares will be equal to the amount contributed. Lossco will be entitled to cumulative dividends on the Newco Preferred Shares, calculated daily by reference to the redemption/retraction price of the Newco Preferred Shares at a rate equal to the interest rate on the Lossco Loan plus a small spread (XXXXXXXXXX basis points).
The amount of dividends on the Newco Preferred Shares held by Lossco will be sufficient to permit Lossco to realize a profit on its investment activity, after the deduction of all its expenses (not only its interest expenses).
18. Newco will use the proceeds received from the subscription of the Newco Preferred Shares to make an interest-free loan of the same amount to Opco (the "Interest-free Loan").
19. Opco will use the proceeds of the Interest-free Loan to repay the Daylight Loan to Finco.
20. Opco will, at least annually, make a contribution of capital to Newco in an amount equal to the dividend payable on the Newco Preferred Shares. No shares will be issued by Newco with respect to these contributions of capital and no amount will be added to Newco's stated capital accounts. The amount of each contribution of capital will be recorded by Newco as contributed surplus for accounting purposes. The contributions of capital will not be treated as income of Newco pursuant to generally accepted accounting principles.
21. Newco will use the amount of capital contribution received from Opco to pay to Lossco the dividends payable on the Newco Preferred Shares described in 17 above.
22. Lossco will use a portion of the amount of dividend received from Newco to pay interest to Opco equal to the amount of interest payable on the Lossco Loan described in 16 above.
23. The following transactions will occur prior to XXXXXXXXXX, in order to unwind the loss consolidation arrangement.
(a) Opco will make a contribution of capital to Newco in an amount equal the dividend payable on the Newco Preferred Shares. No shares will be issued by Newco and no amount will be added to its stated capital account in respect of the contribution. The amount of this contribution of capital, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital, if any, will not be income of Newco pursuant to generally accepted accounting principles.
(b) Opco will borrow on a daylight loan basis from Finco an amount equal to the amount outstanding on the Interest-free loan (the "New Daylight Loan"). Opco will use the proceeds of the New Daylight Loan to repay the Interest-free Loan.
(c) Newco will use the contribution of capital from Opco described in 23(a) above and the funds received from Opco on the repayment of the Interest-free loan described in 18 above to redeem all the issued and outstanding Newco Preferred Shares held by Lossco.
(d) Lossco will use the funds received from the redemption of the Newco Preferred Shares to repay to Opco the Lossco Loan and the accrued unpaid interest thereon.
(e) Opco will use the funds received from Lossco on the repayment of Lossco Loan described in 23 (d) above to repay the New Daylight Loan.
24. Profitco will amend its share capital in order to create a new class of preferred shares non-voting, entitled to a non-cumulative dividend, redeemable and retractable (subject to the approbation of the regulatory authorities) and having priority over all the other class of shares ("Profitco Preferred Shares").
25. Forthwith after the proposed transactions described in 24 above and before XXXXXXXXXX, Opco will transfer all of its common shares of Lossco to Profitco. Opco will jointly elect with Profitco in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). Consideration for the transfer of the common shares of Lossco will consist of Profitco Preferred Shares with a FMV and redemption amount equal to the FMV of the common shares of Lossco transferred. Profitco will add an amount equal to the PUC of the common shares of Lossco to the stated capital of the Profitco Preferred Shares.
26. Shortly after the transaction described in 24 to 25 above and before XXXXXXXXXX, Profitco will cause Lossco to be wound-up in such a manner that all the assets of Lossco are acquired by Profitco and all of the liabilities, if any, of Lossco are assumed by Profitco. The provisions of subsection 88(1) will apply to the wind-up of Lossco. Lossco will be legally dissolved within a short period of time.
27. Profitco will, as soon as practically possible, redeem the Profitco Preferred Shares issued in 25 above. Pursuant to subsection 84(3), Profitco will be deemed to have paid and Opco to have received a dividend of an amount equal to the excess of the redemption amount of the Profitco Preferred Shares over their PUC (the "Profitco Deemed Dividend").
28. After the wind-up of Lossco, the above transactions, other than the transactions described in 11 and 12, will be repeated in the subsequent year (XXXXXXXXXX) in order to use the remaining balance of the Opco Tax Attributes, if any.
Purpose of the Proposed Transactions
29. The purpose of the Proposed Transactions is to allow for the consolidation of the Non-capital Losses of Opco that have been created as part of its operating activities with the taxable income of Profitco. The loss consolidation will be achieved by a series of transactions, including the creation of Non-capital Losses in Lossco, and the subsequent utilization of the Non-capital Losses created in Lossco by the Profitco. The typical loss consolidation arrangement could not be implemented because Opco wants to be compensated for the transfer of its Non-capital Losses to an affiliated corporation.
In a typical loss transfer arrangement, Opco would have lent to Profitco at a stated rate of interest and Profitco would in turn have used the borrowed funds to invest in the Opco Preferred Shares. However, a typical loss consolidation arrangement could not be implemented directly with Profitco because the typical loss transfer arrangement does not provide compensation for the transfer of the Tax Attributes. Moreover, Profitco would need to advise the Regulator in order to borrow an amount equal to the Daylight Loan and the repayment thereof would require regulatory approval. In addition, such borrowing could impact significantly the regulatory capital that Profitco must maintain in order to satisfy its regulatory and statutory requirements.
30. Lossco and Newco will not be used for any other purposes than those described in the Proposed Transactions. Opco will not claim, at any time, a capital loss in respect of its capital contribution in Lossco and Newco. Also, Lossco and Newco should never be insolvent.
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 Lossco has a legal obligation to pay interest on the Lossco Loan and that the Newco Preferred Shares continue to be held by Lossco for the purpose of gaining or producing income from property, pursuant to paragraph 20(1)(c) of the Act, Lossco will be entitled to deduct in a taxation year the interest paid or payable on the Lossco Loan, as described in 16 and 23(d) above, in respect of the taxation year to the extent such amount does not exceed a reasonable amount in respect thereof.
B. No amount will be included in the income of Newco in respect of the contributions of capital made by Opco as described in 20 and 23(a) above, pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) of the Act.
C. The dividends received by Lossco on the Newco Preferred Shares, as described in 21 above (or 23(c) above), will be taxable dividends that will be deductible pursuant to subsection 112(1) of the Act in computing the taxable income of Lossco for the taxation year in which the dividends are received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2) and 112(2.4) of the Act.
D. After the winding-up of Lossco into Profitco is completed, as described in 26 above, the provisions of subsection 88(1.1) of the Act will apply to permit Profitco to deduct the Non-capital Losses of Lossco in computing its taxable income for any taxation year commencing after the commencement of the winding-up, to the extent that the requirements in paragraph 88(1.1)(a) and (b) of the Act are satisfied and subject to the limitations in paragraph 88(1.1)(e) and section 111 of the Act. For this purpose, Lossco will not be considered to have been wound up until after it has been formally dissolved.
E. The Profitco Deemed Dividend deemed received by Opco on the redemption of the Profitco Preferred Shares, as described in 27 above, will be a taxable dividend that will be deductible pursuant to subsection 112(1) of the Act in computing the taxable income of Opco for the taxation year in which the dividend is deemed received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2) and 112(2.4) of the Act.
F. The provisions of subsections 15(1), 56(2), and 246(1) of the Act, in and by themselves, will not apply to the Proposed Transactions.
G. 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 24 to 28, 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.
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 application or non-application of the general anti-avoidance provisions of any province; 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
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