2015 Ruling 2015-0576421R3 - Standard 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: Whether Lossco will be entitled to apply its non-capital losses against the interest income generated as part of the loss consolidation transactions and whether Profitco will be entitled to deduct the corresponding interest expense.

Position: Yes.

Reasons: Conforms to our requirements for such rulings.

XXXXXXXXXX					2015-057642

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX and XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Taxpayers, none of the issues involved in the ruling request is:

i. in an earlier return of any of the Taxpayers or a related person;

ii. being considered by a tax services office or a tax centre in connection with a tax return already filed by 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 appeal to a higher court has not expired; or

v. the subject of a ruling previously issued by the Directorate to any of the Taxpayers or a related person.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

XXXXXXXXXX;

“affiliated persons” has the meaning assigned by subsection 251.1(1);

“CBCA” means the Canada Business Corporations Act (Canada), and where applicable, its predecessor statutes;

XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

“Lossco” means XXXXXXXXXX;

“Lossco Loan” means the loan made by Lossco to Profitco as described in paragraph 23 below;

“Lossco Series I Preferred Shares” means shares of the capital stock of Lossco as defined in paragraph 21 below;

“Lossco Series II Preferred Shares” means shares of the capital stock of Lossco as defined in paragraph 21 below;

“Lossco Series III Preferred Shares” means shares of the capital stock of Lossco as defined in paragraph 21 below;

“non-capital loss” has the meaning assigned by subsection 111(8);

“Parent” means XXXXXXXXXX;

“Profitco” means XXXXXXXXXX;

“Proposed Transactions” means the transactions described in paragraphs 21 to 31;

“related persons” has the meaning assigned by section 251;

“Subsidiary1” means XXXXXXXXXX;

“Subsidiary1 Loan” means the non-interest bearing loan made by Subsidiary1 to Lossco as described in paragraph 22 below;

“Subsidiary2” means XXXXXXXXXX;

“Subsidiary3” means XXXXXXXXXX;

“Subsidiary4” means XXXXXXXXXX;

“Subsidiary5” means XXXXXXXXXX;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

“Treaty” means the XXXXXXXXXX.

FACTS

1. Parent is a corporation incorporated under the laws XXXXXXXXXX for purposes of the Act and a XXXXXXXXXX. Parent is XXXXXXXXXX.

2. XXXXXXXXXX

3. The consolidated financial statements of Parent for its fiscal year ended XXXXXXXXXX indicate that Parent and its accounting consolidated group had:

• total assets of approximately XXXXXXXXXX$XXXXXXXXXX;
• total liabilities of approximately XXXXXXXXXX$XXXXXXXXXX; and
• shareholder’s equity of approximately XXXXXXXXXX$XXXXXXXXXX.

4. Subsidiary1 is a direct wholly-owned subsidiary of Parent. Subsidiary1 is a corporation incorporated XXXXXXXXXX. Subsidiary1 is the parent corporation of directly and indirectly owned subsidiaries and other entities that collectively comprise the XXXXXXXXXX operations of the corporate group.

5. Subsidiary2 is an indirect wholly-owned subsidiary of Parent. Subsidiary2 is a corporation incorporated XXXXXXXXXX. Subsidiary2 is XXXXXXXXXX. Subsidiary2 is the parent corporation of directly and indirectly owned subsidiaries and other entities that collectively comprise the XXXXXXXXXX operations of the corporate group.

6. Subsidiary3 is an indirect wholly-owned subsidiary of Subsidiary1. Subsidiary3 is a corporation incorporated XXXXXXXXXX.

7. Subsidiary4 is an indirect wholly-owned subsidiary of Subsidary2. Subsidiary4 has been a subsidiary of Subsidiary2 since XXXXXXXXXX. Subsidiary4 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX, its taxation centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Subsidiary4’s taxation year end is XXXXXXXXXX.

8. All of the common shares in Subsidiary5 are directly owned by Subsidiary2. Subsidiary5 was incorporated on XXXXXXXXXX. Subsidiary5 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX and its taxation centre is XXXXXXXXXX Taxation Centre and its Tax Services Office is XXXXXXXXXX Tax Services Office. Subsidiary5’s fiscal year-end is XXXXXXXXXX.

9. All of the common shares of Profitco are directly owned by Subsidiary4. Profitco has been a subsidiary of Subsidiary4 since XXXXXXXXXX. Profitco is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX, its taxation centre is the XXXXXXXXXX Taxation Centre, its Tax Services Office is the XXXXXXXXXX Tax Services Office and its business number is XXXXXXXXXX. Profitco’s fiscal year-end is XXXXXXXXXX.

10. Profitco is XXXXXXXXXX. Profitco is XXXXXXXXXX. XXXXXXXXXX has provided approval to Profitco to enter into the Proposed Transactions.

11. Profitco has a secured, revolving line of credit (the “Facility”) XXXXXXXXXX.

12. Profitco’s taxable income for its XXXXXXXXXX prior taxation years for which tax returns have been filed with the CRA is as follows:

Taxation		Net Income		Losses Carried 	XXXXXX	Taxable
Year Ending		For Tax Purposes 	forward from			Income
						Previous
						Taxation Years

XXXXXXXXXX

13. It is expected that Profitco will be able to fully utilize the interest paid or payable on the Lossco Loan either against its income for the taxation year in which the Proposed Transactions are undertaken or by carrying back any loss for that taxation year against its taxable income for its XXXXXXXXXX prior taxation years.

14. Profitco’s stand-alone financial statements for its fiscal year end XXXXXXXXXX, indicate that Profitco has assets of $XXXXXXXXXX.

15. In the prior XXXXXXXXXX years, the provincial allocation of the taxable income of Profitco has been as follows:

Province/Territory	XXXXXXXXXX
XXXXXXXXXX			XXXXXXXXXX
Total				100.0%

It is expected that the provincial allocations of taxable income for the taxation years ending XXXXXXXXXX will be comparable with prior years.

16. XXXXXXXXXX.

17. XXXXXXXXXX. Lossco was incorporated on XXXXXXXXXX.

18. At XXXXXXXXXX, Lossco had non capital losses available for carry-forward of $XXXXXXXXXX, which may be summarized as follows:

Taxation year ending:	Non-capital losses
XXXXXXXXXX			XXXXXXXXXX
Total				XXXXXXXXXX

19. Lossco’s financial statements for its fiscal year end XXXXXXXXXX, indicate that Lossco has assets of $XXXXXXXXXX.

20. Lossco has a permanent establishment in each of the provinces and territories listed below and, for its taxation year ending XXXXXXXXXX, its total salaries and gross revenue for purposes of Part IV of the Regulations was allocated as follows:

Province/Territory	Total Salaries/Wages	Gross Revenue
XXXXXXXXXX			XXXXXXXXXX			XXXXXXXXXX

PROPOSED TRANSACTIONS

21. The authorized share capital of Lossco currently consists of common shares and preferred shares issuable in series. Two series of preference shares have been designated: the “Lossco Series I Preferred Shares” and the “Lossco Series II Preferred Shares”. Lossco Series I Preferred Shares were redeemed on XXXXXXXXXX and Lossco Series II Preferred Shares were purchased by Lossco on XXXXXXXXXX. The authorized capital of Lossco will be amended so that it will consist of four series of shares, namely the addition of one new series of preferred shares which will be non-voting, cumulative dividend paying, redeemable, retractable preferred shares (the “Lossco Series III Preferred Shares”). The cumulative dividends payable on the Lossco Series III Preferred Shares will be calculated XXXXXXXXXX%, which is equal to the interest rate on the Lossco Loan, plus a spread of XXXXXXXXXX%. Dividends will be paid at least semi-annually.

22. On a particular day to be determined by Subsidiary1 and Lossco, Subsidiary1 will make the Subsidiary1 Loan to Lossco. The Subsidiary1 Loan will be in the principal amount of $XXXXXXXXXX. XXXXXXXXXX.

23. On the same day that the Subsidiary1 Loan is made, Lossco will use the proceeds received by it from the Subsidiary1 Loan to make the Lossco Loan to Profitco. The Lossco Loan will be in the principal amount of $XXXXXXXXXX.

24. Interest will accrue on the Lossco Loan at a rate equal to XXXXXXXXXX% per annum which is consistent with rates determined between arm’s length persons. Interest on the Lossco Loan will be computed daily and paid at least semi-annually. Profitco will have at all times the solvency and liquidity to service the Lossco Loan.

25. On the same day that the Lossco Loan is made, Profitco will use the proceeds received by it from the Lossco Loan to subscribe for the Lossco Series III Preferred Shares for $XXXXXXXXXX, which will have an aggregate redemption price equal to the subscription price.

26. On the same day that Profitco subscribes for the Lossco Series III Preferred Shares, Lossco will use the total proceeds received by it from the subscription for the Lossco Series III Preferred Shares to repay the Subsidiary1 Loan.

27. XXXXXXXXXX.

28. XXXXXXXXXX.

29. With respect to the payment of interest and dividends, like amounts will be set off with payment of the balance owing.

30. The following transactions will occur within XXXXXXXXXX years from the date the Proposed Transactions are undertaken, following XXXXXXXXXX notification:

a. Lossco will redeem the Lossco Series III Preferred Shares by issuing a non-interest bearing promissory note (the “Lossco Note”) to Profitco with a principal amount equal to redemption amount of the Lossco Series III Preferred Shares which Profitco will accept as full payment for the redemption price of the Lossco Series III Preferred Shares; and

b. Lossco and Profitco will enter into a set-off agreement pursuant to which they will agree to set-off the amount owing under the Lossco Note against the Lossco Loan.

31. The expected interest deductions, taxable income and carry-back of non-capital losses of Profitco as a result of the transactions that are the subject matter of the XXXXXXXXXX and the Proposed Transactions are as follows (XXXXXXXXXX):

Taxation year	Taxable 	Interest	Interest	Income	Non-
ending:		income/	deductions	deductions-	(Loss)	Capital
			Loss		XXXX		Proposed			Losses
							Transactions		Carried
											Back

XXXXXXXXXX

ADDITIONAL INFORMATION

32. The Lossco Series III Preferred Shares will not at any time during the implementation of the Proposed Transactions be:

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

(b) the subject of a dividend rental arrangement;

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

(d) issued for consideration that is or includes:

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

33. At the time of the Proposed Transactions:

a. Lossco will have the financial capacity to satisfy the applicable solvency test and liquidity test under the CBCA required to pay the dividends on the Lossco Series III Preferred Shares as described in Paragraph 28.

b. Lossco will have the financial capacity to satisfy the applicable solvency test and liquidity test under the CBCA required to redeem the Lossco Series III Preferred Shares as described in Paragraphs 30(b).

34. Profitco and Lossco are related persons and affiliated persons and have been related persons and affiliated persons since XXXXXXXXXX.

35. Neither Profitco nor Lossco is a XXXXXXXXXX as defined in subsection XXXXXXXXXX.

36. Neither Lossco nor Profitco is or will be XXXXXXXXXX. Each of Profitco and Lossco is XXXXXXXXXX within the meaning assigned by subsection 248(1). XXXXXXXXXX. Lossco is not a XXXXXXXXXX as defined in subsection XXXXXXXXXX or XXXXXXXXXX as defined in subsection XXXXXXXXXX.

37. The dividends paid on the Lossco Series III Preferred Shares to Profitco, as described in paragraph 30 of the Ruling Request, have no purpose other than the purpose described under the heading “Purpose of the Proposed Transactions” below.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to effect a tax consolidation of Profitco and Lossco by causing Lossco to earn interest income on the Lossco Loan, thus permitting Lossco to utilize its non-capital loss carry-forwards and to have Profitco incur interest expense to reduce its income for its current taxation year, and to the extent this creates non-capital losses for Profitco, to carry back the non-capital losses to reduce its taxable income from prior taxation years.

RULINGS PROVIDED

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions,

(b) the proposed transactions are completed in the manner described above, and

(c) there are no other transactions which may be relevant to the rulings requested,

we rule that:

A. Provided that Profitco has a legal obligation to pay interest on the Lossco Loan, and the Lossco Series III Preferred Shares continue to be held by Profitco for the purpose of gaining or producing income therefrom, Profitco will be entitled pursuant to paragraph 20(1)(c), to deduct in computing its income for a taxation year, the lesser of: (i) the interest paid or payable in respect of the Lossco Loan for that taxation year (depending on the method regularly followed by Profitco in computing its income for the purposes of the Act); and (ii) a reasonable amount in respect thereof.

B. The dividends received (or deemed to be received) by Profitco in respect of the Lossco Series III Preferred Shares in a particular year will be taxable dividends that will be deductible in computing the taxable income of Profitco for the year in which the dividends are received pursuant to subsection 112(1), 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).

C. Profitco will be entitled to carry-back to its prior taxation years the non-capital losses that are expected to arise as a result of the deductions described in Ruling A above, subject to any applicable restrictions in section 111.

D. The provisions of subsections 15(1), 56(2), 69(1) and 246(1) will not apply as a result of entering into the Proposed Transactions, in and by themselves.

E. Subsection 245(2) will not be applied as a result of entering into the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

F. The general anti-avoidance provision of a province with which the Government of Canada has entered into a tax collection agreement will not be applied, as a result of the Proposed Transactions, in and by themselves, to determine the tax consequences confirmed in the rulings given above, in respect of a taxation year in respect of which such a tax collection agreement is in effect.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA provided that the Proposed Transactions are commenced are entered into on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter 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 reasonableness or fair market value of any fees or expenditures referred to herein;

(c) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

(d) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;

(e) any tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the rulings given above.

OPINIONS

Provided that (i) the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions; (ii) the Proposed Transactions are undertaken in the manner described above; and (iii) the Act is amended in accordance with the Notice of Ways and Means Motions to amend the Income Tax Act and other tax legislation to implement tax measures of April 21, 2015, amended subsection 55(2) will not apply in respect of the dividends described in Ruling B above and amended subsection 112(2.3) will not preclude the deduction of the dividends described in Ruling B above.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch