2017 Ruling 2017-0706211R3 - 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 the losscos would be entitled to apply existing non-capital losses against the interest income that would be generated as part of particular loans that would be made under the loss consolidation transactions and whether the accompanying interest expense would be deductible by the debtor. Further, would the profitco be entitled to deduct the losses transferred by the debtor corporation on the winding up of such debtor corporation under section 88(1).

Position: Yes.

Reasons: The proposed transactions conform to our requirements for these types of loss consolidation rulings. The proposed transactions would be legally effective and commercially realistic.

XXXXXXXXXX							2017-070621

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
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 a previously filed tax 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 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. the subject of a current or completed court process involving the Taxpayers or a related person; or

v. the subject of a ruling request previously considered by the Directorate.

The Taxpayers have also confirmed that the proposed transactions described herein will not result in the Taxpayers or any person related to the Taxpayers being unable to pay any of their outstanding tax liabilities.

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. This document is based solely on the facts described below. Any documentation submitted with your request does not form part of the facts except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

DEFINITIONS:

“Aco” means XXXXXXXXXX, the corporation described in Paragraph 1;

“adjusted cost base” has the meaning assigned by section 54;

“affiliated person” has the meaning assigned by section 251.1;

“arm’s length” has the meaning assigned by subsection 251(1);

“ATR” means advance income tax ruling;

“Bco” means XXXXXXXXXX, the corporation described in Paragraph 2;

“CBCA” means the Canada Business Corporations Act, R.S.C. 1995, c. C-44, as amended;

“Cco” means XXXXXXXXXX, the corporation described in Paragraph 3;

“Cco Note” means the demand non-interest bearing promissory note described in Paragraph 25;

“CRA” means the Canada Revenue Agency;

“Daylight Loan 1” means the loan made by an arm’s length financial institution to Cco described in Paragraph 22;

“Daylight Loan 2” means the loan made by an arm’s length financial institution to Cco described in Paragraph 41a;

“Daylight Loan 3” means the loan made by an arm’s length financial institution to Cco described in Paragraph 42;

“Dco” means XXXXXXXXXX, the corporation described in Paragraph 4;

“Dco Note 1” means the demand non-interest bearing promissory note described in Paragraph 28;

“Dco Note 2” means the demand non-interest bearing promissory note described in Paragraph 31;

“DRA” means a dividend rental arrangement, as defined by subsection 248(1);

“Eco” means XXXXXXXXXX, the corporation described in Paragraph 5;

“Eco Note 1” means the demand non-interest bearing promissory note described in Paragraph 35;

“Eco Note 2” means the demand non-interest bearing promissory note described in Paragraph 38;

“excepted dividend” has the meaning assigned by section 187.1;

“excluded dividend” has the meaning assigned by subsection 191(1);

“Fco” means XXXXXXXXXX, the corporation described in Paragraph 6;

“Holdco” means XXXXXXXXXX, a taxable Canadian corporation and a XXXXXXXXXX, the common shares of which are listed on the XXXXXXXXXX under the symbol “XXXXXXXXXX”;

“implementation date” means a date in XXXXXXXXXX or a few months thereafter in the situation where all the proper authorizations were not received as at that date and means on or about XXXXXXXXXX for taxation years XXXXXXXXXX;

“Lossco” means, a new corporation to be incorporated under the CBCA which is described in Paragraph 18;

“Lossco Common Shares” means the common shares described in Paragraph 18;

“Lossco Note 1” means the interest bearing promissory note described in Paragraph 23;

“Lossco Note 2” means the interest bearing promissory note described in Paragraph 29;

“Lossco Note 3” means the interest bearing promissory note described in Paragraph 36;

“Newco 1” means a new corporation to be incorporated under the CBCA which is described in Paragraph 20;

“Newco 2” means a new corporation to be incorporated under the CBCA which is described in Paragraph 26;

“Newco 3” means a new corporation to be incorporated under the CBCA which is described in Paragraph 33;

“Newco 1 Common Shares” means the common shares of Newco 1 described in Paragraph 20;

“Newco 2 Common Shares” means the common shares of Newco 2 described in Paragraph 26;

“Newco 3 Common Shares” means the common shares of Newco 3 described in Paragraph 33;

“Newco 1 Preferred Shares” means the preferred shares of Newco 1 described in Paragraph 20;

“Newco 2 Preferred Shares” means the preferred shares of Newco 2 described in Paragraph 26;

“Newco 3 Preferred Shares” means the preferred shares of Newco 3 described in Paragraph 33;

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

“paid-up capital” has the meaning assigned by subsection 89(1);

“Paragraph” means a numbered paragraph in this letter;

“Parentco” means XXXXXXXXXX, a taxable Canadian corporation and a XXXXXXXXXX, the subordinate voting shares of which are listed on the XXXXXXXXXX under the symbol “XXXXXXXXXX”;

“Proposed Transactions” means the proposed transactions in this ATR, which are described in Paragraphs 18 to 62 below;

XXXXXXXXXX;

“refundable dividend tax on hand” has the meaning assigned by subsection 129(3);

“related persons” has the meaning assigned by subsection 251(2);

“SEA” means synthetic equity arrangement, as defined by subsection 248(1);

XXXXXXXXXX;

“subject corporation” has the meaning assigned by subsection 186(3);

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

“Tax-indifferent investor” has the meaning assigned by subsection 248(1); and

XXXXXXXXXX.

FACTS:

1. Aco is a taxable Canadian corporation which is wholly owned by Parentco. Aco’s taxation year-end is XXXXXXXXXX. Aco is a holding company that notably controls Bco and Dco.

2. Bco is a taxable Canadian corporation and is a wholly-owned subsidiary of Aco. Bco’s registered address is XXXXXXXXXX. It files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX. Bco’s taxation year-end is XXXXXXXXXX. Bco is a holding company that controls Cco.

3. Cco is a taxable Canadian corporation and is a wholly-owned subsidiary of Bco. Cco’s registered address is XXXXXXXXXX. It files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX. Cco’s taxation year-end is XXXXXXXXXX. XXXXXXXXXX.

4. Dco is a taxable Canadian corporation and is a wholly-owned subsidiary of Aco. Dco’s registered address is XXXXXXXXXX. It files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX. Dco’s taxation year-end is XXXXXXXXXX. Dco operates as a holding company with interests primarily in companies operating in the XXXXXXXXXX.

5. Eco is a taxable Canadian corporation and is a wholly-owned subsidiary of Cco. Eco’s registered address is XXXXXXXXXX. It files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX. Eco’s taxation year-end is XXXXXXXXXX. Eco is the owner of XXXXXXXXXX. The entity earns revenue from XXXXXXXXXX.

6. Fco is a taxable Canadian corporation. XXXXXXXXXX. Fco’s registered address is XXXXXXXXXX. It files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX. Fco’s taxation year-end is XXXXXXXXXX. Fco’s principal business activity is to XXXXXXXXXX.

7. Cco has unexpired non-capital losses carried forward of approximately $XXXXXXXXXX as of the end of its taxation year ended XXXXXXXXXX. In particular, the breakdown of these losses is as follows:

XXXXXXXXXX: $XXXXXXXXXX;

8. It is anticipated that Cco will incur the following non-capital losses in the upcoming years:

XXXXXXXXXX: $XXXXXXXXXX;

9. Dco has unexpired non-capital losses carried forward of approximately $XXXXXXXXXX as of the end of its taxation year ended XXXXXXXXXX. In particular, the breakdown of these losses are as follows:

XXXXXXXXXX: $XXXXXXXXXX;

10. Eco has unexpired non-capital losses carried forward of $XXXXXXXXXX as of the end of its taxation year ended XXXXXXXXXX, which was incurred in XXXXXXXXXX.

11. It is anticipated that Eco will incur the following non-capital losses in the upcoming years:

XXXXXXXXXX: $XXXXXXXXXX;

12. The borrowing capacity of Parentco and its subsidiaries significantly exceeds the maximum amount of $XXXXXXXXXX required to complete the Proposed Transactions described in Paragraphs 18 to 62.

13. Fco anticipates generating taxable income in this year and in each of the next three years in excess of the non-capital losses of each of the Losscos upon their respective wind-up. Fco has generated taxable income in excess of these annual non-capital loss amounts in each of its last three taxation years once taxable income is normalized to exclude:

a) the XXXXXXXXXX pursuant to an agreement entered into with a related party with respect to Part VI.1 tax otherwise payable by such related party in accordance with subsection 191.3(1) and or the loss carryback generated from such a deduction, and

b) the interest deducted pursuant to paragraph 20(1)(c) in respect of the loss consolidation transactions described in advance income tax rulings XXXXXXXXXX. For greater certainty, no interest expense will be deducted after XXXXXXXXXX in respect of the transactions contemplated in these rulings.

In particular, Fco’s taxable income in XXXXXXXXXX was $XXXXXXXXXX (which takes into account interest expense of $XXXXXXXXXX related to the prior loss consolidations described above.) It is estimated that Fco’s future taxable income will be in the range of the XXXXXXXXXX adjusted taxable income, i.e., $XXXXXXXXXX. Thus, taking into account that Fco will have a $XXXXXXXXXX interest deduction in XXXXXXXXXX for a prior loss consolidation, it is estimated that Fco’s taxable income in XXXXXXXXXX will be in the range of $XXXXXXXXXX (i.e., $XXXXXXXXXX - $XXXXXXXXXX) and $XXXXXXXXXX in each of XXXXXXXXXX and XXXXXXXXXX.

14. Cco operates through permanent establishments in the provinces of XXXXXXXXXX. Based on the interprovincial allocation for Cco’s XXXXXXXXXX taxation year, Cco has an allocation factor of approximately XXXXXXXXXX, respectively.

15. For Dco’s XXXXXXXXXX taxation years, Dco will operate through a permanent establishment only in the province of XXXXXXXXXX.

16. For Eco’s XXXXXXXXXX taxation years, Eco will operate through a permanent establishment only in the province of XXXXXXXXXX.

17. Fco operates through permanent establishments in XXXXXXXXXX. Fco has, XXXXXXXXXX taxation year, approximately the following allocation factors:

XXXXXXXXXX		XXXXXXXXXX;

PROPOSED TRANSACTIONS

18. Bco will incorporate a new wholly-owned subsidiary (“Lossco”) under the CBCA. Lossco will be a taxable Canadian corporation. The taxation year-end of Lossco will be XXXXXXXXXX. Lossco’s share capital will include an unlimited number of common shares (“Lossco Common Shares”). Lossco will not carry on any business and its activities will be limited to respectively investing the proceeds received from the Lossco Note 1, the Lossco Note 2 and the Lossco Note 3 in the Newco 1 Preferred Shares, the Newco 2 Preferred Shares and the Newco 3 Preferred Shares, as respectively described below in Paragraphs 24, 30 and 37.

19. Bco will subscribe for Lossco Common Shares for nominal consideration.

Transactions relating to Cco

20. Cco will incorporate a new wholly-owned subsidiary (“Newco 1”) under the CBCA. Newco 1 will be a taxable Canadian corporation. The taxation year-end of Newco 1 will be XXXXXXXXXX. Newco 1’s share capital will include an unlimited number of common shares (“Newco 1 Common Shares”) and an unlimited number of preferred shares (“Newco 1 Preferred Shares”). Newco 1 will not carry on any business and its activities will be limited to investing the proceeds received from the subscription for the Newco 1 Preferred Shares in the Cco Note as described below in Paragraph 25.

The Newco 1 Preferred Shares will have the following attributes:

a) non-voting;

b) non-participating;

c) redeemable at the option of the issuer and retractable at the option of the holder, subject to applicable law, at any time for an amount equal to the cash amount for which they were issued and all declared or unpaid dividends and any accrued dividends, which have not been declared and paid, up to but excluding the date fixed for such redemption or retraction; and

d) entitlement to a cumulative dividend, calculated daily and accruing by reference to the redemption amount of the Newco 1 Preferred Shares, at a rate that is reasonable, based on the current prevailing market rate established in Paragraph 23 for the Lossco Note 1, plus XXXXXXXXXX% per annum.

21. Cco will subscribe for Newco 1 Common Shares for nominal consideration.

22. Cco will borrow an amount of $XXXXXXXXXX in one or more tranches to be determined by Cco on a “daylight loan” basis from an arm’s length financial institution (“Daylight Loan 1”).

23. Cco will use the proceeds received from Daylight Loan 1 to make an interest bearing loan of $XXXXXXXXXX to Lossco (“Lossco Note 1”), on the following conditions:

a) simple interest will accrue on the Lossco Note 1 and will be calculated daily at an annual fixed rate equal to a commercial arm's length rate applicable in these facts and circumstances, presently estimated to be XXXXXXXXXX% per annum. The interest on the Lossco Note 1 will be paid on or before the last business day of each calendar year;

b) Cco’s recourse against Lossco to obtain repayment of the Lossco Note 1 will be limited to the Newco 1 Preferred Shares owned by Lossco, as further described in Paragraph 24 below; and

c) the Lossco Note 1 will provide Lossco with a right to prepay the principal amount and any interest that may have accrued at any time without penalty.

24. Lossco will use the proceeds received from the Lossco Note 1 to subscribe for Newco 1 Preferred Shares having an aggregate issue price equal to the principal amount of the Lossco Note 1. The aggregate redemption amount, retraction amount, adjusted cost base and paid-up capital of the Newco 1 Preferred Shares issued will be equal to the subscription amount of the Newco 1 Preferred Shares.

25. Newco 1 will use the proceeds received from the issuance of the Newco 1 Preferred Shares to make a non-interest bearing loan of $XXXXXXXXXX to Cco (“Cco Note”), which will be repayable on demand.

Transactions relating to Dco

26. Dco will incorporate a new wholly-owned subsidiary (“Newco 2”) under the CBCA. Newco 2 will be a taxable Canadian corporation. The taxation year-end of Newco 2 will be XXXXXXXXXX. Newco 2’s share capital will include an unlimited number of common shares (“Newco 2 Common Shares”) and an unlimited number of preferred shares (“Newco 2 Preferred Shares”). Newco 2 will not carry on any business and its activities will be limited to investing the proceeds received from the subscription for the Newco 2 Preferred Shares in the Dco Note 2 as described below in Paragraph 31.

The Newco 2 Preferred Shares will have the following attributes:

a) non-voting;

b) non-participating;

c) redeemable at the option of the issuer and retractable at the option of the holder, subject to applicable law, at any time for an amount equal to the cash amount for which they were issued and all declared and unpaid dividends and any accrued dividends, which have not been declared or paid, up to but excluding the date fixed for such redemption or retraction; and

d) entitlement to a cumulative dividend, calculated daily and accruing by reference to the redemption amount of the Newco 2 Preferred Shares, at a rate that is reasonable, based on the current prevailing market rate established at Paragraph 29 for the Lossco Note 2, plus XXXXXXXXXX% per annum.

27. Dco will subscribe for Newco 2 Common Shares for nominal consideration.

28. Cco will use a portion of the Daylight Loan 1 to make a non-interest bearing loan of $XXXXXXXXXX to Dco (“Dco Note 1”), which will be repayable on demand.

29. Dco will use the proceeds received from the Dco Note 1 to make an interest bearing loan of $XXXXXXXXXX to Lossco (“Lossco Note 2”) with the following conditions:

a) simple interest will accrue on the Lossco Note 2 and will be calculated daily at an annual fixed rate equal to a commercial arm’s length rate applicable in these facts and circumstances, presently estimated to be XXXXXXXXXX% per annum. The interest on the Lossco Note 2 will be paid on or before the last business day of each calendar year;

b) Dco’s recourse against Lossco to obtain repayment of the Lossco Note 2 will be limited to the Newco 2 Preferred Shares owned by Lossco, as further described in Paragraph 30 below; and

c) the Lossco Note 2 will provide Lossco with a right to prepay the principal amount and any interest that may have accrued at any time without penalty.

30. Lossco will use the proceeds received from the Lossco Note 2 to subscribe for Newco 2 Preferred Shares having an aggregate issue price equal to the principal amount of the Lossco Note 2. The aggregate redemption amount, retraction amount, adjusted cost base and paid-up capital of the Newco 2 Preferred Shares issued will be equal to the subscription amount of the Newco 2 Preferred Shares.

31. Newco 2 will use the proceeds received from the issuance of the Newco 2 Preferred Shares to make a non-interest bearing loan of $XXXXXXXXXX to Dco (“Dco Note 2”), which will be repayable on demand.

32. Dco will use the proceeds received from the Dco Note 2 to repay the Dco Note 1 to Cco.

Transactions relating to Eco

33. Eco will incorporate a new wholly-owned subsidiary (“Newco 3”) under the CBCA. Newco 3 will be a taxable Canadian corporation. The taxation year-end of Newco 3 will be XXXXXXXXXX. Newco 3’s share capital will include an unlimited number of common shares (“Newco 3 Common Shares”) and an unlimited number of preferred shares (“Newco 3 Preferred Shares”). Newco 3 will not carry on any business and its activities will be limited to investing the proceeds received from the subscription to the Newco 3 Preferred Shares in the Eco Note 2 as described below in Paragraph 38.

The Newco 3 Preferred Shares will have the following attributes:

a) non-voting;

b) non-participating;

c) redeemable at the option of the issuer and retractable at the option of the holder, subject to applicable law, at any time for an amount equal to the cash amount for which they were issued and all declared and unpaid dividends and any accrued dividends, which have not been declared or paid, up to but excluding the date fixed for such redemption or retraction; and

d) entitlement to a cumulative dividend, calculated daily and accruing by reference to the redemption amount of the Newco 3 Preferred Shares, at a rate that is reasonable, based on the current prevailing market rate established in Paragraph 36 for Lossco Note 3, plus XXXXXXXXXX% per annum.

34. Eco will subscribe for Newco 3 Common Shares for nominal consideration.

35. Cco will use a portion of the Daylight Loan 1 to make a non-interest bearing loan of $XXXXXXXXXX to Eco (“Eco Note 1”), which will be repayable on demand.

36. Eco will use the proceeds received from the Eco Note 1 to make an interest bearing loan of $XXXXXXXXXX to Lossco (“Lossco Note 3”), with the following conditions:

a) simple interest will accrue on the Lossco Note 3 and will be calculated daily at an annual fixed rate equal to a commercial arm’s length rate applicable in these facts and circumstances, presently estimated to be XXXXXXXXXX% per annum. The interest on the Lossco Note 3 will be paid on or before the last business day of each calendar year;

b) Eco’s recourse against Lossco to obtain repayment of the Lossco Note 3 will be limited to the Newco 3 Preferred Shares owned by Lossco, as further described in Paragraph 37 below; and

c) the Lossco Note 3 will provide Lossco with a right to prepay the principal amount and any interest that may have accrued at any time without penalty.

37. Lossco will use the proceeds received from the Lossco Note 3 to subscribe for Newco 3 Preferred Shares having an aggregate issue price equal to the principal amount of the Lossco Note 3. The aggregate redemption amount, retraction amount, adjusted cost base and paid-up capital of the Newco 3 Preferred Shares issued will be equal to the subscription amount of the Newco 3 Preferred Shares.

38. Newco 3 will use the proceeds received from the issuance of the Newco 3 Preferred Shares to make a non-interest bearing loan of $XXXXXXXXXX to Eco (“Eco Note 2”), which will be repayable on demand.

39. Eco will use the proceeds received from the Eco Note 2 to repay the Eco Note 1 to Cco.

40. Cco will use the remaining proceeds received on the Cco Note described in Paragraph 25 and the proceeds received on the repayment of the Dco Note 1 and the Eco Note 1 to repay the Daylight Loan 1.

Maintenance of the structure

41. The following transactions will occur, once a year, at or shortly before the end of each calendar year, in immediate sequence when jointly determined by Cco, Dco, Eco, Lossco, Newco 1, Newco 2 and Newco 3 (amounts were determined based on the effect of the implementation of the Proposed Transactions for a complete year. The amount will be prorated in the situation where the effect of the Proposed Transactions is less than a complete year):

a) Cco will borrow an amount of $XXXXXXXXXX on a “daylight loan” basis from an arm’s length financial institution (“Daylight Loan 2”);

Transactions relating to Cco

b) In accordance with an agreement entered into at the implementation date, Cco will make a capital contribution to Newco 1 at the end of the year in an amount equal to the amount of any accrued and unpaid dividends on the Newco 1 Preferred Shares. No shares will be issued by Newco 1 with respect to the contribution of capital and no amount will be added to the stated capital of Newco 1. The amount of each contribution of capital will be recorded as contributed surplus for accounting purposes. The contribution of capital will not be income to Newco 1 pursuant to International Financial Reporting Standards;

c) Newco 1 will pay to Lossco the accrued and unpaid dividends on the Newco 1 Preferred Shares;

d) Lossco will pay to Cco the accrued and unpaid interest on the Lossco Note 1;

Transactions relating to Dco

e) From a portion of the outstanding amount borrowed by Cco pursuant to Daylight Loan 2, Cco will make a non-interest bearing loan of $XXXXXXXXXX to Dco;

f) In accordance with an agreement entered into at the implementation date, Dco will make a capital contribution to Newco 2 at the end of the year in an amount equal to the amount of any accrued and unpaid dividends on the Newco 2 Preferred Shares. No shares will be issued by Newco 2 with respect to the contribution of capital and no amount will be added to the stated capital of Newco 2. The amount of each contribution of capital will be recorded as contributed surplus for accounting purposes. The contribution of capital will not be income to Newco 2 pursuant to International Financial Reporting Standards;

g) Newco 2 will pay to Lossco the accrued and unpaid dividends on the Newco 2 Preferred Shares;

h) Lossco will pay to Dco the accrued and unpaid interest on the Lossco Note 2;

i) Dco will repay the non-interest bearing loan received from Cco in Paragraph 41(e);

Transactions relating to Eco

j) From a portion of the outstanding amount borrowed by Cco pursuant to Daylight Loan 2, Cco will make a non-interest bearing loan of $XXXXXXXXXX to Eco;

k) In accordance with an agreement entered into at the implementation date, Eco will make a capital contribution to Newco 3 at the end of the year in an amount equal to the amount of any accrued and unpaid dividends on the Newco 3 Preferred Shares. No shares will be issued by Newco 3 with respect to the contribution of capital and no amount will be added to the stated capital of Newco 3. The amount of each contribution of capital will be recorded as contributed surplus for accounting purposes. The contribution of capital will not be income to Newco 3 pursuant to International Financial Reporting Standards;

l) Newco 3 will pay to Lossco the accrued and unpaid dividends on the Newco 3 Preferred Shares;

m) Lossco will pay to Eco the accrued and unpaid interest on the Lossco Note 3;

n) Eco will repay the non-interest bearing loan received from Cco in Paragraph 41(j);

o) Cco will repay the Daylight Loan 2 with the interest received on the Lossco Note 1, the Lossco Note 2 and the Lossco Note 3, and the balance with its own funds.

p) At or shortly before the end of its XXXXXXXXXX taxation years, Lossco will pay a taxable dividend to Bco equal to an amount corresponding to the difference between (i) the amount of the dividends received on the Newco 1 Preferred Shares, Newco 2 Preferred Shares and Newco 3 Preferred Shares and (ii) the amount of interest paid on the Lossco Note 1, the Lossco Note 2 and the Lossco Note 3 and other annual incidental expenses. Bco intends to apply subsection 55(2) to the dividend such that the amount of the dividend will be deemed to be a capital gain for Bco.

Annual partial unwind of the structure

The structure will be unwound in the following manner at the end of each calendar year:

42. Cco will borrow an amount of $XXXXXXXXXX in one or more tranches to be determined by the company on a “daylight loan” basis from an arm’s length financial institution (“Daylight Loan 3”).

Transactions relating to Cco

43. Cco will use the proceeds received from the Daylight Loan 3 to repay the Cco Note to Newco 1.

44. Newco 1 will use the proceeds received from the repayment of the Cco Note to redeem the Newco 1 Preferred Shares held by Lossco.

45. Lossco will use the proceeds received from the redemption of the Newco 1 Preferred Shares to repay the Lossco Note 1 to Cco.

Transactions relating to Dco

46. From a portion of the outstanding Daylight Loan 3, Cco will make a non-interest bearing loan of $XXXXXXXXXX to Dco.

47. Dco will use the proceeds from the non-interest bearing loan received in Paragraph 46 to repay the Dco Note 2 to Newco 2.

48. Newco 2 will use the proceeds received from the repayment of the Dco Note 2 to redeem the Newco 2 Preferred Shares held by Lossco.

49. Lossco will use the proceeds received from the redemption of the Newco 2 Preferred Shares to repay the Lossco Note 2 to Dco.

50. Dco will use the proceeds received from the repayment of the Lossco Note 2 to repay the non-interest bearing loan received from Cco in Paragraph 46.

Transactions relating to Eco

51. From a portion of the outstanding Daylight Loan 3, Cco will make a non-interest bearing loan of $XXXXXXXXXX to Eco.

52. Eco will use the proceeds from the non-interest bearing loan received in Paragraph 51 to repay the Eco Note 2 to Newco 3.

53. Newco 3 will use the proceeds received from the repayment of the Eco Note 2 to redeem the Newco 3 Preferred Shares held by Lossco.

54. Lossco will use the proceeds received from the redemption of the Newco 3 Preferred Shares to repay the Lossco Note 3 to Eco.

55. Eco will use the proceeds received from the repayment of the Lossco Note 3 to repay the non-interest bearing loan received from Cco in Paragraph 51.

56. Cco will use the proceeds received on the repayment of the Lossco Note 1 in Paragraph 45, the proceeds received on the repayment of the non-interest bearing loan by Dco in Paragraph 50 and the proceeds received on the repayment of the non-interest bearing loan by Eco in Paragraph 55 to repay the Daylight Loan 3.

Sale and wind-up of Lossco

57. Bco and Fco will enter into and consummate an agreement whereby Bco will sell its Lossco Common Shares to Fco at a purchase price equal to an amount agreed upon by Bco and Fco to be the fair market value of such shares.

58. Fco, as sole shareholder of Lossco, will pass a resolution authorizing and requiring Lossco to be wound up into Fco pursuant to subsection 88(1). As a consequence, Lossco’s assets will be transferred to Fco and Fco will assume Lossco’s liabilities. It is expected that Lossco will be formally dissolved before the end of the first taxation year of Fco commencing after the commencement of the winding-up of Lossco.

The transactions described in Paragraphs 18 to 58 will be repeated once annually in each of XXXXXXXXXX on or about XXXXXXXXXX, such that a new Lossco will be formed for each such repetition and except that the transactions described in Paragraphs 20, 21, 26, 27, 33 and 34 (i.e. incorporation of Newco 1, Newco 2 and Newco 3 and subscription for Newco 1 Common Shares, Newco 2 Common Shares, Newco 3 Common Shares) will not be repeated. For XXXXXXXXXX and XXXXXXXXXX, the amount required to be borrowed for the implementation of the structure will be $XXXXXXXXXX for Cco, $XXXXXXXXXX for Dco and $XXXXXXXXXX for Eco. For XXXXXXXXXX and XXXXXXXXXX, the amount required to be borrowed for the implementation of the structure will be up to $XXXXXXXXXX for Cco, $XXXXXXXXXX for Dco and $XXXXXXXXXX for Eco. Any of Cco, Dco, Eco and Fco may choose not to be part of these transactions for any of the XXXXXXXXXX and XXXXXXXXXX years. The structure may also be partially or completely dismantled before the contemplated maturity in the manner described in XXXXXXXXXX (or similarly, i.e. with required adjustments if only a portion of the structure is dismantled) if agreed upon by the entities previously mentioned in this Paragraph. In such cases, a notification will be sent to CRA.

Final unwind of structure

The following steps will be implemented no later than XXXXXXXXXX, upon the final unwind of the structure:

59. Cco, as sole shareholder of Newco 1, will pass a resolution authorizing and requiring Newco 1 to be wound up into Cco pursuant to subsection 88(1). As a consequence, Newco 1’s assets will be transferred to Cco and Cco will assume Newco 1’s liabilities.

60. Dco, as sole shareholder of Newco 2, will pass a resolution authorizing and requiring Newco 2 to be wound up into Dco pursuant to subsection 88(1). As a consequence, Newco 2’s assets will be transferred to Dco and Dco will assume Newco 2’s liabilities.

61. Eco, as sole shareholder of Newco 3, will pass a resolution authorizing and requiring Newco 3 to be wound up into Eco pursuant to subsection 88(1). As a consequence, Newco 3’s assets will be transferred to Eco and Eco will assume Newco 3’s liabilities.

62. Lossco will only incur nominal annual expenses other than interest expense on its Lossco Note 1, Lossco Note 2 and Lossco Note 3. For greater certainty, each year the amount of dividends payable on the Newco 1 Preferred Shares, the Newco 2 Preferred Shares and the Newco 3 Preferred Shares will exceed the aggregate, in that particular year, of the amount of interest accrued on respectively the Lossco Note 1, the Lossco Note 2 and the Lossco Note 3 and other annual expenses.

OTHER REPRESENTATIONS

63. Aco, Bco, Cco, Dco, Eco, Fco, Newco 1, Newco 2, Newco 3 will be, during the implementation of the Proposed Transactions, related persons and affiliated persons. There have been no acquisitions of control of Parentco or of any of its affiliated or related persons that are participants to the Proposed Transactions, including direct or indirect parent corporations of such subsidiary corporations, and there are no planned acquisitions of such corporations, including Parentco. If an unplanned acquisition were to occur, the structure would be partially or completely dismantled before the contemplated maturity in the manner described above in the Proposed Transactions (or similarly, i.e. with required adjustments if only a portion of the structure is dismantled) if any entity previously mentioned in this paragraph ceases to be affiliated or related following the acquisition of control.

64. Fco, as well as all other taxpayers involved in the Proposed Transactions, are, or will be, on the basis that they are related to a corporation described in paragraphs (b) or (d) of the definition of XXXXXXXXXX pursuant to paragraph (g) of that definition. It is, however, understood that each Lossco will not acquire its respective Newco 1 Preferred Shares, Newco 2 Preferred Shares and Newco 3 Preferred Shares and BCo will not acquire its common shares of any Lossco in the ordinary course of its business.

65. None of the corporations involved in the Proposed Transactions has entered or will enter into a DRA with respect to any of the shares issued for the purposes of completing the Proposed Transactions.

66. None of the shares on which a dividend is declared or paid in the course of the Proposed Transactions is the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement” or is a share that is described in subsection 112(2.4).

67. Aco, Bco, Cco, Dco, Eco, Fco, Newco 1, Newco 2, Newco 3 and each Lossco are, or will be, subject corporations, as defined in subsection 186(3). Newco 1, Newco 2 and Newco 3 will be connected to Lossco within the meaning assigned by subsections 186(2) and 186(4). Since Newco 1, Newco 2 and Newco 3 will not have any refundable dividend tax on hand, no Part IV tax will be payable by any Lossco on the dividends respectively paid by Newco 1, Newco 2 and Newco 3 on the Newco 1 Preferred Shares, the Newco 2 Preferred Shares and the Newco 3 Preferred Shares held by a Lossco.

68. Dividends received by each Lossco on its respective Newco 1 Preferred Shares, Newco 2 Preferred Shares and Newco 3 Preferred Shares as described in Paragraph 41 will be excepted dividends within the meaning assigned by section 187.1 and excluded dividends within the meaning assigned by subsection 191(1).

68.1 The dividends paid on the Newco 1 Preferred Shares, Newco 2 Preferred Shares and Newco 3 Preferred Shares to Lossco, as described in Paragraphs 41(c), 41(g) and 41(l), have no purpose other than the purpose described under the heading “Purpose of The Proposed Transactions”.

69. Lossco will be solvent and will have the liquidity to service the Lossco Note 1, the Lossco Note 2 and the Lossco Note 3. Each year, the amounts of dividends payable on the Newco 1 Preferred Shares, the Newco 2 Preferred Shares and the Newco 3 Preferred Shares will exceed the aggregate, in the applicable year, of the amount of interest accrued on respectively the Lossco Note 1, the Lossco Note 2 and the Lossco Note 3 and other annual expenses incurred.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to consolidate taxable income and non-capital losses within a group of affiliated and related persons. The Proposed Transactions will enable Cco, Dco and Eco to respectively earn interest income on the Lossco Note 1, the Lossco Note 2 and the Lossco Note 3 and thus will enable Cco, Dco and Eco to effectively utilize their non-capital losses already incurred and the non-capital losses that are anticipated to be incurred in taxation years covered by the present ATR and permit Fco to effectively utilize such non-capital losses.

The purpose of both the payment and the receipt of the dividends on the Newco 1 Preferred Shares, Newco 2 Preferred Shares and Newco 3 Preferred Shares is to provide a reasonable return on such shares and to fund the interest payments made by Lossco that will be due on the Lossco 1 Note, the Lossco 2 Note and the Lossco 3 Note.

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 the particular Lossco has a legal obligation to pay interest on its Lossco Note 1, Lossco Note 2 and Lossco Note 3, and that the particular Lossco continues to hold its respective Newco 1 Preferred Shares, Newco 2 Preferred Shares and Newco 3 Preferred Shares for the purpose of gaining or producing income, the particular Lossco will be entitled, pursuant to paragraph 20(1)(c), to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by the particular Lossco in computing its income for purposes of the Act) in respect of the year on its Lossco Note 1, Lossco Note 2 and Lossco Note 3, or (ii) a reasonable amount in respect thereof.

B. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

C. No amount will be included in the income of Newco 1, Newco 2 or Newco 3 pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital respectively made by Cco, Dco and Eco as respectively described in Paragraphs 41(b), 41(f) and 41(k).

D. Dividends received by the particular Lossco on its Newco 1 Preferred Shares, Newco 2 Preferred Shares and Newco 3 Preferred Shares, as described above, will be taxable dividends and such dividends will, pursuant to subsection 112(1), be deductible in computing the taxable income of the particular Lossco for the year in which the dividends are received by the particular Lossco and, for greater certainty such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

E. Part IV.1 and Part VI.1 will not apply to the dividends described in Ruling D above.

F. The provisions of subsection 55(2) will not apply to the dividends received by any Lossco on its respective Newco 1 Preferred Shares, Newco 2 Preferred Shares or Newco 3 Preferred Shares as respectively described in Paragraphs 41(c), 41(g) and 41(l) above.

G. Provided that the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply after the winding-up of the particular Lossco into FCo, as described in Paragraph 58, has been completed to permit FCo to deduct the non-capital losses of Lossco in computing its taxable income for a taxation year commencing after the commencement of the winding-up, subject to the limitations in paragraph 88(1.1)(e) and section 111.

I. 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.

J. 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 Tax Collection Agreement is in effect.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are commenced 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) subject to Ruling J, the application or non-application of a general anti-avoidance provision of any province; and

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

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate