2019 Ruling 2018-0788031R3 - 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 lossco 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 profitcos.

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							2018-078803

XXXXXXXXXX, 2019

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 subsequent correspondence.

We understand that, to the best of your knowledge and that of the Taxpayers involved, none of the proposed transactions or issues involved in this Ruling request are the same or substantially similar to transactions or issues that are:

(i) in a previously filed tax return of the Taxpayers or a related person and:

a. being considered by the CRA in connection with such return;

b. under objection by the Taxpayers or a related person; or

c. the subject of a current or completed court process involving the Taxpayers or a related person; or

(ii) the subject of a Ruling request previously considered by the Income Tax Rulings 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.

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

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 the regulations made thereunder (the “Regulations”). All references to monetary amounts are in Canadian dollars.

DEFINITIONS

“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);

“Canadian LP” means XXXXXXXXXX, the limited partnership described in Paragraph 4;

“Class A Preferred Shares” means collectively, the class A preferred shares issuable by Newco described in Paragraph 22;

“Class B Preferred Shares” means collectively, the class B preferred shares issuable by Newco described in Paragraph 22;

“CRA” means Canada Revenue Agency;

“Daylight Loan” means the loan made by Parent to Lossco as described in Paragraph 23;

“eligible dividend” has the meaning assigned by subsection 248(1) and subsection 89(1);

“FMV” means fair market value;

“GAAR” means the general anti-avoidance rule and encompasses the provisions set out in Part XVI of the Act;

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

“Leasing Partnerships” has the meaning assigned in Paragraph 5;

“Loan 1A” means the loan made by Lossco to Profitco 1 described in Paragraph 24.a;

“Loan 1B” means the loan made by Lossco to Profitco 1 described in Paragraph 24.b;

“Loan 2” means the loan made by Lossco to Profitco 2 described in Paragraph 24.c;

“Loan 3” means the loan made by Lossco to Profitco 3 described in Paragraph 24.d;

“Loan 4” means the loan made by Lossco to Profitco 4 described in Paragraph 24.e;

“Loan 5” means the loan made by Lossco to Profitco 5 described in Paragraph 24.f;

“Loans” means collectively, Loan 1A, Loan 1B, Loan 2, Loan 3, Loan 4, and Loan 5;

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

“Newco” means XXXXXXXXXX, the corporation described in Paragraph 19;

“NIB Loan” means the non-interest bearing loan made by Newco to Lossco described in Paragraph 29 below;

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

“Note 1A” means the note payable issued by Newco to Profitco 1 described in Paragraph 34.d.i;

“Note 1B” means the note payable issued by Newco to Profitco 1 described in Paragraph 33.d;

“Note 2” means the note payable issued by Newco to Profitco 2 described in Paragraph 34.d.ii;

“Note 3” means the note payable issued by Newco to Profitco 3 described in Paragraph 34.d.iii;

“Note 4” means the note payable issued by Newco to Profitco 4 described in Paragraph 34.d.iv;

“Note 5” means the note payable issued by Newco to Profitco 5 described in Paragraph 34.d.v;

“Notes” means collectively, Note 1A, Note 1B, Note 2, Note 3, Note 4, and Note 5;

“Operating Partnerships” has the meaning assigned in Paragraph 9;

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

“Paragraph” means a numbered Paragraph in this advance income tax ruling;

“Parent” means XXXXXXXXXX;

“Preferred Share A1” means the preferred shares to be issued by Newco to Profitco 1 as described in Paragraph 26.a;

“Preferred Share A2” means the preferred shares to be issued by Newco to Profitco 1 as described in Paragraph 26.b;

“Preferred Share B” means the preferred shares to be issued by Newco to Profitco 2 as described in Paragraph 26.c;

“Preferred Share C” means the preferred shares to be issued by Newco to Profitco 3 as described in Paragraph 26.d;

“Preferred Share D” means the preferred shares to be issued by Newco to Profitco 4 as described in Paragraph 26.e;

“Preferred Share E” means the preferred shares to be issued by Newco to Profitco 5 as described in Paragraph 26.f;

“Preferred Shares” means collectively, Preferred Share A1, Preferred Share A2, Preferred Share B, Preferred Share C, Preferred Share D, and Preferred Share E or collectively, the Class A Preferred Shares and Class B Preferred Shares;

“Profitco 1” means XXXXXXXXXX, the corporation described in Paragraph 11;

“Profitco 2” means XXXXXXXXXX, the corporation described in Paragraph 14;

“Profitco 3” means XXXXXXXXXX, the corporation described in Paragraph 16;

“Profitco 4” means XXXXXXXXXX, the corporation described in Paragraph17;

“Profitco 5” means XXXXXXXXXX, the corporation described in Paragraph 18;

“Profitcos” mean collectively, Profitco 1, Profitco 2, Profitco 3, Profitco 4, and Profitco 5;

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

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

“REIT” means Real Estate Investment Trust;

“specified financial institution” has the meaning assigned by subsection 248(1);

“taxable Canadian corporation” has the meaning assigned by subsections 248(1) and 89(1);

“taxable dividend” has the meaning assigned by subsections 248(1) and 89(1);

“taxpayers” mean the entities described on page 1 of this document; and

XXXXXXXXXX

FACTS

1. Parent is a XXXXXXXXXX REIT incorporated under the laws of XXXXXXXXXX. Parent is XXXXXXXXXX. Parent’s primary business involves XXXXXXXXXX. Parent’s corporate headquarters are located in XXXXXXXXXX. Parent’s market capitalization is approximately XXXXXXXXXX$XXXXXXXXXX as of the date of this ruling request. Parent is a non-resident of Canada.

2. GPCO is a corporation incorporated under the laws of XXXXXXXXXX and is a taxable Canadian corporation. GPCO is a wholly-owned subsidiary of Parent. GPCO has a XXXXXXXXXX taxation year-end.

3. Lossco is a corporation incorporated under the laws of XXXXXXXXXX and is a taxable Canadian corporation. Lossco is a wholly-owned subsidiary of Parent. It files its return with XXXXXXXXXX and is served by XXXXXXXXXX. Lossco has a XXXXXXXXXX taxation year-end.

4. Canadian LP is a limited partnership formed under the laws of XXXXXXXXXX and is a Canadian partnership within the meaning assigned by subsection 102(1) of the Act. The sole general partner of Canadian LP is GPCO as to a XXXXXXXXXX% interest. The sole limited partner of Canadian LP is Lossco as to a XXXXXXXXXX% interest.

5. XXXXXXXXXX

6. For the taxation year ended XXXXXXXXXX, Lossco had permanent establishments in XXXXXXXXXX. For the purpose of the definition of Lossco’s “taxable income earned in a province” pursuant to subsection 124(4) and Part IV of the Regulations, its provincial allocation is as follows: XXXXXXXXXX.

7. As at XXXXXXXXXX, Lossco reported a non-capital loss carryforward balance of $XXXXXXXXXX. Lossco is expected to incur additional non-capital losses in its XXXXXXXXXX taxation years. All or substantially all of the losses being carried forward are attributable to Lossco’s proportionate share of Canadian LP’s net losses, which derive from interest expense on third party indebtedness of Canadian LP and certain intercompany loans that Canadian LP owes to Parent. The following represents the non-capital losses of Lossco as of the year-end:

XXXXXXXXXX

As of XXXXXXXXXX, the at-risk amount of Lossco is $XXXXXXXXXX. The use of Lossco’s losses of $XXXXXXXXXX in this ruling is subject to the rules in section 111.

8. Each of the Profitcos (described below) is a wholly owned subsidiary of Parent and has a taxation year end of XXXXXXXXXX. Each of the Profitcos files its return with XXXXXXXXXX and is served by XXXXXXXXXX.

9. XXXXXXXXXX

10. XXXXXXXXXX

11. Profitco 1 is a corporation incorporated under the laws of XXXXXXXXXX which later continued under the laws of XXXXXXXXXX. For the taxation year ended XXXXXXXXXX, Profitco 1 had permanent establishments in XXXXXXXXXX. For the purpose of the definition of Lossco’s “taxable income earned in a province” pursuant to subsection 124(4) and Part IV of the Regulations, its provincial allocation is as follows: XXXXXXXXXX.

12. Profitco 1’s reported taxable income for its taxation years ending on XXXXXXXXXX was $XXXXXXXXXX, respectively. Profitco 1’s projected taxable income for its XXXXXXXXXX taxation years is approximately $XXXXXXXXXX, respectively.

13. As at XXXXXXXXXX, Profitco 1 has a limited partnership loss carryforward balance of $XXXXXXXXXX. To the extent permitted by section 111, Profitco 1 will use its tax attributes before or concurrently to any of the losses that arise as a result of the Proposed Transactions.

14. Profitco 2 is a corporation incorporated under the laws of XXXXXXXXXX. As at XXXXXXXXXX, Profitco 2’s taxable income is allocated XXXXXXXXXX% to XXXXXXXXXX. Profitco 2’s reported taxable income for its taxation years ending on XXXXXXXXXX. Profitco 2’s projected taxable income for XXXXXXXXXX taxation years is approximately $XXXXXXXXXX, respectively.

15. As at XXXXXXXXXX, Profitco 2 has a non-capital loss carryforward balance of $XXXXXXXXXX and limited partnership losses of $XXXXXXXXXX. To the extent permitted by section 111, Profitco 2 will use its tax attributes, before or concurrently to any of the losses that arise as a result of the Proposed Transactions.

16. Profitco 3 is a corporation incorporated under the laws of XXXXXXXXXX. As at XXXXXXXXXX, Profitco 3’s taxable income is allocated XXXXXXXXXX% to XXXXXXXXXX. Profitco 3’s reported taxable income for its taxation years ending on XXXXXXXXXX and $XXXXXXXXXX, respectively. Profitco 3’s projected taxable income for its XXXXXXXXXX taxation years is approximately $XXXXXXXXXX, respectively.

17. Profitco 4 is a corporation incorporated under the laws of XXXXXXXXXX. As at XXXXXXXXXX, Profitco 4’s taxable income is allocated XXXXXXXXXX% to XXXXXXXXXX. Profitco 4’s reported taxable income for its taxation years ending on XXXXXXXXXX and $XXXXXXXXXX, respectively. Profitco 4’s projected taxable income for its XXXXXXXXXX taxation years is approximately $XXXXXXXXXX, respectively.

18. Profitco 5 is a corporation incorporated under the laws of XXXXXXXXXX. As at XXXXXXXXXX, Profitco 5’s taxable income is allocated XXXXXXXXXX% to XXXXXXXXXX. Profitco 5’s reported taxable income for its taxation years ending on XXXXXXXXXX was approximately $XXXXXXXXXX, respectively. Profitco 5’s projected taxable income for its XXXXXXXXXX taxation years is approximately $XXXXXXXXXX, respectively.

19. On XXXXXXXXXX, Canadian LP incorporated Newco under the laws of XXXXXXXXXX and subscribed for XXXXXXXXXX common shares for $XXXXXXXXXX.

20. Newco has authorized share capital that consists of an unlimited number of common shares and a taxation year ending on XXXXXXXXXX. Newco will not carry on any business and its activities will be limited to investing the proceeds received upon the issuance of the Preferred Shares to the Profitcos, as described in Paragraph 26 below, in a non-interest-bearing loan to Lossco, as described in Paragraph 29 below.

PROPOSED TRANSACTIONS

Implementation of the structure

21. On or before XXXXXXXXXX, at a time when the only property of Newco is the $XXXXXXXXXX received on its formation, Canadian LP will sell the common shares of Newco to Lossco for $XXXXXXXXXX.

22. Prior to XXXXXXXXXX, the share capital of Newco will be amended to create two classes of preferred shares, of which Newco is authorized to issue an unlimited number (the two classes, “Class A Preferred Shares” and “Class B Preferred Shares” collectively described as “Preferred Shares”). All Preferred Shares will be non-voting and redeemable and retractable for the amount for which the share was issued. The Preferred Shares will have no fixed redemption date but may be redeemed at the option of the holder or retracted at the option of the issuer at any time (within a reasonable notice period). Dividends on the Preferred Shares will be cumulative and accrue at a fixed rate on a daily basis and will be payable on the earliest of XXXXXXXXXX of each calendar year and the time at which any Preferred Shares are redeemed or retracted. The differentiating feature of the two classes of Preferred Shares is the dividend rate. The dividend rate of Class A Preferred Shares, expressed as a percentage of the amount for which the Class A Preferred Shares were issued will be XXXXXXXXXX%. The dividend rate of Class B Preferred Shares, expressed as a percentage of the amount for which the Class B Preferred Shares were issued will be XXXXXXXXXX%. The legal stated capital and PUC of the Preferred Shares will be equal to the subscription amount paid therefor. Any dividends paid on the Preferred Shares will be designated as eligible dividends.

23. On or about XXXXXXXXXX, Lossco will borrow approximately $XXXXXXXXXX on a daylight basis from Parent (the “Daylight Loan”). The Daylight Loan will be non-interest bearing.

24. On or about XXXXXXXXXX, Lossco will use the proceeds of the Daylight Loan to make:

a. Loan 1A to Profitco 1 in the amount of $XXXXXXXXXX;

b. Loan 1B to Profitco 1 in the amount of $XXXXXXXXXX;

c. Loan 2 to Profitco 2 in the amount of $XXXXXXXXXX;

d. Loan 3 to Profitco 3 in the amount of $XXXXXXXXXX;

e. Loan 4 to Profitco 4 in the amount of $XXXXXXXXXX; and
f. Loan 5 to Profitco 5 in the amount of $XXXXXXXXXX.

25. Each of Loan 1A, Loan 1B, Loan 2, Loan 3, Loan 4, and Loan 5, (together, the “Loans”) will have the following general terms:

a. Simple interest will accrue on Loan 1A, Loan 2, Loan 3, Loan 4 and Loan 5 and will be calculated at an interest rate of XXXXXXXXXX%, which has been determined not to exceed a commercial rate of interest;

b. Simple interest will accrued on Loan 1B and will be calculated at an interest rate of XXXXXXXXXX%, which has been determined not to exceed a commercial rate of interest;

c. Interest will be payable annually on XXXXXXXXXX of each year, or such earlier date as the principal is repaid;

d. The principal amount owing for Loan 1A, Loan 2, Loan 3, Loan 4, and Loan 5 may be prepaid, in whole or in part, by the borrower at any time without penalty, but the entire principal amount owing must be repaid no later than XXXXXXXXXX; and

e. The principal amount owing for Loan 1B may be prepaid, in whole or in part, by the borrower at any time without penalty, but the entire principal amount owing must be repaid no later than XXXXXXXXXX.

26. On or about XXXXXXXXXX, proceeds of the Loans will be used as described below:

a. Profitco 1 will use the proceeds from Loan 1A to subscribe for XXXXXXXXXX Class A Preferred Shares (“Preferred Share A1”) (to be secured against Loan 1A);

b. Profitco 1 will use the proceeds from Loan 1B to subscribe for XXXXXXXXXX Class B Preferred Shares (“Preferred Share A2”) (to be secured against Loan 1B);

c. Profitco 2 will use the proceeds from Loan 2 to subscribe for XXXXXXXXXX Class A Preferred Shares (“Preferred Share B”) (to be secured against Loan 2);

d. Profitco 3 will use the proceeds from Loan 3 to subscribe for XXXXXXXXXX Class A Preferred Shares (“Preferred Share C”) (to be secured against Loan 3);

e. Profitco 4 will use the proceeds from Loan 4 to subscribe for XXXXXXXXXX Class A Preferred Shares (“Preferred Share D”) (to be secured against Loan 4); and
f. Profitco 5 will use the proceeds from Loan 5 to subscribe for XXXXXXXXXX Class A Preferred Shares (“Preferred Share E”) (to be secured against Loan 5).

27. Concurrent with the subscription for the Preferred Shares outlined in Paragraph 26, Lossco and Newco will enter into a binding support agreement (the “Support Agreement”) which will require Lossco to make capital contributions to Newco to enable Newco to fund payments for dividends and amounts, if any, required to be paid in cash on the redemption or retraction of the Preferred Shares, upon each of the following occurrences:

a. XXXXXXXXXX of each year; and

b. immediately prior to the time at which the Preferred Shares are to be redeemed or retracted.

28. Lossco will finance the contributions pursuant to the Support Agreement with its cash on hand, borrowed money or a combination of both. The term of the Support Agreement will be for so long as the Preferred Shares are issued and outstanding.

29. On or about XXXXXXXXXX, Newco will use the total proceeds of $XXXXXXXXXX from the issuance of the Preferred Shares to make a non-interest-bearing loan to Lossco (the “NIB Loan”). The principal amount of the NIB Loan will be payable, in whole or in part, upon demand by the lender. No penalty will apply in respect of any repayment of principal. On or before XXXXXXXXXX, Lossco must repay $XXXXXXXXXX of the principal amount, and the remaining $XXXXXXXXXX must be repaid on or before XXXXXXXXXX.

30. On or about XXXXXXXXXX, Lossco will use the proceeds of the NIB Loan to repay the Daylight Loan.

Maintenance of the structure

31. The following transactions will occur on an annual basis.

a. On or immediately before XXXXXXXXXX (i.e., prior to Newco paying dividends on the Preferred Shares), Lossco will make a capital contribution to Newco equal to the amount of dividend payments to be made by Newco on the Preferred Shares for as long as the Preferred Shares are outstanding. No amount will be added to the PUC of the Newco shares in respect of these contributions.

b. On each Preferred Share dividend payment date, Newco will, subject to any applicable corporate law solvency tests, declare and pay dividends to each of the Profitcos in accordance with the terms of the Preferred Shares and will designate such dividends as eligible dividends.

c. On XXXXXXXXXX, each Profitco will pay the interest on their respective Loan(s), as applicable, to Lossco.

32. It is expected that the interest expense of the Profitcos may result in non-capital losses for the Profitcos for their respective XXXXXXXXXX taxation years. Upon filing their XXXXXXXXXX corporate income tax returns, the Profitcos will request that losses be carried back (to the extent permitted by section 111) to their respective XXXXXXXXXX taxation years in prescribed form.

Unwind of the structure

33. On a particular day that is on or before XXXXXXXXXX (the “Loan 1B Unwind Date”), the following transactions will be implemented to wind-up the structure in respect of Loan 1B:

a. Lossco will make a capital contribution to Newco equal to the total of all accrued dividends to be paid to Profitco 1 on the Class B Preferred Shares (being Preferred Share A2), if any, to the extent that Lossco requires the funds to pay such dividends.

b. Newco will, subject to applicable corporate law solvency tests, declare and pay on the Class B Preferred Shares (being Preferred Share A2), all unpaid dividends that have accrued up to the Loan 1B Unwind Date.

c. Profitco 1 will pay any accrued and unpaid interest to Lossco on Loan 1B.

d. Subject to any applicable corporate law solvency tests, Newco will redeem the Class B Preferred Shares (being Preferred Share A2) held by Profitco 1 by delivering to Profitco 1 a portion of the NIB Loan with a principal amount and FMV equal to the redemption amount and FMV of the Class B Preferred Shares (being Preferred Share A2) (“Note 1B”);

e. As Note 1B will have a principal amount and FMV equal to that of Loan 1B, Lossco and Profitco 1 will agree to set off Loan 1B with Note 1B.

34. On a particular day (the “Final Unwind Date”) that is on or before XXXXXXXXXX, the following transactions will be implemented to wind-up the structure in respect of the remaining Loans (that is Loan 1A, Loan 2, Loan 3, Loan 4, and Loan 5):

a. Lossco will make a capital contribution to Newco equal to the total of all accrued dividends to be paid to the Profitcos on the Class A Preferred Shares to the extent that Lossco requires the funds to pay such dividends.

b. Newco will, subject to applicable corporate law solvency tests, declare and pay on the Class A Preferred Shares all unpaid dividends that have accrued up to the Final Unwind Date.

c. The Profitcos will each pay any accrued and unpaid interest to Lossco on its respective remaining Loan.

d. Subject to any applicable corporate law solvency tests, Newco will redeem the Class A Preferred Shares held by each Profitco by delivering to each Profitco a portion of the NIB Loan currently held by Newco as follows:

i. Newco to transfer a portion of the NIB Loan with a principal amount and FMV equal to the redemption amount and FMV of Preferred Share A1 to Profitco 1 (“Note 1A”);

ii. Newco to transfer a portion of the NIB Loan with a principal amount and FMV equal to the redemption amount and FMV of Preferred Share B to Profitco 2 (“Note 2”);

iii. Newco to transfer a portion of the NIB Loan with a principal amount and FMV equal to the redemption amount and FMV of Preferred Share C to Profitco 3 (“Note 3”);

iv. Newco to transfer a portion of the NIB Loan with a principal amount and FMV equal to the redemption amount and FMV of Preferred Share D to Profitco 4 (“Note 4”); and

v. Newco to transfer a portion of NIB Loan with a principal amount and FMV equal to the redemption amount and FMV of Preferred Share E to Profitco 5 (“Note 5”).

e. As the remaining Notes will have a principal amount owing and FMV that is equal to that of the remaining Loans, Lossco and each Profitco will agree to set off the remaining Loans with the remaining Notes as follows:

i. Lossco and Profitco 1 to offset Loan 1A with Note 1A;

ii. Lossco and Profitco 2 to offset Loan 2 with Note 2;

iii. Lossco and Profitco 3 to offset Loan 3 with Note 3;

iv. Lossco and Profitco 4 to offset Loan 4 with Note 4; and

v. Lossco and Profitco 5 to offset Loan 5 with Note 5.

f. Newco will be wound-up into Lossco under subsection 88(1) of the Act.

OTHER REPRESENTATIONS

35. Control of GPCO, Lossco and the Profitcos has not been acquired by any person or group of persons during any preceding taxation year that is relevant for the purpose of applying subsection 111(5) of the Act to the Proposed Transactions.

36. The Profitcos, Newco, GPCO and Lossco are affiliated persons and are related persons with respect to each other and will continue to be affiliated and related to each other throughout the Proposed Transactions.

37. At no time during the implementation of the Proposed Transactions described in this letter will the Preferred Shares 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, as defined in subsection 248(1);

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); or

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

38. The Profitcos will not acquire or be considered to have acquired the Preferred Shares in the ordinary course of their businesses.

39. The Profitcos and Lossco are not financial institutions as defined under subsection 190(1), for purposes of Part VI tax. Newco will not be a financial institution, as defined in subsection 190(1), for purposes of Part VI tax.

40. Parent’s borrowing capacity significantly exceeds the maximum amount required to complete the Proposed Transactions described in Paragraphs 21 to 30.

41. At the time of the Proposed Transactions, Lossco will have the financial capacity, including accessing its leverage capacity, to make the capital contributions to Newco described in Paragraph 27. Lossco may obtain the funds to make the capital contributions to Newco by borrowing from one or more of its affiliates on a daylight loan basis.

42. Dividends paid on the Preferred Shares will have no other purpose other than described under the heading “Purpose of Proposed Transactions”.

43. None of Profitcos or Lossco will claim, at any time, a capital loss in respect of a disposition of any common or preferred shares of Newco.

44. There is no intention for any Profitco to generate a significant loss carryforward balance as a result of the Proposed Transactions (having regard to the expected carry back of losses to prior taxation years), and the Taxpayers will seek to unwind the arrangements at a time that is intended to prevent any significant loss carry-forward balance.

45. The Proposed Transactions are not being undertaken to facilitate the use of any non-capital losses of Lossco that would otherwise have expired.

46. None of the shares of Profitco 1, Profitco 2, Profitco 3, Profitco 4 and Profitco 5, owned by Parent, will be transferred or disposed of to a person unrelated to Parent, as part of a series of transactions or events that includes any of the Proposed Transactions.

47. The Proposed Transactions will be legally effective.

PURPOSE OF THE PROPOSED TRANSACTIONS

48. The purpose of the Proposed Transactions is to effect a tax consolidation of Profitcos and Lossco by resulting in:

a. Lossco earning interest income on the Loans, thereby permitting Lossco to accelerate the use of its non-capital losses; and

b. The Profitcos incurring interest expense on the Loans, thereby permitting the Profitcos to reduce their respective taxable incomes and to create non-capital losses that may be carried back and used to reduce their respective taxable incomes from prior taxation years (XXXXXXXXXX).

49. The purpose of both the payment and the receipt of the dividends on the Preferred Shares as described in Paragraphs 31.b, 33.b, 34.b is to provide a reasonable return on such shares and to fund the interest payments made by the Profitcos that will be due on the Loans. More specifically, none of the purposes of the dividends is to reduce the fair market value or capital gain of any share, or to increase the total cost amounts of any properties.

RULINGS

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 Profitcos have a legal obligation to pay interest on the Loans, and that the Profitcos continue to hold their respective Preferred Shares for the purpose of gaining or producing income, each Profitco 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 Profitco in computing its income for purposes of the Act) in respect of the year on its respective Loan, or (ii) a reasonable amount in respect thereof.

B. Each Profitco, as applicable, 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.

C. Dividends received by the Profitcos from Newco on the Preferred Shares will be included in the income of the Profitcos pursuant to subsection 82(1) and paragraph 12(1)(j).

D. Dividends received by the Profitcos on the Preferred Shares will be deductible, pursuant to subsection 112(1), in computing the Profitcos’ taxable income for the 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), 112(2.3) or 112(2.4).

E. Provided that the only purpose of the payment and receipt of the dividends on the Preferred Shares is as described in the “Purpose of the Proposed Transactions” above, the provisions of subsection 55(2) will not apply to the dividends, if any, referred to in Ruling C, and received by the Profitcos on the Preferred Shares.

F. The settlement of the Loans and the Notes, as described in paragraphs 33.e and 34.e, will not give rise to any “forgiven amount” for purposes of section 80.

G. 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.

The above Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R8 dated November 1, 2018, and are binding on the CRA provided that the Proposed Transactions described in Paragraphs 21 to 30 above are commenced and entered into on or before XXXXXXXXXX, and the Proposed Transactions described in Paragraphs 31, 33 and 34 are entered into on or before 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 and the Regulations which, if enacted, could have an effect on the Rulings provided herein.

OTHER 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;

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
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch