2019 Ruling 2019-0794891R3 - 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 (Parent) would be entitled to apply existing non-capital losses against the interest income that would be generated as part of a loan that would be made under the loss consolidation transactions and whether the accompanying interest expense would be deductible by Newco 2, and then accessible by Amalco on amalgamation with Newco2.

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 plausible.

XXXXXXXXXX								2019-079489

XXXXXXXXXX, 2019

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling Request

Taxpayers: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an Advance Income Tax Ruling on behalf of XXXXXXXXXX (the “Taxpayers”). We also acknowledge the information provided in subsequent correspondence and during our telephone conversations in connection with your request.

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”).

DEFINITIONS

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

“affiliated person” has the meaning assigned by section 251.1, read without reference to the definition of “controlled” in subsection 251.1(3);

“Amalco” means XXXXXXXXXX, a company that will be formed on the amalgamation (referred to herein as the “Amalgamation”) of Canco 1 and its wholly-owned subsidiary Canco 2;

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

“CAD” means Canadian dollars;

“Canco 1” means XXXXXXXXXX, a corporation described in Paragraphs 6 and 7;

“Canco 2” means XXXXXXXXXX, a corporation described in Paragraph 8;

“CBCA” means Canada Business Corporations Act, R.S.C. 1985, c. C-44;

“Company A” means XXXXXXXXXX, the corporation described in Paragraph 34;

“CRA” means Canada Revenue Agency;

“Daylight Loan” means the loan made by a third party bank to Parent as described in Paragraph 17;

“Division A” means the activities carried on by Group A, as described in Paragraph 1;

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

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

“Group A” means the XXXXXXXXXX, a group of companies indirectly controlled by Parent that are in the business of XXXXXXXXXX or in a business related to that activity;

“Group A Treasury Activities” means the activities described in Paragraph 9;

“Group B” means the XXXXXXXXXX, a group of companies indirectly controlled by Parent that are in the business of XXXXXXXXXX or in a business related to that activity;

“Group A USD Opco” means XXXXXXXXXX, a corporation described in Paragraph 6;

“Holdco NR” means XXXXXXXXXX, a corporation described in Paragraph 5;

“JV NR” means XXXXXXXXXX, a corporation described in Paragraph 5;

“Loss Utilization Arrangement” means the arrangement described in Paragraphs 13 to 21;

XXXXXXXXXX;

“IFRS” means International Financial Reporting Standards;

“New Daylight Loan” means the loan made by a third party bank to Parent as described in Paragraph 23(a);

“Newco 1” means a corporation to be incorporated under the CBCA as described in Paragraph 14;

“Newco 1 Preferred Shares” means the preferred shares to be issued by Newco 1 to Newco 2 as described in Paragraphs 14 and 20;

“Newco 2” means a corporation to be incorporated under the CBCA as described in Paragraph 16;

“Newco 2 Loan” means the loan to be made by Parent to Newco 2 as described in Paragraph 19;

“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 document;

“Parent” means XXXXXXXXXX;

“Parent Loan” means the non-interest bearing loan described in Paragraph 20 of the Proposed Transactions;

“Pre-implementation Transactions” means the transactions described in Paragraphs 10 to 12;

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

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

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

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

“Subsidiary Wholly-Owned Corporation” 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;

“taxable preferred share” has the meaning assigned by subsection 248(1);

“term preferred share” has the meaning assigned by subsection 248(1); and

“USD” means dollars of the United States of America.

FACTS

1. Parent is a public corporation and a taxable Canadian corporation. Parent is a XXXXXXXXXX and carries on these XXXXXXXXXX activities in separate divisions (“Division A” and “Division B”, respectively). For financial reporting purposes, the consolidated financial results of Division A are determined in XXXXXXXXXX and the financial results of Division B are determined in USD. Division A is carried on by a group of companies indirectly controlled by Parent (“Group A”). Notwithstanding that the Division A consolidated financial results are determined in XXXXXXXXXX, a number of companies in Group A service the American market and, as a result, determine their own individual financial results in USD. Division B is carried on by another group of companies indirectly controlled by Parent (“Group B”). Parent has a taxation year ending XXXXXXXXXX. Parent files its returns with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Parent reports its income for Canadian tax purposes in USD.

2. Parent has permanent establishments in Canada in the provinces of XXXXXXXXXX. The percentage of Parent’s income attributable to each permanent establishment in Parent’s taxation year ending XXXXXXXXXX was as follows: XXXXXXXXXX.

3. Parent’s tax attributes as of XXXXXXXXXX consist of non-deducted XXXXXXXXXX of $XXXXXXXXXX USD, undepreciated capital cost of $XXXXXXXXXX USD, investment tax credits of $XXXXXXXXXX USD and non-capital losses of $XXXXXXXXXX USD.

4. Parent’s non-capital losses came about as a result of Division B activities that are carried on directly by Parent XXXXXXXXXX.

5. The entities in Group A are held directly and indirectly by JV NR, a corporation incorporated under the laws of XXXXXXXXXX. Parent indirectly owns XXXXXXXXXX% of JV NR, and the remaining XXXXXXXXXX% is owned by a third party. JV NR owns all of the issued and outstanding shares of Holdco NR. Subco NR is a corporation incorporated under the laws of XXXXXXXXXX. Subco NR is a Subsidiary Wholly-Owned Corporation of Holdco NR.

6. Canco 1 is a taxable Canadian corporation and a Subsidiary Wholly-Owned Corporation of Holdco NR. The legal paid-up capital of the shares of Canco 1 held by Holdco NR is denominated in CAD. Canco 1 mainly acts as a holding company for Group A USD Opco, the main Canadian operating subsidiary of Group A and also for other foreign subsidiaries of Group A servicing the American market. Canco 1 has a taxation year ending XXXXXXXXXX. Canco 1 files its returns with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Canco 1 reports its income for Canadian tax purposes in USD. Group A USD Opco is a taxable Canadian corporation and a wholly-owned subsidiary of Canco 1. The legal paid-up capital of the shares of Group A USD Opco held by Canco 1 is denominated in CAD. Group A USD Opco reports its income for Canadian tax purposes in USD.

7. Canco 1 has a non-capital loss carry forward balance of $XXXXXXXXXX USD at the end of its XXXXXXXXXX taxation year. Canco 1’s non-capital losses resulted from XXXXXXXXXX.

8. Canco 2 is a taxable Canadian corporation and an indirect subsidiary of Holdco NR. It is a Subsidiary Wholly-Owned Corporation of Canco 1. Canco 2 has minimal business activities. Canco 2 has a taxation year ending XXXXXXXXXX. Canco 2 files its returns with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Canco 2 reports its income for Canadian tax purposes in CAD, and has not previously made an election under subsection 261(3).

9. The treasury function of Division A (the “Group A Treasury Activities”) is currently performed by XXXXXXXXXX and a Subsidiary Wholly-Owned Corporation of Subco NR.

PROPOSED TRANSACTIONS

Pre-implementation Transactions

10. Prior to the implementation of the structure below and before the end of XXXXXXXXXX, Holdco NR will contribute all of the shares of Canco 1 to Subco NR in exchange for XXXXXXXXXX of Subco NR and share premium. Canco 1 and Canco 2 will amalgamate to form Amalco under short form amalgamation procedures. Amalco will be a taxable Canadian corporation. The shares of Canco 1 will become shares of Amalco and the shares of Canco2 will be cancelled. The legal paid-up capital of the shares of Amalco will remain denominated in CAD.

11. Amalco will make an election under paragraph 261(3)(b) to use the XXXXXXXXXX as its functional currency within 60 days after the amalgamation.

12. Before the end of XXXXXXXXXX, Amalco will acquire the Group A Treasury Activities from XXXXXXXXXX by acquiring XXXXXXXXXX assets, including cash and loans made to other subsidiaries of Group A. This transfer will be effected in the following manner:

XXXXXXXXXX

13. Amalco’s main activities will be group financing, cash management and foreign exchange services for Group A. Amalco will also continue to act as a holding company. As such, Amalco may directly or indirectly acquire, along with the shares it will hold of entities in Group A, shares of other Canadian and foreign entities in Group A.

Implementation of the Loss Utilization Arrangement

14. As soon as possible in XXXXXXXXXX, Parent will incorporate Newco 1 under the CBCA and subscribe for and acquire common shares of Newco 1 for $XXXXXXXXXX USD. Newco 1 will be a taxable Canadian corporation. The taxation year of Newco 1 will end on XXXXXXXXXX. Newco 1 will not carry on any business and its activities will be limited to making the Parent Loan with the proceeds received upon the issuance of the Newco 1 Preferred Shares. The authorized capital of Newco 1 will consist of two classes of shares denominated in USD: common shares and Newco 1 Preferred Shares.

15. Newco 1 will make a USD functional currency election under paragraph 261(3)(b) within 60 days from its incorporation.

16. As soon as possible in XXXXXXXXXX, Parent will incorporate Newco 2 under the CBCA and subscribe for and acquire common shares of Newco 2 for $XXXXXXXXXX USD. Newco 2 will be a taxable Canadian corporation. The taxation year of Newco 2 will end on XXXXXXXXXX. Newco 2 will not carry on any business and its activities will be limited to investing the proceeds from the Newco 2 Loan in the Newco 1 Preferred Shares. The authorized capital of Newco 2 will consist of common shares denominated in USD.

17. Newco 2 will make a USD functional currency election under paragraph 261(3)(b) within 60 days from its incorporation.

18. Parent will borrow approximately $XXXXXXXXXX USD on a day-light loan basis (the “Daylight Loan”) from a third party bank. The amount borrowed by Parent will not exceed its borrowing capacity on a consolidated basis and the financial tests required to be met under its debt covenants will continue to be respected.

19. Parent will use the total proceeds of the Daylight Loan to make a loan of $XXXXXXXXXX USD to Newco 2 (the “Newco 2 Loan”), which will bear interest at an annual rate based on market conditions at the time the loan is granted and which will be considered by Parent to be a reasonable commercial rate in these circumstances. The interest rate is estimated to be approximately XXXXXXXXXX%. The Newco 2 Loan will be payable on demand. The interest on the Newco 2 Loan will be paid annually.

20. Newco 2 will use the total proceeds received from the Newco 2 Loan to subscribe for Newco 1 Preferred Shares having an aggregate redemption/retraction price equal to the total subscription proceeds. The paid-up capital and the FMV of the Newco 1 Preferred Shares will be $XXXXXXXXXX USD. Newco 2 will be entitled to cumulative dividends on the Newco 1 Preferred Shares calculated daily by reference to the redemption / retraction price of the Newco 1 Preferred Shares. The dividend rate on the Newco 1 Preferred Shares will be equal to the interest rate on the Newco 2 Loan plus a spread of XXXXXXXXXX%.

21. Newco 1 will use the total proceeds received from the Newco 1 Preferred Shares subscription to make a non-interest bearing loan to Parent in an amount equal to $XXXXXXXXXX USD (the “Parent Loan”). The Parent Loan will be payable on demand.

22. Parent will use the total proceeds received from the Parent Loan to repay the Daylight Loan.

Maintenance of the Loss Utilization Arrangement

23. While the Newco 2 Loan is outstanding, the following will occur on the day when the unwinding transactions described in Paragraph 24 will be implemented:

a) Parent will make a contribution of capital to Newco 1 in an amount equal to the dividend payable by Newco 1 on the Newco 1 Preferred Shares held by Newco 2 at that time. 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 the contribution of capital will be recorded as contributed surplus for accounting purposes. The contribution of capital will not be income of Newco 1 pursuant to IFRS.

b) Upon receipt of the contribution of capital described above, Newco 1 will use the amounts received to pay dividends to Newco 2 equal to the amount of the dividend payable on the Newco 1 Preferred Shares.

c) Newco 2 will pay to Parent the interest due pursuant to the terms of the Newco 2 Loan.

Unwind of the Loss Utilization Arrangement

24. On or before XXXXXXXXXX the following transactions will occur in order to unwind the loss consolidation arrangement:

a) Parent will borrow approximately $XXXXXXXXXX USD on a day-light loan basis (the “New Daylight Loan”) from a third party bank. The amount borrowed by Parent will be based on, and will not exceed its borrowing capacity on a consolidated basis and the financial tests required to be met under its debt covenants will continue to be respected.

b) Parent will use the total proceeds of the New Daylight Loan to repay the Parent Loan owing to Newco 1.

c) Newco 1 will use the proceeds of the repayment of the Parent Loan to redeem the Newco 1 Preferred Shares held by Newco 2.

d) Newco 2 will use the proceeds from the redemption of the Newco 1 Preferred Shares to repay the Newco 2 Loan to Parent.

e) Parent will use the amount received on the repayment of the Newco 2 Loan to repay the New Daylight Loan.

f) Parent and Amalco will enter into an agreement whereby Parent will sell all of its shares of Newco 2 to Amalco in consideration for FMV.

g) In XXXXXXXXXX, Amalco as sole shareholder of Newco 2, will pass a resolution authorizing and requiring Newco 2 to be wound-up into Amalco. As a consequence, Newco 2’s assets will be distributed to Amalco and its liabilities, if any, will be assumed by Amalco. Newco 2 will be dissolved within a short period of time.

25. The above transactions described in Paragraphs 16 to 24 above will be repeated in years XXXXXXXXXX.

26. It is expected that Newco 2 will be formally dissolved before the end of the first taxation year of Amalco beginning after the commencement of the winding-up of Newco 2.

27. After the transactions described in Paragraph 24 will have been completed for XXXXXXXXXX, Parent as sole shareholder of Newco 1, will pass a resolution authorizing and requiring Newco 1 to be wound-up into Parent. As a consequence, Newco 1’s assets, if any, will be distributed to Parent and its liabilities, if any, will be assumed by Parent. Newco 1 will be dissolved within a short period of time.

OTHER REPRESENTATIONS

28. Parent, Canco 1 and Canco 2 are affiliated persons and are related to each other and will continue to be affiliated and related to each other throughout the period that the Loss Utilization Arrangement is in place.

29. There have not been any acquisitions of control related to Parent or any of its subsidiaries such that subsection 111(5) might apply to some or all of the losses that are the subject of the Ruling Request.

30. It is expected that for the taxation years ending XXXXXXXXXX, Amalco will earn income in excess of the interest expense arising in Amalco as a result of the Proposed Transactions.

31. During the time that the Loss Utilization Arrangement remains in place:

a) Newco 1 will have the financial capacity to satisfy the applicable solvency test required to pay the dividends on the Newco 1 Preferred Shares; and

b) Newco 1 will have the financial capacity to satisfy the applicable solvency test required to redeem the Newco 1 Preferred Shares.

32. Dividends paid on the Newco 1 Preferred Shares will have no other purpose other than those described under the heading “Purposes of the Proposed Transactions”.

33. The Proposed Transactions are not being undertaken to facilitate the use of any non-capital losses of Parent or Canco 1 that would otherwise have expired.

34. The interest rate on the Newco 2 Loan is a commercial rate and the terms of the Newco 2 Loan are arm’s length terms.

35. At no time during the implementation of the Loss Utilization Arrangement will the Newco 1 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 (nor will Newco 2 receive any other property, directly or indirectly, from an investor or any property substituted therefor) 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 would be related to Lossco (if the Act were read without reference to paragraph 251(5)(b)); or

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

36. Each of the corporations involved in the Proposed Transactions is a “specified financial institution” as defined under subsection 248(1) XXXXXXXXXX. However, none of the Newco 1 Preferred Shares will be acquired by Newco 2 in the ordinary course of its business.

37. Neither Parent nor Amalco will claim, at any time, a capital loss in respect of a disposition of any common or preferred shares of Newco 1 or Newco 2. Newco 2 will not claim, at any time, a capital loss in respect of a disposition of any Newco 1 Preferred Shares.

38. Parentco, Canco 1 and Canco 2 are not financial institutions as defined under subsection 190(1), for purposes of Part VI tax.

39. At the time that Holdco NR contributes the shares of Canco 1 to Subco NR as described in Paragraph 10, the shares of Canco 1 will not be taxable Canadian property. Parent will include in its income any foreign accrual property income that arises in respect of Holdco NR in respect of its disposition of the Canco 1 shares.

40. Newco 1, Newco 2, Canco 1, Canco 2, and Amalco are not investment corporations, mortgage investment corporations or mutual fund corporations.

41. For financial accounting purposes, Amalco’s functional currency must be XXXXXXXXXX. Amalco will not independently report its financial results externally other than for Canadian tax purposes. The financial statements presented to and approved by the Board of Directors of Amalco will be denominated in XXXXXXXXXX.

42. The legal paid-up capital of the shares of entities in Group A held by Amalco is mainly denominated in CAD. It is intended that Amalco will own these shares indefinitely and there is no intention to transfer these shares. Accordingly, the foreign exchange risk is viewed as negligible. In addition, it is uncertain whether it would be possible to transfer these shares to a corporation in Group A on a tax-deferred basis.

43. Parent currently has sources of income, independent from Newco 2, to fund capital contributions required under the Proposed Transactions.

44. The Proposed Transactions will be legally effective.

PURPOSES OF THE PROPOSED TRANSACTIONS

45. The purposes of the Pre-Implementation Transactions are:

a. to relocate the Group A Treasury Activities to Canada in order to reduce administrative costs and allow for more efficient transfers of funds;

b. to report in XXXXXXXXXX, for Canadian income tax purposes, the income of Amalco from the Group A Treasury Activities, in order to align the income tax reporting currency of Amalco with its financial accounting functional currency and thus avoid the administrative burden of translating Amalco’s income into CAD;

c. to utilize the non-capital losses incurred in previous taxation years by Canco 1 to reduce the future taxable income of Amalco from the Group A Treasury Activities (it is anticipated that Amalco will fully utilize the Canco 1 non-capital losses over a XXXXXXXXXX period);

d. to combine the existing paid-up capital in Canco 1 with the Group A Treasury Activities, in order to ensure loans from foreign affiliates of the Parent Group that arise as part of the Group A Treasury Activities will not cause subsection 18(4) to apply; and

e. for Amalco to acquire and maintain indefinite ownership of the shares of Group A entities held by Canco 1, in order to defer the taxation of any accrued gains in respect of those shares.

46. The purpose of the Loss Utilization Arrangement is to utilize the non-capital losses incurred in previous taxation years of Parent, in order to reduce the future taxable income of Amalco from the Group A Treasury Activities.

47. The purpose of the Loss Utilization Arrangement is not to shift income between provinces and any such shift of income between provinces will be incidental to the Proposed Transactions.

48. The purpose of both the payment and the receipt of the dividends on the Newco 1 Preferred Shares is to provide a reasonable return on the Newco 1 Preferred Shares and to fund the interest payments made by Newco 2 that will be due on the Newco 2 Loan. Furthermore, none of the purposes of the dividends is to effect a reduction in the fair market value or capital gain of any share or to increase the total cost amounts of properties of Newco 2.

49. None of the main purposes of the Proposed Transactions is to change, or to enable the changing of, the currency in which the Canadian tax results of any property for a taxation year would otherwise be determined.

RULINGS

Provided that

a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and the Purpose 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 Newco 2 has a legal obligation to pay interest on the Newco 2 Loan, and that Newco 2 continues to hold the Newco 1 Preferred Shares for the purpose of gaining or producing income, Newco 2 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 Newco 2 in computing its income for purposes of the Act) in respect of the year on the Newco 2 Loan, or (ii) a reasonable amount in respect thereof.

B. Dividends received by Newco 2 on the Newco 1 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 Newco 2 for the year in which the dividends are received by Newco 2 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).

C. No amount will be included in the income of Newco 1 pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) in respect of the capital contributions to be made by Parent as described in Paragraph 23(a).

D. Subsection 88(1) will apply to the wind-up of Newco 2 into Amalco and to Newco 1 into Parent. Provided that the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply after the wind-up of Newco 2 into Amalco, described in Paragraph 24(g), has been completed to permit Amalco to deduct the non-capital losses of Newco 2 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.

E. Part IV.1 and Part VI.1 will not apply to the dividends described in Ruling B because the dividends will be excepted dividends and excluded dividends.

F. 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.

G. Provided the appropriate respective elections are filed in prescribed form and manner within the prescribed time specified in subsection 261(3) and that the other conditions of that provision are met, subsection 261(5) will apply to Newco 1 and Newco 2 in respect of each respective corporation’s first taxation year, provided that USD remains the primary currency in which each maintains its records and books of account for financial reporting purposes throughout that taxation year.

H. Subparagraph 261(16)(b)(ii) will apply to Newco 2 such that:

i. Newco 2 will be deemed to have filed, six months and one day before its taxation year that includes the commencement of its winding up into Amalco (the “commencement time”), described in Paragraph 24(g), in prescribed form and manner, a notice of revocation under subsection 261(4);

ii. Newco 2’s first reversionary year will be deemed to have ended at the particular time that is immediately after the time at which it began;

iii. a new taxation year of Newco 2 will be deemed to have begun immediately after the particular time;

iv. notwithstanding subsection 261(3), subsection 261(5) will be deemed to apply to Newco 2 in respect of its taxation year that includes the commencement time and each of its subsequent taxation years, if any; and

v. Newco 2 will be deemed to have as its elected functional currency Amalco’s tax reporting currency.

I. Subsection 261(18) will not apply in respect of Parent, Newco 1, Newco 2, Canco 1, Canco 2, XXXXXXXXXX, or Amalco as the result of the Proposed Transactions, in and by themselves.

J. Provided that the only purpose of the payment and receipt of the dividends on the Newco 1 Preferred Shares is as described in the “Purposes of the Proposed Transactions” above, the provisions of subsection 55(2) will not apply to the dividends, if any, referred to in Ruling B, and received by Newco 2 on the Newco 1 Preferred Shares.

K. Subsection 245(2) will not apply 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 70-6R9 dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions described in Paragraphs 13 to 22 above are commenced and entered into on or before XXXXXXXXXX, and the Proposed Transactions described in Paragraphs 23 to 27 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