2020 Ruling 2019-0819971R3 - Loss Consolidation Ruling

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 a particular loss consolidation arrangement is acceptable. In this arrangement, Lossco obtains a daylight loan from a third party bank and uses the proceeds to make an interest bearing loan to NewLossco, which uses the proceeds to invest in preferred shares of Newco. NewLossco will incur a loss carryforward balance which will be made available to Profitco when NewLossco is wound-up into Profitco. The main issues are whether Lossco would be entitled to apply existing non-capital losses against the interest income received on the loan; and whether NewLossco would be entitled to deduct the interest expense paid on the loan and the dividends received on the Newco preferred shares.

Position: Yes.

Reasons: The proposed transactions conform to our requirements for these types of loss consolidation rulings, in this case on the basis that the entities involved are related and affiliated. The proposed transactions would be legally effective and commercially plausible.

XXXXXXXXXX							2019-081997

XXXXXXXXXX, 2020

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;

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

“ACB” means “adjusted cost base” and has the meaning assigned 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);

“agreed amount” means the amount that a transferor and transferee have agreed upon in a joint election under subsection 85(1) in respect of a transfer of eligible property;

“Agreeing Province” means a province that has entered into an agreement with the Government of Canada under which the Government of Canada will collect taxes payable under the income tax statute of that province and will make payments to that province in respect of the taxes so collected;

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

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

“CRA” means Canada Revenue Agency;

“Daylight Loan” means a loan made by an unrelated, arm’s length financial institution to Lossco, as described in Paragraph 11;

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

“eligible property” has the meaning assigned by subsection 85(1.1);

“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;

“financial institution” has the meaning assigned by subsection 190(1);

“financial intermediary corporation” has the meaning assigned by subsection 191(1);

“forgiven amount” has the meaning assigned by subsections 80(1) and 80.01(1);

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

“General Anti-avoidance Provision of an Agreeing Province” means:

(i) British Columbia: Section 68.1, Income Tax Act, R.S.B.C. 1996, c. 215, as amended;

(ii) Manitoba: Section 53.1, Income Tax Act, C.C.S.M. 1988, c. I10, as amended;

(iii) New Brunswick: Section 123, New Brunswick Income Tax Act, S.N.B. 2000, c. N-6.001, as amended;

(iv) Newfoundland: Sections 88 and 88.1, Income Tax Act, 2000, S.N.L. 2000, c. I-1.1, as amended;

(v) Northwest Territories: Section 56.2, Income Tax Act, R.S.N.W.T. 1988, c. I-1, as amended;

(vi) Nova Scotia: Section 80A, Income Tax Act, R.S.N.S., 1989, c. 217, as amended;

(vii) Ontario: Section 110, Taxation Act, 2007, S.O. 2007, C. 11, Sch. A, as amended;

(viii) Prince Edward Island: Section 83, Income Tax Act, R.S.P.E.I. 1988, c. I-1, as amended;

(ix) Saskatchewan: Section 139, Income Tax Act, 2000, S.S. 2000, c. I-2.01, as amended; and

(x) Yukon: Section 61, Income Tax Act, R.S.Y. 2002, c. 118, as amended;

“guarantee agreement” has the meaning assigned by subsection 112(2.2);

“IB Loan” means the interest bearing loan made by Lossco to NewLossco, as described in Paragraph 12;

XXXXXXXXXX;

XXXXXXXXXX;

“Lossco” means XXXXXXXXXX;

“Loss Consolidation Arrangement” means the transactions described in Paragraphs 7 to 16.

“Newco” is a corporation to be incorporated under the XXXXXXXXXX, as described in Paragraph 9;

“Newco Common Shares” means the common shares of Newco described in Paragraph 9;

“Newco Note” means the non-interest bearing promissory note made by Newco to NewLossco, as described in Paragraph 21(b);

“Newco Preferred Shares” means the preferred shares of Newco described in Paragraph 13;

“NewLossco” is a corporation to be incorporated under the XXXXXXXXXX, as described in Paragraph 8;

“NewLossco Common Shares” has the meaning assigned in Paragraph 8;

“NIB Loan” means the non-interest bearing loan made by Newco to Lossco, as described in Paragraph 14;

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

XXXXXXXXXX;

“Old Subco” means XXXXXXXXXX which was wound-up into Lossco on XXXXXXXXXX;

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

“Paragraph” means a numbered paragraph in this letter;

“Parent Group” means XXXXXXXXXX and its direct and indirect subsidiaries;

“principal amount” has the meaning assigned by subsection 248(1);

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

“Profitco” means XXXXXXXXXX;

“Profitco Common Shares” has the meaning assigned in Paragraph 22;

“Proposed Transactions” means the transactions described in Paragraphs 7 to 24;

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

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

“Rulings” means the advance income tax rulings labelled “A” to “L” in this letter;

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

“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 letter;

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

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

“Unwind Year” means the year that the Loss Consolidation Arrangement is unwound, as described in Paragraph 21.

FACTS

1. Lossco is a resident of Canada for purposes of the Act, a taxable Canadian corporation and a widely held publicly traded company. The authorized capital of Lossco consists of an unlimited number of common shares without par value, an unlimited number of non-voting shares without par value and an unlimited number of preferred shares issuable in series that are redeemable without par value. Lossco’s only permanent establishment is in XXXXXXXXXX. Lossco files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Lossco has a XXXXXXXXXX taxation year end.

2. Lossco has a non-capital loss carryforward balance at XXXXXXXXXX of $XXXXXXXXXX, all allocable to its only permanent establishment in XXXXXXXXXX. This amount includes $XXXXXXXXXX from Old Subco, a company that was wound-up into Lossco in XXXXXXXXXX. Lossco’s non-capital loss carryforward balance was generated by year as follows:

       Old Subco		Lossco			Total

XXXXXXXXXX		XXXXXXXXXX		XXXXXXXXXX			XXXXXXXXXX

3. Lossco is expected to incur a loss of $XXXXXXXXXX for the XXXXXXXXXX taxation year and additional annual losses of approximately $XXXXXXXXXX for each taxation year ending in XXXXXXXXXX.

4. Profitco was incorporated under the XXXXXXXXXX and is a taxable Canadian corporation controlled by a public corporation. Profitco is a wholly-owned direct subsidiary of Lossco XXXXXXXXXX. The authorized capital of Profitco consists of an unlimited number of common shares with no par value. At XXXXXXXXXX there were XXXXXXXXXX common shares issued and outstanding, all of which were held by Lossco. Profitco files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office. Profitco has a XXXXXXXXXX taxation year end.

5. Profitco has permanent establishments in XXXXXXXXXX and the provincial allocation of Profitco for the XXXXXXXXXX taxation year is estimated to be as follows:

XXXXXXXXXX

6. Profitco earned taxable income of $XXXXXXXXXX in its XXXXXXXXXX taxation year and $XXXXXXXXXX in its XXXXXXXXXX taxation year. Profitco expects to earn taxable income of approximately $XXXXXXXXXX for its XXXXXXXXXX taxation year, $XXXXXXXXXX for its XXXXXXXXXX taxation year, $XXXXXXXXXX for its XXXXXXXXXX taxation year, and $XXXXXXXXXX for its XXXXXXXXXX taxation year.

PROPOSED TRANSACTIONS

Implementation of the Loss Consolidation Arrangement

7. All the transactions described in Paragraphs 8 to 16 will take place on the same day and in the order described, and within the time limitations specified in this letter.

8. Lossco will incorporate NewLossco. NewLossco will be a taxable Canadian corporation controlled by a public corporation. NewLossco will have a XXXXXXXXXX taxation year end. Lossco will subscribe for common shares of NewLossco on incorporation for $XXXXXXXXXX (the “NewLossco Common Shares”). Lossco will hold the NewLossco Common Shares as capital property. NewLossco will not carry on any business and its activities will be limited to investing the loan proceeds received from Lossco, as described in Paragraph 12, in the Newco Preferred Shares, as described in Paragraph 13. NewLossco will not be a financial intermediary corporation. NewLossco will be a subsidiary wholly-owned corporation of Lossco.

9. Lossco will incorporate Newco. Newco will be a taxable Canadian corporation and will be controlled by a public corporation. Newco will have a XXXXXXXXXX taxation year end. Lossco will subscribe for common shares of Newco on incorporation for $XXXXXXXXXX (the “Newco Common Shares”). Newco will not carry on any business and its activities will be limited to investing the proceeds received on the issuance of the Newco Preferred Shares to NewLossco, as described in Paragraph 13, in a non-interest bearing loan to Lossco, as described in Paragraph 14. Newco will not be a financial intermediary corporation. Newco will be a subsidiary wholly-owned corporation of Lossco.

10. The authorized capital of Newco will consist of two classes of shares, Newco Common Shares and preferred shares (the “Newco Preferred Shares”). Each Newco Preferred Share will be non-voting, redeemable and retractable for the amount at which it was issued. Dividends on the Newco Preferred Shares will accrue at a fixed rate on a daily basis and will be payable each calendar year on the earliest of XXXXXXXXXX and the time at which any Newco Preferred Shares are redeemed or retracted. The dividend rate, expressed as a percentage of the amount for which a Newco Preferred Share is issued, will be equal to the sum of XXXXXXXXXX% plus the interest rate on the IB Loan as defined in Paragraph 12.

11. Lossco will borrow approximately $XXXXXXXXXX from an unrelated, arm’s length financial institution on a daylight loan basis (the “Daylight Loan”). The Daylight Loan will have arm’s length commercial terms customary for this type of loan and will bear interest at approximately XXXXXXXXXX%. The principal amount of the Daylight Loan will not exceed the amount that Lossco could reasonably be expected to borrow from an arm’s length financial institution and will not cause Lossco to contravene any debt covenants. Lossco will fund any fees or costs associated with the Daylight Loan with existing cash or by borrowing from one or more of its affiliates in the Parent Group.

12. Lossco will use the total proceeds received under the Daylight Loan to make an interest bearing loan (the “IB Loan”) to NewLossco. The principal amount will equal the principal amount of the Daylight Loan. The IB Loan will bear interest at an annual rate, based on market conditions at the time the loan is granted, which will not exceed what would be a reasonable commercial rate in these circumstances. The estimated interest on the IB Loan will be XXXXXXXXXX%. Interest on the IB Loan will be payable each calendar year on the earliest of XXXXXXXXXX and the time at which the IB Loan is repaid.

13. NewLossco will use the total proceeds received under the IB Loan to subscribe for Newco Preferred Shares having an aggregate redemption amount and fair market value equal to the total amount of the subscription proceeds. The full amount of the subscription proceeds will be added to the stated capital of the Newco Preferred Shares and will form part of the permanent capital of Newco. The PUC and ACB of each Newco Preferred Share issued will be equal to its redemption amount. The estimated dividend rate on the Newco Preferred Shares will be XXXXXXXXXX%.

14. Newco will use the total proceeds received from the Newco Preferred Share subscription to make a non-interest bearing loan (the “NIB Loan”) to Lossco, the principal amount of which will equal the principal amount of the Daylight Loan.

15. Lossco will use the total proceeds received from the NIB Loan to repay the Daylight Loan.

16. Lossco and Newco will enter into a capital support agreement. The agreement will provide for the contribution of capital by Lossco to Newco in a manner that allows Newco to satisfy its dividend obligations on the Newco Preferred Shares.

Maintenance of the Loss Consolidation Arrangement

17. On XXXXXXXXXX (or another date agreed upon by Lossco, Newco and NewLossco) of each fiscal year until the Loss Consolidation Arrangement is unwound, while the IB Loan is outstanding, Lossco will make a contribution of capital to Newco in an amount equal to the accrued dividends payable, as at that time, on the Newco Preferred Shares. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Newco and, for greater certainty, to the PUC of any class of shares of Newco. For accounting purposes, the amount of the contribution of capital will be recorded as contributed surplus and will not be income of Newco pursuant to International Financial Reporting Standards. Lossco will not, at any time, claim a capital loss in respect of the capital contribution made to Newco.

18. Immediately, upon receipt of the contribution of capital for a particular fiscal year, Newco will pay all dividends on the Newco Preferred Shares that are accrued and unpaid as at that time.

19. Immediately, upon receipt of the payment of the dividends for a particular fiscal year, NewLossco will pay all interest on the IB Loan that is accrued and unpaid as at that time, pursuant to the terms of the IB Loan.

Unwind of the Loss Consolidation Arrangement

20. Lossco will determine the timing of the unwind of the Loss Consolidation Arrangement based on the amount of the losses that have accumulated in NewLossco and the time limitations specified in this letter.

21. The following transactions will occur on or before XXXXXXXXXX, only in the year in which the Loss Consolidation Arrangement will be unwound (the “Unwind Year”):

a. Immediately following the payment of interest described in Paragraph 19, NewLossco will pay a dividend to Lossco on the NewLossco Common Shares held by Lossco equal to the cumulative amount of dividends received on the Newco Preferred Shares from Newco as described in Paragraph 18, less the cumulative amount of interest paid on the IB Loan to Lossco as described in Paragraph 19. Upon payment of the dividend, NewLossco’s assets will consist only of the $XXXXXXXXXX originally contributed by Lossco, as described in Paragraph 8;

b. Newco will redeem the Newco Preferred Shares held by NewLossco in consideration for a non-interest bearing promissory note issued by Newco (the “Newco Note”). The Newco Note will have a principal amount and fair market value equal to the redemption amount and fair market value of the Newco Preferred Shares redeemed;

c. NewLossco will repay the IB Loan by assigning the Newco Note to Lossco in full satisfaction of the amount due under the IB Loan. The IB Loan will be cancelled. Upon repayment of the IB Loan, NewLossco will have no further liabilities; and

d. Newco and Lossco will agree to set off the amount due under the NIB Loan against the amount due under the Newco Note as payment in full. The obligations under the NIB Loan and the Newco Note will be cancelled.

22. Immediately following completion of the transactions described in Paragraph 21, Lossco will transfer all of its NewLossco Common Shares to Profitco in exchange for additional common shares of Profitco (the “Profitco Common Shares”). In particular:

a. NewLossco will be a subsidiary wholly-owned corporation of Profitco.

b. The Profitco Common Shares issued to Lossco by Profitco will have a fair market value equal to the fair market value of the NewLossco Common Shares transferred.

c. Lossco will jointly elect with Profitco, in prescribed form and within the time allowed by subsection 85(6), to have the rules of subsection 85(1) apply to the transfer of the NewLossco Common Shares to Profitco. The agreed amount in respect of the NewLossco Common Shares transferred will be the lesser of the fair market value of the NewLossco Common Shares transferred and $XXXXXXXXXX, being the ACB of the NewLossco Common Shares owned by Lossco. Given that the fair market value of the NewLossco Common Shares will be at least $XXXXXXXXXX, the agreed amount of the NewLossco Common Shares will be $XXXXXXXXXX. The NewLossco Common Shares will be “eligible property” at the time they are transferred to Profitco.

d. Profitco will add to its stated capital account maintained for its common shares the agreed amount of $XXXXXXXXXX, resulting in an increase to the PUC of those shares of $XXXXXXXXXX. For greater certainty, the increase to the PUC of the Profitco Common Shares will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

23. Prior to XXXXXXXXXX of the Unwind Year and following the transfer of the NewLossco Common Shares to Profitco, Profitco as sole shareholder of NewLossco, will pass a resolution authorizing and requiring NewLossco to be wound-up into Profitco. In addition, a general conveyance of the assets of NewLossco and assumption of liabilities of NewLossco will be executed between Profitco and NewLossco. NewLossco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed. The formal dissolution of NewLossco will be completed prior to XXXXXXXXXX of the Unwind Year.

24. Lossco, as sole shareholder of Newco, will pass a resolution authorizing and requiring Newco to be wound-up into Lossco. In addition, a general conveyance of the assets of Newco and assumption of liabilities of Newco will be executed between Lossco and Newco. Newco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.

OTHER REPRESENTATIONS

25. Lossco and Profitco are affiliated persons and related persons. NewLossco and Newco will be affiliated persons and related persons with respect to Lossco, Profitco, and each other. Lossco, Profitco, Newco and NewLossco will be affiliated and related to each other throughout the period that the Loss Consolidation Arrangement is in place.

26. None of the entities described in this letter have been subject to an acquisition of control and no future acquisitions are anticipated. Accordingly, subsection 111(5) does not apply to any of the losses that are the subject of the Rulings requested.

27. The Taxpayers will undertake steps to ensure that Lossco’s income as a result of the Proposed Transactions will not exceed an amount that could be fully sheltered with Lossco’s unused losses.

28. It is expected that for the taxation years ending XXXXXXXXXX, Profitco will earn income in excess of the loss carryforward balance arising in NewLossco as a result of the Proposed Transactions.

29. There is no intention for Profitco to generate a loss carryforward balance as a result of the Proposed Transactions (that cannot be carried back to prior taxation years of Profitco) and the Taxpayers will seek to unwind the Loss Consolidation Arrangement at a time that is intended to prevent any significant loss carryforward balance.

30. Profitco is a specified financial institution. Lossco, NewLossco and Newco will also be specified financial institutions at all material times. The Newco Preferred Shares and NewLossco Common Shares will be term preferred shares. However, the Newco Preferred Shares that will be acquired by NewLossco will not be acquired in the ordinary course of NewLossco’s business. The NewLossco Common Shares that will be acquired by Lossco will not be acquired in the ordinary course of Lossco’s business.

31. At no time during the implementation of the Loss Consolidation Arrangement will the Newco Preferred Shares or the NewLossco Common 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:

ii. an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (if the Act were read without reference to paragraph 251(5)(b)); or

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

32. The principal amount of the Daylight Loan will not exceed the amount that Lossco could reasonably be expected to borrow from an arm’s length financial institution.

33. The interest rate on the IB Loan is a commercial rate and the terms of the IB Loan are arm’s length terms.

34. At the time of the Loss Consolidation Arrangement:

a. Lossco will have the financial capacity to make capital contributions to Newco as described in Paragraphs 16 and 17. Lossco may obtain the funds to make capital contributions to Newco by borrowing from one or more affiliates, or by borrowing from an arm’s length financial institution on a daylight loan basis. Lossco will have the borrowing capacity to borrow the amount of the required capital contributions from an arm’s length financial institution.

b. Newco will have the financial capacity to satisfy the applicable solvency test and liquidity test under the XXXXXXXXXX to pay the dividends on the Newco Preferred Shares described in Paragraph 18 and to redeem the Newco Preferred Shares as described in Paragraph 21(b).

c. NewLossco will have the financial capacity to satisfy the applicable solvency test and liquidity test under the XXXXXXXXXX to pay the dividends on the NewLossco Common Shares described in Paragraph 21(a).

35. Lossco currently has sources of income, independent from NewLossco, to fund capital contributions to Newco as required under the Proposed Transactions.

36. The dividends paid on the Newco Preferred Shares will have no other purpose other than those described under the heading “Purposes of the Proposed Transactions”.

37. The dividends paid on the NewLossco Common Shares will have no other purpose other than those described under the heading “Purposes of the Proposed Transactions”.

38. Lossco will not, at any time, claim a capital loss in respect of its investment in Newco. Lossco will not at any time claim a capital loss in respect of its investment in NewLossco.

39. NewLossco will not, at any time, claim a capital loss in respect of its investment in Newco.

40. Lossco and Profitco are not financial institutions, as defined in subsection 190(1), for purposes of Part VI tax. NewLossco and Newco will not be financial institutions, as defined in subsection 190(1), for purposes of Part VI tax.

41. The Proposed Transactions will be legally effective.

PURPOSES OF THE PROPOSED TRANSACTIONS

42. The purpose of the Proposed Transactions is to effect a tax consolidation of Profitco and Lossco by causing Lossco to earn interest income on the IB Loan, thus permitting Lossco to utilize its non-capital loss carry forward balance, and to have NewLossco incur interest expense to generate a non-capital loss carryforward balance that will be accessed by Profitco when NewLossco is wound-up into Profitco. The purpose of the tax consolidation is not to shift income to a lower rate province. Any shift of income between provinces will be incidental to the Proposed Transactions.

43. The tax attributes of Lossco and Profitco will remain the same except for the transfer of the loss. The Proposed Transactions are not being undertaken to refresh non-capital losses or facilitate the use of such losses in a taxation year after the taxation year in which the losses would have otherwise expired in the hands of Lossco.

44. Due to XXXXXXXXXX, it is not possible to have Lossco make the IB Loan directly to Profitco. Instead, the IB Loan is being made to NewLossco XXXXXXXXXX.

45. The purpose of incorporating Newco is to have Newco issue the Newco Preferred Shares to NewLossco, rather than having Lossco issue preferred shares directly to NewLossco which would result in corporate incest and contravene corporate law constraints.

46. The sole purpose to Newco (as payor) and NewLossco (as recipient) of the payment and receipt of the dividends on the Newco Preferred Shares, as described in Paragraph 18, is to fund the interest payable by NewLossco on the IB Loan such as to provide a reasonable return to NewLossco on the Newco Preferred Shares.

Furthermore, the purpose of the payment and receipt of the dividends on the Newco Preferred Shares owned by NewLossco is not to effect a reduction in the fair market value or capital gain of any share, nor to increase the total cost amounts of properties of NewLossco.

47. The sole purpose to NewLossco (as payor) and to Lossco (as recipient) of the payment and receipt of the dividend on the NewLossco Common Shares, as described in Paragraph 21(a), is to ensure that no surplus assets are transferred to Profitco on the unwind of the Loss Consolidation Arrangement. At the time Lossco transfers all of its NewLossco Common Shares to Profitco, as described in Paragraph 22, NewLossco’s assets will consist only of the $XXXXXXXXXX originally contributed, as described in Paragraph 8.

Furthermore, the purpose of the payment and receipt of the dividend on the NewLossco Common Shares is not to effect a reduction in the fair market value or capital gain of any share, nor to increase the total cost amounts of properties of Lossco.

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. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer, by Lossco, of all of its NewLossco Common Shares to Profitco, as described in Paragraph 22, such that the agreed amount in respect of each transfer of eligible property will be deemed to be Lossco’s proceeds of disposition and Profitco’s cost of such property pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) will not apply to such transfer.

B. Provided that NewLossco has a legal obligation to pay interest on the IB Loan, and that NewLossco continues to hold the Newco Preferred Shares for the purpose of gaining or producing income, NewLossco 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 NewLossco in computing its income for purposes of the Act) in respect of the year on the IB Loan, or (ii) a reasonable amount in respect thereof.

C. No amount will be included in the income of Newco pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) in respect of the capital contributions to be made by Lossco as described in Paragraph 17.

D. Dividends received by NewLossco on the Newco Preferred Shares as described in Paragraph 18, will be taxable dividends and such dividends will, pursuant to subsection 112(1), be deductible in computing the taxable income of NewLossco for the year in which the dividends are received by NewLossco 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. The dividend received by Lossco on its NewLossco Common Shares, as described in Paragraph 21(a), will be a taxable dividend that will be deductible pursuant to subsection 112(1) in computing the taxable income of Lossco for the taxation year in which the dividends are received and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

F. Provided that the only purpose of the payment and receipt of:

a. the dividends on the Newco Preferred Shares, as referred to in Ruling D, is as described in Paragraph 46, and

b. the dividend on the NewLossco Common Shares, as referred to in Ruling E, is as described in Paragraph 47;

and the Proposed Transactions are undertaken in the manner as described above, the provisions of subsection 55(2) will not apply to the dividends referred to in Ruling D, and to the dividend referred to in Ruling E.

G. Provided that the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply, after NewLossco has been wound-up, as described in Paragraph 23, to permit Profitco to deduct the non-capital loss of NewLossco in computing its taxable income under Part I and tax payable under Part IV for any taxation year commencing after the commencement of the winding-up, subject to the limitations in paragraph 88(1.1)(e) and section 111.

H. Part IV.1 and Part VI.1 will not apply to the dividends described in Rulings D and E because the dividends will be excepted dividends and excluded dividends.

I. The settlement of the IB Loan and the Newco Note, as described in Paragraph 21(d) will not give rise to any “forgiven amount” for purposes of section 80.

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

K. 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.

L. The General Anti-avoidance Provision of an Agreeing Province will not be applied, as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the Rulings given above, in respect of a taxation year for which such Province was an Agreeing Province.

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 7 to 16 above are commenced and entered into on or before XXXXXXXXXX, and the Proposed Transactions described in Paragraph 20 to 24 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 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 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