2021 Ruling 2020-0870761R3 - Standard 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: Standard Loss Consolidation Ruling.

Position: See below.

Reasons: See below.

XXXXXXXXXX
									2020-087076

XXXXXXXXXX, 2021

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request

XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, as amended by letters dated 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);

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

XXXXXXXXXX;

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

“Capco” means XXXXXXXXXX, the corporation described in Paragraph 17;

“Capco Capitalization” means the contribution of capital described in Paragraph 26(c)(ii);

“Capco Common Shares” means the common shares of Capco described in Paragraph 17;

“CRA” means Canada Revenue Agency;

“Daylight Loan” means a loan made by a third party financial institution to Lossco, as described in Paragraph 20;

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

“Eco” means XXXXXXXXXX, the corporation described in Paragraph 7;

“eligible refundable dividend tax on hand” has the meaning assigned by subsection 129(4);

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

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

“FMV” or “fair market value” means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act, expressed in terms of cash;

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

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

“IB Loan” means, in the singular, the interest bearing loan made by Lossco to NewLossco described in Paragraph 21 and, in the plural, all of the IB Loans resulting from the transactions described in Paragraph 24;

“IB Note” means the promissory note described in Paragraph 24(a);

“Implementation Date” means a date following the time where all proper internal authorizations of the Taxpayer are received, that is anticipated to be in XXXXXXXXXX, or a few months thereafter;

“Lossco” means XXXXXXXXXX, the corporation described in Paragraph 8;

“Loss Consolidation Arrangement” means the transactions described in Paragraphs 12 to 27;

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

“Newco Class A Common Shares” means the Class A common shares of Newco described in Paragraph 14;

“Newco Class B Common Shares” means the Class B common shares of Newco described in Paragraph 14;

“Newco Loan” means the loan described in Paragraph 26(c)(i);

“Newco Preferred Shares” means the preferred shares of Newco described in Paragraph 14;

“NewLossco” means XXXXXXXXXX, the corporation described in Paragraph 12;

“NewLossco Common Shares” means the common shares of NewLossco described in Paragraph 12;

“NIB Loan” means, in the singular, the non-interest bearing loan described in Paragraph 23 and in the plural, all of the NIB Loans resulting from the transactions described in Paragraph 24;

“NIB Note” means the demand non-interest bearing promissory note described in Paragraph 24(c);

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

“non-eligible refundable dividend tax on hand” has the meaning assigned by subsection 129(4);

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

“Paragraph” means a numbered paragraph in this letter;

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

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

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

“Proposed Transactions” means the transactions described in Paragraphs 12 to 29;

“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);

“stated capital” means the amount of capital determined in respect of a class or series of shares in accordance with the governing legislation of the corporation;

“Support Agreement” means the agreement described in Paragraph 26;

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

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

“Taxpayers” mean the entities described on page 1 of this letter;

“Ultimate XXXXXXXXXX Parent” means XXXXXXXXXX, the corporation described in Paragraph 1; and

“XXXXXXXXXX Parent” means XXXXXXXXXX, the corporation described in Paragraph 6.

FACTS

1. Ultimate XXXXXXXXXX Parent is a non-resident corporation resident in the XXXXXXXXXX, the common shares of which are widely held and listed on the XXXXXXXXXX under the symbol “XXXXXXXXXX”. Ultimate XXXXXXXXXX Parent’s market capitalization was approximately XXXXXXXXXX on XXXXXXXXXX.

2. Canadian Parent is a taxable Canadian corporation and a public corporation, the common shares of which are listed on the XXXXXXXXXX under the symbol “XXXXXXXXXX”. Ultimate XXXXXXXXXX Parent holds XXXXXXXXXX% of Canadian Parent’s common shares. Canadian Parent’s remaining common shares are widely held. Canadian Parent’s business number is XXXXXXXXXX and its market capitalization was approximately $XXXXXXXXXX on XXXXXXXXXX.

3. Profitco is a taxable Canadian corporation and a wholly owned subsidiary of Canadian Parent. Profitco’s principal business activities are XXXXXXXXXX. Profitco has a taxation year-end of XXXXXXXXXX. Profitco’s registered address is XXXXXXXXXX. Profitco files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office.

4. Profitco operates through permanent establishments in a number of provincial and territorial jurisdictions. The provincial allocation for Profitco’s XXXXXXXXXX taxation year was approximately as follows:

XXXXXXXXXX

5. As at Profitco’s taxation year ending XXXXXXXXXX, Profitco has a loss carry forward balance of approximately $XXXXXXXXXX, and expects to incur additional losses of approximately $XXXXXXXXXX in its taxation year ending in XXXXXXXXXX Profitco expects to earn sufficient taxable income from XXXXXXXXXX to apply its non-capital losses as well as the non-capital losses generated as part of the Proposed Transactions. In particular, Profitco’s forecasted net income for tax purposes for taxation years ending in XXXXXXXXXX are as follows:

XXXXXXXXXX

6. XXXXXXXXXX Parent is a non-resident corporation resident in XXXXXXXXXX and an indirect wholly owned subsidiary of Ultimate XXXXXXXXXX Parent.

7. Eco is a taxable Canadian corporation and a wholly owned subsidiary of XXXXXXXXXX Parent.

8. Lossco is a taxable Canadian corporation, the principal business activity of which is XXXXXXXXXX. XXXXXXXXXX Parent and Eco collectively hold all of the issued and outstanding shares of Lossco. Lossco has a taxation year-end of XXXXXXXXXX. Lossco’s registered address is XXXXXXXXXX. Lossco files its return with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office.

9. Lossco operates through permanent establishments in a number of provincial and territorial jurisdictions. The provincial allocation for Lossco’s XXXXXXXXXX taxation year was approximately as follows:

10. Lossco has unexpired non-capital losses available to be carried forward of approximately $XXXXXXXXXX as at its taxation year ended XXXXXXXXXX. These losses originate from XXXXXXXXXX. The breakdown of these losses is as follows:

11. It is anticipated that XXXXXXXXXX, will cause Lossco to incur additional losses in XXXXXXXXXX. Lossco anticipates earning taxable income in XXXXXXXXXX, which it will offset with existing non-capital losses. Lossco’s forecasted net income /loss for tax purposes for the next XXXXXXXXXX taxation years is as follows:

PROPOSED TRANSACTIONS

Pre-Implementation Transactions

Following the receipt by the CRA of the request of the Taxpayers for an Advance Income Tax Ruling, the following transactions that had been proposed to take place were undertaken and executed on XXXXXXXXXX:

12. Lossco incorporated NewLossco under the XXXXXXXXXX. NewLossco is a private corporation and a taxable Canadian corporation. The taxation year-end of NewLossco is XXXXXXXXXX. NewLossco’s share capital includes an unlimited number of common shares (“NewLossco Common Shares”). NewLossco will not carry on any business and its activities are limited to investing the proceeds of the IB Loans received from Lossco in the Newco Preferred Shares.

13. Lossco subscribed for NewLossco Common Shares for nominal consideration.

14. Lossco incorporated Newco under the XXXXXXXXXX. Newco is a private corporation and a taxable Canadian corporation. The taxation year-end of Newco is December 31. Newco’s share capital includes an unlimited number of Class A common shares (“Newco Class A Common Shares”), an unlimited number of Class B common shares (“Newco Class B Common Shares”) and an unlimited number of preferred shares (“Newco Preferred Shares”). Newco will not carry on any business and its activities are limited to investing the proceeds received from the subscription for Newco Preferred Shares in the NIB Note.

15. The Newco Preferred Shares have the following attributes:

a. non-voting;

b. non-participating;

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

d. entitlement to a cumulative dividend, calculated daily and accruing by reference to the redemption amount of the Newco Preferred Shares, at a rate which is equal to the interest rate provided under the IB Note for the IB Loans, plus XXXXXXXXXX% per annum.

16. Lossco subscribed for Newco Class A Common Shares for nominal consideration.

17. Lossco incorporated Capco under the XXXXXXXXXX. Capco is a private corporation and a taxable Canadian corporation. The taxation year-end of Capco is XXXXXXXXXX. Capco’s share capital includes an unlimited number of common shares (“Capco Common Shares”). Capco will not carry on any business and its activities are limited to using all of the proceeds received from the Capco Common Share issuances to subscribe for and hold the Newco Class B Common Shares.

18. Lossco subscribed for Capco Common Shares for nominal consideration.

Implementation of the Loss Consolidation Arrangement

19. The steps described in Paragraphs 20 to 25 below are expected to occur on the same day (the “Implementation Date”).

20. Lossco will borrow $XXXXXXXXXX from an arm’s length financial institution by way of a daylight overdraft loan agreement (the “Daylight Loan”) on arm’s length commercial terms customary for this type of loan.

21. Lossco will use the proceeds received from the Daylight Loan to make an interest bearing loan to NewLossco under the terms described in Paragraph 24(a)(i) to (iv) (each an “IB Loan”).

22. NewLossco will use all of the proceeds received from the IB Loan to subscribe for Newco Preferred Shares having an issue price equal to the amount of such borrowing. The aggregate Redemption Amount, FMV and stated capital of the Newco Preferred Shares issued will be equal to the aggregate subscription price of the Newco Preferred Shares at the time of issuance.

23. Newco will use all of the proceeds received from the issuance of Newco Preferred Shares to make a non-interest bearing demand loan to Lossco (each a “NIB Loan”).

24. The transactions described in Paragraphs 20 to 23 will be repeated an additional XXXXXXXXXX times, such that once such transactions are completed:

a. The aggregate amount of the IB Loans made to NewLossco will equal $XXXXXXXXXX, which loans will be aggregated in a promissory note issued by NewLossco with a principal amount of $XXXXXXXXXX and having the following terms and conditions (the “IB Note”):

i. Simple interest will accrue on the principal amount due under the IB Note and will be calculated daily at an annual fixed rate equal to an estimated arm’s length rate, presently estimated to be XXXXXXXXXX% per annum. The interest on the principal amount due under the IB Note will be paid on or before the earlier of: (a) the end of NewLossco’s second taxation year following the taxation year in which NewLossco incurred interest on the principal amount due under the IB Note and (b) immediately before the transaction described in Paragraph 28;

ii. Lossco’s recourse against NewLossco to obtain repayment of the amounts due under the IB Note will be limited to the Newco Preferred Shares owned by NewLossco;

iii. The IB Note will provide NewLossco with a right to prepay the principal amount and any interest that may have accrued at any time without penalty; and

iv. The IB Note will provide Lossco with the right to demand the repayment of the principal amount and any interest that may have accrued at any time without penalty;

b. The aggregate number of Newco Preferred Shares issued will have an aggregate Redemption Amount and FMV of $XXXXXXXXXX at the time of issuance; and

c. The aggregate NIB Loans under Paragraph 23 will equal $XXXXXXXXXX, which loans will be aggregated in a promissory note issued by Lossco with a principal amount of $XXXXXXXXXX (“NIB Note”). The NIB Note will provide Lossco with a right to prepay the principal amount at any time without penalty.

25. Lossco will use all of the proceeds received from the last NIB Loan to repay the Daylight Loan in full to the arm’s length financial institution.

Maintenance

26. The following transactions will occur immediately before the transaction in Paragraph 28, in immediate sequence when jointly determined by Lossco, NewLossco, Capco and Newco:

a. In accordance with an agreement entered into by Lossco, Capco and Newco in advance of the implementation of the transactions described in Paragraphs 19 to 25 (the “Support Agreement”), Lossco will acquire additional Capco Common Shares for an amount equal to the Capco Capitalization described in Paragraph 26(c)(ii) and the nominal consideration required to acquire Newco Class B Common Shares, as described in Paragraph 26(b).

b. Capco will subscribe for Newco Class B Common shares for nominal consideration.

c. In accordance with the Support Agreement, Lossco will make a loan to Newco, and Capco will make a contribution of capital to Newco, which loan and contribution will be in an aggregate amount that is at least sufficient to satisfy any accrued and unpaid dividends on the Newco Preferred Shares, as follows:

i. Lossco will make a non-interest bearing demand loan to Newco (the “Newco Loan”) with a principal amount and FMV equal to the FMV of the Newco Class A Common Shares at the time of the disposition of those shares by Lossco to Profitco, minus an amount equal to the aggregate ACB of the Newco Class A Common Shares and the NewLossco Common Shares at the time the Newco Loan is made. Pursuant to the terms of the Newco Loan, Lossco will have a right to demand the repayment of the principal amount of the Newco Loan at any time without penalty, and Newco will be required to provide notice to Lossco if any of Newco’s shareholders have requested their shares be repurchased by Newco. The ACB of the Newco Loan will be equal to the principal amount of the Newco Loan at the time the Newco Loan is made.

ii. Capco will make a contribution of capital to Newco equal to the accrued and unpaid dividends on the Newco Preferred Shares minus the principal amount of the Newco Loan (“Capco Capitalization”). 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, or for greater certainty, to the paid-up capital of any class of shares of Newco. For accounting purposes, the amount of the contributions of capital will be recorded as contributed surplus. The contributions of capital will not be income to Newco pursuant to XXXXXXXXXX.

d. Newco will reduce the stated capital of the Newco Preferred Shares by an amount equal to the Newco Loan without payment to the holder of Newco Preferred Shares. For accounting purposes, the amount of the reduction of stated capital will be recorded as contributed surplus.

e. Using the proceeds of the Capco Capitalization and the Newco Loan, Newco will pay to NewLossco the accrued and unpaid dividends on the Newco Preferred Shares.

f. Newco will increase the stated capital of the Newco Preferred Shares by converting contributed surplus into stated capital, in an amount equal to the reduction of stated capital described in Paragraph 26(d).

g. NewLossco will pay to Lossco the accrued and unpaid interest on the principal amount due under the IB Note. NewLossco will only incur nominal annual expenses other than interest expense on the IB Loans.

27. At the time of the steps described in Paragraph 26, Lossco will have the financial capacity, including accessing its leverage capacity, to finance the steps in Paragraph 26.

Unwind of the Loss Consolidation Arrangement

28. On or before XXXXXXXXXX from the Implementation Date, and immediately following the completion of the steps described in Paragraph 26, the structure will be unwound in the following manner:

a. Lossco will transfer all of its NewLossco Common Shares to Newco for consideration consisting of Newco Class A Common Shares. The FMV of the newly issued Newco Class A Common Shares will be equal to the FMV of the NewLossco Common Shares transferred. Lossco and Newco will jointly elect in prescribed form and within the time limit referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the NewLossco Common Shares transferred will be the lesser of the fair market value of those shares and the ACB of those shares. Newco will add an amount to the stated capital of the Newco Class A Common Shares equal to the elected amount. For greater certainty, the increase to the PUC of the Newco Class A Common Shares will not exceed the maximum amount that could be added to the PUC of such shares, having regarding to subsection 85(2.1).

b. Newco will redeem all of the Newco Preferred Shares held by NewLossco for an amount equal to their aggregate Redemption Amount, which is equal to their FMV.

c. As payment of the Redemption Amount for the redemption of the Newco Preferred Shares, Newco will transfer and assign the NIB Note to NewLossco which, for greater certainty, will have a principal amount equal to the aggregate Redemption Amount payable. NewLossco will accept the NIB Note in full payment of the Redemption Amount.

d. Each of Lossco and NewLossco will agree that the IB Note will be set-off against the NIB Note and its obligations thereunder will be satisfied and extinguished in full.

e. Newco will repurchase for cancellation the Newco Class B Common Shares held by Capco for an amount equal to their FMV. For greater certainty, the capital loss realized by Capco on the repurchase of the Newco Class B Common Shares will be deemed nil under subsection 40(3.6).

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

g. Newco will repay the full amount due under the Newco Loan by issuing additional Newco Class A Common Shares to Lossco as consideration. For greater certainty, the FMV of the newly issued Newco Class A Common Shares will be equal to the principal amount and FMV of the Newco Loan.

29. On or before XXXXXXXXXX of the calendar year that follows the year in which the steps in Paragraph 28 are completed:

a. Lossco will transfer its Newco Class A Common Shares to Profitco for consideration consisting of cash at a purchase price equal to the FMV of such shares.

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

c. Immediately following the commencement of the wind-up of Newco, Profitco, as sole shareholder of NewLossco, will pass a resolution authorizing and requiring NewLossco to be wound up into Profitco pursuant to subsection 88(1). Effective as of the making of such resolution, NewLossco’s assets will be transferred to Profitco and Profitco will assume NewLossco’s liabilities. It is expected that NewLossco will be formally dissolved before the end of the first taxation year of Profitco commencing after the commencement of the winding-up of NewLossco.

ADDITIONAL INFORMATION

30. Ultimate XXXXXXXXXX Parent, Canadian Parent, Profitco, XXXXXXXXXX Parent, Eco, Lossco, Newco Capco and NewLossco will be, at all relevant times, related persons and affiliated persons for the purposes of the Act. The Loss Consolidation Arrangement will be unwound in the manner described in Paragraphs 28 and 29 of the Proposed Transactions if any entity previously mentioned in this Paragraph ceases to be affiliated and/or related.

31. None of the entities described in this letter have been subject to an acquisition of control and no such acquisitions are anticipated in the future.

32. An officer of Ultimate XXXXXXXXXX Parent has provided a letter indicating that, based on its financial strength and various ratios, Ultimate XXXXXXXXXX Parent has the capacity to borrow an additional $XXXXXXXXXX.

33. The interest rate on the IB Note is a commercial rate, and the terms of the IB Note are commercial terms.

34. Profitco anticipates generating taxable income in its XXXXXXXXXX taxation year and in each of its subsequent XXXXXXXXXX taxation years. Profitco’s forecasted taxable income is expected to exceed the non-capital losses that are expected to be generated in NewLossco from the Proposed Transactions.

35. Lossco will undertake steps to ensure that the interest income earned by Lossco under the Proposed Transactions will not exceed an amount that could be fully sheltered with Lossco’s non-capital losses.

36. NewLossco will be a specified financial institution. However, NewLossco will not acquire or be considered to have acquired the Newco Preferred Shares in the ordinary course of its business.

37. At no time during the implementation of the Proposed Transactions will the Newco 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), other than an obligation of a corporation that is related (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).

38. The dividends to be paid by Newco and received by NewLossco on the Newco Preferred Shares, as described in Paragraph 26(e), have no purpose other than the purposes described under the heading “Purposes of the Proposed Transactions”.

39. NewLossco will not be a “financial intermediary corporation” as that term is defined in subsection 191(1).

40. The Newco Preferred Shares will be taxable preferred shares. However, dividends received by NewLossco on the Newco Preferred Shares, as described in Paragraph 26(e), will be excepted dividends within the meaning assigned by section 187.1 and excluded dividends within the meaning assigned by subsection 191(1).

41. At the relevant times:

a. Newco will have the financial capacity to satisfy the applicable solvency test and liquidity test under corporate law to pay the dividends on the Newco Preferred Shares described in Paragraph 26(e), and to redeem the Newco Preferred Shares as described in Paragraph 28(b).

b. NewLossco will have the solvency and liquidity to service the amounts due under the IB Note as described in Paragraph 26(g).

42. The ACB of the Newco Class A Common Shares issued on the repayment of the Newco Loan will be equal to the fair market value of the Newco Loan.

43. None of the entities described in this Ruling Request will, at any time, claim a capital loss in respect of its investment in Newco, NewLossco or Capco.

44. In support of Ruling K as it applies with regard to the transactions described in Paragraphs 28(a) and 29(a) above, as part of the series of transactions or events that includes any of the Proposed Transactions, there will not be:

a. a disposition of property described in subparagraphs 55(3)(a)(i), (iii) or (iv); or

b. a significant increase in interest described in subparagraphs 55(3)(a)(ii) to (v).

45. Lossco will use the cash received on the sale of the Newco shares to Profitco described in Paragraph 29(a) for general operating activities.

46. Profitco and Lossco are not financial institutions as defined under subsection 190(1) for purposes of Part VI tax.

47. The Proposed Transactions will be legally effective.

PURPOSE OF THE PROPOSED TRANSACTIONS

48. The Proposed Transactions will enable Lossco to earn interest income on the IB Note and thus will enable Lossco to effectively utilize its non-capital losses already incurred and the non-capital losses that are otherwise anticipated to be incurred in taxation years covered by the present ruling request and to permit Profitco to effectively utilize such non-capital losses.

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

50. The purpose of both the payment and the receipt of the dividends on each of the Newco Preferred Shares, is to provide a reasonable return on the Newco Preferred Shares issued by Newco to NewLossco and to fund the interest payments by NewLossco on the IB Note. Furthermore, the purpose of the dividends is not to reduce the fair market value or capital gain of any share, nor to increase the total cost amounts of properties of NewLossco.

51. The reduction of stated capital of the Newco Preferred Shares described in Paragraph 26(d) and the increase in stated capital of the Newco Preferred Shares described in Paragraph 26(f) does not have a tax purpose.

52. 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.

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 as follows:

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

B. 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 contributions of capital made by Capco to Newco pursuant to the Support Agreement, as described in Paragraph 26(b).

C. Dividends received by NewLossco on the Newco Preferred Shares as described above, will be taxable dividends and such dividends will be deductible pursuant to subsection 112(1) in computing the taxable income of NewLossco 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), (2.2), (2.3) or (2.4).

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

E. The provisions of subsection 55(2) will not apply to the dividends received by NewLossco on its Newco Preferred Shares, as described in Paragraph 26(e) above.

F. Provided that the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply after the winding-up of NewLossco into Profitco, as described in Paragraph 29(c), has been completed to permit Profitco to deduct the non-capital losses of NewLossco 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.

G. The settlement of the IB Note and the NIB Note, as described in Paragraph 28(d) will not give rise to any capital gain or any “forgiven amount” for purposes of section 80.

H. The repayment of the Newco Loan, as described in Paragraph 28(g), will not give rise to any capital gain and will not give rise to any “forgiven amount” for purposes of section 80.

I. No deemed dividend under subsection 84(4) will arise on the reduction of the stated capital of the Newco Preferred Shares which is not paid by Newco on the reduction, as described in Paragraph 26(d), nor will a deemed dividend arise under subsection 84(1) on the increase of the stated capital of the Newco Preferred Shares from the conversion of contributed surplus, as described in Paragraph 26(f), provided that the increase does not exceed the amount described in clause 84(1)(c.3)(iii).

J. The provisions of subsections 15(1), 56(2) 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 a province with which the Government of Canada has entered into a tax collection agreement will not be applied, as a result of the Proposed Transactions, in and by themselves, to determine the tax consequences confirmed in the Rulings given above, in respect of a taxation year in respect of which such tax collection agreement is in effect.

The above Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R11 dated April 1, 2021, and are binding on the CRA provided that the Proposed Transactions described in Paragraphs 19 to 25 above are commenced and entered into on or before XXXXXXXXXX, the Proposed Transactions described in Paragraphs 26 to 28 are entered into on or before XXXXXXXXXX, and the Proposed Transactions described in Paragraph 29 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, or the outstanding balance of various tax accounts for any of the corporate entities described herein;

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

c) the reasonableness or fair market value of any fees or expenditures referred to herein;

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

e) Subject to Ruling L, the application or non-application of a general anti-avoidance provision of any province; and

f) any other tax consequence relating to the Facts, Proposed Transactions, or any transaction or event taking place either prior to or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the Ruling(s) given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Yours truly,

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