2022 Ruling 2022-0941201R3 - Loss consolidation arrangement

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 can apply existing non-capital losses against interest income received on loans made to Profitcos under a loss consolidation arrangement and whether the Profitcos can deduct the interest payments.

Position: Yes.

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

XXXXXXXXXX									2022-094120

XXXXXXXXXX, 2022

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling – Loss Consolidation Arrangement (2022-094120)
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, as amended XXXXXXXXXX, in which you requested an advance income tax ruling (the “Ruling”) on behalf of the above named taxpayers (the “Taxpayers”). We understand that to the best of your knowledge and that of the Taxpayers, none of the Proposed Transactions or issues involved in this Ruling are the same as, or substantially similar to, transactions or issues that are:

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

(i) being considered by the CRA in connection with such return;

(ii) under objection by the Taxpayers or a related person; or

(iii) the subject of a current or completed court process involving the Taxpayers or a related person; or

(b) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

This letter is based solely on the Facts and Proposed Transactions described below. The documentation submitted with the ruling request does not form part of the Facts and Proposed Transactions, and any references thereto are provided solely for the convenience of the reader.

Unless otherwise stated:

(a) all references to a statute are to the relevant provision of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”);

(b) all references to monetary amounts are in Canadian dollars; and

(c) the singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions will be referred to as follows:

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

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

“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);

XXXXXXXXXX;

“Corporation 1” means XXXXXXXXXX;

“CRA” means Canada Revenue Agency;

“Daylight Advance” means the advance described in Paragraph 21;

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

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

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

“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;

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

XXXXXXXXXX;

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

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

“Lossco IFL 1” means the non-interest bearing loan described in Paragraph 24;

“Lossco IFL 2” means the non-interest bearing loan described in Paragraph 31;

“Lossco IFL 3” means the non-interest bearing loan described in Paragraph 32:

“Newco” means a subsidiary wholly-owned corporation to be formed by Profitco 3 described in Paragraph 17;

“Newco Class A Preferred Shares” means the preferred shares described in Paragraph 19(a);

“Newco Class A Preferred Shares Dividends” means the dividends described in Paragraph 19(a)(iv);

“Newco Class B Preferred Shares” means the preferred shares described in Paragraph 19(b);

“Newco Class B Preferred Shares Dividends” means the dividends described in Paragraph 19(b)(iv);

“Newco Class C Preferred Shares” means the preferred shares described in Paragraph 19(c);

“Newco Class C Preferred Shares Dividends” means the dividends described in Paragraph 19(c)(iv);

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

“Newco Preferred Shares” means the Newco Class A Preferred Shares, Newco Class B Preferred Shares and Newco Class C Preferred Shares described in Paragraphs 19(a), 19(b) and 19(c);

“Newco Preferred Shares Dividends” means the Newco Class A Preferred Shares Dividends, Newco Class B Preferred Shares Dividends and Newco Class C Preferred Shares Dividends;

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

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

“Paragraph” means a numbered paragraph in this letter;

“permanent establishment” has the meaning assigned by subsection 400(2) of the Regulations;

“Profitco 1” means XXXXXXXXXX, the corporation described in Paragraph 6;

“Profitco 1 IBL” means the interest-bearing loan described in Paragraph 27;

“Profitco 2” means XXXXXXXXXX, the corporation described in Paragraph 9;

“Profitco 2 IBL” means the interest-bearing loan described in Paragraph 28;

“Profitco 3” means XXXXXXXXXX, the corporation described in Paragraph 13;

“Profitco 3 IBL” means the interest-bearing loan described in Paragraph 22;

“Profitco 3 IFL” means the non-interest bearing loan described in Paragraph 40(d);

“Profitco 3 New Shares” means the preferred shares described in Paragraph 20;

“Profitco IBLs” means the Profitco 1 IBL, Profitco 2 IBL and Profitco 3 IBL;

“Profitcos” means Profitco 1, Profitco 2 and Profitco 3;

“Proposed Transactions” means the transactions described in Paragraphs 17 to 41;

XXXXXXXXXX;

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

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

“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 United States dollars.

FACTS

1. Lossco is a taxable Canadian corporation XXXXXXXXXX. Lossco owns all the issued and outstanding shares of Corporation 1, which in turn controls Profitco 1 and Profitco 2. Lossco owns all the issued and outstanding shares of Profitco 3. Lossco is in the business of XXXXXXXXXX. Lossco’s head office is located at XXXXXXXXXX. Lossco files its tax and information returns at XXXXXXXXXX.

2. The taxation year of Lossco ends on XXXXXXXXXX. As of XXXXXXXXXX, Lossco had a non-capital loss carryforward balance of $XXXXXXXXXX. The majority of its non-capital losses arose in the ordinary course of business due to the impact of the global pandemic and XXXXXXXXXX imposed during the taxation years of XXXXXXXXXX and XXXXXXXXXX. The following details the taxation years when Lossco’s non-capital losses were incurred:

XXXXXXXXXX

3. Lossco is expected to continue to incur non-capital losses until its XXXXXXXXXX taxation year.

4. Lossco has permanent establishments in various provinces and territories and has the following allocation factors as at its XXXXXXXXXX taxation year end:

XXXXXXXXXX

For the XXXXXXXXXX taxation year and taxation years during which the Proposed Transactions are implemented, it is anticipated that the provincial allocations will remain relatively consistent and not vary materially from this allocation.

5. Corporation 1 is resident in Canada for purposes of the Act and is a taxable Canadian corporation XXXXXXXXXX. Corporation 1 is a wholly owned subsidiary of Lossco and its primary business is XXXXXXXXXX.

6. Profitco 1 is resident in Canada for purposes of the Act and is a taxable Canadian corporation XXXXXXXXXX. Profitco 1 is a wholly owned subsidiary of Corporation 1 and an indirect subsidiary of Lossco. Profitco 1’s primary business is XXXXXXXXXX. Profitco 1’s head office is XXXXXXXXXX. Profitco 1 files its tax and information returns at XXXXXXXXXX.

7. The taxation year of Profitco 1 ends on XXXXXXXXXX. It is currently expected that Profitco 1 will be taxable in its taxation year ending XXXXXXXXXX and subsequent years, and as such, will have sufficient income for tax purposes to fully utilize as a deduction, the interest paid or payable on the Profitco 1 IBL. Profitco 1’s taxable income from the three preceding taxation years and the estimated taxable income for the next three taxation years is as follows:

XXXXXXXXXX

8. Profitco 1 operates solely through a permanent establishment in XXXXXXXXXX. The provincial allocation of Profitco 1’s taxable income was XXXXXXXXXX% in XXXXXXXXXX. For the XXXXXXXXXX taxation year and taxation years during which the Proposed Transactions are implemented, it is anticipated that the provincial allocations of Profitco 1’s taxable income will remain relatively consistent and not vary materially from this allocation.

9. Profitco 2 is resident in Canada for purposes of the Act and is a taxable Canadian corporation XXXXXXXXXX. Profitco 2 is a wholly owned subsidiary of Corporation 1 and an indirect subsidiary of Lossco.

10. Profitco 2’s primary business is XXXXXXXXXX. Profitco 2’s head office is XXXXXXXXXX. Profitco 1 files its tax and information returns at XXXXXXXXXX

11. The taxation year of Profitco 2 ends on XXXXXXXXXX. A valid election was made by Profitco 2 under subsection 261(3) resulting in the USD being its elected functional currency. It is currently expected that Profitco 2 will be taxable in its taxation year ending XXXXXXXXXX and subsequent years, and as such, will have sufficient income for tax purposes to fully utilize as a deduction the interest paid or payable on the Profitco 2 IBL. Profitco 2’s taxable income from the three preceding taxation years and the estimated taxable income for the next three taxation years is as follows:

XXXXXXXXXX

12. Profitco 2 operates solely through a permanent establishment in XXXXXXXXXX. The provincial allocation of Profitco 2’s taxable income was XXXXXXXXXX% in XXXXXXXXXX. For the XXXXXXXXXX taxation year and taxation years during which the Proposed Transactions are implemented. It is anticipated that the provincial allocations of Profitco 2’s taxable income will remain relatively consistent and not vary materially from this allocation.

13. Profitco 3 is resident in Canada for purposes of the Act and is a taxable Canadian corporation XXXXXXXXXX. Profitco 3 is a wholly owned subsidiary of Lossco.

14. Profitco 3 operates XXXXXXXXXX. Profitco 3’s head office is located at XXXXXXXXXX. Profitco 3 files its tax and information returns at XXXXXXXXXX.

15. The taxation year of Profitco 3 ends on XXXXXXXXXX. It is currently expected that Profitco 3 will be taxable in its taxation year ending XXXXXXXXXX and subsequent years, and as such, will have sufficient income for tax purposes to fully utilize as a deduction the interest paid or payable on the Profitco 3 IBL. Profitco 3’s taxable income from the three preceding taxation years and the estimated taxable income for the next three taxation years is as follows:

XXXXXXXXXX

16. Profitco 3 has permanent establishments in XXXXXXXXXX. Profitco 3’s income for the XXXXXXXXXX taxation year was XXXXXXXXXX.

PROPOSED TRANSACTIONS

Unless otherwise indicated, the proposed transactions will take place in the following order.

17. Profitco 3 will incorporate a new wholly-owned subsidiary (“Newco”) XXXXXXXXXX. Newco will be a taxable Canadian corporation. The taxation year-end of Newco will be XXXXXXXXXX. The authorized share capital of Newco will include an unlimited number of common shares (“Newco Common Shares”) and an unlimited number of three classes of preferred shares (“Newco Class A Preferred Shares,” “Newco Class B Preferred Shares,” and “Newco Class C Preferred Shares”). The activities of Newco will be limited to the activities described in the Proposed Transactions.

18. Newco will be authorized to issue an unlimited number of Newco Common Shares without nominal or par value. Newco will issue 1 Newco Common Share to Profitco 3 for a nominal amount of $XXXXXXXXXX.

19. The Newco Preferred Shares will have the following attributes:

(a) Newco Class A Preferred Shares

(i) non-voting;

(ii) non-participating;

(iii) redeemable at the option of the issuer and retractable at the option of the holder for a redemption price equal to the fair market value of the consideration for which the shares are issued. The payment of the redemption price may be satisfied, at the issuer’s option, either by (i) payment of cash; or (ii) delivery of property having a fair market value at the time of redemption equal to the aggregate redemption price; and

(iv) entitled to cumulative dividends that are pari passu in entitlement with the Newco Class B and Class C Preferred Shares, payable annually, at a rate equal to the sum of XXXXXXXXXX% plus the interest on the Profitco 1 IBL, presently estimated to be XXXXXXXXXX% per annum (the “Newco Class A Preferred Shares Dividends”).

(b) Newco Class B Preferred Shares

(i) non-voting;

(ii) non-participating;

(iii) redeemable at the option of the issuer and retractable at the option of the holder for a redemption price equal to the fair market value of the consideration for which the shares are issued. The payment of the redemption price may be satisfied, at the issuer’s option, either by (i) payment of cash; or (ii) delivery of property having a fair market value at the time of redemption equal to the aggregate redemption price; and

(iv) entitled to cumulative dividends that are pari passu in entitlement with the Newco Class A and Class C Preferred Shares, payable annually, at a rate equal to the sum of XXXXXXXXXX% plus the interest on the Profitco 2 IBL, presently estimated to be XXXXXXXXXX% per annum (the “Newco Class B Preferred Shares Dividends”).

(c) Newco Class C Preferred Shares

(i) voting;

(ii) non-participating;

(iii) redeemable at the option of the issuer and retractable at the option of the holder for a redemption price equal to the fair market value of the consideration for which the shares are issued. The payment of the redemption price may be satisfied, at the issuer’s option, either by (i) payment of cash; or (ii) delivery of property having a fair market value at the time of redemption equal to the aggregate redemption price; and

(iv) entitled to cumulative dividends, that are pari passu in entitlement with the Newco Class A and Class B Preferred Shares, payable annually, at a rate equal to the sum of XXXXXXXXXX% plus the interest on the Profitco 3 IBL, presently estimated to be XXXXXXXXXX% per annum (the “Newco Class C Preferred Shares Dividends”).

20. The authorized share capital of Profitco 3 will be amended to add a class of preferred shares (“the Profitco 3 New Shares”) which will have the following attributes:

(a) non-voting;

(b) non-participating;

(c) issuable for $XXXXXXXXXX per share;

(d) redeemable at the option of the issuer and retractable at the option of the holder for the amount issued; and

(e) entitled to a XXXXXXXXXX% non-cumulative discretionary dividend.

21. Lossco will borrow the amount $XXXXXXXXXX (“Daylight Advance”) from an arm’s length financial institution by drawing against its existing line of credit at that institution. The Daylight Advance will be subject to the terms and conditions that govern the line of credit.

22. Lossco will use the proceeds of the Daylight Advance and $XXXXXXXXXX of cash available on hand to make an interest-bearing loan to Profitco 3 (the “Profitco 3 IBL”) in the amount of $XXXXXXXXXX. The interest rate on the Profitco 3 IBL will be determined based on market conditions at the time the loan is made, which will not exceed what would be a reasonable commercial arm's length rate in these circumstances, presently estimated to be XXXXXXXXXX% per annum. The Profitco 3 IBL will be payable after XXXXXXXXXX years, but repayable at any time when the Newco Class C Preferred Shares, held by Profitco 3, are redeemed and will also provide that the principal amount may be satisfied at Profitco 3’s option, either by (i) payment of cash or (ii) issuance of a new payable on demand, non-interest bearing note. The interest on the Profitco 3 IBL will be paid annually.

23. Profitco 3 will use the proceeds of the Profitco 3 IBL to subscribe for Newco Class C Preferred Shares having an aggregate redemption amount, fair market value, adjusted cost base and paid-up capital equal to the total amount of the subscription proceeds.

24. Newco will use the proceeds received from the Newco Class C Preferred Shares subscription, described in Paragraph 23, to make a non-interest bearing loan to Lossco (the “Lossco IFL 1”). The Lossco IFL 1 will be payable on demand.

25. Lossco will use the proceeds received from the Lossco IFL 1, described in Paragraph 24, to repay the Daylight Advance.

26. All of the transactions described in Paragraphs 21 - 25 will be completed on the same day.

27. Lossco will use cash available on hand to make an interest-bearing loan to Profitco 1 (the “Profitco 1 IBL”) in the amount of $XXXXXXXXXX. The interest rate on the Profitco 1 IBL will be determined based on market conditions at the time the loan is made, which will not exceed what would be a reasonable commercial arm's length rate in these circumstances, presently estimated to be XXXXXXXXXX% per annum. The Profitco 1 IBL will be payable after XXXXXXXXXX years, but repayable at any time when the Newco Class A Preferred Shares, held by Profitco 1, are redeemed and will also provide that the principal amount may be satisfied with a cash payment. The interest on the Profitco 1 IBL will be paid annually.

28. At the same time as the transaction described in Paragraph 27, Lossco will use cash available on hand to make an interest-bearing loan to Profitco 2 (the “Profitco 2 IBL”) in the amount of $XXXXXXXXXX. The interest rate on the Profitco 2 IBL will be determined based on market conditions at the time the loan is made, which will not exceed what would be a reasonable commercial arm's length rate in these circumstances, presently estimated to be XXXXXXXXXX% per annum. The Profitco 2 IBL will be payable after XXXXXXXXXX years, but repayable at any time when the Newco Class B Preferred Shares, held by Profitco 2, are redeemed and will also provide that the principal amount may be satisfied with a cash payment. The interest on the Profitco 2 IBL will be paid annually.

29. Profitco 1 will use the proceeds of the Profitco 1 IBL to subscribe for Newco Class A Preferred Shares having an aggregate redemption amount, fair market value, adjusted cost base and paid-up capital equal to the total amount of the subscription proceeds.

30. Immediately following the transaction described in Paragraph 29, Profitco 2 will use the proceeds of the Profitco 2 IBL to subscribe for Newco Class B Preferred Shares having an aggregate redemption amount, fair market value, adjusted cost base and paid-up capital equal to the total amount of the subscription proceeds.

31. Newco will use the proceeds from the Newco Class A Preferred Share subscription, described in Paragraph 29, to make a non-interest bearing loan to Lossco (the “Lossco IFL 2”). The Lossco IFL 2 will be payable on demand.

32. Immediately following the transaction described in Paragraph 31, Newco will use the proceeds from the Newco Class B Preferred Share subscription, described in Paragraph 30, to make a non-interest bearing loan to Lossco (the “Lossco IFL 3”). The Lossco IFL 3 will be payable on demand.

33. On an annual basis, until the loss consolidation arrangement is wound up, as described in Paragraphs 38, 39 and 40, Lossco will use available cash from operations to subscribe for Profitco 3 New Shares with an aggregate redemption amount (rounded up to the nearest whole dollar) equal to the Newco Preferred Shares Dividends payable at that time.

34. Immediately following receipt of the annual share subscription described in Paragraph 33, Profitco 3 will use the proceeds to subscribe for Newco Common Shares.

35. Immediately following receipt of the contribution of capital for a particular fiscal year, as described in Paragraph 34, Newco will use the proceeds to pay all Newco Preferred Shares Dividends that are accrued and unpaid at that time.

36. Immediately following receipt of the dividends for a particular fiscal year, as described in Paragraph 35, the Profitcos will pay all interest that is accrued and unpaid, as at that time, pursuant to the terms of the Profitco IBLs.

37. On or before the end of each taxation year of Lossco, Profitco 3 and Lossco will enter into an agreement pursuant to which the Profitco 3 New Shares held by Lossco will be acquired by Profitco 3 from Lossco for total cash consideration equal to $XXXXXXXXXX.

38. No later than XXXXXXXXXX anniversary of the issuance of the Profitco 1 IBL, the loss consolidation arrangement involving Profitco 1 will be unwound on the same day, in the following manner:

(a) Newco will pay all accrued and unpaid Newco Class A Preferred Shares Dividends in cash to the Profitco 1. For greater certainty, immediately prior to the payment of all accrued and unpaid Newco Class A Preferred Shares Dividends, share subscriptions equal to the amount of all accrued and unpaid Newco Class A Preferred Shares Dividends will occur in the same manner described in Paragraphs 33 and 34.

(b) Immediately following the receipt of payment of the dividends described in Paragraph 38(a), Profitco 1 will pay all interest on the Profitco 1 IBL that is accrued and unpaid, as at that time, pursuant to the terms of the Profitco 1 IBL.

(c) Lossco will use cash available on hand to repay the Lossco IFL 2, owing to Newco. The Lossco IFL 2 will be fully repaid and settled.

(d) Newco will use the cash from the repayments described in Paragraph 38(c) to redeem the Newco Class A Preferred Shares held by Profitco 1.

(e) Profitco 1 will use the proceeds from the Newco Class A Preferred Share redemption described in Paragraph 38(d) to repay the Profitco 1 IBL owing to Lossco. The Profitco 1 IBL will be fully repaid and settled.

39. No later than XXXXXXXXXX anniversary of the issuance of the Profitco 2 IBL, the loss consolidation arrangement involving Profitco 2 will be unwound on the same day, in the following manner:

(a) Newco will pay all accrued and unpaid Newco Class B Preferred Shares Dividends in cash to the Profitco 2. For greater certainty, immediately prior to the payment of all accrued and unpaid Newco Class B Preferred Shares Dividends, share subscriptions equal to the amount of all accrued and unpaid Newco Class B Preferred Shares Dividends will occur in the same manner described in Paragraphs 33 and 34.

(b) Immediately following the receipt of payment of the dividends described in Paragraph 39(a), Profitco 2 will pay all interest on the Profitco 2 IBL that is accrued and unpaid, as at that time, pursuant to the terms of the Profitco 2 IBL.

(c) Lossco will use cash available on hand to repay the Lossco IFL 3, owing to Newco. The Lossco IFL 3 will be fully repaid and settled.

(d) Newco will use the cash from the repayments described in Paragraph 39(c) to redeem the Newco Class B Preferred Shares held by Profitco 2.

(e) Profitco 2 will use the proceeds from the Newco Class B Preferred Share redemption described in Paragraph 39(d) to repay the Profitco 2 IBL owing to Lossco. The Profitco 2 IBL will be fully repaid and settled.

40. No later than XXXXXXXXXX anniversary of the issuance of the Profitco 3 IBL, the loss consolidation arrangement involving Profitco 3 will be unwound on the same day, in the following manner:

(a) Newco will pay all accrued and unpaid Newco Class C Preferred Shares Dividends in cash to the Profitco 3. For greater certainty, immediately prior to the payment of all accrued and unpaid Newco Class C Preferred Shares Dividends, share subscriptions equal to the amount of all accrued and unpaid Newco Class C Preferred Shares Dividends will occur in the same manner described in Paragraphs 33 and 34.

(b) Immediately following the receipt of payment of the dividends described in Paragraph 40(a), Profitco 3 will pay all interest on the Profitco 3 IBL that is accrued and unpaid, as at that time, pursuant to the terms of the Profitco 3 IBL.

(c) Newco will redeem the Newco Class C Preferred Shares held by Profitco 3. As consideration for the Newco Class C Preferred Shares redemption, Newco will assign the Lossco IFL 1 to Profitco 3. For greater certainty, the Lossco IFL 1 will have a principal amount and fair market value equal to the redemption amount and fair market value of the Newco Class C Preferred Shares redeemed.

(d) Profitco 3 will repay the Profitco 3 IBL by issuing the Profitco 3 IFL to Lossco in full satisfaction of the amount due under the Profitco 3 IBL. The Profitco 3 IFL will be a non-interest bearing loan, due on demand, and will have a principal amount and fair market value equal to the Profitco 3 IBL.

(e) Profitco 3 and Lossco will agree to set off the amount due under the Lossco IFL 1 against the amount due under the Profitco 3 IFL as payment. The obligations under the Lossco IFL 1 and the Profitco 3 IFL will be offset and cancelled.

41. Once the transactions in Paragraphs 38, 39 and 40 are completed, Profitco 3 will pass resolutions authorizing and requiring Newco to be wound up into Profitco 3. Profitco 3 will file articles of dissolution with the appropriate corporate registry within a short period of time after the winding-up resolutions are passed.

ADDITIONAL INFORMATION

42. The Proposed Transactions will be legally effective.

43. At all relevant times, the Profitcos and Newco will be affiliated and related persons for purposes of the Act and will continue to be affiliated and related persons throughout the Proposed Transactions.

44. At the time of the Proposed Transactions:

(a) Lossco and the Profitcos will have the financial capacity to satisfy the applicable solvency test and liquidity test under their respective governing statutes to service any debt issued as part of the Proposed Transactions.

(b) Lossco and Profitco 3 will have the financial capacity, including accessing their leverage capacity, to subscribe for shares described in Paragraphs 33, 34, 38(a), 39(a) and 40(a).

(c) Newco will have the financial capacity to satisfy the applicable solvency test and liquidity test under the XXXXXXXXXX required to pay the dividends on the Newco Class A Preferred Shares and Newco Class B Preferred Shares as described in Paragraphs 35, 38(a), 39(a) and 40(a) and to the redeem the Newco Class A Preferred Shares and Newco Class B Preferred Shares as described in Paragraphs 38(d) and 39(d) respectively.

45. The Newco Preferred Shares will not, at any time during the implementation of the Proposed Transactions described herein, be:

(a) the subject of any undertaking that is referred to subsection 112(2.2) as a “guarantee agreement”;

(b) the subject of a “dividend rental arrangement” as contemplated in subsection 112(2.3);

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i); or

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

46. The dividend rate on the Newco Class A Preferred Shares and Newco Class C Preferred Shares will exceed the interest rate on the Profitco 1 IBL and Profitco 3 IBL by XXXXXXXXXX% and the dividend rate on the Newco Class B Preferred Shares will exceed the interest rate on the Profitco 2 IBL by XXXXXXXXXX%, generating a positive spread between the dividend rate on those shares acquired and the rate of interest payable on the Profitco IBLs.

47. The dividends paid on the Newco Preferred Shares will be excepted dividends and excluded dividends.

48. None of the Profitcos or Lossco is or will be at any time during the implementation of the Proposed Transactions a “financial intermediary corporation” as defined in subsection 191(1), a “restricted financial institution” or a “specified financial institutions” as defined in subsection 248(1).

49. The sole purpose for the subscription by the Profitcos for the Newco Preferred Shares is to further the loss consolidation described in the Proposed Transactions. None of the Profitcos will acquire or be considered to acquire the Newco Preferred Shares in the ordinary course of their business.

50. 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 such losses would have otherwise expired in the hands of Lossco.

51. The Proposed Transactions are not intended to generate a significant loss carryforward balance in any of the Profitcos (having regard to the expected carry back of losses to prior taxation years), and the Taxpayers will seek to unwind the arrangements at a time that will prevent any significant loss carry-forward balance.

52. Lossco and the Profitcos will undertake steps to ensure that the interest income earned by Lossco on the Profitco IBLs will not materially exceed an amount that could be fully sheltered with Lossco’s non-restricted non-capital losses. In the event that a non-capital loss is created for any of the Profitcos in the course of the Proposed Transactions, any such non-capital loss would be carried back to a prior taxation year or carried forward to a subsequent taxation year in accordance with the provisions of section 111.

53. No acquisitions of control have occurred, or are anticipated to occur, as part of the series of transactions or events that includes the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

54. The purpose of the Proposed Transactions is to effect a tax consolidation in which Lossco’s non-capital losses may be deducted against income generated on the loans to the Profitcos. Absent the Proposed Transactions, it is expected that Lossco would not generate sufficient taxable income to utilize its non-capital losses or such losses may remain unused for a significant period of time.

55. None of the purposes of the Proposed Transactions is to shift income from a higher rate to a lower rate province. Any shift of income in the Profitcos will be incidental to the Proposed Transactions.

56. The only purpose of both the payment and the receipt of the Newco Preferred Shares Dividends is to provide a reasonable return on the Newco Preferred Shares issued by Newco to the Profitcos. More specifically, none of the purposes for the payment or receipt of the Newco Preferred Share Dividends is to effect a reduction in the portion of the capital gain that would have been realized on a disposition fair market value of any share of capital stock or to effect a significant reduction in the fair market value of any share or a significant increase in the cost of any property.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, and there are no other transactions which may be relevant, we confirm the following:

A. Provided that the Profitcos have a legal obligation to pay interest on the Profitco IBLs and the Profitcos continue to hold the Newco Preferred Shares for the purposes of gaining or producing income from property, the Profitcos will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing their respective income for a taxation year (depending on the method regularly followed by the Profitcos in computing income for the purposes of the Act), the lessor of: (i) the interest paid or payable on their respective Profitco IBL in respect of that taxation year; and (ii) reasonable amount in respect thereof.

B. The dividends received by the Profitcos in respect of the Newco Preferred Shares in a particular year will be taxable dividends and, pursuant to subsection 112(1), will be fully deductible in computing the taxable income of the Profitcos for the year in which the dividends are received. For greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

C. Part IV, Part IV.1 and Part VI.1 will not apply to the Newco Preferred Shares Dividends.

D. The settlement of the Profitco 3 IBL, Lossco IFL 1 and the Profitco 3 IFL, as described in Paragraphs 40(d) and (e) respectively, will not give rise to a “forgiven amount” for purposes of section 80.

E. Provided that the only purpose of the payment and receipt of dividends on the Newco Preferred Shares is as described in Paragraph 56 and the Proposed Transactions are undertaken in the manner described above, subsection 55(2) will not apply to such dividends

F. On the disposition of the Profitco 3 New Shares by Lossco to Profitco 3, as described in Paragraph 37, Lossco will be deemed, pursuant to paragraph 69(1)(b), to have received proceeds of disposition equal to the fair market value, at the time of the disposition, of the Profitco 3 New Shares, with the result that Lossco will not incur a loss on the disposition of such shares.

G. The provisions of subsections 15(1), 56(2) and 246(1) will not apply as a result of the Proposed Transactions in and by themselves.

H. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

I. The General Anti-avoidance Provision of an Agreeing Province will not apply as a result of 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 70-6R12 dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within the time frame described in this letter. 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.

COMMENTS

Unless otherwise expressly confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

(a) the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

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

(c) the amount of the non-capital losses, or any other amount of any corporation referred to herein;

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

(e) subject to Ruling I, the application or non-application of a general anti-avoidance provision of any province;

(f) the application of the proposed Excessive Interest and Financing Expenses Limitation rules contained in draft legislation released on XXXXXXXXXX to the Proposed Transactions; and

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

An invoice for our fees in connection with this Ruling will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch