2024 Ruling 2022-0948081R3 - 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 certain Losscos would be entitled to apply existing non-capital losses against the interest income that would be generated as part of a particular loan that would be made under the loss consolidation transaction and whether the accompanying interest expense would be deductible by certain Profitcos.

Position: Yes.

Reasons: The proposed transactions conform to our requirements for these types of loss consolidation rulings. The proposed transactions would be legally effective and commercially realistic.

XXXXXXXXXX									2022-094808

XXXXXXXXXX, 2024

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in correspondence and various discussions concerning your request.

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 as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of the taxpayers or a related person and:

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

B. under objection by the taxpayers or a related person; or

C. the subject of a current or completed court process involving the taxpayers or a related person; or

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

Unless otherwise stated all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) as amended (the “Act”). Unless otherwise indicated all references to monetary amounts are in Canadian dollars.

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

DEFINITIONS

In this letter, unless otherwise noted, the following terms have the meaning specified herein. All references in the singular include the plural.

XXXXXXXXXX means the advance tax ruling issued by the CRA on XXXXXXXXXX;

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

XXXXXXXXXX;

“CAD” means Canadian dollars;

“XXXXXXXXXX” means the XXXXXXXXXX, and where applicable, its predecessor statutes;

“CRA” means the Canada Revenue Agency;

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

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

“Foreign Authority” means the XXXXXXXXXX;

“Foreign Country” means XXXXXXXXXX;

XXXXXXXXXX means the XXXXXXXXXX;

“Lossco 1” means XXXXXXXXXX;

“Lossco 2” means XXXXXXXXXX;

“Lossco 3” means XXXXXXXXXX;

“Losscos” means collectively, Lossco 1, Lossco 2 and Lossco 3;

“Lossco Loan 1” means an interest bearing loan made by Lossco 1 to Profitco 1 as described in Paragraph 27 below;

“Lossco Loan 2” means an interest bearing loan made by Lossco 2 to Profitco 1 as described in Paragraph 27 below;

“Lossco Loan 3” means an interest bearing loan made by Lossco 3 to Profitco 2 as described in Paragraph 27 below;

“Lossco Loans” means collectively Lossco Loan 1, Lossco Loan 2 and Lossco Loan 3;

“Newco 1” is a corporation to be incorporated under the XXXXXXXXXX, as described in Paragraph 23;

“Newco 2” is a corporation to be incorporated under the XXXXXXXXXX, as described in Paragraph 23;

“Newco 3” is a corporation to be incorporated under the XXXXXXXXXX and will elect to report its Canadian tax results in its functional currency of XXXXXXXXXX, as described in Paragraph 23;

“Newcos” means collectively Newco 1, Newco 2 and Newco 3;

“Newco 1 Common Shares” means the common shares to be issued by Newco 1 to Lossco 1 and has the meaning assigned in Paragraph 23;

“Newco 2 Common Shares” means the common shares to be issued by Newco 2 to Lossco 2 and has the meaning assigned in Paragraph 23;

“Newco 3 Common Shares” means the common shares to be issued by Newco 3 to Lossco 3 and has the meaning assigned in Paragraph 23;

“Newco Common Shares” means collectively the Newco 1 Common Shares, Newco 2 Common Shares and Newco 3 Common Shares;

“Newco 1 Loan” means a non-interest bearing loan made by Newco 1 to Lossco 1, as described in Paragraph 29 below;

“Newco 2 Loan” means a non-interest bearing loan made by Newco 2 to Lossco 2, as described in Paragraph 29 below;

“Newco 3 Loan” means a non-interest bearing loan made by Newco 3 to Lossco 3, as described in Paragraph 29 below;

“Newco Loans” means collectively Newco 1 Loan, Newco 2 Loan and Newco 3 Loan;

“Newco 1 Note” means a non-interest bearing promissory note issued by Newco 1 to Profitco 1 as described in Paragraph 35 below;

“Newco 2 Note” means a non-interest bearing promissory note issued by Newco 2 to Profitco 1 as described in Paragraph 35 below;

“Newco 3 Note” means a non-interest bearing promissory note issued by Newco 3 to Profitco 2 as described in Paragraph 35 below;

“Newco Notes” means collectively Newco 1 Note, Newco 2 Note and Newco 3 Note;

“Newco 1 Preferred Shares” means preferred shares to be issued by Newco 1 to Profitco 1 as described in Paragraph 23;

“Newco 2 Preferred Shares” means preferred shares to be issued by Newco 2 to Profitco 1 as described in Paragraph 23;

“Newco 3 Preferred Shares” means preferred shares to be issued by Newco 3 to Profitco 2 as described in Paragraph 23;

“Newco Preferred Shares” means collectively Newco 1 Preferred Shares, Newco 2 Preferred Shares and Newco 3 Preferred Shares;

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

XXXXXXXXXX;

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

“Parent” means XXXXXXXXXX;

“Payment Period” means a calendar month;

“Profitco 1” means XXXXXXXXXX;

“Profitco 2” means XXXXXXXXXX. Profitco 2 reports its Canadian tax results in its functional currency of XXXXXXXXXX;

“Profitcos” means collectively Profitco 1 and Profitco 2;

“Proposed Transactions” means the transactions described in Paragraphs 23 to 36;

“related persons” has the meaning assigned by section 251;

“Subsidiary 1” means XXXXXXXXXX, a direct subsidiary of XXXXXXXXXX, is a corporation incorporated under the laws of Foreign Country, a non-resident of Canada for the purposes of the Act and a resident of Foreign Country for purposes of the Treaty. XXXXXXXXXX is an indirect wholly owned subsidiary of Parent and is a corporation incorporated under the laws of Foreign Country;

“Subsidiary 2” means XXXXXXXXXX. Subsidiary 2 was incorporated on XXXXXXXXXX and is organized under the XXXXXXXXXX pursuant to the XXXXXXXXXX and is a taxable Canadian corporation;

“Subsidiary Loan 1” means the loan made by Subsidiary 1 to Lossco 1, the principal amount of which will equal the aggregate principal amounts of the Lossco Loan 1, as described in Paragraph 26 below;

“Subsidiary Loan 2” means the loan made by Subsidiary 1 to Lossco 2, the principal amount of which will equal the aggregate principal amounts of the Lossco Loan 2, as described in Paragraph 26 below;

“Subsidiary Loan 3” means the loan made by Subsidiary 2 to Lossco 3, the principal amount of which will equal the aggregate principal amounts of the Lossco Loan 3, as described in Paragraph 26;

“Subsidiary Loans” means collectively Subsidiary Loan 1, Subsidiary Loan 2 and Subsidiary Loan 3;

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

“Treaty” means the XXXXXXXXXX; and

XXXXXXXXXX.

FACTS

1. All of the steps in the Proposed Transactions involving Losscos 1 and 2, Newcos 1 and 2, and Profitco 1 will be denominated in CAD. These entities report their Canadian tax results in their functional currency of CAD. All of the steps in the Proposed Transaction involving Profitco 2, Lossco 3, and Newco 3 are carried out in XXXXXXXXXX. These entities report their Canadian tax results in their elected functional currency of XXXXXXXXXX.

2. Parent, through its subsidiary corporations, is a XXXXXXXXXX.

3. Parent is a corporation incorporated under the laws of Foreign Country, a non-resident of Canada for purposes of the Act and a resident of Foreign Country for the purposes of the Treaty. XXXXXXXXXX. There have been no acquisitions of control of Parent or of any of its subsidiary corporations that are participants to the Proposed Transactions, including direct or indirect parent corporations of such subsidiary corporations, and there are no planned acquisitions of such corporations, including Parent.

4. The consolidated financial statements of Parent for its fiscal year ended XXXXXXXXXX indicate that Parent and its accounting consolidated group had:

(a) total assets of approximately XXXXXXXXXX;

(b) total liabilities of approximately XXXXXXXXXX; and

(c) total equity of approximately XXXXXXXXXX.

5. Profitco 1 is an indirect subsidiary of Parent. Profitco 1 was formed by way of an amalgamation effective on XXXXXXXXXX. The predecessors to the amalgamation, XXXXXXXXXX. Profitco 1 is organized under the XXXXXXXXXX pursuant to the XXXXXXXXXX and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX. Profitco 1’s taxation year-end for purposes of the Act is XXXXXXXXXX. Profitco 1 is engaged in the business of both a XXXXXXXXXX.

6. Profitco 1’s taxable income or loss for its XXXXXXXXXX prior taxation years for which a tax return has been filed with the CRA is as follows:

XXXXXXXXXX

7. On XXXXXXXXXX, Profitco 1, XXXXXXXXXX, an indirect wholly-owned subsidiary of Parent, and XXXXXXXXXX, an indirect wholly-owned subsidiary of Parent, XXXXXXXXXX.

8. It is expected that Profitco 1 will be able to fully utilize the deductions resulting from interest paid or payable on Lossco Loan 1 and Lossco Loan 2 either against its income for a current taxation year in which the Proposed Transactions are undertaken or by carrying back any non-capital loss for that taxation year to be deducted against its taxable income for one or more of its three prior taxation years.

9. Profitco 1 XXXXXXXXXX.

10. Profitco 2 has been an indirect subsidiary of Parent since its incorporation on XXXXXXXXXX. Profitco 2 is organized under the XXXXXXXXXX pursuant to the XXXXXXXXXX and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX. Profitco 2's taxation year-end for purposes of the Act is XXXXXXXXXX. Profitco 2 is XXXXXXXXXX.

10.1 Profitco 2 has made a valid election under paragraph 261(3) to use the XXXXXXXXXX as its functional currency effective from its tax year that ended XXXXXXXXXX. Any losses generated by Profitco 2 as a result of the Proposed Transaction can not be carried back to a tax year ending prior to XXXXXXXXXX.

11. Profitco 2’s taxable income or loss for its three prior taxation years for which tax returns have been filed with the CRA is as follows:

XXXXXXXXXX

12. It is expected that Profitco 2 will be able to fully utilize the deductions resulting from interest paid or payable on the Lossco Loan 3 either against its income for a current taxation year in which the Proposed Transactions are undertaken or by carrying back any non-capital loss for that taxation year to be deducted against its taxable income for one or more of its three prior taxation years.

13. Profitco 2 has XXXXXXXXXX.

14. Lossco 1 is an indirect subsidiary of Parent. Lossco 1 has been an indirect subsidiary of Parent since its incorporation on XXXXXXXXXX. Lossco 1 is incorporated under the XXXXXXXXXX and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX. Lossco 1's taxation year end is XXXXXXXXXX. Lossco 1 was XXXXXXXXXX.

15. At XXXXXXXXXX, for which tax returns have been filed with the CRA, and are summarized as follows:

Non-capital losses:

XXXXXXXXXX

16. Lossco 1 has XXXXXXXXXX.

17. Lossco 2 is an indirect subsidiary of Parent. Lossco 2 has been an indirect subsidiary of Parent since its incorporation on XXXXXXXXXX. Lossco 2 is incorporated under the XXXXXXXXXX and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX. Lossco 2's taxation year end is XXXXXXXXXX. Lossco 2 XXXXXXXXXX.

18. At XXXXXXXXXX, Lossco 2 had non-capital losses available for carry forward of $XXXXXXXXXX, for which tax returns have been filed with the CRA, and are summarized as follows:

Non-capital losses:

XXXXXXXXXX

19. Lossco 2 has XXXXXXXXXX.

20. Lossco 3 is an indirect subsidiary of Parent. Lossco 3 has been an indirect subsidiary of Parent since its acquisition on XXXXXXXXXX. Lossco 3 is incorporated under the XXXXXXXXXX and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX. Lossco 3's taxation year end is XXXXXXXXXX. Lossco 3 was XXXXXXXXXX.

20.1 Lossco 3 has made a valid election under subsection 261(3) to use the XXXXXXXXXX dollar as its functional currency effective from its tax year ended XXXXXXXXXX (prior to the taxation year ending XXXXXXXXXX, the first year in which losses were incurred by Lossco 3).

21. At XXXXXXXXXX, Lossco 3 had non-capital losses available for carry forward of XXXXXXXXXX, for which tax returns have been filed with the CRA, and are summarized as follows:

Non-capital losses:

XXXXXXXXXX

22. Lossco 3 has XXXXXXXXXX.

PROPOSED TRANSACTIONS

23. Lossco 1 and Lossco 2 will incorporate their respective Newcos under the XXXXXXXXXX. Lossco 3 will incorporate its respective Newco under the XXXXXXXXXX. The Newcos will be taxable Canadian corporations. The taxation year-end of the Newcos for purposes of the Act will be XXXXXXXXXX. The Losscos will subscribe for common shares of the relevant Newcos (the “Newco Common Shares”) on incorporation for an aggregate subscription price payable to the relevant Newcos of $XXXXXXXXXX each, except for Newco 3 which will be XXXXXXXXXX. The Losscos will hold the Newco Common Shares as capital property. The Newcos will not carry on any business other than the proposed loss consolidation transaction and their activities will be limited to investing the proceeds received upon issuance of the Newco Preferred Shares and Newco Common Shares in the Newco Loans to the Losscos, as described in Paragraph 29. The Newcos will not be financial intermediary corporations. The authorized share capital of each of the Newcos will consist of two classes of shares, common shares and preferred shares (the “Newco Preferred Shares”).

24. The Newco Preferred Shares will be non-voting, cumulative dividend paying, redeemable, retractable preferred shares and dividends will be paid monthly. The cumulative dividends payable on each of the Newco Preferred Shares will be calculated as a percentage of the redemption/retraction price of the Newco Preferred Shares, and will be equal to the interest rate on the relevant Lossco Loans plus a small spread of XXXXXXXXXX%. The cumulative dividends payable on the Newco Preferred Shares is currently estimated to be set at a rate per annum of XXXXXXXXXX% for the Newco 1 Preferred Shares and the Newco 2 Preferred Shares and XXXXXXXXXX% for the Newco 3 Preferred Shares. The actual Newco Preferred Shares dividend rates will be determined immediately before the implementation date of the Proposed Transactions, based on a XXXXXXXXXX% spread above the interest rate on the Lossco Loans.

25. Newco 3 will maintain its records and books of account for financial reporting purposes in XXXXXXXXXX. It will, within 60 days of its incorporation, elect under subsection 261(3) to have XXXXXXXXXX as its functional currency, and it will report its Canadian tax results in that currency.

25.1 The XXXXXXXXXX is the currency used by Newco 3 in maintaining its records and books of accounts for financial reporting purposes. The financial statements, or other documents that show the financial situation of Newco 3 prepared for its board of directors, shareholders, creditors, or that are prepared for any other purpose, are expressed in XXXXXXXXXX. In absence of an election under subsection 261(3), the only financial statement of Newco 3 in Canadian dollars will be for the purposes of preparing its Canadian tax returns. All transactions undertaken by Newco 3 will be in XXXXXXXXXX and its legal stated capital will be maintained in XXXXXXXXXX. The only transactions foreseen to be undertaken by Newco 3 are to issue XXXXXXXXXX denominated shares and to make or receive XXXXXXXXXX denominated loans, as described herein.

26. On a particular day to be determined by Subsidiary 1 or Subsidiary 2, where applicable, and the relevant Lossco, the following Subsidiary Loans will be made:

(a) Lossco 1 will borrow Subsidiary Loan 1 from Subsidiary 1 with an aggregate principal amount of $XXXXXXXXXX;

(b) Lossco 2 will borrow Subsidiary Loan 2 from Subsidiary 1 with an aggregate principal amount of $XXXXXXXXXX; and

(c) Lossco 3 will borrow Subsidiary Loan 3 from Subsidiary 2 with an aggregate principal amount of XXXXXXXXXX.

Each of the Subsidiary Loans will be repayable on demand and will not bear interest. Subsidiary 1 or Subsidiary 2, where applicable, will source the funds for the relevant Subsidiary Loans from its working capital.

27. The Losscos will use the proceeds received by each respective Subsidiary from the Subsidiary Loans to make the following Lossco Loans:

(a) Lossco 1 will advance the Lossco Loan 1 to Profitco 1 with a principal amount of $XXXXXXXXXX, bearing interest at a rate estimated to be XXXXXXXXXX% per annum;

(b) Lossco 2 will advance the Lossco Loan 2 to Profitco 1 with a principal amount of $XXXXXXXXXX bearing interest at a rate estimated to be XXXXXXXXXX% per annum; and

(c) Lossco 3 will advance the Lossco Loan 3 to Profitco 2 with a principal amount of XXXXXXXXXX bearing interest at a rate estimated to be XXXXXXXXXX% per annum.

Interest on the Lossco Loans will be computed daily and paid monthly. The estimated interest rate on each of the Lossco Loans are arm's length and commercial interest rates. Note that the actual interest rates on the Lossco Loans will be finalized using prevailing arm’s length market rates upon the implementation of the Proposed Transaction. The recourse of the Losscos under the relevant Lossco Loans will be limited to amounts received by the Profitcos in respect of the relevant Newco Preferred Shares.

28. The Profitcos will use the proceeds from the Lossco Loans as follows:

(a) Profitco 1 will use the proceeds from the Lossco Loan 1 to subscribe for the Newco 1 Preferred Shares for $XXXXXXXXXX which will have an aggregate redemption price and stated capital equal to $XXXXXXXXXX;

(b) Profitco 1 will use the proceeds from the Lossco Loan 2 to subscribe for the Newco 2 Preferred Shares for $XXXXXXXXXX which will have an aggregate redemption price and stated capital equal to $XXXXXXXXXX; and

(c) Profitco 2 will use the proceeds from the Lossco Loan 3 to subscribe for the Newco 3 Preferred Shares for XXXXXXXXXX which will have an aggregate redemption price and stated capital equal to XXXXXXXXXX.

29. The Newcos will use the proceeds from the relevant Newco Preferred Shares as follows:

(a) Newco 1 will make the Newco 1 Loan to Lossco 1. The principal amount of the Newco 1 Loan will equal the principal amount of Lossco Loan 1;

(b) Newco 2 will make the Newco 2 Loan to Lossco 2. The principal amount of the Newco 2 Loan will equal the principal amount of Lossco Loan 2; and

(c) Newco 3 will make the Newco 3 Loan to Lossco 3. The principal amount of the Newco 3 Loan will equal the principal amount of Lossco Loan 3.

The Losscos will secure their obligations under the relevant Newco Loans by granting a security interest to the Newcos in the relevant Lossco Loans.

30. The Losscos will use the proceeds from the Newco Loans to repay the respective Subsidiary Loans to Subsidiary 1 or Subsidiary 2, where applicable.

31. All of the transactions described in Paragraphs 26 to 30 will take place on the same day.

32. Prior to the start of each Payment Period, the Losscos will make a contribution of capital to each Newco in an amount equal to the accrued dividends payable at the end of the Payment Period by each of the Newcos on their respective Newco Preferred Shares held by the Profitcos. No shares will be issued by the Newcos with respect to these contributions of capital and no amount will be added to the stated capital of any class of shares of the Newcos, or for greater certainty, to the paid-up capital of any class of shares of the Newcos. The Losscos will not claim any deduction in computing income in respect of any capital contributions made to the relevant Newcos.

33. Each of the Newcos will pay all accrued and unpaid dividends on their respective Newco Preferred Shares held by the Profitcos in cash at the end of the Payment Period from the contributions of capital received under Paragraph 32.

34. Upon receipt of the dividend payments described in Paragraph 33, each of the Profitcos will pay all accrued and unpaid interest due and payable on their respective Lossco Loans to the Losscos in cash, pursuant to the terms of respective Lossco Loans.

35. The following transactions will occur on or before XXXXXXXXXX to unwind each loss consolidation arrangement between the Losscos and the Profitcos:

(a) The Losscos will contribute capital to the Newcos, in cash, equal to the amount of the accrued and unpaid dividends on the Newco Preferred Shares;

(b) Using the capital received from the Losscos, the Newcos will pay, in cash, the balance of the accrued and unpaid dividends on the Newco Preferred Shares to their respective Profitcos;

(c) Each respective Profitco will pay in cash to the Losscos all accrued and unpaid interest in respect of the relevant Lossco Loans;

(d) The Losscos will repay each of the Newco Loans by assigning the Lossco Loans to the respective Newcos in full satisfaction of the principal amounts due under the respective Newco Loans;

(e) Newcos will redeem the Newco Preferred Shares held by the respective Profitcos in consideration for a non-interest bearing demand promissory note issued by the respective Newcos (the "Newco Notes"). The Newco Notes will have a principal amount equal to the redemption price of the respective Newco Preferred Shares redeemed; and

(f) Each of the respective Newcos and Profitcos will set-off the amounts due under the respective Lossco Loans against the amounts due under the respective Newco Notes as payment in full of each of these obligations.

The arrangements between the Losscos and each of the Profitcos may be unwound at different times, provided that each arrangement will be unwound on or before XXXXXXXXXX.

36. Following the completion of the transactions described in Paragraph 35, the Newcos will be wound up into the respective Losscos. The Losscos, as sole shareholder of the Newcos immediately before the winding-up, will pass a resolution authorizing and requiring each Newco to be wound up into the respective Losscos. In addition, a general conveyance of the remaining assets of each Newco and assumption of liabilities of each Newco, if any, will be executed between each Newco and Lossco. Each Newco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.

ADDITIONAL INFORMATION

37. The expected interest deductions, taxable income and XXXXXXXXXX:

XXXXXXXXXX

38. The estimated tax refund of federal and provincial income taxes to Profitco 1 as a result of the Proposed Transactions is as follows (all amounts are in $ XXXXXXXXXX):

XXXXXXXXXX

39. The expected interest deductions, taxable income and XXXXXXXXXX:

XXXXXXXXXX

40. The estimated tax refund of federal and provincial income taxes to Profitco 2 as a result of the Proposed Transactions is as follows (all amounts are in XXXXXXXXXX):

XXXXXXXXXX

OTHER REPRESENTATIONS

41. The Newco Preferred Shares will not at any time during the implementation of the Proposed Transactions 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;

(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 (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

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

42. The Losscos, Profitcos and Newcos are affiliated persons and have been related persons to each other since their respective formation. The Losscos, Profitcos and Newcos will be, during the implementation of the Proposed Transactions, related persons and affiliated persons. The structure will be dismantled before the contemplated maturity in the manner described in Paragraphs 35 and 36 if any entity previously mentioned in this paragraph ceases to be affiliated following an acquisition of control by a non-affiliated third party.

43. None of the Profitcos or Losscos is a XXXXXXXXXX.

44. The Losscos are not, and none of the Profitcos is, XXXXXXXXXX.

45. The Losscos and each Profitco will undertake steps to ensure that the interest income earned by a Lossco under the Proposed Transactions will not materially exceed an amount that could be fully sheltered with the Lossco’s non-capital losses. Each Profitco expects to earn taxable income in excess of the interest expense that will arise by virtue of the implementation of the Proposed Transactions. The interest deducted by each Profitco pursuant to paragraph 20(1)(c) in respect of their respective Lossco Loans may create a non-capital loss for the Profitcos during the period in which the Proposed Transactions occur. 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.

46. The payment of dividends on the Newco Preferred Shares have no purpose other than the purpose described under the heading “Purposes of the Proposed Transactions”.

47. The Proposed Transactions will be legally effective.

48. At the time of the Proposed Transactions, the Losscos will have the financial capacity to make the capital contributions to the Newcos as described Paragraphs 32 and 35.

49. At the time it is required to pay the dividends on the Newco Preferred Shares as described in Paragraphs 33 and 35 and at the time it is required to redeem the Newco Preferred Shares as described in Paragraph 35, each Newco will have the financial capacity to satisfy the applicable solvency and liquidity test under the XXXXXXXXXX or the XXXXXXXXXX.

50. At all times, the Profitcos will have the solvency and liquidity to service the Lossco Loans.

51. Each of the Newco Preferred Shares will be term preferred shares.

52. Each of the Lossco Loans will be term loans with a maturity date not later than one year after the date each such Lossco Loan is advanced. Each of the respective Profitcos will have the right to prepay its obligations under the respective Lossco Loans without penalty.

53. Each of the Newco Loans will be demand loans.

54. The Losscos and each respective Profitco will enter into a unanimous shareholders agreement in respect of each of the Newcos authorizing the Lossco to invest any cash on hand in the respective Newcos from time to time on behalf of the Newcos until such time as required by the Newcos to meet their obligations under the terms of the Proposed Transactions.

54.1 The elections described in Paragraphs 10.1 and 20.1 above have not been revoked by Profitco 2 or Lossco 3. There is currently no intention for Profitco 2, Lossco 3, and Newco 3 to revoke the election made, or to be made, under subsection 261(3) and there will be no revocation of such election effective for any taxation year in which the Proposed Transaction is in effect.

54.2 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 the Losscos.

54.3 Neither the Losscos nor the Profitcos will claim, at any time, a capital loss in respect of a disposition of any common or preferred shares of the relevant Newcos.

PURPOSES OF THE PROPOSED TRANSACTIONS

55. The purpose of the Proposed Transactions is to effect a tax consolidation of Profitcos and Losscos by causing Losscos to earn interest income on the Lossco Loans, thus permitting the Losscos to utilize their non-capital loss carry forwards, and to have each of the Profitcos incur interest expense to reduce its income for its current taxation year, and to the extent this creates non-capital losses for any of the Profitcos, to carry back the non-capital losses to reduce their taxable income from prior taxation years.

56. The purpose of both the payment and the receipt of the dividends on each of the Newcos Preferred Shares, as described in Paragraphs 24, 33 and 35, is to provide a reasonable return on the Newco Preferred Shares issued by the Newcos to their respective Profitcos. 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 the Profitcos.

56.1 None of the main purposes of the Proposed Transaction is to change, or to enable the

changing of, the currency in which the Canadian tax results in respect of a property, or property substituted for it, for a taxation year would otherwise be determined.

RULINGS PROVIDED

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, the proposed transactions are completed in the manner described above, and there are no other transactions which may be relevant to the rulings requested, we rule that:

A. Provided that the particular Profitco has a legal obligation to pay interest on the particular Lossco Loan, and the particular Newco Preferred Shares continue to be held by the particular Profitco for the purpose of gaining or producing income therefrom, the particular Profitco will be entitled pursuant to paragraph 20(1)(c) to deduct, in computing its income for a taxation year, the lesser of: (i) the interest paid or payable in respect of the particular Lossco Loan for that taxation year (depending on the method regularly followed by the particular Profitco in computing its income for the purposes of the Act); and (ii) a reasonable amount in respect thereof.

B. The dividends received (or deemed to be received) by each Profitco on the relevant Newco Preferred Shares held by it will be taxable dividends that will, pursuant to subsection 112(1), be fully deductible in computing its taxable income for the taxation year in which the dividends are received (or deemed to be received), and 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. Provided that the only purpose of the dividends in Paragraphs 24, 33 and 35 is what is described under the heading “Purposes of the Proposed Transactions” above, and the Proposed Transactions are undertaken in the manner described above, subsection 55(2) will not apply in respect of the dividends described in Paragraphs 33 and 35 above.

D. Each of the Profitcos will be entitled to carry-back to its prior taxation years the non-capital losses that are expected to arise as a result of the deductions described in Ruling A above, subject to any applicable restrictions in section 111.

E. The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

F. The settlement of the Newco Loans, the Lossco Loans and the Newco Notes as described in Paragraph 35 will not give rise to any “forgiven amount” for purposes of section 80.

G. None of the Profitcos will be subject to Part IV tax with respect to the dividends received from the Newcos, as described in Paragraphs 24, 33 and 35, except to the extent that paragraph 186(1)(b) applies to impose such tax.

H. No amount will be included in the income of the particular Newco pursuant to section 9, or paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital made by the particular Lossco as described in Paragraphs 32 and 35.

I. The provisions of subsection 88(1) will apply to the winding-up of the Newcos into the Losscos as described in Paragraph 36, such that:

(i) Each Newco will be deemed, pursuant to paragraph 88(1)(a), to have disposed of its assets for an amount equal to the cost amount to the respective Newco immediately before the winding-up;

(ii) Each Lossco will be deemed, pursuant to paragraph 88(1)(b), to have disposed of each of the Newcos’ common shares that it owns for proceeds of disposition equal to the greater of the amounts described in subparagraph 88(1)(b)(i) and (ii); and

(iii) Each Lossco will be deemed, pursuant to paragraph 88(1)(c), to have acquired the assets of the Newcos that are distributed to Lossco on the winding-up for an amount equal to the proceeds of disposition to the respective Newco.

J. 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.

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.

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, as described in Paragraphs 23 to 31, and the proposed transactions related to the payment of interest and dividends and to the windup, as described in Paragraphs 32 to 36, are entered into by XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

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

(c) the amount of any non-capital loss, net capital loss 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 J, 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 originally released February 4, 2022 and revised November 3, 2022 and August 4, 2023, or any amendments thereto, to the Proposed Transactions;

(g) whether the elections under subsection 261(3) to use the XXXXXXXXXX as its tax reporting currency were, or will be, validly made by Profitco 2, Lossco 3, and Newco 3;

(h) the application of section 261 to the amount of any income, gain, or loss relevant to, or in respect of, any part of the Proposed Transaction, particularly how the translation of Profitco 2 and Lossco 3’s various Canadian currency amounts and pre-transition debts (if any) were converted from Canadian currency to the XXXXXXXXXX pursuant to subsections 261(7) to (10) that may affect the computation of their income and loss for the relevant taxation years that are impacted by the Proposed Transaction; and

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

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate