2024 Ruling 2024-1015641R3 - 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 the loss consolidation arrangement is acceptable.

Position: Yes.

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

XXXXXXXXXX 2024-101564

XXXXXXXXXX, 2024

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the information provided in subsequent correspondence.

We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions or issues involved in this ruling 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 any such tax 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 Ruling Directorate in relation to the Taxpayers or a related person, except as noted in paragraph 14 below.

The tax account numbers, addresses, Tax Services Offices and Tax Centres of the taxpayers involved in the Proposed Transactions are as follows:

XXXXXXXXXX

This document is based solely on the facts and proposed transactions described below. The documentation submitted with the request does not form part of the facts and proposed transactions, and any references thereto are provided solely for the convenience of the reader.

Definitions

Unless otherwise stated:

i. all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, as amended, (the “Act”);

ii. all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

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

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

“Additional Tax” means the 1.5% surtax on banks and life insurers in section 123.6;

“affiliated persons” 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;

“CRA” means the Canada Revenue Agency;

“credit union” has the meaning assigned by subsection 137(6);

“CUEC” means “cumulative unused excess capacity” and has the meaning assigned by subsection 18.2(1);

“Daylight Loan” means the loan described in Paragraph 17;

“EGE” means “eligible group entity” and has the meaning assigned by subsection 18.2(1);

“FIGE” means “financial institution group entity” and has the meaning assigned by subsection 18.2(1);

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

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

“Holdco 1” means XXXXXXXXXX;

“Holdco 1 Loan” means the interest-bearing loan made by Opco to Holdco 1, as described in Paragraph 18;

“Holdco 2” means XXXXXXXXXX;

“Interest-free Loan” means the non-interest bearing loan made by Newco to Opco, as described in Paragraph 21;

“Lossco” means a corporation to be incorporated by Holdco 1, as described in Paragraph 16;

“Lossco Common Shares” means the common shares described in Paragraph 16;

“Lossco Loan” means the interest-bearing loan made by Holdco 1 to Lossco, as described in Paragraph 19;

“Newco” means a corporation to be incorporated by Opco, as described in Paragraph 15;

“Newco Common Shares” means the common shares described in Paragraph 15 a);

“Newco Preferred Shares” means the preferred shares described in Paragraph 15 b);

“New Daylight Loan” means the loan described in Paragraph 24 b);

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

“Opco” means XXXXXXXXXX;

“Opco 2” means XXXXXXXXXX;

“Opco’s Tax Attributes” means Opco’s unused balance of non-capital losses, as described in Paragraph 10;

“Paragraph” refers to a numbered or lettered paragraph in this letter;

“Parentco” means XXXXXXXXXX;

“Parentco Group” means XXXXXXXXXX;

“Profitco” means XXXXXXXXXX;

“Proposed Transactions” means the transactions described in Paragraphs 15 to 29;

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

XXXXXXXXXX;

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

“RFI” means “restricted financial institution” and has the meaning assigned by subsection 248(1);

“RIFE” means “restricted interest and financing expenses” and has the meaning assigned by subsection 111(8);

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

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

“subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1);

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

“taxation year” has the meaning assigned by subsection 249(1);

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

Facts

A complete description of all the relevant facts is as follows:

1. Parentco is a TCC incorporated under the XXXXXXXXXX. Parentco is a XXXXXXXXXX.

2. Holdco 1 is a TCC governed by the XXXXXXXXXX. Holdco 1 is a subsidiary wholly-owned corporation of Parentco.

3. Holdco 2 is a TCC governed by the XXXXXXXXXX. Holdco 2 is a subsidiary wholly-owned corporation of Holdco 1. Holdco 2 has regulatory restrictions in respect of its capital and indebtedness ratio.

4. Profitco is a TCC governed by the XXXXXXXXXX. Profitco is a subsidiary wholly-owned corporation of Holdco 2. Profitco carries XXXXXXXXXX and is a public corporation pursuant to subsection 141(2). Profitco has regulatory restrictions in respect of its capital and indebtedness ratio.

5. Profitco is subject to the Additional Tax.

6. For the taxation year ended XXXXXXXXXX, Profitco had permanent establishments in all the provinces and territories of Canada. The provincial allocation of Profitco’s taxable income was as follows:

		Jurisdiction		%
		XXXXXXXXXX		XXXXXXXXXX

For the taxation year(s) during which the Proposed Transactions are implemented, it is anticipated that the provincial allocation of Profitco’s taxable income will remain similar.

7. Opco 2 is a TCC governed by the XXXXXXXXXX. Opco 2 is a subsidiary wholly-owned corporation of Profitco.

8. For the taxation year ended XXXXXXXXXX, Opco 2 had a permanent establishment only in the province of XXXXXXXXXX.

9. Opco is a TCC governed by the XXXXXXXXXX. Opco is a subsidiary wholly-owned corporation of Parentco. Opco is a XXXXXXXXXX.

10. At the end of the XXXXXXXXXX taxation year, Opco had unexpired federal non-capital losses carried forward generated in the course of carrying its activities of approximately $XXXXXXXXXX (the “Opco’s Tax Attributes”). Opco’s Tax Attributes are not restricted under subsection 111(5). The non-capital losses were incurred in the following taxation years:

	Year		($)
	XXXXXXXXXX	XXXXXXXXXX

11. For the taxation year ended XXXXXXXXXX, Opco had permanent establishments in the provinces of XXXXXXXXXX. The provincial allocation of Opco’s taxable income was as follows:

	Jurisdiction	%
	XXXXXXXXXX	XXXXXXXXXX

For the taxation year(s) during which the Proposed Transactions are implemented, it is anticipated that the provincial allocation of Opco’s taxable income will remain similar.

12. Each of Parentco, Holdco 1, Holdco 2, Opco, Opco 2 and Profitco is a RFI and a SFI.

13. Each of Parentco, Opco, Opco 2 and Profitco is a FIGE.

Holdco 2 is not a FIGE. The FMV of the capital stock of Holdco 2 is primarily attributable to shares of the capital stock of Profitco, which is an entity described in paragraph (c) of the definition “FIGE” in subsection 18.2(1).

Holdco 1 is not a FIGE. The FMV of the capital stock of Holdco 1 is primarily attributable to shares of the capital stock of Holdco 2.

14. The Proposed Transactions are similar to the transactions considered in advance income tax ruling XXXXXXXXXX and involving the Parentco Group.

Proposed Transactions

The Proposed Transactions will occur in the order presented unless otherwise indicated.

15. Opco will incorporate Newco under the XXXXXXXXXX. The taxation year-end of Newco will be XXXXXXXXXX. Newco will be a TCC and a SFI. Newco’s activities will be limited to those described in the Proposed Transactions.

The authorized share capital of Newco will consist of an unlimited number of:

a) Newco Common Shares, which will be voting (one vote per share), participating and without par value; and

b) Newco Preferred Shares, which will have the following attributes:

i. non-voting;

ii. non-participating;

iii. redeemable and retractable, subject to applicable law, at any time for an amount equal to the cash amount for which they were issued; and

iv. entitled to a cumulative dividend, calculated daily and accruing by reference to the redemption/retraction amount of the Newco Preferred Shares, at the rate established at Paragraph 18 for the Holdco 1 Loan, plus XXXXXXXXXX% per annum.

Newco will issue XXXXXXXXXX Newco Common Shares to Opco for a consideration of $XXXXXXXXXX.

Newco will be an EGE in respect of Opco.

16. Holdco 1 will incorporate Lossco under the XXXXXXXXXX. The taxation year-end of Newco will be XXXXXXXXXX. Lossco will be a TCC and a SFI. Lossco’s activities will be limited to those described in the Proposed Transactions.

The authorized share capital of Lossco will consist of an unlimited number of Lossco Common Shares, which will be voting (one vote per share), participating and without par value.

Lossco will issue XXXXXXXXXX Lossco Common Shares to Holdco 1 for a consideration of $XXXXXXXXXX.

Lossco will be an EGE in respect of Holdco 1.

17. Opco will borrow an amount of approximately $XXXXXXXXXX from Parentco on a “daylight loan” basis (the “Daylight Loan”) on arm’s length commercial terms customary for this type of loan. The amount of the Daylight Loan will not exceed the borrowing capacity of the Parentco Group.

18. Opco will use the proceeds of the Daylight Loan to make an interest-bearing loan of the same amount to Holdco 1 (the “Holdco 1 Loan”). Simple interest will accrue on the Holdco 1 Loan and will be calculated daily at an annual fixed rate that is equal to a commercial arm’s length rate, currently estimated to be XXXXXXXXXX% per annum. The Holdco 1 Loan will be payable on demand and the interest on the Holdco 1 Loan will be paid periodically, as described in Paragraph 23 d).

19. Holdco 1 will use the proceeds of the Holdco 1 Loan to make an interest-bearing loan of the same amount to Lossco (the “Lossco Loan”). Simple interest will accrue on the Lossco Loan at a rate equal to the interest rate of the Holdco 1 Loan plus XXXXXXXXXX%. The Lossco Loan will be payable on demand and the interest on the Lossco Loan will be paid periodically, as described in Paragraph 23 c).

20. Lossco will use the proceeds of the Lossco Loan to subscribe for Newco Preferred Shares. The redemption amount, retraction amount, ACB and PUC of the issued Newco Preferred Shares will be equal to the amount of the Lossco Loan. The amount of dividends to be received by Lossco on the Newco Preferred Shares will be sufficient to permit Lossco to realize a profit on its investment in the Newco Preferred Shares, after the deduction of all its expenses including any interest on the Lossco Loan.

21. Newco will use the proceeds received from the subscription of the Newco Preferred Shares in Paragraph 20 to make an interest-free loan of the same amount to Opco (the “Interest-free Loan”). The Interest-free Loan will be payable on demand.

22. Opco will use the proceeds from the Interest-free Loan to repay the Daylight Loan to Parentco.

23. While the Lossco Loan is outstanding, the following transactions will occur, at least annually:

a) Opco will make a contribution of capital to Newco in an amount equal to the amount of the accrued and unpaid dividends, if any, payable on such date by Newco on the Newco Preferred Shares. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Newco, and, for greater certainty, to the PUC of any class of shares of Newco. For accounting purposes, the amount of the contribution of capital will be recorded as contributed surplus. The contribution of capital will not be income to Newco pursuant to generally accepted accounting principles;

b) Newco will pay the accrued and unpaid dividends on the Newco Preferred Shares to Lossco;

c) Lossco will pay the accrued and unpaid interest on the Lossco Loan to Holdco 1; and

d) Holdco 1 will pay the accrued and unpaid interest on the Holdco 1 Loan to Opco.

24. On or before XXXXXXXXXX, the loss consolidation structure will be unwound in the following manner:

a) Opco will make a contribution of capital to Newco in an amount equal to any accrued and unpaid dividends on the Newco Preferred Shares held by Lossco. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the stated capital of any class of shares of Newco, and, for greater certainty, to the PUC of any class of shares of Newco. For accounting purposes, the amount of the contribution of capital, if any, will be recorded as contributed surplus. The contribution of capital, if any, will not be income to Newco pursuant to generally accepted accounting principles;

b) Opco will borrow an amount equal to the amount outstanding on the Interest-free Loan from Parentco on a “daylight loan” basis (the “New Daylight Loan”). Opco will use the proceeds of the New Daylight Loan to repay the Interest-free Loan;

c) Newco will use the proceeds of the contribution of capital from Opco described in Paragraph 24 a) to pay all accrued and unpaid dividends on the Newco Preferred Shares to Lossco;

d) Newco will use the proceeds from the repayment of the Interest-free Loan described in Paragraph 24 b) to redeem all the issued and outstanding Newco Preferred Shares held by Lossco;

e) Lossco will use most of the proceeds from the payment of the dividends on the Newco Preferred Shares received in Paragraph 24 c) and from the redemption of the Newco Preferred Shares received in Paragraph 24 d) to repay to Holdco 1 the Lossco Loan and the accrued unpaid interest thereon;

f) Holdco 1 will use most of the proceeds from the repayment of the Lossco Loan described in Paragraph 24 e) to repay to Opco the Holdco 1 Loan and the accrued unpaid interest thereon; and

g) Opco will use most of the proceeds from the repayment of the Holdco 1 Loan described in Paragraph 24 f) to repay to Parentco the New Daylight Loan.

25. After the transactions described in Paragraph 24 and before XXXXXXXXXX, Holdco 1 will transfer all of its Lossco Common Shares to Holdco 2. In consideration for such transfer, Holdco 2 will issue common shares of its capital stock to Holdco 1.

Holdco 1 and Holdco 2 will jointly elect, in the prescribed form and manner and within the time specified in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Lossco Common Shares.

The agreed amount in respect of the Lossco Common Shares transferred will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (i.e., the FMV of those shares and $XXXXXXXXXX, being the ACB of such shares). Holdco 2 will add to its stated capital account in respect of the common shares issued to Holdco 1 an amount equal to the PUC of the Lossco Common Shares, which will be XXXXXXXXXX.

26. After the transaction described in Paragraph 25 and before XXXXXXXXXX, Holdco 2 will transfer all of its Lossco Common Shares to Profitco. In consideration for such transfer, Profitco will issue common shares of its capital stock to Holdco 2.

Holdco 2 and Profitco will jointly elect, in the prescribed form and manner and within the time specified in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the Lossco Common Shares.

The agreed amount in respect of the Lossco Common Shares transferred will be an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (i.e., the FMV of those shares and $XXXXXXXXXX, being the ACB of such shares). Profitco will add to its stated capital account in respect of the common shares issued to Holdco 2 an amount equal to the PUC of the Lossco Common Shares, which will be XXXXXXXXXX.

27. Shortly after the transaction described in Paragraph 26 and before XXXXXXXXXX, Profitco will cause Lossco to be wound-up in such a manner that all the assets of Lossco will be acquired by Profitco and all of the liabilities, if any, of Lossco will be assumed by Profitco. It is expected that subsection 88(1) will apply to the wind-up of Lossco. Lossco will be formally dissolved before the end of the first taxation year of Profitco commencing after the commencement of the winding-up of Lossco. Lossco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.

28. Shortly after the transaction described in Paragraph 26 and before XXXXXXXXXX, Opco will cause Newco to be wound-up in such a manner that all the assets of Newco will be acquired by Opco and all of the liabilities, if any, of Newco will be assumed by Opco. It is expected that subsection 88(1) will apply to the wind-up of Newco. Newco will be formally dissolved before the end of the first taxation year of Opco commencing after the commencement of the winding-up of Newco. Newco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.

One or more FIGEs of the Parentco Group and Lossco will jointly elect in prescribed form, pursuant to subsection 18.2(4), to designate an amount equal, in respect of each particular FIGE, to all or a portion of its CUEC, and that amount will be an amount of transferred capacity of each particular FIGE for its taxation year ending in Lossco’s XXXXXXXXXX taxation year and an amount of received capacity of Lossco for its XXXXXXXXXX taxation year.

29. If necessary, after the wind-ups of Lossco and Newco, two new corporations (Lossco 2 and Newco 2) will be incorporated having the same characteristics as Lossco and Newco. The above Proposed Transactions, with Lossco 2 and Newco 2 (instead of Lossco and Newco) will be repeated in the subsequent year in order to use the remaining balance of Opco’s Tax Attributes, if any. Both Lossco 2 and Newco 2 will be wound-up on or before XXXXXXXXXX.

Additional information

30. Opco and Profitco are affiliated persons and have been related persons since their incorporation. Opco, Profitco, Lossco and Newco will be related persons and affiliated persons throughout the period that the loss consolidation structure is in place. The structure will be unwound in the manner described in Paragraphs 24 to 28 if any entity previously mentioned in this letter request ceases to be affiliated following an acquisition of control by a non-affiliated third party.

31. Lossco will not acquire the Newco Preferred Shares in the ordinary course of its business.

32. Lossco and Newco will not be used for any other purposes than those described in the Proposed Transactions. Opco will not claim, at any time, a capital loss in respect of its capital contribution in Newco. Lossco and Newco will never be insolvent.

33. Lossco will not be a “financial institution” as defined in subsection 190(1). Neither Profitco nor Lossco is or will be a financial intermediary corporation, a “mutual fund corporation” as defined in subsection 131(8) or an “investment corporation” as defined in subsection 130(3).

34. 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 or agreement 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), 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).

35. At the time of the Proposed Transactions:

a) Opco will have the financial capacity, including accessing its leverage capacity, to make the capital contributions to Newco as described in Paragraphs 23 a) and 24 a); and

b) Newco will have the financial capacity to satisfy the applicable solvency test required to pay the dividends on the Newco Preferred shares and to redeem the Newco Preferred shares as described in Paragraphs 23 b), 24 c) and 24 d).

36. At all times, Lossco will have the solvency and liquidity to service the Lossco Loan.

37. Profitco and Opco will undertake steps to ensure that the interest income earned by Opco under the Proposed Transactions will not materially exceed an amount that could be fully sheltered with Opco’s non-capital losses. The interest deducted by Lossco pursuant to paragraph 20(1)(c) in respect of the Lossco Loan will create a non-capital loss for Lossco during the period in which the Proposed Transactions occur. Profitco expects to earn taxable income in excess of Lossco’s non-capital losses that will arise by virtue of the implementation of the Proposed Transactions. Any such non-capital loss will not be carried back to a prior taxation year and will be carried forward in a taxation year commencing after the commencement of the winding-up of Lossco in accordance with the provisions of subsection 88(1.1) and section 111.

38. Lossco and Holdco 1 will not elect to treat the interest payable on the Lossco Loan as excluded interest pursuant to paragraph (e) of the definition “excluded interest” in subsection 18.2(1).

39. The aggregate CUEC of EGEs in respect of Lossco that are FIGEs of the Parentco Group is anticipated to exceed the amount of interest payable by Lossco on the Lossco Loan.

40. The Proposed Transactions will be legally effective.

Purposes of the Proposed Transactions

41. The purpose of the Proposed Transactions is to effect a tax consolidation of Opco and Profitco in order to permit Profitco to utilize the non-capital losses of Opco. Absent the Proposed Transactions, it is expected that Opco would not generate sufficient taxable income to utilize its non-capital losses or such losses may remain unused for a significant period of time.

42. Because of regulatory restrictions in respect of Profitco’s capital and indebtedness ratio, the interest-bearing loan necessary to achieve the loss consolidation is being made to Lossco (the Lossco Loan) instead of to Profitco.

43. The purpose of both the payment and the receipt of the dividends on the Newco Preferred Shares described in Paragraphs 23 b) and 24 c) is to provide a reasonable return on the Newco Preferred Shares issued by Newco to Lossco. More specifically, none of the purposes of the dividends is to reduce the FMV or capital gain of any share, nor to increase the total cost amounts of any properties.

44. The purpose of the Proposed Transactions is not to reduce the Additional Tax or to shift income between provinces and any such reduction of Additional Tax or shift of income between provinces will be incidental to the Proposed Transactions.

45. 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 Opco.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, additional information, completed and proposed transactions and purpose of the proposed transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Subject to the application of subsection 18.2(2), provided that Lossco has a legal obligation to pay interest on the Lossco Loan and that Lossco continues to hold the Newco Preferred Shares for the purpose of gaining or producing income therefrom, Lossco 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 Lossco in computing its income for purposes of the Act) in respect of the year on the Lossco Loan; or (ii) a reasonable amount in respect thereof.

B. Subject to the application of subsection 18.2(2), provided that Holdco 1 has a legal obligation to pay interest on the Holdco 1 Loan and that Holdco 1 continues to hold the Lossco Loan for the purpose of gaining or producing income therefrom, Holdco 1 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 Holdco 1 in computing its income for purposes of the Act) in respect of the year on the Holdco 1 Loan; or (ii) a reasonable amount in respect thereof.

C. Provided that:

(i) the FMV of the capital stock of Holdco 1 is, as described in paragraph 13, primarily attributable to any combination of shares or indebtedness of one or more entities described in any of paragraphs (a) to (f) of the definition “FIGE” in subsection 18.2(1) that are controlled by Holdco 1; and

(ii) the conditions set out in paragraphs 18.2(4)(a), (b) and (d) are satisfied;

Lossco will be entitled, pursuant to subsection 18.2(4), to be transferred CUEC from one or more FIGEs that are EGEs in respect of Lossco within the limits set out in paragraphs 18.2(4)(e) and (g).

D. In respect of the contributions of capital made by Opco as described in Paragraphs 23 a) and 24 a), no amount will be included in the income of Newco pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x);

E. Dividends received by Lossco on the Newco Preferred Shares, as described in Paragraphs 23 b) and 24 c), will be taxable dividends and such dividends will be deductible pursuant to subsection 112(1) in computing the taxable income of Lossco 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).

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 Lossco into Profitco, as described in Paragraph 27, to permit Profitco to deduct the non-capital losses and/or the RIFE of Lossco in computing its taxable income for any taxation year commencing after the commencement of the winding-up, subject to the limitations in paragraph 88(1.1)(e) and section 111;

G. Provided that the only purpose of the dividends in Paragraphs 23 b) and 24 c) is as described in the “Purposes of the Proposed Transactions,” and the Proposed Transactions are undertaken in the manner described above, subsection 55(2) will not apply to such dividends received by Lossco on the Newco Preferred Shares.

H. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the Proposed Transaction, in and of themselves.

I. Subsection 245(2) will not apply to the Proposed Transaction, in and of themselves, to redetermine the tax consequences confirmed in the Rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA, provided that the Proposed Transactions described in Paragraphs 15 to 28 are completed on or before XXXXXXXXXX and the Proposed Transactions described in Paragraph 29 are completed on or before XXXXXXXXXX.

The above Rulings are based on the law as it reads at the date of this letter 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 FMV or ACB of any property referred to herein or the stated capital or PUC in respect of any share referred to herein;

b. the reasonableness or FMV 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. the application or non-application of a general anti-avoidance provision of any province;

f. any tax consequences relating to the facts, Proposed Transactions and additional information described herein other than those specifically described in the Rulings given above.

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

Yours truly,

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