27 March 1992 Income Tax Severed Letter 9204665 - Loss Utilization

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: LOSS UTILIZATION Section(s): 20(1)(c), 111(1)(a), 245(2)]

XXX 5-920466 G. Martineau (613) 957-8953 Attention: XXX

March 27, 1992

Dear Sir/Madam:

Re: Loss utilization within a controlled corporate group

This is in reply to your letter dated February 11, 1992 wherein you requested our opinion with respect to two hypothetical situations outlined in your letter involving transactions between related corporations in order to utilize losses.

The situations outlined in your letter appear to involve actual proposed transactions with identifiable taxpayers. As indicated in Information Circular 70-6R2, we do not express opinions on specified proposed transactions other than as a reply to an advance income tax ruling. As a consequence, therefore, we may only offer the following general comments.

Paragraph 20(1)(c) of the Income Tax Act (the "Act") establishes that in order for an amount of interest on borrowed money to be deductible, there must be a legal obligation to pay the amount and the money must have been borrowed for the purpose of gaining or producing income from a business or property.

When preferred share acquisitions are used as part of a series of transactions designed to effect loss utilization in a corporate group, the Department permits the deductibility of the interest expense if the preferred shares are cumulative and have a dividend rate above the borrowing rate. The transactions must also be commercially reasonable when compared to the amount of money that each of the corporations could reasonably expect to borrow from an arm's length lender for use in their business.

In paragraph 5 of Supplement I to Information Circular 88-2, the Department states that the transactions described in the said paragraph for the losses utilization between a parent corporation and its canadian subsidiary, which are related corporations, are not considered an abuse of the Act read as a whole. We also refer you to ATR-44 that states that subsection 245(2) of the Act does not apply to transactions undertaken to utilize deductions and credits within a related corporate group. Usually, there must be some commercial reality to these transactions which would be evidenced by the size of the investment in relation to the business involved, and the time frames of the transaction.

The transfer of property by a lossco to a newco, a shell corporation, followed shortly by the almagation of both corporations could be viewed as having, in substance, no commercial reality.

In order to determine whether or not subsection 245(2) of the Act would apply to a particular situation, we would have to examine all of the relevant facts of the particular situation. Since all the relevant facts of a particular situation can only be disclosed in the context of an advance tax ruling, we are not able to express an opinion as to whether or not subsection 245(2) of the Act would apply to your situations and we are only prepared to give a definitive response in the context of an advance tax ruling.

The above comments, as mentioned above, are an expression of opinion only and are not binding on the Department; nevertheless we hope this will be of assistance.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate