30 November 1995 Ruling 9636763 - RELATED GROUP LOSS UTILIZATION SCHEME

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.

Principal Issues:

interest deductibility

Position:

yes

Reasons:

related group loss utilization scheme

XXXXXXXXXX							3-963676
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re:XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge our various telephone conversations.

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in the requested rulings is being considered by a tax services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

Definitions

In this letter unless otherwise expressly stated:

(a)"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;

(b)"adjusted cost base" has the meaning assigned by section 54;

(c)"CBCA" means Canada Business Corporation Act;

(d) XXXXXXXXXX;

(e)"Canadian corporation" has the meaning assigned by subsection 89(1);

(f)"capital property" has the meaning assigned by section 54;

(g)"cost amount" has the meaning assigned under subsection 248(1);

(h)"dividend rental arrangement" has the meaning assigned by subsection 248(1);

(i)"eligible property" has the meaning assigned by subsection 85(1.1);

(j)"forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(k)"guarantee agreement" has the meaning assigned by subsection 112(2.2);

(l)"net capital loss" has the meaning assigned by subsection 111(8);

(m)"non-capital loss" has the meaning assigned by subsection 111(8);

(n)"paid-up capital" has the meaning assigned by subsection 89(1);

(o)"principal amount" has the meaning assigned by subsection 248(1);

(p)"public corporation" has the meaning assigned by subsection 89(1);

(q)"series of transactions or events" has the meaning assigned by subsection 248(10);

(r)"specified financial institution" and "restricted financial institution" have the meanings assigned under subsection 248(1);

(s)"stated capital account" has the meaning assigned by section 26 of the CBCA;

(t)"subsidiary controlled corporation" has the meaning assigned by subsection 248(1);

(u)"taxable Canadian corporation" has the meaning assigned by subsection 89(1); and

(v)"taxable dividend" has the meaning assigned by subsection 89(1).

FACTS

1.XXXXXXXXXX was incorporated in XXXXXXXXXX and is governed by the CBCA. It is a public corporation and a taxable Canadian corporation.

2. XXXXXXXXXX

3. XXXXXXXXXX

4. XXXXXXXXXX

5. XXXXXXXXXX

6. XXXXXXXXXX

7.XXXXXXXXXX has XXXXXXXXXX common shares issued and outstanding, representing all of its issued voting shares. As a result of the proposed transactions described in our advance income tax ruling dated XXXXXXXXXX, 1996 as amended by our letter dated XXXXXXXXXX, 1996 (our file No. 3-961507 and 1-962322 and are collectively referred to herein as the "Ruling"), the XXXXXXXXXX common shares are held, as at XXXXXXXXXX, as follows:

Shareholder			Number of Shares

XXXXXXXXXX

The proposed transactions in the Ruling will be completed by XXXXXXXXXX. On XXXXXXXXXX will own directly XXXXXXXXXX common shares (approximately XXXXXXXXXX%) and indirectly, the remaining XXXXXXXXXX common shares
XXXXXXXXXX

8.The adjusted cost base of the XXXXXXXXXX common shares XXXXXXXXXX will be $XXXXXXXXXX and the paid-up capital of these shares is not less than the stated capital, estimated to be $XXXXXXXXXX The fair market value of these XXXXXXXXXX common shares exceeds the adjusted cost base to XXXXXXXXXX of such shares. The XXXXXXXXXX common shares are held as capital property of XXXXXXXXXX

9. XXXXXXXXXX

10. XXXXXXXXXX

11.As at XXXXXXXXXX had non-capital losses of $XXXXXXXXXX from its taxation years as follows:

XXXXXXXXXX

XXXXXXXXXX is expected to have income of approximately $XXXXXXXXXX for its XXXXXXXXXX taxation year.

In addition, XXXXXXXXXX had net capital loss carry-forwards of $XXXXXXXXXX

12.XXXXXXXXXX sufficient taxable income from which the non-capital losses of XXXXXXXXXX could be deducted. XXXXXXXXXX

13. XXXXXXXXXX

XXXXXXXXXX

14.None of the common shares of Holdco III and Holdco IV (corporations to be incorporated as described in paragraph 17 below) and XXXXXXXXXX referred to herein is or will be subject to a guarantee agreement.

15.None of the common shares of XXXXXXXXXX, Holdco III and Holdco IV referred to herein has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

16.None of the common shares of XXXXXXXXXX, Holdco III and Holdco IV referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a dividend rental arrangement.

PROPOSED TRANSACTIONS

17.XXXXXXXXXX will incorporate two new corporations ("Holdco III" and "Holdco IV") under the CBCA. Holdco III and Holdco IV will be taxable Canadian corporations.

The authorized share capital of each of Holdco III and Holdco IV will consist of an unlimited number of common shares without nominal or par value. No shares will be issued to XXXXXXXXXX on the incorporation of Holdco III and Holdco IV.

18.XXXXXXXXXX will transfer to Holdco III, at fair market value, XXXXXXXXXX common shares of XXXXXXXXXX that XXXXXXXXXX holds in XXXXXXXXXX In consideration for the transfer, Holdco III will issue a demand promissory note, bearing interest at a commercial rate set at the beginning of each quarter reflecting XXXXXXXXXX weighted average cost of short-term borrowings, with a principal amount equal to an amount that is XXXXXXXXXX cost amount of the XXXXXXXXXX common shares at the time of the transfer (the "Holdco III Note") and XXXXXXXXXX common shares.

Holdco III will add to the stated capital account maintained for its common shares an amount equal to the cost amount of the common shares of XXXXXXXXXX transferred by XXXXXXXXXX less the principal amount of the Holdco III Note. The Board of Directors of Holdco III will pass a resolution to this effect under subsection 26(3) of the CBCA.

19.XXXXXXXXXX will jointly elect with Holdco III in prescribed form and within the time allowed by subsection 85(6), to have the rules of subsection 85(1) apply to the transfer of the XXXXXXXXXX common shares. The agreed amount in respect of the transfer of the XXXXXXXXXX common shares transferred will be the lesser of the fair market value of the shares at the time of the disposition and their cost amount to XXXXXXXXXX at that time. The fair market value of the XXXXXXXXXX common shares will exceed their cost amount at the time of the disposition.

20.XXXXXXXXXX will transfer to Holdco IV at fair market value, XXXXXXXXXX the common shares of XXXXXXXXXX that XXXXXXXXXX holds in XXXXXXXXXX In consideration for the transfer, Holdco IV will issue a demand promissory note, bearing interest at a commercial rate set at the beginning of each quarter reflecting XXXXXXXXXX weighted average cost of short-term borrowings, with a principal amount equal to an amount that is XXXXXXXXXX cost amount of the XXXXXXXXXX common shares at the time of the transfer (the "Holdco IV Note") and XXXXXXXXXX common shares.

Holdco IV will add to the stated capital account maintained for its common shares an amount equal to the cost amount of the common shares of XXXXXXXXXX transferred by XXXXXXXXXX less the principal amount of the Holdco IV Note. The Board of Directors of Holdco IV will pass a resolution to this effect under subsection 26(3) of the CBCA.

21.XXXXXXXXXX will jointly elect with Holdco IV in prescribed form and within the time allowed by subsection 85(6), to have the rules of subsection 85(1) apply to the transfer of the XXXXXXXXXX common shares. The agreed amount in respect of the transfer of the XXXXXXXXXX common shares transferred will be the lesser of the fair market value of the shares at the time of the disposition and their cost amount to XXXXXXXXXX at that time. The fair market value of the XXXXXXXXXX common shares will exceed their cost amount at the time of the disposition.

22. XXXXXXXXXX

23.As a result of the transactions outlined in paragraphs 18 to 21 above, XXXXXXXXXX will earn interest income from which, after applying any current losses from business or property that may otherwise be incurred, its non-capital losses may be deducted.

24.XXXXXXXXXX intends, in the ordinary course of business, to declare and pay XXXXXXXXXX dividends on its common shares to Holdco III and Holdco IV. None of the purposes of paying the dividends will be to effect a significant reduction in the portion of the gain that, but for the dividends, would have been realized on a disposition at fair market value of any share of capital stock immediately before the dividend.

25.Each of Holdco III and Holdco IV intend to declare and pay XXXXXXXXXX dividends to XXXXXXXXXX on their common shares to the extent dividends received by each of them, as described in paragraph 24 above, for that period exceed their respective funding requirements to pay operating, general, administrative and interest expense.

26.Once sufficient income has been generated in XXXXXXXXXX to utilize all or a portion of its non-capital losses:

(i) Holdco III will issue to XXXXXXXXXX, in settlement of the principal amount of the Holdco III Note, 1 common share of Holdco III having an aggregate stated capital equal to the principal amount of the Holdco III Note; and

(ii) Holdco IV will issue to XXXXXXXXXX, in settlement of the principal amount of the Holdco IV Note, 1 common share of Holdco IV having an aggregate stated capital equal to the principal amount of the Holdco IV Note.

The settlement of the Holdco III Note and Holdco IV Note by the issuance of 1 common share by each of Holdco III and Holdco IV described herein, will result in an increase in the fair market value of all of the shares of Holdco III or Holdco IV, as the case may be, held by XXXXXXXXXX by an amount equal to the principal amount of the Holdco III Note and Holdco IV Note.

27.Subsequent to the transactions described in paragraph 26 above, XXXXXXXXXX will transfer to XXXXXXXXXX, at fair market value, all the Holdco III common shares held by XXXXXXXXXX. In consideration for the transfer, XXXXXXXXXX will issue to XXXXXXXXXX a number of common shares equal to the number of XXXXXXXXXX common shares held by Holdco III at that time.

XXXXXXXXXX will add to the stated capital maintained for its common shares an amount equal to the amount of the paid-up capital of the XXXXXXXXXX common shares transferred to Holdco III as described in paragraph 18 above. The Board of Directors of XXXXXXXXXX will pass a resolution to this effect under subsection 26(3) of the CBCA.

28.XXXXXXXXXX will jointly elect with XXXXXXXXXX in prescribed form and within the time allowed by subsection 85(6), to have the rules of subsection 85(1) apply to the transfer of the Holdco III common shares. The agreed amount in respect of the transfer of the Holdco III common shares will be equal to their cost amount to XXXXXXXXXX at that time. The fair market value of the Holdco III common shares will exceed their cost amount at the time of the disposition.

29.XXXXXXXXXX will, under subsection 210(3) of the CBCA, commence the winding-up of Holdco III. On the commencement of the winding-up of Holdco III, the XXXXXXXXXX common shares held by Holdco III will be distributed to XXXXXXXXXX and cancelled. As a result of the cancellation, there will be a pro rata reduction in the stated capital of the common shares of XXXXXXXXXX

30.On the commencement of the winding-up of Holdco III, XXXXXXXXXX will transfer to XXXXXXXXXX, at fair market value, all the Holdco IV common shares held by XXXXXXXXXX. In consideration for the transfer, XXXXXXXXXX will issue to XXXXXXXXXX a number of common shares equal to the number of XXXXXXXXXX common shares held by Holdco IV at that time.

XXXXXXXXXX will add to the stated capital maintained for its common shares an amount equal to the amount of the paid-up capital of the XXXXXXXXXX common shares transferred to Holdco IV as described in paragraph 20 above. The Board of Directors of XXXXXXXXXX will pass a resolution to this effect under subsection 26(3) of the CBCA.

31.XXXXXXXXXX will jointly elect with XXXXXXXXXX in prescribed form and within the time allowed by subsection 85(6), to have the rules of subsection 85(1) apply to the transfer of the Holdco IV common shares. The agreed amount in respect of the transfer of the Holdco IV common shares will be equal to their cost amount to XXXXXXXXXX at that time. The fair market value of the Holdco IV common shares will exceed their cost amount at the time of the disposition.

32.XXXXXXXXXX will, under subsection 210(3) of the CBCA, commence the winding-up of Holdco IV. On the commencement of the winding-up of Holdco IV, the XXXXXXXXXX common shares held by Holdco IV will be distributed to XXXXXXXXXX and cancelled. As a result of the cancellation, there will be a pro rata reduction in the stated capital of the common shares of XXXXXXXXXX.

33.The commencement of the windings-up of Holdco III and Holdco IV, as described in paragraphs 29 and 32 above, will occur on or before XXXXXXXXXX.

ADDITIONAL INFORMATION

34.Other than as described in the facts and proposed transactions above:

(i) XXXXXXXXXX is not currently contemplating a disposition of the common shares of XXXXXXXXXX, Holdco III or Holdco IV which it will acquire as described in the proposed transactions above, or any shares which may be substituted therefor; and

(ii) neither Holdco III nor Holdco IV will dispose of any common shares of XXXXXXXXXX other than in the course of the winding-up of Holdco III and Holdco IV as described in paragraphs 29 and 32 above, or any shares which may be substituted therefor.

PURPOSE OF THE PROPOSED TRANSACTIONS

35.XXXXXXXXXX The corporations continue to face a situation in which XXXXXXXXXX taxable income is realized in certain companies in the group, XXXXXXXXXX, while XXXXXXXXXX non-capital losses remain unutilized in XXXXXXXXXX The purpose of the proposed transactions is to allow for the consolidation of profit and losses in the XXXXXXXXXX corporate group. The consolidation will be achieved by a transfer of XXXXXXXXXX investment in the common shares of XXXXXXXXXX to wholly-owned subsidiary corporations primarily for debt consideration resulting in the transfer, as interest income, of sufficient taxable income from XXXXXXXXXX to XXXXXXXXXX to utilize the non-capital losses of XXXXXXXXXX

XXXXXXXXXX

The proposed transactions are similar to the transactions described in the Ruling and which were to be completed on or before XXXXXXXXXX By completing the proposed transactions in the Ruling prior to XXXXXXXXXX and implementing the proposed transactions described herein in XXXXXXXXXX will be able to utilize the non-capital losses of XXXXXXXXXX in its XXXXXXXXXX taxation year.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A.Provided that:

(i)Each of Holdco III and Holdco IV continues to hold the XXXXXXXXXX common shares for the purpose of gaining or producing income (other than income which is exempt from taxation) from the XXXXXXXXXX common shares; and

(ii)each of Holdco III and Holdco IV has a legal obligation to pay interest in respect of the Holdco III Note or Holdco IV Note, as the case may be,

Holdco III and Holdco IV will be entitled to deduct under paragraph 20(1)(c), in computing its income for a taxation year, the lesser of such interest and a reasonable amount in respect thereof paid in the year or payable in respect of the year (depending on the method Holdco III or Holdco IV, as the case may be, regularly follows in computing its income for the purposes of the Act).

B.The provisions of subsection 85(1) will apply to:

(i)the transfer of the XXXXXXXXXX common shares to Holdco III described in paragraph 18 above; and

(ii)the transfer of the XXXXXXXXXX common shares to Holdco IV described in paragraph 20 above

with the result that the amount agreed upon by the transferor and each transferee in their joint election in respect of the transferred shares will, in each case, be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to the transferor and cost thereof to the transferee.

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers described herein.

C.The provisions of subsection 85(2.1) will apply, but will not result in a reduction to the paid-up capital of:

(i)the Holdco III common shares issued to XXXXXXXXXX described in paragraph 18 above; and

(ii)the Holdco IV common shares issued to XXXXXXXXXX described in paragraph 20 above.

D.Pursuant to the application of clause 256(7)(a)(i)(A), control of XXXXXXXXXX will be deemed not to have been acquired on the transfers of the XXXXXXXXXX common shares to Holdco III and Holdco IV, as described in paragraphs 18 and 20 above, for the purpose of the provisions enumerated in subsection 256(7).

E.The dividends received by Holdco III and Holdco IV, as described in paragraph 24 above, and by XXXXXXXXXX, as described in paragraph 25 above, will be taxable dividends, that will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been 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.Part IV.1 of the Act will not apply to the dividends described in paragraphs 24 and 25 above because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1. Part VI.1 of the Act will not apply to the dividends described in paragraphs 24 and 25 above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

G.By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in paragraphs 24 and 25 above, provided that there is not:

(i)a disposition of any property to a person to whom XXXXXXXXXX, Holdco III or Holdco IV, as the case may be, was not related; or

(ii)a significant increase in the interest in any corporation of any person to whom XXXXXXXXXX, Holdco III or Holdco IV, as the case may be, was not related;

which is part of a series of transactions or events that includes the proposed transactions described herein.

H.The provisions of subsection 84(1) will not apply to deem Holdco III or Holdco IV, as the case may be, to have paid a dividend to XXXXXXXXXX as a result of the issuance by each of Holdco III and Holdco IV of its one common share to XXXXXXXXXX as described in paragraph 26 above.

I.The settlement of the Holdco III Note and Holdco IV Note described in paragraph 26 above, will not give rise to a forgiven amount.

J.The fair market value of the Holdco III Note will be added in computing the adjusted cost base to XXXXXXXXXX of its common shares of Holdco III, as a result of the settlement of the Holdco III Note described in paragraph 26 above, and the fair market value of the Holdco IV Note will be added in computing the adjusted cost base to XXXXXXXXXX of its common shares of Holdco IV, as a result of the settlement of the Holdco IV Note described in paragraph 26 above.

K.The provisions of subsection 85(1) will apply to:

(i)the transfer of the Holdco III common shares to XXXXXXXXXX described in paragraph 27 above; and

(ii)the transfer of the Holdco IV common shares to XXXXXXXXXX described in paragraph 30 above;

with the result that the amount agreed upon by the transferor and each transferee in their joint election in respect of the transferred shares will, in each case, be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to the transferor and cost thereof to the transferee. Paragraph 85(1)(h) will apply to deem that the cost to XXXXXXXXXX of the XXXXXXXXXX common shares received as consideration for the transfers described in paragraphs 27 and 30 above will be the agreed amount in respect of the Holdco III common shares and Holdco IV common shares transferred.

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers described herein.

L.The provisions of subsection 85(2.1) will apply, but will not result in a reduction to the paid-up capital of:

(i)the XXXXXXXXXX common shares issued to XXXXXXXXXX described in paragraph 27 above; and

(ii)the XXXXXXXXXX common shares issued to XXXXXXXXXX described in paragraph 30 above.

M.Pursuant to the application of clause 256(7)(a)(i)(A), control of Holdco III and Holdco IV will be deemed not to have been acquired on the transfers to XXXXXXXXXX of the Holdco III common shares and Holdco IV common shares, as described in paragraphs 27 and 30 above, for the purpose of the provisions enumerated in subsection 256(7).

N.Pursuant to the application of subparagraph 256(7)(a)(ii), control of XXXXXXXXXX will be deemed not to have been acquired on the windings-up of Holdco III and Holdco IV, as described in paragraphs 29 and 32 above, for the purpose of the provisions enumerated in subsection 256(7).

O.After the winding-up of each of Holdco III and Holdco IV into XXXXXXXXXX as described in paragraphs 29 and 32 above are completed:

(i)the provisions of subsection 88(1) will apply to the windings-up;

(ii)the XXXXXXXXXX common shares held by Holdco III and Holdco IV distributed to XXXXXXXXXX on the windings-up will be deemed by paragraph 88(1)(a) to have been disposed of for proceeds of disposition equal to the cost amount to each of Holdco III and Holdco IV, respectively, immediately before the windings-up;

(iii)the shares of Holdco III and Holdco IV held by XXXXXXXXXX immediately before the windings-up will be deemed by paragraph 88(1)(b) to have been disposed of by XXXXXXXXXX for proceeds equal to the adjusted cost base to XXXXXXXXXX of such shares immediately before the windings-up;

(iv)the provisions of subsections 84(2) and (3) will not apply on the disposition of the XXXXXXXXXX common shares by Holdco III and Holdco IV; and

(v)the provisions of subsection 88(1.1) will apply to permit XXXXXXXXXX to deduct the non-capital losses of Holdco III and Holdco IV in computing its taxable income for any taxation year commencing after the commencement of the windings-up to the extent that the requirements in paragraphs 88(1.1)(a) and (b) are satisfied and subject to the limitations in paragraph 88(1.1)(e) and section 111.

P.The provisions of subsections 15(1), 56(2), 69(4), 69(11) and 246(1) will not be applied as a result of the proposed transactions, in and by themselves.

Q.The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

OPINION

1.Provided that proposed paragraphs 80(2)(g) and (g.1) are enacted in substantially the same form as set out in Bill C-69, which was given first reading in the House of Commons on December 2, 1996, and provided that

(a)the increase in the fair market value of all of the shares of Holdco III held by XXXXXXXXXX, as a consequence of the settlement of the Holdco III Note by the issuance of one common share of Holdco III as described in paragraph 26 above, is equal to the principal amount of the Holdco III Note; and

(b)the increase in the fair market value of all of the shares of Holdco IV held by XXXXXXXXXX, as a consequence of the settlement of the Holdco IV Note by the issuance of one common share of Holdco IV as described in paragraph 26 above, is equal to the principal amount of the Holdco IV Note

it is our opinion that no forgiven amount will arise as a result of the settlements.

2.Provided that proposed paragraph 55(3)(a) is enacted in substantially the same form as set out in Bill C-69, which was given first reading in the House of Commons on December 2, 1996, by virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the taxable dividends described in paragraphs 24 and 25 above, provided that there is no dispositions or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v), which is part of a series of transactions or events as a part of which a dividend was received.

3.Provided that proposed subsection 69(11) is enacted in substantially the same form as set out in Bill C-69, which was given first reading in the House of Commons on December 2, 1996, it will not apply to the transfers described in paragraphs 18, 20, 27 and 30 above.

4.Provided that proposed subparagraph 256(7)(a)(ii) is enacted in substantially the same form as set out in Bill C-69, which was given first reading in the House of Commons on December 2, 1996, control of XXXXXXXXXX will be deemed not to have been acquired on the windings-up of Holdco III and Holdco IV, as described in paragraphs 29 and 32 above, for the purpose of the provisions enumerated in subsection 256(7).

The foregoing opinions are not rulings and, in accordance with the practice referred to in Information Circular 70-6R2, are not binding on Revenue Canada.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch