30 November 1996 Ruling 9711083 - RELATED GROUP 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.

Principal Issues:

Whether group loss utilization regime available to corporation holding XXXXXXXXXX% of voting shares and only XXXXXXXXXX% of equity.

Position: Yes

Reasons:

Test is whether corporations are related (affiliated)

XXXXXXXXXX							3-971108
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge your letters of XXXXXXXXXX and 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 or subparagraph is a reference to the relevant provision of the Act;

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

(c)"affiliated persons" has the meaning assigned by proposed subsection 251.1(1);

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

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

(f)"financial intermediary corporation" has the meaning assigned by subsection 191(1);

(g)"investment tax credit" has the meaning assigned by subsection 127(9);

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

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

(j)XXXXXXXXXX;

(k)"related persons" has the meaning assigned by subsection 251(2);

(l)"SR&ED" means "scientific research and experimental development" as that expression is defined in subsection 248(1) and Regulation 2900;

(m)"specified financial institution" has the meaning assigned by subsection 248(1);

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

(o)"taxable income" has the meaning assigned by subsection 248(1).

FACTS

1.XXXXXXXXXX ("Holdco") is a public corporation and a taxable Canadian corporation. Holdco and its subsidiaries and affiliated corporations form a group of companies engaged in XXXXXXXXXX.

The principal subsidiaries of Holdco are:

(a)XXXXXXXXXX ("Subco 1")

(b)XXXXXXXXXX

(c)XXXXXXXXXX ("Subco 2")

(d)XXXXXXXXXX

The fiscal period of Holdco ends on XXXXXXXXXX. As at XXXXXXXXXX, Holdco had approximately $XXXXXXXXXX of non-capital losses, approximately $XXXXXXXXXX of investment tax credits and approximately $XXXXXXXXXX of unclaimed SR&ED expenditures available for carryforward.

The investment tax credits of Holdco had been earned as follows:

Year Amount (approximate)

XXXXXXXXXX

2.Subco 2 is a public corporation governed by the XXXXXXXXXX and is a taxable Canadian corporation.

The authorized share capital of Subco 2 consists of:

(a)an unlimited number of preferred shares, non-participating, non-voting with a par value of $XXXXXXXXXX each;

(b)an unlimited number of Class XXXXXXXXXX common shares, participating, voting, without par value; and

(c)an unlimited number of Class XXXXXXXXXX shares, participating, non-voting, without par value.

As at XXXXXXXXXX, there were XXXXXXXXXX Class XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX shares issued and outstanding in Subco 2. The Class XXXXXXXXXX shares are listed on the XXXXXXXXXX Exchange.

Holdco beneficially owns XXXXXXXXXX Class XXXXXXXXXX common shares and XXXXXXXXXX Class XXXXXXXXXX shares of Subco 2. The shares owned by Holdco represent approximately XXXXXXXXXX% of the outstanding participating shares and approximately XXXXXXXXXX% of the voting rights of the outstanding voting shares of Subco 2. Holdco hold its interest in Subco 2 as a long-term investment.

XXXXXXXXXX

Subco 2's business operations are considered an integral part of the Holdco group.

The fiscal period of Subco 2 ends on XXXXXXXXXX.

3.XXXXXXXXXX ("Subco 3") is a wholly-owned subsidiary of Holdco formed under the XXXXXXXXXX and it is a taxable Canadian corporation. Subco 3 owns shares of Subco 1, which is engaged in XXXXXXXXXX.

The fiscal period of Subco 3 ends on XXXXXXXXXX.

4.The non-consolidated financial statements of Holdco for its fiscal year ended XXXXXXXXXX indicate that Holdco had:

(a)assets of approximately $XXXXXXXXXX which include amounts receivable from affiliated companies of approximately $XXXXXXXXXX;

(b)liabilities of approximately $XXXXXXXXXX which include amounts due to affiliated companies of approximately $XXXXXXXXXX; and

(c)shareholders' equity of approximately $XXXXXXXXXX, which includes retained earnings, cumulative currency translation adjustments and equity relating to preferred shares.

Holdco had net income of approximately $XXXXXXXXXX in its taxation year ended XXXXXXXXXX. It is expected that for its taxation years ending in XXXXXXXXXX, Holdco will have no taxable income.

The arm's-length borrowings of Holdco and its Canadian wholly-owned subsidiaries currently amount to approximately $XXXXXXXXXX. A trust indenture between Holdco and XXXXXXXXXX (the "Holdco" Trust Indenture") restricts Holdco and its Canadian wholly-owned subsidiaries from incurring indebtedness that exceeds an amount determined as the product of XXXXXXXXXX times the consolidated operating cash flow of Holdco, which product is estimated to be approximately $XXXXXXXXXX. Holdco, currently, has available unutilized credit arrangements to borrow an additional $XXXXXXXXXX (approximately), made up of $XXXXXXXXXX on its Operating Loan and $XXXXXXXXXX on its Revolving Term Loan. In addition, Holdco has received from XXXXXXXXXX proposals to provide new financing to Holdco of up to XXXXXXXXXX.

As a result of the arrangements described herein, Holdco or its Canadian wholly-owned subsidiaries are in a position to increase their current arm's-length borrowings by an amount of $XXXXXXXXXX.

Holdco will have the ability to pay dividends on its preferred shares issued in the transaction described in paragraph 14 below, without taking into account the interest income which it would earn as a result of the proposed transactions described herein.

5.The non-consolidated financial statements of Subco 2 for its fiscal year ended XXXXXXXXXX indicate that Subco 2 had:

(a)assets of approximately $XXXXXXXXXX which include amounts receivable from affiliated companies of approximately $XXXXXXXXXX;

(b)liabilities of approximately $XXXXXXXXXX; and

(c)shareholders' equity of approximately $XXXXXXXXXX.

Subco 2 had net income of approximately $XXXXXXXXXX in its taxation year ended XXXXXXXXXX. It is expected that for its taxation years ending in XXXXXXXXXX, Subco 2 will have sufficient taxable income in each year to utilize the non-capital losses of Newco (a corporation to be incorporated as described in paragraph 11 below), prior to the effects of the proposed transactions described herein.

6.Holdco, Subco 2, Subco 3 and Newco, a corporation incorporated as described in paragraph 11 below, are neither specified financial institutions nor financial intermediary corporations.

7.There are not, and will not be at any time prior to the completion of the proposed transactions described herein, any guarantee agreements of the type described in subsection 112(2.2) in respect of any of the Holdco, Subco 2, Subco 3 or Newco shares.

8.None of Holdco, Subco 2, Subco 3 or Newco has entered, or will enter, into a dividend rental arrangement in respect of any of the shares to be redeemed as part of the proposed transactions described herein.

9.None of the Holdco preferred shares, Subco 2 preferred shares or Subco 3 common shares will be issued or acquired as part of a series of transactions described in subsection 112(2.5).

10.Holdco, Subco 2, Subco 3, and Newco are affiliated persons and are related with each other.

PROPOSED TRANSACTIONS

11.Subco 3 will incorporate Newco under the XXXXXXXXXX. Newco will be a taxable Canadian corporation. Subco 3 will subscribe for all the common shares of Newco for a nominal amount following Newco's incorporation. The taxation year of Newco will end on XXXXXXXXXX.

12.Holdco will borrow $XXXXXXXXXX (the "First Loan") from an arm's-length financial institution.

13.Holdco will lend the proceeds of the First Loan to Newco for a demand note (the "Second Loan") with interest at the rate of XXXXXXXXXX% per annum, which approximates the weighted average rate of interest on the arm's-length borrowings of Holdco and its Canadian wholly-owned subsidiaries for the last quarter ended XXXXXXXXXX.

14.Newco will use the proceeds of the Second Loan to subscribe for non-voting, redeemable and retractable preferred shares of Holdco (the "Holdco Preferred Shares"). The Holdco Preferred Shares will have an annual cumulative dividend rate equal to XXXXXXXXXX% of the redemption price of such shares and such dividends will be payable at the same intervals as the interest expense payable on the Second Loan.

15.Holdco will use the funds realized from the issue of the Holdco Preferred Shares to repay the First Loan from the arm's-length financial institution.

16.The following events will occur no later than XXXXXXXXXX:

(a)Holdco will redeem its preferred shares issued to Newco by issuing a demand non-interest-bearing promissory note (the "Holdco Note") having a principal amount equal to the redemption amount of the Holdco Preferred Shares; and

(b)Newco will repay the Second Loan in full by set off with the Holdco Note and the notes will be cancelled.

17.Immediately following the proposed transactions described in paragraph 16 above, Subco 3 will transfer to Subco 2, at fair market value, all of its shares of Newco. As sole consideration, Subco 2 will issue to Subco 3 preferred shares with a redemption and retraction amount equal to the fair market value of the shares transferred. The fair market value of the Newco shares will reflect interest rates, the estimated time of utilization of the non-capital losses of Newco and other considerations.

Subco 2 will add to its stated capital account in respect of the preferred shares issued to Subco 3 an amount equal to the cost amount to Subco 3 of the Newco shares.

18.Subco 3 and Subco 2 will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers described in paragraph 17 above. The agreed amount in respect of the shares transferred will, in each case, be equal to the adjusted cost base of such shares to Subco 3 at the time of the transfer.

19.Subco 2 will redeem for cash the preferred shares issued to Subco 3 as described in paragraph 17 above.

20.Following the transactions described in paragraphs 16, 17, 18 and 19 above, Subco 2 will cause Newco to be wound up. Subco 2 will pass a resolution to authorize the dissolution of Newco under the XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

21.The purpose of the proposed transactions is to allow for the consolidation of profit and losses in Holdco and Subco 2. The consolidation will be achieved by Holdco earning sufficient interest income, over a period not to extend pass XXXXXXXXXX, so as to utilize its accumulated non-capital losses, investment tax credits and unused SR&ED expenditures and to allow Subco 2 to reduce its taxable income by the interest expense incurred by Newco.

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.The dividends received by Newco on the Holdco Preferred Shares 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 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).

B.Part VI.1 of the Act will not apply to the dividends paid by Holdco on the Holdco Preferred Shares because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

C.Part IV.1 of the Act will not apply to the dividends received by Newco on the Holdco Preferred Shares because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.

D.Provided that Newco continues to hold the Holdco Preferred Shares for the purpose of gaining or producing income (other than income which is exempt from taxation) from the Holdco Preferred Shares and Newco has a legal obligation to pay interest in respect of the Second Loan, Newco 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 Newco regularly follows in computing its income for the purposes of the Act).

E.The provisions of subsection 85(1) will apply to the transfer of the Newco shares to Subco 2 described in paragraph 17 above with the result that the amount agreed upon by the transferor and the 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 transfer described herein.

F.After the winding-up of Newco into Subco 2 as described in paragraph 20 above is completed:

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

(ii)the provisions of subsection 88(1.1) will apply to permit Subco 2 to deduct the non-capital losses of Newco in computing its taxable income for any taxation year commencing after the commencement of the winding-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.

G.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 70-6R3 dated December 30, 1996 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

Provided that proposed subparagraphs 55(3)(a)(i) to (v) are reintroduced and enacted in substantially the same form as set out in the proposed amendments tabled by the Department of Finance on December 2, 1996 in Bill C-69, it is our opinion that subsection 55(2) will not apply to the taxable dividend deemed to arise in respect of the redemption of the Subco 2 preferred shares described in paragraph 19 above, provided that as part of the series of transactions or events as part of which the dividend was received, there is no event described in proposed subparagraphs 55(3)(a)(i) to (v) which has not been described herein as a proposed transaction.

The foregoing opinion is not a ruling and, in accordance with the practice referred to in Information Circular 70-6R3, is not binding on Revenue Canada.

Yours truly,

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