30 November 1996 Ruling 9720913 - CORPORATE GROUP LOSS UTIL. 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:

No issues, similar to other in-house loss utilization schemes.

Position: n/a

Reasons: n/a

XXXXXXXXXX							3-972091
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX ("Profitco")
XXXXXXXXXX ("Lossco")
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 or subparagraph is a reference to the relevant provision of the Act;

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

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

(d)"CBCA" means Canada Business Corporations Act;

(e) XXXXXXXXXX;

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

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

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

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

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

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

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

FACTS

1.Profitco was incorporated on XXXXXXXXXX under the name of XXXXXXXXXX which name was changed on XXXXXXXXXX to the present name. Profitco is a taxable Canadian corporation and is controlled by a public corporation.

XXXXXXXXXX

Profitco has a XXXXXXXXXX year-end and generates taxable income on an annual basis.

2.Holdco acquired XXXXXXXXXX% of the common shares of Profitco on XXXXXXXXXX. The Profitco shares were transferred to XXXXXXXXXX, a subsidiary controlled corporation of Holdco.

3.Lossco was incorporated by Profitco in XXXXXXXXXX under the CBCA. Lossco is a taxable Canadian corporation.

XXXXXXXXXX

Lossco has a XXXXXXXXXX year-end. As at XXXXXXXXXX, Lossco had accumulated non-capital losses of $XXXXXXXXXX. It is anticipated that Lossco will incur operating losses in its XXXXXXXXXX fiscal years.

4.The authorized share capital of Lossco consists of an unlimited number of common shares. The issued and outstanding shares of Lossco are held as follows:

Shareholder Number of Shares Held Paid-up Capital

XXXXXXXXXX

Subco is a wholly-owned subsidiary of Profitco. Subco acquired the shares of Lossco in XXXXXXXXXX in consideration for an asset transferred to Lossco from Subco.

The adjusted cost bases to Profitco and Subco of their Lossco shares are $XXXXXXXXXX and $XXXXXXXXXX, respectively.

PROPOSED TRANSACTIONS

5.Lossco will file articles of amendment under the CBCA to create a new class of shares ("Lossco Preferred Shares") which will be non-participating, non-voting, with an annual cumulative dividend rate equal to the prime lending rate of Profitco's leading banker plus XXXXXXXXXX%, determined at the time of the proposed transactions, and subsequently, at the beginning of each taxation year applied to the stated capital of the shares, retractable and redeemable for an amount equal to the aggregate of the amount for which the shares were issued and any unpaid dividends.

6.Profitco will borrow $XXXXXXXXXX from an arm's-length financial institution. Profitco will use the $XXXXXXXXXX to subscribe for Lossco Preferred Shares. Dividends will be paid on the Lossco Preferred Shares on an annual basis. The dividends may be funded with the interest income earned by Lossco on the interest-bearing note described in paragraph 7 below.

XXXXXXXXXX (the "Bank") has provided confirmation, in a letter dated XXXXXXXXXX, that Profitco has the ability to increase its line of credit with the Bank by the amount of $XXXXXXXXXX, independently of Holdco.

7.Lossco will then use the proceeds realized from the issuance of its shares to lend to Profitco $XXXXXXXXXX by way of a demand interest-bearing note with an interest rate equal to the prime lending rate of Profitco's leading banker (the "Profitco Note").

8.Profitco will use the $XXXXXXXXXX borrowed from Lossco to repay the arm's-length financial institution for the loan described in paragraph 6 above.

9.Once sufficient income has been earned by Lossco to utilize all or a portion of its non-capital losses:

(a)Profitco will pay the balance of any accrued and unpaid interest on the Profitco Note;

(b)Lossco will pay the balance of any declared and unpaid dividends on the Lossco Preferred Shares; and

(c)Lossco will redeem its Lossco Preferred Shares held by Profitco by issuing a demand non-interest-bearing promissory note (the "Lossco Note") having a principal amount equal to the redemption amount of the Lossco Preferred Shares and Profitco will repay the Profitco Note in full by set off with the Lossco Note and the notes will be cancelled.

ADDITIONAL INFORMATION

10.None of the Lossco Preferred Shares referred to herein:

(a)is or will be subject to a guarantee agreement;

(b)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); and

(c)is or will be subject to a dividend rental arrangement.

11.Profitco and Lossco are affiliated persons for purpose of the Act.

PURPOSES OF THE PROPOSED TRANSACTIONS

12.The purpose of the proposed transactions is to enable Lossco to earn sufficient interest income, over a period of years, so as to utilize its accumulated non-capital losses and anticipated losses that will be incurred in XXXXXXXXXX by Lossco.

XXXXXXXXXX

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 Profitco on the Lossco 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.Provided that Profitco has a legal obligation to pay interest on the Profitco Note issued in the transaction described in paragraph 7 above, and the Lossco Preferred Shares acquired by Profitco described in paragraph 6 above continue to be held for the purpose of gaining or producing income (other than income which will be exempt), Profitco may deduct the lesser of interest paid or payable or a reasonable amount in respect of the year on the Profitco Note (depending on the method regularly followed by Profitco in computing its income for purposes of the Act) pursuant to paragraph 20(1)(c).

C.The provisions of subsection 15(1), 56(2), 69(4), 69(11) and 246(1) will not apply to any of the proposed transactions described herein, in and by themselves.

D.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.

E.The cancellation of the Profitco Note and the Lossco Note, as described in paragraph 9 above, will not give rise to a "forgiven amount" for purposes of section 80.

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, other than the ones described in paragraph 9 above, 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.

COMMENT

Nothing in this letter should be construed as confirmation that Revenue Canada has reviewed or accepted

(a)the determination of the adjusted cost base or the paid-up capital of any shares; or

(b)the amount of non-capital losses referred to in paragraph 3 above.

Yours truly,

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