30 November 1997 Ruling 9733883 - LOSS CONSOLIDATION

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:

Is a Loss Consolidation Arrangement Among Affiliated Companies using loans and dividends acceptable ?

Position: YES

Reasons:

Rulings position per Tax Executive Institute of Dec 9, 1997

XXXXXXXXXX							973388

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX.

The following terms have the meanings specified

"A Co" means XXXXXXXXXX

"B Co" means XXXXXXXXXX

"C Co" means XXXXXXXXXX

"D Co" means XXXXXXXXXX

You advise that to the best of your knowledge and that of D Co, B Co and C Co, none of the issues involved in this ruling request is being considered by a tax services office and/or taxation centre in connection with a tax return previously filed and none of the issues is under objection or appeal to the courts or is the subject of a ruling previously issued by the Directorate.

Unless otherwise indicated, all statutory references herein are references to provisions of the Income Tax Act (the "Act"), "Public corporation" and "taxable Canadian corporation" as referred to herein have the meanings assigned by subsection 89(1) of the Act .

Our understanding of the facts, proposed transactions and their purpose is as follows:

Facts

1. D Co and B Co are direct wholly-owned subsidiaries of A Co, and C Co is a direct wholly-owned subsidiary of B Co. A Co is a public corporation listed on the XXXXXXXXXX Stock Exchange and is a taxable Canadian corporation. A Co and its subsidiaries are engaged in the XXXXXXXXXX business. The assets of A Co include the shares of its principal subsidiaries, D Co and B Co.

2. A Co was incorporated under the XXXXXXXXXX and has its head office at XXXXXXXXXX. A Co's federal corporate tax number is XXXXXXXXXX and it files its annual income tax returns at the XXXXXXXXXX Tax Services Office. Its fiscal year and taxation year end on XXXXXXXXXX of each year.

3. D Co is a taxable Canadian corporation continued under the XXXXXXXXXX. D Co is in the XXXXXXXXXX business.

XXXXXXXXXX

4. D Co has authorized capital of an unlimited number of Class XXXXXXXXXX Common Shares, an unlimited number of Class XXXXXXXXXX Common Shares, an unlimited number of Class XXXXXXXXXX Preferred Shares and an unlimited number of Class XXXXXXXXXX Preferred Shares, of which only XXXXXXXXXX Class XXXXXXXXXX Common Shares are issued and outstanding. All of the issued and outstanding shares of D Co are owned by A Co.

5. D Co's head office is located at XXXXXXXXXX. D Co's federal corporate tax number is XXXXXXXXXX and it files its annual federal income tax returns at the XXXXXXXXXX Tax Services Office. Its fiscal year and taxation year end on XXXXXXXXXX of each year.

6. B Co is a taxable Canadian corporation, continued under the XXXXXXXXXX. It has its head office at XXXXXXXXXX. B Co owns a XXXXXXXXXX.

7. The authorized share capital of B Co consists of an unlimited number of Common Shares of which XXXXXXXXXX Common Shares are issued and outstanding. All of the issued and outstanding shares of B Co are owned by A Co.

8. B Co's federal corporate tax number is XXXXXXXXXX and it files its annual federal income tax returns at the XXXXXXXXXX Tax Services Office. Its fiscal year and taxation year end on XXXXXXXXXX of each year.

9. C Co is a taxable Canadian corporation, continued under the XXXXXXXXXX. C Co's head office is located at XXXXXXXXXX. The authorized capital of C Co consists of XXXXXXXXXX Common Shares; XXXXXXXXXX cumulative, redeemable, non-voting Preference Shares; and an unlimited number of cumulative, redeemable, non-voting XXXXXXXXXX Preference Shares. There are currently XXXXXXXXXX Common Shares and XXXXXXXXXX Preference Shares issued and outstanding. All of the issued and outstanding shares of C Co are owned by B Co.

10. C Co's federal corporate tax number is XXXXXXXXXX and it files its annual federal income tax returns at XXXXXXXXXX Tax Services Office. Its fiscal year and taxation year end on XXXXXXXXXX of each year.

11. In particular, A Co is not a "specified financial institution" within the meaning of subsection 248(1) of the Act.

12. D Co computes its interest expense on an accrual basis.

13. D Co is about to commence earning net income for tax purposes which is not sheltered by loss carry forwards and expects to continue to do so for the foreseeable future. However, B Co and C Co currently have non-capital loss carry forwards of approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively. These loss carry forwards will expire according to the following schedule:

B Co

EXPIRY DATE NON-CAPITAL LOSS

XXXXXXXXXX

C Co

EXPIRY DATE NON-CAPITAL LOSS

XXXXXXXXXX

14. Moreover, C Co has net income for tax purposes on a current basis, and this is expected to continue indefinitely. B Co has net losses for tax purposes on a current basis and this is expected to continue for a number of years. However, the rate of B Co's current loss is expected to diminish over time and B Co is expected to achieve annual net income within the foreseeable future.

15. XXXXXXXXXX.

Proposed Transactions

16. B Co will amend its articles of incorporation to create a new class of preferred shares (the "B Co Preferred Shares") which will have the following principal attributes:

(i) redeemable at the option of the holder for their stated capital plus accrued and unpaid dividends;

(ii) redeemable at the option of the issuer for their stated capital plus accrued and unpaid dividends;

(iii) non-voting;

(iv) cumulative dividend at the rate of approximately XXXXXXXXXX% per annum;

(v) stated capital on issue to be equal to the issue price of $XXXXXXXXXX per share.

17. C Co will also amend its articles of incorporation to created a new class of preferred shares (the "C Co Preferred Shares") which will have the same principal attributes as the B Co Preferred Shares, as described above.

18. D Co will borrow approximately $XXXXXXXXXX from a Canadian chartered bank (the "Bank") on a short-term basis (the "Bank Loan"). This borrowing is an amount that D Co will be able to service out of the cash flow from its own XXXXXXXXXX business and, as such, is within D Co's normal ability to borrow funds from an arm's length party (albeit with the support of a guarantee from A Co).

19. D Co will use approximately $XXXXXXXXXX of the proceeds of the Bank Loan to acquire B Co Preferred Shares issued by B Co, which will bear annual dividends at the rate of approximately XXXXXXXXXX% on a cumulative basis.

20. D Co will use the remaining amount of the proceeds from the Bank Loan to acquire C Co Preferred Shares issued by C Co, which will bear annual dividends at the rate of approximately XXXXXXXXXX% on a cumulative basis.

21. With the proceeds from the issue of B Co Preferred Shares referred to above, B Co will make a loan (the "B Co Loan") to D Co on a demand basis, bearing interest at a commercial rate of approximately XXXXXXXXXX%.

22. Similarly, with the proceeds from the issue of C Co Preferred Shares referred to above, C Co will make a loan (the "C Co Loan") to D Co on a demand basis, bearing interest at a commercial rate of approximately XXXXXXXXXX%.

23. D Co will use the proceeds of the B Co Loan and the C Co Loan to repay the Bank Loan.

24. As B Co's available tax shelter including its existing loss carry forwards diminishes, B Co will demand partial repayment of the B Co Loan and will make a corresponding redemption of some of the B Co Preferred Shares in the same amount as the loan repayment. (The B Co Loan and the B Co Preferred Shares will be repaid and redeemed progressively because B Co is expected to have continuing, but decreasing, annual losses for income tax purposes.) As B Co achieves positive net income (before interest on the B Co Loan), it will demand repayment of the remaining outstanding amount of the B Co Loan and will redeem the remaining B Co Preferred Shares outstanding.

25. Similarly, as C Co's available loss carry forwards become deducted, C Co will demand repayment of the C Co Loan and will redeem a corresponding amount of the C Co Preferred Shares.

Purpose of the Proposed Transactions

26. The purpose of the proposed transactions is to consolidate income and losses within a group of related taxable Canadian corporations ( D Co, B Co and C Co) by enabling B Co and C Co to earn sufficient interest income so as to use non-capital losses they have incurred or would otherwise incur and to permit D Co to have corresponding interest deductions that will reduce its income otherwise determined.

Rulings Given

Provided all relevant facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate, we confirm the following:

A. Interest payable by D Co to B Co and to C Co in respect of a taxation year of D Co on the B Co Loan and C Co Loan, respectively, will be deductible by D Co in accordance with paragraph 20(1)(c) of the Act.

B. Dividends received by D Co on the B Co Preferred Shares and on the C Co Preferred Shares will be deductible in computing D Co's taxable income pursuant to subsection 112(1) of the Act.

C. The provisions of Part VI.1 of the Act will not be applicable to dividends paid to D Co on the B Co Preferred Shares or on the C Co Preferred Shares and the provisions of Part IV.1 of the Act will not be applicable to the dividends received by D Co on the B Co Preferred Shares or on the C Co Preferred Shares.

D. Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996, and are binding on the Department provided the B Co Preferred Shares and the C Co Preferred Shares are issued as described above on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and does not take into account any future amendments, whether currently proposed or not, to the Act.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Division