30 November 1997 Internal T.I. 980576B - 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: Couple of butterfly issues

Position: See statement of principal issues

Reasons: See statement of principal issues

XXXXXXXXXX
XXXXXXXXXX 					3-980576
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayer. We also acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling request is under objection or appeal or is being considered by any tax services office or taxation centre of Revenue Canada in connection with any income tax return already filed.

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) "ACB" means "adjusted cost base" which has the meaning assigned by section 54;

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

(d) "CCA" means capital cost allowance which has the meaning assigned by section 1100 of the Regulations;

(e) "capital gain" has the meaning assigned by paragraph 39(1)(a);

(f) "capital loss" has the meaning assigned by paragraph 39(1)(b);

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

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

(i) "excluded dividend" has the meaning assigned by subsection 191(1);

(j) "excepted dividend" has the meaning assigned under section 187.1;

(k) "FMV" means "fair market value" and is the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act;

(l) "fiscal period" has the meaning assigned by subsection 249.1(1);

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

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

(o) "predecessor corporation" has the meaning assigned by subsection 87(1);

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

(q) "proceeds of disposition" has the meaning assigned by section 54;

(r) "PUC" means "paid-up capital" which has the meaning assigned by subsection 89(1);

(s) "property" has the meaning assigned by subsection 248(1);

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

(u) "RDTOH" means the expression "refundable dividend tax on hand" as defined in subsection 129(3);

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

(w) "Regulations" means the Income Tax Regulations;

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

(y) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

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

All currency references in this letter are in Canadian dollars unless indicated otherwise.

FACTS

1. The XXXXXXXXXX is the multi-national corporate group consisting of the related corporations described herein.

2. XXXXXXXXXX is a taxable Canadian corporation and a private corporation. XXXXXXXXXX was incorporated under the Companies Act (Canada) on XXXXXXXXXX and continued under the CBCA on XXXXXXXXXX was inactive until XXXXXXXXXX when it acquired the XXXXXXXXXX business assets of XXXXXXXXXX.

3. The authorized share capital of XXXXXXXXXX consists of an unlimited number of common shares.

4. XXXXXXXXXX has XXXXXXXXXX common shares issued and outstanding and is a subsidiary wholly-owned corporation of XXXXXXXXXX. The PUC and the ACB of the XXXXXXXXXX common shares to XXXXXXXXXX is $XXXXXXXXXX.

5. As at XXXXXXXXXX had approximately U.S.$XXXXXXXXXX in interest-bearing debt ("Loan 1") owing to XXXXXXXXXX. At an exchange rate of $1.43 for each U.S. $1, the Canadian dollar equivalent of Loan 1 would be approximately $XXXXXXXXXX. The proceeds of Loan 1 were used to fund the asset acquisition from XXXXXXXXXX. As at XXXXXXXXXX, Loan 1 had an unrealized foreign exchange loss of approximately $XXXXXXXXXX.

6. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX. XXXXXXXXXX had no RDTOH as at XXXXXXXXXX.

7. As atXXXXXXXXXX, it is anticipated that XXXXXXXXXX had approximately $XXXXXXXXXX in non-capital losses carried forward, which is a result of CCA claimed on its Class 29 and other assets acquired from XXXXXXXXXX.

8.

XXXXXXXXXX

9. The FMV of XXXXXXXXXX is estimated to be approximately $XXXXXXXXXX less the amount of its liabilities. The FMV of XXXXXXXXXX common shares to be acquired by XXXXXXXXXX will be determined at the actual transaction date to reflect the additional equity injection described in paragraph 8 above.

10. XXXXXXXXXX is a corporation incorporated under the CBCA on XXXXXXXXXX is taxable Canadian corporation and a private corporation. XXXXXXXXXX is a subsidiary wholly-owned corporation of XXXXXXXXXX a corporation which was incorporated under the laws of the XXXXXXXXXX and which is not a taxable Canadian corporation. XXXXXXXXXX is a member of the XXXXXXXXXX and does not have a permanent establishment in Canada.

XXXXXXXXXX does not have any material assets other than the shares of XXXXXXXXXX, some short term investments and a loan to XXXXXXXXXX as more fully described in paragraph 11 below.

11. As at XXXXXXXXXX had approximately U.S. $XXXXXXXXXX in interest-bearing debt ("Loan 2") owing to XXXXXXXXXX. XXXXXXXXXX is a corporation incorporated under the laws of the XXXXXXXXXX and does not have a permanent establishment in Canada. The Canadian dollar equivalent of Loan 2 is approximately $XXXXXXXXXX and XXXXXXXXXX has an unrealized foreign exchange loss of approximately $XXXXXXXXXX in respect of this debt, which mirrors the approximately $XXXXXXXXXX of unrealized foreign exchange gain on Loan 1 described in paragraph 5 above.

12. On XXXXXXXXXX transferred the receivable related to Loan 2 to another company XXXXXXXXXX is a corporation incorporated under the laws of the XXXXXXXXXX and does not have a permanent establishment in Canada. The terms of Loan 2 were not changed as the result of the transfer.

13. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX.

14. XXXXXXXXXX is subject to the CBCA and resulted from the merger of XXXXXXXXXX is a public corporation and a taxable Canadian corporation. XXXXXXXXXX is engaged in the business of XXXXXXXXXX.

The issued and outstanding shares of XXXXXXXXXX consist of XXXXXXXXXX Class A Common Shares and XXXXXXXXXX% Preferred Shares.

15. XXXXXXXXXX owns XXXXXXXXXX% of the XXXXXXXXXX common shares and XXXXXXXXXX% of the XXXXXXXXXX preferred shares. The remaining XXXXXXXXXX% of the XXXXXXXXXX common shares are held by the public.

16. The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX.

17. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2).

18. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) 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).

19. None of the issued shares 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

20. The proposed transactions will be carried out in the order described herein.

21. XXXXXXXXXX will acquire an inactive subsidiary wholly-owned corporation of XXXXXXXXXX or another related company in the XXXXXXXXXX will subscribe for $XXXXXXXXXX of common shares in XXXXXXXXXX for cash. XXXXXXXXXX will borrow the funds for the subscription of the XXXXXXXXXX common shares from a third party (the "XXXXXXXXXX Loan").

The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX had no RDTOH as at XXXXXXXXXX.

22. XXXXXXXXXX will sell, at fair market value, to XXXXXXXXXX all of its assets and will issue to XXXXXXXXXX a non-interest-bearing demand promissory note (the "XXXXXXXXXX Note"), the principal amount of which will be equal to the amount by which the principal amount of the liabilities assumed by XXXXXXXXXX exceeds the aggregate of the agreed amounts in respect of each eligible property transferred from XXXXXXXXXX and the fair market value of other property transferred.

In consideration for the transfer of the assets of XXXXXXXXXX and the issuance of the XXXXXXXXXX Note, XXXXXXXXXX will assume the liabilities of XXXXXXXXXX and will issue to XXXXXXXXXX preferred shares with a redemption amount equal to the aggregate of the fair market value of the assets transferred by XXXXXXXXXX and the XXXXXXXXXX Note less the fair market value of the liabilities assumed by XXXXXXXXXX. As a result of the assumption of the liabilities of XXXXXXXXXX (which include Loan 1), there will be an agreement between XXXXXXXXXX that XXXXXXXXXX will be substituted as the debtor in respect of Loan 1 and the old debt will be extinguished.

XXXXXXXXXX will add an amount of $XXXXXXXXXX to its stated capital account in respect of its preferred shares so issued.

23. A summary of the assets to be transferred from XXXXXXXXXX to XXXXXXXXXX, with the estimated cost amount and FMV based on the XXXXXXXXXX balance sheet of XXXXXXXXXX, is listed below:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

(The cost amount and FMV of the properties transferred will be adjusted to reflect values at the time of the transfer.)

The liabilities of XXXXXXXXXX are estimated to be in excess of $XXXXXXXXXX.

24. In connection with the transfer of properties described in paragraph 22 above, XXXXXXXXXX and XXXXXXXXXX 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 transfer. The agreed amount in respect of each of the eligible properties transferred will be as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii);

(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii); however, the amount elected in respect of any particular property will not be less than $XXXXXXXXXX.

The fair market value of each eligible property transferred will exceed or be equal to the agreed amount.

25. XXXXXXXXXX will redeem its preferred shares issued to XXXXXXXXXX by issuing to XXXXXXXXXX a demand non-interest-bearing promissory note (the "XXXXXXXXXX Redemption Note") having a principal amount equal to the redemption amount of the XXXXXXXXXX preferred shares.

26. The XXXXXXXXXX Redemption Note will be set off against the XXXXXXXXXX Note and an amount in cash equal to the amount of the excess of the XXXXXXXXXX Redemption Note over the XXXXXXXXXX Note.

27. XXXXXXXXXX will realize a foreign exchange loss of approximately $XXXXXXXXXX on the assumption of Loan 1, as a result of the fluctuation in the exchange rate of US $ on the day of the assumption compared to the rate when the loan was made.

28. The creditor in Loan 1, XXXXXXXXXX, will realize a foreign exchange gain on the assumption of Loan 1 of approximately $XXXXXXXXXX.

28A. XXXXXXXXXX will make a new loan ("New Loan") to XXXXXXXXXX. A portion of the proceeds from the New Loan will be utilized by XXXXXXXXXX to repay Loan 1 which was assumed from XXXXXXXXXX as described in paragraph 22 above. Any foreign exchange gain or loss resulting from the fluctuation in foreign exchange rates since the time when Loan 1 was assumed by XXXXXXXXXX will be realized on the repayment of Loan 1 as described herein.

28B. XXXXXXXXXX will utilize the proceeds from the repayment of Loan 1 to repay Loan 2. Any foreign exchange gain or loss will be realized on the repayment of Loan 2 as described herein.

29. XXXXXXXXXX will pay to XXXXXXXXXX, the holder of XXXXXXXXXX common shares, a cash dividend of approximately $XXXXXXXXXX, being the amount of cash received by XXXXXXXXXX from XXXXXXXXXX on the settlement of the XXXXXXXXXX Redemption Note, as described in paragraph 26 above.

30. XXXXXXXXXX will purchase, at FMV, from XXXXXXXXXX all the common shares of XXXXXXXXXX for cash in the amount of approximately $XXXXXXXXXX. The final purchase price will be determined based on the non-capital and capital losses existing in XXXXXXXXXX at the time of the purchase.

31. XXXXXXXXXX and XXXXXXXXXX (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the CBCA to form a new corporation ("Amalco") in such a manner that:

(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco by virtue of the merger;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco by virtue of the merger; and

(c) all the shares of XXXXXXXXXX held by XXXXXXXXXX will be cancelled on the amalgamation and, as the sole shareholder of XXXXXXXXXX will become the sole shareholder of Amalco with no shares of Amalco being issued on the amalgamation.

PURPOSE OF THE PROPOSED TRANSACTION

32. The purpose of the proposed transactions is to allow for the consolidation of non-capital losses and net capital losses within a related group by allowing XXXXXXXXXX to offset its income and taxable capital gains by the utilization of XXXXXXXXXX accumulated non-capital losses and net capital losses following the amalgamation described in paragraph 31 above.

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. On the transfer of each eligible property of XXXXXXXXXX to XXXXXXXXXX described in paragraph 22 above, the provisions of subsection 85(1) will apply 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 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.

B. On the redemption of the XXXXXXXXXX preferred shares held by XXXXXXXXXX, as described in paragraph 25 above, subject to the application of subsection 55(2):

(i) XXXXXXXXXX will be deemed, pursuant to paragraph 84(3)(a), to have paid at that time a dividend equal to the amount, if any, by which the amount paid to redeem the particular shares exceeds the paid-up capital of the particular shares immediately before the redemption;

(ii) XXXXXXXXXX will be deemed, pursuant to paragraph 84(3)(b), to have received at that time a dividend equal to the amount, if any, by which the amount received on the redemption of the particular shares exceeds the paid-up capital of the particular shares immediately before the redemption;

(iii) to the extent that the dividend described in (ii) above is a taxable dividend, such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of XXXXXXXXXX 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);

(iv) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of a deemed dividend described in (ii) above will be excluded from the proceeds of disposition of the share, and any loss arising from the disposition of the share will be reduced by the amount of such dividends pursuant to subsection 112(3);

(v) Part IV.1 of the Act will not apply to the deemed dividend described in (ii) above because the dividend will be an excepted dividend pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1;

(vi) Part VI.1 of the Act will not apply to the deemed dividend described in (i) above because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1); and

(vii) no taxes in respect of Part IV will be payable in respect to the dividend described in (ii) above.

C. On the payment by XXXXXXXXXX to XXXXXXXXXX of the cash dividend described in paragraph 29 above, subject to the application of subsection 55(2):

(i) the amount of such dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of XXXXXXXXXX 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);

(ii) by virtue of the application of paragraph (j) of the definition "proceeds of disposition" in section 54, the amount of such dividend will be excluded from the proceeds of disposition of the XXXXXXXXXX common shares described in paragraph 31 above, and any loss arising from the disposition of such shares will be reduced by the amount of such dividend pursuant to subsection 112(3);

(iii) Part IV.1 of the Act will not apply to such dividend because the dividend will be an excepted dividend pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1;

(iv) Part VI.1 of the Act will not apply to such dividend because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1); and

(v) no taxes in respect of Part IV will be payable in respect to such dividend.

D. Upon the amalgamation of XXXXXXXXXX described in paragraph 31 above:

(i) by virtue of subsection 87(1.1), the provisions of subsection 87(1) will apply; and

(ii) the provisions of subsection 87(2.11) will apply to deem Amalco to be the same corporation as, and a continuation of XXXXXXXXXX for the purposes of applying section 111 and Part IV.

E. Paragraph 12(1)(x) will have no application in respect of the proposed transaction described in paragraph 30 above.

F. Provided that XXXXXXXXXX acquired the properties transferred from XXXXXXXXXX, as described in paragraph 22 above, for the purpose of gaining or producing income (other than income which is exempt from taxation) from such properties and XXXXXXXXXX has a legal obligation to pay interest in respect of the loan assumed from XXXXXXXXXX, subject to the provisions of subsection 18(4), XXXXXXXXXX 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 XXXXXXXXXX regularly follows in computing its income for the purposes of the Act).

G. Subject to the provisions of subsection 18(4), a portion of the interest paid or payable in a year on the New Loan by XXXXXXXXXX on the borrowings described in paragraph 28A above (depending on the method XXXXXXXXXX regularly follows in computing its income for the purposes of the Act) will, by virtue of the application of subsection 20(3), be deductible in computing the income of XXXXXXXXXX for that year pursuant to paragraph 20(1)(c) to the extent that the amount is reasonable.

H. The set-off of the XXXXXXXXXX Redemption Note against the XXXXXXXXXX Note and an amount in cash as described in paragraph 26 above will not give rise to a forgiven amount.

I. The provisions of subsections 15(1), 56(2) and 246(1) will not apply as a result of the proposed transactions described herein, in and by themselves.

J. 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.

K. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply to deem any portion of the dividends described in Rulings B and C above to be proceeds of disposition, provided that there is no:

(i) disposition of any property to a person to whom XXXXXXXXXX is not related, or

(ii) significant increase in the interest (whether by means of equity or debt) in any corporation of any person to whom XXXXXXXXXX is not related,

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

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) and subsection 55(3.01) are enacted in substantially the same form as proposed in Bill C-28, which was given second reading in the House of Commons on February 4, 1998, it is our opinion that subsection 55(2) will not apply to the taxable dividends described in Ruling B and Ruling C above, provided that as part of the series of transactions or events as part of which the dividends were 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 70-6R2, is not binding on Revenue Canada.

Yours truly,

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