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: Loss and tax credit utilization within a related Canadian corporate group.
Position: OK
Reasons: In this situation it is achieved by way of interest bearing intercompany loan, and PUC reduction and taxable dividends that do not exceed PUC and retained earnings.
XXXXXXXXXX
XXXXXXXXXX 982713
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX (“ACo”)
XXXXXXXXXX (“BCo”)
XXXXXXXXXX (“CCo”)
This is in response to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX.
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling is being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed, and none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.
In this letter “the Act” means the Income Tax Act, RSC 1985, Fifth Supplement, c.1, as amended from time to time.
Facts
1. ACo is a public Canadian XXXXXXXXXX company. CCo is a wholly-owned subsidiary of ACo that provides XXXXXXXXXX. BCo manufactures and sells XXXXXXXXXX. ACo, CCo and BCo are all taxable Canadian corporations.
2. ACo owns approximately XXXXXXXXXX% and CCo owns approximately XXXXXXXXXX% respectively of the common shares of BCo. The paid-up capital of the common shares of BCo is $XXXXXXXXXX. CCo owns all of the preferred shares of BCo which have a paid-up capital of $XXXXXXXXXX.
3. BCo has cash or near cash of approximately $XXXXXXXXXX and $XXXXXXXXXX in retained earnings.
4. The paid-up capital of the common shares of CCo is $XXXXXXXXXX.
5. ACo has approximately $XXXXXXXXXX of non-capital losses, $XXXXXXXXXX of unclaimed Scientific Research and Experimental Development (“SR & ED”) expenditures and $XXXXXXXXXX of unutilized Investment Tax Credit (“ITC”). The non-capital losses, SR &ED, and ITC are amounts incurred or realized during the period throughout which ACo, CCo and BCo were part of a related or affiliated group of companies.
6. ACo has a $XXXXXXXXXX credit facility with its corporate bankers.
Proposed Transactions
7. ACo will borrow $XXXXXXXXXX from its corporate bankers by way of a draw down on its credit facility which will be repaid within 2 days.
8. ACo will then loan $XXXXXXXXXX to BCo (the “intercompany loan”) at a commercial rate of interest that is at least equal to the rate ACo pays on its credit facility for a term of two years. BCo will have the option of extending the term to three years. Interest only will be payable quarterly. BCo is expected to have sufficient net income to meet its interest obligations on the intercompany loan.
9. BCo will cause a reduction of $XXXXXXXXXX in the paid-up capital of its common shares and will pay a taxable dividend of $XXXXXXXXXX on its common shares. ACo will receive approximately $XXXXXXXXXX of the paid-up capital reduction and $XXXXXXXXXX of the dividend. CCo will receive approximately $XXXXXXXXXX of the paid-up capital reduction and $XXXXXXXXXX of the dividend. The dividend paid and the paid-up capital reduction by BCo will not exceed its adjusted equity as computed under section 20.2 of the proposed legislation introduced in 1991.
10. CCo will pay $XXXXXXXXXX to ACo, representing a paid-up capital reduction of $XXXXXXXXXX and a taxable dividend of $XXXXXXXXXX.
11. ACo will repay the $XXXXXXXXXX draw down referred to in paragraph 7 above.
12. Immediately prior to the intercompany loan becoming payable in two or three years, ACo will invest sufficient funds into BCo by way of capital contributions or share subscriptions and BCo will then repay the $XXXXXXXXXX intercompany loan.
Purpose of the Proposed Transactions
Although both ACo and BCo are profitable, the purpose of the proposed transactions is to reduce taxes payable on a consolidated basis through the utilization of losses, the deduction of unclaimed SR & ED expenditures and the utilization of ITC’s that are available to ACo over a shorter period of time than would otherwise be achieved by virtue of the interest income. ACo wishes to maintain the present corporate structure for various reasons, including the environmental risks associated with its business.
All of the proposed transactions will be carried out and will be legally effective.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Provided that BCo has a legal obligation to pay interest on the Intercompany loan referred to in paragraph 7 above, in computing its income for a taxation year, BCo will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act the lesser of the interest paid or payable in respect of that year on the intercompany loan.
B. The provisions of Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, as to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on Revenue Canada, Taxation provided that the proposed transactions described in paragraphs 6 to 11 are completed by XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
4
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