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: Related group loss utilization scheme
Position: No unusual issues.
Reasons: No unusual issues
XXXXXXXXXX
XXXXXXXXXX 3-982839
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
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 your letter 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.
The business numbers, address and Taxation Centre serving the taxpayers are as follows:
Taxpayer Business Number Address Taxation Centre
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
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) "affiliated persons" has the meaning assigned by subsection 251.1(1);
(c) XXXXXXXXXX;
(d) "dividend rental arrangement" has the meaning assigned by subsection 248(1);
(e) "excepted dividends" has the meaning assigned by paragraph (b) of the definition "excepted dividend" in section 187.1;
(f) "excluded dividends" has the meaning assigned by paragraph (a) of the definition "excluded dividend" in subsection 191(1);
(g) "financial intermediary corporation" has the meaning assigned by subsection 191(1);
(h) "forgiven amount" has the meaning assigned by subsections 80(1) or 80.01(1);
(i) "non-capital loss" has the meaning assigned by subsection 111(8);
(j) "public corporation" has the meaning assigned by subsection 89(1);
(k) "related persons" has the meaning assigned by subsection 251(2);
(l) "specified financial institution" has the meaning assigned by subsection 248(1);
(m) "taxable Canadian corporation" has the meaning assigned by subsection 89(1); and
(n) "taxable income" has the meaning assigned by subsection 248(1).
FACTS
1. XXXXXXXXXX is a public corporation and a taxable Canadian corporation.
The common shares of XXXXXXXXXX are listed on the XXXXXXXXXX. The common shares of XXXXXXXXXX are widely held with no person having control of XXXXXXXXXX. As at XXXXXXXXXX, a wholly owned subsidiary of XXXXXXXXXX, which in turn is a wholly owned subsidiary of XXXXXXXXXX, owned approximately XXXXXXXXXX% of XXXXXXXXXX common shares.
2. The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX shares described as follows:
(a) XXXXXXXXXX common shares without par value;
(b) XXXXXXXXXX preference shares without par value; and
(c) XXXXXXXXXX preference shares without par value.
3. XXXXXXXXXX is the direct or indirect parent holding company of several operating companies which carry on the business of XXXXXXXXXX.
4. The taxation year of XXXXXXXXXX ends on XXXXXXXXXX. As at XXXXXXXXXX had accumulated non-capital losses of approximately $XXXXXXXXXX which had been incurred in the XXXXXXXXXX year. It is anticipated that XXXXXXXXXX will incur additional non-capital losses in the XXXXXXXXXX fiscal year.
5. XXXXXXXXXX is a corporation incorporated under the XXXXXXXXXX and is a taxable Canadian corporation and a public corporation.
6. The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX shares described as follows:
(a) XXXXXXXXXX common shares without par value;
(b) XXXXXXXXXX preference shares without par value; and
(c) XXXXXXXXXX preference shares without par value.
All the common shares of XXXXXXXXXX are held directly by XXXXXXXXXX and a number of XXXXXXXXXX% XXXXXXXXXX Preference Shares are held by the public and are listed on the XXXXXXXXXX.
7.
XXXXXXXXXX
8. XXXXXXXXXX has a XXXXXXXXXX year end. XXXXXXXXXX taxable income as filed in its taxation year ended XXXXXXXXXX was $XXXXXXXXXX.
9. XXXXXXXXXX is incorporated under the XXXXXXXXXX and is a taxable Canadian corporation. XXXXXXXXXX is engaged in XXXXXXXXXX. XXXXXXXXXX was previously engaged in the business of XXXXXXXXXX.
The authorized share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares of which XXXXXXXXXX are issued.
All the shares of XXXXXXXXXX are held by XXXXXXXXXX and there is no intention to dispose of the shares of XXXXXXXXXX to arm's-length parties.
10. XXXXXXXXXX has a XXXXXXXXXX year end and as at XXXXXXXXXX had accumulated non-capital loss carryforwards of approximately $XXXXXXXXXX. These losses were incurred in the years XXXXXXXXXX as described in the Form T2S(4) filed with XXXXXXXXXX income tax returns for the year ended XXXXXXXXXX. Approximately $XXXXXXXXXX of these non-capital losses have been included as a result of the wind-up of XXXXXXXXXX (previously wholly owned subsidiaries).
It is anticipated that XXXXXXXXXX will incur additional non-capital losses in the XXXXXXXXXX fiscal year.
11. XXXXXXXXXX has provided confirmation, in a letter dated XXXXXXXXXX, that XXXXXXXXXX has the ability to borrow an amount up to $XXXXXXXXXX at interest rates ranging from XXXXXXXXXX% to XXXXXXXXXX%.
12. XXXXXXXXXX and Newco (a corporation to be incorporated as described in paragraph 19 below) are neither specified financial institutions nor financial intermediary corporations.
13. No specified financial institution will be obligated to effect an undertaking with respect to the transactions described in this letter which is described in subsection 112(2.2).
14. None of the preferred shares issued as part of the Proposed Transactions described herein will be subject to a dividend rental arrangement.
15. There will not be any guarantees, covenants or agreements as referred to in paragraph 112(2.4)(a) to purchase or repurchase any of the preferred shares issued as part of the Proposed Transactions described herein. The consideration for which any of the shares issued will not include an obligation of an unrelated investor to make payments, any portion of which, would be required to be included in computing the income of the issuer nor will it include any right to receive payments or property that may revert to the investor.
16. XXXXXXXXXX and Newco are related persons and affiliated persons for purposes of the Act.
PROPOSED TRANSACTIONS
17. XXXXXXXXXX will pass a special resolution to attach to its authorized Second Preference Shares (the "XXXXXXXXXX Preferred Shares") the rights and restrictions described as follows:
(a) the shares will be non-voting;
(b) entitled to an annual cumulative dividend rate on the amount for which the shares were issued equal to XXXXXXXXXX% (the XXXXXXXXXX Loan Rate), determined at the time of the proposed transactions;
(c) redeemable for an amount equal to the aggregate of the amount for which the shares were issued and any unpaid dividends;
(d) retractable for an amount equal to the aggregate of the amount for which the shares were issued and any unpaid dividends;
(e) dividends payable, and on winding up, will rank ahead of any payment on shares ranking junior;
(f) on winding up or dissolution will receive the amount for which the shares were issued and any unpaid dividends; and
(g) will be automatically retracted three days prior to any bankruptcy or insolvency of XXXXXXXXXX.
18. XXXXXXXXXX will incorporate a new company under the XXXXXXXXXX ("Newco"). Newco will be a taxable Canadian corporation.
The authorized share capital of Newco will consist of one class of common shares and one class of preferred shares ("Newco Preferred Shares").
The Newco Preferred Shares will have rights and restrictions described as follows:
(a) the shares will be non-voting;
(b) entitled to an annual cumulative dividend rate on the amount for which the shares were issued equal to XXXXXXXXXX% (the XXXXXXXXXX Loan Rate plus XXXXXXXXXX%), determined at the time of the proposed transactions;
(c) redeemable for an amount equal to the aggregate of the amount for which the shares were issued and any unpaid dividends;
(d) retractable for an amount equal to the aggregate of the amount for which the shares were issued and any unpaid dividends;
(e) dividends payable, and on winding up, will rank ahead of any payment on shares ranking junior;
(f) on winding up or dissolution will receive the amount for which the shares were issued and any unpaid dividends; and
(g) will be automatically retracted three days prior to any bankruptcy or insolvency of XXXXXXXXXX.
XXXXXXXXXX will subscribe for all of the common shares of Newco for a nominal amount following Newco's incorporation.
The taxation year of Newco will end on XXXXXXXXXX.
19. XXXXXXXXXX will file articles of amendment under the XXXXXXXXXX to create a new class of preferred shares (the "XXXXXXXXXX Preferred Shares"). The XXXXXXXXXX Preferred Shares will have rights and restrictions described as follows:
(a) the shares will be non-voting;
(b) entitled to an annual cumulative dividend rate on the amount for which the shares were issued equal to XXXXXXXXXX% (the XXXXXXXXXX Loan Rate), determined at the time of the proposed transactions;
(c) redeemable for an amount equal to the aggregate of the amount for which the shares were issued and any unpaid dividends;
(d) retractable for an amount equal to the aggregate of the amount for which the shares were issued and any unpaid dividends;
(e) dividends payable, and on winding up, will rank ahead of any payment on shares ranking junior;
(f) on winding up or dissolution will receive the amount for which the shares were issued and any unpaid dividends; and
(g) will be automatically retracted three days prior to any bankruptcy or insolvency of XXXXXXXXXX.
20. XXXXXXXXXX will borrow $XXXXXXXXXX from an arm's-length financial institution (the "Bank Loan").
21. XXXXXXXXXX will use the proceeds of the Bank Loan to subscribe for Newco Preferred Shares. Dividends on the Newco Preferred Shares will be paid on an annual basis. The dividends may be funded in part with the interest income earned on the XXXXXXXXXX Newco Note described in paragraph 25 below.
22. Newco will use the proceeds realized from the issuance of the Newco Preferred Shares to subscribe for $XXXXXXXXXX of XXXXXXXXXX Preferred Shares and $XXXXXXXXXX of XXXXXXXXXX Preferred Shares. Dividends on the XXXXXXXXXX Preferred Shares and XXXXXXXXXX Preferred Shares will be paid on an annual basis.
The dividends on the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX Preferred Shares may be funded in part with the interest income earned on the XXXXXXXXXX-Newco Note or XXXXXXXXXX Newco Note described in paragraphs 23 and 24 below, as the case may be. To the extent that XXXXXXXXXX does not have sufficient liquidity to pay dividends on the XXXXXXXXXX Preferred Shares, XXXXXXXXXX will either make interest-free advances or contributions of capital to XXXXXXXXXX.
23. XXXXXXXXXX will use the proceeds realized from the issuance of the XXXXXXXXXX Preferred Shares to lend to Newco $XXXXXXXXXX by way of a demand interest-bearing note with a rate of XXXXXXXXXX% per annum (the "XXXXXXXXXX-Newco Note").
24. XXXXXXXXXX will use the proceeds realized from the issuance of the XXXXXXXXXX Preferred Shares to lend to Newco $XXXXXXXXXX by way of a demand interest-bearing note with a rate of XXXXXXXXXX% per annum (the "XXXXXXXXXX Newco Note").
25. Newco will use the proceeds from the XXXXXXXXXX-Newco Note and XXXXXXXXXX Newco Note to lend to XXXXXXXXXX $XXXXXXXXXX by way of a demand interest-bearing note with a rate of XXXXXXXXXX% per annum (the "XXXXXXXXXX Newco Note").
26. XXXXXXXXXX will use the $XXXXXXXXXX borrowed from Newco to repay the Bank Loan to the arm's-length financial institution.
27. On or before XXXXXXXXXX, once sufficient income has been earned by XXXXXXXXXX and XXXXXXXXXX to utilize all or a portion of their respective non-capital losses:
(a) Newco will pay the balance of any accrued and unpaid interest on the XXXXXXXXXX-Newco Note;
(b) Newco will pay the balance of any accrued and unpaid interest on the XXXXXXXXXX Newco Note;
(c) XXXXXXXXXX will pay the balance of any accrued and unpaid dividends on the XXXXXXXXXX Preferred Shares held by Newco;
(d) XXXXXXXXXX will pay the balance of any accrued and unpaid dividends on the XXXXXXXXXX Preferred Shares held by Newco;
(e) XXXXXXXXXX will redeem the XXXXXXXXXX Preferred Shares held by Newco by issuing a demand non-interest-bearing promissory note (the "XXXXXXXXXX Note") having a principal amount equal to the redemption amount of the XXXXXXXXXX Preferred Shares and Newco will repay the XXXXXXXXXX-Newco Note in full by set off with the XXXXXXXXXX Note and the notes will be cancelled;
(f) XXXXXXXXXX will redeem the XXXXXXXXXX Preferred Shares held by Newco by issuing a demand non-interest-bearing promissory note (the "XXXXXXXXXX Note") having a principal amount equal to the redemption amount of the XXXXXXXXXX Preferred Shares and Newco will repay the XXXXXXXXXX Newco Note in full by set off with the XXXXXXXXXX Note and the notes will be cancelled;
(g) XXXXXXXXXX will pay the balance of any accrued and unpaid interest on the Newco-XXXXXXXXXX Note;
(h) Newco will pay the balance of any accrued and unpaid dividends on the Newco Preferred shares held by XXXXXXXXXX; and
(i) Newco will redeem the Newco Preferred Shares held by XXXXXXXXXX by issuing a demand non-interest-bearing promissory note (the "Newco Note 2") having a principal amount equal to the redemption amount of the Newco Preferred Shares and XXXXXXXXXX will repay the Newco-XXXXXXXXXX Note in full by set off with the Newco Note 2 and the notes will be cancelled.
28. Following the transactions described in paragraph 27 above, XXXXXXXXXX will, by special resolution, resolve to wind up and dissolve Newco under the provisions of the XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
29. The purpose of the proposed transactions is to enable XXXXXXXXXX and XXXXXXXXXX to earn sufficient interest income, over a period of time, in order to use their accumulated non-capital losses and to allow XXXXXXXXXX to deduct interest expense on borrowed money used to acquire the Newco Preferred Shares in computing its income in the year for purposes of the Act.
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:
(i) XXXXXXXXXX on the Newco Preferred Shares; and
(ii) Newco on the XXXXXXXXXX Preferred Shares and the XXXXXXXXXX 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 IV.1 of the Act will not apply to the dividends described in Ruling A above because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.
C. Part VI.1 of the Act will not apply to the dividends described in Ruling A above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).
D. Provided that XXXXXXXXXX has a legal obligation to pay interest on the Newco-XXXXXXXXXX Note issued in the transaction described in paragraph 25 above, and the Newco Preferred Shares acquired by XXXXXXXXXX described in paragraph 21 above continue to be held for the purpose of gaining or producing income (other than income which will be exempt), XXXXXXXXXX may, by virtue of the application of subsection 20(3), deduct the lesser of interest paid or payable or a reasonable amount in respect of the year on the Newco-XXXXXXXXXX Note (depending on the method regularly followed by XXXXXXXXXX in computing its income for purposes of the Act) pursuant to paragraph 20(1)(c).
E. Provided that Newco has a legal obligation to pay interest on the XXXXXXXXXX-Newco Note and XXXXXXXXXX Newco Note issued in the transactions described in paragraphs 23 and 24 above, respectively, and the Newco-XXXXXXXXXX Note acquired by Newco described in paragraph 25 above continues to be held for the purpose of gaining or producing income (other than income which will be exempt), Newco may deduct the lesser of interest paid or payable or a reasonable amount in respect of the year on the XXXXXXXXXX-Newco Note and XXXXXXXXXX Newco Note, as the case may be, (depending on the method regularly followed by Newco in computing its income for purposes of the Act) pursuant to paragraph 20(1)(c).
F. 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.
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.
H. The cancellation of:
(i) the XXXXXXXXXX-Newco Note and XXXXXXXXXX Note, as described in subparagraph 27(e) above;
(ii) the XXXXXXXXXX Newco Note and XXXXXXXXXX Note, as described in subparagraph 27(f) above; and
(iii) the Newco-XXXXXXXXXX Note and Newco Note 2, as described in subparagraph 27(i) 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 paragraphs 27 and 28 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.
Nothing in this letter should be construed as confirmation that Revenue Canada has reviewed or accepted the amount of non-capital losses referred to in paragraphs 4 and 8 above.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
11
.../cont’d
.../cont’d
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© Her Majesty the Queen in Right of Canada, 1998
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