1999 Ruling 9906593 - CONSOLIDATION TO USE DEDUCTIONS AND CREDITS

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: Use of Deductions and Credits by Affiliated Persons

Position: ok

Reasons: Previous rulings

XXXXXXXXXX
XXXXXXXXXX 990659
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

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 letter 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 request are 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. XXXXXXXXXX ("ACO") and XXXXXXXXXX ("BCO") are taxable Canadian corporations within the meaning of subsection 89(1) of the Act.

2. Each of ACO and BCO are involved in the XXXXXXXXXX business. ACO carries on a XXXXXXXXXX business. BCO carries on a XXXXXXXXXX business and also carries on XXXXXXXXXX.

3. BCO is wholly owned by XXXXXXXXXX ("CCO"), a XXXXXXXXXX corporation. ACO is wholly owned, through two wholly owned Canadian holding corporations, by XXXXXXXXXX corporation. XXXXXXXXXX and CCO are indirectly wholly owned by XXXXXXXXXX public corporation. ACO and BCO are affiliated persons within the meaning of section 251.1 of the Act.

4. ACO devotes substantial resources to research and development. As of XXXXXXXXXX it had $XXXXXXXXXX of undeducted SR & ED expenditures and $XXXXXXXXXX of ITC to carry forward. BCO is in a taxable position and tends to have a positive cash flow. It is expected to generate annual taxable income in the $XXXXXXXXXX range for the foreseeable future.

Proposed Transactions

5. BCO will borrow an amount up to a maximum of $XXXXXXXXXX from a bank at a commercial rate of interest. This is the borrowing capacity of ACO.

6. BCO will acquire the same amount up to a maximum of $XXXXXXXXXX in preferred shares of ACO using the bank loan. The preferred shares will be voting, redeemable at the option of the holder or issuer, and carry a cumulative dividend rate of XXXXXXXXXX%.

7. ACO will lend the same amount up to a maximum of $XXXXXXXXXX of the proceeds it receives for the share issue to BCO at an annual interest rate of XXXXXXXXXX%.

8. BCO will repay its bank loan.

9. BCO will pay interest to ACO on a yearly basis.

10. ACO will pay dividends to BCO on a periodic basis

11. Once ACO has used all of its ITC and SR & ED or at the time that revenue is generated from the new products resulting from the research, ACO will redeem its preferred shares and BCO will repay its loan to ACO.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to minimize the income taxes to paid by the Canadian affiliated companies of the XXXXXXXXXX group by utilizing the tax incentives available, so that the overall cash flow of the Canadian corporate group is improved.

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, and provided that the ACO preferred shares continue to be held for the purpose of earning income, in computing its income for a taxation year, BCO will, pursuant to subsection 20(3) and paragraph 20(1)(c) of the Act, be entitled to deduct the lesser of the interest paid or payable in respect of that year on the intercompany loan or a reasonable amount in respect thereof.

B. 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.

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 provided that the proposed transactions described in paragraphs 5 to 8 are completed by XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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