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: Application of 111(5) - Are the non-capital losses of XXXXXXXXXX from its money lending business available after an acquisition of control if it continues to operate a money lending business?
Position: Question of fact but yes.
Reasons: Based on facts existing money lending business has not ceased, nor is it proposed to cease - the current loans will continue to be serviced by XXXXXXXXXX and as well as new loans will be undertaken and serviced by XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX 991245
XXXXXXXXXX
Attention : XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, and your subsequent correspondence requesting an advance income tax ruling on behalf of the above noted taxpayers. You have advised that to the best of your knowledge, and that of all the taxpayers involved, none of the issues raised in this letter are being considered by any Tax Service Office ("TSO") and/or Taxation Centre in connection with any tax return already filed by the taxpayers, or any person related to the taxpayers, nor are any of these issues under objection, appeal, or before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Suppl.) c.1, as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated:
(a) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(b) "public corporation" has the meaning assigned by subsection 89(1);
(c) "private corporation" has the meaning assigned by subsection 89(1);
(d) "arm's length" has the meaning assigned by section 251;
(e) any reference to an amount of money is expressed in Canadian dollars and all references to the amount or value of an asset or obligation is to its book or carrying value.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is set out as follows:
FACTS
1. XXXXXXXXXX is a public corporation and a taxable Canadian corporation. XXXXXXXXXX holds XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX which is also a taxable Canadian corporation. XXXXXXXXXX taxation year ends on XXXXXXXXXX and it Federal tax account number is XXXXXXXXXX.
2. XXXXXXXXXX was formed by Letters Patent of Amalgamation effective XXXXXXXXXX, pursuant to the XXXXXXXXXX as it then applied. The amalgamating corporations were XXXXXXXXXX. The current authorized and issued capital stock of XXXXXXXXXX consists of approximately XXXXXXXXXX common shares without par value, with an aggregate stated capital of approximately $XXXXXXXXXX.
3. XXXXXXXXXX is governed under the XXXXXXXXXX and as a licensed trust company in several provinces, XXXXXXXXXX (see 8 below), was authorized to provide a broad range of financial services to it customers. Through XXXXXXXXXX branch locations (including the head office branch), the financial services provided by it included deposit taking activities, fiduciary activities and money lending activities.
XXXXXXXXXX
4.
XXXXXXXXXX
XXXXXXXXXX
5. The administration of XXXXXXXXXX mortgage portfolio was the responsibility of the mortgage administration department. Such administration required, among other things, collecting payments from the borrowers, keeping appropriate records, taking proper actions in the case of default by a borrower to secure the repayment of capital and the payment of interest, including exercising the securities available, dealing with concerns of clients and renewals, etc. XXXXXXXXXX mortgage administration department comprised approximately XXXXXXXXXX people.
6.
XXXXXXXXXX
7. In its XXXXXXXXXX taxation years, XXXXXXXXXX incurred significant operating losses mainly due to non-performing loans and provisions therefor, caused in part, by the decline in the real estate market as a result of the recession in the early 90's.
XXXXXXXXXX.
8. XXXXXXXXXX
9. XXXXXXXXXX
10. XXXXXXXXXX, the activities of XXXXXXXXXX consist of the administration of its existing mortgages and loans. Such administration has required XXXXXXXXXX to perform duties similar to those described in 5 above, XXXXXXXXXX
11. The approximate number and gross book value of loans, the number of full-time employees of XXXXXXXXXX and the number of full-time employees of XXXXXXXXXX whose services were devoted to XXXXXXXXXX on XXXXXXXXXX were as follows:
Period
Number of loans
Gross book value
(,000)
Number of staff
Full-time liquidator's staff
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
By XXXXXXXXXX loans remained with a gross book value of $XXXXXXXXXX and, except as described in 14 below, only XXXXXXXXXX whose services were devoted to XXXXXXXXXX duties remained (see 13 below).
12. The drop in the number and gross book value of loans held by XXXXXXXXXX from XXXXXXXXXX to XXXXXXXXXX a sale of approximately $XXXXXXXXXX in loans to the XXXXXXXXXX. As part of that transaction, XXXXXXXXXX acquired almost all the assets of XXXXXXXXXX branches and most of XXXXXXXXXX employees were laid off as a result of that sale. The remaining XXXXXXXXXX branch, located in XXXXXXXXXX, served as the company's head office and principal place of business and was not included in that transaction.
13. The staff of XXXXXXXXXX continued to occupy the head office premises until the beginning of XXXXXXXXXX, although on a smaller scale throughout the period (XXXXXXXXXX). The staff of XXXXXXXXXX used the remaining fixed assets (i.e., the main frame computer system and other computers) of XXXXXXXXXX to perform their tasks until the beginning of XXXXXXXXXX. These tasks related to the operations of a financial institution (XXXXXXXXXX). After XXXXXXXXXX, the remaining XXXXXXXXXX employee was hired by XXXXXXXXXX to continue to perform these tasks.
14. XXXXXXXXXX, the CEO of XXXXXXXXXX, was a member of the executive committee of XXXXXXXXXX in the past. XXXXXXXXXX uses the services of XXXXXXXXXX in the course of carrying on the business of XXXXXXXXXX was the President and CEO of XXXXXXXXXX and his services have been retained by XXXXXXXXXX since XXXXXXXXXX for the purpose of managing the operations of XXXXXXXXXX once XXXXXXXXXX (see paragraph 19 below). XXXXXXXXXX provides advice to XXXXXXXXXX from time to time concerning the operations of XXXXXXXXXX. The services of XXXXXXXXXX have also been retained from time to time by XXXXXXXXXX to assist it in managing of the operations of XXXXXXXXXX.
15. XXXXXXXXXX.
16. XXXXXXXXXX has approximately $XXXXXXXXXX in liquid assets at this time. These assets are invested in bankers' acceptances and short-term deposits.
17. The non-capital loss of XXXXXXXXXX. As at XXXXXXXXXX had non-capital losses of $XXXXXXXXXX available to reduce future years' taxable income (the "non-capital losses"). These operating losses were not generated by the fiduciary activities of XXXXXXXXXX.
18. XXXXXXXXXX, is a private corporation and a taxable Canadian corporation. XXXXXXXXXX carries on a money-lending business. XXXXXXXXXX head office is located in XXXXXXXXXX and it is serviced by the XXXXXXXXXX TSO. XXXXXXXXXX Revenue Canada tax account number is XXXXXXXXXX and it files its returns with the XXXXXXXXXX taxation centre.
PROPOSED TRANSACTIONS
19. XXXXXXXXXX will purchase a portfolio of mortgages with an estimated value of approximately $XXXXXXXXXX from unrelated mortgage brokers. The purchase price of this portfolio will be paid using the current liquid assets of XXXXXXXXXX as described in 16 above.
20. XXXXXXXXXX.
21. Subject to the receipt of a favorable advance income tax ruling, approvals from OSFI and the other regulatory authorities, as well as approvals from the respective Board of Directors of XXXXXXXXXX or one of its wholly-owned subsidiaries, will acquire all of the issued and outstanding shares of XXXXXXXXXX held by XXXXXXXXXX. As a result of this transaction, XXXXXXXXXX, or one of its wholly-owned subsidiaries, will acquire control of XXXXXXXXXX for purposes of the Act.
22. XXXXXXXXXX will invest approximately $XXXXXXXXXX in cash into XXXXXXXXXX either by way of shares and/or a non-interest bearing loan. XXXXXXXXXX will use this cash to repay the subordinated debt held by XXXXXXXXXX.
23. XXXXXXXXXX will remain as a separate legal entity (i.e., XXXXXXXXXX is not currently contemplating the merger or winding-up of XXXXXXXXXX with any other corporation) and the money lending business activities carried on by XXXXXXXXXX prior to the acquisition of control by XXXXXXXXXX will continue to be carried on by XXXXXXXXXX for profit or with a reasonable expectation of profit subject to the following:
- Name - The name of the corporation will be changed to reflect the fact that it is now owned by XXXXXXXXXX.
- Letters patent - XXXXXXXXXX letters patent will not, but for the name change, be amended.
- Regulatory - XXXXXXXXXX will maintain its power to carry on its money lending activities XXXXXXXXXX
- Capital - XXXXXXXXXX will receive additional capital, from time to time, from XXXXXXXXXX in order to satisfy regulatory authorities and permit the revival and expansion of its money-lending business.
- Business - XXXXXXXXXX will invest its existing cash resources and new capital received from XXXXXXXXXX in mortgage loans and other interest bearing securities and to defray general operating expenses. Some of the mortgage loans will be provided by XXXXXXXXXX directly to clients by utilizing the services of mortgage brokers in a similar manner as described in 4 above. Other mortgage loans will be acquired by XXXXXXXXXX in purchase transactions involving XXXXXXXXXX affiliates or other financial institutions.
- Employees - XXXXXXXXXX will either use its own personnel or retain the services of required personnel from XXXXXXXXXX or its affiliates. In the later case appropriate charges for salaries will be borne by XXXXXXXXXX.
24. As a result of the above proposed transactions the only significant differences between the past money lending business activities carried on by XXXXXXXXXX and the business activities that will continue to be carried on following the acquisition of shares by XXXXXXXXXX, or one of its wholly-owned subsidiaries is the following:
- XXXXXXXXXX will be more adequately capitalized. The source of funds in order to support its money-lending activities will principally come out of equity invested by XXXXXXXXXX.
- XXXXXXXXXX will no longer require or maintain any separately identifiable branch locations because its money lending activities will no longer necessitate significant external funding (i.e., acceptance of deposits).
PURPOSE OF THE PROPOSED TRANSACTIONS
25. The purpose of the proposed transactions is to allow XXXXXXXXXX to acquire a financial institution operating a money lending business in Canada. This acquisition, like other acquisitions of financial institutions made in the past by XXXXXXXXXX, allows XXXXXXXXXX to expand its own money lending business and contributes to strengthen its position as a major lender in the Canadian marketplace. The acquisition enhances XXXXXXXXXX reputation as a consolidator of financial services businesses, attracting other potential acquisition names, further strengthening its money lending business. This strength allows XXXXXXXXXX to compete with its much larger rivals, enhancing financial services delivered to Canadians. Enhancing competition was expressed imperative of the recent MacKay Report on the financial sector.
RULINGS GIVEN
Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions we confirm the following:
A. Provided that the money lending business of XXXXXXXXXX, as described in 4 above, is carried on for profit or with a reasonable expectation of profit throughout a particular taxation year ending after the acquisition of control of XXXXXXXXXX by XXXXXXXXXX (or one of its wholly-owned subsidiaries), as described in 21 above, and subject to the time limitations set out in paragraph 111(1)(a), the restrictions set out in subsection 111(3) and any other requirements in the Act regarding deductibility of non-capital losses, the non capital losses of XXXXXXXXXX as determined pursuant to subsection 111(8) may be deducted under paragraph 111(5)(a) in computing the taxable income of XXXXXXXXXX for that taxation year to the extent of the income earned by XXXXXXXXXX from the carrying on its money-lending business in the manner described in 23; and
B. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.
Nothing in this ruling should be construed as implying that Revenue Canada has agreed or reviewed:
(a) the determination of the amount of non-capital losses, as described in 17, that are purported to be available to XXXXXXXXXX for carryforward at the time XXXXXXXXXX (or one of its wholly-owned subsidiaries) acquires control of XXXXXXXXXX;
(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.
The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on Revenue Canada provided that the proposed are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1999
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