1999 Ruling 9919763 - LOSS CONSOLIDATION

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.

XXXXXXXXXX 991976

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sir:

Subject: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

To the best of your knowledge, none of the issues involved in this advance ruling request are being considered by a District Taxation Office or Taxation Centre in connection with a tax return already filed and none of these issues are under objection or appeal.

DEFINITIONS

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) 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) "CBCA" means Canada Business Corporations Act;

(d) XXXXXXXXXX;

(e) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(f) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

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

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

(i) "paid-up capital" has the meaning assigned by subsection 89(1);

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

(k) "subsidiary controlled corporation" has the meaning assigned by subsection 248(1);

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

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

Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:

FACTS

1. XXXXXXXXXX was incorporated on XXXXXXXXXX under the name XXXXXXXXXX and is governed by the CBCA. The name was subsequently changed to XXXXXXXXXX on XXXXXXXXXX. It is a public corporation and a taxable Canadian corporation.

2. XXXXXXXXXX has a XXXXXXXXXX taxation year end and generates taxable income on an annual basis.

3. XXXXXXXXXX is a "public corporation" and a "taxable Canadian corporation".

4. XXXXXXXXXX.

Consequently, XXXXXXXXXX is an indirect wholly-owned subsidiary of XXXXXXXXXX.

5. XXXXXXXXXX was incorporated on XXXXXXXXXX and is governed by the CBCA. XXXXXXXXXX is a public corporation and a taxable Canadian corporation XXXXXXXXXX. All of the XXXXXXXXXX issued and outstanding common shares of XXXXXXXXXX, having a paid-up capital of approximately $XXXXXXXXXX, are, and have always been, owned by XXXXXXXXXX.

6. XXXXXXXXXX has a XXXXXXXXXX taxation year end. At XXXXXXXXXX had non-capital loss carryforwards of approximately $XXXXXXXXXX. It is anticipated that XXXXXXXXXX will incur operating losses in its XXXXXXXXXX fiscal years.

PROPOSED TRANSACTIONS

7. XXXXXXXXXX will file articles of amendment under the CBCA to create a new class of shares ("XXXXXXXXXX Preferred Shares") which will be non-participating, non-voting, with an annual cumulative dividend rate equal to the prime lending rate of XXXXXXXXXX leading banker plus XXXXXXXXXX%, determined at the time of the proposed transactions, and subsequently, at the beginning of each taxation year applied to the stated capital of the shares, retractable and redeemable for an amount equal to the aggregate of the amount for which the shares were issued and any unpaid dividends.

8. XXXXXXXXXX will borrow $XXXXXXXXXX from an arm's-length financial institution ("the Bank Loan"). The loan will bear interest at commercial rates and will be documented by an enforceable agreement. XXXXXXXXXX (the "Bank") has provided confirmation, in a letter dated XXXXXXXXXX, that XXXXXXXXXX has the ability to increase its line of credit with the Bank by the amount of $XXXXXXXXXX independent of its relationship with XXXXXXXXXX.

9. XXXXXXXXXX will use the $XXXXXXXXXX of the proceeds of the Bank Loan to subscribe for XXXXXXXXXX Preferred Shares. Dividends will be paid on the XXXXXXXXXX Preferred Shares on an annual basis. The dividends may be funded with the interest income earned by XXXXXXXXXX on the interest-bearing note described in paragraph 10 below.

10. XXXXXXXXXX will use the funds realized from the issuance of its shares in paragraph 9 above, to lend to XXXXXXXXXX by way of a demand interest-bearing note (the "XXXXXXXXXX Note") with an interest rate equal to the prime lending rate of XXXXXXXXXX leading banker. The interest will be payable quarterly in arrears.

11. XXXXXXXXXX will use the proceeds of the XXXXXXXXXX Note to repay the Bank Loan.

12. Once sufficient income has been earned by XXXXXXXXXX to utilize all or a portion of its non-capital losses:

(a) XXXXXXXXXX will pay the balance of any accrued and unpaid interest on the XXXXXXXXXX Note;

(b) A solvency certificate will be obtained, as described in section 42 of the CBCA, and XXXXXXXXXX will pay the balance of any declared and unpaid dividends on the XXXXXXXXXX Preferred Shares; and

(c) XXXXXXXXXX will redeem its XXXXXXXXXX Preferred Shares held by XXXXXXXXXX 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 XXXXXXXXXX will repay the XXXXXXXXXX Note in full by set off with the XXXXXXXXXX Note and the notes will be cancelled.

ADDITIONAL INFORMATION

None of the XXXXXXXXXX Preferred Shares referred to herein:

(a) is, or will be, subject to a guarantee agreement;

(b) has been or will be acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5); and

(c) is or will be subject to a dividend rental arrangement.

XXXXXXXXXX are affiliated persons for purposes of the Act.

PURPOSE OF THE PROPOSED TRANSACTIONS

(a) The purpose of the proposed transactions is to enable XXXXXXXXXX to earn sufficient income, over a period of time, so as to utilize its accumulated non-capital losses and anticipated losses that will be incurred in XXXXXXXXXX by XXXXXXXXXX.

(b)
XXXXXXXXXX

RULINGS

Provided that the above statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, we rule that:

A. Dividends received by XXXXXXXXXX on the XXXXXXXXXX Preferred Shares issued 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), 112(2.2), 112(2.3), 112(2.4).

B. Provided that XXXXXXXXXX has a legal obligation to pay interest on the XXXXXXXXXX Note issued in the transaction described in paragraph 10 above, and the XXXXXXXXXX Preferred shares, described in paragraph 9 above, continue to be held for the purpose of gaining or producing income, XXXXXXXXXX will be entitled to deduct, pursuant to paragraph 20(1)(c), the lesser of interest paid or payable (depending on the method regularly followed by XXXXXXXXXX in computing its income for purposes of the Act) or a reasonable amount in respect of the year on the XXXXXXXXXX Note.

C. The cancellation of the XXXXXXXXXX Note and XXXXXXXXXX Note, as described in paragraph 12(c), will not give rise to a "forgiven amount" for purposes of section 80.

D. The provisions of subsections 15(1), 56(2), 69(4), 69(11) and 246(1) will not be applied as a result of the proposed transactions, in and by themselves.

E. Section 245 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 limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, provided that the proposed transactions are implemented by 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.

COMMENTS

Nothing in this letter should be construed as confirmation, express or implied, of:

(a) the determination of the fair market value, adjusted cost base, paid-up capital of any particular shares referred to herein; or

(b) the amount of the non-capital losses referred to in paragraph 6 above.

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