1999 Ruling 9930203 - LOSS CONSOLIDATION XXXXXXXXXX

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 CONSOLIDATION WITHIN A RELATED GROUP

Position: OK

Reasons: PREVIOUSLY PROVIDED IN THESE TYPES OF SITUATIONS

XXXXXXXXXX 993020

Attention:

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

We are writing in response to your correspondence of XXXXXXXXXX wherein you had requested an advance income tax ruling on behalf of the above referenced corporations.

You have advised that, to the best of the knowledge of yourself and that of responsible officials of XXXXXXXXXX that none of the issues being considered in this advance income tax ruling request is involved in an income tax return of any of those corporations, is being considered by a Taxation Services Office or Taxation Centre of Canada Customs and Revenue Agency, is the subject of an objection or appeal by those corporations or a person related thereto, are before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or is the subject of an advance income tax ruling previously issued.

FACTS

1. XXXXXXXXXX ("ACO") is a "public corporation" and a "taxable Canadian corporation" within the meaning of those terms in paragraph 89(1) of the Income Tax Act (Canada) (the "Act"). ACO was formed by amalgamation on XXXXXXXXXX. The Class A Voting shares and the Class B Non-Voting shares of ACO are listed on the XXXXXXXXXX Stock Exchanges. The Class B Non-Voting shares are also listed on the XXXXXXXXXX Stock Exchange.

XXXXXXXXXX

The business number of ACO is XXXXXXXXXX and it files its return of income at the XXXXXXXXXX Taxation Centre.

2. XXXXXXXXXX ("BCO") is a "taxable Canadian corporation", within the meaning of that term in subsection 89(1) of the Act and was incorporated on XXXXXXXXXX. All of the common shares of BCO are owned by ACO. The remaining share capital of BCO is comprised of preferred shares, all of which are owned by various direct and indirect wholly-owned subsidiaries of ACO.

The business number of BCO is XXXXXXXXXX and it files its return of income with the XXXXXXXXXX Taxation Centre.

3. XXXXXXXXXX ("CCO") is a "taxable Canadian corporation", within the meaning of that term in subsection 89(1) of the Act, and was formed by amalgamation on XXXXXXXXXX under the Canadian Business Corporations Act). CCO is a wholly-owned subsidiary of ACO and is in the business of XXXXXXXXXX.

The business number of CCO is XXXXXXXXXX and it files its return of income with the XXXXXXXXXX Taxation Centre.

4. The borrowings of ACO and its Canadian subsidiaries (the "ACO Group") currently amount to approximately $XXXXXXXXXX. Indentures on high yield debt restrict ACO from incurring indebtedness that exceeds an amount determined as the product of XXXXXXXXXX the annualized cash flows, which product is estimated to be approximately $XXXXXXXXXX. Within the consolidated group, ACO currently has available (undrawn) credit arrangements sufficient to borrow about $XXXXXXXXXX. In addition, ACO has incremental borrowing capacity of about $XXXXXXXXXX. Accordingly, the ACO Group is in a position to increase its current arm's length borrowings by an amount of about $XXXXXXXXXX.

5. As of XXXXXXXXXX, ACO had incurred non-capital losses in the approximate amount of $XXXXXXXXXX of which $XXXXXXXXXX expire in XXXXXXXXXX.

PROPOSED TRANSACTIONS

6. ACO will use its available funds to make loans to CCO aggregating $XXXXXXXXXX, bearing interest at XXXXXXXXXX %. In order for ACO to have sufficient funds available, it may be necessary for one of ACO's subsidiaries to draw on their available bank lines to repay existing inter-company debts payable to ACO. As of XXXXXXXXXX, there are approximately $XXXXXXXXXX of intercompany loans outstanding between related corporations within the ACO Group.

7. CCO will use the proceeds of the loans to invest $XXXXXXXXXX in a new class of preferred shares issued by BCO. The BCO preferred shares will have a fair market value, redemption amount and paid-up capital, within the meaning of that term in subsection 89(1) of the Act, of $XXXXXXXXXX and will carry rights to cumulative dividends at a rate of XXXXXXXXXX% per annum.

8. The preferred shares of BCO to be issued to CCO will not be, at any time during the implementation of the proposed transactions described herein:

a) the subject of any undertaking that is referred to in subsection 112(2.2) of the Act as a "guarantee agreement".

b) the subject of a dividend rental arrangement as that term is defined in subsection 248(1) of the Act;

c) the subject of any secured undertaking of the type of described in paragraph 112(2.4)(a); or

d) issued for consideration that is or includes:

i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

9. BCO will use the subscription proceeds from the issuance of its new preferred shares to subscribe for $XXXXXXXXXX of new preferred shares of ACO having terms identical to the preferred shares issued by BCO to CCO.

OTHER INFORMATION

Based on its existing assets and resources, ACO will have the ability to pay dividends on its preferred shares issued in the course of these proposed transactions without taking into account the interest income which it would earn as a result of the proposed transactions described herein.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to allow the consolidation of profits and losses within a related group of taxable Canadian corporations. The consolidation is achieved by allowing ACO to earn investment income which is sheltered by its accumulated non-capital losses, and by allowing CCO to reduce its income for tax purposes by the interest expense incurred by it.

RULINGS PROVIDED

Provided that the above statements of fact are complete and accurate and that the proposed transactions are undertaken as described, the following rulings are provided:

A. Interest on the funds borrowed by ACO from CCO and used by ACO to subscribe for the preferred shares of BCO, as described in paragraph 7 of the Proposed Transactions, that is paid or payable in respect of a period in a taxation year during which ACO owns those preferred shares will, pursuant to paragraph 20(1)(c) of the Act, be deductible by ACO in computing its income for tax purposes for that taxation year.

B. Subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the ruling given.

These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding upon the Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.

Yours truly,

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