CRA accepts that deeply subordinated intercompany debt is debt
As a preliminary step to a loss utilization transaction, LossCo will be rendered solvent by adding an option to convert its intercompany debt into an "A" Note and a deeply subordinated "B" Note (ranking behind the unsecured creditors), with the resulting B Note then being eliminated under a debt tuck-under and winding-up transaction (avoiding the debt forgiveness rules).
ProfitCo then will then utilize the LossCo non-capital losses by transferring depreciable assets to LossCo on a rollover basis for preferred shares, then redeeming the preferred shares a day later (on a non-rollover basis), thereby stepping up the UCC of the depreciable assets. There’s no superficial gain rule!
Neal Armstrong. Summary of 2012 Ruling 2012-0451431R3 under s. 111(1)(a).