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).