2011 Ruling 2010-0379631R3 - 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.

Principal Issues: Is the proposed loss consolidation acceptable?

Position: Yes

Reasons: Within established parameters.

XXXXXXXXXX
									2010-037963
									XXXXXXXXXX 

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. In general terms, the transactions described herein involve the use of losses within an affiliated group of corporations. We acknowledge additional information that you provided in subsequent correspondence.

This letter is based solely on the facts, Proposed Transactions and additional information described below. Any documentation submitted in respect of your request does not form part of the facts, Proposed Transactions and additional information, and any references thereto are provided solely for the convenience of the reader.

To the best of your knowledge, and that of the above-noted taxpayers, none of the issues involved in this advance income tax ruling are:

(i) in an earlier tax return of the above-noted taxpayers or of a related person;

(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of the above-noted taxpayers or of a related person;

(iii) under objection by the above-noted taxpayers or by a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the above-noted taxpayers or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act") or the Income Tax Regulations (the "Regulations"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:

Definitions

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

(a) "affiliated persons" has the meaning assigned by subsection 251.1(1) of the Act;

(b) "Agreeing Province" means a province that has entered into an agreement with the Government of Canada under which the Government of Canada will collect taxes payable under the income tax statute of that province and will make payments to that province in respect of the taxes so collected;

(c) XXXXXXXXXX ;

(d) XXXXXXXXXX ;

(e) XXXXXXXXXX ;

(f) "CBCA" means the Canada Business Corporations Act;

(g) "dividend rental arrangement" has the meaning assigned by subsection 248(1) of the Act;

(h) XXXXXXXXXX ;

(i) "General Anti-avoidance Provision of an Agreeing Province" means:
XXXXXXXXXX

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

(k) "Newco" is a new corporation to be incorporated under the laws of Canada as described in 11 below;

(l) "Newco Preferred Shares" means the shares of the capital stock of Newco to be issued by Newco to Subsidiary as described in 15 below;

(m) "Parent" means XXXXXXXXXX , a corporation further described in 1 and 2 below;

(n) "Parent Loan" means the loan made by Newco to Parent as described in 16 below;

(o) XXXXXXXXXX ;

(p) "Preferred Shares" means shares of the capital stock of Newco as defined in 12 below;

(q) "Proposed Transactions" means the transactions described in 11 to 23 below;

(r) XXXXXXXXXX ;

(s) "related" has the meaning assigned by section 251 of the Act;

(t) XXXXXXXXXX ;

(u) XXXXXXXXXX ;

(v) XXXXXXXXXX ;

(w) "Subsidiary" means XXXXXXXXXX , a corporation further described in 3 below;

(x) "Subsidiary Loan" means the loan made by Parent to Subsidiary as described in 13 below;

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

(z) XXXXXXXXXX

Facts

1. Parent is a XXXXXXXXXX taxable Canadian corporation XXXXXXXXXX . Parent's fiscal year-end is XXXXXXXXXX .

2. XXXXXXXXXX . Parent's head office is located at XXXXXXXXXX . Its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office.

3. Subsidiary is a direct wholly-owned subsidiary of Parent. Subsidiary is governed by the XXXXXXXXXX and was formed on XXXXXXXXXX , as a result of the amalgamation of direct and indirect wholly-owned subsidiaries of Parent. Subsidiary is a taxable Canadian corporation XXXXXXXXXX . Its registered address is XXXXXXXXXX , its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Subsidiary's fiscal year end is XXXXXXXXXX . Subsidiary carries on XXXXXXXXXX business.

4. As at XXXXXXXXXX , Parent had a balance of non-capital loss carryforwards of approximately $XXXXXXXXXX . These losses were incurred in Parent's taxation year ending XXXXXXXXXX .

5. Parent has a permanent establishment in each of the provinces and territories listed below XXXXXXXXXX

6. The consolidated financial statements of Parent for its fiscal year ended XXXXXXXXXX , indicate that Parent and its subsidiaries had:

(a) assets of approximately $XXXXXXXXXX ;
(b) liabilities of approximately $XXXXXXXXXX ; and
(c) shareholders' equity of approximately $XXXXXXXXXX .

7. Subsidiary's taxable income for its three prior taxation years was as follows:

Taxation Year Ending Taxable Income

XXXXXXXXXX $XXXXXXXXXX
XXXXXXXXXX $XXXXXXXXXX
XXXXXXXXXX $XXXXXXXXXX

8. It is expected that Subsidiary will be able to fully utilize the interest paid or payable on the Subsidiary Loan made to it against its income for its current and four subsequent taxation years.

9. Subsidiary has a permanent establishment in each of the provinces and territories listed below and, for its taxation year ending XXXXXXXXXX , its gross revenue and salary and wages, for purposes of Part IV of the Regulations, were allocated as follows:

Province/Territory Gross Revenue Salary and Wages
XXXXXXXXXX $XXXXXXXXXX $XXXXXXXXXX

10. Subsidiary's tax return for its fiscal year ended XXXXXXXXXX indicates that Subsidiary had assets of approximately $XXXXXXXXXX .

Proposed Transactions

11. Parent will incorporate Newco under the laws of Canada. Newco will be a taxable Canadian corporation. The taxation year-end of Newco will be XXXXXXXXXX . Newco will not carry on any business and its activities will be limited to lending the proceeds received, upon the issuance of the Newco Preferred Shares, to Parent as the Parent Loan described in 16 below.

12. The authorized capital of Newco will consist of two classes of shares: (i) a class of common shares; and (ii) a class of non-voting, preferential cumulative annual dividend, redeemable preferred shares which, on liquidation, entitle the holder to the redemption price in priority to the holders of the common shares and have a paid-up capital equal to the subscription price (the "Preferred Shares"). The preferential cumulative annual dividends payable on the Preferred Shares will be calculated by reference to the redemption price of the Preferred Shares at a rate equal to the interest rate on the Subsidiary Loan, the proceeds of which were used to acquire the Newco Preferred Shares, plus XXXXXXXXXX %. Dividends will be paid annually in arrears on XXXXXXXXXX . The Preferred Shares will be redeemable by Newco. Parent will acquire the common shares of Newco for $XXXXXXXXXX .

13. On a particular day to be determined by Parent, Parent will make a subordinated loan to Subsidiary with a term of XXXXXXXXXX years (the "Subsidiary Loan"). The aggregate of the Subsidiary Loan, which will not exceed $XXXXXXXXXX.

14. Simple interest will accrue on the Subsidiary Loan and will be calculated daily at a rate equal to a commercial market rate determined at the issue date. The current market rate is approximately XXXXXXXXXX % per annum. The interest on the Subsidiary Loan will be paid annually on XXXXXXXXXX .

15. Subsidiary will use the total proceeds received by it from the Subsidiary Loan to subscribe for the Preferred Shares in the capital of Newco having an aggregate redemption price equal to the subscription price therefor plus any accrued and unpaid dividends (the "Newco Preferred Shares").

16. Newco will use the total proceeds received on the issuance of the Newco Preferred Shares to make a demand, interest-free loan to Parent (the "Parent Loan").

17. On each day on which interest is payable on the Subsidiary Loan, while the Subsidiary Loan is outstanding, Parent will make a capital contribution to Newco in an amount equal to the dividends payable by Newco on that day on the Newco Preferred Shares held by Subsidiary. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the issued and paid-up capital of Newco. XXXXXXXXXX. The contributions of capital will not be income of Newco for accounting purposes.

18. Upon receipt of the capital contribution described in 17 above, Newco will, subject to the applicable solvency test, pay dividends equal to the amount of the dividends payable by it on the Newco Preferred Shares.

19. Subsidiary will use the amounts received as dividends from Newco, as discussed in 18 above, to pay to Parent interest on the Subsidiary Loan made to it, when due and payable.

20. The following transactions will occur on or prior to the XXXXXXXXXX anniversary of the day that the Subsidiary Loan is made:

(a) Parent will make a contribution of capital to Newco in an amount equal to the amount of any accrued and unpaid dividends on the series of Newco Preferred Shares. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the issued and paid-up capital of Newco. XXXXXXXXXX . The contribution of capital, if any, will not be income to Newco for accounting purposes;
(b) Parent will repay the Parent Loan;
(c) Newco will redeem the Newco Preferred Shares (including any accrued dividends) or will pay the accrued dividends on, and then redeem, the Newco Preferred Shares; and
(d) Subsidiary will pay accrued and unpaid interest on the Subsidiary Loan and XXXXXXXXXX will repay the Subsidiary Loan.

21. The transactions described in 20 above will result in, on or prior to the XXXXXXXXXX anniversary of the day that the Subsidiary Loan is made, the payment of all accrued dividends on the Newco Preferred Shares, the payment of all accrued interest on the Subsidiary Loan, the redemption of all Newco Preferred Shares and the repayment of the Parent Loan and the Subsidiary Loan.

22. Parent will cause Newco to be wound-up after all the Newco Preferred Shares have been redeemed and the Parent Loan and Subsidiary Loan have been repaid.

23. It is anticipated that the loss consolidation arrangement described in 11 to 21 above may be undertaken in a future taxation year of Parent and Subsidiary and then similarly unwound until Parent has utilized all of its non-capital loss carryforwards.
Additional Information

24. The Newco Preferred Shares which will be issued as described in 15 above, will not be, at any time during the implementation of the Proposed Transactions:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) the subject of a dividend rental arrangement;
(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(d) issued for consideration that is or includes:

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

25. Parent, Newco and Subsidiary are affiliated persons and are related to each other.

26. XXXXXXXXXX

27. It is expected that dividends paid to Subsidiary by Newco would be designated as eligible dividends.

28. It is expected, taking in to account income arising under the Proposed Transactions, that Parent will be in a profitable position over the next XXXXXXXXXX years.

29. For the purposes of the Act, Parent, or any present or future related or affiliated party of Parent, will not, at any time, include the disposition of its investment in Newco in the calculation of its capital losses.

Purpose of the Proposed Transactions:

30. The purpose of the proposed transactions is to effect a tax consolidation of Parent and Subsidiary by causing Parent to earn interest income on the Subsidiary Loan, thus permitting Parent to utilize its non-capital loss carryforwards and to have Subsidiary incur interest expense to reduce its taxable income.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:

A. With respect to the interest expense incurred by Subsidiary on the Subsidiary Loan, as described in 14, 19 and 20(a) above, provided that Subsidiary has a legal obligation to pay interest on the Subsidiary Loan and Subsidiary continues to hold the Newco Preferred Shares for the purpose of gaining or producing income therefrom, Subsidiary will be permitted, pursuant to paragraph 20(1)(c), to deduct, in computing its income for a taxation year, the lesser of such interest and a reasonable amount in respect thereof paid in the year or payable in respect of the year (depending on the method that Subsidiary regularly follows in computing its income from property for the purposes of the Act).

B. No amount will be included in the income of Newco pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) of the Act in respect of the contributions of capital made by Parent as described in 17 and 20(a) above.

C. The dividends received (or deemed to be received) by Subsidiary on Newco Preferred Shares held by it as described in 18 and 20(c) above will be taxable dividends that will, pursuant to subsection 112(1) of the Act, be deductible in computing its taxable income for the taxation year in which the dividends are received (or deemed to be received), and for greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4) of the Act.

D. Neither Part IV.1 nor Part VI.1 of the Act will apply to the dividends described in Ruling C because the dividends will be excepted dividends within the meaning assigned by section 187.1 of the Act and excluded dividends within the meaning assigned by subsection 191(1) of the Act.

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

F. Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

G. The General Anti-avoidance Provision of an Agreeing Province will not be applied, as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above, in respect of a taxation year for which such province was an Agreeing Province.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the Proposed Transactions, excluding 20 - 23 above, are commenced by XXXXXXXXXX .

The above rulings are based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

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

(b) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein; or

(c) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the ruling given above.

Yours truly,

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate