2015 Ruling 2015-0596971R3 - Standard 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: Whether a lossco will be entitled to apply its non-capital losses against the interest income generated as part of the loss consolidation transactions and whether profitco will be entitled to deduct the corresponding interest expense.

Position: Yes.

Reasons: Conforms to our requirements for such rulings.

XXXXXXXXXX						2015-059697
							XXXXXXXXXX
XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Taxpayers, none of the issues involved in the ruling request is:

i. in an earlier return of any of the Taxpayers or a related person;

ii. being considered by a tax services office or a tax centre in connection with a tax return already filed by any of the Taxpayers or a related person;

iii. under objection by any of the Taxpayers or a related person;

iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

v. the subject of a ruling previously issued by the Directorate to any of the Taxpayers or a related person (XXXXXXXXXX).

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”).

DEFINITIONS

XXXXXXXXXX

XXXXXXXXXX

“affiliated persons” has the meaning assigned by subsection 251.1(1);

“CBCA” means the Canada Business Corporations Act (Canada), and where applicable, its predecessor statutes;

XXXXXXXXXX

“CRA” means the Canada Revenue Agency;

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

XXXXXXXXXX

“Foreign Authority” means the XXXXXXXXXX, which is the XXXXXXXXXX;

“Foreign Country” means XXXXXXXXXX;

XXXXXXXXXX

XXXXXXXXXX;

“Lossco” means XXXXXXXXXX;

“Lossco Loan” means the loan made by Lossco to Profitco as described in paragraph 22 below;

“Lossco Note” means the promissory note issued by Lossco to Profitco as described in paragraph 30 below;

“Lossco Class A Preferred Shares” means shares of the capital stock of Lossco as described in paragraph 21 below;

“Lossco Class B Preferred Shares” means shares of the capital stock of Lossco as described in paragraph 21 below;

“non-capital loss” has the meaning assigned by subsection 111(8);

“Parent” means XXXXXXXXXX;

“Profitco” means XXXXXXXXXX;

“Proposed Transactions” means the transactions described in paragraphs 21 to 39;

“related persons” has the meaning assigned by section 251;

“Subsidiary1” means XXXXXXXXXX;

“Subsidiary1 Loan” means the loan made by Subsidiary1 to Lossco as described in paragraph 21 below;

“Subsidiary2” means XXXXXXXXXX;

“Subsidiary3” means XXXXXXXXXX;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

“Treaty” means the XXXXXXXXXX.

FACTS

1. Parent, through its subsidiary corporations, is a global provider of XXXXXXXXXX.

2. Parent is a corporation incorporated under the laws of Foreign Country, a non-resident of Canada for purposes of the Act and a resident of Foreign Country for the purposes of the Treaty. Parent is XXXXXXXXXX and XXXXXXXXXX. There have been no acquisitions of control of Parent and any of its subsidiary corporations that are participants to the Proposed Transactions, including direct or indirect parent corporations of such subsidiary corporations, and there are no planned acquisitions of such corporations, including Parent.

3. The consolidated financial statements of Parent for its fiscal year ended XXXXXXXXXX indicate that Parent and its accounting consolidated group had:

* total assets of approximately XXXXXXXXXX$XXXXXXXXXX;

* total liabilities of approximately XXXXXXXXXX$XXXXXXXXXX; and

* total equity of approximately XXXXXXXXXX$XXXXXXXXXX.

4. Subsidiary1 is an indirect wholly owned subsidiary of Parent. Subsidiary1 is a corporation incorporated under the laws of Foreign Country, a non-resident of Canada for purposes of the Act and a resident of Foreign Country for purposes of the Treaty. Subsidiary1 is XXXXXXXXXX. Subsidiary1 is the parent corporation of directly and indirectly owned subsidiaries and other entities that collectively comprise XXXXXXXXXX.

5. Subsidiary2 is an indirect wholly-owned subsidiary of Subsidiary1. Subsidiary2 has been a subsidiary of Subsidiary1 since XXXXXXXXXX. Subsidiary2 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX, its Taxation Centre is XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Subsidiary2’s fiscal year-end is XXXXXXXXXX.

6. Subsidiary3 is a direct wholly owned subsidiary of Subsidary1. Subsidiary3 has been a subsidiary of Subsidiary1 since XXXXXXXXXX. Subsidiary3 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX, its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Subsidiary3’s fiscal year end is XXXXXXXXXX.

7. Profitco is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX, its Taxation Centre is the XXXXXXXXXX Taxation Centre, its Tax Services Office is the XXXXXXXXXX Tax Services Office and its business number is XXXXXXXXXX. Profitco’s fiscal year end is XXXXXXXXXX. All of the common shares of Profitco are directly owned by Subsidiary2. Profitco has been a subsidiary of Subsidiary2 since XXXXXXXXXX.

8. Profitco is XXXXXXXXXX. On XXXXXXXXXX, Profitco outsourced its XXXXXXXXXX to a third party. Profitco is regulated by the XXXXXXXXXX. XXXXXXXXXX has provided approval to Profitco to enter into the Proposed Transactions.

9. Profitco has a XXXXXXXXXX (the “Facility”) from an XXXXXXXXXX. Profitco will seek a waiver under the Facility from the XXXXXXXXXX to enter into the Proposed Transactions.

10. Profitco’s taxable income for its XXXXXXXXXX prior taxation years for which tax returns have been filed with the CRA is as follows:

Taxation Year 	Net Income For	Losses Carried 	XXXXXXXX	Taxable
Ending 		Tax Purposes 	forward from			Income
						Previous
						Taxation Years

XXXXXXXXXX

11. It is expected that Profitco will be able to fully utilize the interest paid or payable on the Lossco Loan either against its income for a current taxation year in which the Proposed Transactions are undertaken or by carrying back any loss for that taxation year against its taxable income for its XXXXXXXXXX prior taxation years.

12. Profitco’s stand-alone financial statements for its fiscal year end XXXXXXXXXX, indicate that Profitco has assets of $XXXXXXXXXX.

13. Profitco has a permanent establishment in each of the provinces and territories listed below and, for its taxation year ending XXXXXXXXXX, its gross revenue for purposes of Part IV of the Regulations was allocated as follows:

Province/Territory	Gross Revenue
XXXXXXXXXX			$XXXXXXXXXX

14. In the prior XXXXXXXXXX years, the provincial allocation of the taxable income of Profitco has been as follows:

Province/Territory	XXXXX
XXXXX				XXXXX%
Total				100.0%

It is expected that the provincial allocations of taxable income for the taxation years ending XXXXXXXXXX will be comparable with prior years.

15. On XXXXXXXXXX, Profitco entered into the transactions that were the subject matter of the XXXXXXXXXX, which is a loss consolidation transaction.

16. On XXXXXXXXXX, Profitco entered into the transactions that were the subject matter of the XXXXXXXXXX, which is also a loss consolidation transaction.

17. All of Lossco’s common shares are directly owned by Subsidiary3. All of the Lossco Class A Preferred Shares are directly owned by Subsididary2. Lossco was incorporated on XXXXXXXXXX. Lossco is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX, its Taxation Centre is the XXXXXXXXXX Taxation Centre, its Tax Services Office is the XXXXXXXXXX Tax Services Office and its business number is XXXXXXXXXX. Lossco’s fiscal year end is XXXXXXXXXX. XXXXXXXXXX.

18. At XXXXXXXXXX, Lossco had non-capital losses available for carry forward of $XXXXXXXXXX, which may be summarized as follows:

Taxation year ending:	Non-capital losses
XXXXXXXXXX			$XXXXXXXXXX
Total				$XXXXXXXXXX

19. Lossco’s financial statements for its fiscal year-end XXXXXXXXXX, indicate that Lossco has assets of $XXXXXXXXXX.

20. Lossco has a permanent establishment in each of the provinces and territories listed below and, for its taxation year ending XXXXXXXXXX, its total salaries and gross revenue for purposes of Part IV of the Regulations was allocated as follows:

Province/Territory	Total Salaries/Wages	Gross Revenue
XXXXXXXXXX			$XXXXXXXXXX			$XXXXXXXXXX
Total				$XXXXXXXXXX			$XXXXXXXXXX

PROPOSED TRANSACTIONS

21. The authorized share capital of Lossco currently consists of common shares and Class A Preferred Shares: (the “Lossco Class A Preferred Shares”). The authorized capital of Lossco will be amended so that it will consist of three classes of shares, namely the addition of one new class of preferred shares which will be non-voting, cumulative dividend paying, redeemable, retractable preferred shares (the “Lossco Class B Preferred Shares”). The cumulative dividends payable on the Lossco Class B Preferred Shares will be calculated as a percentage of the redemption/retraction price of the Lossco Class B Preferred Shares at a rate equal to XXXXXXXXXX%, which is equal to the interest rate on the Lossco Loan, plus a small spread of XXXXXXXXXX%. Dividends will be paid at least semi-annually. On a particular day to be determined by Subsidiary1 and Lossco, Subsidiary1 will make the Subsidiary1 Loan to Lossco. The Subsidiary1 Loan will be repayable on demand and non-interest bearing. The Subsidiary1 Loan will be in the principal amount of $XXXXXXXXXX. Subsidiary1 will source the funds for the Subsidiary1 Loan from its working capital.

22. On the same day that the Subsidiary1 Loan is made, Lossco will use the proceeds received by it from the Subsidiary1 Loan to make the Lossco Loan to Profitco. The Lossco Loan will be in the principal amount of $XXXXXXXXXX.

23. Interest will accrue on the Lossco Loan at a rate of approximately XXXXXXXXXX% per annum. The interest rate on the Lossco Loan will not exceed what would be a reasonable commercial rate in these circumstances. Interest on the Lossco Loan will be computed daily and paid at least semi-annually.

24. On the same day that the Lossco Loan is made, Profitco will use the proceeds received by it from the Lossco Loan to subscribe for the Lossco Class B Preferred Shares for $XXXXXXXXXX, which will have an aggregate redemption price equal to the subscription price.

25. On the same day that Profitco subscribes for the Lossco Class B Preferred Shares, Lossco will use the total proceeds received by it from the subscription for the Lossco Class B Preferred Shares to repay the Subsidiary1 Loan.

26. Profitco will use revenue from its business to pay interest to Lossco on the Lossco Loan when due and payable. Profitco will have at all times the solvency and liquidity to service the Lossco Loan.

27. Lossco will use revenue from its business to pay dividends to Profitco on the Lossco Class B Preferred Shares.

28. With respect to the payment of interest and dividends, like amounts will be set-off with payment of the balance owing.

29. The following transactions will occur within XXXXXXXXXX years from the date the transactions described in paragraphs 20 to 28 above are undertaken, following XXXXXXXXXX notification:

(a) Profitco will repay the Lossco Loan, including all accrued but unpaid interest.

(b) Lossco will redeem the Lossco Class B Preferred Shares and pay the redemption price thereof, including any accrued dividends, ensuring that the redemption price for the outstanding Lossco Class B Preferred Shares is equal to the principal amount outstanding on the Lossco Loan.

30. In particular, with respect to the transactions described in paragraph 29, it is expected that the Lossco Class B Preferred Shares will be redeemed by Lossco issuing a non-interest bearing promissory note (the “Lossco Note”) to Profitco with a principal amount equal to the redemption amount of the Lossco Class B Preferred Shares and Lossco and Profitco will enter into a set-off agreement pursuant to which they will agree to set-off the amount owing under the Lossco Note against the Lossco Loan.

31. The expected interest deductions, taxable income and carry back of non-capital losses of Profitco as a result of the transactions that are the subject matter of the XXXXXXXXXX, the XXXXXXXXXX and the Proposed Transactions are as follows (all amounts are in $ XXXXXXXXXX):

Taxation year	Taxable	Interest	Interest	Interest 	Carry back
ending		Income or 	deduction	deduction	deductions-	of non-
			Loss		XXXXX		XXXXX		Proposed 	capital
									Transactions Losses
											To prior
											Years

XXXXXXXXXX

32. The estimated tax refund of provincial income taxes to Profitco as a result of the Proposed Transactions is as follows:

Province XXXXXXXXXX
XXXXXXXXXX $XXXXXXXXXX

ADDITIONAL INFORMATION

33. The Lossco Class B Preferred Shares will not at any time during the implementation of the Proposed Transactions be:

(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:

(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).

34. At the time of the Proposed Transactions:

(a) Lossco will have the financial capacity to satisfy the applicable solvency test and liquidity test under the CBCA required to pay the dividends on the Lossco Class B Preferred Shares as described in Paragraph 27.

(b) Lossco will have the financial capacity to satisfy the applicable solvency test and liquidity test under the CBCA required to redeem the Lossco Class B Preferred Shares as described in Paragraph 29(b).

35. Profitco and Lossco are affiliated and related persons and have been affiliated and related persons since XXXXXXXXXX.

36. Neither Profitco nor Lossco is a XXXXXXXXXX as defined in subsection XXXXXXXXXX.

37. Neither Lossco nor Profitco is or will be a XXXXXXXXXX. Each of Profitco and Lossco is XXXXXXXXXX within the meaning assigned by subsection 248(1). By reason only of the Proposed Transactions described herein, Profitco will not be considered to have acquired the Lossco Class B Preferred Shares in the ordinary course of the business carried on by it. Lossco is not a XXXXXXXXXX as defined in subsection XXXXXXXXXX or XXXXXXXXXX as defined in subsection XXXXXXXXXX.

38. There is no intention for Profitco to generate a significant loss carry-forward balance as a result of the Proposed Transactions, and the Taxpayers will seek to unwind the arrangements prior to that time.

39. The payment of dividends on the Lossco Class B Preferred Shares has no purpose other than the purpose described under the heading “Purpose of the Proposed Transactions”.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to effect a tax consolidation of Profitco and Lossco by causing Lossco to earn interest income on the Lossco Loan, thus permitting Lossco to utilize its non-capital loss carry forwards and to have Profitco incur interest expense to reduce its income for its current taxation year, and to the extent this creates non-capital losses for Profitco, to carry back the non-capital losses to reduce its taxable income from prior taxation years.

RULINGS PROVIDED

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions,

(b) the proposed transactions are completed in the manner described above, and

(c) there are no other transactions which may be relevant to the rulings requested,
we rule that:

A. Provided that Profitco has a legal obligation to pay interest on the Lossco Loan, and the Lossco Class B Preferred Shares continue to be held by Profitco for the purpose of gaining or producing income therefrom, Profitco will be entitled pursuant to paragraph 20(1)(c), to deduct in computing its income for a taxation year, the lesser of: (i) the interest paid or payable in respect of the Lossco Loan for that taxation year (depending on the method regularly followed by Profitco in computing its income for the purposes of the Act); and (ii) a reasonable amount in respect thereof.

B. The dividends received (or deemed to be received) by Profitco in respect of the Lossco Class B Preferred Shares in a particular year will be taxable dividends that will be deductible in computing the taxable income of Profitco for the year in which the dividends are received pursuant to subsection 112(1), 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).

C. Profitco will be entitled to carry-back to its prior taxation years the non-capital losses that are expected to arise as a result of the deductions described in Ruling A above, subject to any applicable restrictions in section 111.

D. The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply as a result of entering into the Proposed Transactions, in and by themselves.

E. Provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the receipt of the taxable dividends described in Ruling B above, then by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Ruling B above. For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

F. Subsection 245(2) will not be applied as a result of entering into the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

G. The general anti-avoidance provision of a province with which the Government of Canada has entered into a tax collection agreement will not be applied, as a result of the Proposed Transactions, in and by themselves, to determine the tax consequences confirmed in the rulings given above, in respect of a taxation year in respect of which such a tax collection agreement is in effect.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA provided that the Proposed Transactions are commenced are entered into on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this 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 reasonableness or fair market value of any fees or expenditures referred to herein;

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

(d) any tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the rulings given above.

OPINIONS

Provided that (i) the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions; (ii) the Proposed Transactions are undertaken in the manner described above; and (iii) the Act is amended in accordance with the draft legislative proposals released by the Department of Finance on July 31, 2015, subsection 55(2) will not apply in respect of the dividends described in Ruling B above and subsection 112(2.3) will not preclude the deduction of the dividends described in Ruling B above.

The foregoing opinion is not a ruling and, as noted in paragraph 19(f) of Information Circular 70-6R6, is not binding on the CRA.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
International Division
Income Tax Rulings Directorate