2009 Ruling 2007-0248301R3 - Loss utilization

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: Loss utilization within an affiliated group.

Position: The loss utilization is acceptable.

Reasons: Consistent with our position in previous rulings and with Department of Finance Policy.

XXXXXXXXXX 							2007-024830

XXXXXXXXXX , 2009

Dear Sir:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers referred to above. We also acknowledge our subsequent telephone conversations and correspondence concerning your request. The documents submitted with your request are part of this document only to the extent described herein.

We understand that to the best of your knowledge and that of the taxpayers on whose behalf this ruling is being requested, none of the issues involved in this ruling request:

(i) is in an earlier return of the taxpayers or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;
(iii) is under objection by the taxpayers or a related person;
(iv) is, in relation to the taxpayers or a related person, before the courts or is the subject of a judgment the time limit for appeal from which has not expired; or
(v) is the subject of a ruling previously considered by the Canada Revenue Agency in relation to the taxpayers or a related person.

DEFINITIONS

1. In this letter the following terms have the meanings set out below, unless otherwise specified:

(a) XXXXXXXXXX

(b) "Acquireco" means XXXXXXXXXX ;

(c) "Acquisition Debt" has the meaning assigned in paragraph 0;

(d) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and all statutory references herein are to provisions of the Act unless otherwise specified;

(e) "affiliated persons" has the meaning assigned in subsection 251.1(1);

(f) "Daylight Loan" has the meaning assigned in paragraph 0;

(g) "Debt Reduction Transaction" has the meaning assigned in paragraph 0;

(h) "dividend rental arrangement" has the meaning assigned in subsection 248(1);

(i) "XXXXXXXXXX Finco" means XXXXXXXXXX .;

(j) "XXXXXXXXXX Holdco" means XXXXXXXXXX .;

(k) "excepted dividend" has the meaning assigned in section 187.1;

(l) "excluded dividend" has the meaning assigned in subsection 191(1);

(m) "financial intermediary corporation" has the meaning assigned in subsection 191(1);

(n) "forgiven amount" has the meaning assigned by subsection 80(1) or 80.01(1);

(o) "guarantee agreement" has the meaning assigned in subsection 112(2.2);

(p) "Holdco" means XXXXXXXXXX ;

(q) "Holdco Predecessor" has the meaning assigned in paragraph 0;

(r) "XXXXXXXXXX Treaty" means the XXXXXXXXXX

(s) "Newco" means the new corporation described in paragraph 0;

(t) "Newco Loan" has the meaning assigned in paragraph 0;

(u) XXXXXXXXXX

(v) "Opco" means XXXXXXXXXX ;

(w) "Opco Loan" has the meaning assigned in paragraph 0;

(x) "Preferred Share" has the meaning assigned in paragraph 0;

(y) "Proposed Transactions" means the transactions described in Paragraphs 16.1 to 28;

(z) "restricted financial institution" has the meaning assigned in subsection 248(1);

(aa) "specified financial institution" has the meaning assigned in subsection 248(1);

(bb) "Target" means XXXXXXXXXX .;

(cc) "taxable Canadian corporation" has the meaning assigned in subsection 89(1);

(dd) "XXXXXXXXXX Parent" means XXXXXXXXXX ; and

(ee) "XXXXXXXXXX Treaty" means the XXXXXXXXXX .

FACTS

2. XXXXXXXXXX Parent is a corporation incorporated under the laws of XXXXXXXXXX and is a non-resident of Canada for the purposes of the Act and a resident of XXXXXXXXXX for the purposes of the XXXXXXXXXX Treaty. The shares of the common stock of XXXXXXXXXX Parent are listed on the XXXXXXXXXX Stock Exchange. XXXXXXXXXX Parent and its subsidiaries are XXXXXXXXXX .

3. XXXXXXXXXX Parent does not carry on any business in Canada for purposes of the Act, and does not have a permanent establishment in Canada for purposes of the XXXXXXXXXX Treaty.

4. XXXXXXXXXX Holdco is a limited liability private company governed by the laws of XXXXXXXXXX and is a non-resident of Canada for the purposes of the Act and a resident of XXXXXXXXXX for the purposes of the XXXXXXXXXX Treaty. XXXXXXXXXX Holdco is an indirect wholly-owned subsidiary of XXXXXXXXXX Parent.

5. XXXXXXXXXX Holdco does not carry on any business in Canada for purposes of the Act and does not have a permanent establishment in Canada for the purposes of the XXXXXXXXXX Treaty.

6. XXXXXXXXXX Finco is a limited liability private company governed by the laws of XXXXXXXXXX and is a non-resident of Canada for the purposes of the Act and a resident of XXXXXXXXXX for the purposes of the XXXXXXXXXX Treaty.

7. XXXXXXXXXX Finco does not carry on any business in Canada for purposes of the Act and does not have a permanent establishment in Canada for the purposes of the XXXXXXXXXX Treaty. XXXXXXXXXX Finco is an indirect wholly-owned subsidiary of XXXXXXXXXX Parent.

8. Holdco is an unlimited liability company governed under the XXXXXXXXXX that was formed pursuant to an amalgamation as described in further detail below. Holdco is a taxable Canadian corporation and is a direct wholly-owned subsidiary of XXXXXXXXXX Holdco. Holdco is primarily a holding company, but its assets also include XXXXXXXXXX real properties in XXXXXXXXXX provinces that are leased to Opco. Holdco also performs certain management and administrative support functions for the corporate group and employs XXXXXXXXXX individuals in Canada.

9. Opco is a taxable Canadian corporation incorporated under the XXXXXXXXXX . All of Opco's issued and outstanding common shares are held by Holdco. All of Opco's issued and outstanding Class A non-voting shares are held by XXXXXXXXXX a wholly-owned subsidiary of Holdco. Opco is engaged in the XXXXXXXXXX Opco has operating facilities in XXXXXXXXXX provinces and its operations serve customers throughout Canada.

10. On XXXXXXXXXX , Acquireco was incorporated as an unlimited liability corporation under the XXXXXXXXXX . All its issued and outstanding shares were held by XXXXXXXXXX Holdco. Acquireco was formed for the purpose of acquiring, either directly or indirectly, all of the issued and outstanding shares of Target. Target was governed by the XXXXXXXXXX and its shares were listed on the XXXXXXXXXX Stock Exchange.

11. In order to fund the acquisition of Target, Acquireco borrowed $XXXXXXXXXX from XXXXXXXXXX Finco (the "Acquisition Debt"). The Acquisition Debt is evidenced by a promissory note having a term of XXXXXXXXXX years and with interest stipulated to be payable annually in arrears at the rate of XXXXXXXXXX % per annum accruing daily.

12. On XXXXXXXXXX , Acquireco, directly and indirectly, acquired approximately XXXXXXXXXX % of the issued and outstanding common shares of Target pursuant to a take-over bid in consideration for cash. On XXXXXXXXXX , Acquireco acquired the remaining issued and outstanding common shares of Target pursuant to the compulsory acquisition procedures under the XXXXXXXXXX . The take-over bid provided that shareholders of Target could tender their shares in Target directly to Acquireco or, under certain circumstances, they could elect a "holdco alternative" pursuant to which Acquireco would acquire a holding corporation which, in turn, held only common shares of Target directly, or shares of a holding corporation that held only the shares of a second holding corporation which, in turn, held only common shares of Target.

13. Following the take-over bid, Target ceased to be listed on the XXXXXXXXXX Stock Exchange. On XXXXXXXXXX , Target and several other wholly-owned subsidiaries of Acquireco were amalgamated to form Holdco Predecessor. On XXXXXXXXXX , Acquireco and Holdco Predecessor were amalgamated to form Holdco. As a result of this amalgamation, the Acquisition Debt became an obligation of Holdco.

14. Holdco has a taxation year-end of XXXXXXXXXX . Unless the Proposed Transactions are undertaken, Holdco will incur non-capital losses of approximately $XXXXXXXXXX in its XXXXXXXXXX taxation year, and non-capital losses of approximately $XXXXXXXXXX in each subsequent taxation year as a result of the deduction of interest payable on the Acquisition Debt.

15. Opco has a taxation year-end of XXXXXXXXXX . In the taxation year ended XXXXXXXXXX , Opco reported taxable income of $XXXXXXXXXX and non-capital loss carry-forwards of nil. Opco has taxable income for the XXXXXXXXXX and subsequent taxation years.

16. Based on its existing assets and financial projections, it is expected that Opco will have the financial capacity to pay interest on the Opco Loan from its own cash flow (calculated as its net accounting income before depreciation and taxes) without taking into account the dividend income that it would earn on the Preferred Shares (described in paragraph 0).

PROPOSED TRANSACTIONS

16.1 XXXXXXXXXX will file an application in XXXXXXXXXX for authorization to continue into another jurisdiction and file articles of continuance in XXXXXXXXXX so that XXXXXXXXXX will be continued as an unlimited liability company under the XXXXXXXXXX .

16.2 Opco will file an application in XXXXXXXXXX for authorization to continue into another jurisdiction and file articles of continuance in XXXXXXXXXX so that Opco will be continued as an unlimited liability company under the XXXXXXXXXX .

17. Holdco will incorporate a new corporation ("Newco") as an unlimited liability company under the XXXXXXXXXX . Newco will have a XXXXXXXXXX taxation year-end, and will be a taxable Canadian corporation.

17.1 Holdco will be continued from the XXXXXXXXXX to the XXXXXXXXXX and will register its head office in XXXXXXXXXX . It is contemplated that the unlimited liability clause that is currently in the articles of Holdco would be removed from the articles of the company as accepted for continuance to the XXXXXXXXXX .

18. The authorized share capital of Newco will consist of two classes of shares: common shares and non-voting, non-participating, cumulative dividend, redeemable and retractable preferred shares (the "Preferred Shares"). The cumulative dividends payable on the Preferred Shares will be calculated at a rate, applied to the redemption amount of the shares, equal to the then current interest rate on the Opco Loan, plus XXXXXXXXXX %. Dividends will be payable annually in arrears.

19. Pursuant to the terms of the Preferred Shares, the redemption proceeds payable by Newco upon a redemption of the Preferred Shares (including unpaid dividends), may, at the option of Newco, be paid in cash or by delivering a financial asset of Newco (including the Newco Loan described under paragraph 0 below). The Preferred Shares will also be redeemable by setting off amounts owing under the Opco Loan against the redemption price of the Preferred Shares where Newco becomes the holder of the Opco Loan.

20. One common share of Newco will be issued to Holdco for $XXXXXXXXXX .

21. Holdco will borrow an amount (the "Principal Amount"), not to exceed
$XXXXXXXXXX , on a "daylight loan basis" (the "Daylight Loan") from an arm's length financial institution. The Principal Amount represents an amount that Holdco or Opco could reasonably borrow from an arm's length financial institution.

22. Holdco will use the proceeds from the Daylight Loan to make a demand loan in an amount equal to the Principal Amount to Opco on a subordinated basis (the "Opco Loan"). The Opco Loan will bear interest at a rate equal to XXXXXXXXXX % which, based on market conditions at the time the loan will be issued, will be considered by Holdco to be a reasonably commercial rate. The interest on the Opco Loan will be payable annually in arrears.

23. The terms of the Opco Loan will provide that repayment may be made in cash or by delivering a financial asset of Opco (including the Newco Loan described in paragraph 0).

24. Opco will use the proceeds of the Opco Loan to subscribe for Preferred Shares of Newco having an aggregate redemption/retraction amount equal to the Principal Amount.

25. Dividends on the Preferred Shares will be paid on an annual basis. The dividends will be funded by capital contributions made by Holdco as described in paragraph 0.

26. Newco will use the proceeds from the issuance of the Preferred Shares, as described in paragraph 0, to make a demand, non-interest-bearing loan to Holdco in an amount equal to the Principal Amount (the "Newco Loan"). The total amount of the Newco Loan represents an amount that Holdco or Opco could reasonably borrow from an arm's length financial institution. The terms of the Newco Loan will allow Holdco to repay the Newco Loan by assigning the Opco Loan to Newco.

27. Holdco will use the proceeds from the Newco Loan to repay the Daylight Loan.

28. Opco will pay interest to Holdco on the Opco Loan on an annual basis.

ADDITIONAL TRANSACTIONS

29. Holdco will make contributions of capital to Newco on an annual basis equal to the amount of dividends to be paid by Newco to Opco on the Preferred Shares as long as such Preferred Shares are outstanding. Holdco will, however, not be required to make such contributions of capital if Newco is no longer paying dividends to Opco on the Preferred Shares. No share will be issued by Newco with respect to the contributions of capital and no amount will be added to the account of issued and paid-up share capital of Newco. The amount of each contribution of capital will be recorded as contributed surplus for accounting purposes and will not be treated as income of Newco pursuant to generally accepted accounting principles.

30. Newco will use the amounts received as capital contributions as described in paragraph 0 to pay dividends to Opco on the Preferred Shares on an annual basis.

31. A transaction may be entered into in circumstances where the interest to be paid to Holdco on the Opco Loan is, or is expected to be, greater than the amount necessary to utilize any losses that may otherwise be incurred by Holdco in its current taxation year and its non-capital losses carried forward from prior years (a "Debt Reduction Transaction"). The need for a Debt Reduction Transaction could arise for numerous reasons, including a partial repayment by Holdco of its Acquisition Debt. A Debt Reduction Transaction would be effected through the following steps:

(a) Holdco will make capital contributions to Newco equal to the amount of any accrued and unpaid dividends on the Preferred Shares. No share will be issued by Newco with respect to the contributions of capital and no amount will be added to the account of issued and paid-up share capital of Newco. The amount of each contribution of capital will be recorded as contributed surplus for accounting purposes. The contributions of capital will not be treated as income of Newco pursuant to generally accepted accounting principles;

(b) Newco will pay the balance of any accrued and unpaid dividends on the Preferred Shares to be redeemed under subparagraph 0;

(c) Opco will pay the balance of any accrued and unpaid interest on all or the portion of the Opco Loan to be settled under subparagraph 0;

(d) Newco will redeem all or a portion of the Preferred Shares held by Opco and settle the amount owing on redemption by assigning a corresponding amount of the Newco Loan to Opco;

(e) Opco will repay all or a portion of the Opco Loan equal to the amount of Preferred Shares redeemed under Subparagraph 0 by setting off the amount owing to Holdco with a corresponding amount of the Newco Loan, and such portions of the Newco Loan and the Opco Loan will be cancelled; and

(f) once all of the Preferred Shares held by Opco have been redeemed and all of the Newco Loan has been assigned to Opco as described in Subparagraph 0, Newco will be wound up into Holdco pursuant to the provisions of the XXXXXXXXXX

ADDITIONAL INFORMATION

32. Holdco, Opco, and Newco are neither specified financial institutions, restricted financial institutions, nor financial intermediary corporations.

33. The Preferred Shares will not be subject to a guarantee agreement.

34. The Preferred Shares will not be the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or issued for consideration that is or includes: 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 any right of the type described in subparagraph 112(2.4)(b)(ii).

35. The Preferred Shares will not be subject to a dividend rental arrangement.

36. Holdco, Opco, and Newco are affiliated persons for purposes of the Act.

37. In its taxation year-ended XXXXXXXXXX , the allocation of Opco's taxable income was reported as follows:

Province		Allocation of Taxable Income	% of Total Income
XXXXXXXXXX 		XXXXXXXXXX 				XXXXXXXXXX 

The percentage of Opco's taxable income allocated to a particular province in its taxation year ended XXXXXXXXXX , will approximate the percentage of Opco's taxable income allocated to the same province in its taxation year ended XXXXXXXXXX .

A predecessor of Holdco Predecessor, Target, which held all of the issued and outstanding shares of Opco prior to the takeover described in paragraph 0, earned XXXXXXXXXX % of its income in XXXXXXXXXX for its taxation year ended XXXXXXXXXX

It is the intention of Holdco's management that Debt Reduction Transactions be undertaken from time to time so that Holdco will not have any significant taxable income in any taxation year as a result of the receipt of interest on the Opco Loan.

PURPOSE OF THE PROPOSED TRANSACTIONS

38. The purpose of the Proposed Transactions is to consolidate profit and losses within a related group by enabling Holdco to earn sufficient interest income on the Opco Loan, over a period of time, so as to utilize any losses it would otherwise incur in the current taxation year and any non-capital losses carried forward from prior taxation years.

39. Under XXXXXXXXXX , Opco is precluded from acquiring and holding more than XXXXXXXXXX % of the shares in Holdco for a period exceeding XXXXXXXXXX days. In order to undertake the Proposed Transactions in a legally effective manner, it is necessary to incorporate Newco in order to enable Opco to hold an interest in the Preferred Shares.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, Proposed Transactions, additional transactions, additional information, and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed as described, our rulings are as follows:

(A) The dividends received (or deemed to be received) by Opco on the Preferred Shares of Newco will be taxable dividends that will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the taxation year in which the dividends are received (or deemed to be received), and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

(B) Part IV.1 of the Act will not apply to the dividends described in Ruling A above because the dividends will be excepted dividends.

(C) Part VI.1 of the Act will not apply to the dividends described in Ruling A above because the dividends will be excluded dividends.

Provided that Opco has a legal obligation to pay interest on the Opco Loan as described in paragraphs 22 and 28 above and that the Preferred Shares of Newco continue to be held by Opco for the purpose of earning income from property, Opco will be entitled to deduct, in computing its income for a taxation year, pursuant to paragraph 20(1)(c), the lesser of the interest paid or payable on the Opco Loan (depending on the method regularly followed by Opco in computing its income for purposes of the Act) in respect of the taxation year, or a reasonable amount in respect thereof.

(D) No amount will be included in the income of Newco pursuant to section 9, or paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital described in paragraph 0 or paragraph 0 above.

(E) The set-off of all or any part of the Newco Loan against the corresponding amount of the Opco Loan described in paragraph 0 above will not give rise to a forgiven amount.

(F) Subsection 15(1) and subsection 246(1) will not apply as a result of the Proposed Transactions, in and by themselves.

(G) Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

Our Comments:

Our rulings are given subject to the limitations set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided the Proposed Transactions, other than those described in paragraphs 25 and 28, are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act. Nothing in this ruling should be construed as implying that CRA has reviewed any tax consequences relating to the facts or the Proposed Transactions other than those described in the rulings given above, or has agreed:

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

(b) to any tax consequences relating to the facts, Proposed Transactions, or any other representations described herein, other than those specifically described in the rulings given.

Yours truly,

XXXXXXXXXX
Manager
Corporate Reorganizations, Section I
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch