30 November 1997 Ruling 9728683 - 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Loss consolidation by transfer of interest expense from subsidiary to parent. Preferred shares of subsidiary may be left outstanding or converted to common shares.

Position:

OK

Reasons:

No fundamental problems.

XXXXXXXXXX							972868
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX

We are writing in response to your correspondence of XXXXXXXXXX wherein you had requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge our various telephone conversation with respect to this matter.

You have advised that the corporate account number of XXXXXXXXXX and that both corporations file their returns of income with the XXXXXXXXXX Taxation Services Office of Revenue Canada. Also, you have advised that, to the best of the knowledge of yourself, none of the issues involved in this advance income tax ruling has or is being considered by an office of Revenue Canada in connection with an income tax return previously filed and that none of the issues being considered in the context of this ruling is the subject of a notice of objection or is under appeal.

FACTS

1.XXXXXXXXXX are each a "private corporation" and a "taxable Canadian corporation" as those terms defined in subsection 89(1) of the Income Tax Act (the "Act").

2.All of the issued shares of XXXXXXXXXX are owned by XXXXXXXXXX.

3.XXXXXXXXXX% of the issued shares of XXXXXXXXXX are owned by XXXXXXXXXX, a U.S. corporation.

4.All of the issued shares of XXXXXXXXXX are owned by XXXXXXXXXX company.

5.XXXXXXXXXX% of the issued shares of XXXXXXXXXX are owned by XXXXXXXXXX.

6.The "paid-up capital", within the meaning of that term in subsection 89(1) of the Act, of XXXXXXXXXX consists of the following as at XXXXXXXXXX:

AUTHORIZED:

		An unlimited number of preference shares.
		An unlimited number of common shares.

ISSUED:

common shares with an aggregate paid-up capital of $XXXXXXXXXX.

7.The "paid-up capital", within the meaning of that term in subsection 89(1) of the Act, of XXXXXXXXXX consists of the following as at XXXXXXXXXX:

AUTHORIZED:

XXXXXXXXXX%, non-cumulative, preferred shares redeemable at the amount paid thereon.

An unlimited number of common shares.

ISSUED:

XXXXXXXXXX preferred shares with an aggregate paid-up capital of $XXXXXXXXXX.

XXXXXXXXXX common shares with an aggregate paid-up capital of $XXXXXXXXXX.

8.XXXXXXXXXX is the importer and wholesale distributor of XXXXXXXXXX for the Canadian market.

9.The business of XXXXXXXXXX is to act as a XXXXXXXXXX company supporting the sales programs of its parent company, XXXXXXXXXX.

PROPOSED TRANSACTIONS

10.XXXXXXXXXX propose to enter into a subscription agreement under which XXXXXXXXXX will subscribe for preference shares of XXXXXXXXXX. The subscription agreement under which XXXXXXXXXX will subscribe for preferred shares of XXXXXXXXXX will not exceed $XXXXXXXXXX. All of the funds which XXXXXXXXXX requires to meet its obligations under the subscription agreement will be internally generated or will be borrowed from Canadian or non-resident lenders at market rates of interest which rates will be less than XXXXXXXXXX% per annum.

11.The preference shares will have the following features:

(i)entitled to an annual cumulative fixed preferential dividend of XXXXXXXXXX per cent of the initial purchase price of the shares;

(ii)entitled to priority over other shares with respect to the distribution of assets on a return or reduction of capital, a winding-up or a dissolution up to a sum equal to the amount for which they were issued;

(iii)not entitled to any further or other right of participation in the assets of XXXXXXXXXX;

(iv)retractable at the option of the holder at the amount for which they were issued;

(v)redeemable at the option of XXXXXXXXXX at the amount for which they were issued;

(vi)the issuer will undertake that no dividend will be paid on any other class of shares that would result in the issuer being unable to redeem the preferred shares at their redemption price; and

(vii)each holder will have the right at any time before the redemption to convert all or any of the preference shares into fully paid common shares in the capital of XXXXXXXXXX at the rate of one common share for every preference share held.

PURPOSE OF PROPOSED TRANSACTIONS

For business reasons, the XXXXXXXXXX operations of XXXXXXXXXX must be maintained in a separate and distinct corporation from the distribution operations of XXXXXXXXXX. XXXXXXXXXX intends to use the funds received from XXXXXXXXXX on the issuance of the preference shares to replace existing debt to reduce its interest charges. The proposed transactions will allow utilization of previously incurred and projected losses of XXXXXXXXXX. Also, it is expected that the preferred shares of XXXXXXXXXX will remain outstanding.

RULINGS PROVIDED

Provided that the preceding statements are accurate and complete and the proposed transactions are carried out as described above, we confirm the following:

A.Provided that the funds borrowed by XXXXXXXXXX are used by XXXXXXXXXX for the purpose of earning income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy) in a year, the amount paid or payable in respect of that year (depending upon the method regularly followed by XXXXXXXXXX in computing its income) or a reasonable amount in respect thereof, whichever is lesser, will be deductible pursuant to paragraph 20(1)(c) of the Act by XXXXXXXXXX in computing its income for income tax purposes in respect of the year.

B.Subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

This ruling is provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and is binding upon the Department provided that the proposed transactions are completed on or prior to XXXXXXXXXX. This ruling is based on the Act and the Income Tax Regulations in their present form and does not take into account the effects of any proposed amendments thereto.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch