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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
PRINCIPAL ISSUE:
Loss consolidation. Taxpayer seeking certainty on deductibility of interest on funds borrowed as part of a loss consolidation scheme within a related group.
Position:
Favourable rulings given.
REASON:
The facts in the present case can be distinguished from the fact pattern in C.R.B. Logging Co. Ltd v. The Queen, 99 DTC (TCC). Moreover, we have previously provided favourable rulings in similar situations. See for example # 2000-005236, # 992051, # 991085, # 972734 and # 971058.
XXXXXXXXXX 2000-009488
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in the requested ruling:
(i) is being considered by any Tax Services Office or Taxation Centre of the Agency in connection with a tax return already filed, or
(ii) is under objection by a taxpayer identified in this document or by a related person.
(iii) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") 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 and proposed transactions is as follows:
Facts
1. XXXXXXXXXX (hereinafter "Parentco") was incorporated under the laws of the province of XXXXXXXXXX . Parentco is a taxable Canadian corporation and a Canadian-controlled private corporation. The issued and outstanding shares of Parentco are held by XXXXXXXXXX and corporations controlled by XXXXXXXXXX. Parentco's taxation year end is XXXXXXXXXX. Parentco's offices are located at XXXXXXXXXX. Parentco is served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Tax Centre.
XXXXXXXXXX.
2. XXXXXXXXXX (hereinafter "A Co") was incorporated under the laws of the province of XXXXXXXXXX. A Co is a taxable Canadian corporation and a Canadian-controlled private corporation. A Co's authorized share capital consists of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX each. A Co's issued and outstanding share capital is comprised of XXXXXXXXXX common shares all of which are held by Parentco. A Co's taxation year end is XXXXXXXXXX. A Co's offices are located at XXXXXXXXXX. A Co is served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Tax Centre.
A Co is a holding company. A Co presently holds investments in and loans from wholly-owned affiliates in the group.
3. XXXXXXXXXX (hereinafter "B Co") was incorporated under the laws of the province of XXXXXXXXXX . B Co is a taxable Canadian corporation and a Canadian-controlled private corporation. B Co's authorized share capital consists of XXXXXXXXXX common shares without par value and XXXXXXXXXX preference shares with a par value of $ XXXXXXXXXX per share. B Co's issued and outstanding share capital is comprised of XXXXXXXXXX common shares all of which are held by A Co. B Co's taxation year end is XXXXXXXXXX. B Co's offices are located at XXXXXXXXXX. B Co is served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Tax Centre.
B Co operates a XXXXXXXXXX. In addition, B Co owns all the issued and outstanding shares of XXXXXXXXXX, (hereinafter "C Co"). C Co is a taxable Canadian corporation and a Canadian-controlled private corporation that operates a XXXXXXXXXX.
4. XXXXXXXXXX, (hereinafter "D Co") was incorporated under the laws of the province of XXXXXXXXXX. D Co is a taxable Canadian corporation and a Canadian-controlled private corporation. D Co's authorized share capital consists of XXXXXXXXXX common shares without par value. D Co's issued and outstanding share capital is comprised of XXXXXXXXXX common shares all of which are held by B Co. D Co's taxation year end is XXXXXXXXXX. D Co's offices are located at XXXXXXXXXX. D Co is served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Tax Centre.
XXXXXXXXXX
5. Parentco, A Co, B Co, C Co and D Co (hereinafter collectively referred to as the "Affiliated Group") are affiliated pursuant to subparagraph 251.1(1)(b)(i).
6. A Co made a demand non interest bearing loan to D Co on XXXXXXXXXX, in the amount of $ XXXXXXXXXX. D Co immediately used the loan proceeds from A Co to make a demand loan to B Co with interest accruing at prime plus XXXXXXXXXX%. These loans were described in advance income tax ruling number 1999-001398. These loans are still outstanding.
A Co made a second demand non interest bearing loan to D Co on XXXXXXXXXX, in the amount of $ XXXXXXXXXX. D Co immediately used the loan proceeds from A Co to make a demand loan to B Co with interest accruing at prime plus XXXXXXXXXX%. These loans were described in advance income tax ruling number 2000-003991. These loans are also still outstanding.
Additionally, C Co made two non-interest bearing loans between XXXXXXXXXX inclusively, which have an aggregate balance outstanding of approximately $ XXXXXXXXXX. C Co transferred these two outstanding loans receivable from D Co to B Co in XXXXXXXXXX. D Co used the amounts advanced by C Co to acquire XXXXXXXXXX currently used in its business. B Co advanced an additional $ XXXXXXXXXX to D Co during XXXXXXXXXX to fund the purchase of XXXXXXXXXX as described in paragraph 10 below.
7. For the taxation year ending XXXXXXXXXX, D Co projects an operating loss, before depreciation, of approximately $ XXXXXXXXXX. It is anticipated that the projected loss will be increased for purposes of computing D Co's loss for income tax purposes primarily by the amount of capital cost allowance to be claimed for the said taxation year.
8. As at XXXXXXXXXX, B Co held a various non-interest bearing loans receivable from affiliates in the Affiliated Group in the aggregate amount of $ XXXXXXXXXX.
9. Parentco's retained earnings balance for the year ended on XXXXXXXXXX, is $ XXXXXXXXXX.
10. XXXXXXXXXX.
Proposed Transactions
11. A Co will amend its authorized share capital to include a class of non-voting, redeemable, retractable preferred shares, with cumulative dividends. The dividends will be calculated at a rate that is XXXXXXXXXX% in excess of the interest rate on the Parentco Loan described in paragraph 16 below.
12. XXXXXXXXXX.
13. Parentco will borrow an amount on a "daylight loan" basis from an arm's length financial institution (the "Parentco Daylight Loan"). It is anticipated that the principal amount of the Daylight Loan will be up to $ XXXXXXXXXX.
14. Parentco will use the proceeds from the Parentco Daylight Loan to subscribe for Preferred Shares in A Co having an aggregate redemption/retraction price equal to the principal amount of the Parentco Daylight Loan (up to $ XXXXXXXXXX).
15. A Co will use the proceeds received from the issuance of the Preferred Shares (up to $ XXXXXXXXXX) to make a demand, interest-free loan to D Co in an amount equal to such proceeds (the "D Co Loan"). The D Co Loan will be secured by the Parentco Loan described below.
A Co will pay dividends on the cumulative preferred shares issued to Parentco as described in paragraph 14 above on an ongoing basis.
16. D Co will use the proceeds from the D Co Loan (up to $ XXXXXXXXXX) to make a demand, unsecured, interest-bearing loan to Parentco in an amount equal to the D Co Loan (the "Parentco Loan"). Interest on the Parentco Loan will accrue at the XXXXXXXXXX prime rate plus an amount between XXXXXXXXXX% and XXXXXXXXXX% based on the fact that the loan is unsecured. It is intended that the interest rate charged on the Parentco Co Loan represent a commercial market rate for similar type loans from an arm's length third party lender given the fact that the loan is unsecured and payable on demand.
17. Parentco will use the proceeds from the Parentco Loan (up to $ XXXXXXXXXX) to repay the Parentco Daylight Loan.
18. Periodically, while the D Co Loan is outstanding, D Co will, subject to cash flow requirements, use its excess cash to repay the D Co Loan or declare and pay dividends.
19. From time to time, D Co may decrease (or even eliminate) the Parentco Loan in circumstances where the interest income generated in D Co is greater than, respectively, the amount required to offset its expected losses and any loss carryforwards for the year.
Purpose of the Proposed Transactions
20. Consolidate profit and losses within the Affiliated Group by enabling D Co to earn sufficient interest income on the Parentco Loan in order to reduce losses that it would otherwise incur during the capital-intensive growth of its XXXXXXXXXX business.
Rulings
Provided that the above description of facts, proposed transactions and purpose of the proposed transaction are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose thereof, and provided further that the proposed transactions are completed in the manner described above, we confirm that:
A. Provided that Parentco has a legal obligation to pay interest on the Parentco Daylight Loan and provided that the Preferred Shares of A Co continue to be held for the purpose of gaining or producing income from property (other than income which would be exempt), Parentco 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 Parentco Daylight Loan in respect of the taxation year or a reasonable amount in respect thereof.
B. Provided that Parentco is entitled to a deduction pursuant to paragraph 20(1)(c) in respect of interest paid or payable on the Parentco Daylight Loan and provided that the preferred shares of A Co continue to be held for the purpose of gaining or producing income from property (other than income which would be exempt), Parentco will be entitled to deduct for a taxation year pursuant to subsection 20(3) and paragraph 20(1)(c) the lesser of the interest paid or payable on such portion of the funds borrowed pursuant to the Parentco Loan as described in paragraph 16 of the Proposed Transactions which are used by Parentco to repay the Parentco Daylight Loan or a reasonable amount in respect thereof.
C. No amount will be included in the income of B Co pursuant to subsection 15(1) and section 56(2) will not apply to A Co or Parentco, solely by virtue of the fact that interest will not be paid or payable by D Co to A Co in respect of the D Co Loan as described in paragraph 15 above.
D. Subsection 245(2) 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.
These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this letter should be construed as implying that the Agency has:
a) Agreed that interest paid by any member of the Affiliated Group on any loan except as specifically set out in rulings A and B above is deductible in computing income under paragraph 20(1)(c) of the Act; or
b) Agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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