2020 Ruling 2019-0834901R3 - Loss Utilization - Depreciable Property

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 the transfer of depreciable property from a Profitco to a Lossco at cost and the subsequent transfer back of the depreciable property to the Profitco at fair market value conforms with the Canada Revenue Agency’s administrative policies for loss consolidation transactions and whether the depreciable property transferred to Lossco will retain its character throughout the Subject Transactions.

Position: Yes

Reasons: The proposed subject transaction conforms with the CRA's policy to not apply subsection 55(2) of the Act to internal reorganizations within a related group for loss consolidation purposes and recognizing that property retains its character on a rollover transaction between related parties is consistent with the CRA’s position in CRA View 2014-0553731I7 that depreciable property should retain its character on wind-up.

XXXXXXXXXX								2019-083490

XXXXXXXXXX

Dear XXXXXXXXXX:

Re: CONTAINS TAXPAYER INFORMATION
Advance Income Tax Ruling Request – Loss Utilization
XXXXXXXXXX (collectively referred to as the “Taxpayers”)

This is in reply to your letter dated XXXXXXXXXX (the “Request”) in which you requested an advance income tax ruling (“Ruling”) on behalf of the Taxpayers. We also acknowledge the additional information provided in our various other communications in respect of this matter. The information provided in such communications form part of this letter only to the extent described herein.

We understand that to the best of your knowledge and that of the Taxpayers, none of the transactions or issues involved in this Ruling are the same as or substantially similar to transactions or issues that are:

(a) in a previously filed return of the Taxpayers or a related person;

(b) 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;

(c) under objection by the Taxpayers or a related person;

(d) the subject of a current or completed court process involving the Taxpayers or a related person; or

(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the Taxpayers or a related person.

The Taxpayers also represent that the Subject Transactions described herein will not result in any taxpayer described herein being unable to pay its existing outstanding tax liabilities.

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act, RSC 1985, c 1 (5th Supp), as amended (the “Act”), or, where appropriate, the Income Tax Regulations. C.R.C., c. 945, as amended, and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, unless otherwise noted, the following terms have the meaning specified herein. All references in the singular include the plural.

“ACB” means “adjusted cost base” and has the meaning assigned in section 54;

“amalgamation” has the meaning assigned by subsection 87(1);

“BCA” means the Business Corporations Act XXXXXXXXXX, as amended;

“CCA” or “capital cost allowance” means the deduction allowed by paragraph 20(1)(a) and Regulation 1100;

“Companies Act” means the Companies Act XXXXXXXXXX, as amended;

“cost amount” has the meaning assigned by subsection 248(1);

“CRA” means the Canada Revenue Agency;

“Deemed Dividend” means the dividend described in Paragraph 22;

“depreciable property” has the meaning assigned by subsection 13(21);

“eligible property” has the meaning assigned by subsection 85(1.1);

“FMV” means “fair market value” and means the highest price expressed in terms of money or money's worth, available in an open and unrestricted market between knowledgeable, informed, and prudent parties acting at arm's length, neither party being under any compulsion to transact;

“Lossco” means XXXXXXXXXX, which is the corporate entity formed as a result of the amalgamation of Subco1 and Subco4;

“Lossco Note” means the promissory note issued by Lossco as described in Paragraph 22;

“Lossco Preferred Shares” means the shares issued in the transaction described in Paragraph 18;

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

“PUC” means “paid-up capital” and has the meaning assigned by subsection 89(1);

“Paragraph” refers to a paragraph of this letter;

“Parent” means XXXXXXXXXX;

“Partnership1” means the XXXXXXXXXX which is a Canadian partnership operating a XXXXXXXXXX.

“Profitco” means XXXXXXXXXX, a corporation formed under the BCA;

“Profitco Note” means the promissory note issued by Profitco as described in Paragraph 23;

“Profitco Preferred Shares” means the shares issued in the transaction described in Paragraph 20;

“specified financial institution” has the meaning assigned by subsection 248(1);

“Subco1” means XXXXXXXXXX, a corporation formed under the Companies Act;

“Subco2 ” means XXXXXXXXXX;

“Subco2 Amalco” means XXXXXXXXXX, which is the corporate entity formed as a result of the amalgamation of Subco2 and Subco3;

“Subco2 Amalco Shares” means the common shares of Subco2 Amalco described in Paragraph 14;

“Subco3” means XXXXXXXXXX;

“Subco4” means XXXXXXXXXX;

“Subject Transactions” means the transactions described in Paragraphs 18 to 26;

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

“Transferred Assets” refers to the assets described in Paragraph 18;

“UCC” means “undepreciated capital cost” and has the meaning assigned by subsection 13(21); and

XXXXXXXXXX

FACTS

1. Parent is a XXXXXXXXXX whose shares are listed on a XXXXXXXXXX stock exchange. Parent is not a resident of Canada for Canadian income tax purposes. All of the entities described below are directly or indirectly wholly owned by Parent.

2. Before the amalgamation described in Paragraph 15, Subco1 was a resident of Canada for Canadian income tax purposes, a taxable Canadian corporation and indirectly owned by Parent. Subco1 carried on a XXXXXXXXXX business, directly for its own account and indirectly through its wholly-owned subsidiaries. Subco1’s head office was located in XXXXXXXXXX. Subco1 was a XXXXXXXXXX.

3. Profitco is a resident of Canada for Canadian income tax purposes, a taxable Canadian corporation and directly owned by Parent. XXXXXXXXXX. Profitco carries on XXXXXXXXXX. Profitco’s head office is located in XXXXXXXXXX;

4. Before the amalgamation described in Paragraph 13, Subco2 was a resident of Canada for Canadian income tax purposes and is a taxable Canadian corporation owned directly by Subco1. Subco2’s head office is located in XXXXXXXXXX.

5. Before the amalgamation described in Paragraph 13, Subco3 was a resident of Canada for Canadian income tax purposes and is a taxable Canadian corporation owned directly by Subco2. Subco3’s head office is located in XXXXXXXXXX.

6. Before the amalgamation described in Paragraph 15, Subco4 was a resident of Canada for Canadian income tax purposes and was a taxable Canadian corporation owned directly by Subco1. Subco4’s head office was located in XXXXXXXXXX.

7. Subco4 currently holds XXXXXXXXXX% of the partnership interests of Partnership1, a Canadian partnership for Canadian income tax purposes.

8. Partnership1 operates a XXXXXXXXXX. The partners in Partnership1 are three subsidiaries of Subco1: Subco3 (which is indirectly owned by Subco1 through Subco2) (XXXXXXXXXX%), Subco4 (XXXXXXXXXX%) and XXXXXXXXXX (XXXXXXXXXX%).

9. Subco4’s share of Partnership1’s XXXXXXXXXX loss is expected to be approximately $XXXXXXXXXX.

10. Subco1 had a non-capital loss balance carry forward of $XXXXXXXXXX for the XXXXXXXXXX taxation year.

11. Profitco’s taxable income in the following taxation years is forecasted by Profitco to be:

• XXXXXXXXXX; and
• XXXXXXXXXX.

12. On XXXXXXXXXX, Profitco owned class XXXXXXXXXX depreciable property with the following attributes (which in the case of FMV is determined without regard to their tax cost):

• ACB: $XXXXXXXXXX;
• FMV: $XXXXXXXXXX; and
• UCC: $XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX.

15. XXXXXXXXXX.

16. Lossco is a taxable Canadian corporation, a XXXXXXXXXX and its head office is in XXXXXXXXXX

17. As the successor to Subco4 and Subco1, Lossco has approximately $XXXXXXXXXX of non-capital loss carryforwards pursuant to subsection 87(2.1).

Subject Transactions

Following the receipt by the CRA of the request of the Taxpayers for an advance income tax ruling, the following transactions that had been proposed to take place were undertaken and executed at the times and in the manner set forth below.

18. On XXXXXXXXXX, subsequent to the step described in Paragraph 15, Profitco transferred class 12 depreciable property (the “Transferred Assets”) to Lossco in exchange for redeemable, retractable preferred shares of Lossco with a redemption amount equal to the FMV of the Transferred Assets (the “Lossco Preferred Shares”). As permitted by the Companies Act, the Lossco Preferred Shares had a stated capital and PUC equal to the UCC of the Transferred Assets.

19. Profitco and Lossco will jointly elect, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each of the Transferred Assets, each of which is an eligible property. The agreed amount specified in the election will be within the limits specified in subsection 85(1). Profitco and Lossco will elect at the minimum permitted amount in respect of the eligible property transferred, which is Profitco’s UCC balance of approximately $XXXXXXXXXX.

20. On XXXXXXXXXX, subsequent to the step described in Paragraph 18, Lossco transferred all the Transferred Assets to Profitco in exchange for redeemable, retractable preferred shares of Profitco with a redemption amount equal to the FMV of the Transferred Assets (the “Profitco Preferred shares”). As permitted by the BCA, the Profitco Preferred Shares will have a stated capital and PUC equal to the FMV of the Transferred Assets.

21. Profitco and Lossco will jointly elect, in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each of the Transferred Assets which is an eligible property. The agreed amount specified in the election will be within the limits specified in subsection 85(1). Profitco and Lossco will elect at the FMV of the Transferred Assets. Lossco will recognize recapture under subsection 13(1) on this transfer to the extent the agreed amount exceeds the UCC of the Transferred Assets. Profitco and Lossco will determine the agreed amount before the time limit referred to in subsection 85(6). The PUC and Lossco’s ACB of the preferred shares received will equal the elected amount agreed to by Profitco and Lossco under subsection 85(1).

22. On XXXXXXXXXX, subsequent to the step described in Paragraph 20, Lossco redeemed the Lossco Preferred Shares by issuing a promissory note (the “Lossco Note”) with a principal amount and FMV equal to the redemption amount of the Lossco Preferred Shares. In accordance with subsection 84(3), Profitco realized a Deemed Dividend to the extent the Lossco Note’s FMV exceeds the Lossco Preferred Shares’ PUC, therefore $XXXXXXXXXX ($XXXXXXXXXX).

23. On XXXXXXXXXX, concurrent with the step described in Paragraph 22, Profitco redeemed the Profitco Preferred Shares by issuing a promissory note (the “Profitco Note”) with a principal amount and FMV equal to the FMV of the Profitco Preferred Shares.

24. On XXXXXXXXXX, subsequent to the steps described in Paragraphs 22 and 23, Profitco and Lossco offset their reciprocal notes.

25. In filing its tax return in respect of its XXXXXXXXXX taxation year, Profitco will claim the maximum CCA deduction allowable under paragraph 20(1)(a) in respect of the Transferred Assets.

26. In filing its tax return in respect of its XXXXXXXXXX taxation year, Lossco will record recapture income under subsection 13(1) equal to the amount by which the elected amount in Paragraph 21 exceeds Profitco’s UCC in the Transferred Assets.

PURPOSE OF THE SUBJECT TRANSACTIONS

27. The sole purpose of the Subject Transactions is to facilitate the tax efficient use of Lossco’s non-capital losses within the related group by Profitco and to permit Profitco to utilize, and potentially carry back to previous taxation years, the non-capital losses of Lossco.

RULINGS

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the Subject Transactions, and provided that the Subject Transactions were completed in the manner described above, our rulings are as follows:

A. Subject to the application of subsection 69(11), provided the appropriate joint elections are filed in the prescribed form and manner within the time limits specified in subsection 85(6) and provided that each particular property so transferred is an eligible property in respect of which shares have been issued as full or partial consideration therefor, subsection 85(1) will apply to the transfers of the Transferred Assets described in Paragraphs 18 and 20, such that the agreed amount in respect of each such transfer will be deemed to be the particular transferor’s proceeds of disposition of the particular property and the particular transferee’s cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. As a result of the redemption by Lossco of the Lossco Preferred Shares held by Profitco as described in Paragraph 22, by virtue of subsection 84(3), Lossco will be deemed to have paid and Profitco will be deemed to have received a taxable dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption and any such dividend will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

C. 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 any of the Subject Transactions, by virtue of paragraph 55(3)(a) the provisions of subsection 55(2) will not apply to the taxable dividend described in Paragraph 22. For greater certainty, the Subject 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).

D. The provisions of subsection 245(2) will not apply as a result of the Subject Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R9 dated April 23, 2019. They are binding on the CRA provided that the Subject Transactions were completed on XXXXXXXXXX, unless otherwise specified.

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

COMMENTS

Unless otherwise confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

(a) the PUC of any share or the ACB or FMV of any property referred to herein, or the outstanding balance of various tax accounts, such as capital losses, for any of the corporate entities described herein; or

(b) any other tax consequence relating to the Facts, Subject Transactions or any transaction or event taking place either prior to the Subject Transactions or subsequent to the Subject Transactions, whether described in this letter or not, other than those specifically described in the rulings given above.

Nothing in this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
For Director Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch