Section 111

Subsection 111(1) - Losses deductible

Paragraph 111(1)(a) - Non-capital losses

Cases

The Queen v. Merali, 88 DTC 6173, [1988] 1 CTC 320 (FCA)

"There is nothing in the Act to prevent a resident from carrying over non-capital losses incurred when he was a non-resident taxpayer having elected during his non-resident years to be treated as a resident under the terms of subsection 216(1) of the Income Tax Act."

Oceanspan Carriers Ltd. v. The Queen, 87 DTC 5102, [1987] 1 CTC 210 (FCA)

"A corporation which incurs losses from business activities outside Canada when it is neither a resident nor had income from a source in Canada, and thus is not subject to assessment under the Act, is not entitled to deduct such losses to reduce taxable income to nil on income derived after it becomes a Canadian resident."

See Also

Hatt v. The Queen, 2015 TCC 207 (Informal Procedure)

RPP contribution generated non-capital loss for carryforward

The taxpayer, who became a non-resident when she went on unpaid leave from her Canadian job in 2003, retired in 2007 and thereupon received $2497.44 in unused annual leave credits (treated by CRA as income from her Canadian employment under s. 115(1)(a)(i)) and a retiring allowance of $43,255 (taxable under Part XIII rather than Part I). She contributed $22,384 to a registered pension plan which, by virtue of its deductibility under s. 147.2(4)(a), gave rise to a 2007 loss from employment under s. 5(2). After her return to Canada in 2010, she deducted this amount from her taxable income as a non-capital loss.

CRA disallowed the carry-forward on the basis that s. 147.2(4) does not allow the carry-forward of RPP contributions but rather requires that the deduction be made "in the year" they are contributed - and this limitation's "purpose would be frustrated by the availability of non-capital losses under section 111" (para. 35).

In allowing the taxpayer's appeal, D'Arcy J stated (at para. 48):

[P]ursuant to the definition in subsection 111(8), the Appellant incurred a non-capital loss from employment of $20,302 in her 2007 taxation year. Pursuant to subsection 111(1)(a), such loss may be carried forward and deducted when determining the Appellant's 2010 taxable income.

Administrative Policy

2018 Ruling 2018-0742641R3 - Loss consolidation arrangement

triangular loss shift with reps re independent financial capacity to pay the annual interest payments (at a senior secured financing rate) and annual pref dividends contributions

Background

Lossco is the corporate parent of a group of Canadian and non-Canadian corporations. It has non-capital loss carryforwards. Lossco owns all the shares of Profitco. Before giving effect to the proposed transactions, Profitco will become taxable in several years. All of the gross revenue and salaries and wages of Lossco and Profitco are allocated to a particular province.

Proposed transactions
  1. Lossco will borrow under a daylight loan.
  2. Lossco will lend the proceeds to Profitco under a subordinated loan (the “Profitco Loan”) bearing interest payable annually in arrears. The interest rate is “based on a comparison to the most recent arm’s length senior secured financing issued in XXXXXXXXXX.” The Profitco Loan may be settled at the option of Profitco at any time in cash or by delivering a financial asset. According to its financial projections, Profitco has the financial capacity to pay the interest on the Profitco Loan from its own cash flow.
  3. Profitco will use the proceeds of the Profitco Loan to subscribe for non-voting redeemable cumulative retractable Preferred Shares of Newco (newly incorporated by Lossco).
  4. Newco will lend such subscription proceeds to Lossco on an interest-free demand basis (“Lossco Loan”). The terms of the Lossco Loan will allow Lossco to repay the Lossco Loan by assigning the Profitco Loan to Newco.
  5. Lossco will use such proceeds to repay the daylight loan.
  6. Lossco will annually make contributions of capital to Newco (funded out of an independent source of income) equaling the annual dividends to be paid on the Newco Preferred Shares.

On the unwinding transactions, Newco will redeem all its preferred shares by assigning the Profitco Loan to Profitco, and the Lossco Loan and Profitco Loan will be set-off.

Rulings

Including re ss. 20(1)(c), 12(1)(x), and 55(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) intercompany subordinated loan to bear interest at the rate for a senior secured financing 78

2016 Ruling 2016-0652041R3 - Loss consolidation arrangement

standard triangular loss shift with annual funding of dividends and interest, cashless unwind with set-off and provincial GAAR and s. 55(2) rulings
Proposed transactions

In order to effectively shift taxable income from Parentco to its wholly-owned subsidiary, Profitco:

  1. Parentco will use the proceeds of a daylight loan to make an interest-bearing loan (the “Profitco Loan”) to Profitco.
  2. Profitco will use such proceeds to subscribe for non-voting redeemable retractable cumulative preferred shares (the “Newco Preferred Shares”), carrying a positive spread, of a newly-incorporated CBCA subsidiary (“Newco”) of Parentco.
  3. Newco will use such proceeds to make a non-interest-bearing loan to Parentco (the “Parentco Loan”), with Parentco repaying its daylight loan.
  4. On the anniversaries of the above transactions, Parentco will fund the dividend obligations of Newco (which will be recorded as giving rise to contributed surplus for accounting purposes) with Profitco, in turn, servicing the Profitco Loan.
  5. At the earlier of X years from the implementation date and the utilization of Parentco’s non-capital losses, the loss consolidation structure will be unwound by Newco delivering the Parentco Loan to Profitco in redemption of its Newco Preferred Shares.
  6. The Parentco Loan and Profitco Loan are set off and Newco wound-up.
Rulings

Including re s. 20(1)(c), s. 246(1), s. 112(1) and the provincial GAAR. No s. 12(1)(c) or 9 ruling re the funding by Parentco of Newco’s dividend obligations. CRA also provided a s. 55(2) ruling based on a representation that the only purpose “of the dividends on Newco’s Preferred Shares … is to provide a reasonable return… .”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) s. 55(2) ruling re dividends on preferred shares used in loss shift 150

9 August 2016 Internal T.I. 2014-0526171I7 - Resettlement of a Trust

constructive resettlement of trust on sale of beneficial interests therein extinguished its losses

A non-resident common-law commercial trust had been settled with cash and Canadian real estate by two (apparently non-resident) corporations. A subsequent sale of their interests in the trust to a third-party resident purchaser (along with the shares of the corporate trustee) was found to have given rise to a resettlement of the trust, so that losses of the trust disappeared and, thus, were not available to shelter gain on the immediately ensuing sale of the real estate by the trust.

In this regard, the Directorate stated:

[T]he two original beneficiaries were not specifically prohibited from disposing of their capital and income interests in the Trust by selling it to someone else. However, in doing so the intention of the two original settlors is completely set aside. The intention of the settlors, as clearly spelled out in the Trust Deed, was to have the trustee hold and invest the capital of the trust for the benefit of two specific beneficiaries, the two original settlors themselves, and this is no longer the case. … [T]he transaction changed the whole substratum or “raison d’etre” of the Trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition sale of the two interests in a commercial trust to a 3rd party gave rise to a new trust given that this not contemplated when trust settled 370
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) sale of trust with losses to 3rd party was abusive 147

2015 Ruling 2015-0582101R3 - loss utilization

non-triangular partly-completed loss shift from lossco parent to profitco sub

Completed transactions
  1. Lossco (which incurred non-capital losses in a number of taxation years) borrowed (not in excess of its borrowing capacity) under a daylight loan.
  2. It used the proceeds to make the “IB Loan,” bearing quarterly interest, to its wholly-owned subsidiary, Profitco.
  3. Profitco used the proceeds to subscribe for non-voting redeemable retractable preferred shares, bearing a quarterly dividend of XX% higher than the interest rate on the IB Loan, of its wholly-owned subsidiary Newco.
  4. Newco used the proceeds to make a demand non-interest-bearing loan (the “NIB Loan”) to Lossco.
  5. Lossco repaid the daylight loan.
Proposed transactions
  1. Lossco will make capital contributions to Newco equal to the dividend payments to be made on the preferred shares, with such dividends being declared and paid by Newco.
  2. Profitco will pay the accrued interest on the same dates.
  3. Once Lossco’s non-capital losses are fully utilized and remaining dividends and interest are paid as described above,
  4. Newco will redeem the preferred shares by delivering the NIB Loan to Profitco.
  5. The IB Loan will be set-off against the NIB Loan.
Rulings

Including re s. 20(1)(c), s. 12(1)(x) and s. 55(3)(a).

Opinion

Re non-application of s. 55(2) to the dividends in 1 after giving effect to the July 31, 2015 draft legislation.

2015 Ruling 2015-0604071R3 - Loss Consolidation Arrangement

loss shift entailing Profitco subscribing for prefs of its Lossco parent, with dividends paid pursuant to support agreement/prefs redeemed wih note

Background

Profitco is wholly-owned by Lossco, which is wholly owned by Parent. Based on Profitco's audited financial information, it would be in a position to borrow on a subordinated basis in an amount up to $XX (the "Profitco Borrowing Capacity").

Proposed transactions
  1. Profitco will advance the proceeds of a daylight borrowing to subscribe for non-voting cumulative redeemable retractable preferred shares of Lossco. Parent will agree, in a support agreement with Lossco, to make capital contributions to fund Lossco’s payment of the dividends thereon.
  2. Lossco will use the proceeds received in 1 to make an advance, evidenced by a promissory note (the “Investment Note”), which will bear interest reflecting the advance’s full subordination.
  3. Profitco will repay the daylight loan.

On the unwinding:

  1. Parent will make capital contributions to Lossco to allow Lossco to pay the accrued but unpaid dividends;
  2. Lossco will redeem the preferred shares by issuing a demand non-interest-bearing promissory note (the “Redemption Note”);
  3. Profitco will pay the accrued interest; and
  4. the Redemption Note and Investment Note will be paid by set-off.
Rulings

Including re s. 20(1)(c), s. 55(2), s. 80, GAAR for agreeing provinces and s. 245(2).

Opinion

After giving effect the July 31, 2015 draft amendments, s. 55(2) will not apply to the dividend in 4.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) loss shifting transaction not affected 85

19 August 2015 External T.I. 2015-0589611E5 - loss consolidation arrangements

related by not affiliated OK/Lossco generally must have other assets/no 3rd party commitment letter required

In loss consolidation transactions: are they permitted to occur amongst related parties that are not affiliated? Does it matters whether or not the "lossco" has any source of funds to cover dividend payments other than the interest income paid by a "profitco".Does CRA requires a commitment letter issued by a third party to confirm that the proposed transactions are commercially plausible?

CRA responded:

S3-F6-C1… paragraph… 1.71… indicates that such loss consolidation arrangements could be undertaken by parties that are related but not affiliated (as well as parties that are both related and affiliated and parties that are affiliated but not related).

…[I\n upstream shareholding situations, the CRA will generally ask for a representation that the issuer of the shares will have other assets from which the dividends will be funded.

...[T]ypically the CRA will request a representation relating to borrowing capacity. In some cases, such as situations where the amount of the debt is substantial, CRA may request a signed letter from a director or other documentation.

2015 Ruling 2014-0559181R3 - Internal Reorganization

internal spinoff by "profitco" for previous loss transfer rulings will not prejudice those rulings

CRA provided s. 55(3)(a) and other rulings for spinning off various business divisions of an indirect subsidiary (Bco) of a public corporation to newly-incorporated sisters (Cco, Dco and Eco). Bco also was the "profitco" in a loss shifting transaction for which a 2012 ruling letter (2012-0437881R3) was received. Those transactions are described as already having been completed (i.e., their set-up but not their unwinding?) In confirming that the transactions described in the second ruling letter would not cause the 2012 rulings to cease to be binding, CRA stated:

Bco, through its XX, will generate sufficient income to absorb the interest expense resulting from the loss consolidation transactions… . Therefore, no modification is required to any of the loss consolidation transactions.

…[N]o new business activities will be created within the corporate group as only existing operations will be transferred into sister corporations… . Moreover, the Proposed Transactions will be made in a tax-deferred manner and will not have the effect of creating new tax obligations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) business division spin-offs by indirect public corp sub to new sisters 311

2014 Ruling 2013-0516071R3 - Reorganization

transfer of already-earned profits to Lossco by transfer of LP units with income allocation at LP year end

Background

Profitco is wholly-owned by Foreign Parent 2 which, in turn, is indirectly wholly-owned by Foreign Parent 1. Profitco is the limited partner of LP1 and its subsidiary is the GP. LP1 holds all the LP units of LP2, whose GP is another subsidiary of Profitco. Profitco will have positive QTI re LP1. Lossco is wholly-owned by Foreign Parent 1.

Transactions
  1. Prior to the ruling letter, Profitco transferred its LP1 units to a newly-incorporated unlimited liability company ("Subco") in consideration for Subco common shares, with a joint s. 85(1) election filed. The LP1 partnership agreement will be amended "to clarify that it allocates its income for income tax purposes only to those partners that are partners at the end of its fiscal period."
  2. Profitco will transfer all its shares of Subco to Lossco under s. 85(1) in consideration for non-voting redeemable retractable preferred shares of Lossco.
  3. Lossco and Subco will amalgamate, so that XX% of the income of LP1 for its current fiscal period will be allocated to "Amalco."
  4. After the LP1 year end, Amalco will transfer the LP1 units to a newly-incorporated ULC ("Newco") under s. 85(1) in consideration for common shares.
  5. Amalco will transfer its common shares of Newco to Profitco under s. 85(1) in consideration for non-voting redeemable retractable preferred shares of Profitco.
  6. Amalco and Profitco will cross-redeem the two preferred share holdings for notes and set-off the notes.
  7. Newco will be wound-up.
Rulings

The proposed transactions will not result in any disposition or increase in interest described in ss. 55(3)(a)(i) to (v). S. 34.2(14) will deem Profitco to be a member of LP1 continuously until the end of its XX taxation year for purposes of s. 34.2(13)(a). S. 245(2) will not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 34.2 - Subsection 34.2(14) transfer by Profitco of profitable LP to Lossco which is affiliated by virtue of common NR indirect parent 92
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) transfer of profitable LP to Lossco followed by allocation of previously-earned profits of LP to Lossco 87

2014 Ruling 2014-0543911R3 - loss consolidation

loss transfer to parent/cashless unwind of prefs by delivering loans to parent/cash circled to avoid daylight loan
Similar to 2013-0498551R3

.

Proposed Transactions

Lossco, which is an indirect subsidiary of Parent and has permanent establishments in various provinces, will make a series of loans, on one or more days, to Parent (also with PEs in various provinces). Parent will use the total proceeds to subscribe for one or more series of redeemable retractable preferred shares of Lossco bearing a cumulative quarterly dividend at a small spread over the interest (payable quarterly) on the loans (with the resulting Lossco losses thereby effectively transferred to Parent in its xx taxation year being less than its income for that year). Prior to the end of that taxation year, Lossco will redeem the preferred shares by delivering the loans to Parent (pusuant to a term in the share terms contemplating such a payment in kind).

Rulings

Standard rulings re ss. 20(1)(c), 112(1), 15(1), 56(2), 246(1) and 245(2) (but no provincial GAAR ruling). The delivery of the loans to Parent will not give rise to a forgiven amount.

2015 Ruling 2014-0563151R3 - Loss consolidation

annual renewal of loss shifting ruling

This is essentially identical to 2014-0518451R3 from a year earlier. Briefly, a lossco parent (Lossco) will not transfer losses to a profitco subsidiary (Opco) under typical triangular loss-shifting techniques, because Opco has public preference shareholders and does not wish to incur debt. Accordingly, Lossco will engage in such techniques to transfer losses to a newco subsidiary (Aco), and then transfer Aco to Opco to be wound-up under s. 88(1.1) (2013-0511991R3 and 2013-0496351R3 are similar). More realistically than 2013-0496351R3, the usual borrowing capacity rep is given in relation to the Lossco rather than Aco. The unwinding of the loss transfer transactions will occur on a cashless basis. The Additional Information states:

It is anticipated that the steps described in the Proposed Transactions will be undertaken at the beginning of each future taxation year of Lossco, with new entities to be created having the same attributes as ACo and Newco.

2013 Ruling 2013-0498551R3 - Loss Consolidation

loss shift to parent/loans to parent used to redeem prefs/no borrowing capacity rep
Similar to 2014-0543911R3

Lossco, an indirect subsidiary of Parent, will make interest-bearing loans to Parent, and Parent will subscribe for redeemable retractable preferred shares of Lossco ("prefs"). On the unwinding, Lossco will redeem the prefs by delivering the loans which it made to Parent. Rulings include interest-deductibility by Parent, and delivery of the loans on the pref redemption not giving rise to a forgiven amount.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount no forgiven amount on loan transfer to debtor 68

2014 Ruling 2014-0525441R3 - loss consolidation arrangement

losses utilized within a month by loans from lossco LP to sister profitco/no rep re independent borrowing capacity/loans to parent used as currency for cashless unwind/loans split up to avoid daylight loan

Existing structure

Parent holds Subsidiary, which is profitable, directly, and holds Lossco A (which, in turn, holds Lossco B and Lossco C) through Holdco. In a preliminary transaction, the "New LP Partners," (Lossco A, B and C) will become the limited partners of a new LP ("New LP"), with a newly-incorporated subsidiary of Parent ("GP Co") as the general partner.

Proposed transactions
  1. Parent will make non-interest-bearing demand loans (the "Parent Loans") to New LP.
  2. New LP will on-lend these funds at interest to Subsidiary under the "Subsidiary Loans."
  3. Subsidiary will use such proceeds to subscribe for non-voting redeemable "Preferred Shares" of a newly-incorporated subsidiary of Parent ("Newco").
  4. Newco will use those proceeds to make non-interest-bearing demand loans (the "Newco Loans") to Parent.
  5. On each monthly interest payment date, Parent will make a contribution of capital to Newco to fund the Newco Preferred Share dividends, and Subsidiary will pay to New LP the interest then due on the Subsidiary Loans.
  6. Upon generation of interest sufficient to utilize the non-capital losses of Subsidiary (which is anticipated to occur "on or before the month end in which the Proposed Transactions are initiated,") the transactions will be unwound through: Newco redeeming the Preferred Shares by delivering the Newco Loans to Subsidiary; Subsidiary repaying the Subsidiary Loans by delivering the Newco Loans to New LP; and New LP repaying the Parent Loans by set-off against the Newco Loans.
  7. New LP, Newco and GP Co will be wound-up (with no capital loss being claimed by Parent respecting its investment in Newco).

Newco and the Losscos will satisfy the applicable corporate solvency tests.

Rulings

: Including interest deductibility to Subsidiary, timing of Ne LP income allocation to Losscos and non-application of ss. 9 and 12(1)(c) to capital contributions received by Newco. SS. 56(2), 15(1), 69(11), 246(1) and 245(2) are not applicable. Provincial GAAR ruling.

2 December 2014 CTF Roundtable, Q2(a)

positive spread/independent servicing source in loss consolidations

In a loss consolidation arrangement, "Lossco," which has non-capital losses, lends money to Profitco at a reasonable stated rate of interest and Profitco in turn uses the inter-corporate debt to acquire preferred shares of Lossco. Does the CRA require a positive spread between the dividend yield on the preferred shares acquired with inter-corporate debt and the interest rate on that debt, and must the dividend payor have an independent source of income to pay the dividends? CRA stated:

[I]t is the CRA's policy not to provide rulings without a positive spread between the interest paid and the dividends earned. …[I]n circumstances of upstream shareholding in which a subsidiary acquired dividend paying preferred shares of the parent…[o]ur views… expressed in Income Tax Technical News No. 30…[are], "The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) positive spread/independent servicing source in loss consolidations 165

2 December 2014 CTF Roundtable, Q2(b)

loss transfer where affiliated but not related

Must corporations be affiliated or related or both in a loss consolidation arrangement? CRA responded:

The CRA will consider ruling requests where the corporations are related and affiliated, as well as circumstances in which the corporations are related.

…[W]here the corporations are affiliated but not related…the meaning of affiliated will be determined on the same criteria as stipulated in subsection 69(11)… . In other words, where two corporations are not related, but are affiliated, the CRA would consider a loss consolidation arrangement only if the corporations are affiliated by reason of de jure control.

2 December 2014 CTF Roundtable, Q2(c)

provincial loss transfers

Does the decision in the 2013 Federal Budget not to proceed with a corporate group taxation system impact rulings for loss consolidation arrangements? CRA responded:

The 2013 Federal Budget announcement has not had an impact… .It should be noted, however, that where we consider that one of the main reasons for engaging in a loss consolidation arrangement is for the purposes of shifting income among provinces, the CRA may challenge that loss consolidation under provincial GAAR legislation.

2014 Ruling 2014-0518451R3 - Loss consolidation

losses transferred to new "Aco" which is wound-up into profitco – but borrowing capacity rep of Lossco not Aco/ provincial GAAR ruling/ cashless un-wind

Overview

Loan 2 (in step 3 below) is being made by Lossco (the wholly-owned loss subsidiary of Parent) to Aco (so as to generate losses in Aco for later transfer under s. 88(1.1) to Opco), instead of being made directly to Opco, "to ensure that Opco, which is a public corporation, does not incur debt in order to implement the loss utilization." Furthermore, "any shift of income between provinces will be incidental to the Proposed Transactions."

Proposed transactions
  1. Parent will borrow the Parent Loan.
  2. Parent will use the proceeds to make Loan 1 to Lossco. "Lossco will have the borrowing capacity to obtain a daylight loan, in an amount equal to the amount of Loan 1, directly from an arm's-length financial institution."
  3. Lossco will use the total proceeds received under Loan 1 to make Loan 2 (bearing interest) to ACo.
  4. ACo will use such proceeds to subscribe for Newco Preferred Shares. (Although these shares will be term preferred shares, they not be acquired by ACo "in the ordinary course of ACo's business.")
  5. Newco will use such proceeds to make Loan 3 (not bearing interest) to Lossco.
  6. Lossco will repay Loan 1.
  7. Parent will repay the Parent Loan.
  8. Lossco will make periodic contributions of capital to Newco to fund accruing dividends on the Newco Preferred Shares, with Aco in turn servicing Loan 2 interest. The contributions will be recorded as contributed surplus under IFRS.
  9. After generation of the requisite losses in Aco, Newco will redeem the Newco Preferred Shares of ACo in consideration for the Newco Note.
  10. ACo will repay Loan 2 by assigning the Newco Note to Lossco - and Lossco and Newco will agree to setoff the amount due under Loan 3 against the amount due under the Newco Note.
  11. Lossco will transfer all of its ACo Common Shares to Opco in exchange for additional common shares of Opco under s. 85(1).
  12. In the same taxation year, the winding-up of Aco will be commenced, and "ACo will file articles of dissolution with the appropriate Corporate Registry within a reasonable time after the winding-up resolution is passed."
Rulings

: Including interest deductibility to ACo on Loan 2 and non-application of ss. 9 and 12(1)(c) to capital contributions received by Newco. Ss. 56(2), 15(1), 246(1) and 245(2) are not applicable. Provincial GAAR ruling. Dividends received by Aco on its Newco Preferred Shares (which are term preferred shares) will be deductible under s. 112(1).

2014 Ruling 2013-0511991R3 - Loss consolidation

losses transferred to Newco which is wound-up into profitco, s. 88(1.1) loss transfer not effective until articles of dissolution, provincial GAAR ruling, cashless un-wind

Structure

Lossco, which is a specified financial institution with non-capital losses, is a subsidiary of non-resident parent, and serves as the holding company for Opco.

Proposed transactions
  1. Lossco will use the proceeds of a daylight loan to make Loan 1 to a newly-incorporated special-purpose subsidiary (ACo). Loan 1 will be interest-bearing and its amount "will not exceed the amount that ACo could reasonably be expected to borrow from an arm's-length financial institution."
  2. ACo will use the total proceeds received from Loan 1 to subscribe for non-voting redeemable retractable preferred shares (the Newco Preferred Shares) of Newco, which is a newly-incorporated subsidiary of Lossco.
  3. Newco will use such proceeds to make a non-interest-bearing loan to lossco (Loan 2), with Lossco repaying its daylight loan.
  4. Lossco will annually make contributions of capital to Newco in order that it can pay the accrued dividends on the Newco Preferred Shares which, in turn, will fund th epayment of the accrued interest on Loan 1.
  5. The unwinding of the transactions will be accomplished by: Newco redeeming the Newco Preferred Shares held by ACo in consideration for a non-interest bearing promissory note (the "Newco Note"); ACo will repaying Loan 1 by assigning the Newco Note to Lossco; and Loan 2 and the Newco Note being set-off.
  6. Lossco will transfer all its ACo shares to Opco in exchange for Opco common shares, electing under s. 85(1), and Aco will be wound-up into Opco, with articles of dissolution being filed "within a reasonable time after the winding-up resolution is passed."
Reason for Aco

"Due to regulatory constraints and the potential liability issues that may arise with respect to the operations of Opco, it is not feasible from a business perspective to have Lossco make Loan 1 directly to Opco. Instead, Loan 1 is being made to ACo to ensure that Opco does not incur debt in the course of executing the loss consolidation."

Rulings

: Including interest deductibility to Profitco on Profitco Note and non-application of ss. 9 and 12(1)(c) to capital contributions received by Newco. SS. 56(2), 15(1), 246(1) and 245(2) are not applicable. Provincial GAAR ruling.

S. "88(1.1) will apply after the winding up of ACo into Opco….[and] [f]or this purpose, ACo will not be considered to have been wound up until it has been formally dissolved."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) s. 88(1.1) loss transfer not effective until articles of dissolution 124

13 June 2014 External T.I. 2014-0522251E5 - Independent source of income for loss utilization

independent income source of Lossco

Lossco, which is developing a commercial use building, lends money to Profitco (a related corporation) at interest and Profitco uses the proceeds to invest in preferred shares of Lossco. Lossco does not yet have an independent source of income. How does the CRA policy that the loss corporation have an independent source of income apply? CRA stated:

Income Tax Technical News No. 30 (May 21, 2004) makes the following comment regarding the CRA's views on typical loss utilization structures:

  • "While we have not reached the point where we would state that C.R.B. Logging is no longer good law, we have provided rulings on some upstream shareholding situations. The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary".

Whether there are assets in the parent company that can generate sufficient income to pay the dividends on preferred shares held by the subsidiary is a question of fact.

2013 Ruling 2013-0512321R3 - Loss Consolidation

conventional shift between sisters

Conventional loss shift between two sister corporations (Lossco and Profitco) utilizing preferred shares and interest-bearing loan.

2013 Ruling 2013-0504301R3 - Loss Consolidation

Lossco sale of Newco pref to profitco for profitco note; provincial GAAR ruling

Background

Lossco, which is a Canadian public corporation with a portion of its shares held by Parentco, wishes to transfer losses to Profitco, which is a wholly-owned subsidiary of Cco which in turn, is a wholly-owned subsidiary of Bco, which is a Canadian public corporation whose shares are widely held but which is controlled by Lossco. This will be accomplished by Lossco selling cumulative preferrred shares of a newly-incorporated subsidiary to Profitco in consideration for an interest-bearing note of Profitco. The borrowing capacity of Bco, and of Lossco and its subsidiaries, significantly exceeds the maximum amount required to complete the transactions. losses being transferred to Profitco on a s. 88(1.1) winding-up.

Proposed transactions
  1. Lossco will borrow under a daylight loan from an arm's length financial institution or a related entity.
  2. Lossco will use such proceeds to subscribe for non-voting cumulative redeemable retractable preferred shares (the "Newco Preferred Shares") of a newly-incorporated subsidiary ("Newco").
  3. Lossco will transfer the Newco Preferred Shares to Profitco in consideration for an interest-bearing debenture (the "Profitco Note"), recourse under which will be limited to the Newco Preferred Shares and which will have a security interest in the Newco Preferred Shares.
  4. Newco will use the proceeds in 2 to make a non-interest-bearing loan to Lossco under the "Lossco Note."
  5. Lossco will repay the daylight loan.
  6. At least quarterly, Lossco will make a contribution of capital to Newco to fund the payment by it of accrued dividends on the Newco Preferred Shares held by Lossco, with Profitco then paying all accrued and unpaid interest on the Profitco Note.
  7. In connection with the unwinding, Newco will redeem the Newco Preferred Shares and deliver the Lossco Note to Profitco as payment of the redemption proceeds, with the Lossco Note and the Profitco Note then set-off.
  8. Newco will be wound-up into Lossco pursuant to s. 88(1).
Rulings

Including interest deductibility to Profitco on Profitco Note and non-application of ss. 9 and 12(1)(c) to capital contributions received by Newco. SS. 56(2), 15(1),246(1) and 245(2) are not applicable.

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) provincial GAAR ruling re loss shift 111

2014 Ruling 2013-0483491R3 - Loss Consolidation Arrangement

limited recourse loan to LP subsidiary of Profitco to comply with debt indenture

Existing structure/debt indenture

Parentoco, a widely-held non-resident corporation, holds Forco, a non-resident holding company, which holds Holdco 1, which holds Holdco 2, which holds Opco, the latter three subsidiaries being taxable Canadian corporations. In the transactions below, Opco is a limited partner of New LP to limit the potential claims and recourses of creditors of New LP (including Holdco 1) against assets of Opco, so as to comply with the provisions of a Debt Indenture.

Proposed transactions

.

  1. Holdco 1 borrows on a daylight basis from the Financial Institution.
  2. Holdco 1 makes the "New LP Loan" to a partnership (New LP) formed by a newly-incorporated subsidiary of Opco, as general partner (Newco 2), and Opco as limited partner. Holdco 1's recourse is limited to the Newco 1 Preferred Shares described in 3 below. "The borrowing capacity of Holdco 2 and its subsidiaries ("Holdco 2 Subsidiary Group Borrowing Capacity") is equal to or exceeds the principal amount of the New LP Loan."
  3. New LP subscribes for cumulative preferred shares of a newly-incorporated subsidiary of Holdco 1 (Newco 1). The dividends payable on the Newco 1 Preferred Shares will exceed the aggregate of the interest accrued on the New LP Loan and nominal incidental expenses of New LP.
  4. Newco 1 makes a non-interest-bearing demand loan to Holdco 1 (the "Newco 1 Loan").
  5. Holdco 1 repays its daylight loan.
  6. At least annually, Opco and Newco 2 will make pro rata cash capital contributions to New LP to fund interest on the New LP Loan;
  7. New LP will pay the interest on the New LP Loan.
  8. Holdco 1 will make contributions of capital to Newco 1 to fund dividends payable on the Newco 1 Preferred Shares held by New LP.
  9. On unwinding the loss consolidation arrangement, (a) Newco 1 will redeem the Newco 1 Preferred Shares by assigning its Newco 1 Loan receivable to New LP, (b) New LP will repay the New LP Loan by set-off with the Newco 1 Loan, (c) Newco 1 will be wound-up into or amalgamated with Holdco 1; and (d) Newco 2 will be wound-up into or amalgamated with Opco, with the result that New LP will cease to exist.
Rulings

Including re s. 20(1)(c) deductions of New LP, utilization of streamed and non-streamed losses by Losscos and non-application of s. 12(1)(x) re contributions of capital to Newco 1.

2013 Ruling 2012-0458091R3 - XXXXXXXXXX - loss consolidation

use of LP to consolidate loss transfers

Proposed transactions
  1. Parent borrows on a daylight basis from the Financial Institution.
  2. Parent makes a daylight loan to a partnership (New LP) formed by the Profitcos (Parent and two wholly-owned subsidiaries – Aco and CCo, with another wholly-owned subsidiary, BCo as the GP).
  3. New LP subscribes for cumulative preferred shares of the Losscos (DCo, a wholly-owned subsidiary of Parent to and Eco to KCo, wholly-owned subsidiaries of DCo).
  4. Each Lossco makes a loan to New LP at a commercial rate of interest resulting in New LP earning dividend income somewhat in excess of its interest expense.
  5. New LP repays its daylight loan.
  6. Parent repays its daylight loan.
  7. If a Lossco does not have sufficient cash available to pay dividends on its Preferred Shares, DCo will provide to the Lossco, by way of an interest-free loan (the "PS Dividend Loan"), the amount required for the Lossco to pay the full amount of the dividends on the Preferred Shares.
  8. New LP will use the proceeds from the Preferred Share dividends to pay the interest on the New LP Loans.
  9. Each Lossco will repay any PS Dividend Loan out of its interest income. If any balance remains, DCo will, at its discretion, make a contribution of capital to the particular Lossco.
  10. Once the (post-acquisition of control) non-capital losses of the Losscos have been fully utilized, the transactions will be unwound.
Rulings

Including re s. 20(1)(c) deductions of New LP, utilization of streamed and non-streamed losses by Losscos and non-application of s. 12(1)(x) re DCo contributions of capital.

2013 Ruling 2013-0496351R3 - Loss Consolidation

value of losses transferred to new Lossco reflected in Lossco sale price

Background

Opco, which has non-capital losses and is a great-grandchild RFI subsidiary of Parentco (also an RFI) and an immediate subsidiary of its RFI parent (Holdco 2), wishes to transfer its non-capital losses to Profitco, another RFI subsidiary of Holdco 2, on a basis that will permit it to be compensated for those losses. A further difference from typical loss-shifting transactions is that in order to not impact its regulatory capital, Profitco does not wish to borrow from Opco. Accordingly, Opco will effectively transfer its losses to a newco (a.k.a. Lossco) and then sell Lossco to Profitco, with the newly-generated Lossco losses being transferred to Profitco on a s. 88(1.1) winding-up.

Proposed transactions
  1. Opco will borrow under a daylight loan from Finco, a taxable Canadian corporation of which Parentco and XX are members.
  2. Opco will use such proceeds to make an interest-bearing loan to its newly-incorporated subsidiary, Lossco (Lossco Loan).
  3. Lossco will use such proceeds to subscribe for redeemable retractable preferred shares of another newly-incorporated subsidiary of Opco (Newco).
  4. Newco will use such proceeds to make a non-interest-bearing loan (the Interest-free Loan) to Opco.
  5. Opco will repay the daylight loan.
  6. At least annually, Opco will make a contribution of capital to Newco to fund the payment by it of accrued dividends on the Newco Preferred Shares held by Lossco, with Lossco then paying all accrued and unpaid interest on the Lossco Loan to Opco.
  7. In connection with the unwinding, Opco will borrow on a daylight basis from Finco in the amount of the Interest-free Loan, then;
  8. Opco will repay the Interest-free Loan to Newco, then;
  9. Newco will redeem its preferred shares issued in 3 above; then
  10. Lossco will repay the Lossco Loan to Opco; then
  11. Opco will repay the new daylight loan.
  12. Opco will transfer all of its Lossco common shares to Profitco in exchange for preferred shares of Profitco with a fair market value and redemption amount equal to the FMV of the transferred Lossco common shares, utilizing s. 85(1).
  13. Lossco will be wound up into Profitco.
  14. Profitco will redeem the preferred shares issued in 12 above.
  15. In a subsequent year, the above transactions will be repeated to use the remaining balance of the Opco non-capital losses.
Reasons for not using a direct loss shift

: "[A] typical loss consolidation arrangement could not be implemented directly with Profitco because the typical loss transfer arrangement does not provide compensation for the transfer of the [Opco non-capital losses]. Moreover, Profitco would need to advise the [financial] Regulator in order to borrow an amount equal to the Daylight Loan and the repayment thereof would require regulatory approval. In addition, such borrowing could impact significantly the regulatory capital that Profitco must maintain in order to satisfy its regulatory and statutory requirements."

Rulings

Including interest deductibility to LosscoA Co on Loan 2 and non-application of ss. 9 and 12(1)(c) to capital contributions received by Newco. SS. 56(2), 15(1),246(1) and 245(2) are not applicable. No explicit s. 55(3)(a) ruling.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) Subco "has been wound up" when it is dissolved 81

2013 Ruling 2012-0472291R3 - Loss consolidation

losses generated in newco to be wound up into public profitco; interest paid (in cash) only on maturity; cashless unwinding

Background

Lossco, which has non-capital losses and is a holding company subsidiary of Parent, holds all the common shares of Opco, which is a public corporation with various classes of non-voting shares which are widely held and traded.

Proposed transactions

In order to permit Opco to use losses which Lossco is expected to incur:

  1. Parent will borrow under a daylight loan (Parent Loan).
  2. Parent will use such proceeds to make a non-interest-bearing loan to Lossco (Loan 1).
  3. Lossco will use such proceeds to make an interest-bearing loan (Loan 2) to a newly-incorporated subsidiary of Lossco (A Co).
  4. A Co will use such proceeds to subscribe for redeemable retractable preferred shares (Newco Preferred Shares ) of another newly-incorporated subsidiary of Lossco (Newco).
  5. Newco will use such proceeds to make a non-interest-bearing loan (Loan 3) to Lossco.
  6. Lossco will repay Loan 1.
  7. Parent will repay the Parent Loan.
  8. At a subsequent juncture, Lossco will make a contribution of capital to Newco to fund the payment by it of accrued dividends on the Newco Preferred Shares held by A Co., with A Co then paying all accrued and unpaid interest on Loan 2 to Lossco.
  9. Immediately following the interest payment in 8, and in connection with the unwinding of the loss consolidation arrangement Newco will redeem the Newco Preferred Shares held by A Co in consideration for its issuance of a non-interest bearing promissory note (the "Newco Note"), then;
  10. A Co will repay Loan 2 by assigning the Newco Note to Lossco, then;
  11. Loan 3 and the Newco Note will be repaid by mutual set-off.
  12. Lossco will transfer all of its A Co Common Shares to Opco in exchange for the "Opco Common Shares," utilizing s. 85(1).
  13. A Co will be wound up into Opco and Newco wound up into Lossco.
Additional information

"Loan 2 is being made to A Co, instead of having Lossco make Loan 2 directly to Opco, to ensure that Opco, which is a public corporation, does not incur debt in order to implement the loss utilization." No rep that A Co has stand-alone borrowing capacity.

Rulings

Including interest deductibility to A Co on Loan 2 and non-application of ss. 9 and 12(1)(c) to capital contributions received by Newco. Opinion that provided draft s. 55(3.01)(h) is enacted, s. 55(2) will not apply to the dividends that ACo will receive from Newco by virtue of s. 55(3)(a).

18 December 2012 Internal T.I. 2012-0461651I7 - Foreign Tax Credits - s. 126 vs. s. 110.5

amalgamation-equivalency policy

Canco realized deductible losses on FX hedging instruments due to the strengthening of the U.S. dollar. Accordingly, it engaged in the transactions summarized below ("Project Shift") to shift taxable income from profitable subsidiaries to itself. The intended effect was to allow Canco to claim foreign tax credits, and generate losses in the subsidiaries for carry-back to prior years. However, the hedging losses turned out to be greater than the income which was transferred to it under Project Shift, so that Canco had to make a s. 110.5 election to generate enough taxable income to claim the requisite level of foreign tax credits. Under Project Shift:

  • Canco made a demand interest-bearing loan to each of the subsidiaries (without requiring a daylight loan).
  • Each of the subsidiaries (which were Canadian) used the borrowed funds to invest in preferred and common shares of new wholly-owned subsidiaries (Newcos).
  • Each of the Newcos then lent the proceeds to Canco on a demand, non-interest bearing basis.
  • After the income from the subsidiaries were transferred (via interest payments), the structure was unwound.

In noting that Project Shift accorded with CRA's position on acceptable loss consolidation strategies (which it also described in general terms), the Directorate stated:

The purpose of such strategies is generally to effectively allow all the non-capital losses to be utilized, which would be similar to the situation they would be in had the lossco and profitco in the related group been amalgamated. Since we would normally allow for such losses to be utilized under an amalgamation, two entities who choose not to amalgamate for business reasons, should not be disadvantaged, and thus this is why the policy behind such structures are permitted and not subject to GAAR.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.5 policy of s. 110.5 292

2012 Ruling 2012-0451431R3 - Loss Consolidation

ATR-66 elimination of debt to make Lossco solvent; roll-in/distribution out (one-day after roll in) of appreciated depreciables to use its losses

LossCo, which is insolvent, and ProfitCo, both are indirect subsidiaries of a foreign parent. LossCo is indebted to ProfitCo under the LossCo Indebtedness.

Proposed transactions:

  • LossCo will amend its prior years' returns to claim unclaimed capital cost allowance, thereby increasing its non-capital losses
  • the terms of the LossCo Indebtedness will be amended to make them convertible into two new interest bearing debt obligations: the LossCo Note A Indebtedness, bearing interest at LIBOR and ranking pari passu with the general creditors; and the LossCo Note B Indebtedness bearing interest at LIBOR plus X% and ranking junior to the general creditors
  • ProfitCo will then exercise this conversion right
  • ProfitCo will transfer the LossCo Note B Indebtedness to newly-incorporated Canadian subsidiary in exchange for one share of Newco
  • ProfitCo will sell Newco to LossCo for $X, subject to a price adjustment clause "whereby LossCo will issue a demand promissory note to ProfitCo in an amount equal to the amount of any price adjustment"
  • Newco will be wound up into LossCo to make an election under s. 80.01(4) in respect of the settlement of the LossCo Note B Indebtedness; as a result of such settlement, LossCo will become solvent
  • ProfitCo will transfer assets including depreciable property to LossCo in consideration for redeemable retractable preferred shares, electing under s. 85(1), with the transferred assets being leased back
  • one day later, the preferred shares will be redeemed in consideration for the transfer of the assets back to ProfitCo on a non-rollover basis

Rulings:

  • the addition of the conversion feature will not result in a disposition of the LossCo Indebtedness provided that there was no novation or rescission of the debt
  • s. 51.1 will apply to the conversion, and no forgiven amount will arise
  • the loss denied under s. 40(2)(e.1) on the transfer of the LossCo Note B Indebtedness to Newco will be added to the adjusted cost base of that debt to Newco under s. 53(1)(f.1)
  • no forgiven amount will arise on the settlement of the LossCo Note B Indebtedness
  • on the taxable transfer-back of the assets, LossCo will utilize its non-capital losses to offset recapture income; and Profitco will acquire such assets at a cost amount and undepreciated capital cost equal to their fair market value [no mention of 1/2 step up limitation in s. 13(7)(e)]
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition addition of conversion right 115
Tax Topics - Income Tax Act - Section 51.1 intercompany debt conversion to senior and junior note and elimination of junior note 25
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(4) intercompany debt conversion to senior and junior note and elimination of junior note 276

2012 Ruling 2012-0439191R3 - Loss Consolidation

triangular limited-recourse loss shift

Lossco, which is a wholly-owned indirect subsidiary of a non-resident parent ("Parent"), borrows money under a daylight loan and uses the proceeds to make an interest-bearing loan to Profitco (another wholly-owned indirect subsidiary of Parent), with recourse under that loan (the "Profitco Note") being limited to the preferred shares of Newco (incorporated by Lossco) which Profitco subscribes to with the Profitco Note proceeds. The Profitco Note also provides that is may be settled through delivery of such preferred shares. Newco uses the proceeds from such preferred shares to make a non-interest bearing loan (the "Lossco Note") to Lossco, which repays the daylight loan. The dividends on the Newco preferred shares will exceed the interest payable by Profitco.

Pursuant to a capital contribution agreement, Lossco will make periodic capital contributions to Newco equal to the amount of accrued but unpaid dividends on the Newco preferred shares. After the utilization of the Lossco losses, the arrangement will be unwound by Newco redeeming its preferred shares through delivery of the Profitco [sic, Lossco] Note to Profitco, and the Profitco and Lossco Notes then being set-off.

Lossco has permanent establishments in various provinces, whereas Profitco only has a permanent establishment in one province. A "financial institution has provided confirmation, in a letter dated XX, that Lossco has the ability to obtain borrowings up to $XXX."

Rulings: that interest not exceeding a reasonable amount will be deductible by profitco on the Profitco Note; and that the periodic capital contribution amounts received by Newco will not be included in its income.

5 October 2012 APFF Roundtable, 2012-0454061C6 F - Transfer of a Lossco to a related corporation

related but not affiliated transfer of Lossco shares to father's or brother's company
Example 1

Son claims an ABIL under s. 50(1) with respect to his share investment in a wholly-owned corporation (Lossco), which had ceased active business operations in the year, and then transfers his shares of Lossco at the beginning of the following year to a corporation wholly-owned by his Father (Profitco) for consideration of $1, with Lossco then being wound-up into Profitco under s. 88(1).

Example 2

Brothers A and B each hold 50% of the common shares of Lossco, which had ceased active business operations in the year, with Brother B claiming an ABIL under s. 50(1). Brother B then transfers his shares of Lossco at the beginning of the following year to a corporation wholly-owned by Brother A (Profitco) for $1, Brother A sells his shares of Lossco to Profitco for their fair market value, and Lossco is liquidated into Profitco under s. 88(1).

CRA indicated that both examples represented transactions of a different type than loss consolidation transactions described in 2009-0332571R3. However, as in these two examples, there was not an acquisition of control of the Losscos by virtue of s. 256(7)(a)(i), "it appears that the restrictions provided for in paragraphs 88(1.1)(e) and 88(1.2)(c) respecting the utilization of losses other than capital losses and net capital losses would not be applicable." (TaxInterpretations translation)

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares non-capital losses of corporation taken into account in valuing its shares 152
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) lossco with no assets or liabilities cannot be insolvent 357
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) lossco losses maintained on father-son or sibling transfers and s. 88(1.1) wind-up 208

2012 Ruling 2012-0437881R3 - Loss Utilization

classic triangular loss shift

Set-up

Aco, which is a direct Canadian-resident holding-company subsidiary of Parentco (which, in turn, is a wholly-owned subsidiary of Ultimate Parentco, a public corporation), borrows under a daylight loan in order to make an interest-bearing loan (at bankers' acceptance rate plus X%) to its profitable Canadian subsidiary Bco, which has permanent establishments in various provinces. Bco uses such proceeds to subscribe for non-voting cumulative redeemable retractable preferred shares of Newco, a newly-incorporated CBCA subsidiary of Aco. Newco uses such proceeds to make a non-interest-bearing loan to Aco.

Periodic payments

The periodic interest/dividend payments will be handled from time to time as follows:

  • Pursuant to a capital contribution agreement, Aco will make a contribution of capital to Newco in an amount equal to the accrued but unpaid dividends on the Newco preferred shares held by Aco
  • Newco will declare and pay such dividends
  • Bco will pay the interest on its borrowing from Aco
Unwinding

On the unwinding of these arrangements, Newco will redeem its preferred shares by assigning the loan owing to it by Aco, with Aco and Bco then setting off the loans now owing to each other.

Rulings

as to interest-deductibility by Bco and the contribution amounts not being included in the income of Newco under s. 9, 12(1)(c) or (x).

2012 Ruling 2011-0427951R3 - Loss Consolidation

loss shift from grandchild to child

1st Proposed transactions

Subsidiary1, which is a non-resident subsidiary of Parent (a non-resident publicly listed corporation) makes an interest-bearing loan to Opco1 (the "Subsidiary1 Loan"). Opco1 is a direct wholly-owned Canadian subsidiary of Subsidiary2, which is a Canadian corporation that is an indirect wholly-owned subsidiary of Subsidiary1. Opco1 on-lends the proceeds of the Subsidiary1 Loan on an interest-bearing basis to Subsidiary2 (the "Opco1 Loan"). Subsidiary2 uses the proceeds of the Opco1 Loan to subscribe for non-voting cumulative redeemable retractable preferred shares of Opco1. Opco1 then repays the Subsidiary1 Loan from Parent.

2nd Proposed transactions

Subsidiary3, which is the direct and indirect parent of subsidiaries carrying on a different line of business than those of the direct and indirect subsidiaries of Subsidiary1 (and which is not explicitly stated to be a subsidiary of Parent in the unredacted portions of the letter), subscribes for preferred shares (similar to those of Opco1) of Opco2, which is an indirect wholly-owned subsidiary of Subsidiary3 having non-capital losses that were incurred in various provinces (and with some of such non-capital losses having been incurred prior to Subsidary3's acquisition of control of Opco2). Opco2 is affiliated with Subsidiary2 and Opco1. Opco2 uses such share subscription proceeds to make an interest-bearing loan (the "Opco2 Loan") to Subsidiary2, which uses such proceeds to acquire the preferred shares of Opco2 held by Subsidiary3.

Unwinding

The above transactions will be reversed once Subsidiary2 has incurred sufficient interest expense to generate non-capital losses that eliminate prior years' taxable income. In the meantime, payments of interest and dividends will be made through the set-off of like amounts, with the payment of the balance owing. Subsidiary2 will have sufficient borrowing capacity to effect the proposed transactions.

Rulings

Interest deduction ruling for Subsidiary2 and ruling that Opco2 will be entitled under s. 111(1)(a) to deduct its non-streamed non-capital losses from its taxable income arising on the Opco2 Loan provided that its streamed non-capital losses are first deducted in accordance with the loss-streaming rules.

2012 Ruling 2012-0426581R3 -

loss shift does not detract from principal business

Creditco is an indirect subsidiary of Parentco, which is a Canadian corporation. Creditco carries on business in one province, has non-capital losses and unutilized credits and is a qualified corporation (presumably as defined in s. 125.4(1).)

Creditco receives a loan from Parentco (funded by Parentco out of a daylight loan) and on-lends the proceeds in demand loans bearing interest at a market rate to various direct and indirect subsidiaries of Parentco (Aco through to Nco), who use the lent proceeds to subscribe for preferred shares of Creditco bearing a cumulative dividend equal to the interest rate on the demand loans plus a spread. These demand loans do not exceed the respective borrowing capacities of the borrowing subsidiaries. Creditco uses such share subscription proceeds to pay off the loan from Parentco. The arrangement will be unwound in X years.

Interest deduction ruling given re Aco to Nco; and ruling that these transactions will not cause Creditco to cease to be a qualified corporation.

Income Tax Technical News No. 44 13 April 2011 [archived]

inter-provincial loss shifting

If a typical loss-consolidation transaction results in an incidental shifting of income or losses between provinces, simply because the profitco and the lossco happen to have different provincial allocations, there should not be a concern from the perspective of agreeing provinces. If, on the other hand, the transactions are designed to deliberately shift income or loss between provinces, provincial concerns will have to be considered.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) exchangeable debenture appreciation not recognized 90
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(f) exchangeable debenture appreciation not recognized 106
Tax Topics - Income Tax Act - Section 49 - Subsection 49(1) exchangeable debenture exercise 84
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) FMV basis in contributed property 35
Tax Topics - Treaties - Income Tax Conventions - Article 10 use of s.à r.l. 123

2010 Ruling 2009-0332571R3 - Loss consolidation - related or affiliated

loss shift between related but unaffiliated corporations

Mr A and Mrs B are siblings. Mr A holds all the voting shares of HA which, in turn, holds Lossco. HA also is the common shareholder of HASub. Mr. B and/or Mrs B indirectly control HBSub through a similar structure.

Lossco will make interest-bearing loans to HASub and HBSub, and HASub and HBSub will use the loan proceeds to subscribe for preferred shares of Lossco, thereby accomplishing a loss shift.

Standard rulings including GAAR. Summary states:

The transfer of losses between related, but not affiliated, corporations should not result "in an abuse having regard to [the provisions of the Act]...read as a whole", for the purposes of subsection 245(4), because specific provisions such as subsections 111(4) to (5.5), 256(7), 191.3(1), 112(2.4), paragraph 55(3.1)(c), section 80.04 etc. allow loss utilization transactions between related corporations, while only subsection 69(11) does not allow rollover where property is transferred to a person other than a person that is affiliated with the transferor.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) loss shift between related but unaffiliated corporations 153

2009 Ruling 2008-0289771R3 - Loss Consolidation

iteration of loss transactions

Favourable ruling was given with respect to transactions in which the following three transactions are repeated until the right amount of interest-bearing data is created: Lossco Sub transfers its portfolio to its parent, Lossco in exchange for an interest-free demand note, Lossco transfers the portfolio to a newly-created subsidiary ("Newco") in exchange for an interest-bearing demand note, and Newco transfers the portfolio to Lossco Sub in exchange for Lossco Sub preferred shares.

17 December 2008 External T.I. 2007-0253031E5 - Loss Consolidation Arrangement

no borrowing capacity

Ruling request denied because the Lossco did not have the borrowing capacity to effect the loss consolidation arrangement: "It is the borrowing capacity of the entity that actually suffers the losses, rather than the borrowing capacity of the affiliated group as a whole, that is relevant in the particular circumstances."

Income Tax Technical News, No. 30, 21 May 2004

dollar amounts not artificial; parent lossco must have independent income source

As noted earlier, loss consolidation transactions must be legally effective. ...However, we would not feel comfortable providing a ruling on a loss consolidation transaction that contemplates dollar amounts and time frames that are blatantly artificial. Thus, in order to be provided with a ruling, we must be able to satisfy ourselves that the transactions are plausible, and the quickest way for us to obtain such assurance is through a commitment letter. ...

While we have not reached the point where we would state that CRB Logging is no longer good law, we have provided rulings on some upstream shareholding situations. The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary.

27 May 1998, Chartered Accountants of Ontario Roundtable, 9811750

loss transfer within affiliated corporate group

"Transfers of income or deductions between corporations that are affiliated using transactions that are legally effective and complying with all applicable provisions of the Income Tax Act will not usually result in the application of GAAR."

12 April 1995 T.I. 9508595 [inventory roll-down to use non-capital losses]

inventory roll-down to use non-capital losses

Would GAAR apply where inventory is transferred by a corporation to a wholly owned corporation for the purpose of utilizing the accumulated non- capital losses of that subsidiary? CRA stated:

The Technical Notes to subsection 245(4)...[state]:

In fact, the scheme of the Act as a whole, and the expressed object and spirit of the corporate loss limitation rules, clearly permit such transactions between related corporations where these transactions are otherwise legally effective and comply with the letter and spirit of these exceptions. Therefore, even if these transactions may appear to be primarily tax-motivated, they ordinarily do not fall within the scope of section 245… .

1994 A.P.F.F. Round Table, Q. 3

Where Mr. X has been employed by Opco Inc. for a number of years and is also the sole shareholder of a corporation ("Investco") with accumulated non-capital losses, the non-capital losses of Investco could be utilized by having Opco conclude an agreement with Investco under which services previously rendered directly by Mr. X are to be rendered by Investco. Such an arrangement generally would not be considered to result in an abuse for purposes of s. 245(4).

1 December 1992 T.I. (Tax Window, No. 27, p. 9, ¶2319)

If one of the purposes of a series of transfers of a capital property within a related corporate group is to utilize non-capital losses of one of the corporations and if the vendor corporation has no intention of reacquiring the particular assets, then GAAR will not apply.

2 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 21, ¶1024)

Where a non-resident person incurs a non-capital loss in a business carried on in Canada, the loss may be applied against income earned by the person after becoming a resident of Canada. However, non-capital losses incurred in a foreign business by the non-resident may not be applied against Canadian source income.

Articles

Vukets, "Structural Issues and Utilization of Domestic Loss Carryforward Pools", 1993 Conference Report, C. 23

Discussion (at pp. 28-29) of Revenue Canada's position on similar businesses.

Paragraph 111(1)(b) - Net capital losses

Administrative Policy

21 March 2018 External T.I. 2017-0736291E5 - Interest calculation - loss substitutions

net capital loss carried back from Year 3 replaces non-capital loss carryforward from Year 1 without interest cost

Aco first applied a $1,000 non-capital loss from Year 1 to offset a $1,000 taxable capital gain realized in Year 2. However, it then realized a $1,000 allowable capital loss in Year 3 and filed an amended Year 2 return to deduct that net capital loss under s. 111(1)(b), thereby restoring its $1,000 non-capital loss from Year 1.

CRA stated that, notwithstanding that the wording of s. 161(7)(b) does not accommodate this:

[I]t remains the CRA’s longstanding administrative practice not to assess interest where there is a substitution of losses, such as the replacement of a non-capital loss from a prior year with a net capital loss from a subsequent year, provided that there was no tax payable on either the original or amended return. Therefore … in the example above, the CRA would not assess interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 161 - Subsection 161(7) - Paragraph 161(7)(b) interest not assessed on loss substitutions 213

24 July 2017 Internal T.I. 2017-0705801I7 - non-TCP net capital loss

emigration loss from non-TCP offsettable against post-emigration TCP gain

The Directorate confirmed that a non-resident may offset a taxable capital gain on the disposition of taxable Canadian property with a net capital loss that arose on a previous deemed disposition, while the taxpayer was a resident of Canada, of capital property that was not TCP.

The particular situation being addressed was a Canadian corporation that realized a deemed capital loss under s. 128.1(4)(b) on the disposition of non-TCP on its emigration from Canada, and carried that loss forward for use when it subsequently disposed of TCP. The restriction in s. 111(9) did not apply because such deemed disposition occurred (barely) within the deemed stub taxation year, ending immediately before the time of its emigration, and it was still resident in Canada in that stub year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(9) capital loss realized on emigration on non-TCP available for carryforward against TCP gain 180

14 August 2014 Internal T.I. 2013-0506691I7 - Capital Losses - Health & Welfare Trusts

deduction by health trust of net capital losses

Are health and welfare trusts ("HWTs") permitted to incur capital losses and deduct net capital losses when computing taxable income under Division C and/or adjusted taxable income under Division E.1? CRA stated:

2004-009364 concluded that where a HWT has expenses that were otherwise deductible and not allowed because of the limitation discussed in paragraph 12 of IT-85R2, it will be permitted to use those expenses to reduce its adjusted taxable income for purposes of AMT. …

Consistent with section 3.., a HWT's gross trust income for a year includes its taxable capital gains realized in the year in excess of its allowable capital losses realized in the year. …[I]t would be inequitable to prevent a HWT from reducing taxable capital gains through the application of net capital losses, given that a HWT effectively applies allowable capital losses on a current basis when determining its gross trust income for a year.

5 July 2013 External T.I. 2013-0479161E5 - Capital Loss Adjustment - 152(4)

amend capital loss in statute barred year

The correspondent asked whether a capital loss for a statute-barred year can be amended to increase the amount of the capital loss, and whether that loss can be carried forward to a non-statute-barred year. CRA stated:

[T]he Minister may adjust the net capital loss for a taxation year after the normal reassessment period, but cannot adjust the tax payable for that year except as described above. In other words, the Minister may adjust the net capital loss (available for carry forward), but the amount of the capital loss previously not claimed cannot be applied against the capital gains reported for the statute-barred year. Furthermore, the net capital loss would be equal to the net capital loss that would have been available had the allowable capital loss originally been reported correctly.

Paragraph 111(1)(e) - Limited partnership losses

Cases

Canada v. Green, 2017 FCA 107

upper-tier LP not required to compute income and therefore not subject to s. 111(1)(e)

CRA considered that business losses incurred by lower tier partnerships (the PSLPs) were deemed to be limited partnership losses of an upper-tier LP (MLP) – which meant that they were effectively trapped in MLP given that s. 111 (and, thus, the ability to deduct limited partnership losses under s. 111(1)(e)) was only available to a taxpayer and not to a partnership such as MLP. Webb JA rejected this interpretation and considered that the PSLP business losses were also business losses rather than limited partnership losses in the hands of MLP, so that such losses could be allocated to the MLP partners in the same manner as if they had been generated in a single-tier LP.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.1) business losses of lower-tier LPs flowed through upper-tier partnership 526
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) partnerships not taxpayers for ss. 3 and 111 purposes 39
Tax Topics - Income Tax Act - 101-110 - Section 102 - Subsection 102(2) ITA recognizes 2-tier partnerships 66

See Also

Green v. The Queen, 2016 DTC 1018 [at 2629], 2016 TCC 10

limited partnership losses flow through a 2-tier LP structure

Paris J found that the business losses of a limited partnership allocated to an upper-tier partnership in excess of its at-risk amount continue to be business losses in its hands, so that such losses can, in turn be allocated to the partners in the upper-tier partnership – so that, if the at-risk amount rules apply, it is only to restrict the losses that are allocated to the partners in the upper-tier partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.1) limited partnership losses flow through a 2-tier LP structure 475

Administrative Policy

31 May 2012 External T.I. 2012-0436521E5 - Ltd ptnp losses in stacked ptnsp

denial occurs after 2-tier structure created as upper tier partners have no at risk amount in lower tier

In Year 1, C and D form a limited partnership (CD), which incurs a loss of $500 in that year, which is $300 in excess of their contributed capital. At the beginning of Year 2, C and D transfer their interests in CD under s. 97(2) to another limited partnership (Master) in consideration for LP interests in Master. At the end of Year 2, Master allocates $500 of income to CD which, in turn, allocates this income equally to C and D.

Notwithstanding the subsequent interposition of Master, C and D have a limited partnership loss in respect of CD because they were members of CD at the end of Year 1. However, the at-risk amount of its interest in CD at the end of Year 2 would be computed by Master and not by C and D. Accordingly, as C and D would not have an at-risk amount in respect of CD at that time, they would not be able to deduct their limited partnership losses in respect of CD at that time, notwithstanding the allocation to them of income which was sourced to CD.

25 February 2005 External T.I. 2004-0107981E5 - Limited Partnership Losses-Tiered Partnership

denial to upper-tier partners, who have no limited partnership loss

In response to an inquiry as to the deductibility of limited partnership losses ("LPL") in a multi-tier partnership arrangement, the Directorate noted that "the LPL of a partnership that is a member of a limited partnership cannot be used by the partnership," and then stated:

It is our view that the losses allocated by a limited partnership to each of its members, including another partnership (as a result of subsection 102(2) of the Act), will be deductible by each member, to a maximum of each member's (including the member partnership's) at-risk amount. The excess of the loss over the member's at-risk amount is deemed to be a member's LPL by virtue of paragraph 96(2.1)(e) of the Act. However, this LPL cannot be used by the member partnership because a partnership is not a taxpayer for purposes of paragraph 111(1)(e) of the Act. Also, subsection 96(1) of the Act does not allow the transfer of a LPL to its members.

14 May 2004 Miscellaneous 2004-0062801E5 - limited partnership losses- tiered partnership

denial where GP atop an LP

Suppose that Mr A and B form a partnership (AB Partnership), with AB taking the $100 contributed by each of them to, in turn, contribute $200 to a limited partnership, which realizes a business loss of $500 in Year 1 and business income of $500 in Year 2.

Although AB Partnership would have a $300 limited partnership loss for Year 1, Mr A and B would have no limited partnership loss with respect to the limited partnership when income is allocated to them in Year 2 ("subsection 96(1)...does not allow the transfer of a limited partnership loss to its members"), with the result that they would have no deduction from that income allocation in respect of the previously denied loss of CD - nor could the limited partnership loss of AB Partnership be used by it "because a partnership is not a taxpayer for purposes of paragraph 111(1)(e)...."

2 May 1994 External T.I. 5-940777 -

limited partnership loss denial where 2-tier structure

A general partnership, that is a limited partner of a limited partnership, cannot carry forward its limited partnership losses arising from the limited partnership because it is not a taxpayer for purposes of s. 111. Furthermore, s. 96(1) does not provide for the flow-through of limited partnership losses of a partnership to its partners.

92 C.M.TC - Q.11

Deductions under s. 111(1)(e) are not available to a general partner who was formerly a limited partner.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition may be no disposition on conversion of limited to general partnership 34

Articles

Joint Committee, "Response to Green case", 19 January 2018 Joint Committee Submission to Finance respecting the Green case

Suggested response to Green

Whether Finance chooses to respond to Green by providing that all portions of s. 96 apply to partnerships where they are members of lower-tier partnerships (which could have unintended consequences) or instead adopts the narrower approach of only clarifying that the at-risk rules apply through tiered partnerships, it is recommended that there be an ability to carry over unused limited partnership losses to future years in which the upper-tier partnership has an at-risk amount respecting the lower-tier partnership. For example, a provision could be added to allow partnerships to claim a deduction in computing their income in circumstances similar to where a taxpayer is allowed a deduction in computing taxable income under s. 111(1)(e).

Other comments on the at-risk rules

  • A limited partner who ceases to be a limited partner when it has a positive at-risk amount but insufficient income to fully utilize the available limited partnership losses should be allowed to carry such losses forward.
  • The ability to carry-forward limited partnership losses should not be lost when limited liability status is lost or where the units are transferred to a successor partner.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.12) 49

Forster, "Limited Partnership Losses", Canadian Current Tax, June 1992, p. P57

A limited partner who becomes a general partner thereafter will have no at-risk amount and, accordingly, will be unable to deduct any unutilized limited partnership losses.

Subsection 111(2) - Year of death

Administrative Policy

21 November 2017 External T.I. 2017-0690651E5 - Net Capital Losses - Year of Death

unrestricted net capital loss deductibility under s. 111(2) applies only in the terminal year and the immediately preceding year

Does the definition of “non-capital loss” found in s. 111(8), read with s. 111(2), allow a taxpayer to deduct the full amount of unused net capital losses in the year of death or the immediately preceding year, thereby generating a non-capital loss available to be carried back to a previous taxation year? CRA responded:

if, in the year of death, a taxpayer has a net capital loss or any unused net capital losses carried forward from prior years, the special rules in subsection 111(2) concerning the application of paragraphs 111(1)(b) and 111(1.1)(b), as they are to be read under these circumstances, allow the deduction of such losses (less the amount of any capital gains exemption claimed by the taxpayer …) up to the amount of the taxpayer’s available income from all sources for the year of death and the immediately preceding year.

The modification provided in subsection 111(2) in the year of death clearly indicates the parameters within which unused net capital losses can be applied against all sources of income (i.e., Parliament intended for this concession to apply only in the year of death and the immediately preceding year). Accordingly, if there is a balance of unused net capital losses remaining after applying the unused net capital losses against all sources of income in the year of death and immediately preceding year, it is our view that such unused net capital losses are not transformed into a non-capital loss that can be carried back to another taxation year other than as described above.

Articles

Sandra Bussey, Jim Barnett, "Capital Gains and Losses in the Year of Death", Tax for the Owner-Manager, Vol. I, No. 2, April 2001, p. 10.

Subsection 111(3) - Limitation on deductibility

Cases

CCLI (1994) INC v. Canada, 2007 DTC 5372, 2007 FCA 185

In its 1989 taxation year, the taxpayer deducted non-capital losses of $29.4 million which it treated as comprising a non-capital loss carried back from 1991 of $5.8 million and a $23.5 million non-capital loss carried back from 1992. The Minister, following a request by the taxpayer for a loss determination for the 1991 and 1992 taxation years provided a loss re-determination indicating that the losses for 1991 were now $25.8 million and for 1992 were $8.1 million (based on treating the taxpayer's foreign exchange gains and losses as being on capital account rather than income account). These re-determined figures were correct.

The Court reversed the Tax Court, where Miller J. found that in determining the amount of the 1991 loss that was available to be deducted by the taxpayer in 1993, the Minister was entitled and required to apply the ordering provisions of s. 11(3), so that the amount of the 1991 loss that should be considered to have been utilized by the taxpayer in its 1989 taxation year was higher than the $5.8 million originally considered by the taxpayer to have been so applied. The Minister could not point to any legal authority for requiring the deduction of the 1991 loss in 1989 (which was statute-barred) to be increased (so that the amount of such loss that could be carried forward was decreased). Furthermore, under subsection 111(1), "only the taxpayer has the right to choose how to allocate the non-capital loss of a particular year between the 3 prior years and the 7 subsequent years, subject only to the restrictions in subparagraphs 111(3)(a)(i) and 113(3)(b)(i)."

Paragraph 111(3)(b)

Administrative Policy

17 May 1993 Memorandum (Tax Window, No. 31, p. 11, ¶2522)

Except as provided in s. 111(3)(b), s. 111 does not impose an ordering on the application of losses and, therefore, a taxpayer can claim losses in the manner which is most beneficial. Accordingly, where a taxpayer incurred an allowable business investment loss and an ordinary non-capital loss in Year 1, had income equal to the allowable business investment loss in Year 2, and in Year 3 there was an acquisition of control resulting in the application of s. 111(5), the taxpayer could choose to have the allowable business investment loss considered to have been applied in Year 2.

Subsection 111(4) - Acquisition of control

Administrative Policy

10 July 1997 External T.I. 5-971588 -

"The policy stated in paragraph 18 of IT-302R3 would apply to a corporation receiving a notice of reassessment in the same manner as is described for a corporation receiving a notice of assessment."

Paragraph 111(4)(c)

Administrative Policy

7 October 2005 APFF Roundtable Q. 1, 2005-0140881C6 F - Acquisition of Control - Foreign Corp. - Losses

As s. 249(4) does not apply to a non-resident corporation that does not have a permanent establishment in Canada and whose control is acquired by another non-resident corporation, ss.111(4)(c) and (d) will not apply to shares of a taxable Canadian corporation held by the first non-resident corporation.

Paragraph 111(4)(d)

Administrative Policy

94 C.P.T.J. - Q.25

S.111(4) does not generally apply to the capital property of a foreign affiliate upon the acquisition of control of the affiliate or the Canadian parent of the affiliate.

Tax Professionals Mini Round Table - Vancouver - Q. 11 (March 1993 Access Letter, p. 104)

Where s. 111(4)(d) applies to create a loss, then s. 40(2)(g) will deem that loss to be nil where the criteria therein are met.

Paragraph 111(4)(e)

Administrative Policy

6 October 2017 APFF Roundtable Q. 15, 2017-0709141C6 F - Designation pursuant to paragraph 111(4)(e)

appreciated goodwill is now eligible for the s. 111(4)(e) step-up

The sole asset of a corporation sold to a 3rd party is goodwill with a fair market value of $200,000. Can the corporation make a s. 111(4)(e) designation respecting its goodwill, viewed as a Class 14.1 property with an FMV and capital cost of $200,000 and nil, respectively? CRA responded:

Since January 1, 2017, goodwill relating to a business is Class 14.1 depreciable property. Consequently, it is capital property and, based on the facts set out above, was owned by the corporation immediately before the corporation was subject to a loss restriction event. In addition, according to the facts provided, the goodwill is not a depreciable property to which subsection 111(5.1) would apply … .

Therefore, the corporation can designate the goodwill in accordance with paragraph 111(4)(e).

7 October 2016 APFF Roundtable Q. 17, 2016-0652781C6 F - Functional currency and acquisition of control

FX gains or losses on pre-transition debts not affected

Can a s. 111(4)(e) election be made respecting a pre-transition debt held immediately before an acquisition of control so as to realize a gain the year terminating immediately before the acquisition of control through the application of s. 261(10)? In explaining that 111(4) of the Act, including the election under paragraph 111(4)(e), cannot be applied in respect of the portion of the foreign exchange gain or loss realizable by virtue of s. 261(10) with respect to a "pre-transition debt" and that, in any event, s. 111(4) could not apply where a "pre-transition debt" is denominated in the same currency as the "functional currency," CRA stated:

[A] "pre-transition debt" denominated in a currency other than the "elected functional currency"… would be deemed, by virtue of subsection 261(9), to have been issued immediately before the taxpayer’s first "functional currency year" for the purposes of determining the amount of the taxpayer’s gain or loss, for a functional currency year of the taxpayer (other than gain or loss arising under subsection 261(10)), that is attributable to a fluctuation in the value of a currency. Thus, although the "pre-transition debt" is a "foreign currency debt" for purposes of subsection 111(12), only the fluctuation of the value of that currency vis-à-vis the "functional currency" from the time specified in subsection 261(9) until immediately before the acquisition of control would be subject to subsections 111(4) and (12).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(9) - Paragraph 261(9)(a) exclusion of pre-transition debts from s. 111(4) 96
Tax Topics - Income Tax Act - Section 40 - Subsection 40(10) exclusion of pre-transition debts 147

10 February 1995 T.I. 950069 (C.T.O."Paragraph 111(4) Amended Designation")

"In view of the fact that, in subsection 248(1) of the Act, the term 'assessment' is defined as including a 'reassessment', it is our position that a corporation is permitted to file an amended designation within 90 days from the later of the date of mailing of a notice of assessment for the taxation year ending with the acquisition of control and the date of mailing of a notice of reassessment, if any, for that year."

10 February 1995 T.I. 942448 (C.T.O."Paragraphs 111(4)(c) & e")

S.111(4) does not generally apply to the capital property of a foreign affiliate upon the acquisition of control of the affiliate or the Canadian parent of the affiliate.

93 CR - Q. 22

Depreciable property designated under s. 111(4)(e) is deemed to have been disposed of by the corporation and reacquired by it for the purposes of computing the corporation's taxable income, including Part XI of the Regulations. However, Regulation 1100(2.21) will ameliorate the resulting consequences.

8 July 1992 External T.I. 5-922051 -

Because an "assessment" includes a "reassessment", a corporation is allowed to amend a previously-made election under s. 111(4)(e) for a taxation year within 90 days from the date of the notice of reassessment for that year.

13 February 1992 T.I. (Tax Window, No. 16, p. 19, ¶1747)

RC will accept an election under s. 111(4)(e), or any written amendment thereto, made within 90 days from the date of assessment or reassessment of the fiscal period ending on the acquisition of control.

90 C.R. - Q42

Because s. 111(4)(e) is only applicable with respect to capital properties rather than foreign currency obligations, the designation will not be available with respect to an unrealized gain or loss on the latter.

90 C.R. - Q45

RC will not accept designations under s. 111(4)(e) beyond the time limits specified therein.

88 C.R. - Q8

Ss.111(4)(c), (d) and (e) do not apply to foreign exchange gains and losses on indebtedness of the corporation.

Subsection 111(5) - Idem [Acquisition of control]

Cases

Yarmouth Industrial Leasing Ltd. v. The Queen, 85 DTC 5401, [1985] 2 CTC 67 (FCTD)

For the purposes of s. 111(5), control of a corporation may be acquired by virtue of control being acquired of its parent. [C.R.: 125(1)]

Malka v. The Queen, 78 DTC 6144, [1978] CTC 219 (FCTD)

The taxpayers, who acquired 400 voting common shares in a company were held to have thereby acquired control of it notwithstanding that 500 voting preference shares with a par value of $1.00 each had been issued to the vendors immediately prior to the time of the acquisition. Under the Quebec corporate law, the common shareholders could liquidate the company at any time and "preferred shareholders, that can be discarded that easily, cannot seriously be said to have a controlling interest." In addition, the "holders of preferred shares could not care less about [the company] as ... their main worry was to assure themselves to get back the $500 that had been paid for the shares." The supposed control by the preference shareholders accordingly was a sham.

See Also

A.G. of Canada v. Fallbridge Holdings Ltd. (1985), 31 BLR 57 (FCA)

It was stated, obiter, that the fact that two companies acted in concert to effect an acquisition did not necessarily constitute them as a group of persons.

Administrative Policy

25 February 1999 External T.I. 5-990002 -

Various illustrations of the RC position that there generally will be an acquisition of control whenever one of two shareholders, each holding 50% of the shares, sell his or her shares to another person.

Income Tax Technical News, No. 16

"The Department will apply the Supreme Court's findings [in Duha] that, outside of the constating documents of a corporation and its share register, Unanimous Shareholder Agreements are generally the only relevant documents that need to be examined in determining de jure control." RC would generally seek to apply GAAR when temporary control of a corporation is acquired in order to take advantage of tax benefits.

93 C.R. - Q. 57

Where an individual makes an assignment in bankruptcy, there will be no acquisition of control of a corporation owned by the individual for purposes of s. 111(5), because s. 128(2)(a) deems the trustee in bankruptcy to be the agent of the bankrupt individual.

88 C.R. - Q.43

Where 4 unrelated individuals each own 1/4 of the shares of a corporation and one of the individual's shares are redeemed, then control of the corporation will not be considered to have been acquired if A, B and C acted together to control the corporation both before and after the redemption.

If A, who owns all the shares of a corporation, sells 1/3 of the shares to each of B and C, then control of the corporation will be considered to have been acquired if any of A and B, B and C, A and C or A, B and C act together to control the corporation.

Where a public corporation reduces its shareholding in a second public corporation ("Pubco 2") from 55% to 35%, then if persons can be identified after the sale who own in aggregate more than 50% of the shares and such persons act together to control Pubco 2, then control of Pubco 2 will have been acquired by a group of persons.

Articles

Joel A. Nitikman, "Who Has De Jure Control of a Corporation When Its Shares Are Held by a Limited Partnership?", 2011 Canadian Tax Journal, Vol 59, p. 765

Argues that (at least where the shares of a subsidiary corporation held as partnership property are registered in the name of the limited partnership rather than the general partner), an acquisition of control of the general partner or of the limited partners will not result in an acquisition of control of the subsidiary corporation as it is owned by the limited partnership itself.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 249 - Subsection 249(4) 63

Paragraph 111(5)(a)

Cases

Manac Inc. Corp. v. Canada, 98 DTC 6605 (FCA)

All the voting shares of a corporation ("Nortex") which manufactured resin-coated wood panels, were acquired by a subsidiary of a predecessor of the taxpayer ("2432"). Nortex was then wound-up into 2432, and 2432 amalgamated with the predecessor of the taxpayer.

Nortex's former business of manufacturing fibreglass panels for sale to 2432 which used the panels in the manufacture of boxes for trailers and semi-trailers did not satisfy the test in s. 111(5)(a)(ii) given that there was no evidence that income derived from the sale or development of the panels made up substantially all the income attributable to the 2432 business. In addition, the Court did "not see how property which loses its identity when incorporated into an end product can be described as property similar to the end product" (p. 6608).

Canada v. Diversified Holdings Ltd., 97 DTC 5203 (FCA)

The taxpayer, which at the relevant times operated a ranch and was a real estate developer, acquired, in an arm's length transaction, another BC company ("860") that operated a parking lot. Following a sale of the parking lot to a creditor of 860 and an amalgamation of the taxpayer and 860, the amalgamated corporation sought to deduct the losses of 860 from income of its real estate development business. In dismissing the Crown's appeal, Strayer J.A. stated (at pp. 5207-8):

"In the present case the learned trial judge was faced with a generic type of business, namely real estate development, and it was open to him to conclude that such business had not disappeared. It was also open to him to conclude that a period of inactivity of two months was not enough to demonstrate the end of such a business ... ."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(2) - Paragraph 80(2)(a) legally binding settlement required 125

The Queen v. Dorchester Drummond Corp. Ltd., 79 DTC 5163, [1979] CTC 219 (FCTD)

A company which acquired vacant land with the intention of eventually erecting a highrise office tower thereon, and which during the period between the time of acquisition and the time that the vacant land was sold for a gain, operated a parking lot on the land during years that it was not prohibited from doing so by municipal by-law, was held to be "undoubtedly carrying on business during the years in question."

Orlando v. The Minister of National Revenue, 62 DTC 1064, [1962] CTC 108, [1962] S.C.R. 261

With the exception of minimal revenues from the sale of hay, the only revenues derived by the taxpayer from her farm lands were sums which she received for the annual sale of topsoil to a company controlled by her husband. Abbott J. held (p. 1065) that the taxpayer's "dealings in topsoil had no relation to any farming operations she may have been carrying on" for purposes of s. 27(1)(e) of the pre-1972 Act.

See Also

Birchcliff Energy Ltd. v. The Queen, 2015 TCC 232, nullified on procedural grounds 2017 FCA 89

grant of proxy did not detract from investors acting individually in own interest
see summary of 2017 FCA 89

A predecessor ("Birchcliff") of the taxpayer negotiated a plan to merge with a corporation ("Veracel"), which had discontinued its medical equipment business, in order to access Veracel's non-capital losses and credits. Investors subscribed for subscription receipts of Veracel and received voting common shares of Veracel therefor under a Plan of Arrangement, and Veracel and Birchcliff amalgamated immediately thereafter under the Plan. The voting common shares received by the investors on the amalgamation represented a majority of the voting shares of the amalgamated corporation, so that no acquisition of control of Veracel occurred under s. 256(7)(b)(iii)(B), and the loss-streaming rules under ss. 111(5)(a) and 87(2.1) were avoided.

Before finding that this represented abusive avoidance under s. 245(2), Hogan J rejected (at para. 61) the Minister's submission that the new investors represented a "group of persons" who had acquired control of Veracel:

[T]here is no evidence to show that the New Investors knew each other or had a plan to control the corporation together. ..[They] entered into the Subscription Agreement and granted a proxy to [two officers of Veracel and Birchcliff] to vote their shares in favour of the plan…because it appealed to their individual self-interest [and]…did so without discussing the matter with the other investors. Therefore…the grant of the proxy…is insufficient to demonstrate a common connection… .

See summary under s. 245(4).

Words and Phrases
group of persons
Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham transitory share issuance under plan of arrangement was not a sham 167
Tax Topics - Income Tax Act - Section 245 - Subsection 245(3) share subscription was avoidance transaction notwithstanding its "overarching purpose" was financing 142
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) abusive reverse takeover by Lossco through diverted private placement 251

NRT Technology Corp. v. The Queen, 2013 DTC 1021 [at 110], 2012 TCC 420, briefly aff'd 2013 DTC 5153 [at 6360], 2013 FCA 221

reasonable expectation of profit

The taxpayer, which sold ATMs to the gaming industry, and specialized keyboards and price scanners to retail stores, in January 2006 acquired a corporation ("Telepanel") that had been carrying on a business of selling electronic price display modules to retail stores. C. Miller J. found that s. 111(5)(a) precluded the taxpayer from using Telepanel's losses in the taxpayer's taxation year ending on September 30, 2007, as the business was not carried on for profit or with a reasonable expectation of profit in that year. The business was "dormant" in that year: the only third-party business activity identified was the receipt of a small licence fee, and explaining to a customer how to replace batteries. Furthermore, if the former Telepanel business nonetheless was still being carried on, it was not being carried on with a view to profit, having regard to the objective factors listed in Tonn. In particular, the business had persistent and substantial losses, and the taxpayer had no plan, and made no effort, to turn the business around, and instead used the Telepanel technology in its gaming business, which was not the same or a similar business.

No. 678 v. MNR, 60 DTC 45 (TAB)

The taxpayer, which had been a dealer in trucks and cars, ceased operations and, following a change of control, started operating service stations. These were found to be two separate businesses, with the result that losses from the former business could not be carried forward for deduction from the profits of the second business.

Maidment v. Kibby & Anor., [1993] BTC 291 (D)

Vice-Chancellor Nicholls affirmed the finding of the Commissioner that the purchase as a going concern by the taxpayers of an existing fish and chip shop business in a village five miles away, followed by the continued conduct of that business from the same premises but with substantial variations in the mode of conduct thereof should be characterized as an expansion by the taxpayers of their own fish and chip business into the new premises, rather than as a continuation of the trade carried on by the former owner at the new premises.

Montplaisir Ltée v. MNR, 92 DTC 2317 (TCC), aff'd , 2001 DTC 5366 (FCA)

The taxpayer, which acquired control of a corporation ("Pinard") carrying on a used car dealership, was found not to be carrying on the business of Pinard with a reasonable expectation of profit following the amalgamation of the two corporations given that prior to the amalgamation Pinard had disposed of all its tangible assets and not continued with any of its staff other than its best salesman. Lamarre Proulx J. stated (p. 2321) that "it is impossible to logically arrive at the conclusion that the mere use by an automobile garage business of a key person from another automobile garage business is the continuation of that latter business".

Queen & Metcalfe Carpark Ltd. v. MNR, 74 DTC 6007, [1973] CTC 810 (FCTD), aff'd [1976] CTC xvi (FCA)

The proposed renting out of hotel premises or a cinema structure was implicitly treated as part of the taxpayer's business of acquiring various properties and leasing them out for rental use, notwithstanding that it had never rented out facilities of this character before: "the fact that the realty handled and leased by the appellant is of a different type or kind than that contemplated by the structure [in question] makes no difference."

Jeffrey v. Rolls - Royce, Ltd. (1961), 40 TC 443 (HL)

In finding that sums received by the taxpayer for providing technical know-how to foreign organizations were receipts of its trade of manufacturing automobiles and airplane engines, Lord Radcliffe stated (at p. 495) that "I think that the Crown were right in saying that the Company's new way of exploiting 'know-how' was no more than a development of its direct manufacturing trade and did not rank, or need to rank, as a separate business".

Utah Co. of Americas v. MNR, 59 DTC 1275, [1959] CTC 496 (Ex Ct)

A Nevada company which was engaged in Canada in the construction of housing (and of a large building in Vancouver), and which carried on a mining operation (after having wound up the company which had previously carried on that operation) was found to be carrying on two separate businesses for purposes of s. 27(1)(e) of the pre-1972 Act. The two divisions "had different (a) processes; (b) products; (c) services; (d) customers for the products ... ; (e) inventories; (f) locations; (g) union contracts; (h) offices; and (i) staffs. In addition, the accounting and records for each of the two divisions were maintained separately ... I find here no inter-connection, interlacing or interdependence and no unity embracing these two operations."

Frankel Corporation Ltd. v. Minister of National Revenue, 59 DTC 1161, [1959] CTC 244, [1959] S.C.R. 713

An operation of recovering non-ferrous metals from scrap material, alloying them with other non-ferrous metals to specifications required by purchasers, and selling the products, was found to be a separate business (for purposes of the Doughty doctrine) from an operation of dealing in ferrous and non-ferrous scrap, a wrecking and salvaging operation and a steel fabrication and erection operation, in light of evidence that the areas and equipment of the respective operations were separate (albeit contiguous) and the maintenance of separate accounts. Compared to the ferrous operations, the sources of material and the customers were, in general, different, and the staffs were separate. In addition, those in the trade generally regarded the smelting and alloying of non-ferrous metals as separate from that of iron and steel.

Keir & Cawder, Ltd. v. C.I.R. (1958), 38 TC 23 (C.S. (1st Div.))

The taxpayer, which sold materials for use in construction projects, made a foray into the field of construction contracting which was terminated on the death of a consulting engineer whose services it had retained. In finding that the death did not result in the loss of the taxpayer's business, the Lord Present (Clyde) stated (p. 30):

"The civil engineering activities of the Appellants were not being conducted by a separate entity, but formed an inchoate part of a single business which still continues."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Compensation Payments 71

Canadian Fruit Distributors Ltd. v. MNR, 54 DTC 1145, [1954] CTC 284 (Ex. Ct.)

The respective activities of the taxpayer in acting as a broker for the sale of the fruit and vegetable products of its parent and of third parties were found to be one business.

Bell v National Provincial Bank of England, Limited, [1904] 1 KB 149 (CA)

an existing company with a similar business could also succeed to the business of a predecessor

The taxpayer, a bank with numerous branches in England and Wales, purchased the business and premises and other assets of the County of Stafford Bank, which carried on business only in Wolverhampton. The respondent then opened a branch at the purchased premises, and proceeded to carry on the business with the same manager and staff as before. The profits and outgoings of the new business were merged in those of the National Provincial Bank as a whole. In finding that there had been a succession to the trade of the County of Stafford Bank, within the meaning of the Fourth Rule applicable to the First and Second Cases in Schedule D, section 100, of the Income Tax Act 1842, Collins MR stated (at p. 161):

The words of the Fourth Rule appear to me quite plain. If the National Provincial Bank had not been in existence, and a new company had been formed for the purpose of taking over the business of the County of Stafford Bank, the case would have been directly within the terms of the Rule. In that case the new company would clearly "have succeeded to" the "trade, adventure, or concern" of the old. I do not see how it can make any difference that the person succeeding to a business had an existing business of his own of a similar kind. He none the less succeeds to an existing business… The respondents acquired by purchase the goodwill and assets of the County of Stafford Bank, and carried on its business in the same way as before, except of course that the accounts and profits of the business became merged in those of the National Provincial Bank.

Words and Phrases
succeeded to

Administrative Policy

1 March 2012 Internal T.I. 2012-0437901I7 F - Timing of the adjustments pursuant to 111(5)

acquisition of control of target does not reduce its NCLs at that time – streaming rules apply prospectively

A corporation acquired all of the shares of a target corporation, resulting in an acquisition of control, and a day later, they amalgamated to form "Amalco". During an audit of Amalco, the auditor found that it did not carry on the same type of business as that carried on by the target corporation. Before finding that CRA should not assess the target corporation for its taxation year ending with the acquisition of control to deny its non-capital loss at that time, the Directorate stated:

In such a case, subsection 111(5) of the Act will only have effect in determining the amount deductible under paragraph 111(1)(a) in computing the taxable income for a year ending after the acquisition of control. In our view, it could not be otherwise since the determination of the portion of the non-capital loss that is deductible in computing the taxable income for a particular taxation year under subsection 111(5) depends on the situation established throughout the particular taxation year.

2011 Ruling 2011-0392171R3 - XXXXXXXXXX

A deposit-taking financial institution with significant non-capital losses (LossCo") was directed by the provincial regulator to quickly merge with a financially stronger institution. Accordingly, ProfitCo acquired all the the LossCo shares of LossCo Shareholder, and ProfitCo and LossCo then amalgamated to form AmalCo, with each LossCo and ProfitCo shareholder receiving shares of AmalCo which were substantially similar to the shares in the capital of ProfitCo. AmalCo will sell or close down some of the LossCo branches, but employ the employees associated with the closed branches and the continuing branches (as well as the employees of the branches to be sold until the time of sale). The ProfitCo Services which were provided before the amalgamation will be provided by AmalCo through the LossCo retained branches (now held by AmalCo) to the customers of those branches, with LossCo customers of the closed branches being serviced by the geographically proximate ProftCo branches.

Before ruling that GAAR would apply respecting transactions intended to avoid the application of the debt forgiveness rules to the non-capital losses of LossCo, rulings were provided that: the operation by AmalCo of the retained branches and the branches to be sold will constitute the carrying on by it of the LossCo business for purposes of s. 111(5)(a)(i); and that the income of AmalCo from the services referred to above "will be considered to be derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services" to the services previously rendered by LossCo.

2007 Ruling 2006-0198421R3 - Utilization of Losses - Acquisition Control

Ruling that following the transfer by Lossco of a business to a partnership of which it was part owner and an indirect acquisition of control of Lossco, the business of Lossco will now be carried on through the transferee partnership, so that the Lossco streamed losses may now be deducted by the amalgamated successor to Lossco under paragraph 111(5)(a) provided that such business is carried on for profit or with a reasonable expectation of profit throughout the particular taxation year of the amalgamation corporation in which the Lossco losses are deducted.

Income Tax Technical News, No. 34, 27 April 2006 under "Sale of Tax Losses"

Where Profitco avails itself of the benefit of tax losses of Lossco, a publicly traded corporation that is insolvent and has ceased to carry on its business, by transferring assets to Lossco in consideration for shares that represent only 45% of the votes but substantially all the value of Lossco, CRA would consider the application of GAAR.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) 56

7 October 2005 APFF Roundtable Q. 6, 2005-0140981C6 F - Loss Carryforward under subsection 111(5)

Where there is an acquisition of control of two Canadian furniture manufacturers (A and B), and B then leases all its assets to A and transfers all its employees to A, B would not be able to carry forward its pre-acquisition non-capital losses for deduction from post-acquisition profits because the loss business would now be carried on by A and not by B. However, if A and B were amalgamated, the amalgamated corporation would be able to deduct non-capital losses sustained originally by B in its first taxation year.

Income Tax Technical News, No. 30, 21 May 2004

The Agency "would not feel comfortable providing a ruling on a loss consolidation transaction that contemplates dollar amounts and time frames that are blatantly artificial".

17 February 2003 External T.I. 2003-000072 -

It is unlikely that the similar property test would be satisfied where a profitable corporation that is in the business of producing a type of flour that can only be used for producing bread acquired control of a corporation with accumulated non-capital losses from its bread baking business, or where a profitable farm corporation that is in the business of growing hay used to feed dairy cattle acquires control of another farm corporation having accumulated non-capital losses from its dairy cattle business.

24 March 1997 Memorandum 9705947

Tin and uranium are similar properties for purposes of s. 111(5)(a)(ii). Similarly, "the Department has previously opined that income derived by a corporation that carried on a business of extracting, processing and selling uranium and income derived by a corporation that carried on a business of extracting, processing and selling gold were considered to be from the sale of similar properties ... since uranium and gold are both 'minerals' within the meaning of subsection 248(1) of the Act. The Department has also taken the same position regarding subparagraph 111(5)(a)(ii) of the Act with respect to metallurgical coal and other metals (such as base and precious metals)."

17 October 1996 T.I. 962781

listing of similar businesses

RC referred to a passage from Barnwell Consolidated School District No. 15 v. Canadian Western and Natural Gas, Light, Heat & Power Co. in concluding that the word "similar" meant "of the same general nature or character", and went on to indicate that in the past it had regarded the following properties or services to be similar: (a) system software and applications software; (b) trucking of sand and gravel, and trucking of poultry and lumber; (c) mining and sale of metallurgical coal, and mining and sale of other minerals; (d) operating a hotel which includes a restaurant and lounge, and operating a restaurant and lounge; (e) operating a hotel or motel with no restaurant, operating a restaurant, and operating a hotel or motel with a beverage room but no separate restaurant, and operating a hotel with a restaurant; (f) operating a prime rib restaurant and operating a steak restaurant even where the latter is operated in conjunction with a hotel; (g) the sale of fast-food chicken and the sale of fast-food fish; (h) staging musical concerts in a stadium, and staging professional football; (i) security equipment, and electro-magnetic labels developed for use in libraries, hospitals and retail establishments; and (j) the manufacture of parts and major components for aircraft, and the design, manufacture and sale of aircraft.

Words and Phrases
similar

5 January 1996 External T.I. 5-951491 -

Where a business carried on by a corporation subsequent to an acquisition of control of the corporation, is transferred to a partnership in which the corporation is a general partner, the corporation would normally be considered to be carrying on the business carried on by the partnership. However, the addition of other assets upon the introduction of other partners might result in a different business being carried on by the partnership.

An automobile manufactured by one manufacturer and an automobile manufactured by another manufacturer would ordinarily be considered to be "similar properties" for purposes of s. 111(5)(a)(ii).

Revenue Canada Round Table TEI, 16 May 1994, Q. 10 (C.T.O. 94 TEI Round Table Reasonable Expectation of Profit")

RC referred to the general principles laid down in Moldowan v. The Queen, 77 DTC 5213 as to what constitutes a reasonable expectation of profit.

Generally, RC will only look at the normal operations of a business (as opposed to transactions out of the normal course) in determining whether that business is carried on with a reasonable expectation of profit throughout the particular year.

19 May 1993 T.I. (Tax Window, No. 31, p. 12, ¶2524)

Although an operation of oil and gas wells in Alberta following an acquisition of control would not be the same business as the operation of oil and gas wells in Saskatchewan prior to such acquisition, they would involve the sale of similar properties.

17 May 1993 Memorandum (Tax Window, No. 31, p. 12, ¶2523)

Losses from a rental property incurred by a corporation prior to an acquisition will continue to be available after the acquisition of control if the rental operation were considered to be a specified investment business.

17 May 1993 Memorandum (Tax Window, No. 31, p. 2, ¶2508)

Where three shareholders (A, B and C) each owning 1/3 of the shares of LossCo transfer their shares of LossCo to ACo, BCo and CCo, then assuming that a group can be identified (for example, A and B) that controlled LossCo prior to the transfer and a group such as ACo and BCo controlled Lossco after the transfer, there will be an acquisition of control of LossCo. S. 256(7)(a) will not apply because ACo and BCo are not related to LossCo prior to the acquisition of control.

September 1991 Memorandum (Tax Window, No. 9, p. 4, ¶1443)

Discussion of when a number of shareholders comprise a "group". The existence of a shareholders' agreement will not always be prima facie evidence that the parties constitute a group. Whether a lender who acquires shares for the purpose of securing a loan is part of a controlling group would depend on the circumstances.

October 1990 T.I. 1990-128

Company A, whose losses from Div 1 are streamed due to a previous acquisition of control, transfers Div 1 to a partnership, whose other partner (Company C) transfers two other but similar businesses (Div 2 and Div 3) to the partnership. Since "a corporate partner will normally be considered to be carrying on the business of the partnership of which it is a member", the test in s. 111(5)(a)(i) would normally be considered to be satisfied so that the streamed losses from Div 1 could be deducted by Company A from the income from the similar businesses allocated to it by the partnership. "We would caution, however, that...if the partnership does not, in fact, carry on Div 1 as a separate business from Div 2 and Div 3, the business of the partnership may be a different business from Div 1 previously carried on by Company A."

11 June 1990 T.I. (November 1990 Access Letter, ¶1530)

A business involving software is not similar to a business involving computer hardware and peripheral equipment, although a business involving systems software is similar to one involving applications software.

13 February 1990 T.I. (July 1990 Access Letter, ¶1331)

The construction of single-family houses and the construction of rental properties cannot be considered as similar services. Where an acquiring corporation continues the unprofitable operations of the acquired corporation for only six months after the acquisition of control, the requirement that the business be carried on "throughout" the year will not be met.

11 January 1990 T.I. 5-9152

Where Company A, a wholesaler of a product, acquires all the shares of a retailer of the same product in order to ensure continued distribution of the product, the wholesale business would be considered to be a business substantially all the income of which was derived from the sale of similar properties for the purposes of ss.111(5) and 88(1.1).

12 September 89 T.I. 5-8250

A corporation which is in the business of retailing clothing, which it has manufactured or which has been manufactured by others, through its outlets located in shopping centres, would be considered to have acquired a business of selling "similar properties" where the acquired business entailed the manufacturing of clothing and the sale of such clothing as well as clothing manufactured by others through retail outlets of the business. The acquired business would not so qualify if it was a retail clothing business with a retail presence in shopping centres, or a business of manufacturing clothing: the phrase "similar properties or the rendering of similar services" should be given a strict meaning, and the businesses must be truly and essentially similar. However, if the taxpayer corporation could be said to be conducting two separate businesses, i.e., manufacturing and retailing, the loss corporation could be in either the businesses described above and the losses would be applicable to one or other or both of the businesses.

89 C.R. - Q.37

Where a loss corporation transfers its entire business to a partnership of which the corporation is a member, that corporation would normally be considered to carry on the business of the partnership. However, the addition of other assets upon the introduction of other partners may result in a different business being carried on. The income of a partner from a partnership would be considered to be income from a "similar business" if the business of the partnership satisfied the criteria set out in ss.111(5)(a)(ii) and (b)(ii) in relation to a business carried on directly by the partner.

IT-206R "Separate Businesses"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 22 - Subsection 22(1) 8

Articles

Anu Nijhawan, "When is 'Loss Trading' Permissible: A Purposive Analysis of Subsection 111(5)", 2015 CTF Annual Conference paper

Absence of purpose test for loss-streaming rules (p. 9:6)

[S]ubsection 111(5) does not incorporate a purpose test. Such inclusion was explicitly rejected by the Department of Finance in the 1980s, largely on the basis that the fisc's concerns with loss-trading transactions existed whether or not the participants had "malevolent intent" and also in recognition that a purpose test might rarely be satisfied, since the main purpose of an acquisition would generally be to acquire a business with the loss attributes only an additional factor [fn: 32: ...David Dodge (then Senior Assistant Deputy Minister, Tax Policy and Legislation Branch, Department of Finance) under the heading "Loss-Trading Provisions: the Departmental Response" in William J. Strain, David A. Dodge, and Victor Peters, "Tax Simplification: The Elusive Goal," ...1988 Conference Report (Toronto: Canadian Tax Foundation, 1989), 4:1-63, at 4:24]

Identification of the loss business (p. 9:9-10)

[I]dentification of the loss business is not necessarily restricted by the location of its operations, management and employees, machinery or customers at any particular time. Rather, the focus is to identify the "essence" of the business [fn: 47: Crystal Beach Park Ltd. v. R., 2006 TCC 183.] or the long-term "primary purpose" of the corporation's activities. [fn: 48: Gaz Metropolitain Inc. v. The Queen, 1998 CanLII 227 (TCC)] The characterization issue will also depend on factors specific to the industry in question and the expertise of the Lossco's principals. This approach is reflected in the following examples from the case law: [fn: 49: Of course, there is a limit to how expansive a characterization will be permitted. For example, in No. 678 v. MNR, 60 DTC 45 (TAB), the Tax Appeal Board denied the taxpayer's argument that the loss business should be broad enough to include both the selling of trusts and cars and the operating of service stations. Similarly, in Island Motor Trans. Ltd. v. MNR, (1983) 33 Tax ABC 365 (TAB), the Tax Appeal Board held that the loss business was the operation of franchises, not the holding and operation of franchises.]

  • The loss business was broadly identified as marine construction, rather than being limited to marine construction in a specific location, based upon evidence that marine construction businesses typically operate in various areas throughout the country; [fn: 50: Canadian Dredge & Dock Co. v. MNR, 81 DTC 154 (TRB). In contrast, however, see CRA Document 9234795, May 19, 1993, where the Canadian Revenue Agency (CRA) appeared to take the position that oil and gas properties in Saskatchewan constituted a different business than oil and gas operations in Alberta.]
  • The loss business was a retail hardware business, rather than the operation of a particular hardware store or the serving of a particular clientele; [fn 51: Hoffman v. Minister of National Revenue, 50 DTC 284 (TAB).]
  • Notwithstanding that the bulk of the corporation's revenues initially came from the conversion of vehicles to natural gas to facilitate future sales, the loss business was found to be the sale of natural gas, given the long-term purpose of the initial activities; [fn 52: Gaz Metropolitain Inc. v. The Queen, 1998 CanLII 227 (TCC).]
  • The loss business was found to be selling clothes, whether those clothes were sold to individuals or to retail and wholesale merchants, and whether they were ladies' clothing or men's and boy's clothing; [fn 53: Martin & Co. (E.P. ) v. MNR (1959), 22 Tax ABC 254 (TAB).]
  • The loss business in relation to real estate can be generically defined. The high-water mark of this concept is reflected in a case where the loss business was determined to be the exploitation of a recreational site, which could encompass both the use of the site as an amusement park preacquisition and the use of the site as a marina and condo development post-acquisition. [fn 54: Crystal Beach Park Limited. v. The Queen, 2006 TCC 183.] In another case, the loss business was described as the business of developing property, selling property and renting property; [fn 55: Wigmar Holdings Ltd. v. R., [1997] 2 CTC 263 (FCA)] in yet another, the loss business was found to be land speculation and land development, particularly given that the corporation's principals were experienced and knowledgeable in both elements (and thus were considerd to be "savvy real estate operators"); [fn 56: S.T.B. Holdings Ltd v. The Queen, 2011 TCC 144, at paragraph 56.]
  • The loss business was the cutting and processing of timber, lumber, pulpwood, and other forest products, rather than being limited to the cutting and processing of timber, [fn 57: No. 717 v. MNR (1960), 24 Tax ABC 367 (TAB).] suggesting that a loss business involving production may be described by the generic industry, as opposed to the particular product involved.
  • The loss business was the sale of an electronic shelf labelling system used to register and display prices on grocery shelves, but did not extend to the use of that technology in other industries in the absence of any evidence that other applications had been considered by the Lossco prior to the acquisition. [fn 58: NRT Technology Corp. v. The Queen, 2012 TCC 420.]

Continuity of business following CCAA proceedings (pp. 9:12)

Paragraph 128(l)(g) provides that, where an absolute order of discharge is granted in' respect of a corporation, the corporation's non-capital losses are no longer available for carryforward. [fn 67: See also Holiday Knitwear Ltd v MNR (1963), 31 Tax ABC 30 (TAB).] Absent such a discharge, the question of whether a Lossco's business continues while under creditor protection is determined under general principles. This position is consistent with the purpose of the BIA, which is to provide for an orderly distribution of assets where it is clear that the business can no longer continue, and with the purpose of the CCAA, which is to permit the continuation of normal business operations while restructuring to relieve financial distress.

Integration of loss business into that of acquiror (p.9:16)

Where the loss business is integrated into the business of the acquiror, it is unclear whether the similar business test even has to be considered. In such a situation, presumably the income is from the loss business. The decision in Gaz Métropolitan has created some uncertainty on the point but is nevertheless generally helpful to the taxpayer. There, the Tax Court observed that where the business of the Lossco had been merged with the business of the acquiror, it is impossible to determine what income is derived from the loss business versus the integrated business; it then becomes necessary to determine whether the income is earned from a business where substantially all of the income was derived from the sale, leasing, rental or development of property similar to that sold, leased, rented or developed by the subsidiary or target. The court held that the fact that it was not necessary to create a separate division to operate the loss business activities was considered evidence of the similarity between the loss business and the integrated business.

Value paid for non-capital losses (p. 9:16)

The price to be paid for non-capital losses of a target Lossco will depend on many factors. Anecdotal evidence and limited publicly available materials demonstrate a range of values, from $0.03 to $0.10 per dollar of non-capital losses, indicating that most purchasers will discount the predicted post-acquisition value of the losses….

Term of loss-balance reps (pp. 9:19)

Since the year in which a Lossco's losses are applied in the future is outside of the control of the Lossco's pre-acquisition management, reliance on the normal reassessment period as the survival period for a representation regarding loss balances can, in practice, amount to an open-ended representation (at least until the expiry of the losses).

[W]here the purchaser is providing consideration for loss balances, such consideration will generally account for the estimated time horizon to utilize such losses. In such circumstances, it is not unusual for the parties to agree to an explicit survival period in respect of representations relating to tax loss balances; a survey of the limited public disclosure available indicates a range of six to seven years from closing of the acquisition.

Ian Gamble, "Income from a Business or Property: General Principles and Current Issues", 2014 Conference Report, Canadian Tax Foundation, 5:1-32

Share investments potentially a business (pp. 5:10-15)

[C]onsolidated Mogul's chief task in the relevant years was the development and management of properties owned by other companies in which it had acquired various shareholdings….

Not only was the investment in shares a business activity, it was part of the corporation's mining business….The mere fact that the corporation's assets consisted largely of shares and that its income consisted largely of dividends did not make the corporation's business any less a mining business [[1969] S.C.R. 54].

[I]n Firestone [87 DTC 5237], the appellant set out to create his own venture capital business By acquiring financially distressed manufacturing businesses and making them profitable through supervision and direction….

MacGuigan J (for the court) observed that shares are no different from other business assets of a capital nature….However, MacGuigan J also found that the supervision costs were fully deductible under section 9 because they were operating costs in the venture capital business, incurred for the purpose of earning profits in the form of dividend income….

In short shares held by a parent corporation on capital account can easily form part and parcel of the parent's business, whether this business be called an investment business, a venture capital business, a capital management business, a group stewardship business, a capital financing business, or even a mining or some other industry business….

Furthermore, as a general principle under sections 3 and 9, dividends paid on shares held in such business constitute income from business (not income from property).

Potential carry-forward of losses of an investment business (pp. 5-17-18)

Losses from property do not carry over under subsection 111(5)…

The line separating the passive owner from the parent that holds shares in group companies as part of its business is easily crossed. For the parent that has crossed this line, losses from this source—including interest expense deductible under paragraph 20(l)(c)—are considered losses from business, not from property.

…The loss business might not change in the parent, as a factual matter, following the acquisition… . [T]he loss business might be described in various ways depending on the facts—as an investment business, a venture capital business, a capital management business, a capital financing business, or even a mining (or some other industry) business….

Income and profit from the loss business, under the streaming rules, can easily include dividend income. Dividends constitute income under section 9, notwithstanding that an amount equal to such dividends is deductible in computing the corporation's taxable income under subsection 112(1). This may have the indirect effect of allowing the streamed business losses to be used against other taxable income….

Anthony Schiefer, "Buyer Beware - Structuring to Minimize to Minimize Capital Tax Consequences of a Share Purchase", Corporate Structures in Groups, Vol. IV. No. 1, p. 300

Discussion of techniques to use interest expense of purchaser to shelter taxable income of target.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) 15

Cadesky, "Corporate Losses", 1990 Conference Report, c. 19.

Subparagraph 111(5)(a)(ii)

See Also

Leekes Ltd v HM Revenue & Customs, [2018] EWCA Civ 1185

ability of successor to apply predecessor losses to income from same trade did not extend to profits from an enlarged trade

The taxpayer (Leekes) carried on a trade of running department stores (three in Wales and one in Wiltshire) and acquired for nominal consideration all the shares of another company (Coles) that carried on a similar trade from three furniture stores and a distribution centre in the West Midlands. Coles distributed all its assets to Leekes, and all three Coles stores were re-branded under the Leekes name and continued to trade as before. At issue was whether the losses sustained in the hands of Leekes from its continued operation of the former Coles stores could be deducted from its income from operating its other stores. S. 343(3) of the Income and Corporation Taxes Act 1988 provided that Leekes (viewed as the successor) could deduct any amount for which the predecessor (Coles) would have been entitled to relief if it had continued to carry on the trade.

After discussing Bell v National Provincial Bank, and in finding that such relief was unavailable, Henderson LJ stated (at paras. 27-28):

The successor is entitled to relief "for any amount for which the predecessor would have been entitled to relief if it had continued to carry on the trade". This wording introduces a further hypothesis, namely that the predecessor (here Coles) had itself continued to carry on the trade. In this context, the words "the trade" can only refer to the trade previously carried on by Coles. They cannot refer to the enlarged trade carried on by Leekes, because that trade had never been carried on by Coles, and Coles cannot therefore be deemed to have continued to carry it on. The hypothesis thus requires the former trade of Coles to be identified in the hands of Leekes, as a component of the enlarged trade, and confines the availability of relief to any trading income which Leekes may derive from the former Coles trade. In other words, it is necessary to ascribe a deemed continuity to the former trade of Coles, although it now forms part of the merged business carried on by Leekes, and relief may only be obtained if and to the extent that Leekes then derives trading income from the former Coles trade.

This ...construction of section 343(3) ... is the only construction which the ordinary and natural meaning of the statutory language can bear, and it produces an obviously sensible result. If the construction advanced by Leekes were correct, the result would be to place the successor company in a more favourable position than the predecessor, because it would enable the successor to utilise the accumulated losses of the predecessor against trading income derived from a business which the predecessor had never carried on. ...

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) acquired business was segregated from its expanded component 230

Paragraph 111(5)(b)

Subparagraph 111(5)(b)(ii)

See Also

Yarmouth Industrial Leasing Ltd. v. The Queen, 85 DTC 5401, [1985] 2 CTC 67 (FCTD)

For the purposes of the pre-1983 version of s. 111(5)(a), it was found that a corporation - whose business had consisted in the leasing of a building and equipment to its parent corporation, and which then commenced, after a period of relative dormancy of a year, to purchase office equipment and heavy equipment for leasing to lessees throughout Canada, - had changed the business which it carried on.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(5) 23

Subsection 111(5.1) - Computation of undepreciated capital cost

Administrative Policy

25 April 1990 T.I. (September 1990 Access Letter, ¶1429)

Where the amount designated by a corporation under s. 111(4)(e) in respect of a depreciable property exceeds its fair market value at the time of acquisition, s. 111(5.1) will not apply to reduce the UCC of the class because immediately before the time of acquisition of control the corporation will not have any property in the class whose UCC exceeds its fair market value given that the taxpayer is deemed by s. 111(4)(e) to have disposed of the property and not to have reacquired the property until the time of acquisition of control. [Note that CCH editorial comments ignore s. 13(7)(f). However, as noted, the above Technical Interpretation effectively was overruled by the July 13, 1990 Technical Amendments. ]

88 CPTJ - Q.24

S.111(5.1) applies whether or not the purchaser's intention is to acquire losses.

84 C.R. - Q.42

Where the controlling shareholder of a public corporation disposes of sufficient of its shares to the public to lose control, or where a 49% block in a widely-held public corporation is sold to a third party who previously did not own any shares, there will be an acquisition of control if persons can be identified after the sale who own more than 50% and who also act together to exercise control.

Where two 50% shareholders each sell 1/3 of their shares to a third party, there will be considered to be an acquisition of control if they cease to act together to control the corporation.

"'Persons' will be considered as having collectively acquired control where there is evidence that they have a common link or interest or they act together to control the corporation."

84 C.R. - Q.43

Guidelines on what constitutes the same or similar business have not yet been developed.

81 C.R. - Q.47

There is a control change where a corporation owned equally by X and Y becomes fully owned by X, or where a corporation fully owned by X becomes equally owned by X and Y. [C.R.: 249(4)]

Subsection 111(5.2)

Cases

Devon Canada Corporation v. The Queen, 2018 TCC 170, 2018 TCC 170

stock option surrender payments of target deductible under s. 111(5.2)

Two public-companies made cash payments for the surrender by employees of their options previously granted to them under employee stock option plans, with the surrenders occurring on the closing of their acquisition by other public companies.

After Sommerfeldt J accepted the taxpayer submissions that the surrender payments were deductible as to 75% under s. 111(5.2), given his finding that they qualified as eligible capital expenditures.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure payments made to target’s employees for surrendering their options on target’s acquisition were mostly deductible by it 279
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e) - Subparagraph 20(1)(e)(i) quaere whether “sale” includes a sale to a 3rd party 167
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition disposition of surrendered stock options occurred under doctrine of merger 287
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base "cost" implies the acquisition of an asset 163

Subsection 111(5.5) - Restriction

Administrative Policy

2014 Ruling 2014-0523221R3 - Amalgamation of mutual funds

amalgamation of two mutual fund corporations each with capital losses

underline;">: Proposed transactions. C1, which is a smaller mutual fund corporation than C2, will amalgamate with C2 to form Amalco. C1, C2 and Amalco have different series of mutual fund shares each tracking what for securities law purposes is regarded as a separate mutual fund as well as nominal value voting common shares. On the amalgamation, the former common shareholders of C1 will acquire a majority of the voting common shares of Amalco. Both C1 and C2 have capital loss carryforwards. C1 will make step-up designations under s. 111(4)(e).

Rulings

include: As a result of the amalgamation there will be an acquisition of control of C1 pursuant to s. 256(7)(b)(iii), and there will not be an acquisition of control of C2. Ss. 69(11) and 111(5.5) will not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) amalgamation of two mutual fund corporations each with capital losses 126
Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) amalgamation of two mutual fund corporations each with capital losses 127

Subsection 111(8) - Definitions

Non-Capital Loss

Cases

Taylor v. The Queen, 88 DTC 6422 (F.CTC)

A submission that a (foreign non-business income) tax can never be an expense so as to create a loss within the meaning of s. 111(8)(b) was rejected. The deduction of foreign taxes under s. 20(12) was a specific exception to the general rule in s. 18(1)(a).

Administrative Policy

11 October 2013 Roundtable, 2013-0495901C6 F - Limited partnership loss and non-capital loss

non-capital loss is not increased by amount otherwise deductible under s. 111(1)(e)

A limited partner has both losses from other sources and losses and limited partnership losses from the limited partnership. Based on the "non-capital loss" ("NCL") definition in s. 111(8), its NCL would not be increased by the amount deducted by virtue of s. 111(1)(e). Is this correct? CRA responded:

We agree with you that the amount of a limited partnership loss is not considered for purposes of computing the taxpayer's NCL. In fact, the amount of the NCL, as defined in subsection 111(8), is not increased by the amount that would otherwise be deductible under paragraph 111(1)(e) for a given taxation year.

Based on our understanding of tax policy, this result appears consistent with the one underlying the restrictions on the deductibility of partnership losses sustained by a taxpayer in a partnership.

22 May 1997 TI 970019

"A taxpayer may claim a net capital loss carried over from a previous year ... pursuant to variable E in the formula, notwithstanding the fact that there is insufficient income to absorb the deduction. While this will not reduce the taxpayer's income below nil, the amount can be considered 'deducted' so that it can be used to reinstate ... a non-capital loss which could otherwise be reduced by the taxable capital gain included in income for the year."

3 July 1997 T.I. 963922

Although s. 114 specifies that each partial period is treated as a whole taxation year, for purposes of s. 111, the loss from one period and the income from another is combined pursuant to s. 111(8) to determine loss carried forward.

5 September 1996 External T.I. 5-962696 -

A loss to a mortgage investment corporation resulting from it paying taxable dividends in an amount greater than its income for the year will give rise to a non-capital loss, because the deduction under s. 130.1(1)(a) is considered to represent a deduction in computing the corporation's income from business or property for the taxation year.

6 April 1993 T.I. (Tax Window), No. 30, p. 7, ¶2489)

Where a non-capital loss in a preceding year has been reinstated as the result of the carryback to that year of a net capital loss, the taxpayer will be required to comply with s. 152(6) in order to carry back the reinstated non-capital loss to a year preceding the loss application year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(6) 37

24 June 1992 External T.I. 5-920948 -

Respecting an inquiry as to the treatment of CEE renounced to a non-resident shareholder, the Rulings Directorate stated:

For the purpose of paragraph 3(a) a flow-through share is a source of property income. However, when the share is held in conjunction with the business carried on by the owner, it would be a source of income from that business. In computing income for the purpose of paragraph 3(a) of the Act, a Canadian resident shareholder may deduct renounced Canadian exploration expenses to the extent permitted by subdivision E of the Act and in so doing may create a non-capital loss.

Where the flow-through share is owned by a non-resident of Canada and is not held in conjunction with a business carried on in Canada, the share would normally be a "source" for the purpose of determining the non-resident's income from property. Subsection 2(3) and section 115... require a non-resident of Canada to determine Part I tax on income specifically identified in section 115(1) of the Act....As a result, Canadian exploration expense renounced to the non-resident shareholder may only be claimed under the authority of paragraph 3(c) of Part I of the Act to the extent there is income for Canadian tax purposes as described in section 115.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 flow-through shares a source 82

30 August 1991 T.I. (Tax Window, No. 8, p. 7, ¶1427)

S.111(8)(b) required a taxable capital gain for a year to be reduced by deductions available for the year (in this case, deductions for dividends from taxable Canadian corporations), with the result that such taxable capital gain could not be offset by a net capital loss realized in a subsequent taxation year.

24 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 23, ¶1104)

An individual who has realized a capital gain but has no net income for the year may claim the capital gains exemption on the full amount of the eligible capital gain, thereby increasing his non-capital loss for the year.

20 April 1990 TI 5-9269

A taxpayer (which is not a principal business corporation) may deduct CEE or CDE without restriction to its income so as to create a non-capital loss provided that the deduction under s. 66.1(3) or 66.2(2) is referable to a source that is business or property. If the deductions for CEE and CDE are not attributable to a particular source the amount may be claimed as a deduction under s. 3(d) but a non-capital loss cannot be created.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 53

90 C.R. - Q52

An ABIL is included in non-capital losses and may be carried back three years and forward seven years without adjustment for the different inclusion rates.

Articles

Forster, "Administrative and Regulatory", Canadian Current Tax, March 1992, p. A7

A

Administrative Policy

2 September 2009 Internal T.I. 2009-0329251I7 F - Application du paragraphe 80(16)

s. 61.3 deduction reduced non-capital loss

In the particular taxation year, a commercial debt obligation that ACO issued in the course of carrying on its business was forgiven. In addition, ACO sustained an allowable capital loss from the disposition of a capital property. Prior to the application of the debt forgiveness rules, ACO had a balance of a non-capital loss realized in a previous year and available for carry forward, a cumulative eligible capital balance and adjusted cost base of shares of related corporations.

The Directorate confirmed the TSO approach, which was to designate pursuant to s. 80(16) the maximum amounts permitted under ss. 80(7) and (11), so that the forgiven amount would be applied first against the balance of the non-capital loss, second as to reduce ¾ of the cumulative eligible capital and third, to reduce the adjusted cost base of the related corporation shares under s. 80(11), resulting in an amount being deemed to be a capital gain from the disposition of capital property under s. 80(12). This resulted in an amount to be added in computing ACO’s business income under s. 80(13), and with a deduction under s. 61.3(1).

Turning to the computation of the remaining non-capital loss, the Directorate stated:

The definition of "non-capital loss" in subsection 111(8) indicates that a taxpayer's non-capital loss for a taxation year is the amount determined under a formula. In this case, in order for an amount to be determined under that formula, ACO must have incurred a loss for the year in respect of its Business and that loss must be greater than the remainder computed under paragraph 3(c) for that year.

The Directorate went on to provide a redacted computation showing the s. 61.3 insolvency deduction as a subdivision (e) deduction under s. 3(c).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(16) s. 80(16) designation under s. 80(11) increased s. 80(13) income inclusion 209
Tax Topics - Income Tax Act - Section 80 - Subsection 80(13) s. 80(13) income was from the debtor's business 28

D.2

Administrative Policy

23 May 2012 Internal T.I. 2011-0418071I7 F - Remise de dettes, PAC

debt settlement results in immediate application of forgiven amount to reduce NCL at that time

After the taxpayer had settled a commercial debt obligation so as to give rise to a forgiven amount, it was assessed by CRA to increase its taxable income for two taxation years preceding the years generating non-capital losses (NCLs). CRA acceded to the taxpayer’s request to apply such NCLs (which had been sustained before the taxation year in which the debt settlement occurred) because it was not yet aware of the debt settlement, as the return for the debt-settlement year had not yet been filed. When that return was filed, the taxpayer applied the forgiven amount against its undepreciated capital cost balance.

In finding the forgiven amount should have instead reduced the NCLs that had been incorrectly applied to carryback to the assessed taxation years, the Directorate stated:

Where a debt settlement occurs, element D.2 of the definition of NCL in subsection 111(8) reduces the amount of the NCL in a taxation year by the amount of the reduction that results from the application of section 80. Consequently, the NCL for each taxation year that ended before the time of settlement of the debt is reduced within the limits set out in paragraph 80(3)(a). The NCL reduction for a taxation year due to a debt settlement is applicable from the moment the debt settlement takes place.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80 - Subsection 80(3) - Paragraph 80(3)(a) debt settlement results in immediate application of forgiven amount to reduce NCL at that time 248

Subsection 111(9) - Exception

Administrative Policy

24 July 2017 Internal T.I. 2017-0705801I7 - non-TCP net capital loss

capital loss realized on emigration on non-TCP available for carryforward against TCP gain

A corporation, upon emigration from Canada incurred a capital loss pursuant to s. 128.1(4) on the deemed disposition of property which was not taxable Canadian property (“TCP”), which it was unable to utilize in that year. In a subsequent year (while non-resident) it disposed of TCP (which was not treaty-protected property) and realized a capital gain. CRA stated:

[T]he corporation would, due to the deemed disposition rule in subsection 128.1(4) of the Act, have a net capital loss for the year ended immediately prior to its emigration. Pursuant to subsection 111(9) of the Act, there are restrictions on the determination of a net capital loss for a year in which a taxpayer is a non-resident, however, where a net capital loss occurs in a year in which a taxpayer is a resident of Canada, this restriction does not apply.

Consequently … a non-resident may offset a taxable capital gain on the disposition of TCP (other than treaty-protected property) with a net capital loss on the deemed disposition of property that was not TCP that arose when the taxpayer was a resident of Canada.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(b) emigration loss from non-TCP offsettable against post-emigration TCP gain 125

18 April 1990 T.I. (September 1990 Access Letter, ¶1428)

Where the rental activities of a non-resident did not constitute the carrying on of a business in Canada, the net losses generated would not be deductible as a non-capital loss from his income after becoming a resident of Canada because his non-capital losses for the non-resident taxation years are to be determined as if his only losses were losses from businesses carried on by him in Canada.

IT-262R2 "Losses of Non-Residents and Part-Year Residents"

Subsection 111(12) - Foreign currency debt on acquisition of control

Administrative Policy

2 August 2016 External T.I. 2014-0544941E5 F - Interaction between ss. 111(12) and 80.01(3)

no accrued FX loss on a loan owing by a target to a sub is realized on an AOC where there is a same-day amalgamation and no time-stamping

Aco is indebted to Bco (its wholly-owned subsidiary and also a Canadian-controlled private corporation) for US$1,000,000 under a “commercial obligation” (the "Debt"), which was issued in 20X0 while the US dollar was at par. On January 1, 20X5, the control of Aco was acquired at a time that the exchange rate was CDN$1.10 to US$1.00 (so that there was an unrealized loss of CDN$100,000 on the Debt).

Also on January 1, 20X5, Aco and Bco amalgamated under s. 87(1) to form Amalco, so that the Debt was extinguished. No time of amalgamation was stated in the amalgamation agreement or certificate of amalgamation.

Did Aco realized a capital loss of CDN$100,000? In finding that such loss instead vanished, CRA stated:

[I]n subsection 111(12)…the "measurement time," with respect to Aco…is, immediately before January 1, 20X5 (…the “Calculation Time"). …

[T]he payment, deemed by virtue of subsection 80.01(3) to be made, immediately before the time immediately before the amalgamation, by Aco to Bco… (i.e., CDN$1,000,000) would be equal to the ACB to Bco of the Debt (i.e., CDN$1,000,000). …

[U]nder subsection 80.01(3), the Debt would be deemed to have been settled immediately before the Calculation Time. As Aco would no longer be indebted to Bco at the Calculation Time, it could not be able the owner of the Notional Property for the purposes of subsection 111(12) and, consequently, Aco's unrealized loss in respect of the Debt would not exist anymore at that time.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3) deemed settlement under 80.01(3) before operation of 111(12) 143

S4-F7-C1 - Amalgamations of Canadian Corporations

application following amalgamation

1.59 Where control of a corporation is acquired and that corporation makes a designation under paragraph 111(4)(e) to realize an accrued foreign exchange gain on a foreign currency denominated debt that arises because of the application of subsection 111(12), the new corporation formed on a subsequent qualifying amalgamation of that corporation would, under paragraph 87(7)(d) and for the purposes of subsections 40(10) and (11), be considered to be the corporation that realized the gain in respect of the foreign currency denominated debt under paragraph 111(4)(e) and subsection 111(12). As a result, no double taxation of the same gain would arise when the new corporation actually repays the debt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(2.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1) deemed tcp following amalgamation 155
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5.1) continuity of s. 13(5.1) on amalgamation 126
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1) Amalco can continue objection and receive refunds 145
Tax Topics - Income Tax Act - Section 169 Amalco can continue objection 97
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder shareholder need not hold shares 82
Tax Topics - Income Tax Act - Section 251 - Subsection 251(3.1) deemed non-arm's length relationship on amalgamation 164
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) realted party, majority and 50% group exceptions 448
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(iii) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(7) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 69 - Subsection 69(13) no disposition of predecessor property on general principles 103
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.4) s. 87(5) not applicable 104
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3) non-87 amalgamation/no FX gain 159
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) no deemed dividend to dissenter on amalgamation 81
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) election filing by Amalco 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.1) s. 87(1.1) qualifies for all s. 87 purposes 60
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.2) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 87 - Subsection 87(10) deemed listing of temporary Amalco shares 114
Tax Topics - Income Tax Act - Section 87 - Subsection 87(11) gain if high PUC is sub shares 47
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) presumptive satisfaction of s. 87(1)(a)/dissent and squeeze-outs onside 260
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a) new corp/deemed year end coinciding or not with acquisition of control 0
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(b) Amalco must follow predecessor's valuation method subject to truer picture doctrine 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(c) reserve after amalgamation 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(d) cost amount carryover 135
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(e.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(o) no continuity rule for non-security options 133
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(q) pre-amalgamation services 96
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11) loss-carry back to parent 159
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1) dovetailing with s. 88(1.1) 38
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3.1) 328
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3) PUC shifts 181
Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) fractional share cash/ACB or value shift/implied non-recognition for predecessor shares 247
Tax Topics - Income Tax Act - Section 87 - Subsection 87(7) dovetailing with s. 78 and 112(12) 171
Tax Topics - Income Tax Act - Section 87 - Subsection 87(9) allocation of s. 87(9)(c)(ii) excess as parent chooses 218
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) late designation 106
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) dovetailing with s. 87(2.1) 56
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) partnership dissolution on amalgamation 123
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) deemed non-arm's length relationship on amalgamation 415
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) deemed non-arm's length relationship on amalgamation 323
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(14) class continuity on non-arm's length amalgamation 311
Tax Topics - Income Tax Regulations - Regulation 8503 - Subsection 8503(3) - Paragraph 8503(3)(b) pre-amalgamation services 96

Articles

Carrie Aiken, Johnson Tai, "Debt Restructuring Transactions – Issues, Strategies and Trends", 2016 CTF Annual Conference draft paper

A Canadian public company (Canco) will be recapitalized so that the provider of debtor-in-possession financing will end up holding 2/3 of the common shares having a fair market value equaling that of the DIP financing provided by it, and most of the balance of 1/3 of the common shares will be received by the holders of the U.S.-dollar bonds, who thereby will recognize a 90% loss in U.S.-dollar terms – or less than that in Canadian-dollar terms.

If the transactions are structured so that the acquisition of control by the DIP financier occurs first (or is deemed to occur first under s. 256(9)), Canco will realize the accrued FX loss on the bonds under s. 111(12). If the bonds are instead settled first, s. 80(2)(k) will effectively prevent realizing an FX loss on the 90% of the bonds that is forgiven, thereby resulting in fewer tax attributes recognized by Canco.

Carrie Smit, "Foreign Currency Debts and Acquisitions of Control: Beware the Unexpected Gain", International Tax (Wolters Kluwer CCH), February 2017, No. 9, p. 6

Avoidance of s. 111(12) where simultaneous acquisition of control (AoC) and amalgamation (p. 3)

[2014-05544941E5] found that both the AoC and Amalgamation were considered to occur at the same time, [fn 8: This would result in only one taxation year-end for ACo and BCo, given that no other transactions occurred on that day other than transactions in the ordinary course of business.] being the earliest moment on the particular day. Because subsection 80.01(3) deemed the Debt to have been settled two moments before the time of the AoC/Amalgamation, the Debt was not considered to be outstanding one moment before the AoC, and therefore subsection 111(12) and paragraph 111(4)(c) were inapplicable.

Unmatched application of ss. 111(12) and 40(11) where amalgamation follows AoC (pp. 3-4)

[I]f the Amalgamation had occurred the day after the AoC, subsection 111(12) would have applied…[and] as a result, ACo would have realized a capital loss (equal to the FX loss in the Debt) under paragraph 111(4)(d) in its taxation year ending immediately before the AoC. …

Finance should consider amending the Act to permit the subsection 111(12) loss to be carried forward after the AoC to offset a later related subsection 40(11) gain.

Unmatched applications of ss. 111(12) and 40(11) where AoC before debt settlement (pp. 4-5)

[A]ssume that XCo owes US$1OO million to a third party creditor. This debt was issued when the Canadian dollar was at par, and now US$1.00 = CDN$1.30. This debt is to be settled and extinguished on the payment of US$20 million as part of a debt restructuring which includes an AoC of XCo. On a net basis, XCo is economically advantaged by CDN$74 million — it borrowed the equivalent of CDN$100 million and is only required to repay the equivalent of CDN$26 million. Its net tax result should reflect this CDN$74 million "economic gain".

If the AoC occurs first, XCo will realize a capital loss equal to CDN$30 million under subsections 111(12) and 111(4).

On the subsequent settlement of the debt for US$20 million, XCo will realize a debt forgiveness equal to CDN$80 million. [fn 12: The forgiven amount is based on the currency exchange rate at issuance, pursuant to paragraph 80(2)(k).] If XCo has at least CDN$80 million of non-capital losses, the debt forgiveness will be fully offset by these losses. XCo's FX gain or loss on the actual settlement of the debt will be determined under subsection 40(11) to be a gain of CDN$24 million (being the net of an FX loss of CDN$6 million on the US$20 million repaid, and a reversal of the CDN$30 million subsection 111(12) loss). This gain will not be able to be offset by any existing losses of XCo (including the subsection 111(12) loss), as it is realized after the AoC. However, if the debt settlement were to occur prior to the AoC, XCo would realize a forgiven amount of CDN$80 million and an FX loss of CDN$6 million; this is the same net economic result (reflecting the CDN$74 million "economic gain") but it would not result in an unsheltered capital gain.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(11) 117