Section 111

Background

Aco, a non-resident corporation which is an indirect-wholly owned subsidiary of a public non-resident corporation, and Bco, a Canadian wholly-owned subsidiary of Aco, collectively hold all the shares of Lossco which, in turn, wholly-owns both Numberco, which has unexpired non-capital losses, and Profitco.

Loss consolidation transactions

1. Lossco will receive a daylight loan from an arm’s length financial institution.
2. Lossco will use the daylight loan proceeds to make an interest bearing loan (evidenced by the “IB Note”) to Profitco.
3. Profitco will use all of such proceeds to subscribe for newly-created non-voting redeemable retractable Numberco preferred shares bearing a cumulative dividend equal to the interest rate under the loan from Lossco plus 0.0001% per annum.
4. Numberco will use the proceeds from such share issuance to make a non-interest bearing demand loan to Lossco.
5. The transactions in 2 to 4 will be repeated an additional three times, interest on the IB Note in 2 will bear simple interest which will be paid on the earlier of the end of Profitco’s second taxation year following the taxation year in which it incurred the interest, and immediately before the unwinding transaction in 8 below. Lossco’s recourse against Profitco to obtain repayment of the amounts due under the IB Note will be limited to the Numberco preferred shares owned by Profitco.
6. Lossco will use the proceeds received from the last NIB Loan to repay the daylight loan.
7. Immediately before the unwinding transaction in 8 below, Lossco will make a contribution of capital to Numberco, which it will use to pay the accrued dividends on its preferred shares, with Lossco using such proceeds to pay the accrued interest on the IB Note.
8. Numberco will redeem its preferred shares in consideration for assigning the non-interest-bearing note to Profitco, which will then be set-off against the IB Note.
9. Numberco will be wound up into Lossco pursuant to s. 88(1).

Rulings

Including re s. 20(1)(c), s. 12(1)(x) (re non-application to contribution of capital), s. 55(2), s. 88(1.1), and s. 245(2).

Background

Parent indirectly wholly-owns Profitcos 1, 2 and 3 and itself has non-capital loss carryforwards. The loss consolidation transactions below do not entail loans being made directly to the Profitcos because they are regulated entities which should not incur debt under those transactions.

Proposed transactions

1. New LP will be formed with a new subsidiary of Parent as the general partner and the Profitcos as the three limited partners.
2. Parent will use the proceeds of the “Daylight Loan” (from an arm’s length financial institution) to make an interest-bearing demand loan to New LP (the "New LP Loan").
3. New LP will use the proceeds thereof to subscribe for non-voting redeemable retractable preferred shares (with dividends payable annually) of a newly-incorporated subsidiary of Parent (“Newco”).
4. Newco will use such proceeds to make a non-interest-bearing demand loan to Parent (the "Parent Loan").
5. Parent will use such proceeds to repay the Daylight Loan.
6. Parent and Newco will enter into a capital support agreement pursuant to which Parent will make annual contributions to Newco to fund the annual preferred shares dividends which, in turn, will fund the interest payment by New LP.
7. The unwinding of the above loss consolidation arrangements will entail inter alia Newco redeeming its preferred shares with a note, which New LP will use to repay the New LP Loan by assigning it to Parent, with that note then being set off against the Parent Loan – and Newco and New LP being wound up.

Rulings

Including re s. 20(1)(c) interest deduction on the New LP Loan, no income inclusion re the capital contributions, a s. 112(1) deduction to the Profitcos re the dividends allocated to them, non-application of the GAAR rules in agreeing provinces and non-application of s. 245(2).

Background

LP, a Canadian limited partnership, holds common shares of Profitco through two Holdcos and holds preference shares of Profitco directly. It is unclear whether Profitco is wholly-owned, directly or indirectly, by LP. LP also holds all the shares of Lossco, which is affiliated and related to Profitco, except that a redacted person holds non-voting preference shares of Lossco.

Proposed transactions

Lossco will use the proceeds of a daylight loan (drawn down under a group credit facility) to subscribe for an interest-bearing note of Profitco, which will use such loan proceeds to subscribe for newly-created non-voting cumulative redeemable retractable preference shares of Lossco, whose proceeds will be used by Lossco to repay the daylight loan. Profitco will also subscribe for Class G preference shares of Lossco.

LP and Lossco will enter into an agreement pursuant to which LP will make an annual non-interest bearing advance to Lossco in an amount equal to the excess of the amount of dividends payable on the Preference Shares over the amount of interest payable on Note 1 on an annual basis (the Annual Advance).

The above loss consolidation arrangement will be terminated, on the earlier of a specified date and the utilization of Lossco’s non-capital losses by the payment of the accrued and unpaid dividends on the preference shares and of the interest on Note 1, followed by Lossco redeeming the Preference Shares through delivery of Note 1 to Profitco, with Note 1 being extinguished by set-off, and Profitco repaying all Annual Advance amounts.

Additional information

The Group's borrowing capacity under the undrawn credit facility will exceed the level required to complete the proposed transactions.

Rulings

Including ruling on s. 20(1)(c) and opinion on Bill C-59 version of s. 245.

Background

Parentco (along with the other named corporations, a taxable Canadian corporation) wholly-owned two Losscos and a Profitco.

Proposed transactions

1. Parentco will borrow a daylight loan from an arm’s length or non-arm’s length lender. This may occur up to five times in quick succession, with the transactions in 1 to 5 being repeated that number of times.
2. Parentco will lend the proceeds on arm’s length terms (including interest) to the two Losscos.
3. The Losscos will make interest-bearing subordinated loans at a reasonable commercial rate of interest to Profitco (the “IBLs”).
4. Profitco will use the proceeds to subscribe for newly-created cumulative non-voting preferred shares of the Losscos.
5. The Losscos will use those proceeds to repay the loans from 2, and Parentco will repay its daylight loan.
6. Lossco will annually pay the preferred share dividends, which will fund the annual interest payments on the IBLs.
7. The unwinding of the transactions, which will occur at the earlier of 3 years from inception and the utilization of the Lossco non-capital losses, will include the Lossco redeeming their preferred shares with notes, and setting those notes off against the IBLs.

Rulings

Including re s. 20(1)(c) deduction on IBLs to Profitco, the carryback of non-capital losses potentially arising from the transactions to Profitco to preceding Profitco taxation years within the s. 111(1)(a) carryback period, and the non-application of s. 55(2) provided that none of the purposes of the dividends is to reduce the FMV or capital gain on any share or to increase the total cost amount of any properties.

Background

Parentco (listed on an exchange) holds Lossco directly and through Subco, and also holds Profitco. Lossco holds recently-incorporated Newco 1 and Newco 2. Profitco’s functional currency (as defined in s. 261(1)) and tax reporting currency is other than the Canadian dollar. Lossco has not make an election under s. 261(3), and it (and Newco 1 and 2 referred to below) will not do so, so that their tax reporting currency is the Canadian dollar.

Proposed transactions

1. Lossco will use the proceeds of a daylight loan to subscribe for unsecured floating-rate debt (the “IB Debt”) of Newco 2 pursuant to the “IB Credit Facility” and Parentco, Subco and Lossco will enter into the “Support Agreement” regarding the funding of dividend payments referred to in 5 below.
2. Newco 2 will use the proceeds of the IB Debt to subscribe for cumulative non-voting redeemable retractable preferred shares of Newco 1 (the “Newco 1 Preferred Shares”) representing a positive spread over the IB Debt.
3. Newco 1 will use the proceeds of the Newco 1 Preferred Shares to make a non-interest-bearing loan to Lossco (the “NIB Debt”).
4. Lossco will repay the daylight loan.
5. Immediately before the annual unwind transactions referred to in 6 below, Lossco will use share subscription proceeds from Subco to make a capital contribution to Newco 1, Newco 1 will pay the accrued dividends on the Newco 1 Preferred Shares, Newco 2 will use such proceeds to pay the interest on the IB Debt to Lossco, which will use such funds to distribute to Subco the PUC received on the previous share subscription.
6. Under the annual unwind transactions, Newco 1 will redeem its Newco 1 Preferred Shares by transferring to Newco 2 the NIB Debt in accordance with the terms of the Newco 1 Preferred Shares, with Newco 2 and Lossco then settling the NIB Debt and IB Debt by set-off.
7. Lossco will sell all of its shares of Newco 2 to Profitco for FMV cash consideration, and
8. Profitco will then immediately authorize the winding-up of Newco 2 into Profitco so that all its assets are distributed to Profitco and any liabilities assumed, and it will then be formally dissolved.

The transactions described above will be repeated with Newco 3 and then with Newco 4. When Lossco’s non-capital losses and investment tax credits are fully utilized, Lossco will wind-up Newco 1.

Other representations

Newco 2’s second fiscal period, which will begin at the first moment of the day of its dissolution and end with that dissolution, will be its first functional currency year.

Proposed s. 18.2(4) will not apply to limit the deductibility of the interest on the IB Debt as Lossco and Newco 2 are eligible group corporations in respect of one another and will elect to treat the interest payment under the IB Debt as excluded interest.

Rulings

Including re ss. 20(1)(c), 88(1.1) and 55(2), re the application of s. 261(16)(a) to the wind-up of Newco into Profitco regarding Newco 2 being deemed to have elected Profitco’s tax reporting currency for its second short taxation year and re the non-application of the avoidance rule in s. 261(18) and the stop-loss rule in s. 262(21).

CRA ruled on transactions for Profitco, which is an indirect wholly-owned Canadian subsidiary of a non-resident parent, to utilize the non-capital losses of Lossco, which is a direct wholly-owned Canadian subsidiary of the non-resident parent. Profitco transferred Class 12 property on a s. 85(1) rollover basis to Lossco in consideration for redeemable preferred shares of Lossco, then Lossco transferred the properties back to Profitco in consideration for redeemable preferred shares of Profitco having a paid-up capital equaling their redemption amount, with a joint s. 85(1) election being made at the estimated FMV of the properties, so that Lossco realized recapture of depreciation. The two preferred shareholdings were then redeemed for notes, and the notes set off. Profitco claimed CCA on its stepped-up Class 12 property.

In its summary, the Directorate stated:

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

Background

Parent wholly-owns Lossco (a holding company) which, in turn, owns all the issued and outstanding voting common shares of Opco (a public corporation), which has non-voting shares that trade on an exchange.

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 (ACo).
4. ACo 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 all the accrued dividends on the Newco Preferred Shares held by ACo., with ACo 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 ACo in consideration for its issuance of a non-interest bearing promissory note (the "Newco Note"), then;
10. ACo 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 ACo Common Shares to Opco in exchange for the "Opco Common Shares," utilizing s. 85(1).
13. ACo will be wound up into Opco and Newco wound up into Lossco.

Additional Information

"Loan 2 is being made to ACo, 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."

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 lender. No rep that ACo has stand-alone borrowing capacity.

The Newco Preferred Shares, although term preferred shares, will not be acquired by ACo in the ordinary course of ACo's business.

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.
• Provided both the payment and the receipt of the dividends on the Newco Preferred shares occurs so as to provide a reasonable return on such shares and to fund the interest payments made by ACo on Loan 2, rather than to reduce the fair market value or capital gain of any share, or to increase the total cost amounts of any properties, s. 55(2) will not apply to dividends received by ACo on the Newco Preferred shares.

Background

Lossco, a publicly-traded resident corporation, has non-capital loss carryforward balances all allocable to its only permanent establishment (presumably, its office), and is expected to incur additional annual losses. Profitco is a wholly-owned direct subsidiary of Lossco and a specified financial institution.

Proposed transactions

1. Lossco will use the proceeds of a daylight loan to make an interest bearing loan (the “IB Loan”) to a newly-incorporated subsidiary (“NewLossco”).
2. NewLossco will use such proceeds to subscribe for Preferred Shares of another newly-incorporated subsidiary of Lossco (“Newco”).
3. Newco will use such proceeds to make a non-interest bearing loan (the “NIB Loan”) to Lossco.
4. Pursuant to a capital support agreement, Lossco will annually make contributions of capital to Newco to fund the accrued Preferred Share dividends, with NewLossco thereupon paying all the accrued interest on the IB Loan.
5. In connection with unwinding the loss consolidation arrangement , Newco will redeem the Newco Preferred Shares held by NewLossco in consideration for a non-interest bearing promissory note (the “Newco Note”), with NewLossco repaying the IB Loan by assigning the Newco Note to Lossco, and with Newco and Lossco will agree to set off the amount due under the NIB Loan against the amount due under the Newco Note.
6. Lossco will thereupon transfer all of its NewLossco Common Shares to Profitco under s. 85(1) in exchange for additional common shares of Profitco, and NewLossco will be wound up into Profitco.

Other representations

The Taxpayers will undertake steps to ensure that Lossco’s income as a result of the Proposed Transactions will not exceed an amount that could be fully sheltered with Lossco’s unused losses.

The Newco Preferred Shares and NewLossco Common Shares will be term preferred shares. However, the Newco Preferred Shares that will be acquired by NewLossco will not be acquired in the ordinary course of NewLossco’s business. The NewLossco Common Shares that will be acquired by Lossco will not be acquired in the ordinary course of Lossco’s business.

The Proposed Transactions are not being undertaken to refresh non-capital losses or facilitate the use of such losses in a taxation year after the taxation year in which the losses would have otherwise expired in the hands of Lossco.

Rulings

Standard, including that GAAR provisions of the agreeing provinces would not be applied.

Background

Aco, a holding company which generally does not have taxable income, otherwise than foreign accrual property income (FAPI) from a wholly-owned controlled foreign affiliate (Bco), has been incurring losses as a result of debt issued to the public. Profitco is wholly-owned by Holdco, which is wholly-owned by Aco.

Proposed transactions

1. Aco will use the proceeds of a daylight loan (whose amount “will not exceed the borrowing capacity of the Aco group”) to make an interest-bearing loan (the “Lossco1 Loan”) to a newly-incorporated subsidiary of Holdco (“Lossco1”).
2. Lossco1 will use such proceeds to subscribe for non-voting cumulative redeemable retractable preferred shares (the “Newco1 Preferred Shares”) of Newco1 (wholly-owned by Aco).
3. Newco1 will use such proceeds to make an interest-free loan to Aco (the “Aco Loan”).
4. Aco will make periodic contributions of capital to Newco1 to fund the payment of dividends on the Newco1 Preferred Shares, with Lossco1 using those amounts to pay interest to Aco on the Lossco1 Loan.
5. To unwind the structure, Aco will use the proceeds of a daylight loan to repay the Aco Loan to Newco1, which will redeem the Newco1 Preferred Shares held by Lossco1, which will repay the Lossco1 Loan, with Aco repaying the daylight loan.
6. Holdco will transfer its Lossco1 shares on a s. 85(1) rollover basis to Profitco.
7. Lossco1 will be wound-up into Profitco. “Lossco1 will be formally dissolved before the end of the first taxation year of Profitco commencing after the commencement of the winding-up of Lossco1. Lossco1 will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.”
8. Newco1 will be wound-up.

The above transactions will be repeated “in the XXXXXXXXXX taxation year in order to use the portion of the interest expense on the Issued Public Debt that cannot be otherwise sheltered with FAPI from Bco,” with Newco2 and Lossco2 playing the same role as Newco1 and Lossco1, and then being wound-up.

Additional information

“Aco will not claim, at any time, a capital loss in respect of its capital contribution in Lossco1 and Newco1. Also, Lossco1 and Newco1 will never be insolvent.”

Rulings

Standard

Current structure

Three corporations within a group wholly-owned by Parentco (Cco, Dco and Eco) have generated non-capital losses. CCo wholly owns Eco and (going up the chain) is wholly-owned by BCo, Aco and Parentco; and Dco is wholly-owned by ACo. Fco, which is generating taxable income, has an undisclosed ownership (perhaps, its direct or indirect ownership by Parentoco is less than 100% but greater than 50%.) “The borrowing capacity of Parentco and its subsidiaries significantly exceeds the maximum amount ... required to complete the Proposed Transactions … .”

Proposed transactions

1. Bco will incorporate a new wholly-owned subsidiary (“Lossco”) and subscribe for Lossco common shares for nominal consideration.
2. Cco will incorporate a new wholly-owned subsidiary (“Newco 1”) and subscribe for Newco 1 common shares for nominal consideration.
3. Cco will use the proceeds of a daylight loan to make an interest-bearing loan (“Lossco Note 1”) to Lossco, with recourse being limited to the Newco 1 Preferred Shares of Lossco described below.
4. Lossco will use such proceeds to subscribe for cumulative (with a positive spread) non-voting redeemable retractable preferred shares (the “Newco 1 Preferred Shares”) of Newco 1.
5. Newco 1 will use such proceeds to make a non-interest-bearing demand loan to Cco (the “Cco Note”).
6. At year end, Cco will use the proceeds of a daylight loan to make a capital contribution to Newco 1, which will be used to fund the dividend payments on the Newco 1 Preferred Shares, with Lossco paying the interest on the Lossco Note 1. Lossco will have the liquidity to service its Notes.
7. Also at year end, Cco will use the proceeds of a daylight loan to repay the Cco Note to Newco 1, which will redeem the Newco 1 Preferred Shares, with Lossco repaying the Lossco Note 1 to Cco.
8. The transactions in 1 to 7 will be replicated for Eco and Dco (with the respective use of Newco 2 and Newco 3), and with the daylight loan to Cco being repaid as Cco is repaid.
9. Bco will sell its Lossco common shares to Fco for their agreed fair market value.
10. Lossco will then be wound-up into Fco under s. 88(1.1).
11. The transactions described 1 to 10 will be repeated once annually, such that a new Lossco will be formed for each such repetition and the sold one year later, although Newco 1, Newco 2 and Newco 3 will continue to be used rather than fresh Newcos being incorporated.
12. Ultimately, Newco 1, Newco 2 and Newco 3 will be wound-up.

Rulings

Standard including provincial GAAR ruling.

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).

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… .”

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.

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.

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:

4. Parent will make capital contributions to Lossco to allow Lossco to pay the accrued but unpaid dividends;
5. Lossco will redeem the preferred shares by issuing a demand non-interest-bearing promissory note (the “Redemption Note”);
6. Profitco will pay the accrued interest; and
7. 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.

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.

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.

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.

.

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.

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.

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.

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.

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).

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."

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.

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

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.

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.

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.

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.

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).

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.

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)]

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.

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)

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).

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.

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.

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.

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.

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."

Regarding loss consolidation transactions, CCRA stated:

For a transaction to be commercially reasonable, the amount of borrowings and investments in common shares and preferred shares must be reasonable when compared to the amount of money that each of the corporations could reasonably expect to be able to borrow from a lender that deals at arm's length with them. This is based solely on their credit, which is determined by reference to items such as assets, shareholders' equity, profits and cash flow, but income from the loss utilization scheme is not taken into account. In addition, the losses in question must arise from a business carried on in Canada.

… [W]here the transaction is not commercially reasonable, the borrowed money does not meet the test in paragraph 20(1)(c) of being used for the purpose of earning income.

[T]he fact that Profitco's income is "foreign accrual property income" … will not, in and of itself, change the Agency's position.

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… .

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.

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.

Aco, and its subsidiary Bco, have available capital losses that they wish to use in stepping up the undepreciated capital cost of trademarks (Class 14.1 properties presumably having a nominal or modest capital cost) which Bco uses in the course of carrying on its business. In broad terms, this is accomplished by Bco using up its losses in spinning the trademarks off to Aco on a partial rollover basis, and by Aco dropping the trademarks down to Bco to also use up its losses.

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.

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.

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.

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.

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.

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.

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)...."

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.

After 65302 was decided, the Corporation revised its taxable income computation for a taxation year (Year 1) that was before the normal reassessment period by claiming a deduction for a fine paid by it in Year 1. This had the effect of restoring non-capital losses that had been applied to reduce its taxable income for Year 1, which it now sought to carry forward to a subsequent taxation year (Year 2) that had already been assessed and which apparently was within the normal reassessment period. In finding that CCRA should not allow such carryforward, the Directorate stated:

Since Parliament used the term "deducted" as opposed to "deductible" in paragraph 111(3)(a), we are of the view that any portion of the loss actually deducted by the Corporation in previous taxation years must be considered, even if the taxpayer deducted an amount in error [citing Dominion of Canada General Insurance].

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.

The Taxpayer recognized a capital loss under s. 111(4)(d) for the excess of the ACB of a loan receivable from one of its controlled foreign affiliate (the “Loan”) over the Loan’s fair market value (“FMV”), and designated the following capital property pursuant to s. 111(4)(e): Class 12: intellectual property; Class 14.1: customer relationship; and Class 14.1: goodwill. Could these designations be made even though such property had no capital cost or undepreciated capital cost before the acquisition of control? The Directorate stated:

[P]aragraph 13(34)(a) states … that where a taxpayer carries on a particular business, there is deemed to be a single goodwill in respect of the particular business. …

[T]he goodwill and the customer relationship … constitute a single property, being the goodwill in respect of the Taxpayer’s business.

… 2017-0709141C6 … confirmed that a designation pursuant to paragraph 111(4)(e) can be made with respect to internally generated goodwill.

Regarding what appeared to be a question as to whether the IP could also be stepped up even though it had been generated without any cost, the Directorate stated:

A taxpayer may designate under paragraph 111(4)(e) any amount between the ACB and the FMV of property, including intellectual property included in class 12, as proceeds of disposition, and this property is deemed to be reacquired at a cost equal to the elected proceeds.

The sole asset of a corporation sold to a 3^rd 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).

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).

"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."

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.

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.

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.

Holdco, a CCPC, had accumulated non-capital losses (NCLs) arising from the management services it had rendered over the years (i.e., the services of its employee providing administrative services) to its wholly-owned manufacturing subsidiary, Opco. Immediately after an acquisition of control of Holdco by Buyco, Holdco and Opco amalgamated, so that the same services of the employee now occurred within Amalco.

(a) Could the NCLs accumulated by Holdco be deducted in computing Amalco's taxable income in light of the ss. 87(2.1) and 111(5) restrictions?

(b) Would the answer change if Amalco had two divisions (with separate financial statements): one carrying on the manufacturing business; and the second division for management services, including those previously rendered by Holdco to Opco?

CRA responded:

[O]n the limited basis of the facts submitted … it would be reasonable to consider that the business that generated the losses, namely the management services business that was carried on by Holdco prior to the acquisition of control and prior to the amalgamation of Holdco and Opco, ceased to be operated after the amalgamation. This conclusion is based in particular on … the management activities performed by the Amalco employee [being] intended solely to support the corporation in the manufacturing field, and … not in themselves represent[ing] the carrying on of a business. …

[C]reating two divisions with a separate financial statement for the management services and manufacturing businesses would not change our conclusion … that it would be reasonable to consider that the management services business that was carried on by Holdco ceased to be carried on after the amalgamation of Holdco and Opco.

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.

In finding that the non-capital losses of an acquired corporation were from property rather than a business, so that they could not be utilized by the acquirer following the winding-up of the acquired corporation, the Directorate noted that the Ensite presumption was rebuttable and stated:

[T]hroughout its corporate existence, XXXXXXXXXX earned interest income from a loan to an affiliated corporation. In that regard, it appears that XXXXXXXXXX did not have any employees.

Other than that loan, the only other significant asset of XXXXXXXXXX was its investment in shares of the capital stock of its subsidiary XXXXXXXXXX that did not earn any income.

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.

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.

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.

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.

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)."

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.

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).

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.

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."

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.

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.

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).

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.

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.

After noting that a salary advance was includible in employment income under s. 6(3), CRA indicated that repayment giving rise to a deduction under s. 8(1)(n) could give rise to a non-capital loss.

After 65302 was decided, the Corporation revised its income and taxable income computation for a taxation year (Year 1) that was before the normal reassessment period by claiming a deduction for a fine paid by it in Year 1 as well as reversing a deduction for charitable donations. This had the effect of restoring non-capital losses that had been applied to reduce its taxable income for Year 1 and creating an undeducted balance of charitable donations. It then sought to carry forward the restored non-capital loss together with the undeducted balance of charitable donations to a subsequent taxation year (Year 2) that had already been assessed and which apparently was within the normal reassessment period.

The Directorate indicated:

[I]n a taxation year in which a taxpayer deducts a loss from a previous taxation year pursuant to section 111, the taxpayer may modify the computation of that loss determined under subsection 111(8), for example by adding an additional deduction in computing the taxpayer's business income or loss, even if that loss had already been computed by the taxpayer when filing the tax return for that previous taxation year. This principle stems from New St. James … 66 DTC 5241 … .

Subsection 164(4.1) … does not … prevent a taxpayer from changing the computation of the taxpayer’s loss carryforward from a previous year … consequent on a favourable decision received by another taxpayer.

However, CCRA should not exercise its discretion under s. 152(4) to reassess Year 2 based on IC 75-7R3, para. 4(e), providing that no adjustment will be made to a tax return where the request is based solely upon a successful appeal to the Courts by another taxpayer. Furthermore, since the purportedly restored non-capital losses had already been claimed (i.e., deducted) in the return for Year 1, they could not now be deducted in the Year 2 return. The Directorate stated:

Since Parliament used the term "deducted" as opposed to "deductible" in paragraph 111(3)(a), we are of the view that any portion of the loss actually deducted by the Corporation in previous taxation years must be considered, even if the taxpayer deducted an amount in error [citing Dominion of Canada General Insurance].

"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."

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.

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.

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.

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.

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.

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.

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.