2021 Ruling 2020-0869161R3 - Loss Carryforwards and 88(1.1)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Can non-capital losses of a subsidiary be claimed by a parent on a winding-up as a result of a two-step loss acquisition where the loss business carried on by the subsidiary and the shares of the subsidiary are acquired in separate transactions.

Position: Yes.

Reasons: Consistent with prior positions.

XXXXXXXXXX								2020-086916

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
(the “Taxpayer”)

This is in reply to your letter dated XXXXXXXXXX (the “Request”) in which you requested an advance income tax ruling on behalf of the Taxpayer.

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

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

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayer or a related person;

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

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

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

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

This document is based solely on the facts and Proposed Transactions described below. The documentation submitted with the Request does not form part of the facts and Proposed Transactions and any references thereto are provided solely for the convenience of the reader.

I. ENTITIES INVOLVED

Throughout this letter, the entities below will be referred to as follows:

“Opco” means XXXXXXXXXX, a corporation governed by Act 3 that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation and a CCPC;

“Lossco” means XXXXXXXXXX, a corporation governed by Act 1 that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation and a Private Corporation;

“Parentco” means XXXXXXXXXX, a corporation governed by Act 2 that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation and a Private Corporation;

“Taxpayer” means XXXXXXXXXX, a corporation governed by Act 1 that is and will be, at any relevant time and for all purposes of the Act, a Taxable Canadian Corporation and a CCPC;

“Corporate Shareholder” means XXXXXXXXXX, a Taxable Canadian Corporation governed by the laws of Act 3;

“Parent Shareholder 1” means XXXXXXXXXX; and

“Parent Shareholder 2” means XXXXXXXXXX.

II. DEFINITIONS

In this letter, unless otherwise noted, the following terms have the meanings specified herein and, where the circumstances so require, the singular should be read as plural and vice versa:

“ACB” means adjusted cost base, as defined in section 54;

“Act” means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.) c. 1 (as amended);

“Act 1” means the Canada Business Corporations Act R.S.C 1985, c. C-44;

“Act 2” means XXXXXXXXXX;

“Act 3” means XXXXXXXXXX;

“Arm’s Length” has the meaning assigned by subsection 251(1);

“Asset Purchase” means the purchase of Lossco’s assets by the Taxpayer as described in Paragraph 18(d);

“CCAA” means the Companies’ Creditors Arrangement Act R.S.C. 1985, c. C-36;

“CCAA Proceedings” means the proceedings described in Paragraphs 17 and 18;

“CCPC” means a “Canadian-controlled private corporation”, as defined in subsection 125(7);

“Completed Transactions” means the transactions described in the Completed Transactions section of this letter (Paragraphs 26 through 29);

“Cost Amount” has the meaning assigned by subsection 248(1);

“Country 1” means the XXXXXXXXXX;

“Court” means XXXXXXXXXX;

“Court Order” means the order of the Court described in Paragraph 26;

“CRA” means the Canada Revenue Agency;

“FMV” means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at Arm's Length and without compulsion to act, expressed in terms of cash;

“Facility 1” means the facility described in Paragraph 16(b);

“Facility 2” means the facility described in Paragraph 16(c);

“Facility 3” means the facility described in Paragraph 16(d);

“Facility 4” means the facility described in Paragraph 16(e);

“Facility 5” means the facility described in Paragraph 16(f);

“Facility 5 XXXXXXXXXX” means the facility described in Paragraph 16(g);

“Forgiven Amount” has the meaning assigned by subsections 80(1) and 80.01(1);

“Head Office” means the office described in Paragraph 16(a);

“Loss Business” means the business described in Paragraph 15;

“Lossco Liquidation” means the winding-up of Lossco described in Paragraph 31;

“Lossco PUC Reduction” means the PUC reduction described in Paragraph 30;

“Lossco Shares” means the issued and outstanding shares of Lossco;

“Lossco Share Purchase” means the purchase of the Lossco Shares by the Taxpayer as described in Paragraph 26;

XXXXXXXXXX;

“LP” means a limited partnership;

“Monitor” means XXXXXXXXXX, appointed by order of the Court to oversee the CCAA process involving Lossco and Parentco;

“Mr. A” means XXXXXXXXXX, an individual resident in Canada for the purposes of the Act;

“Non-Capital Loss” has the meaning assigned by subsection 111(8);

“Paragraph” refers to a numbered paragraph in this letter;

“Private Corporation” has the meaning assigned by subsection 89(1);

“Proceeds of Disposition” has the meaning assigned by section 54;

“Proposed Transactions” means the transactions described in Paragraph 30 and Paragraph 31;

“Province 1” means the Province of XXXXXXXXXX;

“Province 2” means the Province of XXXXXXXXXX;

“Province 3” means the Province of XXXXXXXXXX;

“Province 3 XXXXXXXXXX” means the XXXXXXXXXX employed by Lossco in Province 3, as described in Paragraph 16(a);

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

“Related” in respect of a person has the meaning assigned by subsection 251(2);

“Residual Assets” means the assets of Lossco as described in Paragraph 27(c);

“Stated Capital” in respect of the share capital of a corporation, has the meaning assigned by the statute by which the corporation is governed;

“Taxable Canadian Corporation” has the meaning assigned by subsection 89(1);

“Taxation Year” has the meaning assigned by subsection 249(1); and

“Terminal Loss” means a deduction pursuant to subsection 20(16).

III. FACTS

The Taxpayer Group

1. The Taxpayer is a Taxable Canadian Corporation governed by the laws of Act 1 and has a taxation year and fiscal period that ends on XXXXXXXXXX. The Taxpayer files its annual corporate income tax return at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.

2. Mr. A owns XXXXXXXXXX% of the shares of, and controls, the Taxpayer.

3. Corporate Shareholder owns XXXXXXXXXX% of the shares of the Taxpayer. Corporate Shareholder deals at Arm’s Length with the Taxpayer, Opco, Lossco, and Parentco. The shares of Corporate Shareholder are owned by XXXXXXXXXX, all individuals resident in Canada. Corporate Shareholder owns and operates a XXXXXXXXXX. Its business is therefore similar to one aspect of the Taxpayer’s operations.

4. The Taxpayer was incorporated in XXXXXXXXXX to complete the Asset Purchase and carry on the Loss Business as further described below.

5. Opco is a Taxable Canadian Corporation governed by the laws of Act 3 and has a taxation year and fiscal period that ends on XXXXXXXXXX. Opco files its annual corporate income tax return at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office.

6. Mr. A is the sole shareholder of Opco.

7. XXXXXXXXXX

Parentco

8. Parentco is a Taxable Canadian Corporation governed by the laws of Act 2 and has a taxation year and fiscal period that ends on XXXXXXXXXX. Parentco files its annual corporate income tax return at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office. Parentco’s business number is XXXXXXXXXX.

9. The holders of Parentco shares consist of:

(a) Parent Shareholder 1 as to XXXXXXXXXX% of the issued and outstanding shares;

(b) Parent Shareholder 2 as to XXXXXXXXXX% of the issued and outstanding shares; and

(c) XXXXXXXXXX individuals resident in Canada for the purposes of the Act, who at all relevant times, deal at Arm’s Length with the Taxpayer.

10. Parent Shareholder 1 is a limited partnership governed by the laws of Country 1. At all relevant times all of its partners will deal at Arm’s Length with the Taxpayer.

11. Parent Shareholder 2 is a XXXXXXXXXX governed by the laws of Country 1. At all relevant times all its members will deal at Arm’s Length with the Taxpayer.

12. At all times prior to the Lossco Share Purchase, Parentco held all of the issued and outstanding Lossco Shares.

Lossco and the Lossco Business

13. Lossco is a Taxable Canadian Corporation governed by the laws of Act 1 and has a taxation year and fiscal period that ends on XXXXXXXXXX. Lossco files its annual corporate income tax return at the XXXXXXXXXX Taxation Centre and is serviced by the XXXXXXXXXX Tax Services Office. Lossco’s business number is XXXXXXXXXX.

14. The PUC of the Lossco Shares is approximately $XXXXXXXXXX.

15. Lossco has carried on a XXXXXXXXXX business (the “Loss Business”), dealing primarily in XXXXXXXXXX

16. The Loss Business can be described as follows:

(a) Head Office: Lossco’s head office (the “Head Office”) was located in XXXXXXXXXX, Province 1 in leased premises. The Head Office operations included all XXXXXXXXXX and management of the business generally. All senior management, sales staff, administrative staff, and most logistics and XXXXXXXXXX staff worked out of the Head Office. At the commencement of the CCAA proceedings, Lossco had XXXXXXXXXX employees working at the Head Office.

In addition to the XXXXXXXXXX staff working at the Head Office, Lossco employed XXXXXXXXXX in Province 3 (the “Province 3 XXXXXXXXXX”) who had established relationships with XXXXXXXXXX in Province 3 and were integral to Lossco’s operations.

(b) Facility 1: “Facility 1” is XXXXXXXXXX.

(c) Facility 2: “Facility 2” is XXXXXXXXXX.

(d) Facility 3: “Facility 3” is XXXXXXXXXX.

(e) Facility 4: “Facility 4” is XXXXXXXXXX.

(f) Facility 5: “Facility 5” is XXXXXXXXXX.

(g) Facility 5 XXXXXXXXXX: “Facility 5 XXXXXXXXXX” is XXXXXXXXXX.

Lossco CCAA Proceedings

17. Lossco encountered financial difficulty and began to incur losses from the Loss Business starting in its XXXXXXXXXX Taxation Year. In XXXXXXXXXX, Lossco and Parentco filed for insolvency protection under the CCAA and the Court granted Lossco and Parentco a protective order under the CCAA in respect of their creditors and appointed the Monitor to oversee the CCAA process.

18. After receiving the protective order, Lossco engaged in a process of selling its assets in order to realize proceeds for the benefit of its creditors.

(a) In XXXXXXXXXX, Lossco sold Facility 2 to a third party. The sale was approved by order of the Court.

(b) In XXXXXXXXXX, the Taxpayer offered to purchase all of Lossco’s remaining assets and offer employment to substantially all of Lossco’s employees. This offer was subject to a XXXXXXXXXX condition that could not be waived in a timely way and did not complete. The Taxpayer revised its purchase offer as described below.

(c) In XXXXXXXXXX, Lossco entered into an agreement to sell Facility 3, Facility 4, Facility 5 and Facility 5 XXXXXXXXXX to a third party. This sale was approved by the Court and completed in XXXXXXXXXX.

(d) In XXXXXXXXXX, Lossco entered into an agreement to sell Facility 1 and the Head Office to the Taxpayer (the “Asset Purchase”). The Asset Purchase was approved by the Court and completed in XXXXXXXXXX, and is described further below.

(e) After completing the above sales, Lossco continued to collect on its receivables and make distributions to creditors in the course of the CCAA Proceedings.

The Asset Purchase

19. The Asset Purchase involved the following:

(a) The Taxpayer purchased substantially all of the assets which comprised Facility 1, including all land, buildings, machinery and equipment, XXXXXXXXXX rights, XXXXXXXXXX. The Taxpayer hired all XXXXXXXXXX of the Lossco employees then working at Facility 1.

(b) The Taxpayer purchased substantially all of the assets which comprised the Head Office, including computers, furniture and equipment, software licences, customer information, XXXXXXXXXX, quality control records, marketing information, XXXXXXXXXX, and acquired rights to operate from the Head Office leased premises. The Taxpayer hired all of the Lossco employees then working at the Head Office, except for the XXXXXXXXXX senior Lossco employees. XXXXXXXXXX of the retained employees were hired on or about the completion of the Asset Purchase, while XXXXXXXXXX employees were hired prior to the Asset purchase to assist in the transition of the Loss Business.

The Taxpayer also acquired a trademark used for the marketing and sale of XXXXXXXXXX by Lossco and hired XXXXXXXXXX of the Province 3 XXXXXXXXXX.

20. The Taxpayer acquired the Loss Business as a result of the Asset Purchase and the related Lossco employees, and the Taxpayer has continued to carry on the Loss Business as a going concern, with the acquired assets and employees, continuously since the Asset Purchase. Specifically:

(a) Prior to the Asset Purchase, Lossco carried on the Loss Business through its employees at the Head Office XXXXXXXXXX, and operations generally. After the Asset Purchase, the Taxpayer carried on the Loss Business through the same employees at the Head Office, XXXXXXXXXX and operations in the same way except that XXXXXXXXXX facilities were reduced to Facility 1. The Taxpayer has also rehired XXXXXXXXXX of the former Head Office employees who were laid off during the CCAA Proceedings. This makes a total of XXXXXXXXXX Head Office employees with XXXXXXXXXX of these employees working out of the Head Office and XXXXXXXXXX Head Office employees working out of Province 3.

Prior to the Asset Purchase, Lossco sourced and XXXXXXXXXX for the Loss Business through the Province 3 XXXXXXXXXX. After the Asset Purchaser, the Taxpayer continued to source and XXXXXXXXXX for the Loss Business through the XXXXXXXXXX Province 3 XXXXXXXXXX that it hired, with the advantage of the relationships they had established with XXXXXXXXXX.

(b) Prior to the Asset Purchase, Lossco received and XXXXXXXXXX at XXXXXXXXXX facilities in Province 3, with Facility 1 being the largest. After the Asset Purchase, the Taxpayer received and XXXXXXXXXX at Facility 1 in the same way as occurred when it was owned by Lossco, employing the same employees as were employed by Lossco at the time of the Asset Purchase. The Taxpayer has also hired additional employees to work at Facility 1 and there are now XXXXXXXXXX employees working at Facility 1. All but XXXXXXXXXX of the XXXXXXXXXX employees are former Lossco employees.

(c) Prior to the Asset Purchase, the Loss Business focused on XXXXXXXXXX, purchased from XXXXXXXXXX in XXXXXXXXXX. After the Asset Purchase, the Loss Business continued to focus on dealing in XXXXXXXXXX, purchased from XXXXXXXXXX in XXXXXXXXXX.

21. The assets acquired by the Taxpayer were significant in relation to the assets used by Lossco in the Loss Business at the time the CCAA Proceedings commenced.

(a) Based on the tax returns filed by Lossco for its XXXXXXXXXX through XXXXXXXXXX Taxation Years, over XXXXXXXXXX% of Lossco’s total revenue was attributable to its Head Office operations. Substantially all of the revenue of the Loss Business is derived from XXXXXXXXXX at the Head Office and the profitability of the Loss Business is based on that XXXXXXXXXX revenue net of the cost of XXXXXXXXXX purchased through the Head Office staff, costs of XXXXXXXXXX, delivery and other overhead expenses. In addition, the Taxpayer hired XXXXXXXXXX of the Province 3 XXXXXXXXXX who, based on their established relationships with XXXXXXXXXX, continued to perform an integral role to the Loss Business in XXXXXXXXXX.

(b) Facility 1 was the largest and most productive processing facility.

(i) In terms of XXXXXXXXXX, Facility 1 XXXXXXXXXX% of the amount of XXXXXXXXXX at the second most productive facility (Facility 2), and more than XXXXXXXXXX% of the amount of XXXXXXXXXX at the third most productive facility (Facility 3). As a percentage of XXXXXXXXXX processed among all facilities, Facility 1 represented over XXXXXXXXXX%.

(ii) In terms of productivity based on XXXXXXXXXX net of facility operating costs, Facility 1 was approximately XXXXXXXXXX% of the productivity of the second most productive facility (Facility 3), and nearly XXXXXXXXXX% of the productivity of the third most productive facility (Facility 2). As a percentage of total productivity of the facilities based on XXXXXXXXXX net of facility operating costs, Facility 1 represented XXXXXXXXXX% of the total.

(iii) In terms of cost of investment, Facility 1 represented approximately XXXXXXXXXX% of the net book value of all property, plants and equipment used in the Loss Business.

(c) In terms of employees, the employees working at Facility 1 and the Head Office and who were hired by the Taxpayer in connection with the Asset Purchase and subsequently represent about XXXXXXXXXX% of the employees described above who were working in the Loss Business at the commencement of the CCAA Proceedings.

Taxpayer’s Business Since the Asset Purchase

22. Since the time of the Asset Purchase, the Taxpayer has continued to carry on the Loss Business without interruption using the assets acquired in the Asset Purchase and with the employees hired in connection with the Asset Purchase, along with additional employees hired since then. In addition to the Head Office employees hired at the time of the Asset Purchase, the Taxpayer has re-hired XXXXXXXXXX former Head Office employees who had been laid off during the CCAA Proceedings. The XXXXXXXXXX Province 3 XXXXXXXXXX it hired also continue to be employed in the Loss Business XXXXXXXXXX. The Loss Business carried on by the Taxpayer continues to be the same XXXXXXXXXX business, with emphasis on XXXXXXXXXX, as was carried on by Lossco.

23. The Loss Business continues to be carried on by the Taxpayer through the Head Office with those assets and employees acquired as part of the Asset Purchase, with the Head Office employees XXXXXXXXXX. In addition to the XXXXXXXXXX Head Office employees hired prior to completing the Asset Purchase, the Taxpayer re-hired XXXXXXXXXX of the former Head Office employees and continues to employ XXXXXXXXXX of the Province 3 XXXXXXXXXX who XXXXXXXXXX in the same way and from the same XXXXXXXXXX as was the case when Lossco carried on the Loss Business. The Head Office was later moved to leased premises in XXXXXXXXXX, Province 1 and the Taxpayer hired an additional XXXXXXXXXX Head Office employees who work out of Province 3.

24. The Taxpayer continues to XXXXXXXXXX and operate Facility 1 in the same way as it had been operated by Lossco and with the same employees that were hired in connection with the Asset Purchase. The Taxpayer has also hired additional employees to work at Facility 1 such that its staffing level is nearly the same as the Facility 1 staffing level at the commencement of the CCAA Proceedings.

Lossco’s Non-Capital Losses

25. Lossco incurred Non-Capital Losses in each of its XXXXXXXXXX through XXXXXXXXXX Taxation Years. The Non-Capital Losses arose from operations and from Terminal Losses resulting from the sales described above. Lossco’s Non-Capital Losses by year of origin, as reported in the tax return filed by Lossco for its XXXXXXXXXX Taxation Year, are set out below:

XXXXXXXXXX

IV. COMPLETED TRANSACTIONS

26. On XXXXXXXXXX, the Taxpayer entered into an agreement with Parentco to purchase all of the Lossco Shares (the “Lossco Share Purchase”). The Lossco Share Purchase was approved by XXXXXXXXXX order of the Court (the “Court Order”) and completed on XXXXXXXXXX.

27. At the time of the Lossco Share Purchase:

(a) Lossco had no employees;

(b) Lossco owed approximately $XXXXXXXXXX to creditors who, at all relevant times, deal at Arm’s Length with the Taxpayer; and

(c) Lossco’s remaining assets consisted of its books and records, trademarks, tradenames, internet domain names, websites, inventory and supplies including branded XXXXXXXXXX (the “Residual Assets”). The Cost Amount to Lossco of each Residual Asset is nominal.

28. The Taxpayer was required to pay $XXXXXXXXXX to Parentco on completion of the Lossco Share Purchase, and is required to pay an additional $XXXXXXXXXX to Parentco provided this letter was issued before XXXXXXXXXX. All payments received by Parentco will be distributed to claimants in the CCAA Proceedings in accordance with the Court Order.

29. As a consequence of the Court Order, approximately $XXXXXXXXXX of debt owing by Lossco was extinguished without repayment resulting in a Forgiven Amount. After reduction for the Forgiven Amount, Lossco’s Non-Capital Loss balance for its Taxation Year ending immediately before the Lossco Share Purchase is approximately $XXXXXXXXXX.

V. PROPOSED TRANSACTIONS

30. In accordance with the provisions of Act 1, Lossco will reduce the stated capital of its outstanding shares to $XXXXXXXXXX, which is an amount not less than the aggregate Cost Amount to Lossco of the Residual Assets (the “Lossco PUC Reduction”). Nothing will be paid by Lossco, and no amount will be received by the Taxpayer, on the reduction of the stated capital of the Lossco Shares.

31. Lossco will be wound up and subsequently dissolved in accordance with the provisions of Act 1 (the “Lossco Liquidation”).

VI. ADDITIONAL INFORMATION

32. At all relevant times, the Taxpayer will continue to carry on the Loss Business for profit or with a reasonable expectation of profit.

33. At the time of the Lossco Share Purchase, Lossco had no assets other than the Residual Assets, had no employees and did not carry on business.

34. The combined effect of the Asset Purchase, Completed Transactions and Proposed Transactions would put the Taxpayer in the same position as if it had simply purchased all of the Lossco Shares at the time of the Asset Purchase and continued to run the Loss Business through Lossco. This was not possible given the limitations imposed by the CCAA process.

35. A limited number of Opco’s XXXXXXXXXX employees will become employees of the Taxpayer but will continue to be located, and work from, Opco’s offices in Province 2. After they become employed by the Taxpayer, the XXXXXXXXXX employees will, on behalf of the Taxpayer, XXXXXXXXXX which are identical to the XXXXXXXXXX in the Loss Business. The purpose of the Taxpayer hiring employees of Opco to work in the Loss Business is to increase the scale and volume of sales in the Loss Business.

36. Lossco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.

37. Lossco and Parentco are not related to and deal at arm’s length with the Taxpayer, and the shareholders of the Taxpayer.

38. The amount determined under subparagraph 88(1)(d)(i) would be nominal and less than the PUC of the Lossco shares.

VII. PURPOSE OF THE PROPOSED TRANSACTIONS

39. The purpose of the Lossco PUC Reduction is to reduce the PUC of the Lossco Shares to better align it with the Cost Amount of Lossco’s Residual Assets.

40. The purpose of the Lossco Liquidation is to permit the Taxpayer to deduct the Non-Capital Losses in computing taxable income from the Loss Business or another business substantially all of the income of which is derived from selling property which is similar to the property sold in the Loss Business.

VIII. RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Subparagraph 53(2)(a)(ii) will not require the Taxpayer to deduct any amount in computing the ACB of its Lossco Shares as a result of the Lossco PUC Reduction.

B. The provisions of subsection 88(1) will apply to the Lossco Liquidation with the result that:

(a) Lossco will be deemed, pursuant to paragraph 88(1)(a), to dispose of the Residual Assets for Proceeds of Disposition equal to their Cost Amount to Lossco immediately before the Lossco Liquidation;

(b) the Taxpayer will be deemed, pursuant to paragraph 88(1)(b), to dispose of its Lossco Shares for Proceeds of Disposition equal to the greater of the amounts described in subparagraph 88(1)(b)(i) and (ii); and

(c) the Taxpayer will be deemed, pursuant to paragraph 88(1)(c), to have acquired the Residual Assets that are distributed to the Taxpayer on the Lossco Liquidation for an amount equal to the Proceeds of Disposition to Lossco.

C. Provided that the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply after the Lossco Liquidation has been completed to permit the Taxpayer to deduct the Non-Capital Losses of Lossco in computing its taxable income for a taxation year commencing after the commencement of the winding-up, subject to the limitations in paragraph 88(1.1)(e) and section 111.

D. Subsection 245(2) will not be applied to the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.

For greater certainty, the acquisition of the Loss Business from Lossco by the Taxpayer in a separate transaction completed prior to the Proposed Transactions as more particularly described herein; the fact that Lossco has since been inactive with no assets other than the Residual Assets; and the fact that the Taxpayer carries on the Loss Business, shall not, in and by themselves, cause: (i) the Taxpayer to fail to satisfy the requirement of paragraph 88(1.1)(b); or (ii) the Loss Business carried on by the Taxpayer to not be treated as the same as the Loss Business for purposes of paragraph 88(1.1)(e).

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R11 issued on April 1, 2021, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

IX. COMMENTS

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

a) the FMV or ACB of any property referred to herein or the PUC in respect of any share referred to herein including the amount paid for the shares of Lossco, described in Paragraph 28;

b) the outstanding balance of various tax accounts, such as Non-Capital Losses, for any of the corporate entities described herein including whether the settlement of the debts due from Lossco gave rise to any income or gain or any Forgiven Amount for Lossco or should otherwise have reduced Lossco’s Non-Capital Losses;

c) whether the requirements of paragraphs 88(1.1)(a), (b) or (e) are satisfied, except as expressly provided herein, or

d) any provincial tax consequences of the Proposed Transactions or any other tax consequence relating to the facts, proposed transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Yours truly,

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