1999 Ruling 9910853 - LOSS CONSOLIDATION

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

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

PRINCIPAL ISSUE:

Loss Consolidation

Position:

Ok

REASON:

Previously provided in other rulings (972734 and 971058). The corporations have proven that they have the credit facilities to borrow the amount proposed.

XXXXXXXXXX
XXXXXXXXXX 3-991085
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX

This is in response to your letter of XXXXXXXXXX, requesting advance income tax rulings on behalf of the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX.

Unless otherwise indicated, all statutory references contained in this letter are to the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to date hereof (the “Act”).

Our understanding of the facts and proposed transactions is as follows:

Definitions

(a) “affiliated persons” has the meaning assigned by subsection 251.1(1);

(b) “investment tax credit” has the meaning assigned by subsection 127(9);

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

(d) “related persons” has the meaning assigned by subsection 251(2);

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

(f) “taxable income” has the meaning assigned by subsection 248(1).

Facts

1. XXXXXXXXXX was incorporated under the Canada Business Corporations Act and is a taxable Canadian corporation.

XXXXXXXXXX

The fiscal period of XXXXXXXXXX ends on XXXXXXXXXX. As at XXXXXXXXXX had approximately $XXXXXXXXXX of non-capital losses, approximately $XXXXXXXXXX of unclaimed SR&ED expenditures and approximately $XXXXXXXXXX of investment tax credits.

XXXXXXXXXX

These credit facilities are available to XXXXXXXXXX without any guarantee or letter of comfort from its parent.

2. The authorized share capital of XXXXXXXXXX consists of:

(a) an unlimited number of Class “A” shares, without par value, each share entitled to one vote;

(b) an unlimited number of Class “B” shares, without par value, to be issued for an unlimited consideration, each share entitled to two votes;

(c) an unlimited number of XXXXXXXXXX% non-cumulative, non-voting, redeemable Class “C” shares, without par value, to be issued for an unlimited consideration.

As at XXXXXXXXXX, there were XXXXXXXXXX Class “A” shares, XXXXXXXXXX Class “B” shares and XXXXXXXXXX Class “C” shares issued and outstanding in XXXXXXXXXX.

XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, owns all the issued and outstanding shares of XXXXXXXXXX.

3. XXXXXXXXXX is a taxable Canadian corporation which XXXXXXXXXX.

4. The authorized share capital of XXXXXXXXXX consists of:

(a) an unlimited number of preferred shares, without par value, issuable in series;

(b) an unlimited number of common shares, without par value.

As at XXXXXXXXXX, there were XXXXXXXXXX common shares issued and outstanding in XXXXXXXXXX.

5.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

6. The most recent non-consolidated internal financial statements of XXXXXXXXXX, which does not include the acquisition of XXXXXXXXXX, indicate that XXXXXXXXXX had:

(a) assets of approximately $XXXXXXXXXX;

(b) liabilities of approximately $XXXXXXXXXX;

(c) shareholders’ equity of approximately $XXXXXXXXXX.

7. The internal financial statements of XXXXXXXXXX for its fiscal year ended XXXXXXXXXX indicate that XXXXXXXXXX had:

(a) assets of approximately $XXXXXXXXXX;

(b) liabilities of approximately $XXXXXXXXXX;

(c) shareholders’ equity of approximately $XXXXXXXXXX.

XXXXXXXXXX had a taxable income of approximately $XXXXXXXXXX for its taxation year ending XXXXXXXXXX. It is expected that for its taxation year ending XXXXXXXXXX will have a taxable income of approximately $XXXXXXXXXX.

8. XXXXXXXXXX are persons affiliated as well as related with each other.

Proposed Transactions

9. XXXXXXXXXX will incorporate a corporation (“Newco”) under the Canada Business Corporations Act. Newco will be a taxable Canadian corporation. The taxation year end of Newco will be XXXXXXXXXX. Newco will not carry on any business and its activities will be limited to investing the proceeds received upon the issuance of its Preferred Shares to XXXXXXXXXX as described in paragraph 14 below, in the non-interest bearing loan to XXXXXXXXXX as described in paragraph 15 below.

10. The authorized capital of Newco will consist of two classes of shares, common shares and non-voting, cumulative dividend, redeemable, retractable preferred shares (the “Preferred Shares”). The cumulative dividends payable on the Preferred Shares will be calculated daily by reference to the redemption/retraction price of the Preferred Shares at a rate equal to the XXXXXXXXXX loan (see paragraph 13) interest rate plus one basis point. Dividends will be payable monthly in arrears on the last day of every month.

11. The common shares of Newco will be issued to XXXXXXXXXX for $XXXXXXXXXX.

12. XXXXXXXXXX will borrow an amount (the “Principal Amount”) of $XXXXXXXXXX on a “daylight loan” basis from an arm’s-length financial institution (the “Daylight loan “). At the time of such borrowing it is not expected that XXXXXXXXXX will have utilized the credit facilities mentionned in paragraph 1 above.

13. XXXXXXXXXX will use the proceeds received from the Daylight Loan to make a demand loan to XXXXXXXXXX (the “XXXXXXXXXX Loan”). Simple interest will accrue on the XXXXXXXXXX Loan and will be calculated daily at a rate of prime (as quoted by the XXXXXXXXXX) plus 99 basis points payable monthly in arrears on the last day of every month.

14. XXXXXXXXXX will use the proceeds received from the XXXXXXXXXX Loan to subscribe for Preferred Shares in Newco having an aggregate redemption/retraction price equal to the Principal Amount.

15. Newco will use the proceeds received from the Preferred Shares subscription to make a demand, interest-free loan to XXXXXXXXXX (the “XXXXXXXXXX Loan”) in an amount equal to the Principal Amount.

16. XXXXXXXXXX will use the proceeds received from XXXXXXXXXX Loan to repay the Daylight Loan.

17. On the last day of each month while XXXXXXXXXX Loan is outstanding, XXXXXXXXXX will make a contribution of capital to Newco in an amount equal to the dividends payable by Newco on that day on the Preferred Shares.

18. Once it is expected that the interest income will be greater than the amounts required to utilize the tax attributes available, the following transactions may be implemented:

(a) XXXXXXXXXX will borrow an amount on a “daylight loan” basis from an arm’s-length financial institution and will use the funds to pay down the XXXXXXXXXX Loan;

(b) Newco will use the funds received to redeem part of its Preferred Shares held by XXXXXXXXXX;

(c) XXXXXXXXXX will use the proceeds from the redemption to pay down the XXXXXXXXXX Loan;

(d) XXXXXXXXXX will use the funds received on the repayment of the XXXXXXXXXX Loan to repay the daylight loan.

19. XXXXXXXXXX will cause Newco to be wound-up within sixty days after all the Preferred Shares are redeemed and the XXXXXXXXXX Loan has been repaid.

Purpose of the Proposed Transactions

20. The purpose of the proposed transactions is to effect a tax consolidation of XXXXXXXXXX and XXXXXXXXXX by causing XXXXXXXXXX to earn interest income, thus permitting XXXXXXXXXX to utilize the non-capital losses, investment tax credit and other tax attributes available to it.

21. Since the business of XXXXXXXXXX is not a core business for the XXXXXXXXXX group, the integration of that business with XXXXXXXXXX is not, from a commercial point of view, warranted. Also, from a tax point of view, the price paid for the XXXXXXXXXX shares was $ XXXXXXXXXX and it is preferable to preserve the cost basis of these shares which could not be attained if XXXXXXXXXX was either to amalgamate or to be wound-up.

Additional Information

22. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling is being considered by a Tax Services Office or a Taxation Centre of Revenue Canada Customs, Excises and Taxation in connection with any tax returns already filed, and none of the issues are subject of any notice of objection or is under appeal.

23. The taxpayers are served by the XXXXXXXXXX Tax Services Offices and the XXXXXXXXXX Taxation Centre.

Rulings Given

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

A. No amount will be included in the income of Newco pursuant to paragraph 12(1(x) of the Act in respect of the contributions of capital made by XXXXXXXXXX to Newco as described in paragraph 17 of the Proposed Transactions.

B. Provided that XXXXXXXXXX has a legal obligation to pay interest on the XXXXXXXXXX loan and provided that the Preferred Shares of Newco continue to be held for the purpose of gaining or producing income (other than income which would be exempt), XXXXXXXXXX will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c) of the Act.

C. Subsection 245(2) of the Act will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on Revenue Canada Custom , Excises and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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