2016 Ruling 2016-0652041R3 - Loss consolidation arrangement -- summary under Paragraph 111(1)(a)

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… .”