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
- Lossco will borrow under a daylight loan.
- 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.
- 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).
- 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.
- Lossco will use such proceeds to repay the daylight loan.
- 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).