2017 Ruling 2017-0706211R3 - Standard Loss Consolidation -- summary under Paragraph 111(1)(a)

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.