2017 Ruling 2017-0711911R3 - loss consolidation ruling -- summary under Paragraph 111(1)(a)

Background

Aco, a holding company which generally does not have taxable income, otherwise than foreign accrual property income (FAPI) from a wholly-owned controlled foreign affiliate (Bco), has been incurring losses as a result of debt issued to the public. Profitco is wholly-owned by Holdco, which is wholly-owned by Aco.

Proposed transactions

1. Aco will use the proceeds of a daylight loan (whose amount “will not exceed the borrowing capacity of the Aco group”) to make an interest-bearing loan (the “Lossco1 Loan”) to a newly-incorporated subsidiary of Holdco (“Lossco1”).
2. Lossco1 will use such proceeds to subscribe for non-voting cumulative redeemable retractable preferred shares (the “Newco1 Preferred Shares”) of Newco1 (wholly-owned by Aco).
3. Newco1 will use such proceeds to make an interest-free loan to Aco (the “Aco Loan”).
4. Aco will make periodic contributions of capital to Newco1 to fund the payment of dividends on the Newco1 Preferred Shares, with Lossco1 using those amounts to pay interest to Aco on the Lossco1 Loan.
5. To unwind the structure, Aco will use the proceeds of a daylight loan to repay the Aco Loan to Newco1, which will redeem the Newco1 Preferred Shares held by Lossco1, which will repay the Lossco1 Loan, with Aco repaying the daylight loan.
6. Holdco will transfer its Lossco1 shares on a s. 85(1) rollover basis to Profitco.
7. Lossco1 will be wound-up into Profitco. “Lossco1 will be formally dissolved before the end of the first taxation year of Profitco commencing after the commencement of the winding-up of Lossco1. Lossco1 will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.”
8. Newco1 will be wound-up.

The above transactions will be repeated “in the XXXXXXXXXX taxation year in order to use the portion of the interest expense on the Issued Public Debt that cannot be otherwise sheltered with FAPI from Bco,” with Newco2 and Lossco2 playing the same role as Newco1 and Lossco1, and then being wound-up.

Additional information

“Aco will not claim, at any time, a capital loss in respect of its capital contribution in Lossco1 and Newco1. Also, Lossco1 and Newco1 will never be insolvent.”

Rulings

Standard