2020 Ruling 2019-0819971R3 - Loss Consolidation Ruling -- summary under Paragraph 111(1)(a)

Background

Lossco, a publicly-traded resident corporation, has non-capital loss carryforward balances all allocable to its only permanent establishment (presumably, its office), and is expected to incur additional annual losses. Profitco is a wholly-owned direct subsidiary of Lossco and a specified financial institution.

Proposed transactions

1. Lossco will use the proceeds of a daylight loan to make an interest bearing loan (the “IB Loan”) to a newly-incorporated subsidiary (“NewLossco”).
2. NewLossco will use such proceeds to subscribe for Preferred Shares of another newly-incorporated subsidiary of Lossco (“Newco”).
3. Newco will use such proceeds to make a non-interest bearing loan (the “NIB Loan”) to Lossco.
4. Pursuant to a capital support agreement, Lossco will annually make contributions of capital to Newco to fund the accrued Preferred Share dividends, with NewLossco thereupon paying all the accrued interest on the IB Loan.
5. In connection with unwinding the loss consolidation arrangement , Newco will redeem the Newco Preferred Shares held by NewLossco in consideration for a non-interest bearing promissory note (the “Newco Note”), with NewLossco repaying the IB Loan by assigning the Newco Note to Lossco, and with Newco and Lossco will agree to set off the amount due under the NIB Loan against the amount due under the Newco Note.
6. Lossco will thereupon transfer all of its NewLossco Common Shares to Profitco under s. 85(1) in exchange for additional common shares of Profitco, and NewLossco will be wound up into Profitco.

Other representations

The Taxpayers will undertake steps to ensure that Lossco’s income as a result of the Proposed Transactions will not exceed an amount that could be fully sheltered with Lossco’s unused losses.

The Newco Preferred Shares and NewLossco Common Shares will be term preferred shares. However, the Newco Preferred Shares that will be acquired by NewLossco will not be acquired in the ordinary course of NewLossco’s business. The NewLossco Common Shares that will be acquired by Lossco will not be acquired in the ordinary course of Lossco’s business.

The Proposed Transactions are not being undertaken to refresh non-capital losses or facilitate the use of such losses in a taxation year after the taxation year in which the losses would have otherwise expired in the hands of Lossco.

Rulings

Standard, including that GAAR provisions of the agreeing provinces would not be applied.