2020 Ruling 2019-0835141R3 - Loss consolidation arrangement -- summary under Paragraph 111(1)(a)

Background

Parent wholly-owns Lossco (a holding company) which, in turn, owns all the issued and outstanding voting common shares of Opco (a public corporation), which has non-voting shares that trade on an exchange.

Proposed transactions

In order to permit Opco to use losses which Lossco is expected to incur:

1. Parent will borrow under a daylight loan (Parent Loan).
2. Parent will use such proceeds to make a non-interest-bearing loan to Lossco (Loan 1).
3. Lossco will use such proceeds to make an interest-bearing loan (Loan 2) to a newly-incorporated subsidiary of Lossco (ACo).
4. ACo will use such proceeds to subscribe for redeemable retractable preferred shares (Newco Preferred Shares) of another newly-incorporated subsidiary of Lossco (Newco).
5. Newco will use such proceeds to make a non-interest-bearing loan (Loan 3) to Lossco.
6. Lossco will repay Loan 1.
7. Parent will repay the Parent Loan.
8. At a subsequent juncture, Lossco will make a contribution of capital to Newco to fund the payment by it of all the accrued dividends on the Newco Preferred Shares held by ACo., with ACo then paying all accrued and unpaid interest on Loan 2 to Lossco.
9. Immediately following the interest payment in 8, and in connection with the unwinding of the loss consolidation arrangement, Newco will redeem the Newco Preferred Shares held by ACo in consideration for its issuance of a non-interest bearing promissory note (the "Newco Note"), then;
10. ACo will repay Loan 2 by assigning the Newco Note to Lossco, then;
11. Loan 3 and the Newco Note will be repaid by mutual set-off.
12. Lossco will transfer all of its ACo Common Shares to Opco in exchange for the "Opco Common Shares," utilizing s. 85(1).
13. ACo will be wound up into Opco and Newco wound up into Lossco.

Additional Information

"Loan 2 is being made to ACo, instead of having Lossco make Loan 2 directly to Opco, to ensure that Opco, which is a public corporation, does not incur debt in order to implement the loss utilization."

Lossco will have the borrowing capacity to obtain a daylight loan, in an amount equal to the amount of Loan 1, directly from an arm's length lender. No rep that ACo has stand-alone borrowing capacity.

The Newco Preferred Shares, although term preferred shares, will not be acquired by ACo in the ordinary course of ACo's business.

Rulings

• Including interest deductibility to ACo on Loan 2 and non-application of ss. 9 and 12(1)(c) to capital contributions received by Newco.
• Provided both the payment and the receipt of the dividends on the Newco Preferred shares occurs so as to provide a reasonable return on such shares and to fund the interest payments made by ACo on Loan 2, rather than to reduce the fair market value or capital gain of any share, or to increase the total cost amounts of any properties, s. 55(2) will not apply to dividends received by ACo on the Newco Preferred shares.