2020 Ruling 2019-0819871R3 - Loss Consolidation Involving Canadian Branch -- summary under Subsection 87(2.1)

Background

• Canco1, which carries on the Profitco Business in Canada is wholly-owned by Foreignco2 which, in turn, is wholly-owned by Foreignco1, a public company that is the group’s ultimate parent.
• USco1, which is wholly-owned by US Parent, carries on its business (the “USco1 Business”) only in Canada through permanent establishments (the “USco1 Canadian Branch”). The USco1 Business has an NCL carry forward balance, which arose in a particular province.
• US Parent, which is wholly-owned by Foreignco1, also wholly-owns UScorp2, which carries on business solely in the US.

Proposed transactions

1. US Parent will contribute all the shares of USco1 to UScorp2. (This step will “ensure that US Parent’s status as a holding company for … net worth … tax is not jeopardized by the completion of the Proposed Transactions. Such status could otherwise be jeopardized if US Parent were to own the shares of USco1 after it becomes a ULC.”)
2. USco1 will continue its existence out of XX and continue its existence into XX. (“It was determined that the company could not be directly continued from XXXXXXXXXX to a Canadian jurisdiction.”)
3. USco1 will then continue its existence out of XX and continue its existence as a ULC under a provincial Act, so that it becomes resident in Canada for purposes of the Act and ceases to be a resident of the US under Article IV of the Treaty. USco1 will so be continued first as a ULC rather than a regular corporation for US tax reasons.)
4. UScorp2 will sell all of the shares of USco1 to Foreignco2 (so as to avoid split ownership of Amalco) for fair market value consideration.
5. USco1 will amend its articles to change from a ULC to a regular business corporation.
6. USco1 will continue out of that province and into the Canadian federal jurisdiction to be governed under the CBCA.
7. Canco1 and USco1 will amalgamate, with Foreignco2 being deemed by s. 87(1.1) to have received shares of the capital stock of Amalco by virtue of the amalgamation for purposes of s. 87(1). The USco1 Business will continue to be carried on by Amalco, for profit or with a reasonable expectation of profit throughout any taxation year in which the USco1 NCLs will be used to offset the income generated by the combined Canadian businesses.

Rulings

Including that USco1 will continue to be the same corporation following the two continuances and that, in light inter alia of s. 87(2.1), the NCLs of USco1 will be available to be utilized by Amalco.