Background
Lossco and its parent (Parentco, also a taxable Canadian corporation) filed for insolvency protection under the CCAA. After receiving a court protective order, Lossco through its Monitor sold five of its facilities to others. However, with court approval, it sold its largest facility including related business assets (Facility 1) together with the assets of its Head Office to the Taxpayer (representing a substantial portion of what had been its assets at the commencement of the CCAA proceedings). The Taxpayer had been incorporated to effect this purchase, and dealt at arm’s length with Lossco and Parentco. The Taxpayer also hired most of the related employees, and hired further employees such that the staffing levels at Facility 1 were nearly what they had formerly been.
The Taxpayer purchased the Lossco shares from Parentco, at which time, Lossco had no assets other than residual assets with a nominal value, had no employees and did not carry on business.
Pursuant to a court order, a portion of debt owing by Lossco was extinguished without repayment, thereby reducing its non-capital loss balances.
Proposed transactions
Lossco will reduce the stated capital of its outstanding shares to an amount not less than the aggregate cost amount to Lossco of its residual assets, with no amount being paid on such reduction.
Lossco will be wound up and subsequently dissolved.
The combined effect of the transactions will be to put the Taxpayer in the same position as if it had simply purchased all of the Lossco shares at the time of the asset purchase and continued to run the loss business through Lossco. This was not possible given the limitations imposed by the CCAA process.
Rulings
Including that the Taxpayer will be deemed to dispose of its Lossco Shares for the greater of the amounts described in ss. 88(1)(b)(i) and (ii); provided ss. 88(1.1)(a) and (b) are satisfied, s. 88(1.1) will apply to permit the deduction of the non-capital losses of Lossco subject to the limitations in s. 88(1.1)(e) and s. 111, and as to the non-application of s. 245(2).