2023 Ruling 2022-0949841R3 - Loss Consolidation Ruling -- summary under Paragraph 111(1)(a)

Background

Parentco (listed on an exchange) holds Lossco directly and through Subco, and also holds Profitco. Lossco holds recently-incorporated Newco 1 and Newco 2. Profitco’s functional currency (as defined in s. 261(1)) and tax reporting currency is other than the Canadian dollar. Lossco has not make an election under s. 261(3), and it (and Newco 1 and 2 referred to below) will not do so, so that their tax reporting currency is the Canadian dollar.

Proposed transactions

1. Lossco will use the proceeds of a daylight loan to subscribe for unsecured floating-rate debt (the “IB Debt”) of Newco 2 pursuant to the “IB Credit Facility” and Parentco, Subco and Lossco will enter into the “Support Agreement” regarding the funding of dividend payments referred to in 5 below.
2. Newco 2 will use the proceeds of the IB Debt to subscribe for cumulative non-voting redeemable retractable preferred shares of Newco 1 (the “Newco 1 Preferred Shares”) representing a positive spread over the IB Debt.
3. Newco 1 will use the proceeds of the Newco 1 Preferred Shares to make a non-interest-bearing loan to Lossco (the “NIB Debt”).
4. Lossco will repay the daylight loan.
5. Immediately before the annual unwind transactions referred to in 6 below, Lossco will use share subscription proceeds from Subco to make a capital contribution to Newco 1, Newco 1 will pay the accrued dividends on the Newco 1 Preferred Shares, Newco 2 will use such proceeds to pay the interest on the IB Debt to Lossco, which will use such funds to distribute to Subco the PUC received on the previous share subscription.
6. Under the annual unwind transactions, Newco 1 will redeem its Newco 1 Preferred Shares by transferring to Newco 2 the NIB Debt in accordance with the terms of the Newco 1 Preferred Shares, with Newco 2 and Lossco then settling the NIB Debt and IB Debt by set-off.
7. Lossco will sell all of its shares of Newco 2 to Profitco for FMV cash consideration, and
8. Profitco will then immediately authorize the winding-up of Newco 2 into Profitco so that all its assets are distributed to Profitco and any liabilities assumed, and it will then be formally dissolved.

The transactions described above will be repeated with Newco 3 and then with Newco 4. When Lossco’s non-capital losses and investment tax credits are fully utilized, Lossco will wind-up Newco 1.

Other representations

Newco 2’s second fiscal period, which will begin at the first moment of the day of its dissolution and end with that dissolution, will be its first functional currency year.

Proposed s. 18.2(4) will not apply to limit the deductibility of the interest on the IB Debt as Lossco and Newco 2 are eligible group corporations in respect of one another and will elect to treat the interest payment under the IB Debt as excluded interest.

Rulings

Including re ss. 20(1)(c), 88(1.1) and 55(2), re the application of s. 261(16)(a) to the wind-up of Newco into Profitco regarding Newco 2 being deemed to have elected Profitco’s tax reporting currency for its second short taxation year and re the non-application of the avoidance rule in s. 261(18) and the stop-loss rule in s. 262(21).