2023 Ruling 2023-0964601R3 - Loss consolidation arrangement -- summary under Paragraph 111(1)(a)

Background

Parentco (along with the other named corporations, a taxable Canadian corporation) wholly-owned two Losscos and a Profitco.

Proposed transactions

1. Parentco will borrow a daylight loan from an arm’s length or non-arm’s length lender. This may occur up to five times in quick succession, with the transactions in 1 to 5 being repeated that number of times.
2. Parentco will lend the proceeds on arm’s length terms (including interest) to the two Losscos.
3. The Losscos will make interest-bearing subordinated loans at a reasonable commercial rate of interest to Profitco (the “IBLs”).
4. Profitco will use the proceeds to subscribe for newly-created cumulative non-voting preferred shares of the Losscos.
5. The Losscos will use those proceeds to repay the loans from 2, and Parentco will repay its daylight loan.
6. Lossco will annually pay the preferred share dividends, which will fund the annual interest payments on the IBLs.
7. The unwinding of the transactions, which will occur at the earlier of 3 years from inception and the utilization of the Lossco non-capital losses, will include the Lossco redeeming their preferred shares with notes, and setting those notes off against the IBLs.

Rulings

Including re s. 20(1)(c) deduction on IBLs to Profitco, the carryback of non-capital losses potentially arising from the transactions to Profitco to preceding Profitco taxation years within the s. 111(1)(a) carryback period, and the non-application of s. 55(2) provided that none of the purposes of the dividends is to reduce the FMV or capital gain on any share or to increase the total cost amount of any properties.