Principal Issues: Whether Lossco would be entitled to apply existing non-capital losses against the interest income that would be generated as part of particular loan that would be made under the loss consolidation transaction and whether the accompanying interest expense would be deductible by Profitco.
Position: Yes.
Reasons: The proposed transactions conform to our requirements for these types of loss consolidation rulings. The proposed transactions would be legally effective and commercially plausible.
XXXXXXXXXX 2023-099430
XXXXXXXXXX 2024
Subject: Request for advance income tax rulings
XXXXXXXXXX
XXXXXXXXXX,
This is in response to the letter of XXXXXXXXXX, in which advance income tax rulings on behalf of the taxpayers listed above (the "Taxpayers") were requested. We have also taken into account information received by email as well as additional information submitted during telephone conversations (XXXXXXXXXX).
Unless otherwise indicated, all legislative references below are to the provisions of the Income Tax Act, R.S.C. (1985), c. 1, (5th Supp.) (the "Act").
We understand that to the best of your knowledge and that of the Taxpayers, none of the proposed transactions or issues involved in this ruling are the same as or substantially similar to transactions or issues that are:
i. in a previously filed tax return of the Taxpayers or a related person and:
A. being considered by the CRA in connection with any such tax return;
B. under objection by the Taxpayers or a related person; or
C. the subject of a current or completed court process involving the Taxpayers or a related person; or
ii. the subject of a ruling request previously considered by the Income Tax Ruling Directorate in relation to the Taxpayers or a related person.
The main contact details for the Taxpayers affected by the advance rulings are:
XXXXXXXXXX
DEFINITIONS AND ABBREVIATIONS USED
The names and corporate names of the taxpayers are replaced by the names and corporate names indicated below.
"Group" means XXXXXXXXXX;
"Holdco 1" means XXXXXXXXXX;
"Holdco 2" means XXXXXXXXXX;
"Lossco" means XXXXXXXXXX;
"LP" means XXXXXXXXXX;
"Profitco" means XXXXXXXXXX
Unless otherwise stated, the following abbreviations have the meanings set out below.
"ACB" means "adjusted cost base" and has the meaning set out in Section 54;
"affiliated persons" has the meaning assigned by subsection 251.1(1), without reference to the definition of "controlled" in subsection 251.1(3);
"Annual Advance" means the amount advanced annually to Lossco by LP as described in Paragraph 29;
"Canadian partnership" has the meaning set out in subsection 102(1);
"CRA" means the Canada Revenue Agency;
"Credit Facility" means the credit facility described in Paragraph 18;
"Daylight Loan" means a loan received by Lossco from a financial institution with which it deals at arm's length as described in Paragraph 21;
"DR" means "dividend refund" and has the meaning set out in subsection 129(1);
"FMV" means "fair market value" and means the highest price, in dollars, that would be agreed upon in an open market between two arm's length parties who are knowledgeable, informed and prudent, neither party being under any compulsion to act;
"Loss Consolidation Arrangement" means the transactions described in Paragraphs 21 to 30;
"NCL" means non-capital losses;
"non-arm's length" means not dealing at arm’s length within the meaning of subsection 251(1);
"Note 1" means the note issued in Paragraph 24;
"Paragraph" means a numbered paragraph of this request;
"Preference Shares" means the shares of the capital stock of Lossco that Profitco will hold as provided in Paragraph 26;
"private corporation" has the meaning assigned by subsection 89(1);
"Proposed Transactions" means the transactions referred to in Paragraphs 21 to 32;
"PUC" means "paid-up capital" and has the meaning set out in paragraph 89(1);
"related persons" has the meaning assigned by subsection 251(2);
"TCC" means "taxable Canadian corporation" as defined in subsection 89(1).
XXXXXXXXXX;
XXXXXXXXXX;
FACTS
1. Profitco is a private corporation and a TCC. Profitco was incorporated under the XXXXXXXXXX.
2. Lossco is a private company and a TCC. Lossco was incorporated under XXXXXXXXXX.
3. LP is a limited partnership formed under the XXXXXXXXXX. LP is a Canadian partnership.
4. XXXXXXXXXX.
5. The units of LP are held as follows:
- XXXXXXXXXX% of the units as general partner by XXXXXXXXXX;
- XXXXXXXXXX% of the units as limited partner by XXXXXXXXXX;
- XXXXXXXXXX% of the units as limited partner by XXXXXXXXXX;
- XXXXXXXXXX % of the units as limited partner by XXXXXXXXXX;
- XXXXXXXXXX % of the units as limited partner by XXXXXXXXXX;
- XXXXXXXXXX % of the units as limited partner by XXXXXXXXXX.
6. LP holds XXXXXXXXXX% of the Preference Shares of the capital stock of Profitco. Those Preference Shares are non-voting.
7. Holdco 1 and Holdco 2 hold XXXXXXXXXX% and XXXXXXXXXX%, respectively, of the common shares of the capital stock of Profitco. Those shares are voting and participating.
8. LP holds XXXXXXXXXX% of the issued and outstanding shares of the capital stock of Holdco 1 and Holdco 2.
9. The issued and outstanding shares of the capital stock of Lossco are as follows:
- XXXXXXXXXX Class B shares, non-voting, non-participating, entitled to dividends, held by LP;
- XXXXXXXXXX Class C shares, non-voting, non-participating, entitled to dividends, held by XXXXXXXXXX;
- XXXXXXXXXX Class D shares, non-voting, non-participating, entitled to dividends, held by LP;
- XXXXXXXXXX Class G shares, voting (one share entitles the holder to XXXXXXXXXX votes), non-participating, no dividend, held by LP;
- XXXXXXXXXX Class H shares, non-voting, non-participating, entitled to dividends, held by LP;
- XXXXXXXXXX Class K shares, non-voting, participating and entitled to dividends, held by LP;
- XXXXXXXXXX Class P shares, non-voting, non-participating, entitled to dividends, held by LP.
10. Profitco and Lossco have floating year ends ending on the last Saturday of XXXXXXXXXX.
11. Profitco carries on a XXXXXXXXXX business.
12. Lossco carries on a XXXXXXXXXX business.
13. Profitco is profitable. Its accounting profit before tax, depreciation and amortization for the fiscal period ended XXXXXXXXXX is $XXXXXXXXXXX and is estimated to be $XXXXXXXXXXX and $XXXXXXXXXXX without giving effect to the Proposed Transactions for the fiscal periods ending in XXXXXXXXXX.
14. Lossco had an estimated NCL balance of $XXXXXXXXXX as at XXXXXXXXXX at the federal level and of $XXXXXXXXXX as at XXXXXXXXXX. These NCLs arose in the XXXXXXXXXX fiscal periods.
15. Lossco's accounting income/(loss) before taxes, depreciation and amortization for the year ended XXXXXXXXXX is XXXXXXXXXX $XXXXXXXXXX and is estimated to be $XXXXXXXXXX and $XXXXXXXXXX without giving effect to the Proposed Transactions for the fiscal periods ending in XXXXXXXXXX.
16. For the taxation year ended XXXXXXXXXX, XXXXXXXXXX% of Profitco's taxable income was attributable to its only permanent establishment which is located in XXXXXXXXXX.
17. For the taxation year ended XXXXXXXXXX, XXXXXXXXXX% of Profitco's loss was attributable to its only permanent establishment which is located in XXXXXXXXXX.
18. As at XXXXXXXXXX, the Group had a global credit facility of $XXXXXXXXXX with an arm's length financial institution (the Credit Facility). The Credit Facility is secured by first ranking hypothecs on the majority of the current and future tangible and intangible assets of subsidiaries of the Group.
19. As at XXXXXXXXXX, the Group had drawn $ XXXXXXXXXX under the Credit Facility.
20. The Group's borrowing capacity under the Group's undrawn Credit Facility was $XXXXXXXXXX as at XXXXXXXXXX and the prevailing interest rate was XXXXXXXXXX%.
PROPOSED TRANSACTIONS
21. Lossco will borrow $XXXXXXXXXX on a daylight basis under the Credit Facility (the Daylight Loan). The interest rate on the Daylight Loan will be the market rate.
22. Lossco's share capital will be amended to allow for the creation of a new class of non-voting, non-participating, cumulative dividend preference shares, redeemable at the option of the holder or the issuer at an amount equal to the total consideration received upon issuance (the Preference Shares).
23. The dividend rate on the Preference Shares will be established as the interest rate on Note 1 plus XXXXXXXXXX%. Dividends will be payable on an annual basis.
24. Lossco will use the proceeds of the Daylight Loan to make a loan of $XXXXXXXXXX to Profitco payable on demand by Lossco (Note 1).
25. Note 1 will bear interest at the market rate for an unsecured demand note. Interest on Note 1 will be payable on an annual basis.
26. Profitco will use the proceeds of Note 1 to subscribe for Preference Shares in the total amount of $XXXXXXXXXXX having a redemption value and a FMV equal to the subscription amount. An amount equal to the Subscription Amount will be added to the stated capital of the Preference Shares. The amount of the PUC and ACB of the Preference Shares will be equal to the subscription amount and the redemption value.
27. Profitco will subscribe for XXXXXXXXXX Class G shares of the capital stock of Lossco for $XXXXXXXXXXX.
28. Lossco will use the proceeds of the subscription for the Preference Shares to repay the Daylight Loan.
29. LP and Lossco will enter into an agreement pursuant to which LP will make an annual non-interest bearing advance to Lossco in an amount equal to the excess of the amount of dividends payable on the Preference Shares over the amount of interest payable on Note 1 on an annual basis (the Annual Advance).
30. On an annual basis and until such time as the Loss Consolidation Arrangement is terminated, the following transactions will be effected in the following order:
(i) LP will make the Annual Advance to Profitco;
(ii) Profitco will pay interest to Lossco on Note 1;
(iii) Lossco will pay to Profitco the dividends on the Preference Shares.
31. The Loss Consolidation Arrangement will be terminated no later than the earlier of the date of XXXXXXXXXX anniversary of the implementation of the transaction described in Paragraph 26 and the time at which Lossco's NCL balance is fully utilized.
32. The Loss Consolidation Arrangement will be terminated as follows:
(i) Profitco will pay the unpaid cumulative dividends on the Preference Shares to Lossco;
(ii) Lossco will pay the unpaid accrued interest on the Note 1 to Profitco;
(iii) Lossco will redeem the Preference Shares having a FMV and a redemption value equal to the principal amount of Note 1 and will deliver Note 1 to Profitco in payment for the redemption of the Preference Shares;
(iv) Note 1 will be extinguished by set-off in accordance with applicable law;
(v) Profitco will repay the total of the amounts of each Annual Advance to LP.
ADDITIONAL INFORMATION
33. The Proposed Transactions will be legally valid.
34. At all times in connection with the Proposed Transactions, Lossco will have the financial capacity to satisfy the solvency test and the liquidity test applicable under applicable corporate law to pay the dividends on the Preference Shares described in Paragraphs 30 and 32 and to redeem the Preference Shares described in Paragraph 32.
35. The interest rate on Note 1 will be the market interest rate for an unsecured demand note.
36. The Group's borrowing capacity under the undrawn Credit Facility will exceed the level required to complete the Proposed Transactions.
37. Lossco and Profitco are "affiliated persons" and are "related persons" and will continue to be so during the Proposed Transactions.
38. Profitco will not claim any capital loss on the Preference Shares.
39. Profitco will have the financial ability to pay the interest on Note 1 from its own cash flow.
40. Profitco will have taxable income from the XXXXXXXXXX and subsequent taxation years available to deduct the interest expense on Note 1.
41. Profitco will use the interest income on Note 1 and the Annual Advance to pay dividends on the Preference Shares to Profitco.
42. The dividends on the Preference Shares have no other purpose than that described in the section "Purposes of the Proposed Transactions" below.
43. It is not anticipated that the interest income that Lossco will earn in connection with the Proposed Transactions will exceed the amount of Lossco's NCL. Lossco will not use NCL in excess of the federal NCL Balance. Specifically, Lossco will not use the difference between the federal NCL and the Québec NCL in connection with the Proposed Transactions.
44. It is anticipated that the deduction of interest payable on Note 1 will result in a NCL to Profitco. Profitco will carry over any NCL resulting from the deduction of the interest payable on Note 1 to an earlier or later taxation year in accordance with the provisions of section 111. For greater certainty, any NCL will not be carried over to an earlier or later taxation year in which Profitco and Lossco are not affiliated or related persons.
45. No acquisition of control has occurred, or is expected to occur, with respect to Lossco and Profitco in connection with the series of transactions or events that comprise the Proposed Transactions.
46. LP holds XXXXXXXXXX which has a permanent establishment outside of Canada. This is XXXXXXXXXX. None of the Proposed Transactions involve XXXXXXXXXX, so there is no information to provide under the BEPS Action 5 exchange of information on tax rulings.
47. At no time during the implementation of the Proposed Transactions will the Preference Shares be:
(i) the subject of undertakings referred to in paragraph 112(2.2);
(ii) the subject of a "dividend rental arrangement" within the meaning of subsection 248(1) and referred to in subsection 112(2.3);
(iii) the subject of obligation undertakings referred to in subsection 112(2.4);
(iv) issued for consideration including:
a. an obligation as described in subparagraph 112(2.4)(b)(i); or
b. a right as described in subparagraph 112(2.4)(b)(ii).
48. Currently and during the implementation of the Proposed Transactions, neither Lossco nor Profitco are or will be:
(i) "specified financial institutions" as defined in subsection 248(1); nor
(ii) a "financial intermediary corporation" as described in any of paragraphs (a) to (f) of subsection 191(1).
PURPOSES OF PROPOSED TRANSACTIONS
49. The sole purpose of the Proposed Transactions is to consolidate taxable income and NCLs within a group of affiliated and related persons. The Proposed Transactions are not intended to update or facilitate the use of NCLs in any taxation year before or after the taxation year in which the NCLs would otherwise expire in regards to Lossco.
50. The sole purpose of the payment of dividends on the Preference Shares is to provide a reasonable return to Profitco. The payment of dividends is not intended to materially reduce the FMV of any share of the capital stock of Lossco, nor to reduce the capital gain on disposition of any share of the capital stock of Lossco, nor to increase the capital cost of any property.
51. The Proposed Transactions are not being undertaken for the purpose of transferring income between provinces, and any transfer of income between provinces will be incidental to the Proposed Transactions.
RULINGS
Provided that the statement of facts, the Proposed Transactions, the purposes of the Proposed Transactions and the Additional Information constitutes full disclosure of all relevant facts and of all proposed transactions and that the Proposed Transactions are carried out as described above, our rulings are as follows:
A. To the extent that the Preference Shares of the capital stock of Lossco continue to be held by Profitco, Profitco will be entitled to deduct, pursuant to paragraph 20(1)(c), the lesser of (i) the interest paid or payable (using the method regularly followed by Profitco in computing its income for the purposes of the Act) for the year in satisfaction of a legal obligation to pay interest on Note 1, and (ii) a reasonable amount in respect thereof.
B. Dividends paid by Lossco to Profitco on the Preference Shares, as described in Paragraphs 30 and 32, will be taxable dividends and will be required by paragraph 12(1)(j) to be included in Profitco's income. On the other hand, Profitco will be able to deduct those taxable dividends in computing its taxable income under subsection 112(1). For greater certainty, none of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply to prevent the application of subsection 112(1).
C. To the extent that the sole purpose of the payment and receipt of dividends on the Preference Shares is as described in Paragraph 50, the provisions of subsection 55(2) will not apply to the dividends, if any, referred to in Ruling B.
D. Profitco will not be subject to Part IV tax in respect of dividends received by it from Lossco described in Ruling B, except to the extent that Lossco is entitled to a DR for its taxation year in which it pays the dividends, pursuant to paragraph 186(1)(b).
E. Profitco will not be subject to Part IV.1 tax in respect of the dividends described in Ruling B.
F. Lossco will not be subject to Part VI.1 tax in respect of the dividends it pays to Profitco described in Ruling B.
G. Subsections 15(1), 56(2) and 246(1) will not apply in respect of the Proposed Transactions described above.
These decisions are rendered subject to the restrictions and general conditions set out in Information Circular 70-6R12 dated April 1, 2022, published by the CRA and are binding on the CRA, provided that the Proposed Transactions described in Paragraphs 21 to 29 are completed before the period of 6 months ending after the date hereof. Subsequent proposed transactions described in Paragraphs 30 to 32 must be completed within the timeframes set out herein, as described above. These decisions are based on the current Act and do not take into account the proposed amendments thereto.
OPINION
Provided that (i) the statement of facts, the Proposed Transactions, the purposes of the Proposed Transactions and the additional information constitutes full and accurate disclosure of all relevant facts, of all Proposed Transactions and of all purposes of the Proposed Transactions; (ii) the Proposed Transactions are carried out as described above; and (iii) the Act is amended in accordance with the Notice of Ways and Means Motion tabled on November 28, 2023 (which received second reading in the House of Commons on March 18, 2024 (Bill C-59)), the provisions of subsection 245(2) will not apply as a result of the Proposed Transactions, per se, to redetermine the tax consequences confirmed in the rulings above.
The foregoing opinion is not a ruling and, as stated in paragraph 19(f) of Information Circular 70-6R12 dated April 1, 2022, is not binding on the CRA.
OTHER COMMENTS
Nothing in the Rulings should be construed as implying that the CRA has accepted, considered or made a determination regarding:
(a) the FMV, ACB of any property and PUC of any share of the capital stock of a corporation described herein;
(b) the reasonableness or FMV of any costs or expenses referred to herein;
(c) the amount of the NCL Balance in the statement of Facts and Proposed Transactions;
(d) any of the provincial income tax consequences that may result from the Proposed Transactions set forth herein;
(e) the application or non-application of any general provincial anti-avoidance provision; or
(f) any other tax consequences that may result from the Proposed Transactions set forth herein; and
(g) the application of, or any amendments to, the proposed measures of the Excessive Interest and Financing Expenses Limitation regime included in the Notice of Ways and Means Motion tabled on November 28, 2023 (which received second reading in the House of Commons on March 18, 2024 (Bill C-59)) to the Proposed Transactions.
A statement of our fees for the time spent on your file will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch