2023 Ruling 2023-0973911R3 - Loss Consolidation Ruling -- summary under Paragraph 111(1)(a)

Background

Aco, a non-resident corporation which is an indirect-wholly owned subsidiary of a public non-resident corporation, and Bco, a Canadian wholly-owned subsidiary of Aco, collectively hold all the shares of Lossco which, in turn, wholly-owns both Numberco, which has unexpired non-capital losses, and Profitco.

Loss consolidation transactions

1. Lossco will receive a daylight loan from an arm’s length financial institution.
2. Lossco will use the daylight loan proceeds to make an interest bearing loan (evidenced by the “IB Note”) to Profitco.
3. Profitco will use all of such proceeds to subscribe for newly-created non-voting redeemable retractable Numberco preferred shares bearing a cumulative dividend equal to the interest rate under the loan from Lossco plus 0.0001% per annum.
4. Numberco will use the proceeds from such share issuance to make a non-interest bearing demand loan to Lossco.
5. The transactions in 2 to 4 will be repeated an additional three times, interest on the IB Note in 2 will bear simple interest which will be paid on the earlier of the end of Profitco’s second taxation year following the taxation year in which it incurred the interest, and immediately before the unwinding transaction in 8 below. Lossco’s recourse against Profitco to obtain repayment of the amounts due under the IB Note will be limited to the Numberco preferred shares owned by Profitco.
6. Lossco will use the proceeds received from the last NIB Loan to repay the daylight loan.
7. Immediately before the unwinding transaction in 8 below, Lossco will make a contribution of capital to Numberco, which it will use to pay the accrued dividends on its preferred shares, with Lossco using such proceeds to pay the accrued interest on the IB Note.
8. Numberco will redeem its preferred shares in consideration for assigning the non-interest-bearing note to Profitco, which will then be set-off against the IB Note.
9. Numberco will be wound up into Lossco pursuant to s. 88(1).

Rulings

Including re s. 20(1)(c), s. 12(1)(x) (re non-application to contribution of capital), s. 55(2), s. 88(1.1), and s. 245(2).