2022 Ruling 2021-0910431R3 - Loss consolidation arrangement -- summary under Paragraph 111(1)(a)

Background

Parent indirectly wholly-owns Profitcos 1, 2 and 3 and itself has non-capital loss carryforwards. The loss consolidation transactions below do not entail loans being made directly to the Profitcos because they are regulated entities which should not incur debt under those transactions.

Proposed transactions

1. New LP will be formed with a new subsidiary of Parent as the general partner and the Profitcos as the three limited partners.
2. Parent will use the proceeds of the “Daylight Loan” (from an arm’s length financial institution) to make an interest-bearing demand loan to New LP (the "New LP Loan").
3. New LP will use the proceeds thereof to subscribe for non-voting redeemable retractable preferred shares (with dividends payable annually) of a newly-incorporated subsidiary of Parent (“Newco”).
4. Newco will use such proceeds to make a non-interest-bearing demand loan to Parent (the "Parent Loan").
5. Parent will use such proceeds to repay the Daylight Loan.
6. Parent and Newco will enter into a capital support agreement pursuant to which Parent will make annual contributions to Newco to fund the annual preferred shares dividends which, in turn, will fund the interest payment by New LP.
7. The unwinding of the above loss consolidation arrangements will entail inter alia Newco redeeming its preferred shares with a note, which New LP will use to repay the New LP Loan by assigning it to Parent, with that note then being set off against the Parent Loan – and Newco and New LP being wound up.

Rulings

Including re s. 20(1)(c) interest deduction on the New LP Loan, no income inclusion re the capital contributions, a s. 112(1) deduction to the Profitcos re the dividends allocated to them, non-application of the GAAR rules in agreeing provinces and non-application of s. 245(2).