2022 Ruling 2021-0910431R3 - Loss consolidation arrangement -- summary under Subsection 112(1)

CRA ruled on loss consolidation transactions involving a parent with losses and three indirect “Profitco” subsidiaries. The transactions did not entail direct interest-bearing loans to the Proficos, which were regulated entities. Instead, the Profitcos would become limited partners of a newly-formed LP (with a parent newly-formed subsidiary as the GP), which would receive an interest-bearing loan from the parent and subscribe for dividend-bearing preferred shares of a Newco subsidiary of the parent, with the preferred dividends being funded with annual cash contributions to Newco by the parent. Although the LP would in fact generate a thin profit, the Profitcos would take s. 112(1) deductions for their share of the LP’s dividend income.