2015 Ruling 2015-0582101R3 - loss utilization -- summary under Paragraph 111(1)(a)

Completed transactions

1. Lossco (which incurred non-capital losses in a number of taxation years) borrowed (not in excess of its borrowing capacity) under a daylight loan.
2. It used the proceeds to make the “IB Loan,” bearing quarterly interest, to its wholly-owned subsidiary, Profitco.
3. Profitco used the proceeds to subscribe for non-voting redeemable retractable preferred shares, bearing a quarterly dividend of XX% higher than the interest rate on the IB Loan, of its wholly-owned subsidiary Newco.
4. Newco used the proceeds to make a demand non-interest-bearing loan (the “NIB Loan”) to Lossco.
5. Lossco repaid the daylight loan.

Proposed transactions

1. Lossco will make capital contributions to Newco equal to the dividend payments to be made on the preferred shares, with such dividends being declared and paid by Newco.
2. Profitco will pay the accrued interest on the same dates.
3. Once Lossco’s non-capital losses are fully utilized and remaining dividends and interest are paid as described above,
4. Newco will redeem the preferred shares by delivering the NIB Loan to Profitco.
5. The IB Loan will be set-off against the NIB Loan.

Rulings

Including re s. 20(1)(c), s. 12(1)(x) and s. 55(3)(a).

Opinion

Re non-application of s. 55(2) to the dividends in 1 after giving effect to the July 31, 2015 draft legislation.