In a loss consolidation arrangement, "Lossco," which has non-capital losses, lends money to Profitco at a reasonable stated rate of interest and Profitco in turn uses the inter-corporate debt to acquire preferred shares of Lossco. Does the CRA require a positive spread between the dividend yield on the preferred shares acquired with inter-corporate debt and the interest rate on that debt, and must the dividend payor have an independent source of income to pay the dividends? CRA stated:
[I]t is the CRA's policy not to provide rulings without a positive spread between the interest paid and the dividends earned. …[I]n circumstances of upstream shareholding in which a subsidiary acquired dividend paying preferred shares of the parent…[o]ur views… expressed in Income Tax Technical News No. 30…[are], "The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary."
