7 December 1999 Ruling 1999-0014030 - INTEREST DEDUCTIBILITY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: interest deductibility following CRB Logging

Position: no change in our positions

Reasons: we would no have ruled favourably on CRB scenario

XVII Advance Rulings for "In-House" Loss Transfer Arrangements

Question

Without formal announcement, Revenue Canada has seemingly discontinued, or at least modified, its practice of issuing advance rulings on intra-group or "in-house" loss-transfer arrangements. It is unclear whether this change in procedure is a result of the decision in CRB Logging Co. Limited v. The Queen, Tax Court of Canada No. 96-96(IT)G (February 19, 1999), and hence limited to the facts and circumstances of that case, or whether it reflects a broad change in administrative practice or procedure with far reaching tax policy implications. TEI recommends that Revenue Canada clarify its position in respect of "in-house" loss transfer arrangements as soon as possible. Specifically, will Revenue Canada continue to issue such rulings on in-house loss transfer arrangements? If Revenue Canada will generally issue such rulings, are there specific arrangements or fact patterns, such as those in CRB Logging, on which Revenue Canada will decline to rule?

More fundamentally, Revenue Canada's challenge to the structure employed by the taxpayer in CRB Logging is troubling since loss transfer arrangements have been routinely employed by companies and benignly accepted by Revenue Canada. If Revenue Canada will not issue advance rulings in cases similar to CRB Logging, what are the unusual facts or the abuse in the CRB Logging case that led Revenue Canada to challenge it? Should other taxpayers that implemented similar arrangements prior to the decision in CRB Logging expect a challenge from Revenue Canada?

Response

Our positions regarding in-house loss transfer arrangements has not changed as a result of the CRB Logging decision.

We would not have ruled favourably in the CRB Logging situation for the same reasons that Justice Sarchuk concluded that the borrowing transaction did not satisfy paragraph 20(1)(c). Specifically, the Court said:

"There could be no realistic expectation of dividend income from the preferred shares because Meager had no income source of substance independent of the existence of CRB's business. The true purpose of the May, 1988 loan was to enable Meager to finance its purchase of the Tyee and Pemberton shares and thereby to indirectly acquire CRB. In essence, CRB financed its own acquisition".

We thus agree with the conclusion that the borrowing transaction did not satisfy the direct use rule, and would not have ruled favourably.

In the rulings we have given to date, there was potentially a source of income that the share issuer could look to for a source of income to fund the dividend payments. This is distinct from Justice Sarchuk's finding in CRB that:

"the closed nature of the income flow made it virtually impossible for CRB to receive dividends that did not originate from its own business activities".

We will continue to rule as we have been as long as there is an independent source of income which can reasonably be considered sufficient to fund the dividends to be paid to the borrower. In other words, it is business as usual.

Chris Savage
December 7, 1999