2016 Ruling 2015-0611061R3 - Loss Consolidation Arrangement

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.

Principal Issues: Whether the proposed use of excess ITCs to offset income of a related and affiliated corporation is acceptable.

Position: Yes.

Reasons: The proposed transactions fall within CRA's policy for loss consolidation arrangements.

XXXXXXXXXX						2015-061106

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

We are writing in response to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information provided in correspondence and telephone conversations with your firm concerning your request.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this ruling request:

(a) is reflected in an earlier return of either taxpayer or a related person;

(b) is being considered by a Tax Services Office or a Taxation Centre in connection with a previously filed tax return of either taxpayer or a related person;

(c) is under objection by either taxpayer or a related person;

(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(e) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated: (i) all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) as amended (the “Act”); and (ii) all references to monetary amounts are in Canadian dollars. None of the transactions will impact the currently outstanding tax liabilities, if there are any, of the parties to the ruling.

DEFINITIONS

(a) “adjusted cost base” has the meaning assigned by section 54;

(b) “affiliated person” has the meaning assigned by section 251.1;

(c) “Agreeing Province” means a province that has entered into an agreement with the Government of Canada under which the Government of Canada will collect taxes payable under the income tax statute of that province and will make payments to that province in respect of the taxes so collected;

(d) “arm’s length” has the meaning assigned by subsection 251(1);

(e) XXXXXXXXXX;

(f) “CBCA” means Canada Business Corporations Act;

(g) “CRA” means Canada Revenue Agency;

(h) “Credit Facility” means the XXXXXXXXXX that allows Parentco Affiliated Group to borrow up to XXXXXXXXXX$XXXXXXXXXX. The Credit Facility expires on XXXXXXXXXX. Under certain requirements, Parentco may request an increase in the facility up to an additional XXXXXXXXXX$XXXXXXXXXX and request XXXXXXXXXX extensions, subject to certain conditions;

(i) “Daylight Loan” has the meaning specified in Paragraph 8;

(j) “General Anti-avoidance Provision of an Agreeing Province” means:

XXXXXXXXXX;

(k) “ITC” means investment tax credit and has the meaning assigned by subsection 127(5);

(l) “ITCco” means XXXXXXXXXX, the corporation described in Paragraph 2;

(m) “paid-up capital” has the meaning assigned by subsection 89(1);

(n) “Paragraph” means a numbered paragraph in this letter;

(o) “Parentco” means XXXXXXXXXX, the corporation described in Paragraph 1;

(p) “Parentco Affiliated Group” means ITCco, Profitco, and Parentco;

(q) “private corporation” has the meaning assigned by subsection 89(1);

(r) “Profitco” means XXXXXXXXXX, the corporation described in Paragraph 3;

(s) “Profitco Note” means the demand non-interest-bearing promissory note described in Paragraph 9;

(t) “related persons” has the meaning assigned by subsection 251(2);

(u) “tax attributes” means, collectively, XXXXXXXXXX and ITCs; and

(v) “taxable Canadian corporation” has the meaning assigned by subsection 89(1).

STATEMENT OF FACTS

1. Parentco is a public company incorporated in XXXXXXXXXX and the XXXXXXXXXX parent company of ITCco and Profitco. ITCco and Profitco are both wholly-owned subsidiaries of Parentco. Parentco XXXXXXXXXX (XXXXXXXXXX%) of Profitco and XXXXXXXXXX common shares (XXXXXXXXXX%) of ITCco. There are no other shares of either entity outstanding. Parentco is a XXXXXXXXXX whose shares are XXXXXXXXXX within the meaning of Part XXXII of the Income Tax Regulations. Parentco and its affiliated corporations currently employ approximately XXXXXXXXXX employees and have offices in approximately XXXXXXXXXX countries, including Canada and XXXXXXXXXX. Parentco's revenues for the year ended XXXXXXXXXX totaled more than XXXXXXXXXX$XXXXXXXXXX with consolidated net earnings amounting to approximately XXXXXXXXXX$XXXXXXXXXX. The common shares of Parentco are listed on the XXXXXXXXXX. The market capitalization of Parentco is approximately XXXXXXXXXX$XXXXXXXXXX as of XXXXXXXXXX.

2. ITCco was incorporated on XXXXXXXXXX and is governed by the CBCA. ITCco’s address is XXXXXXXXXX. Its Taxation Centre is the XXXXXXXXXX Taxation Centre, its Tax Services Office is the XXXXXXXXXX Tax Services Office and its business number and tax account number is XXXXXXXXXX. ITCco is controlled by Parentco and is a taxable Canadian corporation whose shares are not listed on a prescribed stock exchange within the meaning of Part XXXII of the Income Tax Regulations. ITCco is a XXXXXXXXXX as defined under subsection 89(1) of the Act. As at XXXXXXXXXX, ITCco had $XXXXXXXXXX of unused Federal ITCs and $XXXXXXXXXX of unused XXXXXXXXXX.

For the fiscal year XXXXXXXXXX and subsequent years, XXXXXXXXXX $XXXXXXXXXX of Federal ITCs and $XXXXXXXXXX of XXXXXXXXXX by virtue of its XXXXXXXXXX activities. XXXXXXXXXX.

3. Profitco is a sister company of ITCco, incorporated on XXXXXXXXXX under the CBCA. Profitco’s address is XXXXXXXXXX. Its Taxation Centre is the XXXXXXXXXX Taxation Centre, its Tax Services Office is the XXXXXXXXXX Tax Services Office and its business number and tax account number is XXXXXXXXXX. Profitco is a taxable Canadian corporation. Profitco had taxable income as follows for its XXXXXXXXXX previous taxation years:

XXXXXXXXXX

4. For its year ended XXXXXXXXXX, ITCco had:

a. assets of approximately $XXXXXXXXXX;

b. liabilities of approximately $XXXXXXXXXX; and

c. shareholder's equity of approximately $XXXXXXXXXX.

For its year ended XXXXXXXXXX, Profitco had:

a. assets of approximately $XXXXXXXXXX;

b. liabilities of approximately $XXXXXXXXXX; and

c. shareholder's equity of approximately $XXXXXXXXXX.

For its year ended XXXXXXXXXX, Parentco Affiliated Group had:

a. assets of approximately $XXXXXXXXXX;

b. liabilities of approximately $XXXXXXXXXX; and

c. shareholder's equity of approximately $XXXXXXXXXX.

5. As of XXXXXXXXXX, the arm's length borrowings of the Parentco Affiliated Group amounted to approximately XXXXXXXXXX$XXXXXXXXXX, which was comprised of Senior Notes. None of these borrowings were drawn from the Credit Facility of $XXXXXXXXXX available to Parentco. As of XXXXXXXXXX, the cash and cash equivalents of the Parentco Affiliated Group amounted to approximately $XXXXXXXXXX. The Parentco Affiliated Group therefore has access to approximately $XXXXXXXXXX of liquidity, which is the sum of the unused Credit Facility ($XXXXXXXXXX) and the cash available to the Group ($XXXXXXXXXX) as of XXXXXXXXXX. The borrowing capacity of the Parentco Affiliated Group is sufficient to complete the proposed transactions described in Paragraphs 8 to 16.

6. For the taxation year ended XXXXXXXXXX, ITCco had a permanent establishment in XXXXXXXXXX. For the purpose of the definition of ITCco's “taxable income earned in a province” pursuant to subsection 124(4) and Part IV of the Income Tax Regulations, XXXXXXXXXX% of its income was allocated to XXXXXXXXXX.

7. For the taxation year ended XXXXXXXXXX, Profitco had permanent establishments in XXXXXXXXXX. For the purpose of the definition of Profitco’s “taxable income earned in a province” pursuant to subsection 124(4) of the Act and Part IV of the Income Tax Regulations, XXXXXXXXXX% of its income was allocated to XXXXXXXXXX and XXXXXXXXXX% to XXXXXXXXXX.

PROPOSED TRANSACTIONS

8. ITCco will borrow $XXXXXXXXXX from Parentco on a daylight basis (the “Daylight Loan”). Parentco will fund the Daylight Loan either by using its available cash and cash equivalents or by itself borrowing on a daylight basis.

9. ITCco will use the proceeds of the Daylight Loan to make a $XXXXXXXXXX loan to Profitco, to be evidenced by a promissory note, payable on demand and bearing interest at a rate of XXXXXXXXXX% per annum (hereafter referred to as “the Profitco Note”).

10. Profitco will use the proceeds of the Profitco Note to subscribe for $XXXXXXXXXX worth of preferred shares of ITCco (the “ITCco Preferred Shares”). The aggregate redemption amount, fair market value, adjusted cost base and paid-up capital of the ITCco Preferred Shares issued will be $XXXXXXXXXX.

11. The ITCco Preferred Shares will have the following attributes:

a. non-voting;

b. non-participating;

c. redeemable at the option of the issuer and retractable at the option of the holder, subject to applicable law, at any time for an amount equal to the cash amount for which they were issued. The payment of the redemption or retraction price may be satisfied, at the holder’s option, either by (i) payment of cash, or (ii) delivery of property having a fair market value at the time of redemption equal to the aggregate redemption amount, (iii) or the Profitco Note, in each case together with an amount in cash equal to all declared and unpaid dividends and any accrued dividends which have not been declared and paid up to but excluding the date fixed for such redemption or retraction; and

d. entitlement to a cumulative dividend, payable annually, calculated daily and accruing by reference to the redemption amount of ITCco Preferred Shares at a rate equal to XXXXXXXXXX% per annum.

12. ITCco will use the proceeds from the issuance of the ITCco Preferred Shares to repay the Daylight Loan referenced in Paragraph 8 above. To the extent that Parentco originally funded the Daylight loan with new borrowings of its own, it will repay such borrowings upon receipt of the $XXXXXXXXXX of cash from ITCco.

13. The proposed transactions as described in Paragraphs 8 to 12 will be performed in XXXXXXXXXX.

14. The following transactions will occur on the XXXXXXXXXX of every year the Profitco Note is outstanding:

a. ITCco will pay the accrued and unpaid dividends on the ITCco Preferred Shares; and

b. Profitco will pay the accrued and unpaid interest on the Profitco Note.

15. At the end of the XXXXXXXXXX year following the year in which the transactions above are first implemented, the structure will be unwound in the manner set out in Paragraph 16 below. To the extent that ITCco continues to have unused attributes at that time, or anticipates generating similar amounts of tax attributes for the next XXXXXXXXXX years, the taxpayers will request a new ruling based on updated facts at that time.

16. The structure will be unwound in the following manner:

a. ITCco will redeem the ITCco Preferred Shares held by Profitco for an amount equal to their aggregate redemption amount.

b. As payment for the redemption of the ITCco Preferred Shares, ITCco will issue a non-interest bearing demand promissory note (“the redemption note”) with a principal amount of $XXXXXXXXXX.

c. The redemption note will be offset against the Profitco Note.

ADDITIONAL INFORMATION

17. Neither Parentco, Profitco nor ITCco is, or will be at any time during the implementation of the Proposed Transactions, a specified financial institution, or a corporation described in any of paragraphs (a) to (f) of the definition of “financial intermediary corporation” in subsection 191(1) of the Act.

18. The issued ITCco Preferred Shares will not, at any time during the course of the Proposed Transactions, be:

a. the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;

b. The subject of “dividend rental arrangement” as defined by subsection 248(1) with respect to any of the shares issued for the purposes of completing the Proposed Transactions;

c. the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

d. issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

19. It is expected that ITCco will have sufficient cash-flow from its operations (excluding any interest income or additional funding from Profitco) to facilitate payment of the annual dividends on the ITCco Preferred Shares.

20. Parentco, ITCco and Profitco have been related persons and affiliated persons since XXXXXXXXXX and will be, throughout the series of transactions that includes the Proposed Transaction, related persons and affiliated persons and will continue to be related persons and affiliated persons going forward. In this context, Parentco, ITCco and Profitco are affiliated persons as that meaning is assigned by section 251.1 if read without reference to the definition of “controlled” in subsection 251.1(3).

21. No portion of the interest on the Profitco Note will be considered to be a “contingent amount” as provided for in subsection 143.4(1) of the Act.

22. Profitco represents that, for each year during that period covered by this ruling request, it expects to earn taxable income in excess of the interest expense that will arise by virtue of the implementation of the proposed transactions. XXXXXXXXXX. Any such non-capital loss will be carried back to a prior taxation year in accordance with the rules in section 111 to the extent of Profitco’s taxable income otherwise earned in any such preceding year. No losses will be carried back to a year in which ITCco and Profitco were not affiliated or related persons.

23. Profitco and ITCco represent that they will undertake steps to ensure that interest income to be earned by ITCco in respect of the loan will not exceed an amount of income which could be fully sheltered with ITCco’s existing tax attributes.

24. The annual dividend paid on the ITCco Preferred Shares of the capital stock of ITCco has no other purpose other than the purposes described under the heading “Purpose of the Proposed Transactions”.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to utilize the tax attributes of ITCco to offset the tax liability of Profitco. The Proposed Transactions will enable ITCco to earn interest income on the Profitco Note and permit Profitco to effectively utilize ITCco’s tax attributes.

The purpose of both the payment and receipt of the annual dividend paid on the ITCco Preferred Shares is to provide a reasonable return on the ITCco Preferred Shares and to fund the interest payments that will be due on the Profitco Note. Furthermore, the purpose of the annual dividends paid on the ITCco Preferred Shares is not to reduce the fair market value of any share, nor to increase the total cost amounts of properties of Profitco.

RULINGS

Provided that:

a. the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions,

b. the proposed transactions are completed in the manner described above, and

c. there are no other transactions which may be relevant to the rulings requested,

we rule that:

A. Provided that Profitco has a legal obligation to pay interest on the Profitco Note, and the ITCco Preferred Shares continue to be held by Profitco for the purpose of gaining or producing income therefrom, Profitco will, pursuant to subparagraph 20(1)(c)(i) of the Act, be entitled to deduct, in computing its income for a taxation year, the lesser of the interest on the Profitco Note, as described in Paragraph 14 above, paid or payable on the Profitco Note in respect of that taxation year (depending on the method regularly followed by Profitco in computing its income for the purposes of the Act) and (ii); or a reasonable amount in respect thereof.

B. The provisions of subsections 15(1), 56(2) and 246(1) will not apply as a result of entering into the Proposed Transactions, in and by themselves.

C. Dividends received by Profitco on the ITCco Preferred Shares, as described above, will be taxable dividends and such dividends will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of the recipient corporation for the year in which the dividends are received by Profitco and, for greater certainty such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

D. Subsection 55(2) will not apply in respect of the dividends received by Profitco on the ITCco Preferred Shares as described in Paragraph 14 above.

E. Subsection 245(2) will not be applied as a result of entering into the Proposed Transactions to re-determine the tax consequences confirmed in the rulings given.

F. The General Anti-avoidance Provision of an Agreeing Province will not be applied, as a result of the Proposed Transactions, to redetermine the tax consequences confirmed in the rulings given above, in respect of a taxation year in respect of which such Tax Collection Agreement is in effect.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are commenced on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

(b) the reasonableness or fair market value of any fees or expenditures referred to herein;

(c) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein; or

(d) any tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the rulings given above.

OPINION

Provided that (i) the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Additional Information, Purpose of the Proposed Transactions; (ii) the Proposed Transactions are undertaken in the manner described above; and (iii) the Act is amended in accordance with the draft legislative proposals released by the Department of Finance on July 31, 2015, and which received second reading in the House of Commons on May 10, 2016, (Bill C-15), subsection 55(2) will not apply in respect of the dividends described in Ruling D above.

The foregoing opinion is not a ruling and, as noted in paragraph 19(f) of Information Circular 70-6R7, is not binding on the CRA.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate