2024 Ruling 2024-1024021R3 - Loss consolidation involving Canadian branch

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: 1. Whether a XXXXXXXXXX corporation’s non-capital losses will constitute non-capital losses of the XXXXXXXXXX corporation immediately after its continuance to XXXXXXXXXX as a ULC. 2. Whether subsection 87(2.1) will apply in respect of the amalgamation of the continued corporation and its Canadian sister corporation. 3. Whether various benefit rules will apply in respect of the proposed transactions. 4. Whether the federal or provincial GAAR will apply in respect of the proposed transactions.

Position: 1. Yes. 2. Yes. 3. No. 4. No. Favorable ruling issued.

Reasons: 1. The governing corporate legislation provides for continuance and treats the continued corporation as the same corporation. 2. Meets statutory requirements. 3. / 4. Consistent with previous rulings and CRA positions on loss consolidations.

XXXXXXXXXX 2024-102402

XXXXXXXXXX, 2024

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling – Loss Consolidation involving Canadian Branch
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling (the “Ruling”) on behalf of the above-named taxpayers (the “Taxpayers”). We understand that to the best of your knowledge and that of the Taxpayers, none of the Proposed Transactions or issues involved in this Ruling are the same as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of the Taxpayers or a related person and:

A. being considered by the CRA in connection with such return;

B. under objection by the Taxpayers or a related person; or

C. the subject of a current or completed court process involving the Taxpayers or a related person; or

ii. the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

This letter is based solely on the Facts and Proposed Transactions described below. The documentation submitted with the ruling request does not form part of the Facts and Proposed Transactions, and any references thereto are provided solely for the convenience of the reader.

DEFINED TERMS

In this letter, unless otherwise indicated:

i. all references to a statute are to the relevant provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”);

ii. all terms and conditions used in this Ruling that are defined in the Act (or in the Regulations) have the meaning given in such definition;

iii. all references to monetary amounts are in Canadian dollars; and

iv. the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions will be referred to as follows:

“ACB” means “adjusted cost base” as defined in section 54;

“affiliated” means, in relation to a particular person, another person who is affiliated to the particular person by virtue of subsection 251.1(1), read without reference to the definition of “controlled” in subsection 251.1(3);

“Agreeing Provinces” 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;

“Amalco” means the corporation to be formed on the Amalgamation;

“Amalgamation” means the amalgamation of Canco1 and XXXXXXXXXXco1 as described in Paragraph 30;

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

“Canco1” means XXXXXXXXXX;

“Continuance” means the continuance of XXXXXXXXXXco1 as a ULC as described in Paragraph 27;

“Contributions” means the transactions described in Paragraph 29;

“CRA” means the Canada Revenue Agency;

“Cross-Border Activities” means the XXXXXXXXXX activities of XXXXXXXXXXco1 described in Paragraph 6;
“Domestic Activities” means the XXXXXXXXXX activities of XXXXXXXXXXco1 described in Paragraph 6;

“FMV” means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act, that is expressed in terms of cash;

“Foreignco1” means XXXXXXXXXX.;

“Foreignco2” means XXXXXXXXXX.;

“Foreignco3” means XXXXXXXXXX.;

“foreign affiliate” has the meaning assigned by subsection 95(1);

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

i. XXXXXXXXXX, as amended;

ii. XXXXXXXXXX, as amended;

iii. XXXXXXXXXX, as amended;

iv. XXXXXXXXXX, as amended;

v. XXXXXXXXXX, as amended;

vi. XXXXXXXXXX, as amended;

vii. XXXXXXXXXX, as amended; and

viii. XXXXXXXXXX, as amended;

“Group” means the group of persons that are related and affiliated with XXXXXXXXXX Parent as described in Paragraph 2;

“Loss Restriction Event” has the meaning assigned by subsection 251.2(2);

“Minister” means the Minister of National Revenue;

XXXXXXXXXX;

“non-capital loss” has the meaning assigned by subsection 111(8), as modified by subsection 111(9);

“NCL Carryforward” means each non-capital loss of XXXXXXXXXXco1 described in Paragraph 13;

“paid-up capital adjustment” has the meaning assigned by paragraph 128.1(2)(a);

“Paragraph” means a numbered paragraph in this letter;

“particular time” means the time described in Paragraph 42.1.a.

“Permanent Establishment” has the meaning assigned in Article V of the Treaty;

“Profitco Business” means the business carried on by Canco1 as described in Paragraph 17;

“Proposed Transactions” means the transactions described in Paragraphs 27 to 31;

“PUC” means “paid-up capital” as defined in subsection 89(1);

“related” means, in relation to a particular person, another person who is related to the particular person by virtue of subsection 251(2);

“return of income” has the meaning assigned by subsection 150(1);

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

“taxable income” has the meaning assigned by subsection 248(1);

“taxable income earned in Canada” has the meaning assigned by subsection 248(1);

“TCP” means “taxable Canadian property” as defined in subsection 248(1);

“time of disposition” means the time described in Paragraph 42.1.b.

“Treaty” means the XXXXXXXXXX;

“ULC” means an unlimited company governed by the XXXXXXXXXX;

XXXXXXXXXX;

“XXXXXXXXXXco1” means, prior to the Continuance, XXXXXXXXXX, and, after the Continuance, the entity so continued.;

“XXXXXXXXXXco1 Activities” means the business carried on by XXXXXXXXXXco1 as described in Paragraph 5;

“XXXXXXXXXXco1 NCLs” means each of, or all of, as the context requires, the following non-capital losses of XXXXXXXXXXco1: (i) each NCL Carryforward; (ii) the non-capital loss incurred by XXXXXXXXXXco1 for its taxation year ended XXXXXXXXXX, as described in Paragraph 13.1. (if any); and (iii) the non-capital loss incurred by XXXXXXXXXXco1 for its taxation year ending immediately before the particular time, as described in Paragraph 42.1.a. (if any);

“XXXXXXXXXXco2” means XXXXXXXXXX.;

“XXXXXXXXXXco3” means XXXXXXXXXX.;

“XXXXXXXXXXco4” means XXXXXXXXXX.;

“XXXXXXXXXXco5” means XXXXXXXXXX.;

“XXXXXXXXXX Parent” means XXXXXXXXXX; and

“XXXXXXXXXX Act” means the XXXXXXXXXX Corporations, Partnerships and Associations.

FACTS

XXXXXXXXXXco1 and the Group’s Corporate Structure

1. XXXXXXXXXX Parent is a corporation resident in the XXXXXXXXXX whose shares are listed on the XXXXXXXXXX.

2. XXXXXXXXXX Parent and its group of related and affiliated entities (the “Group”) are collectively engaged in the XXXXXXXXXX.

3. XXXXXXXXXX Parent owns all the issued and outstanding shares of XXXXXXXXXXco2, which in turn owns all of the issued and outstanding shares of XXXXXXXXXXco1.

4. XXXXXXXXXXco1 is a corporation incorporated under XXXXXXXXXX and is a resident of the XXXXXXXXXX and not a resident of Canada for the purposes of the Act and the Treaty.

5. XXXXXXXXXXco1 is involved in the XXXXXXXXXX business and specializes in the XXXXXXXXXX (the “XXXXXXXXXXco1 Activities”).

6. The XXXXXXXXXXco1 Activities involve XXXXXXXXXX.

7. XXXXXXXXXXco1 does not own any shares or interests in other corporations.

8. XXXXXXXXXXco1 is subject to tax under Part I on its taxable income earned in Canada from the carrying on of its business in Canada through a Permanent Establishment situated in Canada in accordance with XXXXXXXXXX of the Treaty.

9. XXXXXXXXXXco1’s profits from the Cross-Border Activities are exempt from income tax under the Act pursuant to paragraph 81(1)(a) and XXXXXXXXXX of the Treaty.

10. XXXXXXXXXXco1 has a taxation year ending on XXXXXXXXXX of each year for the purposes of the Act.

11. XXXXXXXXXXco1’s registered address is XXXXXXXXXX.

12. During its taxation year ended XXXXXXXXXX, XXXXXXXXXXco1 maintained a permanent establishment, as defined in subsection 400(2) of the Regulations, in XXXXXXXXXX: XXXXXXXXXX. Its provincial allocation for such taxation year, as determined under Part IV of the Regulations, was as follows: XXXXXXXXXX

13. As of XXXXXXXXXX, in its return of income, XXXXXXXXXXco1 reported a non-capital loss for each of the following taxation years (each a “NCL Carryforward”):

Taxation year-end Non-capital loss
XXXXXXXXXX XXXXXXXXXX

Of the amount of the NCL Carryforward of $XXXXXXXXXX incurred in the taxation year ended XXXXXXXXXX, an amount of $XXXXXXXXXX was carried forward to the taxation year ended XXXXXXXXXX, an amount of $XXXXXXXXXX was carried forward to the taxation year ended XXXXXXXXXX and an amount of $XXXXXXXXXX was carried forward to the taxation year ended XXXXXXXXXX.

13.1. It is also expected that XXXXXXXXXXco1 will incur a non-capital loss for its taxation year ended XXXXXXXXXX.

14. XXXXXXXXXX.

15. None of the following were incurred by XXXXXXXXXXco1 prior to a Loss Restriction Event: (i) a NCL Carryforward; or (ii) the non-capital loss described in Paragraph 13.1. (if any).

16. Reserved.

17. Canco1 is involved in the XXXXXXXXXX (the “Profitco Business”).

18. Canco1 is a ULC and is a resident of Canada for the purposes of the Act. Canco1 is a taxable Canadian corporation.

19. Canco1 does not own any shares or interests in any foreign affiliate and does not own shares of XXXXXXXXXXco1.

20. Reserved.

21. For its taxation year ended XXXXXXXXXX, Canco1 had taxable income of $XXXXXXXXXX.

22. Canco1’s registered address is XXXXXXXXXX.

23. During its taxation year ended XXXXXXXXXX, Canco1 maintained permanent establishments, as defined in subsection 400(2) of the Regulations, in XXXXXXXXXX.

24. As of the date hereof:

a. XXXXXXXXXX Parent owns all the issued and outstanding shares of XXXXXXXXXXco2;

b. XXXXXXXXXXco2 owns all of the issued and outstanding shares of XXXXXXXXXXco1;

c. XXXXXXXXXXco2 owns all of the issued and outstanding shares of XXXXXXXXXXco3;

d. XXXXXXXXXXco3 owns all of the issued and outstanding shares of XXXXXXXXXXco4;

e. XXXXXXXXXXco4 owns all of the issued and outstanding shares of XXXXXXXXXXco5;

f. XXXXXXXXXXco5 owns all of the issued and outstanding shares of Foreignco1;

g. Foreignco1 owns all of the issued and outstanding shares of Foreignco2;

h. Foreignco2 owns all of the issued and outstanding shares of Foreignco3; and

i. Foreignco3 owns all of the issued and outstanding shares of Canco1.

25. Each of XXXXXXXXXXco2, XXXXXXXXXXco3, XXXXXXXXXXco4 and XXXXXXXXXXco5 is a corporation incorporated in XXXXXXXXXX and is a resident of the XXXXXXXXXX and not a resident of Canada for the purposes of the Act.

26. Each of Foreignco1, Foreignco2 and Foreignco3 is a corporation incorporated in the XXXXXXXXXX and is a resident of the XXXXXXXXXX and not a resident of Canada for the purposes of the Act.

PROPOSED TRANSACTIONS

The following transactions will be completed in the order described below.

Migration of XXXXXXXXXX into Canada

27. XXXXXXXXXXco1 will, pursuant to the provisions of XXXXXXXXXX and the XXXXXXXXXX, continue its existence out of XXXXXXXXXX and continue its existence into XXXXXXXXXX as a ULC (the “Continuance”). In the course of the Continuance:

a. no new class of shares of XXXXXXXXXXco1 will be created and no additional shares will be issued by XXXXXXXXXXco1;

b. no material change will be made to the rights and conditions attached to the issued and outstanding shares of the capital of XXXXXXXXXXco1;

c. XXXXXXXXXXco1’s existence will be preserved; that is, no new entity will be created;

d. XXXXXXXXXXco1’s assets and liabilities will remain with XXXXXXXXXXco1;

e. XXXXXXXXXXco1 will become a ULC as if it had always been formed under the XXXXXXXXXX;

f. the Continuance will not result in any express or deemed exchange, disposition, redemption, cancellation or reissuance of the outstanding shares in the capital of XXXXXXXXXXco1 under the XXXXXXXXXX or XXXXXXXXXX; and

g. the aggregate stated capital account for the issued and outstanding shares of XXXXXXXXXXco1 before the Continuance will become the aggregated stated capital account for the outstanding shares of XXXXXXXXXXco1 immediately after the Continuance.

28. The board of directors of XXXXXXXXXXco1 will take the necessary actions for the Continuance to be ratified so that XXXXXXXXXXco1 becomes resident in Canada for the purposes of the Act and ceases to be a resident of the XXXXXXXXXX under XXXXXXXXXX of the Treaty.

Contribution of XXXXXXXXXXco1’s shares down corporate chain

29. Sometime after obtaining a certificate of continuance under the XXXXXXXXXX, all of the issued and outstanding shares of XXXXXXXXXXco1 will be contributed down the corporate chain in the following manner (collectively, the “Contributions”):

XXXXXXXXXX.

Amalgamation

30. Sometime after the completion of the Contributions, XXXXXXXXXXco1 will amalgamate with Canco1 (the “Amalgamation”) in accordance with the provisions of the XXXXXXXXXX to form Amalco, which will be a taxable Canadian corporation. As part of the Amalgamation:

a. all of the property (except amounts receivable from either XXXXXXXXXXco1 or Canco1) of XXXXXXXXXXco1 and Canco1 immediately before the Amalgamation will become property of Amalco by virtue of the Amalgamation;

b. all of the liabilities (except amounts payable to either Canco1 or XXXXXXXXXXco1) of XXXXXXXXXXco1 and Canco1 immediately before the Amalgamation will become liabilities of Amalco by virtue of the Amalgamation, and

c. for the purposes of paragraph 87(1)(c), Foreignco3 will be deemed by subsection 87(1.1) to have received shares of Amalco by virtue of the Amalgamation.

31. Subsequent to the Amalgamation, the XXXXXXXXXXco1 Activities and the Profitco Business will be carried on by Amalco.

ADDITIONAL INFORMATION

32. None of the Proposed Transactions will result in a Loss Restriction Event for XXXXXXXXXXco1 or any entity involved in the Proposed Transactions.

33. At all relevant times prior to the Proposed Transactions, XXXXXXXXXXco1 and Canco1 are affiliated and are related to each other and will continue to be affiliated and related to each other throughout the Proposed Transactions.

34. XXXXXXXXXXco1 does not own any significant real or immovable property in Canada XXXXXXXXXX.

35. The shares of XXXXXXXXXXco1 are not TCP and will not be TCP at any time in the 60-months preceding the time of any of the Proposed Transactions. For greater certainty, the shares of XXXXXXXXXXco1 will not be TCP at any time during the Proposed Transactions.

36. The profits from the Cross-Border Activities will no longer be exempt from income tax in Canada pursuant to paragraph 81(1)(a) and XXXXXXXXXX of the Treaty after the Continuance. Consequently, profits from the Cross-Border Activities earned by XXXXXXXXXXco1 or Amalco, as the case may be, will become subject to tax under Part I after the Continuance.

37. XXXXXXXXXX.

38. XXXXXXXXXXco1 will comply with the requirements under section 116 arising in connection with the deemed dispositions of its properties pursuant to paragraph 128.1(1)(b).

39. XXXXXXXXXXco1 will file an election under paragraph 128.1(2)(b) if a positive paid-up capital adjustment is available for its shares pursuant to subsection 128.1(2).

40. In connection with the Continuance, XXXXXXXXXXco1 will comply with all applicable statutory requirements under the XXXXXXXXXX and XXXXXXXXXX.

41. As a result of the Continuance, XXXXXXXXXXco1 will continue to be the same corporation as it was prior to the Continuance and will not cease to exist as a result of such Continuance.

a. From a XXXXXXXXXX standpoint, the Continuance will be governed by the following provisions of the XXXXXXXXXX:

XXXXXXXXXX, which provides:

XXXXXXXXXX

b. XXXXXXXXXX

42. For greater certainty, none of the XXXXXXXXXXco1 NCLs arose, or will arise, as the case may be, from the Cross-Border Activities.

42.1. In filing its return of income, XXXXXXXXXXco1 will apply the following tax consequences as a result of, and pursuant to, the Continuance:

a. pursuant to paragraph 128.1(1)(a), XXXXXXXXXXco1’s taxation year will be deemed to have ended immediately before the time it becomes resident in Canada for the purposes of the Act, as described in Paragraph 28 (the “particular time”) and a new taxation year of XXXXXXXXXXco1 will be deemed to have begun at the particular time;

b. pursuant to paragraph 128.1(1)(b), XXXXXXXXXXco1 will be deemed to have disposed, at the time (the “time of disposition”) that is immediately before the time that is immediately before the particular time, of each property owned by XXXXXXXXXXco1 for proceeds equal to its fair market value at the time of disposition; and

c. pursuant to paragraph 128.1(1)(c), XXXXXXXXXXco1 will be deemed to have acquired at the particular time each property deemed by paragraph 128.1(1)(b) to have been disposed of by XXXXXXXXXXco1, at a cost equal to the proceeds of disposition of the property.

PURPOSES OF THE PROPOSED TRANSACTIONS

43. The purpose of the Proposed Transactions is to realize synergies and efficiencies by combining XXXXXXXXXXco1 with Canco1 (and, therefore, the XXXXXXXXXXco1 Activities and the Profitco Business) in a manner that preserves the XXXXXXXXXXco1 NCLs so that Amalco can claim the XXXXXXXXXXco1 NCLs in computing its taxable income.

44. The purpose of the Continuance is to satisfy the requirements in subsection 87(1) by ensuring that XXXXXXXXXXco1 becomes a taxable Canadian corporation prior to the Amalgamation and to ultimately allow for Amalco to claim the XXXXXXXXXXco1 NCLs in computing its taxable income.

45. The purpose of XXXXXXXXXXco1 continuing its existence as a ULC is to facilitate the Amalgamation since Canco1 is already a ULC.

46. XXXXXXXXXX.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions, additional information, and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, and there are no other transactions which may be relevant, we confirm the following:

A. Provided that XXXXXXXXXXco1 continues to be the same corporation as it was prior to the Continuance and does not cease to exist as a result of the Continuance, the XXXXXXXXXXco1 NCLs will constitute non-capital losses of XXXXXXXXXXco1 immediately after the Continuance.

B. For the purposes of determining Amalco’s non-capital loss for any taxation year as a result of the Amalgamation, subsection 87(2.1) will apply to deem Amalco to be the same corporation as, and a continuation of, each of Canco1 and XXXXXXXXXXco1.

C. The provisions of subsections 15(1), 56(2), 69(1), 69(11) and 246(1) will not apply as a result of the Proposed Transactions, in and by themselves.

D. Subsection 245(2) will not be applied, as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences as confirmed by any of the Rulings described in A to C.

E. The General Anti-avoidance Provision of an Agreeing Province will not be applied, as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed by any of the Rulings described in A to C, in respect of a taxation year for which such province was an Agreeing Province.

The above Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions described in Paragraphs 27 to 29 (inclusive) are completed no later than six (6) months after the date of this letter and the Proposed Transaction described in Paragraph 30 is completed, and the Proposed Transaction described in Paragraph 31 is commenced, no later than XXXXXXXXXX. The above Rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the Rulings provided herein.

COMMENTS

Unless otherwise expressly confirmed, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination, or accepted any method for the determination in respect of:

a) the FMV or ACB of any property or the PUC of any shares referred to herein;

b) the amount of any non-capital loss referred to herein;

c) the allocation of expenses incurred by XXXXXXXXXXco1 between its Cross-Border Activities and Domestic Activities in computing its non-capital loss or taxable income earned in Canada, as the case may be;

d) the application of section 116 to any of the Proposed Transactions;

e) the tax consequences resulting from the deemed dispositions of XXXXXXXXXXco1’s properties under paragraph 128.1(1)(b);

f) whether any property referred to herein is TCP;

g) any foreign tax consequences;

h) any residency determination in respect of any entity referred to herein; and

i) any other tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the Rulings given above.

An invoice for our fees in connection with this Ruling will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
For Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch