2025 Ruling 2024-1046651R3 - Loss Consolidation

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 a corporation with accumulated non-capital losses can use those losses against interest income on loans made to related/affiliated corporations; 2) Whether the proposed loss consolidation transactions are consistent with the scheme of the Act.

Position: 1) Yes; 2) Yes.

Reasons: The proposed loss consolidation meets the requirements for deductibility of interest in paragraph 20(1)(c) and the carry forward of accumulated non-capital losses; 2) The proposed transactions will be legally effective, commercially reasonable, and be fully implemented within 36 months of the commencement of the proposed transactions – further, the proposed transactions are consistent with the scheme of the Act as it applies to the use of losses within an affiliated/related group.

XXXXXXXXXX 2024-104665

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling (Ruling) on behalf of the above-named taxpayer.

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.

We understand that, to the best of your knowledge and that of the taxpayer, none of the Proposed Transactions or issues involved in this Ruling are the same as, or substantially similar to, transactions or issues that are:

(a) in a previously filed tax return of the taxpayer or a related person and

i. being considered by the Canada Revenue Agency in connection with such return;
ii. under objection by the taxpayer or a related person; or

iii. the subject of a current or completed court process involving the taxpayer or a related person; or

(b) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated:

(a) all statutory references herein are to the relevant provisions of the Income Tax Act, RSC, 1985, c.1 (5th Supp.) or the Income Tax Regulations, CRC, c. 945;

(b) all references to monetary amounts are to Canadian dollars; and

(c) the singular should be read as plural and vice versa where the circumstances so require.

DEFINITIONS

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

“XXXXXXXXXX” means XXXXXXXXXX, a taxable Canadian corporation, incorporated by XXXXXXXXXX to facilitate the acquisition of the shares of XXXXXXXXXX;

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

“Act” means the Income Tax Act, RSC, 1985, c.1 (5th Supp.), as amended to the date of this letter;

“affiliated persons” has the meaning assigned by section 251.1 read without reference to the definition of “controlled” in subsection 251.1(3);

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

“XXXXXXXXXX” means the XXXXXXXXXX, as amended;

“CCPC” means Canadian-controlled private corporation, as defined in subsection 125(7);

“XXXXXXXXXX” means XXXXXXXXXX, a taxable Canadian corporation described in Paragraph 8;

“Class A PS” refers to the Class A preferred shares of Newco, as described in Paragraph 27;

“Class B PS” refers to the Class B preferred shares of Newco, as described in Paragraph 27;

“Contribution of Capital” refers to a contribution of capital to be made by Lossco to Newco, as described in Paragraphs 51, 52 and 53;

“CRA” means the Canada Revenue Agency;

“Daylight Loan” refers to the amount borrowed by Lossco from a third-party lender, on a daylight basis, as described in Paragraph 29;

“FMV” means “fair market value” which 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, expressed in terms of money;

“IFLs” collectively refers to the interest-free loans, Lossco IFL-1 and Lossco IFL-2;

“Loss Consolidation Period” means, in respect of Profitco 1 and Profitco 2, the time period beginning immediately after the advance of the Daylight Loan described in Paragraph 29 and ending at the time the loss consolidation structure is wound up under Paragraph 52 or 53, as the case my be;

“Lossco” refers to XXXXXXXXXX;

“Lossco IFL-1” refers to the interest-free loan made by Newco to Lossco, referred to in Paragraph 32;

“Lossco IFL-2” refers to the interest-free loan made by Newco to Lossco, referred to in Paragraph 42;

“Lossco NCLs” refers to the non-capital losses of Lossco, as described in Paragraphs 4 and 5;

“Newco” is a taxable Canadian corporation to be incorporated by Lossco under the XXXXXXXXXX, as described in Paragraph 26;

“NCL” means “non-capital loss” as that term is defined in subsection 111(8);

“Paragraph” refers to a numbered paragraph in this letter;

“permanent establishment” has the meaning assigned by subsection 400(2) of the Regulations;

“Newco Preferred Shares” collectively refers to the Class A PS and the Class B PS;

“principal amount” has the meaning assigned by subsection 248(1);

“Profitco 1” refers to XXXXXXXXXX, a taxable Canadian corporation described in Paragraphs 16 to 20;

“Profitco 2” refers to XXXXXXXXXX, a taxable Canadian corporation described in Paragraphs 21 to 25;

“Profitco 1 Subscription” refers to the Class A PS subscription in Newco by Profitco 1, as described in Paragraph 31;

“Profitco 2 Subscription” refers to the Class B PS subscription in Newco by Profitco 2, as described in Paragraph 41;

“Profitco IBL-1” means the interest-bearing loan owed by Profitco 1 to Lossco referred to in Paragraph 30;

“Profitco IBL-2” means the interest-bearing loan owed by Profitco 2 to Lossco referred to in Paragraph 40;

“Profitco IBLs” collectively refers to the interest-bearing loans, Profitco IBL-1 and Profitco IBL-2;

“Profitcos” collectively refers to Profitco 1 and Profitco 2;

“Proposed Transactions” means the transactions described in Paragraphs 26 to 54;

“Provincial Allocation” refers to the allocation of the taxable income earned by Lossco and each of the Profitcos in the provinces where they respectively have a permanent establishment for the purposes of computing their taxable income Earned in the Year in a Province in accordance with Part IV of the Regulations;

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

“Regulations” means the Income Tax Regulations, CRC, c. 945, as amended;

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

“subsidiary wholly-owned corporation” has the meaning assigned by subsection 248(1);

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

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

“taxable income” has the meaning assigned by subsections 248(1) and 2(2);

“Taxable Income Earned in the Year in a Province” has the meaning assigned by subsection 124(4).

TAX IDENTIFICATION

The Tax Services Office, Tax Centre, and business numbers of XXXXXXXXXX are as follows:

XXXXXXXXXX

FACTS

A complete description of all the relevant facts is as follows:

Lossco

1. Lossco is a taxable Canadian corporation and a CCPC. Lossco is governed by XXXXXXXXXX exceeds XXXXXXXXXX% of the FMV of all the shares of the capital stock of Lossco.

2. Lossco is a XXXXXXXXXX. Lossco also enables Canadian XXXXXXXXXX to offer Lossco’s XXXXXXXXXX.

3. During its taxation year ended XXXXXXXXXX, Lossco exclusively maintained a permanent establishment in the province of XXXXXXXXXX and for that year, Lossco’s Provincial Allocation was fully attributed to the province of XXXXXXXXXX. Lossco does not expect that its Provincial Allocation will significantly change in the foreseeable future.

4. Lossco’s operations depend on the development of cutting edge XXXXXXXXXX to support its operations as a XXXXXXXXXX. In the process of developing and adapting its XXXXXXXXXX, Lossco incurred the following non-capital losses between XXXXXXXXXX:

	Taxation year-end		Non-capital losses
	XXXXXXXXXX			XXXXXXXXXX

5. In addition, Lossco estimates that it may incur the following non-capital losses in XXXXXXXXXX (collectively with the non-capital losses described in the previous paragraph, referred to herein as the “Lossco NCLs”):

	Taxation year-end		Non-capital losses
	XXXXXXXXXX			XXXXXXXXXX

6. None of the Lossco NCLs have been (or will be, as the case may be) incurred prior to a “loss restriction event” as that term is defined in subsection 251.2(2). Lossco’s tax reporting currency and functional currency is the Canadian dollar and it has not previously elected to report its Canadian tax results in a functional currency other than the Canadian dollar.

7. Without the implementation of the Proposed Transactions, the Lossco NCLs are expected to accumulate and remain unused by Lossco.

Acquisition of the Profitcos

8. On XXXXXXXXXX, Lossco acquired all the issued and outstanding shares of XXXXXXXXXX through a wholly-owned subsidiary of Lossco, XXXXXXXXXX. Immediately before the acquisition, XXXXXXXXXX was the direct and indirect parent company of the Profitcos (or their predecessors). The purchase price for XXXXXXXXXX was approximately $XXXXXXXXXX, which was financed largely by arm’s length borrowing. The acquisition of XXXXXXXXXX resulted in an acquisition of control of the Profitcos.

9. Prior to the acquisition described in Paragraph 8, XXXXXXXXXX was looking for a buyer for its shares. XXXXXXXXXX, Lossco was chosen to acquire the shares of XXXXXXXXXX. Neither XXXXXXXXXX nor any of its subsidiaries were looking to acquire Lossco or any other corporation.

10. The strategic rationale for the acquisition of XXXXXXXXXX by Lossco is multifaceted. Lossco was aiming to supplement its business operations and to create a leading XXXXXXXXXX company in Canada. More specifically, the acquisition has allowed Lossco to:

XXXXXXXXXX.

11. Lossco intends to combine its XXXXXXXXXX, known for its advanced XXXXXXXXXX, with the XXXXXXXXXX of the Profitcos. The acquisition has resulted in a corporate group with a uniquely XXXXXXXXXX.

12. Immediately before the acquisition described in Paragraph 8, the shareholders of XXXXXXXXXX, a taxable Canadian corporation.

Similar Businesses

13. The services rendered by the Profitcos in the course of carrying on XXXXXXXXXX.

Post-acquisition amalgamations

14. On XXXXXXXXXX and XXXXXXXXXX were amalgamated under the XXXXXXXXXX in the manner described in subsection 87(1).

15. On XXXXXXXXXX, the resulting entity of the amalgamation described in Paragraph 14 and Profitco 1 were amalgamated under the XXXXXXXXXX. The amalgamation was an amalgamation described in subsection 87(1) to which subsection 87(2.11) applies. The entity resulting from this second amalgamation adopted the name XXXXXXXXXX. (hereafter referred to as Profitco 1).

Profitco 1

16. Profitco 1 is a taxable Canadian corporation and a CCPC. It is governed by the XXXXXXXXXX and has a taxation year-end of XXXXXXXXXX.

17. Profitco 1 is a subsidiary wholly-owned corporation of Lossco.

18. Profitco 1 XXXXXXXXXX services in Canada.

19. During its taxation year ended XXXXXXXXXX, Profitco 1 maintained a permanent establishment in XXXXXXXXXX. For that year, Profitco 1’s Provincial Allocation was as follows: XXXXXXXXXX. Profitco 1 does not expect that its Provincial Allocation will significantly change in the foreseeable future.

20. The estimated taxable income of Profitco 1 for its taxation years ending in XXXXXXXXXX without taking into consideration the tax implications of the Proposed Transactions is as follows:

	Year			Estimated Taxable Income
	XXXXXXXXXX		XXXXXXXXXX

Profitco 2

21. Profitco 2 is a taxable Canadian corporation and CCPC. It is governed by the XXXXXXXXXX and has a taxation year-end of XXXXXXXXXX.

22. Profitco 2 is a subsidiary wholly-owned corporation of Profitco 1.

23. Profitco 2 offers XXXXXXXXXX services in Canada.

24. During its taxation year ended XXXXXXXXXX, Profitco 2 maintained a permanent establishment in XXXXXXXXXX. For that year, Profitco 2’s Provincial Allocation was as follows: XXXXXXXXXX. Profitco 2 does not expect that its Provincial Allocation will significantly change in the foreseeable future.

25. The estimated taxable income of Profitco 2 for its taxation years ending in XXXXXXXXXX without taking into consideration the tax implications of the Proposed Transactions is as follows:

	Year		Estimated Taxable Income
	XXXXXXXXXX	XXXXXXXXXX

PROPOSED TRANSACTIONS

Unless otherwise specified, the transactions described below will occur in the following order.

Incorporation of Newco

26. Lossco will incorporate a new corporation (“Newco”) under the XXXXXXXXXX and will subscribe for one (1) common share for an initial subscription price of $XXXXXXXXXX. Newco will have the following three classes of shares:

(a) unlimited number of common shares;

(b) unlimited number of Class A preferred shares (“Class A PS”);

(c) unlimited number of Class B preferred shares (“Class B PS”).

27. The Class A PS and the Class B PS of Newco (collectively referred to as the “Newco Preferred Shares”) will have the following rights:

(a) non-voting;

(b) non-participating;

(c) redeemable at the option of the issuer and retractable at the option of the holder, subject to the 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. the payment of cash,

ii. the delivery of property having a fair market value at the time of redemption equal to the aggregate redemption amount, or

iii. The delivery of the Lossco IFL-1 in the case of the Class A PS having a principal amount equal to the redemption amount of the Class A PS and the delivery of the Lossco IFL-2 in the case of the Class B PS having a principal amount equal to the redemption amount of the Class B PS, 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;

(d) Entitlement to a cumulative dividend, payable annually, calculated daily and accruing by reference to the redemption amount at a fixed rate per annum equivalent to the rate per annum on the Profitco IBL-1 plus XXXXXXXXXX% in the case of the Class A PS and on the Profitco IBL-2 plus XXXXXXXXXX% in the case of the Class B PS; and

(e) Each of the Class A PS and the Class B PS will have a different notice period for their redemption and will not be considered as shares of the same class.

28. Newco will be a taxable Canadian corporation and a CCPC with a XXXXXXXXXX tax year end. Newco will not carry on any business and its activities will be limited to making the Lossco IFLs with the proceeds received from the issuance of the Class A PS and Class B PS described below. Newco will have as its tax reporting currency and functional currency, the Canadian dollar.

Daylight Loan

29. Lossco will borrow an amount of approximately $XXXXXXXXXX from an arm’s length lender (the “Daylight Loan”). The exact principal amount of the Daylight Loan will be confirmed immediately before the implementation of the Proposed Transactions.

Profitco IBL-1 and IBL-2

30. Using the proceeds of the Daylight Loan, Lossco will make an interest-bearing loan of approximately $XXXXXXXXXX to Profitco 1 (“Profitco IBL-1”). The Profitco IBL- 1 may be satisfied, by (i) payment of money, (ii) delivery of property having a fair market value at the time of repayment equal to the amount borrowed, or (iii) way of set-off against the Lossco IFL-1 if the Lossco IFL-1 belongs to Profitco 1 at the time of repayment.

31. Profitco 1 will use all of the proceeds of the Profitco IBL-1 to subscribe for Class A PS in Newco (Profitco 1 Subscription).

32. Using all of the proceeds from the Profitco 1 Subscription, Newco will make a interest-free loan to Lossco (Lossco IFL-1).

33. [Reserved]

34. The Profitco IBL-1 will be payable on demand without penalty and will bear interest at an annual rate estimated to be approximately XXXXXXXXXX% (to be finally determined immediately before the commencement of the Proposed Transactions). The annual rate on the Profitco IBL-1 will reflect the prevailing market rate of interest for a comparable loan on similar terms and conditions and will not exceed a reasonable commercial rate available in the circumstances.

35. The terms of the Profitco IBL-1 will provide that:

(a) The recourse of Lossco with respect to the Profitco IBL-1 will be limited to the Class A PS having a redemption amount equal to the principal amount of the Profitco IBL-1, and not to any other assets of Profitco 1;

(b) The payment of the principal amount of the Profitco IBL-1 may be satisfied, at Profitco 1’s option, either through:

i. the payment of cash to Lossco;

ii. the transfer of property having an aggregate fair market value equal to the principal amount of the Profitco IBL-1 at the time of its repayment;

iii. the delivery of the Class A PS having a redemption amount equal to the principal amount of the Profitco IBL-1; or

iv. the set-off of the Profitco IBL-1 with the Lossco IFL-1 (having an equivalent principal amount) if Profitco 1 owns such Lossco IFL-1 at the time of repayment.

36. Profitco 1 will grant a security interest in its Class A PS to Lossco in respect of its obligations under the Profitco IBL-1.

37. The aggregate issue price, redemption amount, retraction amount, fair market value, ACB and PUC of the Class A PS issued to Profitco 1 will be equal to the principal amount of the Profitco IBL-1.

38. The amount of dividends to be received by Profitco 1 on the Class A PS will be sufficient to permit Profitco 1 to realize a profit on its investment in its Class A PS, after deduction of any interest paid or payable on the Profitco IBL-1.

39. The terms of the Lossco IFL-1 will provide that:

(a) the recourse of Newco with respect to the Lossco IFL-1 will be limited to the Profitco IBL-1 of an equal principal amount, and not to any other assets of Lossco;

(b) the payment of the principal amount on the Lossco IFL-1 may be satisfied, at Lossco’s option, either through:

i. the transfer of property to Newco having an aggregate fair market value equal to the principal amount of the Lossco IFL-1 at the time of its repayment;

ii. the transfer of the Profitco IBL-1 (having a principal amount equal to the principal amount of the Lossco IFL-1) to Newco; or

iii. by way of set-off against the Profitco IBL-1 having an equivalent principal amount if the Lossco IFL-1 is owned by Profitco 1 at the time of repayment.

40. On the same day as the steps described in Paragraphs 31 to 36, but after those steps are completed, Lossco will make an interest-bearing loan of approximately $XXXXXXXXXX to Profitco 2 (the “Profitco IBL-2” and collectively with the Profitco IBL-1 referred to as the “Profitco IBLs”) using proceeds from the Daylight Loan.

41. Profitco 2 will use all of the proceeds of the Profitco IBL-2 to subscribe for Class B PS (the “Profitco 2 Subscription”).

42. Using all of the proceeds from the Profitco 2 Subscription, Newco will make an interest-free loan to Lossco (“Lossco IFL-2” and collectively with the Lossco IFL - 1 referred to as the “IFLs”).

43. [Reserved]

44. The Profitco IBL-2 will be payable on demand without penalty and will bear interest at an annual rate estimated to be approximately XXXXXXXXXX% (to be finally determined immediately before the commencement of the Proposed Transactions). The annual rate on the Profitco IBL-2 will reflect the prevailing market rate of interest for a comparable loan on similar terms and conditions and will not exceed a reasonable commercial rate available in the circumstances.

45. The terms of the Profitco IBL-2 will provide that:

(a) The recourse of Lossco with respect to the Profitco IBL-2 will be limited to the Class B PS having a redemption amount equal to the principal amount of the Profitco IBL-2, and not to any other assets of Profitco 2;

(b) The payment of the principal amount of the Profitco IBL-2 may be satisfied, at Profitco 2’s option, either through:

i. the payment of cash to Lossco;

ii. the transfer of property having an aggregate fair market value equal to the principal amount of the Profitco IBL-2 at the time of its repayment;

iii. the delivery of the Class B PS having a redemption amount equal to the principal amount of the Profitco IBL-2; or

iv. the set-off of the Profitco IBL-2 with the Lossco IFL-2 (having an equivalent principal amount) if Profitco 2 owns such Lossco IFL-2 at the time of repayment.

46. Profitco 2 will grant a security interest in its Class B PS to Lossco in respect of its obligations under the Profitco IBL-2.

47. The aggregate issue price, redemption amount, retraction amount, fair market value, ACB and PUC of the Class B PS issued to Profitco 2 will be equal to the principal amount of the Profitco IBL-2.

48. The amount of dividends to be received by Profitco 2 on its Class B PS will be sufficient to permit Profitco 2 to realize a profit on its investment in its Class B PS, after deduction of any interest paid or payable on its Profitco IBL-2.

49. The terms of the Lossco IFL-2 will provide that:

(a) The recourse of Newco with respect to the Lossco IFL-2 will be limited to the Profitco IBL-2 of an equal principal amount, and not to any other assets of Lossco;

(b) The payment of the principal amount on the Lossco IFL-2 may be satisfied, at Lossco’s option, either through:

i. the transfer of property to Newco having an aggregate fair market value equal to the principal amount of the Lossco IFL-2 at the time of its repayment;

ii. the transfer of the Profitco IBL-2 (having a principal amount equal to the principal amount of the Lossco IFL-2) to Newco; or

iii. by way of set-off against the Profitco IBL-2 having an equivalent principal amount if the Lossco IFL-2 is owned by Profitco 2 at the time of repayment.

Repayment of the Daylight Loan

50. Lossco will use the aggregate proceeds from the Lossco IFL-1 and Lossco IFL-2, as the case may be, to fully repay the Daylight Loan.

Maintenance of the structure

51. The following transactions will occur at least once a year in respect of the Newco Preferred Shares and the Profitco IBLs when jointly determined by Lossco and each of Profitco 1 and Profitco 2, and before the loss consolidation structure is unwound:

(a) Pursuant to a capital contribution agreement, Lossco will make a contribution of capital to Newco in an amount equal to the sum of the accrued and unpaid dividends, if any, on the Newco Preferred Shares (the “Contribution of Capital”):

i. The amount of the Contribution of Capital will be recorded as contributed surplus for accounting purposes. No shares will be issued by Newco and no amount will be added to the stated capital of any class of shares of the capital stock of Newco. For greater certainty, the Contribution of Capital will not be income to Newco pursuant to International Financial Reporting Standards, and

ii. Lossco will not claim, at any time, a capital loss in respect of its investment in Newco.

(b) Subject to any applicable solvency test under corporate law, Newco will pay the accrued and unpaid dividends on the Newco Preferred Shares; and

(c) Each of Profitco 1 and Profitco 2 will pay the accrued and unpaid interest on their respective Profitco IBLs to Lossco.

(d) Profitco 1 and Profitco 2 are each expected to have an annual interest expense on the Profitco IBL-1 and Profitco IBL-2 that is lower than their anticipated taxable income in the absence of the Proposed Transactions. Accordingly, the Proposed Transactions are not expected to create any non-capital losses in either Profitco 1 or Profitco 2 and, to the extent that such losses may result from the Proposed Transactions, such losses will be applied against income earned in future taxation years.

Unwinding the structure

52. The loss consolidation structure involving Profitco 1 will be unwound in the manner described below no later than 36 months after the commencement of the Loss Consolidation Period:

(a) Lossco will make a Contribution of Capital to Newco which will be equal to the amount of any accrued and unpaid dividends on the Class A PS. The amount of the Contribution of Capital will be recorded as contributed surplus for accounting purposes. No shares will be issued by Newco and no amount will be added to the stated capital of any class of shares of the capital stock of Newco. For greater certainty, the Contribution of Capital will not be income to Newco pursuant to International Financial Reporting Standards.

(b) Newco will declare and pay the balance of any accrued and unpaid dividends on the Class A PS;

(c) Profitco 1 will pay the balance of any accrued and unpaid interest on its Profitco IBL-1;

(d) Newco will redeem the Class A PS held by Profitco 1 and will settle the amount owing on such redemption by assigning to Profitco 1 the Lossco IFL - 1, having a principal amount equal to the redemption amount of the Class A PS; and

(e) Lossco and Profitco 1 will set-off the amounts due between them under the Profitco IBL-1 and the Lossco IFL-1 in full and absolute payment of each of these obligations.

53. The loss consolidation structure involving Profitco 2 will be unwound in the manner described below no later than 36 months after the commencement of the Loss Consolidation Period:

(a) Lossco will make a Contribution of Capital to Newco which will be equal to the amount of any accrued and unpaid dividends on the Class B PS. The amount of the contribution will be added to contributed surplus for accounting purposes. No shares will be issued and no amount will not be added to the stated capital of any class of shares of the capital stock of Newco. For greater certainty, the Contribution of Capital will not be income to Newco pursuant to International Financial Reporting Standards.

(b) Newco will declare and pay the balance of any accrued and unpaid dividends on the Class B PS.

(c) Profitco 2 will pay the balance of any accrued and unpaid interest on its Profitco IBL-2.

(d) Newco will redeem the Class B PS held by Profitco 2 and will settle the amount owing on such redemption by assigning to Profitco 2 the Lossco IFL - 2, having a principal amount equal to the redemption amount of the Class B PS.

(e) Lossco and Profitco 2 will set-off the amounts due between them under the Profitco IBL-2 and the Lossco IFL-2 in full and absolute payment of each of these obligations.

54. Lossco will resolve to wind-up Newco. Within a reasonable period of time following the winding-up, Newco will file articles of dissolution with the appropriate corporate registry.

ADDITIONAL INFORMATION

55. The Proposed Transactions will be legally effective.

56. Lossco, Profitco 1, Profitco 2 and Newco are related and affiliated persons and will continue to be related and affiliated throughout the period that includes the Proposed Transactions.

57. Lossco does not expect that the interest income to be earned by Lossco on the Profitco IBL-1 and Profitco IBL-2 will exceed an amount that could be sheltered with the Lossco NCLs.

58. Lossco, Profitco 1 and Profitco 2 do not expect or intend that the life of any of the Lossco NCLs will be extended beyond their normal carry forward period.

59. The Proposed Transactions are not intended to generate non-capital losses for either Profitco 1 or Profitco 2 that will not be utilized before the end of the applicable Loss Consolidation Period. If it becomes evident that non-capital losses will be incurred by either Profitco 1 or Profitco 2 that cannot be utilized before the end of the applicable Loss Consolidation Period, one or both of the Profitcos, as the case may be, will immediately seek to unwind the loss consolidation structure.

60. The Newco Preferred Shares will not, at any time during the implementation of the Proposed Transactions, be:

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

(b) the subject of a “dividend rental arrangement” as defined under subsection 248(1) of the Act;

(c) the subject of any 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 would be related (otherwise than by reason of a right referred to in paragraph 251(5)(b) of the Act); or

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

(e) issued or acquired as part of a transaction or series of transactions of the type described in subsection 112(2.5) of the Act.

61. Dividends received on the Newco Preferred Shares by each of Profitco 1 and Profitco 2, will be “excepted dividends” within the meaning assigned by section 187.1 of the Act and “excluded dividends” within the meaning assigned by subsection 191(1) of the Act.

62. The amount of the Daylight Loan will not exceed the borrowing capacity of Lossco.

63. Neither Profitco 1 nor Profitco 2 will acquire the Newco Preferred Shares in the ordinary course of their respective businesses.

64. Section 18.2 of the Act (Interest and Financing Expense Limitation) should not apply to prohibit the deduction of any interest expense to be incurred by Profitco 1 or Profitco 2 as each of the corporations involved in the Proposed Transactions should be an “excluded entity” as defined in subsection 18.1(2). If necessary, a joint election, as described in paragraph (e) of the definition “excluded interest” in subsection 18.2(1), within the time specified for making such an election, to ensure that the interest expense to be incurred by Profitco 1 and Profitco 2 is excluded interest.

65. None of Lossco, Profitco 1 or Profitco 2 is a “specified XXXXXXXXXX” as defined in subsection 248(1) or a “XXXXXXXXXX” as defined in subsection 190(1).

PURPOSES OF THE PROPOSED TRANSACTIONS

66. The purpose of the Proposed Transactions is to consolidate taxable income and non-capital losses within a group of affiliated and related persons by causing Lossco to earn interest income on the Profitco IBLs against which the Lossco NCLs can be applied and to create deductible interest expenses in each of Profitco 1 and Profitco 2 to reduce their respective income and taxable income for taxation years ending after the commencement of the Proposed Transactions.

67. The purpose of both the payment and the receipt of the dividends on the Newco Preferred Shares is to provide a reasonable return on those shares and to fund the interest payments to be made by each of Profitco 1 and Profitco 2 on the Profitco IBLs. More specifically, none of the purposes of any dividend to be paid by Newco and received by Profitco 1 and Profitco 2 on the Newco Preferred Shares is to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at FMV, immediately before the dividend, of any share of capital stock, a significant reduction in the FMV of any share, or a significant increase in the cost of any property.

68. The Proposed Transactions are not intended to shift income between provinces and any such shift between provinces will be incidental to the Proposed Transactions, and only to the extent necessary to utilize the NCLs.

69. The Proposed Transactions are not being undertaken to refresh non-capital losses or facilitate the use of the Lossco NCLs in a taxation year after the taxation year in which the losses would have otherwise expired in the hands of Lossco.

70. None of the reasons for the acquisition of XXXXXXXXXX, as described in Paragraph 8, or any of the transactions or events in the series of transactions or events that includes such acquisition, is so that a “specified provision” as that term is defined in subsection 256.1(1), does not apply to one or more corporations.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we confirm the following:

A. Subject to section 18.2, and provided that Profitco 1 and Profitco 2 have a legal obligation to pay interest on the indebtedness represented by Profitco IBL-1 and Profitco IBL-2, as the case may be, and provided that Profitco 1 and Profitco 2 continue to hold the Class A PS and Class B PS for the purpose of gaining or producing income from property, Profitco 1 and Profitco 2 will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing their income for a taxation year (depending on the method regularly followed by each such corporations in computing its income for the purposes of the Act), the lessor of: (i) the interest paid or payable on the Profitco 1 IBL or the Profitco 2 IBL, as the case may be, for that taxation year; and (ii) a reasonable amount in respect thereof.

B. No amount will be included in the income of Newco under any of section 9, or paragraphs 12(1)(c) or 12(1)(x) in respect of the Contributions of Capital that Newco will receive from Lossco.

C. Dividends received by Profitco 1 and Profitco 2 on the Preferred Shares will be taxable dividends and such dividends will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of Profitco 1 and Profitco 2 for the taxation year in which the dividends are received. For greater certainty such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4) of the Act.

D. Neither Part IV.1 nor Part VI.1 of the Act will apply to the dividends described in Ruling C.

E. Provided that the purpose of the payment and receipt of the dividends on the Newco Preferred Shares is as described in Paragraph 67, subsection 55(2) will not apply to such dividends.

F. Provided that the FMV of the Profitco IBL-1, Profitco IBL-2, Lossco IBL-1 and Lossco ILB-2 is equal to their principal amount, the settlement of the Profitco IBL - 1, Profitco IBL-2, Lossco IFL-1 and Lossco IFL-2, as described in Paragraphs 52(e) and 53(e), will not give rise to a “forgiven amount” pursuant to section 80 of the Act and will not, in itself, result in the realization of a gain.

G. Subsections 15(1), 56(2), and 246(1) of the Act will not apply to the Proposed Transactions.

H. Subsection 245(2) of the Act will not be applied as a result of entering into the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

I. The general anti-avoidance provision of a province with which the Government of Canada has entered into a Tax Collection Agreement 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:

(a) 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 are completed within time described herein; and

(b) based on the law as it reads on the date of this letter and do not take into account any proposed amendments to the Income Tax Act or the Regulations thereto which, if enacted, could have an effect on the Rulings provided herein.

Other 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 fair market value or adjusted cost base of any property or the PUC of any class of shares referred to herein;

(b) the application of section 18.2 to the interest expense to be incurred as part of the Proposed Transactions;

(c) the reasonableness of any outlays or expenses referred to herein;

(d) the amount of the non-capital losses or other tax accounts in respect of any corporation referred to herein;

(e) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;

(f) subject to Ruling I, the application or non-application of a general anti-avoidance provision of any province; or

(g) any 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
Manager/Reorganizations Section II
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch