30 November 1997 Ruling 9731503 - RELATED GROUP LOSS UTIL. & RECAPTURE DEFERRAL

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:

Whether XXXXXXXXXX business operated in XXXXXXXXXX are one business. XXXXXXXXXX

Position:

Yes. Reg 1101 would not apply to include depreciable assets relating to XXXXXXXXXX business in a separate class.

Reasons:

XXXXXXXXXX business is one business to the Group, the main reasons for the existence of

XXXXXXXXXX

XXXXXXXXXX							3-973150
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings. We also acknowledge your letter of XXXXXXXXXX and our various telephone conversations.

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in the requested rulings is being considered by a tax services office or a taxation centre in connection with a tax return already filed, or is under objection or appeal.

Definitions

In this letter unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "ACB" means the expression "adjusted cost base" which has the meaning assigned by section 54;

(c) XXXXXXXXXX;

(d) "affiliated persons" has the meaning assigned by proposed subsection 251.1(1);

(e) XXXXXXXXXX;

(f) "CCA" means the expression "capital cost allowance" which refers to a deduction allowed under paragraph 20(1)(a);

(g) "cost amount" has the meaning assigned by subsection 248(1);

(h) XXXXXXXXXX;

(i) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(j) "depreciable property" has the meaning assigned by subsection 248(1);

(k) "eligible property" has the meaning assigned by subsection 85(1.1);

(l) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(m) "investment tax credit" has the meaning assigned by subsection 127(9);

(n) "net capital loss" has the meaning assigned by subsection 111(8);

(o) "non-capital loss" has the meaning assigned by subsection 111(8);

(p) "public corporation" has the meaning assigned by subsection 89(1);

(q) XXXXXXXXXX;

(r) "related persons" has the meaning assigned by subsection 251(2);

(s) "Regulations" means the Income Tax Regulations;

(t) "series of transactions or events" has the meaning assigned by subsection 248(10);

(u) "specified financial institution" has the meaning assigned by subsection 248(1);

(v) "SR&ED" means "scientific research and experimental development" as that expression is defined in subsection 248(1) and Regulation 2900;

(w) "subject corporation" has the meaning assigned by subsection 186(3);

(x) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(y) "taxable dividend" has the meaning assigned by subsection 89(1); and

(z) "UCC" means the expression "undepreciated capital cost" which has the meaning assigned by subsection 13(21).

FACTS

1. XXXXXXXXXX ("Holdco") is a public corporation and a taxable Canadian corporation. Holdco and its subsidiaries and affiliated corporations form a group of companies ( the "Holdco Group") engaged in

XXXXXXXXXX

XXXXXXXXXX

Holdco acquired XXXXXXXXXX of Subco 4, Subco 5, Subco 6 and Subco 7 and its subsidiaries in XXXXXXXXXX by acquiring all the shares of XXXXXXXXXX (as a result of transactions that were the subject of an advance income tax ruling, our file No. 961625).

The fiscal period of Holdco ends on XXXXXXXXXX. As at XXXXXXXXXX, Holdco had approximately $XXXXXXXXXX of non-capital losses, approximately $XXXXXXXXXX of investment tax credits and approximately $XXXXXXXXXX of unclaimed SR&ED expenditures available for carryforward.

2. Holdco owns directly or indirectly through its wholly-owned subsidiary, XXXXXXXXXX ("Subco 3"), all the issued and outstanding shares of Subco 1 which owns all the issued and outstanding shares of Subco 2.

3. Subco 1 is a corporation incorporated under XXXXXXXXXX. Subco 1 is a taxable Canadian corporation and subject corporation.

The fiscal period of Subco 1 ends on XXXXXXXXXX. As at XXXXXXXXXX, Subco 1 had approximately $XXXXXXXXXX of UCC with respect to its XXXXXXXXXX included in Class 8 in Schedule II of the Regulations.

4. Subco 2 is a corporation incorporated under the XXXXXXXXXX. Subco 2 is a taxable Canadian corporation and a subject corporation. Subco 2 was acquired by Subco 1 XXXXXXXXXX years ago.

The fiscal period of Subco 2 ends on XXXXXXXXXX.

5. On XXXXXXXXXX, Subco 1 and XXXXXXXXXX concluded an agreement (the "Asset Purchase Agreement") for the sale, at fair market value, of the XXXXXXXXXX operated by Subco 1 (currently operated by Subco 2) to XXXXXXXXXX, or its designated subsidiary (XXXXXXXXXX) for approximately $XXXXXXXXXX, subject to adjustments.

XXXXXXXXXX

The cost amount of each asset to be sold pursuant to the Asset Purchase Agreement is less than its respective sale price. The sale price and the cost amount of the assets to be sold are as follows:

XXXXXXXXXX

Sale Price Cost Amount

Tangible Assets			    XXXXXXXXXX    XXXXXXXXXX

Goodwill & other intangibles XXXXXXXXXX
XXXXXXXXXX

6. XXXXXXXXXX is a corporation incorporated under the laws of the province of XXXXXXXXXX. XXXXXXXXXX is a subsidiary of XXXXXXXXXX.

7. XXXXXXXXXX

Holdco provides to all the corporate operators within the Holdco Group executive, administrative, financial, strategic planning, regulatory representation, legal, tax and other services. Holdco manages the business for all the corporate operators within the Holdco Group and any actions taken or decisions made are for the overall benefit of the Holdco Group. The corporate operators are required to pay Holdco their proportionate share of the expenses incurred to provide such services.

XXXXXXXXXX

XXXXXXXXXX

The Holdco Group employs more than XXXXXXXXXX employees in its XXXXXXXXXX business of which approximately XXXXXXXXXX are covered by labour agreements. The employees of Subco 2 do not belong to a union. As a result of the labour agreement issues that arise in such a situation, the XXXXXXXXXX business of the Holdco Group is not carried on in only one corporate entity. The separateness of the corporate entities also resolves issues like the financial restrictions on various indebtedness in the Holdco Group.

8. Holdco, Subco 1, Subco 2, Subco 3 and Newco, a corporation to be incorporated as described in paragraph 13 below, are neither specified financial institutions nor financial intermediary corporations.

9. There are not, and will not be at any time prior to the completion of the proposed transactions described herein, any guarantee agreements of the type described in subsection 112(2.2) in respect of any of the Subco 1, Subco 2 or Newco shares.

10. None of Subco 1, Subco 2 or Newco has entered, or will enter, into a dividend rental arrangement in respect of any of the shares to be redeemed as part of the proposed transactions described herein.

11. None of the Subco 1 Special Shares, the Newco Special Shares or the Newco common shares will be issued or acquired as part of a series of transactions described in subsection 112(2.5).

12. Holdco, Subco 1, Subco 2, Subco 3 and Newco are affiliated persons and are related to each other.

PROPOSED TRANSACTIONS

13. Holdco will incorporate a new corporation ("Newco") under the XXXXXXXXXX. Newco will be a taxable Canadian corporation. Holdco will subscribe for common shares of Newco for a nominal amount following Newco's incorporation. The authorized share capital of Newco will consist of common and Newco Special Shares. The terms and conditions of the Newco Special Shares will be as follows:

(a) each share will be redeemable at the option of the issuer and retractable at any time on the demand of the holder for a redemption amount equal to the fair market value of the consideration for which the shares are issued (in the issuance described in paragraph 14 below, the redemption amount will be equal to the fair market value of the shares of Subco 2 immediately before the transfer of the Subco 2 shares);

(b) the holder of each share will be entitled to dividends in an amount not exceeding XXXXXXXXXX% of the redemption amount described in (a) above;

(c) the holder of each share will be entitled, upon dissolution, to a payment in priority to the holders of the common shares of an amount equal to the redemption amount; and

(d) each share will be non-voting.

14. Subco 1 will transfer, at fair market value, to Newco all of its Subco 2 shares. As sole consideration for such transfer, Newco will issue to Subco 1 Newco Special Shares that are redeemable and retractable in the aggregate at an amount equal to the fair market value of the Subco 2 shares transferred to Newco.

15. In connection with the transfer of shares described in paragraph 14 above, Subco 1 and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the shares so transferred will be equal to their ACB to Subco 1, immediately before the transfer, which amount will be less than the fair market value of such shares.

Newco will add to the stated capital account maintained for its Newco Special Shares an amount equal to the agreed amount in respect of the transfer. The paid-up capital of the Subco 2 shares transferred will not exceed the ACB of such shares to Subco 1.

16. Newco will redeem all of the Newco Special Shares held by Subco 1 for an amount equal to the redemption amount of such shares. This amount will be satisfied by the issuance of a non-interest-bearing demand promissory note ("Newco Redemption Note") with a principal amount and fair market value equal to the redemption amount of the shares redeemed.

17. Newco and Subco 2 (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the XXXXXXXXXX to form a new corporation ("Amalco") in such a manner that:

(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco by virtue of the merger;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco by virtue of the merger; and

(c) all the shares of Subco 2 held by Newco will be cancelled on the amalgamation and, as the sole shareholder of Newco, Holdco will become the sole shareholder of Amalco with no shares of Amalco being issued on the amalgamation.

18. In its taxation year immediately before the amalgamation described in paragraph 17 above, Subco 2 will claim CCA in respect of its depreciable properties of a prescribed class in an amount not to exceed the maximum amount allowable pursuant to section 1100 of the Regulations.

19. Following the transactions described in paragraphs 17 and 18 above, Holdco will cause Amalco to be wound up. The shareholder, Holdco, will pass a resolution to authorize the dissolution of Amalco. As a result of the wind-up, the assets and liabilities of Amalco (including the Newco Redemption Note) will become assets and liabilities of Holdco. Following the distribution of the assets and liabilities on the wind-up of Amalco, Holdco will own and operate the XXXXXXXXXX.

20. Holdco will transfer, at fair market value, to Subco 1 all of the assets related to the XXXXXXXXXX. In consideration for such transfers Subco 1 will assume liabilities, relating to the XXXXXXXXXX, of Holdco and issue to Holdco Subco 1 Special Shares, with a redemption and retraction amount and fair market value equal to the amount by which the fair market value of the transferred properties that will be received by Subco 1 exceeds the fair market value of the liabilities assumed by Subco 1.

21. In connection with the transfer of properties described in paragraph 20 above, Holdco and Subco 1 will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of each eligible property so transferred will be determined in a manner to maximize the utilization of the tax attributes of Holdco and to reduce the tax burden of Subco 1 on the sale of the XXXXXXXXXX pursuant to the Asset Purchase Agreement. However, the agreed amount in respect of each property will not exceed its fair market value or be less than its cost amount. The amount of liabilities assumed by Subco 1 will be allocated to specific properties transferred by Holdco to Subco 1. The amount of liabilities allocated to a property in respect of which an election under subsection 85(1) will be made will not exceed the elected amount in such election in respect of the particular property.

Subco 1 will add to the stated capital account maintained for its Subco 1 Special Shares an amount not exceeding the aggregate of the agreed amounts in respect of eligible property and the fair market value of all other properties transferred less the fair market value of the liabilities of Holdco assumed by Subco 1.

22. Holdco and Subco 1 will not elect pursuant to subsection 22(1) in respect to the transfer of the accounts receivable relating to the XXXXXXXXXX business from Holdco to Subco 1.

23. With respect to the assumptions of certain undertakings of Holdco, XXXXXXXXXX, Holdco and Subco 1 will jointly elect, in the form and within the time referred to in subsection 20(25), to have the rules in subsection 20(24) apply to Holdco as the payer and to Subco 1 as the recipient in respect of any payment made by Holdco to Subco 1.

24. Subco 1 will redeem all of the Subco 1 Special Shares held by Holdco for an amount equal to the redemption amount of such shares. This amount will be satisfied by the issuance of a non-interest-bearing demand promissory note ("Subco 1 Redemption Note") with a principal amount and fair market value equal to the redemption amount of the shares redeemed.

25. Subco 1 will retire the Subco 1 Redemption Note by a payment in cash to Holdco of an amount equal to the principal amount of the Subco 1 Redemption Note.

26. Holdco will retire the Newco Redemption Note by a payment in cash to Subco 1 of an amount equal to the principal amount of the Newco Redemption Note.

27. The XXXXXXXXXX will be sold by Subco 1 to XXXXXXXXXX pursuant to the Asset Purchase Agreement.

ADDITIONAL INFORMATION

28. XXXXXXXXXX.

It is proposed that the transactions described in paragraphs 13, 14 and 16 above will take place on the same day. The amalgamation described in paragraph 17 above will occur on the day immediately following the day of the transactions described in 13, 14 and 16 above. The winding-up of Amalco described in paragraph 19 will commence on the day following the amalgamation described in paragraph 17 above. The transaction described in paragraph 20 will occur approximately 5 days before the sale of the XXXXXXXXXX as described in paragraph 27 above. The transactions described in paragraphs 24, 25 and 26 above will occur immediately following the transaction described in paragraph 20. The proposed transactions will occur in sequential order as described herein.

30. You have advised XXXXXXXXXX of the proposed transactions and the possible effect, as a result of the diversion of income from the disposition of the XXXXXXXXXX of Subco 2, on income earned in the province of XXXXXXXXXX by Subco 2. The XXXXXXXXXX was also approached concerning the nature of the proposed transactions. Each of these approaches was made on a no-names basis.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. The purpose of the proposed transactions is to allow for the utilization of Holdco's accumulated non-capital losses, investment tax credits and unused SR&ED expenditures and Subco 1's UCC in its Class 8 assets to offset the gain and shelter the recapture of CCA on the disposition of the XXXXXXXXXX.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, we confirm the following:

A. On the transfer of the Subco 2 shares to Newco described in paragraph 14 above, the provisions of subsection 85(1) will apply with the result that the amount agreed upon by the transferor and the transferee in their joint election in respect of the transferred shares will be deemed pursuant to paragraph 85(1)(a) to be the proceeds of disposition thereof to the transferor and cost thereof to the transferee.

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer described herein.

B. On the redemption of the Newco Special Shares held by Subco 1 as described in paragraph 16 above and the redemption of the Subco 1 Special Shares held by Holdco as described in paragraph 24 above, the amount, if any, by which the amount paid to redeem the shares exceeds the paid-up capital of the shares immediately before the redemption will, subject to subsection 55(2), be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by Newco or Subco 1, as the case may be.

C. Part IV.1 of the Act will not apply to the dividends deemed to be received by Subco 1 on the Newco Special Shares and by Holdco on the Subco 1 Special Shares because the dividends will be excepted dividends pursuant to paragraph (b) of the definition of "excepted dividend" in section 187.1.

D. Part VI.1 of the Act will not apply to the dividends deemed to be paid by Newco on the Newco Special Shares and by Subco 1 on the Subco 1 Special Shares because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

E. Upon the amalgamation of Newco and Subco 2 described in paragraph 17 above:

(i) by virtue of subsection 87(1.1), the provisions of subsection 87(1) will apply;

(ii) the provisions of paragraph 87(2)(a) will apply such that Amalco will be deemed to be a new corporation the first taxation year of which will commence at the time of the amalgamation and Subco 2 and Newco will be deemed to have a taxation year end immediately before the amalgamation;

(iii) the provisions of paragraphs 87(2)(d) and apply in determining the capital cost and UCC to Amalco of depreciable property;

(iv) by virtue of paragraph 1102(14)(d) of the Regulations, depreciable property of a prescribed class or a separate prescribed class of a predecessor corporation that is acquired by Amalco upon the amalgamation will be deemed to be property of the same prescribed class or separate class, as the case may be, to Amalco.

F. On the winding-up of Amalco into Holdco as described in paragraph 19 above:

(i) the provisions of paragraph 88(1)(f) will apply where property that was depreciable property of a prescribed class of Amalco is distributed to Holdco on the winding-up and the capital cost to Amalco of the property exceeds the amount deemed by paragraph 88(1)(a) to be Amalco's proceeds of disposition, for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a), the capital cost to Holdco shall be deemed to be the amount that was the capital cost of the property to Amalco and any excess shall be deemed to have been allowed to Holdco in respect of the property under regulations made under paragraph 20(1)(a) in computing income for taxation years before the acquisition by Holdco of the property;

(ii) by virtue of paragraph 1102(14)(d) of the Regulations, depreciable property of a prescribed class or a separate prescribed class of Amalco that is acquired by Holdco upon the winding-up will be deemed to be property of the same prescribed class or separate class, as the case may be, to Holdco.

G. On the transfer of the depreciable property by Holdco to Subco 1 as described in paragraph 20 above:

(i) the provisions of subsection 85(5) will apply, where the capital cost of a property transferred exceeds the proceeds of disposition to Holdco of that property, such that, for the purposes of sections 13 and 20 and any regulations made under paragraph 20(1)(a), the capital cost to Subco 1 of each such depreciable property will be deemed to be the amount that was the capital cost of such property to Holdco and the excess will be deemed to have been allowed to Subco 1 in respect of the property under regulations made under paragraph 20(1)(a) in computing income for taxation years before the acquisition by Subco 1 of the property;

(ii) the provisions of paragraph 13(7)(e) will apply, where the capital cost of a property transferred to Subco 1, determined without reference to this paragraph, exceeds the capital cost of such property to Holdco immediately before its disposition, such that the capital cost to Subco 1 of such property will be deemed to be the amount that is equal to the capital cost of such property to Holdco plus 3/4 of the amount by which Holdco's proceeds of disposition of such property exceeds the capital cost of such property to Holdco;

(iii) by virtue of paragraph 1102(14)(d) of the Regulations, depreciable property of a prescribed class or a separate prescribed class of Holdco that is acquired by Subco 1 on the transfer will be deemed to be property of the same prescribed class or separate class, as the case may be, to Subco 1;

(iv) the provisions of subsection 1101(1) of the Regulations will not apply to include the properties acquired for the purpose of gaining or producing income from the XXXXXXXXXX in a separate prescribed class.

H. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to any of the proposed transactions described herein, in and by themselves.

I. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENTS

Unless paragraph 55(3)(a) is amended as described in the opinion below, subsection 55(2) will apply to the dividends described in Ruling B above.

OPINION

Provided that proposed subparagraphs 55(3)(a)(i) to (v) are enacted as proposed in Bill C-28 in the form which received first reading in the House of Commons on December 10, 1997 it is our opinion that subsection 55(2) will not apply to the taxable dividend deemed to arise in respect of the redemptions of the Newco Special Shares and Subco 1 Special Shares described in paragraphs 16 and 24, respectively, provided that as part of the series of transactions or events as part of which the dividend is received, there is no event described in proposed subparagraphs 55(3)(a)(i) to (v) which has not been described herein as a proposed transaction.

The foregoing opinion is not a ruling and, in accordance with the practice referred to in Information Circular 70-6R3, is not binding on Revenue Canada.

COMMENTS

Nothing in this letter should be construed as confirmation that Revenue Canada has reviewed or accepted

(a) any tax consequences arising from the facts or proposed transactions described herein other than those specifically confirmed in the rulings given, or

(b) any tax consequences arising from the facts or proposed transactions described herein that may be subject to a law of a province that provides for the imposition or collection of tax.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch