1999 Ruling 9828053 - AMALGAMATION FOR 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.

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: loss consolidation

Position: acceptable

Reasons: involves a related group

XXXXXXXXXX
XXXXXXXXXX 982805
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX (“Holding”)
XXXXXXXXXX (“Father”)
XXXXXXXXXX (“Wife”)

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers.

To the best of your knowledge and the knowledge of the responsible officers of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a Tax Services Office or Taxation Centre in connection with an income tax return already filed and none of the issues involved is subject to a notice of objection or is otherwise under appeal.

Definitions

In this letter unless otherwise expressly stated:

(a) “Act” means 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) “adjusted cost base”(“ACB”) has the meaning assigned in section 54;

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

(d) “Canadian-controlled private corporation” has the meaning assigned in subsection 248(1);

(e) “capital property” has the meaning assigned in section 54;

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

(g) “small business corporation” has the meaning assigned in subsection 248(1);

(h) “taxable Canadian corporation” has the meaning assigned in subsection 89(1); and

(i) “taxable dividend” has the meaning assigned in subsection 89(1).

Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:

Statement of Facts

1) XXXXXXXXXX is a Canadian-controlled private corporation, a taxable Canadian corporation and a small business corporation. XXXXXXXXXX was incorporated under the XXXXXXXXXX and commenced its business in XXXXXXXXXX as an XXXXXXXXXX. The authorized capital consists of an unlimited number of:

- Class "A" voting, participating, convertible into Class "D" shares at the option of the holder;

- Class "B" voting, participating;

- Class "C" voting, non-participating, automatically redeemable upon the death of the holder at a price equal to the amount added to the stated capital account for these shares, redeemable at the option of the company at a price agreed upon by the holder and the company;

- Class "D" XXXXXXXXXX% monthly, non-cumulative, non-participating, non-voting, redeemable at the option of the holder or the company at a price equal to the amount added to the stated capital account for these shares, plus a premium equal to the difference between the amount added to the stated capital account for these shares and the fair market value of Class "A" shares on the date of conversion into Class "D" shares;

- Class "E" XXXXXXXXXX% monthly, non-cumulative, non-participating, non-voting, redeemable at the option of the holder or the company at a price equal to the amount added to the stated capital account for these shares, plus a premium equal to the difference between the fair market value of the consideration received for which such shares have been issued and the total comprising:

(a) the amount added to the stated capital account for these shares, and;

(b) the fair market value of any property, other than Class "E" shares, given in payment by the corporation for that consideration;

- Class "F" $XXXXXXXXXX per share, non-cumulative dividend, non-participating, non-voting, redeemable at the option of the holder or the company at a price equal to the consideration for which such share has been issued;

and

- Class "G" $XXXXXXXXXX per share, non-cumulative dividend, non-participating, non-voting, redeemable at the option of the company at a price equal to the consideration for which such share has been issued.

2) The issued and outstanding share capital consists of XXXXXXXXXX Class "A" shares having a stated capital of $XXXXXXXXXX per share.

Father and Wife each own XXXXXXXXXX Class "A" shares.

3) XXXXXXXXXX has incurred non-capital losses of approximately $XXXXXXXXXX within the last several years. It is not anticipated that XXXXXXXXXX will be able to use these losses within the time limit specified under paragraph 1l1(l)(a).

4) Father and XXXXXXXXXX, an adult son of Father who is a resident of Canada for purposes of the Act, have collectively loaned XXXXXXXXXX approximately $XXXXXXXXXX (the “Shareholder Loans”). It is not anticipated that XXXXXXXXXX will ever be able to repay the loans if it continues operating in its present form. These loans are interest-bearing, having no specific terms of repayment and are repayable after XXXXXXXXXX.

5) XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation and is incorporated under the XXXXXXXXXX is in the XXXXXXXXXX business. The authorized capital consists of an unlimited number of:

- XXXXXXXXXX% non-cumulative, non-participating, voting, Class "A", preferred shares, redeemable at a par value of $XXXXXXXXXX each;

- non-voting, Class "B", preferred shares, without par value, with a non-cumulative, monthly dividend of XXXXXXXXXX%, non-participating, redeemable at the paid-up capital amount; and

- common shares.

6) The issued and outstanding share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares having a stated capital of $XXXXXXXXXX per share and XXXXXXXXXX Class "B" preferred shares having a stated capital of $XXXXXXXXXX per share.

The issued share capital of XXXXXXXXXX is held as follows:

- Holding owns XXXXXXXXXX common shares with an ACB of $XXXXXXXXXX;

- XXXXXXXXXX owns XXXXXXXXXX Class "B" preferred shares with an ACB of $XXXXXXXXXX;

- XXXXXXXXXX, an adult son of Father who is a resident of Canada for purposes of the Act, owns XXXXXXXXXX Class "B" preferred shares with an ACB of $XXXXXXXXXX;

and

- an adult daughter of Father who is a resident of Canada for purposes of the Act, owns XXXXXXXXXX Class "B" preferred shares with an ACB of $XXXXXXXXXX.

7) Holding is a Canadian-controlled private corporation and a taxable Canadian corporation and is incorporated under the XXXXXXXXXX. The authorized capital consists of an unlimited number of:

- Class "A" preferred shares, non-participating, non-cumulative dividend of $XXXXXXXXXX per share, voting, redeemable at the fair market value of the consideration received at the issuance of the shares;

- Class "B" preferred shares, non-participating, non-cumulative dividend of $XXXXXXXXXX per share, voting, convertible into class "H" preferred shares, redeemable at the fair market value of the consideration received at the issuance of the shares;

- Class "C" preferred shares, non-participating, non-cumulative dividend of $XXXXXXXXXX per share, voting, convertible into class "I" preferred shares, redeemable at the paid-up capital amount;

- Class "D" preferred shares, non-participating, non-cumulative dividend of $XXXXXXXXXX per share, non-voting, convertible into class "J" preferred shares, redeemable at the issue price;

- Class "E" preferred shares, non-participating, non-cumulative dividend of $XXXXXXXXXX per share, non-voting, redeemable at the fair market value of the consideration received at the issuance of the shares;

- Class "F" preferred shares, non-participating, non-cumulative monthly dividend of XXXXXXXXXX%, non-voting, redeemable at the paid-up capital amount;

- Class "G" preferred shares, non-participating, without dividends, voting XXXXXXXXXX votes for each share, redeemable at the paid-up capital amount;

- Class "H", "I" and "J" preferred shares, non-participating, cumulative monthly dividend of XXXXXXXXXX%, voting, redeemable at the fair market value of the consideration received at the issuance of the shares; and

- Class "A", "B" and "C" common shares

8) The issued and outstanding share capital of Holding consists of XXXXXXXXXX Class "A" common shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class "C" common shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class "E" preferred shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class "F" preferred shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class "G" preferred shares having a stated capital of XXXXXXXXXX per share, XXXXXXXXXX Class "H" preferred shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class "I" preferred shares having a stated capital of $XXXXXXXXXX per share and XXXXXXXXXX Class "J" preferred shares having a stated capital of $XXXXXXXXXX per share.

The issued share capital of Holding is held as follows:

- XXXXXXXXXX owns XXXXXXXXXX Class "A" common shares and XXXXXXXXXX Class "E" preferred shares;

- XXXXXXXXXX owns XXXXXXXXXX Class "C" common shares and XXXXXXXXXX Class "E" preferred shares;

- XXXXXXXXXX owns XXXXXXXXXX Class "F" preferred shares; and

- Father owns XXXXXXXXXX Class "G" preferred shares, XXXXXXXXXX Class "H" preferred shares, XXXXXXXXXX Class "I" preferred shares and XXXXXXXXXX Class "J" preferred shares.

9) XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation and is incorporated under the XXXXXXXXXX. The authorized capital consists of an unlimited number of:

- XXXXXXXXXX% non-cumulative preferred shares, redeemable at issued price;

- Class "E", non-voting, preferred shares, non-cumulative dividend of $XXXXXXXXXX per share, redeemable at the fair market value of the consideration received at the issuance of the shares; and

- Common shares.

10) The issued and outstanding share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX preferred shares having a stated capital of $XXXXXXXXXX per share and XXXXXXXXXX Class "E" preferred shares having a stated capital of $XXXXXXXXXX per share.

XXXXXXXXXX owns all of the issued shares.

11) XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation and is incorporated under the XXXXXXXXXX. The authorized capital consists of an unlimited number of:

- Class "A", voting and participating;

- Class "B", XXXXXXXXXX% non-cumulative, non-voting, non-participating, redeemable at the option of the company at the paid-up capital amount;

and

- Class "C", non-cumulative monthly dividend of XXXXXXXXXX% of the fair market value of the consideration received at the issuance of the shares, non-voting, non-participating, redeemable at the option of the company at the fair market value of the consideration received at the issuance of the shares.

12) The issued and outstanding share capital of XXXXXXXXXX consists of Class “A” shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class “B” shares having a stated capital of $XXXXXXXXXX per share and XXXXXXXXXX Class “C” preferred shares having a stated capital of $XXXXXXXXXX per share.

The issued share capital is held as follows:

- XXXXXXXXXX owns XXXXXXXXXX Class “B” shares and XXXXXXXXXX Class “C” preferred shares;

- Father owns XXXXXXXXXX Class “A” shares;

- XXXXXXXXXX owns XXXXXXXXXX Class “A” share; and

- XXXXXXXXXX owns XXXXXXXXXX Class “A” share.

13) XXXXXXXXXX is a Canadian-controlled private corporation and is incorporated under the XXXXXXXXXX. The authorized capital consists of an unlimited number of:

- XXXXXXXXXX% non-cumulative preferred shares, redeemable at issued price;

- Class “E”, non-voting, preferred shares, non-cumulative dividend of $XXXXXXXXXX per shares, redeemable at the fair market value of the consideration received at the issuance of the shares; and

- Common shares.

14) The issued and outstanding share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX preferred shares having a stated capital of $XXXXXXXXXX per share and XXXXXXXXXX Class “E” preferred shares having a stated capital of $XXXXXXXXXX per share.

XXXXXXXXXX owns all the issued shares.

15) XXXXXXXXXX is a Canadian-controlled private corporation and a taxable Canadian corporation and is incorporated under the XXXXXXXXXX. The authorized capital consists of an unlimited number of:

- voting and participating Class “A” and “B” shares;

- XXXXXXXXXX% cumulative, non-voting Class “C” shares, redeemable at the issued price;

- XXXXXXXXXX% cumulative, voting Class "D" and "E" shares, redeemable at the issued price at the shareholder's option;

- XXXXXXXXXX% non-cumulative, non-voting Class "F" shares, redeemable at the issued price;

- XXXXXXXXXX% cumulative, non-voting Class "G" shares, redeemable at the issued price at the shareholder's option; and

- XXXXXXXXXX% cumulative, non-voting Class "H" shares, dividend payable on the redemption price, redeemable at the shareholder's option at the fair market value of the consideration received at the date of issuance

16) The issued and outstanding share capital of XXXXXXXXXX consists of XXXXXXXXXX Class "A" shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class "B" shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class "C" shares having a stated capital of $XXXXXXXXXX per share, XXXXXXXXXX Class "D" shares having a stated capital of $XXXXXXXXXX per share and XXXXXXXXXX Class "E" shares having a stated capital of $XXXXXXXXXX per share.

The issued share capital is held as follows:

- XXXXXXXXXX owns XXXXXXXXXX Class "A" shares and XXXXXXXXXX Class "C" shares;

- XXXXXXXXXX owns XXXXXXXXXX Class "A" shares and XXXXXXXXXX Class "C" shares; and

- XXXXXXXXXX owns XXXXXXXXXX Class "B" shares, XXXXXXXXXX Class "D" shares and XXXXXXXXXX Class “E” shares.

17) XXXXXXXXXX is indebted to XXXXXXXXXX in the amount of approximately $XXXXXXXXXX (the “XXXXXXXXXX Debt”). This loan is non-interest-bearing and has no specific terms of repayment.

Proposed Transactions

18) Since XXXXXXXXXX is not in a position to repay the indebtedness, Father and XXXXXXXXXX will each forgive the Shareholder Loans. Father and XXXXXXXXXX will each file an election pursuant to the provisions of paragraph 50(1)(a). Pursuant to the provisions of section 80, XXXXXXXXXX losses carried forward will be reduced by the amount of the forgiven indebtedness.

19) XXXXXXXXXX will amend its charter to add a new class of preferred shares (Class "C"). The Class "C" shares will be non-voting, non-participating, redeemable and retractable shares having a non-cumulative dividend rate of XXXXXXXXXX% per month.

20) Following the above transaction, Father and Wife will each transfer XXXXXXXXXX Class "A" shares of XXXXXXXXXX to XXXXXXXXXX in return for XXXXXXXXXX Class "C" shares of XXXXXXXXXX having a fair market value equal to the fair market value of the XXXXXXXXXX shares so transferred and a stated capital equal to the stated capital of the XXXXXXXXXX shares. Father and Wife will each file the appropriate elections pursuant to the provisions of subsection 85(1) using an elected amount of $XXXXXXXXXX which is equal to the fair market value of the shares so transferred. The relevant agreements will contain a price adjustment clause for the purchase price.

21) XXXXXXXXXX will amalgamate under the XXXXXXXXXX to form a new corporation ("Amalco") in such manner that:

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

(b) all the liabilities (except 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 shareholders of the predecessor corporations before the merger, except XXXXXXXXXX, will receive shares of Amalco by virtue of the merger.

The authorized capital of Amalco will be as follows:

- an unlimited number of XXXXXXXXXX% non-cumulative, non-participating, voting, Class “A” preferred shares, redeemable at a par value of $XXXXXXXXXX each;

- an unlimited number of non-voting, Class “B”, preferred shares, without par value, with a non-cumulative, monthly dividend of XXXXXXXXXX%, non-participating, redeemable at the paid-up capital amount;

- an unlimited number of non-voting, Class “C”, preferred shares, without par value, with a non-cumulative, monthly dividend of XXXXXXXXXX%, non-participating, redeemable at the paid-up capital amount; and

- an unlimited number of common shares.

The issued share capital of Amalco will be held as follows:

Father XXXXXXXXXX Class “C” preferred shares

Wife XXXXXXXXXX Class “C” preferred shares

XXXXXXXXXX XXXXXXXXXX Class “B” preferred shares

XXXXXXXXXX XXXXXXXXXX Class “B” preferred shares

XXXXXXXXXX XXXXXXXXXX Class “B” preferred shares

Holding XXXXXXXXXX common shares

Purpose of Proposed Transactions

The purpose of the proposed transactions is to permit another corporation in the related corporate group to utilize the non-capital losses incurred by XXXXXXXXXX.

Ruling

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

A. Provided that the Shareholder Loans were acquired by Father and XXXXXXXXXX for the purpose of gaining or producing income from a business or property (other than exempt income), and provided that Father and XXXXXXXXXX can establish that the Shareholder Loans have become a bad debt in the year, the loss on the disposition of the Shareholder Loans will be a business investment loss within the meaning of paragraph 39(1)(c).

B. The amalgamation of XXXXXXXXXX will be an amalgamation within the meaning of subsection 87(1) with the result that:

(i) each shareholder of a predecessor corporation will be deemed by paragraph 87(4)(a) to have disposed of his or her shares in the capital stock of a predecessor corporation for proceeds equal to their aggregate ACB immediately before the amalgamation;

(ii) for greater certainty, the rules in paragraphs 87(4)(c), (d) and (e) will not apply; and

(iii) the provisions of subsection 87(2.1) will apply to deem Amalco to be the same corporation as, and a continuation of, each of XXXXXXXXXX, respectively, for the purposes, and subject to the restrictions, described in subsection 87(2.1).

C. 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 forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996, and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account 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 interpreted as confirming that:

(a) for purposes of the Act, any adjustment made pursuant to any price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction;

(b) for the purposes of the Act, any amount paid pursuant to any price adjustment clause, in respect of such transaction subsequent to the time of such transaction will be an additional payment on the redemption of any shares redeemed; or

(c) in the event that any adjustment is made pursuant to any price adjustment clause, the proposed transactions referred to above will be considered to have been carried out as described herein.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department’s general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

Nothing in this ruling should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to:

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

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, it is our view that subsection 15(1) may apply to confer a benefit on the shareholders of XXXXXXXXXX or Amalco in connection with the increase in the fair market value of the XXXXXXXXXX Debt as a consequence of the amalgamation.

Yours truly,

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