1999 Ruling 9911403 - 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: ok

Reasons: Previous Files

XXXXXXXXXX 					991140

Attention: XXXXXXXXXX

XXXXXXXXXX , 1999

Dear Sirs:

Re: XXXXXXXXXX - Advance Income Tax Ruling

This is in response to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge your letter of XXXXXXXXXX.

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are being considered by a Tax Services Office or a Taxation Centre in connection with any tax return already filed, and none of the issues involved in the requested rulings is the subject of any notice of objection or is under appeal.

In this letter "the Act" means the Income Tax Act, RSC 1985, Fifth Supplement, c.1, as amended from time to time.

Facts

1. XXXXXXXXXX ("ACO"), XXXXXXXXXX, and XXXXXXXXXX ("BCO"), XXXXXXXXXX, are Canadian-controlled private corporations and taxable Canadian corporations within the meaning of subsections 125(7) and 89(1) of the Act. Each of ACO and BCO have taxation years ending on XXXXXXXXXX.

2. ACO was incorporated under the XXXXXXXXXX and has significant operations in the XXXXXXXXXX. All of the issued and outstanding shares of ACO are owned by XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX.

3. BCO was incorporated under the Canada Business Corporations Act and its principal business activities are XXXXXXXXXX. All of the issued and outstanding shares of BCO are owned by XXXXXXXXXX ("CCO"), a corporation incorporated under the Canada Business Corporations Act.

4. ACO owns all of the common shares of CCO.

5. All operations of ACO and BCO conducted through the corporations are located within Canada. CCO only operates as a holding company for the BCO shares.

6. ACO has significant undepreciated capital cost balances in respect of its assets. ACO has non-capital losses of $XXXXXXXXXX.

7. BCO had taxable income of $XXXXXXXXXX in the year ended XXXXXXXXXX and anticipates that its taxable income for the year ending on XXXXXXXXXX will be nil.

8. Based on current agreements in place between Canadian chartered banks and ACO and its related companies, $XXXXXXXXXX in excess of the currently outstanding borrowings of ACO and its related companies can be borrowed by ACO from Canadian chartered banks without contravening current borrowing agreements, including the default of any bank covenants.

9. ACO is engaged in multiple businesses and has many subsidiaries in addition to owning shares in BCO, such that its ability to pay dividends on the preferred shares described in paragraph 11, below is not solely dependent on the earning capacity of BCO as its subsidiary.

Proposed Transactions

10. BCO will be continued under the XXXXXXXXXX.

11. ACO will amend its articles of incorporation to create a class of preferred shares which will be redeemable at the option of the holder for their stated capital plus accrued and unpaid dividends; redeemable at the option of the issuer for their stated capital plus accrued and unpaid dividends; non-voting; cumulative at a rate equal to the interest paid on the ACO loan described below plus XXXXXXXXXX %; and have a stated capital equal to the issue price of $XXXXXXXXXX.

12. ACO will borrow $XXXXXXXXXX from a Canadian chartered bank on a short term basis.

13. ACO will use the proceeds of the bank loan to make a loan to BCO ("the Intercompany loan") in the amount of $XXXXXXXXXX payable on demand at a commercial rate of interest.

14. BCO will use the proceeds of the Intercompany loan to acquire $XXXXXXXXXX worth of preferred shares of the class described in paragraph 11, above.

15. With the proceeds from the share issue ACO will repay its $XXXXXXXXXX bank loan.

16. In the taxation year ending XXXXXXXXXX, ACO will demand repayment of the Intercompany loan. BCO will then demand the redemption of the preferred shares.

Purpose of the Proposed Transactions

17. The purpose of the proposed transactions is to shift expenses from ACO to BCO in its year ending XXXXXXXXXX that will result in a non-capital loss which may be carried back to its XXXXXXXXXX taxation year and to shift income to ACO in its XXXXXXXXXX taxation year to utilize its capital cost allowance.

Rulings

A. Provided that BCO has a legal obligation to pay interest on the Intercompany loan referred to in paragraph 13, above in computing its income for a taxation year, BCO will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act the lesser of the interest paid or payable in respect of that year on the Intercompany loan or a reasonable amount in respect thereof.

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

These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the proposed transactions described in paragraphs 10 to 15, above are completed by XXXXXXXXXX.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate