2025 Ruling 2025-1065241R3 - 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 an related/affiliated corporation; 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 2025-106524

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 taxpayers.

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 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:

(a) in a previously filed tax return of the taxpayers 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 taxpayers 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.), as amended 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.

Tax identification

The tax account numbers, Tax Services Offices and the Tax Centres of the taxpayers involved are as follows:

XXXXXXXXXX

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:

“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;

“Act 1” means the XXXXXXXXXX, as amended;

“Act 2” means the XXXXXXXXXX, as amended;

“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);

“Borrowerco” refers to XXXXXXXXXX, the corporation described in Paragraph 1;

“Canco 1” refers to XXXXXXXXXX, the corporation described in Paragraph 5;

“Canco 2” refers to XXXXXXXXXX, the corporation described in Paragraph 11;

“Canco 3” refers to XXXXXXXXXX, the corporation described in Paragraph 17;

“Canco 4” refers to XXXXXXXXXX, the corporation described in Paragraph 23;

“Completed Transactions” means the transactions described in Paragraphs 29 to 30;

“Contribution of Capital” refers to a contribution of capital to be made by Lossco to Newco, as described in Paragraph 42;

“Corporate Group” means Borrowerco and all of its direct and indirect wholly owned subsidiaries, including Canco 1, Canco 2, Canco 3 and Canco 4;

“CRA” means the Canada Revenue Agency;

“Daylight Loans” means the Daylight Loan 1 and Daylight Loan 2, collectively;

“Daylight Loan 1” refers to the amount borrowed by Borrowerco from a third-party lender, on a daylight basis, as described in Paragraph 34;

“Daylight Loan 2” refers to the amount borrowed by Lossco from Borrowerco, with the same terms and conditions as the Daylight Loan 1 except for an additional XXXXXXXXXX% on the interest rate, as described in Paragraph 35;

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

“excepted dividend” has the meaning assigned by section 187.1;

“excluded dividend” has the meaning assigned by subsection 191(1);

“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;

“guarantee agreement” has the meaning assigned by subsection 112(2.2);

“IB Debt” means the interest-bearing loan owned by Profitco to Lossco as described in Paragraph 37;

“Loss Consolidation Period” means, in respect of Profitco, the time period beginning immediately after the advance of the Daylight Loan 1 described in Paragraph 34 and ending at the time the loss consolidation structure is wound up under Paragraph 45 and 46;

“Lossco” refers to the corporation formed as a result of the amalgamation described in Paragraph 29;

“Lossco NCLs” refers to the non-capital losses of Lossco, comprising the aggregate of the non-capital losses of Canco 1 and Canco 2;

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

“Newco” is a taxable Canadian corporation to be incorporated by Lossco, as described in Paragraph 31;

“Newco Preferred Shares” refers to the preferred shares of Newco, as described in Paragraph 31;

“NIB Debt” means to the non-interest bearing loan owed by Lossco to Newco as described in Paragraph 39;

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

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

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

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

“Profitco” refers to the corporation formed as a result of the amalgamation described in Paragraph 30;

“Proposed Transactions” means the transactions described in Paragraphs 31 to 46;

“Provincial Allocation” refers to the allocation of the taxable income earned by Lossco and Profitco 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);

“Support Agreement” means an agreement between Borrowerco, Newco and Lossco providing Newco with a funding entitlement in an amount equal to the dividends payable on the Newco Preferred Shares and a commitment that Newco will use the proceeds to pay such dividends;

“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);

“taxable preferred share” has the meaning assigned by subsection 248(1); and

“term preferred share” has the meaning assigned by subsection 248(1).

Facts

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

Borrowerco

1. Borrowerco is a taxable Canadian corporation and a private corporation. Borrowerco is governed by Act 1 and has a taxation year-end of XXXXXXXXXX.

2. All of the issued and outstanding shares of Borrowerco are held by XXXXXXXXXX, a corporation resident in XXXXXXXXXX.

3. Borrowerco is a holding and management corporation with interests in the business of transportation infrastructure and construction through its subsidiaries.

4. Borrowerco’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.

Canco 1

5. Canco 1 is a taxable Canadian corporation and a private corporation. Canco 1 is governed by Act 2 and has a taxation year-end of XXXXXXXXXX.

6. All of the issued and outstanding shares of Canco 1 are owned by Borrowerco.

7. Canco 1 operates XXXXXXXXXX. In the course of business operations, Canco 1 incurred NCLs resulting in a balance of $XXXXXXXXXX as of XXXXXXXXXX. Canco 1’s NCLs will begin to expire XXXXXXXXXX. None of these 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). In addition, Canco 1 expects that it will generate taxable income for the year ended XXXXXXXXXX on account of timing reversals of certain reserves, but it will incur non-capital losses of between approximately $XXXXXXXXXX in each of its XXXXXXXXXX taxation years.

8. During its taxation year ended XXXXXXXXXX, Canco 1 exclusively maintained a permanent establishment in the province of XXXXXXXXXX and that year, Canco 1’s Provincial Allocation was fully attributed to the province of XXXXXXXXXX. Canco 1 does not expect that its Provincial Allocation will significantly change in the foreseeable future.

9. Although it is expected that a portion of the NCLs of Canco 1 will be used in the taxation year ending XXXXXXXXXX, without the implementation of the Proposed Transactions, the NCLs of Canco 1 are expected to accumulate and remain unused by Canco 1.

10. Canco 1’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.

Canco 2

11. Canco 2 is a taxable Canadian corporation and a private corporation. Canco 2 is governed by Act 2 and has a taxation year-end of XXXXXXXXXX.

12. All of the issued and outstanding shares of Canco 2 are owned by Canco 1.

13. Canco 2 operates XXXXXXXXXX. In the course of business operations, Canco 2 incurred NCLs resulting in a balance of $XXXXXXXXXX as of XXXXXXXXXX. Canco 2’s NCLs will begin to expire XXXXXXXXXX. None of these 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). In addition, Canco 2 expects that it will generate taxable income for the year ended XXXXXXXXXX, but it will incur non-capital losses of between approximately $XXXXXXXXXX in each of its XXXXXXXXXX taxation years.

14. During its taxation year ended XXXXXXXXXX, Canco 2 exclusively maintained a permanent establishment in the province of XXXXXXXXXX and that year, Canco 2’s Provincial Allocation was fully attributed to the province of XXXXXXXXXX. Canco 2 does not expect that its Provincial Allocation will significantly change in the foreseeable future.

15. Although it is expected that a portion of the NCLs of Canco 2 will be used in the taxation year ending XXXXXXXXXX, without the implementation of the Proposed Transactions, the NCLs of Canco 2 are expected to accumulate and remain unused by Canco 2.

16. Canco 2’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.

Canco 3

17. Canco 3 is a taxable Canadian corporation and a private corporation. Canco 3 is governed by Act 2 and has a taxation year-end of XXXXXXXXXX.

18. All of the issued and outstanding shares of Canco 3 are owned by Canco 4.

19. Canco 3 operates XXXXXXXXXX. In the course of business operations, Canco 3 incurred NCLs resulting in a balance of $XXXXXXXXXX as of XXXXXXXXXX. Canco 3’s NCLs will begin to expire XXXXXXXXXX. None of these 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). Canco 3 is not expected to incur additional NCLs in the near future.

20. The estimated taxable income of Canco 3 for each of its taxation years ending XXXXXXXXXX, without taking into consideration the tax implications of the Proposed Transactions, will be approximately $XXXXXXXXXX.

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

22. Canco 3’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.

Canco 4

23. Canco 4 is a taxable Canadian corporation and a private corporation. Canco 4 is governed by Act 2 and has a taxation year-end of XXXXXXXXXX.

24. All of the issued and outstanding voting common shares of Canco 4 are owned by Borrowerco. The only other issued and outstanding shares of Canco 4 are non-voting preferred shares which are owned by XXXXXXXXXX, a taxable Canadian corporation that is wholly-owned by Borrowerco.

25. Canco 4 operates XXXXXXXXXX. During its taxation year ended XXXXXXXXXX, Canco 4 maintained a permanent establishment in three provinces. For that year, Canco 4’s Provincial Allocation was as follows: XXXXXXXXXX. Canco 4 does not expect that its Provincial Allocation will significantly change in the foreseeable future.

26. The estimated taxable income of Canco 4 for each of its taxation years ending XXXXXXXXXX, without taking into consideration the tax implications of the Proposed Transactions should exceed approximately $XXXXXXXXXX.

27. It is expected that Canco 4 will have sufficient taxable income to utilize the NCLs of Canco 1, Canco 2 and Canco 3, described above.

28. Canco 4’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.

Completed transactions

29. On XXXXXXXXXX, Canco 1 and Canco 2 amalgamated to form Lossco, by way of a vertical short-form amalgamation under the provisions of Act 2. As a result of the amalgamation, the issued and outstanding shares of Canco 2, held by Canco 1, were cancelled without any payment of capital in respect thereof. Lossco’s authorized share capital is the same as the authorized share capital of Canco 1 and the issued and outstanding shares of Canco 1 survived and continued to be shares in Lossco, without amendment. The stated capital of each class of shares of Lossco is an amount equal to the stated capital of such class of shares of Canco 1 immediately before the amalgamation. Lossco is a taxable Canadian corporation carrying on the business of XXXXXXXXXX.

30. At the same time as the transaction described in Paragraph 29, Canco 3 and Canco 4 amalgamated to form Profitco, by way of a vertical short-form amalgamation under the provisions of Act 2. As a result of the amalgamation, the issued and outstanding shares of Canco 3, held by Canco 4, were cancelled without any payment of capital in respect thereof. Profitco’s authorized share capital is the same as the authorized share capital of Canco 4 and the issued and outstanding shares of Canco 4 survived and continued to be shares in Profitco, without amendment. The stated capital of each class of shares of Profitco is an amount equal to the stated capital of such class of shares of Canco 4 immediately before the amalgamation. Profitco is a taxable Canadian corporation carrying on the business of XXXXXXXXXX.

Proposed transactions

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

Incorporation of Newco

31. Lossco will incorporate Newco under Act 2 and will subscribe for XXXXXXXXXX common shares of Newco for $XXXXXXXXXX. Newco will be authorized to issue an unlimited number of voting common shares and an unlimited number of preferred shares (the “Newco Preferred Shares”).

32. 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 the redemption equal to the aggregate redemption amount, or

(iii) the delivery of the NIB Debt having a principal amount equal to the redemption amount of the Newco Preferred Shares, 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 semi-annually, calculated daily and accruing by reference to the redemption amount of the Newco Preferred Shares at a rate equal to the interest rate on the IB Debt plus XXXXXXXXXX%.

33. Newco will be a taxable Canadian corporation. Newco will not carry on any business and its activities will be limited to making the NIB Debt with the proceeds received from the issuance of the Newco Preferred Shares, described below. Newco will have the Canadian dollar as its tax reporting currency and functional currency.

Daylight Loans

34. Borrowerco will borrow an amount of approximately $XXXXXXXXXX from an arm’s length lender (the “Daylight Loan 1”). The exact principal amount of the Daylight Loan 1 will be confirmed immediately before the implementation of the Proposed Transactions. The amount borrowed by Borrowerco will not exceed its borrowing capacity on a consolidated basis and the financial tests required to be met under its debt covenants will continue to be respected.

35. Borrowerco will use the proceeds of the Daylight Loan 1 to make a loan to Lossco, equal to the principal amount of the Daylight Loan 1 of approximately $XXXXXXXXXX (the “Daylight Loan 2”). The Daylight Loan 2 will have the same terms and conditions as the Daylight Loan other than having an interest rate equal to that of the Daylight Loan 1 plus XXXXXXXXXX%.

36. At the same time as the transaction described in Paragraph 35, Borrowerco, Newco and Lossco will enter into the Support Agreement.

IB Debt

37. Lossco will use the proceeds of the Daylight Loan 2 to make an interest-bearing loan of approximately $XXXXXXXXXX to Profitco (the “IB Debt”) having the following conditions:

(a) repayable on demand, and at any time at the option of the borrower, without penalty;

(b) bearing interest at an annual rate based on market conditions at the time the credit facility is granted and 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. The interest rate is estimated to be approximately XXXXXXXXXX% per annum, calculated daily and payable semi-annually. The rate of interest will be finalized immediately before the commencement of the Proposed Transactions;

(c) the payment of the principal amount of the IB Debt may be satisfied, at Profitco’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 IB Debt at the time of its repayment,

(iii) the delivery of the Newco Preferred Shares having a redemption amount equal to the principal amount of the IB Debt, and

(iv) the set-off of the IB Debt with the NIB Debt (having an equivalent principal amount) if Profitco owns such NIB Debt at the time of repayment; and

(d) the amount borrowed will not exceed the Corporate Group’s borrowing capacity.

Newco Preferred Share Subscription

38. Profitco will use all of the proceeds of the IB Debt to subscribe for Newco Preferred Shares having an aggregate redemption amount equal to the total subscription proceeds. The full amount of the subscription proceeds will be added to the stated capital of the Newco Preferred Shares.

NIB Debt

39. Newco will use all of the proceeds from the share subscription described in Paragraph 38 to make an interest-free loan to Lossco that is due on demand (the “NIB Debt”).

Repayment of Daylight Loans

40. Lossco will use the proceeds from the NIB Debt to fully repay the Daylight Loan 2.

41. Borrowerco will use the proceeds from the Daylight Loan 2 to fully repay the Daylight Loan 1.

Maintenance of the structure

42. Pursuant to a capital contribution agreement, on an annual basis, 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”). Specifically:

(a) 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, or for greater certainty, the paid-up capital of any class of shares of Newco, and

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

43. Upon receipt of the Contribution of Capital, subject to the applicable corporate solvency tests, Newco will pay the accrued and unpaid dividends on the Newco Preferred Shares.

44. Upon receipt of the payments of the dividends described in Paragraph 43, Profitco will pay all accrued and unpaid interest on the IB Debt to Lossco.

Unwinding the structure

45. The loss consolidation structure 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 Newco Preferred Shares. 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, or for greater certainty, the paid-up capital of any class of shares of Newco;

(b) Upon receipt of the Contribution of Capital described above, subject to the applicable corporate solvency tests, Newco will pay all accrued and unpaid dividends on the Newco Preferred Shares;

(c) Upon receipt of the payments of the dividends described above, Profitco will pay all accrued and unpaid interest on the IB Debt to Lossco;

(d) Newco will redeem the Newco Preferred Shares held by Profitco and will settle the amount owing on such redemption by assigning to Profitco the NIB Debt, having a principal amount equal to the redemption amount of the Newco Preferred Shares; and

(e) Lossco and Profitco will agree to set-off the amounts due between them under the IB Debt and NIB Debt in full and absolute payment of each of these obligations.

46. 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

47. The Proposed Transactions will be legally effective.

48. Lossco and Profitco are affiliated persons and related persons and will continue to be affiliated and related throughout the period that includes the Proposed Transactions. The structure will be immediately unwound in the manner described in Paragraphs 45 to 46 if Lossco and Profitco cease to be affiliated and related to one another.

49. No acquisitions of control have occurred, or are anticipated to occur, as part of the series of transactions or events that includes the Proposed Transactions in respect of Borrowerco, Lossco, Profitco or Newco.

50. Lossco does not expect that the interest income earned by Lossco on the IB Debt will exceed an amount that could be sheltered with the Lossco NCLs.

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

52. The Proposed Transactions are not intended to generate non-capital losses for Profitco 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 Profitco that cannot be utilized before the end of the applicable Loss Consolidation Period, Profitco will immediately seek to unwind the loss consolidation structure.

53. Neither Lossco nor Profitco will claim, at any time, a capital loss in respect of a disposition of any common or preferred shares of Newco.

54. The amount of the Daylight Loan 1 will not exceed the borrowing capacity of the Corporate Group.

55. At the time of the Proposed Transactions:

(a) Borrowerco, Lossco and Profitco will have the financial capacity to satisfy the applicable solvency test and liquidity test under their respective governing statutes to service any debt issued as part of the Proposed Transactions; and

(b) Newco will have the financial capacity to satisfy the applicable solvency test and liquidity test under Act 2 required to pay the dividends on the Newco Preferred Shares as described in Paragraphs 43 and 45(b) and to redeem the Newco Preferred Shares as described in Paragraph 45(d).

56. Profitco will not acquire the Newco Preferred Shares in the ordinary course of its business.

57. 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.

60. The Newco Preferred Shares will be term preferred shares.

61. Dividends received on the Newco Preferred Shares by Profitco 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. None of Lossco, Profitco or Newco is a “specified financial institution” as defined in subsection 248(1) or a “financial institution” as defined in subsection 190(1).

63. 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 as a joint election will be filed by each of Profitco and Lossco, 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 is excluded interest.

Purposes of the completed and proposed transactions

64. The purposes of the Completed Transactions are to:

(a) reduce administrative costs related to implementing the loss consolidation arrangement and, more generally, simplify the Corporate Group structure while minimizing compliance costs; and

(b) utilize the non-capital losses incurred by Canco 3 in previous taxation years to offset Canco 4’s taxable income.

65. The purpose of the Proposed Transactions is to consolidate taxable income and non-capital losses within a group of affiliated and related persons causing Lossco to earn interest income on the IB Debt against which Lossco’s NCLs can be applied and to create deductible interest expenses in Profitco to reduce its income and taxable income for taxation years ending after the commencement of the Proposed Transactions.

66. The purpose of both the payment and 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 Profitco on the IB Debt. More specifically, none of the purposes of any dividend to be paid by Newco and received by Profitco 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.

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

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.

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 has a legal obligation to pay interest on the indebtedness represented by the IB Debt, and provided that Profitco continues to hold the Newco Preferred Shares for the purpose of gaining or producing income from property, Profitco will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year (depending on the method regularly followed by Profitco in computing its income for the purposes of the Act), the lessor of: (i) the interest paid or payable on the IB Debt for that taxation year; and (ii) a reasonable amount in respect thereof.

B. No amount will be included in the income of Newco under 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 on the Newco 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 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. Part IV, Part IV.1 and Part VI.1 will not apply to the dividends described in Ruling C.

E. Provided that the purpose of the payment and receipt of the taxable dividends on the Newco Preferred Shares is as described in Paragraph 66, subsection 55(2) will not apply to such dividends.

F. Provided that the FMV of the IB Debt and the NIB Debt is equal to their principal amount, the settlement of the IB Debt and NIB Debt, as described in Paragraph 45(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. The provisions of subsections 15(1), 56(2), 69(4) and 246(1) will not apply as a result of the Proposed Transactions in and by themselves.

H. Subsection 245(2) of the Act will not apply to 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 apply to the Proposed Transactions, in and by themselves, 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 the 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 NCLs or other tax accounts in respect of any corporation referred to herein or the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;

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

(f) 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