2025 Ruling 2025-1076391R3 - 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 2025-107639

XXXXXXXXXX, 2025

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX
Advance Income Tax Ruling

This letter is in response to your XXXXXXXXXX request for an advance income tax ruling (Ruling) on behalf of the above-named taxpayer and replaces our previous letter to you dated XXXXXXXXXX.

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;

“XXXXXXXXXX” 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);

“agreed amount” means the amount agreed to by the transferor and the transferee in respect of the transfer of eligible property in a joint election filed pursuant to subsection 85(1);

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

“CCA” or “capital cost allowance” means the deduction allowed by paragraph 20(1)(a) and section 1100 of the Regulations;

“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 28;

“Contribution of Capital” refers to a contribution of capital to be made by Lossco to Newco, as described in Paragraphs 45 and 46;

“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 32;

“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;

“GPco” refers to a newly incorporated corporation described in Paragraph 24;

“Loss Consolidation Period” means, in respect of Profitco, the time period beginning immediately after the advance of the Daylight Loan described in Paragraph 32 and ending at the time the loss consolidation structure is wound up under Paragraphs 46 and 47;

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

“Lossco IFL” refers to the interest-free loan made by Newco to Lossco, referred to in Paragraph 36;

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

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

“New LP” refers to a new limited partnership to be formed by Lossco and GPco as described in Paragraph 26;

“Newco” refers to XXXXXXXXXX, the corporation described in Paragraph 27;

“Opco” refers to XXXXXXXXXX, the corporation described in Paragraph 21;

“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);

“Profitco” refers to XXXXXXXXXX, a taxable Canadian corporation described in Paragraph 16;

“Profitco IBL” means the interest-bearing loan owed by Profitco to Lossco referred to in Paragraph 34;

“Profitco Subscription” refers to the Class A PS subscription in Newco by Profitco, as described in Paragraph 35;

“Proposed Transactions” means the transactions described in Paragraphs 32 to 47;

“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);

“Software” refers to Lossco’s XXXXXXXXXX software XXXXXXXXXX;

“Software License” refers to the license granted to New LP, as described in Paragraph 30;

“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); and

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

TAX IDENTIFICATION

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 and has a taxation year-end of XXXXXXXXXX. Its shareholders include a diverse number of individuals, corporations and partnerships. XXXXXXXXXX, as described Paragraph 8. Further, no person or group of persons has, since the acquisition, held shares of the capital stock of Lossco with a FMV that exceeds XXXXXXXXXX% of the FMV of all the shares of the capital stock of Lossco.

2. Lossco is a XXXXXXXXXX. Lossco also enables XXXXXXXXXX.

3. During its taxation year ended XXXXXXXXXX, Lossco XXXXXXXXXX. Lossco does not expect that its Provincial Allocation will significantly change in the foreseeable future.

4. Lossco’s operations depend 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 Profitco

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 Profitco (or its 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 Profitco.

9. Prior to the acquisition described in Paragraph 8, XXXXXXXXXX was looking for 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. XXXXXXXXXX:

XXXXXXXXXX.

11. Lossco intends to combine its XXXXXXXXXX of Profitco. The acquisition has resulted in a corporate group with a uniquely XXXXXXXXXX business model, XXXXXXXXXX.

12. Immediately before the acquisition described in Paragraph 8, the shareholders of XXXXXXXXXX.

Similar Businesses

13. XXXXXXXXXX continue to carry on their respective businesses throughout the applicable Loss Consolidation Period.

Post-acquisition amalgamations

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

15. On XXXXXXXXXX, the resulting entity of the amalgamation described in Paragraph 14 and Profitco were amalgamated under 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).

Profitco

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

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

18. Profitco XXXXXXXXXX.

19. During its taxation year ended XXXXXXXXXX, Profitco maintained a permanent establishment in XXXXXXXXXX. Profitco does not expect that its Provincial Allocation will significantly change in the foreseeable future.

20. The estimated taxable income of Profitco 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

Opco

21. Opco is a taxable Canadian corporation governed by XXXXXXXXXX and has a taxation year-end of XXXXXXXXXX.

22. Opco is a subsidiary wholly-owned corporation of Lossco.

23. Opco operates a XXXXXXXXXX.

GPco

24. Prior to the commencement of the Proposed Transactions, Lossco will incorporate GPco and subscribe for XXXXXXXXXX common shares for an initial subscription price of $XXXXXXXXXX. GPco will be a taxable Canadian corporation governed by XXXXXXXXXX and will have a taxation year-end of XXXXXXXXXX.

25. GPco will be a subsidiary wholly-owned corporation of Lossco.

New LP

26. Prior to the commencement of the Proposed Transactions, Lossco and GPco will enter into a limited partnership agreement for the formation of New LP. Each of Lossco and GPco will contribute $XXXXXXXXXX of cash to New LP in exchange for one limited partnership unit and one general partnership unit, respectively.

Newco

27. On XXXXXXXXXX, Lossco incorporated a new corporation (“Newco”) under XXXXXXXXXX, and subscribed for one (1) common share for an initial subscription price of $XXXXXXXXXX. Newco has the following XXXXXXXXXX classes of shares:

(a) unlimited number of common shares; and

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

28. The Class A PS 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 in the case of the Class A PS having a principal amount equal to the redemption amount of the Class A 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; and

(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 plus XXXXXXXXXX% in the case of the Class A PS.

29. Newco is a taxable Canadian corporation and a CCPC with a XXXXXXXXXX tax year end. Newco does not carry on any business and its activities are limited to holding an investment in Opco and making the Lossco IFL with the proceeds received from the issuance of the Class A PS, as described under the Proposed Transactions below. Newco has as its tax reporting currency and functional currency, the Canadian dollar.

Transfer of Software License to New LP

30. Prior to the commencement of the Proposed Transactions, Lossco will transfer to New LP an exclusive, perpetual and irrevocable licence for the external use of its Software (“Software License”) for consideration consisting solely of XXXXXXXXXX limited partnership units with an aggregate FMV equal to the aggregate FMV of the Software License. In connection with this transfer:

(a) a joint election will be filed in prescribed form and within the time limits referred to in subsection 96(4) to have the rules of subsection 97(2) apply to the transfer of the Software License to New LP;

(b) the amount agreed upon in such election will be within the limits prescribed by paragraph 97(2)(a), which provides that the provisions of paragraphs 85(1)(a) to (f) are applicable, as modified by paragraph 97(2)(a);

(c) a portion of the Lossco NCLs are expected to be claimed in the taxation year in which such transfer occurs and will fully offset the taxable capital gain realized on the transfer of the Software License. The Lossco NCLs are expected to exceed of the taxable capital gain realized on this transfer; and

(d) New LP will claim CCA on the Software License pursuant to paragraphs 13(7)(e) and 20(1)(a). Any net losses from CCA deductions will be allocated to Lossco and GPco.

Lossco will file an information return in respect of the above-described transfer pursuant to subsection 237.3(12.1), on or before Lossco’s filing-due date for the taxation year in which the transfer occurs.

31. Prior to the commencement of the Proposed Transactions, Lossco and New LP will enter into a licensing agreement whereby New LP makes the Software License available to Lossco.

PROPOSED TRANSACTIONS

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

Daylight Loan

32. 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.

Transfer of Opco shares

33. Lossco will transfer all of its common shares of Opco to Newco for consideration consisting solely of XXXXXXXXXX common shares of Newco, with an aggregate FMV equal to the aggregate FMV of the common shares of Opco transferred to Newco by Lossco at that time. In connection with this transfer:

(a) Lossco and Newco will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the common shares of Opco;

(b) the agreed amount in respect of the disposition of the common shares of Opco will be the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(c) the amount added by Newco to the stated capital of the common shares of Newco so issued will be equal to such agreed amount. For greater certainty, the amount added to the stated capital of the common shares of Newco issued by Newco, as consideration for the Opco common shares it will receive, will not exceed the maximum amount that could be added to the aggregate PUC of such shares without a reduction taking place pursuant to subsection 85(2.1).

Profitco IBL

34. Using the proceeds of the Daylight Loan, Lossco will make an interest-bearing loan of approximately $XXXXXXXXXX to Profitco (“Profitco IBL”). The Profitco IBL 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 if the Lossco IFL belongs to Profitco at the time of repayment.

35. Profitco will use all of the proceeds of the Profitco IBL to subscribe for Class A PS in Newco (“Profitco Subscription”).

36. Using all of the proceeds from the Profitco Subscription, Newco will make an interest-free loan to Lossco (“Lossco IFL”).

37. The transactions described in Paragraphs 32, 34 to 36 and 44 may be repeated up to four times over the Loss Consolidation Period so as to advance the principal amount of the Profitco IBL and the Lossco IFL in a series of tranches, the total amount of which will not exceed, in aggregate, $XXXXXXXXXX.

38. The Profitco IBL 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 and immediately before the issuance of any subsequent tranche of the Profitco IBL). The annual rate on the Profitco IBL 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.

39. The terms of the Profitco IBL will provide that:

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

(b) the payment of the principal amount of the Profitco IBL 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 Profitco IBL 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, or

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

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

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

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

43. The terms of the Lossco IFL will provide that:

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

(b) the payment of the principal amount on the Lossco IFL 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 at the time of its repayment,

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

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

Repayment of the Daylight Loan

44. Lossco will use the aggregate proceeds from the Lossco IFL to fully repay the Daylight Loan.

Maintenance of the structure

45. The following transactions will occur at least once a year in respect of the Class A PS and the Profitco IBL when jointly determined by Lossco and Profitco, 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 Class A PS (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 Class A PS;

(c) Profitco will pay the accrued and unpaid interest on the Profitco IBL to Lossco; and

(d) Profitco is expected to have an annual interest expense on the Profitco IBL that is lower than its anticipated taxable income in the absence of the Proposed Transactions. Accordingly, the Proposed Transactions are not expected to create any non-capital losses in Profitco 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

46. 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 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 will pay the balance of any accrued and unpaid interest on the Profitco IBL;

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

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

47. 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

48. The Proposed Transactions will be legally effective.

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

50. Lossco does not expect that the interest income to be earned by Lossco on the Profitco IBL will exceed an amount that could be sheltered either with Lossco NCLs and current operating losses of Lossco.

51. The Proposed Transactions are not intended to generate interest expense in excess of income earned by Profitco (determined without reference to such interest expense) within the 36-month period beginning immediately after the advance of the Daylight Loan. If it can reasonably be expected that the interest expense on the Profitco IBL will exceed the income earned by Profitco within such 36-month period, Profitco will immediately seek to unwind the loss consolidation structure.

52. The Class A PS 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; or

(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.

53. Dividends received on the Class A PS 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.

54. The total amount of the Daylight Loans will not exceed the borrowing capacity of Lossco.

55. Profitco will not acquire the Class A PS in the ordinary course of its business.

56. 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 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 is excluded interest.

57. Neither Lossco nor Profitco is a “specified financial institution” as defined in subsection 248(1) or a “financial institution” as defined in subsection 190(1).

58. 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.

PURPOSES OF THE PROPOSED TRANSACTIONS

59. The purpose of the Proposed Transactions is to consolidate income within a group of affiliated and related persons by creating interest income in the hands of Lossco, against which the expenses and non-capital losses of Lossco 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.

60. The purpose of both the payment and the receipt of the dividends on the Class A PS is to provide a reasonable return on those shares and to fund the interest payments to be made by Profitco on the Profitco IBL. More specifically, none of the purposes of any dividend to be paid by Newco and received by Profitco on the Class A PS 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.

61. The Proposed Transactions are not intended to shift income between provinces and any such shift between provinces will be incidental to the Proposed Transactions.

62. 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.

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 Profitco IBL, and provided that Profitco continues to hold the Class A PS 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 Profitco IBL, 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 on the Class A PS 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. 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 Class A PS is as described in Paragraph 60, subsection 55(2) will not apply to such dividends.

F. Provided that the FMV of the Profitco IBL and Lossco IBL is equal to their principal amount, the settlement of the Profitco IBL and Lossco IFL, as described in Paragraphs 46(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 commence no later than XXXXXXXXXX and 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; and

(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, and in particular, the tax consequences relating to the transfer described in Paragraph 30.

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