2006 Ruling 2006-0178401R3 - 132.2 reorganization of a mutual fund trust

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: Reorganization of an existing mutual fund trust, trust- on-corporation structure to a trust-on-partnership structure using rollovers available under s. 85, s.97 and 132.2; Additional issues encountered include deductibility of interest; debt forgiveness; acb of partnership interest & status of the mutual fund trust.

Position: Rulings, with some modifications substantively granted as requested.

Reasons: Proposed transactions will produce the desired outcome using legislative tools available and are within policy intention.

XXXXXXXXXX 									2006-017840

Attention: XXXXXXXXXX

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX - Account Number XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX in which you request an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge your correspondence of XXXXXXXXXX.

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:

a) in an earlier return of the taxpayers or related persons;

b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;

c) under objection by the taxpayers or related persons;

d) before the courts or if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.

The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader. Unless otherwise indicated, all references to monetary amounts are in Canadian dollars and all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act") or to the Income Tax Regulations (the "Regulations").

I. Definitions

In this letter, the following terms have the meanings specified:

"adjusted cost base" ("ACB") and "capital property" have the meanings in section 54;

"Amalco-MFC" means the corporation to be formed on the amalgamation of MFC and MCo-Amalco under the BCA, as described in paragraphs 52 and 53 below;

"Amalco-MFC Class A Shares" means the Class A shares in the capital of Amalco-MFC with the same terms and conditions as the MFC Class A Shares described in subparagraph 44(b) below;

"Amalco-MFC Class B Shares" means the Class B shares in the capital of Amalco-MFC with the same terms and conditions as the MFC Class B Shares described in subparagraph 44(c) below;

"Amalco-MFC Class B Shares Transfer Agreement" means the agreement of purchase and sale to be entered into by the Fund and LP as described in paragraph 59 below;

"Amalco-MFC Common Shares" means the common shares in the capital of Amalco-MFC with the same terms and conditions as the MFC Common Shares described in subparagraph 44(a) below;

"BCA" means the Business Corporations Act (XXXXXXXXXX);

"Class A Redemption Price" means the fair market value of any consideration for which the MFC Class A Shares were issued plus any declared and unpaid dividends on such shares at the date of redemption or retraction;

"Class B Redemption Price" means the fair market value of any consideration for which the MFC Class B Shares were issued plus any declared and unpaid dividends on such shares at the date of redemption or retraction;

"Combination Agreement" means the agreement to be entered into by Amalco-MFC and the Fund as described in paragraph 56 below;

"Declaration of Trust" means the declaration of trust dated XXXXXXXXXX establishing and governing the Fund, as amended and restated;

"Draft Amendments" means the legislative proposals released by the Department of Finance on November 9, 2006;

"Fund" means XXXXXXXXXX, an open-ended trust formed under the laws of the Province of XXXXXXXXXX pursuant to the Declaration of Trust;

"Fund Unit" means a trust unit of the Fund described in paragraph 3 below;

"Fund Unitholder" means the holder of a Fund Unit or a Special Fund Unit;

"General Partner" means GP Trust, the general partner of LP;

"GP Trust" means a trust to be formed under the laws of the Province of XXXXXXXXXX, as described in paragraph 26 below;

"GP Trust Unit" means a trust unit of GP Trust described in paragraph 26 below;

"GP Units" means the XXXXXXXXXX% interest of the general partner in the capital of LP;

"Holdco" means XXXXXXXXXX, a taxable Canadian corporation;

"Holdco Common Shares" means the common shares in the capital of Holdco;

"Holdco Notes" means the unsecured subordinated debt obligations of Holdco;

"Licence and Royalty Agreement" means the licence and royalty agreement between MCo and Opco2 pursuant to which Opco2 was granted a licence to use the Marks and agreed to pay a monthly royalty to MCo;

"LP" means a limited partnership to be formed under the laws of the Province of XXXXXXXXXX, as described in paragraph 29 below;

"LP Agreement" means the agreement to be entered into by GP Trust and MCo as described in paragraph 29 below;

"LP Note" means a demand, non-interest bearing promissory note to be issued by LP as described in paragraph 39 below and having a principal amount as set forth in that paragraph;

"LP Units" means the XXXXXXXXXX% interest of the limited partner in the capital of LP;

"Marks" means the trade-marks registered or the subject of pending applications for registration under the Trade-marks Act (Canada), and such unregistered trade-marks, trade names, operating procedures, methods, systems and other intellectual property and proprietary rights that are currently owned by MCo and used in connection with the operation of XXXXXXXXXX in Canada and all associated rights;

"Marks Transfer Agreement" means the agreement of purchase and sale to be entered into by MCo-Amalco and LP as described in paragraph 39 below;

"MCo" means XXXXXXXXXX, a taxable Canadian corporation;

"MCo-Amalco" means the corporation to be formed on the amalgamation of Holdco and MCo, under the BCA as described in paragraphs 37 and 38 below;

"MCo-Amalco Common Shares" means the common shares in the capital of MCo-Amalco with the same terms and conditions as the Holdco Common Shares;

"MCo-Amalco Common Shares and Notes Transfer Agreement" means the agreement of purchase and sale to be entered into by the Fund and MFC as described in paragraph 50 below;

"MCo-Amalco Notes" means the Holdco Notes which will become the debt obligations of MCo-Amalco by virtue of the amalgamation of Holdco and MCo as described in paragraph 37 below;

"MCo Common Shares" means the common shares in the capital of MCo;

"MCo Notes" means the unsecured subordinated debt obligations of MCo;

"MCo Term Loan" means the loan described in paragraph 25 below;

"MFC" means a taxable Canadian corporation to be formed under the BCA, as described in paragraphs 43 and 44 below;

"MFC Class A Shares" means the Class A shares in the capital of MFC described in subparagraph 44(b) below;

"MFC Class B Shares" means the Class B shares in the capital of MFC described in subparagraph 44(c) below;

"MFC Common Shares" means the common shares in the capital of MFC described in subparagraph 44(a) below;

"Opco 1" means XXXXXXXXXX, a taxable Canadian private corporation formed under the BCA, which owns all of the issued and outstanding shares of Opco2. Opco1 carries on a XXXXXXXXXX business primarily focused on XXXXXXXXXX;

"Opco 2" means XXXXXXXXXX, a wholly-owned subsidiary of Opco1, formed under the BCA. Opco2 carries on business as a franchisor of XXXXXXXXXX and operator of company-owned XXXXXXXXXX in Canada. Opco2 has entered into the Licence and Royalty Agreement with MCo for a period of XXXXXXXXXX years commencing XXXXXXXXXX. In return for the right to use the Marks, Opco2 pays a monthly royalty to MCo equal to XXXXXXXXXX% of gross revenues generated by the XXXXXXXXXX in the royalty pool. The principal office of Opco2 is located at XXXXXXXXXX;

"Regulations" means the Income Tax Regulations (Canada), as amended;

"Right of Renunciation" means the right of a Fund Unitholder that is a Subsidiary of the Fund to renounce, release and surrender, for no consideration, all rights and benefits in and to the Special Fund Units specified in a delivered written notice of renunciation;

"Special Fund Unit" means a trust unit of the Fund described in subparagraph 54(d) below;

"Subsidiary" of the Fund means any entity, corporation, trust, or partnership in which the Fund holds, either directly or indirectly (through one or more Subsidiaries), 95% or more of the beneficial interest therein, including, without limitation, in respect of a corporation, 95% or more of the shares of each class of the corporation, in respect of a trust, 95% or more of the beneficial interest in the trust, and in respect of a partnership, 95% or more of the partnership units or interest in the partnership;

"Transfer and Assumption Agreement" means an agreement to be entered into by Amalco-MFC and the Fund as described in subparagraph 56(a) below; and

"XXXXXXXXXX Transactions" means the funding and acquisition of the Marks and related transactions described in the final prospectus for the offering of Fund Units dated XXXXXXXXXX.

II. Facts

1. The Fund is a mutual fund trust as defined in subsection 132(6) which was established to, among other things, invest in securities, including shares and debt of Holdco and MCo and their affiliated entities. The Fund was not established and has not been maintained primarily for the benefit of non-residents. The Fund Units are traded on the XXXXXXXXXX Stock Exchange and the Fund has a XXXXXXXXXX year end for purposes of the Act.

2. The principal office of the Fund is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. The Fund's account number is XXXXXXXXXX.

3. Under the terms of the Declaration of Trust, the Fund may issue an unlimited number of Fund Units of one class. Each Fund Unit represents an equal, undivided beneficial interest in any distributions by the Fund (whether of income, net realized capital gains or other amounts) and in the Fund's net assets in the event of termination of the Fund. Each Fund Unit entitles the holder thereof to one vote and is redeemable at the option of the holder at a redemption price determined by way of a formula.

4. The XXXXXXXXXX trustees of the Fund are resident in Canada. Pursuant to the Declaration of Trust, the Fund Unitholders are entitled to vote with respect to the election or removal of the trustees of the Fund.

5. As part of the XXXXXXXXXX Transactions, the Fund completed an initial public offering of Fund Units for cash on XXXXXXXXXX. The Fund used the net proceeds from the offering, plus the proceeds of Opco2's subscription for Fund Units, to subscribe for XXXXXXXXXX Holdco Common Shares and $XXXXXXXXXX Holdco Notes of its wholly-owned subsidiary, Holdco.

6. In XXXXXXXXXX , MCo purchased from the Fund XXXXXXXXXX Fund Units, which units it delivered to Opco2 as consideration for amounts owing to Opco2 pursuant to the terms of the Licence and Royalty Agreement. The Fund used the net proceeds received on the issuance to subscribe for XXXXXXXXXX Holdco Common Shares and $XXXXXXXXXX of Holdco Notes.

7. The Fund owns all of the issued and outstanding Holdco Common Shares with an aggregate adjusted cost base ("ACB") of approximately $XXXXXXXXXX, an aggregate paid-up capital ("PUC") of approximately $XXXXXXXXXX and a fair market value ("FMV") in excess of their ACB. The Holdco Common Shares are capital property to the Fund for purposes of the Act.

8. The Fund also owns all of the interest-bearing Holdco Notes with an aggregate principal amount of $XXXXXXXXXX . The Holdco Notes mature on the XXXXXXXXXX anniversary of their issuance. The Holdco Notes are capital property to the Fund for purposes of the Act.

9. The Fund does not own any other asset of material value other than surplus cash.

10. There were approximately XXXXXXXXXX Fund Units issued and outstanding as of XXXXXXXXXX. Approximately XXXXXXXXXX% of the issued and outstanding Fund Units are owned by the public and the remaining XXXXXXXXXX% are owned by Opco2. It is estimated that less than XXXXXXXXXX% are owned by non-residents of Canada.

11. Holdco was incorporated under the BCA. The authorized capital of Holdco consists of an unlimited number of common shares, of which XXXXXXXXXX are currently issued and outstanding and held by the Fund.

12. Holdco's principal activity consists of holding the MCo Common Shares and the MCo Notes. Holdco has no employees.

13. The principal office of Holdco is located at XXXXXXXXXX , and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Services Office. Holdco's business number is XXXXXXXXXX.

14. As part of the XXXXXXXXXX Transactions, Holdco used the net proceeds from the subscription of Holdco Common Shares and the issuance of Holdco Notes to the Fund, as described in paragraph 5 above, to acquire all of the issued and outstanding shares of a predecessor of MCo from Opco1. At the time the interest in the predecessor of MCo was acquired by Holdco, its primary asset was the Marks.

15. Holdco transferred the shares acquired in 14 above to a wholly-owned subsidiary of Holdco in exchange for XXXXXXXXXX common shares and notes with an aggregate principal amount of $XXXXXXXXXX of the subsidiary. The shares and notes of the subsidiary subsequently became the MCo Common Shares and MCo Notes by virtue of the amalgamation of the wholly-owned subsidiary with a predecessor of MCo to form MCo, a wholly-owned subsidiary of Holdco.

16. In XXXXXXXXXX, Holdco used the net proceeds from the subscription of Holdco Common Shares and issuance of Holdco Notes to the Fund, as described in paragraph 6 above, to acquire XXXXXXXXXX MCo Common Shares and $XXXXXXXXXX of MCo Notes.

17. Holdco owns all of the issued and outstanding MCo Common Shares with an aggregate ACB of approximately $XXXXXXXXXX, an aggregate PUC of approximately $XXXXXXXXXX and a FMV in excess of their ACB. The MCo Common Shares are capital property to Holdco for purposes of the Act.

18. Holdco also owns all of the interest-bearing MCo Notes with an aggregate principal amount of $XXXXXXXXXX. The MCo Notes mature on the XXXXXXXXXX anniversary of their issuance. The MCo Notes are capital property to Holdco for purposes of the Act.

19. Holdco does not own any other asset of material value.

20. As noted in paragraph 15 above, MCo was formed by amalgamation under the BCA. The authorized capital of MCo consists of an unlimited number of common shares, of which XXXXXXXXXX are currently issued and outstanding and held by Holdco.

21. The business of MCo consists of the ownership of the Marks, the taking of actions consistent with the Licence and Royalty Agreement to exploit the use of those marks by Opco2, the collection of royalties payable to MCo thereunder and the administration of the Fund and Holdco.

22. The principal office of MCo is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. MCo's business number is XXXXXXXXXX.

23. MCo owns the Marks with an ACB of approximately $XXXXXXXXXX and a FMV in excess of their ACB. The Marks are eligible capital property to MCo for purposes of the Act.

24. MCo does not own any other asset of material value except for royalties and other payments receivable from Opco2 and surplus cash.

25. Except for the MCo Notes, the only material debt of MCo is a loan of approximately $XXXXXXXXXX advanced by a Canadian chartered bank under credit facilities totaling $XXXXXXXXXX. A predecessor of MCo distributed the net proceeds of the loan to Opco1, its sole shareholder, as a return of capital in the course of the XXXXXXXXXX Transactions. This loan became the MCo Term Loan by virtue of an earlier amalgamation of predecessors of MCo to form the predecessor of MCo described in paragraph 14 above. The credit facilities are comprised of an $XXXXXXXXXX non-revolving term credit facility and a $XXXXXXXXXX operating credit facility. At XXXXXXXXXX, the full amount of the $XXXXXXXXXX non-revolving credit facility had been drawn upon and no advances had been made under the operating credit facility. The MCo Term Loan is guaranteed by the Fund and Holdco.

III. Proposed Transactions

26. A Canadian resident third party settlor will settle GP Trust with a nominal cash contribution in exchange for one GP Trust Unit. Under the declaration of trust establishing GP Trust, GP Trust will be entitled to issue an unlimited number of GP Trust Units of one class. Each GP Trust Unit will represent an equal and undivided beneficial interest in the distributions made by GP Trust, as well as the net assets of GP Trust in the event of termination or winding-up of GP Trust. Each GP Trust Unit will entitle the holder thereof to one vote.

27. The Fund will subscribe for one GP Trust Unit for nominal consideration. The initial GP Trust Unit issued to the third party settlor on the settlement of GP Trust, as described in paragraph 26 above, will be repurchased by GP Trust for an amount equal to the cash received from the third party.

28. A majority of the trustees of GP Trust will be resident in Canada and will not be trustees of the Fund.

29. LP will be formed under the Limited Partnerships Act (XXXXXXXXXX) by GP Trust as General Partner and MCo as limited partner. Under the terms of the LP Agreement, LP will be entitled to issue an unlimited number of GP Units and LP Units. Each LP Unit will entitle the holder thereof to one vote. GP Trust will be entitled to one vote and will have exclusive authority to manage the affairs of LP in its capacity as General Partner. The income and loss of LP will be allocated to the partners of LP based on their respective interests in LP at the time of allocation. The year end of LP will be XXXXXXXXXX.

30. GP Trust will subscribe for one GP Unit for a nominal cash consideration of $XXXXXXXXXX, representing a XXXXXXXXXX% general partnership interest in LP. MCo will subscribe for XXXXXXXXXX LP Units for a cash consideration of $XXXXXXXXXX, representing a XXXXXXXXXX% limited partnership interest in LP. The LP units will be held as capital property.

31. LP will qualify as a "Canadian Partnership" for purposes of the Act at all times throughout the proposed transactions.

32. The Fund will borrow from a third party an amount equal to the outstanding principal amount of the MCo Term Loan immediately before the amalgamation described in paragraph 37 below. The Fund will use the borrowed funds to subscribe for Holdco Common Shares and Holdco Notes, which properties will be acquired for the purpose of earning income from property. The Holdco Notes issued in this paragraph 32 will have the same terms as the Holdco Notes described in paragraph 8 above.

33. LP, Holdco, MCo and MCo-Amalco will guarantee the third party loan in paragraph 32 above, which guarantee will be secured by certain assets of LP, Holdco, MCo and MCo-Amalco.

34. Holdco will use the funds from the subscription of Holdco Common Shares and Holdco Notes by the Fund, as described in paragraph 32 above, to subscribe for MCo Common Shares and MCo Notes.

35. MCo will use the funds from the subscription of MCo Common Shares and MCo Notes by Holdco, as described in paragraph 34 above, to repay the MCo Term Loan immediately before the amalgamation described in paragraph 37 below.

36. After the repayment of the MCo Term Loan in paragraph 35 above, and before the amalgamation in paragraph 37 below, MCo will not have any material third party liabilities.

37. Following the repayment of the MCo Term Loan, Holdco and MCo (herein referred to as "predecessor corporations") will amalgamate to form MCo-Amalco in such a manner that:

a) all of the property (except for the MCo Common Shares and MCo Notes) of the predecessor corporations immediately before the amalgamation will become property of MCo-Amalco by virtue of the amalgamation;

b) all of the liabilities (except for the liabilities of MCo with respect to the MCo Notes) of the predecessor corporations immediately before the amalgamation will become liabilities of MCo-Amalco by virtue of the amalgamation;

c) each Holdco Common Share will be converted into a MCo-Amalco Common Share with the same terms and conditions;

d) the MCo Common Shares will be cancelled without any repayment of capital in respect thereof; and

e) the MCo Notes will be cancelled.

38. In accordance with the provisions of the BCA, the articles of amalgamation of MCo-Amalco will be the same as the articles of Holdco, and MCo-Amalco will not issue any securities in connection with the amalgamation described in paragraph 37 above.

39. LP and MCo-Amalco will enter into the Marks Transfer Agreement pursuant to which MCo-Amalco will transfer the Marks and assign all of its rights under the Licence and Royalty Agreement to LP for a purchase price equal to the aggregate FMV of the Marks and the rights of MCo-Amalco under the Licence and Royalty Agreement. LP will satisfy the purchase price by (i) assuming any outstanding liabilities and obligations of MCo-Amalco other than the MCo-Amalco Notes; (ii) issuing an LP Note having a principal amount equal to the aggregate cost of the Marks and rights of MCo-Amalco under the Licence and Royalty Agreement less the sum of the assumed liabilities and obligations of MCo-Amalco; and (iii) increasing the capital account maintained for MCo- Amalco in respect of the LP Units it already owns by an amount equal to the excess of the aggregate FMV of the Marks and the rights of MCo-Amalco under the Licence and Royalty Agreement over the principal amount of the assumed liabilities and obligations of MCo-Amalco and the LP Note.

Prior to the transfer described in paragraph 50 below, MCo-Amalco will repay a portion of the principal amount outstanding on the MCo-Amalco Notes equal to the principal amount of the LP Note issued in this paragraph 39 by assigning the LP Note to the Fund.

40. After the transfer described in paragraph 39 above, LP will carry on the business currently being carried on by MCo-Amalco.

41. MCo-Amalco, in its capacity as transferor, and GP Trust and MCo-Amalco, as partners of the transferee, will jointly elect under subsection 97(2), in prescribed form and within the prescribed time under subsection 96(4) or 96(5), with respect to the transfer described in paragraph 39 above. The elected amount for purposes of the 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). Since the filing due date for this election is after the amalgamation described in paragraph 52 below, it will be filed by the partners of LP and Amalco-MFC. The partners of LP and Amalco-MFC may also file elections under subsection 20(24) and section 22 as considered appropriate by the parties at the time of the transfer described in paragraph 39 above.

42. Concurrently with the transaction described in paragraph 39 above, the Fund will subscribe for additional units of GP Trust for a cash contribution. GP Trust will use these funds to subscribe for additional GP Units of LP in order to maintain the partnership interest of MCo-Amalco and GP Trust in LP at XXXXXXXXXX% and XXXXXXXXXX%, respectively.

43. The Fund will incorporate MFC. The articles of incorporation of MFC will provide that its only undertaking will be activities described in paragraph 131(8)(b). The Fund will subscribe for one MFC Common Share on incorporation for nominal cash consideration.

44. The authorized share capital of MFC will consist of an unlimited number of MFC Common Shares, MFC Class A Shares and MFC Class B Shares with the following terms and conditions:

a) The MFC Common Shares will, subject to the BCA:

i. entitle the holder to one vote in respect of each MFC Common Share on all matters to be voted on at all meetings of shareholders;

ii. entitle the holder thereof to receive dividends if, as and when declared by the board of directors of MFC, to the exclusion of holders of MFC Class A Shares or MFC Class B Shares; and

iii. on the liquidation, dissolution or winding-up of MFC, subject to the rights of the holders of any other class of shares of MFC entitled to receive assets of MFC upon such a distribution in priority to or rateably with the holders of the MFC Common Shares, entitle the holder thereof to share rateably in any remaining assets of MFC.

b) The MFC Class A Shares will, subject to the BCA:

i. be non-voting;

ii. entitle the holder thereof to receive dividends if, as and when declared by the board of directors of MFC, to the exclusion of holders of MFC Common Shares or MFC Class B Shares;

iii. be redeemable at the option of MFC at the Class A Redemption Price. The Class A Redemption Price will be payable in cash, or satisfied by the transfer of Fund Units;

iv. be retractable at the option of the holder at the Class A Redemption Price. The Class A Redemption Price will be payable in cash, or satisfied by the transfer of Fund Units; and

v. on the liquidation, dissolution or winding-up of MFC, entitle the holder thereof to receive the Class A Redemption Price pari passu with the holders of MFC Class B Shares before any amount will be paid or any assets of MFC will be distributed to the holders of MFC Common Shares, or any shares ranking junior to the MFC Common Shares.

c) The MFC Class B Shares will, subject to the BCA:

i. be non-voting;

ii. entitle the holder thereof to receive dividends if, as and when declared by the board of directors of MFC, to the exclusion of holders of MFC Common Shares or MFC Class A Shares;

iii. be redeemable at the option of MFC at the Class B Redemption Price. The Class B Redemption Price will be payable in cash, or satisfied by the transfer of Fund Units or Special Fund Units;

iv. be retractable at the option of the holder at the Class B Redemption Price. The Class B Redemption Price will be payable in cash, or satisfied by the transfer of Fund Units or Special Fund Units; and

v. on the liquidation, dissolution or winding-up of MFC, entitle the holder thereof to receive the Class B Redemption Price pari passu with the holders of MFC Class A Shares before any amount will be paid or any assets of MFC will be distributed to the holders of MFC Common Shares, or any shares ranking junior to the MFC Common Shares.

45. The MFC Class A Shares will be listed on the XXXXXXXXXX Stock Exchange.

46. Following the listing of MFC Class A Shares in paragraph 45 above, the Fund will subscribe for a number of MFC Class A Shares equal to the number of Fund Units owned by the Fund Unitholders immediately before the distribution described in paragraph 48 below for a nominal cash consideration.

47. At all times following their issuance, the aggregate FMV of the MFC Class A Shares and MFC Class B Shares will at least be equal to 95% of the FMV of all of the issued shares of MFC.

48. The Fund will distribute to the Fund Unitholders, as a return of capital, all of its MFC Class A Shares acquired in paragraph 46 above. Each Fund Unitholder will receive a number of MFC Class A Shares equal to the number of Fund Units owned by such holder immediately before the distribution in this paragraph 48.

49. In its tax return for its first taxation year, MFC will elect to be deemed to have been a public corporation from the beginning of that year. Since the filing due date for this return is after the amalgamation described in paragraph 52 below, it will be filed by Amalco-MFC.

50. Prior to the amalgamation described in the paragraph 52 below, the Fund and MFC will enter into the MCo-Amalco Common Shares and Notes Transfer Agreement pursuant to which the Fund will transfer the MCo-Amalco Common Shares and the MCo-Amalco Notes to MFC for a purchase price equal to the aggregate FMV of the properties so transferred. MFC will satisfy the purchase price by issuing MFC Class B Shares to the Fund with a FMV equal to the aggregate FMV of the MCo-Amalco Common Shares and MCo-Amalco Notes.

51. The Fund will jointly elect with MFC, in prescribed form and within the prescribed time in subsection 85(6) or 85(7), to have the provisions of subsection 85(1) apply to the transfer of MCo-Amalco Common Shares and MCo-Amalco Notes as described in paragraph 50 above. The elected amount in respect of the MCo-Amalco Common Shares and MCo-Amalco Notes will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). In each case, the elected amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b). Since the filing due date for this election is after the amalgamation described in paragraph 52 below, it will be filed by the Fund and Amalco-MFC.

52. Following the transfer described in paragraph 50 above, MFC and MCo-Amalco will amalgamate (hereinafter referred to as "predecessor corporations) to form Amalco-MFC in such a manner that:

a) all of the property (except for the MCo-Amalco Common Shares and MCo-Amalco Notes) of the predecessor corporations immediately before the amalgamation will become property of Amalco-MFC by virtue of the amalgamation;

b) all of the liabilities (except for the liabilities of MCo-Amalco with respect to the MCo-Amalco Notes) of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco-MFC by virtue of the amalgamation;

c) each MFC Common Share will be converted into an Amalco-MFC Common Share with the same terms and conditions;

d) each MFC Class A Share will be converted into an Amalco-MFC Class A Share with the same terms and conditions;

e) each MFC Class B Share will be converted into an Amalco-MFC Class B Share with the same terms and conditions;

f) the MCo-Amalco Common Shares will be cancelled without any repayment of capital in respect thereof; and

g) the MCo-Amalco Notes will be cancelled.

53. In accordance with the provisions of the BCA, the articles of amalgamation of Amalco-MFC will be the same as the articles of incorporation of MFC, and Amalco-MFC will not issue any securities in connection with the amalgamation described in paragraph 52 above. The majority of directors of Amalco-MFC will not be trustees of GP Trust.

54. Before the transactions described in paragraph 56 below, the Declaration of Trust of the Fund will be amended as follows:

a) The provisions in respect of the consolidation of Funds Units will be amended to provide that the consolidation of Fund Units described in paragraph 65 below will be automatic and not require the consent of the Fund Unitholders;

b) The provisions regarding in specie redemption of Fund Units will be amended to provide that the redemption proceeds may be paid and satisfied by way of a distribution in specie of securities of Subsidiaries of the Fund;

c) The Right of Renunciation will be added for the Special Fund Units held by a Subsidiary of the Fund; and

d) A class of Special Fund Units will be created and authorized for issuance. Each Special Fund Unit will represent a beneficial interest in the Fund and will entitle the holder thereof to benefit from the subordination of the distribution entitlement of holders of Fund Units, as described in paragraph 55 below. Each Special Fund Unit will entitle the holder thereof to one vote, be redeemable at the option of the holder at an amount equal to the Class B Redemption Price, and in addition thereto, will entitle the holder to exercise the Right of Renunciation in respect of such unit.

No Fund Units will be cancelled or redeemed and the Fund Unitholders will not receive, and shall not be entitled to receive any proceeds of disposition in respect of the amendments to the Declaration of Trust of the Fund.

55. All holders of Fund Units, effective upon the first issuance of the Special Fund Units in paragraph 56 below, will be deemed to subordinate their entitlement to receive distributions from the Fund such that they will not receive any distributions from the Fund (other than the distributions to be undertaken pursuant to paragraph 48 above) in respect of their Fund Units until the earlier of:

a) the date on which an aggregate amount has been paid to the holder of the Special Fund Units in respect of such units equal to the Class B Redemption Price; or

b) the time at which there are no Special Fund Units issued and outstanding which shall occur following paragraph 64 below.

56. At the moment that is the transfer time for the purposes of the definition of "qualifying exchange" in subsection 132.2(2) (hereinafter referred to as the "Transfer Time"), the Fund and Amalco-MFC will enter into the Combination Agreement under the following terms and conditions:

a) Amalco-MFC will transfer all of its assets to the Fund in accordance with the Transfer and Assumption Agreement; and

b) As consideration for the transfer described in subparagraph 56(a) above, the Fund will assume any outstanding liabilities of Amalco-MFC and issue Fund Units and Special Fund Units to Amalco-MFC having an aggregate FMV equal to the aggregate FMV of the assets transferred to the Fund less any assumed liabilities.

57. At the Transfer Time, Amalco-MFC will qualify as a mutual fund corporation and the Fund will qualify as a mutual fund trust for purposes of the Act.

58. At the Transfer Time, Amalco-MFC will have no material outstanding liabilities and the only material asset of Amalco-MFC will be the LP Units.

59. Immediately after the transactions described in paragraph 56 above, the Fund and LP will enter into the Amalco-MFC Class B Shares Transfer Agreement pursuant to which:

a) The Fund will transfer all of its Amalco-MFC Class B Shares to LP for a purchase price equal to the FMV of these shares; and

b) LP will satisfy the purchase price by increasing the capital account maintained for the Fund in respect of LP Units acquired by it in paragraph 56 above by an amount equal to the FMV of the Amalco-MFC Class B Shares.

60. The Fund, in its capacity as transferor, and GP Trust and the Fund, as partners of the transferee, will jointly elect under subsection 97(2), in prescribed form and within the prescribed time under subsection 96(4) or 96(5), with respect to the transfer described in paragraph 59 above. The elected amount for purposes of the 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).

61. Concurrently with the transaction described in paragraph 59 above, the Fund will subscribe for additional units of GP Trust for a cash contribution. GP Trust will use these funds to subscribe for additional GP Units of LP in order to maintain the partnership interest of the Fund and GP Trust in LP at XXXXXXXXXX% and XXXXXXXXXX%, respectively.

62. Within 60 days after the Transfer Time, Amalco-MFC will redeem all of the issued and outstanding Amalco-MFC Class B Shares held by LP and all of the issued and outstanding Amalco-MFC Class A Shares held by Fund Unitholders at the Class B Redemption Price and the Class A Redemption Price, respectively. Amalco-MFC will satisfy the Class B Redemption Price and the Class A Redemption Price by transferring the Special Fund Units acquired in subparagraph 56(b) above to LP and the Fund Units acquired in that subparagraph to the holders of Fund Units. No other consideration will be received by LP or the holders of Fund Units on the redemption of the Amalco-MFC Class B Shares and Amalco-MFC Class A Shares other than the Special Fund Units and Fund Units, respectively.

63. Upon receipt of the Special Fund Units, LP will, pursuant to the Right of Renunciation, deliver a written notice of renunciation in which it will immediately renounce, release and surrender all of its interest in the Fund (income, capital or otherwise). LP will not renounce, release or surrender its interest in favour of any particular person, and will not receive any consideration from the Fund or any other person in respect of this renunciation and surrender.

64. As a result of the exercise of the Right of Renunciation described in paragraph 63 above, the Special Fund Units held by LP will be cancelled and the subordination by the holders of Fund Units to receive distributions from the Fund will terminate, as described in paragraph 55 above.

65. Immediately after the transactions described in paragraphs 63 and 64 above, the outstanding Fund Units held by the Fund Unitholders will be consolidated on a basis such that the number of Fund Units outstanding following such consolidation will be equal to the number of Fund Units outstanding immediately before the reorganization. No Fund Units will be cancelled or redeemed and the Fund Unitholders will not receive, and shall not be entitled to receive, any proceeds of disposition as a consequence of this consolidation.

66. Following the transactions described in paragraph 65 above, but prior to the dissolution of Amalco-MFC described in paragraph 69 below, Amalco-MFC will jointly elect with the Fund, in prescribed form and within the prescribed time in paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(2), to have the rules in section 132.2 apply to the transactions described in paragraphs 56 and 62 above. No amount will be agreed upon in respect of the transfer of assets of Amalco-MFC to the Fund pursuant to clause 132.2(1)(c)(ii)(B).

67. The LP Agreement will provide that LP may distribute cash or loan funds to its limited partner, the Fund to fund the distributions by the Fund to the Fund Unitholders. To the extent that LP loans funds to the Fund, the amounts of the distributions payable by LP to the Fund will be set-off against the amounts loaned by LP to the Fund.

68. Amalco-MFC will not be dissolved but will continue to exist, at least until the latest of:

a) the last day on which the election under subsection 97(2) referred to in paragraph 41 above can be filed pursuant to subsection 96(5);

b) the last day on which the tax return of MFC referred to in paragraph 49 above must be filed pursuant to paragraph 150(1)(a);

c) the last day on which the election under subsection 85(1) referred to in paragraph 51 above can be filed pursuant to subsection 85(7); and

d) the last day on which the election under paragraph 132.2(2)(c) referred to in paragraph 66 above can be filed pursuant to paragraph 132.2(2)(c).

69. After all of the elections described in paragraph 68 above have been filed, the Fund will, by special resolution, resolve to dissolve Amalco-MFC under the applicable provisions of the BCA. The one Amalco-MFC Common Share held by the Fund will be cancelled and any remaining properties of Amalco-MFC will be distributed to the Fund on the winding-up. Articles of dissolution will be filed in due course and Amalco-MFC will be dissolved.

70. A meeting of Fund Unitholders will be held prior to the implementation of the transactions described herein to approve the proposed reorganization of the Fund by way of special resolution. Implementation will be subject to receipt of the tax rulings requested herein.

IV. Purpose of the Proposed Transactions

71. The proposed reorganization described herein is intended to modify the current structure of the Fund to conform it with those of other funds that have been reorganized in a similar manner. The Fund believes that it will be able to maximize distributions to Fund Unitholders by eliminating the potential for taxation at the Holdco and MCo level. The Fund also believes that the proposed reorganization is necessary to enable it to continue to compete with other funds that are organized on a flow-through basis in attracting investors.

V. Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the above transactions, and provided that the proposed transactions are completed in the manner described above, and there are no other transactions which may be relevant to the rulings requested, our rulings are as follows:

A. Provided that the Fund has a legal obligation to pay interest on the third party debt referred to in paragraph 32 above, the Fund will be entitled to deduct, pursuant to subparagraph 20(1)(c)(i), the lesser of (i) the interest paid or payable in respect of the year (depending on the method regularly followed by the Fund in computing its income for purposes of the Act) on the third party debt or (ii) a reasonable amount in respect thereof.

B. Provided that the property transferred is capital property or eligible capital property and a joint election under subsection 97(2) is filed in prescribed form within the prescribed time in subsection 96(4) or 96(5), the rules in

subsection 97(2) will apply to the transfer of the Marks and the assignment of rights under the Licence and Royalty Agreement by MCo-Amalco to LP described in paragraph 39 above, in the manner and as described in paragraph 41 above.

C. Subject to the application of subsection 69(11), provided that the property transferred is an eligible property within the meaning assigned by

subsection 85(1.1) and a joint election under subsection 85(1) is filed in prescribed form within the prescribed time in subsection 85(6) or 85(7), the rules in subsection 85(1) will apply to the transfer of the Mco-Amalco Common Shares and Mco-Amalco Notes by the Fund to MFC described in paragraph 50 above, in the manner and as described in paragraph 51 above.

D. Paragraph 87(2)(e.1) will apply as a result of the amalgamation described in paragraph 52 above, such that Amalco-MFC will be considered to be the same corporation as and a continuation of MCo-Amalco for purposes of computing the ACB to Amalco-MFC of the LP Units.

E. The Fund will not be considered to have disposed of its property and resettled a new trust by virtue of the amendments to the Declaration of Trust of the Fund described in paragraph 54 above.

F. Fund Unitholders will not be considered to have disposed of any portion of their Fund Units by virtue of the amendments to the Declaration of Trust of the Fund described in paragraph 54 above.

G. Provided that subsection 132(7) is not applicable to the Fund at the Transfer Time, Amalco-MFC will, at the Transfer Time, qualify as a mutual fund corporation within the meaning assigned by subsection 131(8) and subsection 131(8.1) will not apply to Amalco-MFC at that time.

H. Provided that:

a) at the Transfer Time, as defined in paragraph 56 above, Amalco-MFC is a mutual fund corporation within the meaning of subsection 131(8) and the Fund is a mutual fund trust within the meaning of subsection 132(6);

b) at the Transfer Time, the property transferred by Amalco-MFC to the Fund has an aggregate FMV equal to at least 90% of the FMV of all property owned by Amalco-MFC; and

c) Amalco-MFC and the Fund jointly elect, in prescribed form within the prescribed time in paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(2);

the transactions described in paragraphs 56 and 62 above will constitute a "qualifying exchange" such that the rules in subsection 132.2(1) will apply to such transactions.

For greater certainty:

Any losses that may be incurred by LP as a result of the application of section 132.2, including losses that may result from the cost of the Special Fund Units being set by that section, will be denied if LP is subject to the application of subclause 132.2(3)(g)(iv)(C)(I) as proposed to be introduced by the Draft Amendments and consequently will not result in an adjustment under subparagraph 53(2)(c)(i) to the ACB of the LP Units owned by the Fund.

I. Provided that the property transferred is capital property and a joint election under subsection 97(2) is filed in prescribed form within the prescribed time in subsection 96(4) or 96(5), the rules in subsection 97(2) will apply to the transfer of the Amalco-MFC Class B Shares by the Fund to LP described in paragraph 59 above, in the manner and as described in paragraph 60 above.

J. The provisions of subsections 15(1), 56(2), 56(4), 69(4), 105(1) or 246(1) will not apply in respect of the renunciation described in paragraph 63 above. For greater certainty, GP Trust and LP will not be considered to have received, or deemed to have received, proceeds of disposition under paragraph 69(1)(b), and the Fund will not be considered to have received, or deemed to have received an amount or benefit as a result of the renunciation described in paragraph 63 above.

K. The consolidation of the Fund Units held by Fund Unitholders, as described in paragraph 65 above, will not result in a disposition of Fund Units by the Fund Unitholders.

L. Immediately after the transactions described in paragraph 64 above, the ACB of the LP Units owned by the Fund will be equal to the aggregate of the following amounts: (i) the amount deemed to be the cost of the LP Units acquired by the Fund in subparagraph 56(a) above as determined under paragraph 132.2(1)(c), and (ii) the elected amount described in paragraph 60 above which will be added to the ACB of LP Units owned by the Fund in accordance with

subparagraph 97(2)(b)(i) as a result of the transfer described in paragraph 59 above.

M. Section 253.1 will apply in respect of the proposed transactions such that neither Amalco-MFC nor the Fund will be considered to carry on any business or other activity of LP, for purposes of paragraph 131(8)(b) or paragraph 132(6)(b) respectively, solely because of the acquisition and holding of the LP Units.

N. Subsection 245(2) will not be applied to redetermine any of the tax consequences confirmed in rulings given above solely as a result of the transactions described herein.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed within six months of the date of this letter.

V. Opinions

A. Provided that subsection 132(7) is not applicable to the Fund at the Transfer Time, for purposes of the definition of "qualifying exchange" in subsection 132.2(1) as that subsection is proposed to be amended by the Draft Amendments, Amalco-MFC will, at the Transfer Time, qualify as a mutual fund corporation within the meaning assigned by subsection 131(8) as that subsection is proposed to be amended by the Draft Amendments and subsection 131(8.1) will not apply to Amalco-MFC at that time.

B. Provided that:

a) at the moment that is the transfer time for purposes of the definition of "qualifying exchange" in subsection 132.2(1), as that subsection is proposed to be amended by the Draft Amendments, Amalco-MFC is a mutual fund corporation within the meaning of subsection 131(8), as that subsection is proposed to be amended by the Draft Amendments, and the Fund is a mutual fund trust within the meaning of subsection 132(6), as that subsection is proposed to be amended by the Draft Amendments;

b) at the moment that is the transfer time for purposes of the definition of "qualifying exchange" in subsection 132.2(1), as that subsection is proposed to be amended by the Draft Amendments, subsection 131(8.1) is not applicable to Amalco-MFC and subsection 132(7) is not applicable to the Fund;

c) at the moment that is the transfer time for purposes of the definition of "qualifying exchange" in subsection 132.2(1), as that subsection is proposed to be amended by the Draft Amendments, the property transferred by Amalco-MFC to the Fund has an aggregate FMV equal to at least 90% of the FMV of all property owned by Amalco-MFC; and

d) Amalco-MFC and the Fund jointly elect, in prescribed form within the prescribed time in paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(1), as that subsection is proposed to be amended by Draft Amendments,

the transactions described in paragraphs 56 and 62 will constitute a "qualifying exchange" within the meaning of subsection 132.2(1), as that subsection is proposed to be amended by the Draft Amendments, such that the rules in subsections132.2(2) through (4) and subsections 132.2(6) and (7), as those subsections are proposed to be amended or introduced by the Draft Amendments, will apply to such transactions.

For greater certainty:

Any losses that may be incurred by LP as a result of the application of section 132.2, as that section is proposed to be amended by the Draft Amendments, including losses that may result from the cost of the Special Fund Units being set by this section, as that section is proposed to be amended by the Draft Amendments, will be denied if LP is subject to the application of subclause 132.2(3)(g)(iv)(C)(I) as proposed to be introduced by the Draft Amendments and consequently will not result in an adjustment under subparagraph 53(2)(c)(i) to the ACB of the LP Units owned by the Fund.

C. Immediately after the transactions described in paragraph 64 above, the ACB of the LP Units owned by the Fund will be equal to the aggregate of the following amounts: (i) the amount deemed to be the cost of the LP Units acquired by the Fund in subparagraph 56(a) above as determined under paragraph 132.2(4)(b), as that paragraph is proposed to be introduced by the Draft Amendments, and (ii) the elected amount described in paragraph 60 above which will be added to the ACB of LP Units owned by the Fund in accordance with subparagraph 97(2)(b)(i) as a result of the transfer described in paragraph 59 above.

D. Section 253.1, as that section is proposed to be amended by the Draft Amendments, will apply in respect of the Proposed Transactions such that neither Amalco-MFC nor the Fund will be considered to carry on any business or other activity of LP, for purposes of paragraph 131(8)(b) or paragraph 132(6)(b) respectively, as those paragraphs are proposed to be amended by the Draft Amendments, solely because of the acquisition and holding of the LP Units.

Yours truly,

For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch