Income Tax Severed Letters - 2006-08-18

Principal Issues: 1.Is the requirement to establish a cash collateral account (the "Collection Account") acceptable, that is not economically obliging the borrower to repay the loan? 2. Are the events of default under the loan agreement acceptable events of default? 3.Are the EBITDA and negative covenant provisions under the loan agreement acceptable? 4. Is the requirement for Payment with respect to Net Asset Proceeds acceptable?

Position: 1.YES 2. YES 3. YES 4. YES

Reasons: Corporation is in financial difficulty. It is the terms of the loan that compel early repayment and the Loan precludes such use of the Collection Account. The Credit Agreement contain acceptable events of default and the payment terms with respect to EBITDA and Net Asset Proceeds are acceptable provisions as those types of Rulings have been given before.

Principal Issues: The REIT has acquired an indirect interest in real property located in Canada through its investment in a unit trust that is a limited partner of a limited partnership that holds the real property in co-ownership with other parties. XXXXXXXXXX and the financial institutions providing mortgages on the real property require the REIT and other co-owners to guarantee jointly and severally, or solidarily, the indebtedness on the real property. Will the issuance of guarantees by the REIT on the mortgages held on the properties for the benefit of the REIT and the other co-owners be considered an undertaking other than investing funds in property such that the REIT would not qualify as a mutual fund trust under 132(6)(b)?

Position: No, a guarantee issued in the situation described in the ruling will not, in and by itself, disqualify the REIT as a mutual fund trust as defined in 132(6)(b).

Reasons: The REIT will receive no fee for the guarantee and the other co-owners will be jointly and severally, or solidarily, liable for the indebtedness on the property. In addition, each guarantor will enter into an indemnity agreement with each other guarantor in respect of the indebtedness. The Supreme Court of Canada has opined that an undertaking can be made of an array of activities. Even though there is no case law dealing with the requirement that the only undertaking be the investing of funds, the courts have considered in several cases dealing with other issues that a guarantee can be part and parcel of an investment provided that the level of integration between the guarantees and the investing activities is sufficiently high to make sure that the undertaking blends with the investing of funds because a guarantee is an undertaking by itself. It is reasonable to conclude in this case that the degree of integration between the investment of the funds and the guarantee is sufficiently high that the guarantee will not be considered to be a separate undertaking.

Principal Issues: Arrangement whereby XXXXXXXXXX insures a loan given for on-reserve housing that is partially indemnified by a Trust and whereby the Trust is indemnified by the Band - are amounts paid out by the Trust to honour its indemnity deductible?

Position: Amounts made payable are deductible

Reasons: Trust earns business income from which to deduct payments made

Principal Issues: Whether transferring the business of the income trust's corporate subsidiary to a partnership on a rollover basis using section 85, 97(2) and 132.2 meets the requirements of the Act and is within policy. Before the proposed transactions, the trust owns shares of the corporate subsidiary that carries on a business. At the end of the proposed transactions, it owns a limited partnership interest and shares of the general partner of a partnership that carries on that business.

Position: The proposed transactions meet the requirements of the Act and rulings on the various rollover provisions and section 245 are granted.

Reasons: The provisions of the Act; the trustees of the trust do not form the majority of the directors of the corporate general partner.