30 November 1995 Ruling 9615983 - DISTRESS PREFERRED SHARE RULING

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Distress Preferred Share proposal

Position TAKEN:

Favourable ruling issued.

Reasons FOR POSITION TAKEN:

Financial difficulty criteria met and utilization of acceptable financial reorganization structure.

XXXXXXXXXX							961598
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX.

Unless otherwise specified, all references to statute are to the Income Tax Act.

You advise that to the best of your knowledge and that of XXXXXXXXXX, none of the issues involved in the ruling request has been considered by a taxation services office or a taxation centre in connection with a tax return already filed, and none of the issues involved in the ruling request is the subject of any notice of objection or is under appeal.

Our understanding of the facts, proposed transactions and their purposes is as follows.

FACTS

1. XXXXXXXXXX

XXXXXXXXXX is a "private corporation" and a "taxable Canadian corporation" within the meaning assigned to these expressions by subsection 89(1) and a "Canadian-controlled private corporation" within the meaning assigned to this expression by subsection 125(7). The corporate account number is XXXXXXXXXX Income tax returns are filed in the XXXXXXXXXX tax services office.

XXXXXXXXXX current fiscal period is XXXXXXXXXX. XXXXXXXXXX is a "taxable Canadian corporation" as defined in subsection 89(1).

XXXXXXXXXX is a bank governed by the Bank Act and is a "taxable Canadian corporation" as defined in subsection 89(1).

2.XXXXXXXXXX is a wholly-owned subsidiary of XXXXXXXXXX.

XXXXXXXXXX has no assets or liabilities of its own other than its shares in XXXXXXXXXX.

XXXXXXXXXX

3. XXXXXXXXXX

4. XXXXXXXXXX

5. XXXXXXXXXX

6.XXXXXXXXXX is indebted to a number of creditors ("lenders") in respect of the following loans XXXXXXXXXX (dollar value indicates the principal amount of long-term indebtedness plus accrued interest less insurance policy loans at XXXXXXXXXX.

A. XXXXXXXXXX (Approximately XXXXXXXXXX). (These individual debts will be referred to collectively as XXXXXXXXXX)

XXXXXXXXXX mortgage on XXXXXXXXXX TOTAL = XXXXXXXXXX

XXXXXXXXXX mortgage on XXXXXXXXXX TOTAL = XXXXXXXXXX

XXXXXXXXXX mortgage on XXXXXXXXXX TOTAL = XXXXXXXXXX

XXXXXXXXXX loan debenture XXXXXXX TOTAL = XXXXXXXXXX

Included in the above debts is $XXXXXXXXXX in accrued interest to XXXXXXXXXX which XXXXXXXXXX has agreed to capitalize as part of the distress preferred share issue. To be added is a pro-rata share of the costs of the refinancing as mentioned in paragraph 23 below.

B. XXXXXXXXXX (Approximately XXXXXXXXXX)
XXXXXXXXXX loan, bearing interest at XXXXXXXXXX

Included in this debt is $XXXXXXXXXX in accrued interest to XXXXXXXXXX which XXXXXXXXXX has agreed to capitalize as part of the distress preferred share issue.

C. XXXXXXXXXX (Total of XXXXXXXXXX)
XXXXXXXXXX mortgage XXXXXXXXXX

D. XXXXXXXXXX
XXXXXXXXXX mortgage XXXXXXXXXX

E. XXXXXXXXXX
XXXXXXXXXX promissory note XXXXXXXXXX

F. XXXXXXXXXX
XXXXXXXXXX mortgage XXXXXXXXXX

The proceeds of each of the above borrowings were used by XXXXXXXXXX to XXXXXXXXXX.

7.The Lenders, all financial institutions that are "taxable Canadian corporations" and "specified financial institutions" ("SFI") within the meanings assigned to those terms in subsections 89(1) and 248(1) respectively, deal with XXXXXXXXXX and its' shareholders at arms' length within the meaning assigned to this expression by subsection 251(1).

8. XXXXXXXXXX

9. XXXXXXXXXX

10.XXXXXXXXXX is currently in serious financial difficulty. XXXXXXXXXX suffered losses of XXXXXXXXXX.

11.XXXXXXXXXX currently operates without an operating line of credit or overdraft privileges due to its present financial situation. Therefore positive cash flows are only possible through deferred mortgage payments or through the withholding of cheques to trade creditors.

12.XXXXXXXXXX lenders. XXXXXXXXXX have deferred taking steps to realize principal and interest in arrears XXXXXXXXXX in anticipation of the issue of distress preferred shares.

XXXXXXXXXX have advised XXXXXXXXXX that all amounts owing to them will become immediately due and payable in the event a favourable ruling is not obtained and the DPS are not issued in accordance therewith.

13. XXXXXXXXXX

14. XXXXXXXXXX

(1)XXXXXXXXXX

(2)XXXXXXXXXX

(3)XXXXXXXXXX

XXXXXXXXXX

15.XXXXXXXXXX Further deferrals have been granted in anticipation of the DPS as outlined in paragraph 12 above.

16.XXXXXXXXXX is unable to raise additional financing from other sources. All of the assets of XXXXXXXXXX have been pledged as security including XXXXXXXXXX. Guarantees by XXXXXXXXXX and assignments of life insurance and business interruption insurance by XXXXXXXXXX have also been provided as security for certain indebtedness. XXXXXXXXXX also been pledged as security for certain indebtedness.

17.XXXXXXXXXX a wholly-owned subsidiary of XXXXXXXXXX experienced losses in each XXXXXXXXXX fiscal years in the amount of XXXXXXXXXX. With a long-term debt load of $XXXXXXXXXX against total assets of $XXXXXXXXXX as at year end, XXXXXXXXXX is currently running an accumulated deficit of $XXXXXXXXXX and is not in a position to financially assist its parent. XXXXXXXXXX

18.XXXXXXXXXX are unable to alleviate the financial problems within XXXXXXXXXX.

19. XXXXXXXXXX

20.XXXXXXXXXX cash flow projections for the calendar years XXXXXXXXXX indicate continuing deficiencies if the XXXXXXXXXX Debts and XXXXXXXXXX Debt are not converted into share capital as outlined in the proposed transactions described below. The following summarizes the projected cash flows XXXXXXXXXX assuming firstly, that the XXXXXXXXXX Debts remain outstanding and secondly, that the XXXXXXXXXX Debts are converted into share capital as outlined in the proposed transactions described below:

								CASH FLOW		CASH FLOW
				FISCAL YEAR		Without DPS	With DPS

XXXXXXXXXX

Cash flow projections are based upon:

XXXXXXXXXX

PROPOSED TRANSACTIONS - XXXXXXXXXX

The following transactions are proposed with respect to the XXXXXXXXXX debts as described in paragraph 6 above.

XXXXXXXXXX

21.XXXXXXXXXX will incorporate a new corporation ("Subco A") under the CBCA. The first fiscal year end of Subco A will be XXXXXXXXXX. The activities of Subco A will be limited to acquiring, holding and realizing upon certain indebtedness as described below, issuing the shares as described below and activities ancillary thereto.

22.The authorized share capital of Subco A will consist of XXXXXXXXXX common shares all of which will be beneficially owned by XXXXXXXXXX and XXXXXXXXXX classes of non-voting preferred shares (the "Subco A Shares"). The common shares will be issued to XXXXXXXXXX for nominal consideration. The Subco A Shares will have, amongst others, the following attributes:

(a)issuable for $XXXXXXXXXX each;

(b)non-voting (except when an event of default has occurred and is continuing. An event of default includes a failure to pay dividends on a scheduled dividend payment date and a failure to make a payment to a holder of the Subco A Shares as a reduction of capital as and when required);

(c)purchasable for cancellation for an amount equal to its initial stated capital plus accrued and unpaid dividends less any amounts previously paid out by way of a return of capital as contemplated in paragraphs 28 and 29 below (the "Purchase Amount");

(d)monthly preferential cumulative dividends at a fixed rate of XXXXXXXXXX%;

(e)in the event of a liquidation, dissolution or winding-up of Subco A, the holders of the Subco A Shares will be entitled to receive in priority to the holders of common shares an amount equal to the Purchase Amount.

23.XXXXXXXXXX has also agreed to advance funds to XXXXXXXXXX to allow XXXXXXXXXX to pay for the portion of the costs of the refinancing proposed herein that may reasonably be considered to relate to the XXXXXXXXXX Debts. The XXXXXXXXXX refinancing costs are estimated at $XXXXXXXXXX as noted in paragraph 20 above. Such amount advanced will be included in the debts to be refinanced with the Subco A Shares. Furthermore, XXXXXXXXXX proposes to capitalize all interest on the XXXXXXXXXX Debts which will have accrued to the day scheduled for the completion of the distress preferred share refinancing described herein (the "closing date"). The date of closing is anticipated to occur prior to XXXXXXXXXX. All XXXXXXXXXX Debts will be rescheduled to mature within a few days prior to the fifth anniversary of the closing date.

XXXXXXXXXX

24.Subco A will borrow on a daylight loan basis (the "Daylight Loan") from XXXXXXXXXX an amount equal to the aggregate of the XXXXXXXXXX Debts of approximately $XXXXXXXXXX as described in paragraph 6 above. Subco A will immediately use the funds so borrowed to purchase from XXXXXXXXXX the XXXXXXXXXX Debts owing by XXXXXXXXXX and held by XXXXXXXXXX along with related security.

XXXXXXXXXX

XXXXXXXXXX

Subco A will guarantee the present and future obligations of XXXXXXXXXX to XXXXXXXXXX under the XXXXXXXXXX Put Agreement referred to in paragraph 35 and will pledge the XXXXXXXXXX Debts and related security in support of the guarantee. Subco A will enter into an agreement with XXXXXXXXXX pursuant to which XXXXXXXXXX will have the right to purchase each XXXXXXXXXX Debt and related security from Subco A for an amount equal to the amount of that XXXXXXXXXX Debt.

25.XXXXXXXXXX will subscribe for XXXXXXXXXX classes of Subco A Shares, XXXXXXXXXX representing the number of XXXXXXXXXX Debts owed to XXXXXXXXXX by XXXXXXXXXX. The aggregate subscription price XXXXXXXXXX will be equal to the aggregate amounts of the XXXXXXXXXX Debts which XXXXXXXXXX has sold to Subco A with the subscription price for one class matching the amount of one XXXXXXXXXX Debt. The aggregate amount of the proceeds from the issue of each class of Subco A Shares will be added to Subco A's stated capital account maintained for that class of Subco A Shares. The Subco A Shares will be issued for $XXXXXXXXXX per share.

26.XXXXXXXXXX will then sell the XXXXXXXXXX separate classes of Subco A Shares to XXXXXXXXXX for a sale price of $XXXXXXXXXX per share XXXXXXXXXX.

27.Subco A will use the proceeds of the subscription referred to in paragraph 25 above to repay the Daylight loan referred to in paragraph 24.

28.XXXXXXXXXX will agree to make payments to Subco A as contributions of capital to provide Subco A with sufficient funds to meet Subco A's required dividend payments on the Subco A Shares, and any fees and expenses incurred by Subco A in connection with the transactions described herein. It will be agreed that such capital contributions will be regarded as funds held for the benefit of XXXXXXXXXX until such time as Subco A requires the funds to make these payments. In addition, it will be agreed that XXXXXXXXXX will make the scheduled monthly repayments of principal on the XXXXXXXXXX Debts held by Subco A and that Subco A will use the funds when received to make payments to XXXXXXXXXX by way of a return of capital on the Subco A shares. The return of capital is a reduction in arriving at the Purchase Amount of the Subco A Shares as described in paragraph 22 above.

29.Notwithstanding the terms and conditions of the Subco A Shares or any return of capital of the Subco A Shares as contemplated by paragraph 28 above, all XXXXXXXXXX Excess Cash Flow ("XXXXXXXXXX arising in a fiscal period shall be applied, subject to paragraph 30 below, to reduce the principal amount of the XXXXXXXXXX Debts owed to Subco A. The portion of XXXXXXXXXX to be applied to pay down each XXXXXXXXXX Debt will be determined by XXXXXXXXXX The application of XXXXXXXXXX in such manner will occur in sufficient time to allow Subco A to make corresponding reductions of capital of the Subco A Shares (in the manner contemplated in paragraph 33 below) on the dividend payment date which is closest to XXXXXXXXXX.

30.The XXXXXXXXXX in respect of a particular fiscal period shall be the cash flow for the period of XXXXXXXXXX and Subco A from all operations XXXXXXXXXX, as would be reported on a Consolidated Statement of Changes in Financial Position, XXXXXXXXXX, prepared in accordance with generally accepted accounting principles, but before outlays for:

(a)the payment of dividends other than dividends paid on the Subco A Shares;

(b)capital expenditures or any payment on capital account other than in respect of:

(i)the purchase or redemption of or the reduction of the capital of the Subco A Shares, other than purchases, redemptions, or capital reductions made in the year in respect of the prior year's XXXXXXXXXX;

(ii)regularly scheduled repayments of indebtedness incurred in the normal and ordinary course of business and in existence at the date the Subco A shares are issued;

(iii)repayments of additional debt incurred for the specific purpose of funding current operating requirements;

(iv)repayments of additional debt incurred for the specific purpose of enabling Subco A to purchase, redeem, or reduce the capital in respect of the Subco A Shares as referred to in (i) above, or to pay dividends thereon;

(iv)XXXXXXXXXX incurred in the normal and ordinary course of the existing business, XXXXXXXXXX;

(c)repayments of shareholders loans or redemptions of any of the shares of XXXXXXXXXX, and

(d)loans to shareholders, directors and officers of XXXXXXXXXX or other persons, firms or corporations.

For purposes of this definition the XXXXXXXXXX:

(a)the cash flow will include not only the cash flow from operations but also the cash flow generated from the sale of properties securing the XXXXXXXXXX debt, any amounts received under the life insurance policies currently charged in favour of XXXXXXXXXX and subject to paragraph 30(d) below, any amounts received under any insurance policy held in relation to any of the properties securing any of the XXXXXXXXXX Debts.

(b)the foregoing shall be adjusted as appropriate to avoid any unintended duplication of amounts,

(c)additional debt should not include a debt which arose as a result of the use of cash or funds for a purpose not envisaged herein, and

(d)proceeds of insurance received in a particular period in respect of damage or destruction to property but used, with the consent of XXXXXXXXXX, in any subsequent year to repair or replace such property, shall not be included in calculating ECF for the period of receipt but shall be included in calculating the ECF for the subsequent year in which such proceeds are so used, provided that such proceeds are set aside, with the consent of XXXXXXXXXX, in the period of receipt to repair or replace such property, and not used for any other purpose.

It is intended that cash flow savings realized from this refinancing of XXXXXXXXXX Debts be applied to the XXXXXXXXXX Debts. XXXXXXXXXX has agreed, however, that XXXXXXXXXX can be used to fund the obligations on the Subco B Shares, defined in paragraph 37, if the cash flow generated from the properties which secured the XXXXXXXXXX Debts (XXXXXXXXXX) is insufficient to fund the dividend and share redemption requirements on the Subco B Shares. XXXXXXXXXX

31.The articles of Subco A will provide that there will be no transfer of the common shares of Subco A without the consent of XXXXXXXXXX has agreed not to create any encumbrance on the common shares which it owns in Subco A. A unanimous shareholders agreement to be entered into between the shareholders of Subco A will provide that XXXXXXXXXX as voting shareholder will vote such that:

(a)no transfer or encumbrance of the assets of Subco A will be made other than as permitted by the agreements relating to the refinancing; and

(b)other than as contemplated therein or in such refinancing agreements, Subco A will not carry on any activities; engage in any business transaction; incur indebtedness, create any security over its assets; make any guarantee; amalgamate, merge or consolidate; declare or pay any dividends (other than on the Subco A Shares); or purchase or redeem any of its shares (other than the Subco A Shares).

32.Subject to the operation of any applicable law to which Subco A is subject, Subco A will be wound up without any undue delay after the earlier of:

(a)the time at which all of the Subco A Shares are repurchased, redeemed or cancelled, or

(b)the fifth anniversary of the closing date.

If Subco A is precluded by law from repurchasing all of the shares issued by it by the time referred to in paragraph 32(b) above, then Subco A will repurchase the shares on the first business day thereafter that it is not so precluded.

33. XXXXXXXXXX

34.XXXXXXXXXX will enter into an agreement (Put/Call Agreement") with XXXXXXXXXX, pursuant to which, among other things:

(a)XXXXXXXXXX will be granted the right to sell all of its Subco A Shares to XXXXXXXXXX in certain events including any of the following:

(i)if any representations, warranties or undertakings under the transaction documents prove to have been materially incorrect;

(ii)if XXXXXXXXXX is not entitled to the benefit of any portion of the rulings requested herein; and

(iii)if Subco A fails to pay dividends when due or fails to make returns of capital on the Subco A Shares when required;

(b)XXXXXXXXXX will be granted a right to require XXXXXXXXXX to sell its Subco A Shares to XXXXXXXXXX upon the occurrence of certain events;

(c)the purchase price per Share (the "Purchase Price") to be paid pursuant to paragraph 34(a) or (b) above will be equal to the Purchase Amount (defined in paragraph 22) of such Subco A Shares plus such additional amount as may be required to put XXXXXXXXXX in the same position as if all accrued and unpaid dividends had been received by XXXXXXXXXX as tax-free inter-corporate dividends.

(d)XXXXXXXXXX will put an amount on deposit with XXXXXXXXXX. The deposit will bear interest at the rate of XXXXXXXXXX% being the market rate applicable to a five year deposit offered by XXXXXXXXXX or other comparable financial institution. The funds so deposited by XXXXXXXXXX will be used in the business of XXXXXXXXXX in the same manner as its other general funds are used. The funds on deposit will be released as amounts are paid out to XXXXXXXXXX in respect of the Subco A Shares by way of a reduction of capital to correspond to the decreased risk of XXXXXXXXXX.

35.XXXXXXXXXX will enter into an agreement (the "XXXXXXXXXX Put Agreement") which will provide that XXXXXXXXXX will, upon the occurrence of certain events, at the option of XXXXXXXXXX purchase the Subco A Shares for a purchase price equal to the purchase price paid to XXXXXXXXXX for the Subco A Shares pursuant to the Put/Call Agreement. Any unpaid balance of the purchase price owed by XXXXXXXXXX to XXXXXXXXXX will effectively be subject to the existing terms of the XXXXXXXXXX Debts as Subco A will be required to transfer the XXXXXXXXXX Debts and related security to

XXXXXXXXXX

XXXXXXXXXX will pledge its common shares in Subco A to XXXXXXXXXX as security for its obligations under the XXXXXXXXXX Put Agreement.

PROPOSED TRANSACTIONS - XXXXXXXXXX

The following transactions are proposed with respect to the XXXXXXXXXX Debt as defined in paragraph 6 above.

XXXXXXXXXX

36.XXXXXXXXXX will incorporate a new corporation ("Subco B") under the CBCA. Subco B will be a taxable Canadian corporation. The first fiscal year end of Subco B will be XXXXXXXXXX The activities of Subco B will be limited to acquiring, holding and realizing upon certain indebtedness as described below, issuing the shares as described below and activities ancillary thereto.

37.The authorized share capital of Subco B will consist of XXXXXXXXXX common shares all of which will be beneficially owned by XXXXXXXXXX and XXXXXXXXXX non-voting preferred shares (the "Subco B Shares"). The common shares will be issued to XXXXXXXXXX for nominal consideration. The Subco B Shares will have, amongst others, the following attributes:

(a)issuable for $XXXXXXXXXX each;

(b)non-voting (except when an event of default has occurred and is continuing. An event of default includes a failure to pay dividends on a scheduled dividend payment date and a failure to make a payment to a holder of the Subco B Shares as a reduction of capital as and when required);

(c)retractable following certain events (a "retraction event");

(d)redeemable or may be purchased for cancellation for an amount equal to its initial stated capital plus accrued and unpaid dividends less any amounts previously paid out by way of a return of capital as contemplated in paragraphs 42 and 43 below (the "Purchase Amount");

(e)monthly preferential cumulative dividends at a fixed rate of XXXXXXXXXX%;

(f) in the event of a liquidation, dissolution or winding-up of Subco B, the holders of the Subco A Shares will be entitled to receive in priority to the holders of common shares an amount equal to the Purchase Amount.

38.XXXXXXXXXX has also agreed to advance funds to XXXXXXXXXX to allow XXXXXXXXXX to pay for the portion of the costs of the refinancing proposed herein that may reasonably be considered to relate to the XXXXXXXXXX Debts. The XXXXXXXXXX refinancing costs are estimated at $XXXXXXXXXX as noted in paragraph 20 above. Such amount advanced will be included in the debts to be refinanced with the Subco B Shares. Furthermore, XXXXXXXXXX proposes to capitalize all interest on the XXXXXXXXXX Debts which will have accrued to the day scheduled for the completion of the distress preferred share refinancing described herein (the "closing date"). The date of closing is anticipated to fall on or about XXXXXXXXXX. The XXXXXXXXXX Debt is scheduled to mature within a few days prior to the XXXXXXXXXX anniversary of the closing date.

39.Subco B will borrow on a daylight loan basis (the "Daylight Loan") from XXXXXXXXXX an amount equal to the XXXXXXXXXX Debt of approximately $XXXXXXXXXX as described in paragraph 6 above. Subco B will immediately use the funds so borrowed to purchase from XXXXXXXXXX the XXXXXXXXXX Debt owing by XXXXXXXXXX and held by XXXXXXXXXX along with related security.

XXXXXXXXXX

XXXXXXXXXX

Subco B will guarantee the present and future obligations of XXXXXXXXXX under the XXXXXXXXXX Put Agreement referred to in paragraph 51 and will pledge the XXXXXXXXXX Debts and related security in support of the guarantee. Subco B will enter into an agreement with XXXXXXXXXX pursuant to which XXXXXXXXXX will have the right to purchase the XXXXXXXXXX Debt and related security from Subco B for an amount equal to the amount of the XXXXXXXXXX Debt.

40.XXXXXXXXXX will subscribe for the Subco B Shares for an aggregate subscription price, XXXXXXXXXX, equal to the amount of the XXXXXXXXXX Debt which XXXXXXXXXX has sold to Subco B. The aggregate amount of the proceeds from the issue of the Subco B Shares will be added to Subco B's stated capital account maintained for the Subco B Shares. The Subco B Shares will be issued for $XXXXXXXXXX per share.

41.Subco B will use the proceeds of the subscription referred to in paragraph 40 above to repay the XXXXXXXXXX loan referred to in paragraph 39 above.

42.XXXXXXXXXX will agree to make payments to Subco B as contributions of capital to provide Subco B with sufficient funds to meet Subco B's required dividend payments on the Subco B Shares, and any fees and expenses incurred by Subco B in connection with the transactions described in paragraphs 38 and 39 above. It will be agreed that such capital contributions will be regarded as funds held for the benefit of XXXXXXXXXX until such time as Subco B requires the funds to make these payments. In addition, it will be agreed that XXXXXXXXXX will make the scheduled monthly repayments of principal on the Debts held by Subco B and that Subco B will use the funds when received to make payments to XXXXXXXXXX by way of a return of capital on the Subco B Shares. The return of capital is a reduction in arriving at the Purchase Amount of the Subco B Shares as described in paragraph 37 above.

43.Notwithstanding the terms and conditions of the Subco A and B Shares or any return of capital as contemplated by paragraphs 37 and 42 above that may be required by XXXXXXXXXX all Excess Cash Flow ("XXXXXXXXXX") (as defined in paragraph 44 below) arising in each fiscal period shall be applied to make corresponding reductions of capital of the Subco B Shares (in the manner contemplated by paragraph 50 below) on the dividend payment date which is closest to the XXXXXXXXXX.

44.The XXXXXXXXXX in respect of a particular fiscal period shall be the cash flow for the period of XXXXXXXXXX and Subco B from all operations XXXXXXXXXX, as would be reported on a Consolidated Statement of Changes in Financial Position, XXXXXXXXXX, prepared in accordance with generally accepted accounting principles, but before outlays for:

(a)the payment of dividends other than dividends paid on the Subco B Shares;

(b)capital expenditures or any payment on capital account other than in respect of:

(i)the purchase or redemption of or the reduction of the capital of the Subco B Shares, other than purchases, redemptions, or capital reductions made in the year in respect of the prior year's XXXXXXXXXX;

(ii)regularly scheduled repayments of indebtedness incurred in the normal and ordinary course of business and in existence at the date the Subco A shares are issued;

(iii)repayments of additional debt incurred for the specific purpose of funding current operating requirements;

(iv)repayments of additional debt incurred for the specific purpose of enabling Subco B to purchase, redeem, or reduce the capital in respect of the Subco B Shares as referred to in (i) above, or to pay dividends thereon;

(v)XXXXXXXXXX incurred in the normal and ordinary course of the existing business, XXXXXXXXXX;

(c)repayments of shareholders loans or redemptions of any of the shares of XXXXXXXXXX, and

(d)loans to shareholders, directors and officers of XXXXXXXXXX or other persons, firms or corporations.

For purposes of this definition the XXXXXXXXXX:

(a)the cash flow will include not only the cash flow from operations but also the cash flow generated from the sale of properties securing the XXXXXXXXXX debt, any amounts received under the life insurance policies presently held by XXXXXXXXXX, and subject to paragraph 44(d) below, any amounts received under any insurance policy held in relation to any of the properties securing any of the XXXXXXXXXX Debt;

(b)the foregoing shall be adjusted as appropriate to avoid any unintended duplication of amounts;

(c)additional debt should not include a debt which arose as a result of the use of cash or funds for a purpose not envisaged herein, and

(d)proceeds of insurance received in a particular period in respect of damage or destruction to property but used, with the consent of XXXXXXXXXX, in any subsequent year to repair or replace such property, shall not be included in calculating XXXXXXXXXX for the period of receipt but shall be included in calculating the XXXXXXXXXX for the subsequent year in which such proceeds are so used, provided that such proceeds are set aside, with the consent of XXXXXXXXXX, in the period of receipt to repair or replace such property, and not used for any other purpose.

45.The excess cash flow of XXXXXXXXXX in respect of a particular fiscal period shall be the cash flow for the period of XXXXXXXXXX, from all sources, as would be reported on a Consolidated Statement of Changes in Financial Position, XXXXXXXXXX prepared in accordance with generally accepted accounting principles, but before outlays for:

(a)the payment of dividends other than dividends paid on the Subco A and Subco B Shares;

(b)capital expenditures or any payment on capital account other than in respect of:

(i)the purchase or redemption of or the reduction of the capital of the Subco A and Subco B Shares, other than purchases, redemptions, or capital reductions made in the year in respect of the prior year's XXXXXXXXXX;

(ii)repayments of indebtedness incurred in the normal and ordinary course of business and in existence at the date the Subco A and Subco B shares are issued;

(iii)repayments of additional debt incurred for the specific purpose of funding current operating requirements;

(iv)repayments of additional debt incurred for the specific purpose of enabling Subco A and Subco B to purchase, redeem, or reduce the capital in respect of the Subco A and Subco B Shares as referred to in (i) above, or to pay dividends thereon;

(v)reasonable capital expenditures or payments on capital account incurred in the normal and ordinary course of the existing business, and repayments of additional debt for the specific purpose of making such capital expenditures or payments on capital account.

(c)repayments of shareholders loans or redemptions of any of the shares of XXXXXXXXXX, and

(d)loans to shareholders, directors and officers of XXXXXXXXXX or other persons, firms or corporations.

For purposes of this definition the XXXXXXXXXX:

(a)the foregoing shall be adjusted as appropriate to avoid any unintended duplication of amounts;

(b)additional debt should not include a debt which arose as a result of the use of cash or funds for a purpose not envisaged herein, and

(c)proceeds of insurance received in a particular period in respect of damage or destruction to property but used in any subsequent year to repair or replace such property, shall not be included in calculating XXXXXXXXXX for the period of receipt but shall be included in calculating the XXXXXXXXXX for the subsequent year in which such proceeds are so used, provided that such proceeds are set aside in the period of receipt to repair or replace such property, and not used for any other purpose.

Included in the XXXXXXXXXX calculation for XXXXXXXXXX consolidated financial statements, XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

46.Notwithstanding the terms and conditions of the Subco A and Subco B Shares, the reduction of capital to be made to the Subco A and B Shares that may be required by XXXXXXXXXX and the excess cash flow formulations negotiated between XXXXXXXXXX defined in paragraph 45 above, XXXXXXXXXX defined in paragraph 30 above, the XXXXXXXXXX defined in paragraph 44 above and the XXXXXXXXXX defined in paragraph 45 above) all "ECF" as defined in paragraph 47 below shall, at a minimum, be applied to either redeem or reduce the capital of the Subco A and Subco B Shares within XXXXXXXXXX days after the end of that fiscal period.

47.ECF in respect of a particular fiscal period shall be the change or increase in cash flow for such period of XXXXXXXXXX, as would be reported on a Consolidated Statement of Changes in Financial Position prepared in accordance with generally accepted accounting principles, if only directly or indirectly wholly-owned subsidiaries of XXXXXXXXXX, were so included, but before outlays for:

(a)the payment of dividends other than dividends paid on any DPS or dividends paid to XXXXXXXXXX from any of its directly or indirectly owned subsidiaries;

(b)capital expenditures or any payment on capital account, other than in respect of the following:

(i) the purchase or redemption of any of the DPS other than purchases or redemptions made in the period in respect of the prior period's ECF,

(ii)repayments of indebtedness incurred in the normal and ordinary course of business and in existence at the date the DPS are issued,

(iii)repayments of additional debt incurred for the specific purpose of funding current operating requirements:

(iv)expenditures or payments between XXXXXXXXXX and its directly and indirectly wholly-owned subsidiaries;

(v) reasonable capital expenditures or payments on capital account incurred in the normal and ordinary course of the existing business and repayments of additional debt for the specific purpose of making such capital expenditures or payments on capital account;

(vi) repayments of additional debt incurred for the specific purpose of enabling the Subco A and Subco B to redeem or reduce the capital of the DPS or to pay dividends on the DPS;

(c)repayments of loans to shareholders of XXXXXXXXXX or persons related to shareholders; and

(d) loans to directors, officers and shareholders of XXXXXXXXXX or to other persons, firms or corporations except for any loan(s) between XXXXXXXXXX from any of their directly or indirectly owned subsidiaries;

For the purposes of this definition of ECF:

(1)the foregoing shall be adjusted as appropriate to avoid any unintended duplication of amounts;

(2) additional debt should not include a debt which arose as a result of the use of cash or funds for a purpose not envisaged herein, and

(3)proceeds of insurance received in a particular period in respect of damage or destruction to property which are intended to be used in the immediately following period to repair or replace such property, shall not be included in calculating ECF for the period of receipt but shall be included in calculating the ECF for the immediately following fiscal period, provided that such proceeds are set aside, with the consent of XXXXXXXXXX, or other lenders as appropriate, in the period of receipt to repair or replace such property, and not used for any other purpose.

XXXXXXXXXX

48. XXXXXXXXXX

(a)XXXXXXXXXX

(b)XXXXXXXXXX

49.Subject to the operation of any applicable law to which Subco B is subject, Subco B will be wound up without any undue delay after the earlier of:

(a)the time at which all of the Subco B Shares are repurchased, redeemed or cancelled, or

(b)the fifth anniversary of the closing date.

If Subco B is precluded by law from repurchasing all of the shares issued by it by the time referred to in paragraph 49(b) above, then Subco B will repurchase the shares on the first business day thereafter that it is not so precluded.

50.Following the issue of the Shares, XXXXXXXXXX will take all steps as may be necessary under the CBCA to cause Subco B to reduce the stated capital of the Subco B Shares to $XXXXXXXXXX in the aggregate for each class, without any distribution of any amount to the shareholders of Subco B. The amount of the reduction in stated capital will be added to the contributed surplus account of Subco B. The purpose of this reduction in stated capital is to assist Subco B in meeting the solvency test under the CBCA for the payment of dividends on the Subco B Shares. On each dividend payment date and after the payment of dividends on that date, Subco B will increase the stated capital of its Subco B Shares by an amount equal to the principal repayment made by XXXXXXXXXX on the XXXXXXXXXX Debt. Immediately thereafter Subco B will pay the amounts so received from XXXXXXXXXX to the holder of the Subco B Shares by way of a reduction of capital of the Subco B Shares.

51.XXXXXXXXXX will enter into an agreement (the XXXXXXXXXX Put Agreement") which will provide that XXXXXXXXXX will, upon the occurrence of certain events, at the option of XXXXXXXXXX, purchase the Subco B Shares for a purchase price equal to the purchase amount (defined in paragraph 37 above) plus such additional amount as may be required to put XXXXXXXXXX in the same position as if all accrued and unpaid dividends had been received by XXXXXXXXXX as tax-free inter-corporate dividends. Any unpaid balance of the purchase price owed by XXXXXXXXXX to XXXXXXXXXX will effectively be subject to the existing terms of the XXXXXXXXXX Debt as Subco B will be required to transfer the XXXXXXXXXX Debt and related security to XXXXXXXXXX.

XXXXXXXXXX will pledge its common shares in Subco B to XXXXXXXXXX as security for its obligations under the XXXXXXXXXX Put Agreement.

52.XXXXXXXXXX will agree to indemnify XXXXXXXXXX on a tax-adjusted basis for certain matters in relation to the Subco B Shares. Such indemnity may, in certain circumstances, be paid by the payment of additional dividends on the shares.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to convert a large part of XXXXXXXXXX long term debt into share capital and thereby increase XXXXXXXXXX cash flow so as to allow it to continue its operations and to better its overall financial situation by reducing debt service requirements.

RULINGS GIVEN

Provided all relevant facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate, we confirm the following:

A.The shares to be issued to XXXXXXXXXX, as described in paragraph 25 and sold to XXXXXXXXXX as described in paragraph 26 above, and the shares to be issued to XXXXXXXXXX as described in paragraph 40 above, will be:

(a)shares described in subparagraph (e)(iii) of the definition of "term preferred share" in subsection 248(1) of the Act for a period not exceeding five years from the date of their issuance and,

(b)"exempt shares" pursuant to paragraph (c) of the definition thereof in subsection 112(2.6) for that same period

and, accordingly, subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4) of the Act will not apply to deny XXXXXXXXXX or a subsequent Canadian resident corporate purchaser, as the case may be, a deduction under subsection 112(1) of the Act for dividends received or deemed to have been received by it on such shares during such period;

B.No amount will be included in the income of Subco A or Subco B pursuant to paragraphs 12(1)(c) or 12(1)(x) or subsections 12(3), 12(9), 16(1), or 246(1) or section 9 of the Act in respect of capital contributions made or required to be made by XXXXXXXXXX to Subco A or Subco B, as described in paragraphs 28 and 42 above, nor will such amounts constitute proceeds of disposition, as defined in section 54 of the Act, to Subco A or Subco B from the disposition by it of any property;

C.Section 80 of the Act will not apply to XXXXXXXXXX by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX to Subco A or B in respect of the XXXXXXXXXX Debts referred to in paragraphs 24 and 39 above or by virtue of the failure of Subco A or B to demand payment of the XXXXXXXXXX Debts;

D.Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by Subco A or B in the course of borrowing money and issuing shares will be deductible pursuant to paragraph 20(1)(e) of the Act to the extent such expenses are reasonable in the circumstances;

E.The cost amount, within the meaning of subsection 248(1) of the Act, of the Subco A Shares to XXXXXXXXXX, as described in paragraph 25 above, and of the Subco B Shares to XXXXXXXXXX, as described in paragraph 40 above, immediately after their issuance will be equal to the amount paid by XXXXXXXXXX respectively for those shares;

F.The cost amount, within the meaning of subsection 248(1) of the Act, to Subco A of each of the XXXXXXXXXX Debts and to Subco B to the XXXXXXXXXX Debt will, immediately after the respective debts are acquired from XXXXXXXXXX in the case of Subco A, as described in paragraph 24 above, and from XXXXXXXXXX in the case of Subco B, as described in paragraph 39 above, will equal the purchase price paid thereof;

G.No amount will be included in computing the income of XXXXXXXXXX under subsection 56(2) of the Act in respect of any capital contributions made by XXXXXXXXXX to Subco A, as described in paragraph 28 above, or to Subco B as described in paragraph 42 above;

H.If an XXXXXXXXXX Debt(s) are reacquired by XXXXXXXXXX pursuant to agreements described in paragraph 24 above, or if the XXXXXXXXXX Debt is reacquired by XXXXXXXXXX pursuant to agreements described in paragraph 39 above, the cost amount, within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX, as the case me be, of those respective debts immediately after they are acquired will be the purchase price paid therefor;

I.No amount will be included in the income of XXXXXXXXXX pursuant to subsections 15(1) or 246(1) of the Act solely by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX to Subco A in respect of the XXXXXXXXXX Debts or Subco B in respect of the XXXXXXXXXX Debt respectively in paragraphs 24 and 39 above or as a result of the provision of the guarantee by Subcos A and B to XXXXXXXXXX as described in paragraphs 24 and 39 above;

J.Provided that the XXXXXXXXXX Debts and the XXXXXXXXXX Debt arose from one or more loans made by XXXXXXXXXX (with respect to the XXXXXXXXXX Debts) and by XXXXXXXXXX (with respect to the XXXXXXXXXX Debt) in the course of their money lending business, the XXXXXXXXXX Debts reacquired by XXXXXXXXXX as described in paragraph 35 above and the XXXXXXXXXX Debt reacquired by XXXXXXXXXX as described in paragraph 51 above will be considered to have been acquired by XXXXXXXXXX respectively in the ordinary course of their business of lending money for the purposes of paragraphs 20(1)(l) and 20(1)(p) of the Act;

K.Subsection 112(4) of the Act will not apply to any loss realized by XXXXXXXXXX on the XXXXXXXXXX Debts and to XXXXXXXXXX on the XXXXXXXXXX Debt subsequent to the reacquisition of those debts by XXXXXXXXXX in respect of any dividends received by XXXXXXXXXX on the Subco A Shares and to XXXXXXXXXX on the Subco B Shares;

L.Provided that XXXXXXXXXX meets the requirements outlined in paragraph 6209(a) of the Income Tax Regulations (the "Regulations") and the Subco A and B Shares are not "prescribed securities" to XXXXXXXXXX within the meaning assigned by paragraph 6209(b) of the Regulations, such Subco A and B Shares will be "prescribed shares" to XXXXXXXXXX within the meaning assigned by paragraph 6209(a) of the Regulations for the purpose of the definition of "lending asset" in subsection 248(1);

M.The cost amount, within the meaning of subsection 248(1) of the Act, of the Subco A shares acquired by XXXXXXXXXX from XXXXXXXXXX immediately after they are acquired, as described in paragraph 26 above, will be equal to the amount paid by XXXXXXXXXX for those shares;

N.By virtue of paragraph 84(1)(c.3) of the Act, no dividend will be deemed to have been paid by Subco A or Subco B when it increases its stated capital as described in paragraphs 33 and 50 above;

O.No amount will be included in the income of Subco A or Subco B pursuant to subsections 12(3), 12(9), 20(14) or section 9 of the Act in respect of the interest accrual described in paragraphs 24 and 39 above;

P.An amount will be deductible by XXXXXXXXXX pursuant to paragraph 20(1)(c) of the Act in respect of the interest accrual described in paragraphs 24 and 39 above only where the transfer described therein occurs in the taxation year in which the interest accrued.

Q.The fee payable by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 23 above will be deductible by XXXXXXXXXX pursuant to and in accordance with subparagraph 20(1)(e)(ii.2) of the Act.

R.As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings given;

OPINION REQUESTED

1.Provided that XXXXXXXXXX meets the requirements outlined in paragraph 6209(a) of the Income Tax Regulations (the "Regulations") for a particular taxation year and the Subco B Shares are not "prescribed securities" to XXXXXXXXXX within the meaning assigned to that expression by draft paragraph 6209(b) of the regulations and provided this draft paragraph is enacted in substantially the same form as proposed in the draft amendments to the regulations which were issued by the Minister of Finance in June 1995, the Subco B Shares will be "prescribed shares" to XXXXXXXXXX for that taxation year for the purpose of the definition of "lending asset" in subsection 248(1) of the Act.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 issued by Revenue Canada on September 28, 1990 and is binding on the Department provided the preference shares of Newco are issued as described above on or before XXXXXXXXXX. This ruling is based on the Act in its present form and does not take into account the effects of any proposed amendments thereto.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch