30 November 1995 Ruling 9620373 - DPS

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.

Principal Issues:

Distress preferred shares - Parking of shares with 3rd party bank. Lender has original loan at say 12%. Agrees to accept DPS with dividends of 7% so that same after tax return. If unable to use dividend deduction it will "park" shares. If interest rate that it gets on deposit of proceeds from sale of DPS equates to original interest rate, then ok. However, what occurs is that because of interest fluctuations the original lender receives less on its deposit. Third party Bank is receiving a dividend rate greater than it would receive on a similar loan return, therefore agrees to return an amount to original lender to make them whole.

In order to achieve this end the Bank proposes to accept proceeds on deposit and pay market value interest. It will lend on an interest free basis an amount that will allow the vendor to invest (ie: deposit with the Bank) and increase its return up to original interest rate.

Is this any different than non-deductible put fee?

Position:

In our view we see this arrangement as no different than direct payment of put-fee.

Reasons:

The two deposits are linked ie: DPS sale does not stand alone from the interest free loan.

XXXXXXXXXX							962037
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX

We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling with respect to the above-noted taxpayers. We also acknowledge your letters of XXXXXXXXXX and our several telephone conversations.

To the best of your knowledge and that of each particular applicant none of the issues involved in the requested ruling in respect of that particular applicant is being considered by a district office or a taxation centre in connection with a tax return of that particular applicant already filed and none of the issues involved in the requested rulings in respect of that particular applicant is under appeal or objection.

Except as otherwise noted, all statutory references in this ruling application are references to the provisions of the Income Tax Act Canada (the "Act").

Definitions

In this letter, unless otherwise expressly stated or the context otherwise requires:

"Acquired Debt" means the Indebtedness acquired by a Subsidiary from a Particular Lender.

"Assignment and Security Sharing Agreement" means an agreement to be entered into between a Subsidiary, XXXXXXXXXX and a Particular Lender, pursuant to which, inter alia:

such Particular Lender sells the Acquired Debt held by it to such Subsidiary;

such Subsidiary assumes all of such Particular Lender's obligations in respect of such Acquired Debt;

such Subsidiary appoints such Particular Lender to act as its agent in administering such Acquired Debt;

the parties agree that all loan documents and security relating to such Acquired Debt will be held as security for (and all proceeds received therefrom shall be applied against),

first, all costs of enforcement,

second, all obligations owed to the Particular Lender by either or both of XXXXXXXXXX and such Subsidiary under any documentation entered into to implement the Proposed Transactions including, without limitation, the Share Put Agreement, the Debt Put/Call Agreement, the Indemnity Agreement and the Support Agreement or any part of the Acquired Debt reacquired by such Particular Lender;

third, such portion or portions of the Acquired Debt held by such Subsidiary as determined by such Particular Lender, and

fourth, the balance in accordance with the applicable loan documents relating to the Acquired Debt; and

prior to the occurrence of one of certain specified events, the obligation of XXXXXXXXXX to pay interest on such Acquired Debt, in accordance with the loan documents relating thereto, is waived and certain principal payments are rescheduled.

"Buildings" mean:

XXXXXXXXXX;

"Closing Date" means the date on which the Proposed Transactions are to be effective.

(e)"Excess Cash Flow" has the meaning ascribed thereto in paragraph 29 below.

(f) "cost amount" has the meaning ascribed thereto in subsection 248(1).

(g) Put/Call Agreement" means an agreement to be entered into between a Subsidiary and a Particular Lender, after the issue to such Particular Lender of the Preferred Shares to be issued by a Subsidiary, pursuant to which

such Subsidiary will have the right at any time to require such Particular Lender to purchase all (but not less than all), and

such Particular Lender will have the right in certain circumstances to purchase all or any portion of,

the Acquired Debt held by such Subsidiary and acquired from such Particular Lender, together with all related security, at a price equal to the amount of such Acquired Debt at such time.

(h) "Fiscal Year" means 12 consecutive months commencing XXXXXXXXXX;

(i) "Holder" means, in respect of Preferred Shares of a Subsidiary, a person that holds such Preferred Shares;

(j)"Indebtedness" means the XXXXXXXXXX Loans or the XXXXXXXXXX Loans, as appropriate;

(k) "Indemnity Agreement" means an agreement to be entered into between a Subsidiary, XXXXXXXXXX and a Particular Lender pursuant to which, inter alia, XXXXXXXXXX will indemnify such Particular Lender, on a tax-adjusted basis, for inter alia:

any tax, interest or penalties payable by a Particular Lender in respect of dividends on, or the redemption of, Preferred Shares issued by a Subsidiary;

any accrued and unpaid dividends on the Preferred Shares, whether or not declared; and

any losses, expenses, costs or damages incurred or suffered by a Particular Lender as a result of, or in connection with the issuance of or subscription for the Preferred Shares, or the sale or reacquisition thereof to or from a Subsequent Purchaser.

Such indemnity may in certain circumstances be payable by way of an adjustment to the dividends payable on the Preferred Shares.

(l) "Interim Debt Put Agreement" means an agreement to be entered into between a Subsidiary and a Particular Lender pursuant to which such Subsidiary will have the right at any time to require such Particular Lender to purchase the Acquired Debt then outstanding and held by such Subsidiary, at a price equal to the amount of such Acquired Debt. The Interim Debt Put Agreement will be superseded by the Debt Put/Call Agreement between such Subsidiary and such Particular Lender.

(m) "Joint Ventures" means a XXXXXXXXXX;

(n) XXXXXXXXXX;

(o) "XXXXXXXXXX Loans" means the loans made by XXXXXXXXXX to XXXXXXXXXX in the aggregate amount of approximately $XXXXXXXXXX as at XXXXXXXXXX, as more fully described in paragraph 14 below.

(p) XXXXXXXXXX;

(q) "Particular Lender" means XXXXXXXXXX, as appropriate.

(r) "Particular Lender's Dividend Rate" means the XXXXXXXXXX Dividend Rate or the XXXXXXXXXX Dividend Rate, as appropriate.

(s) "Preferred Shares" means one or more classes of preferred shares to be issued by a Subsidiary to a Particular Lender in the Proposed Transactions.

(t) "proceeds of disposition" has the meaning ascribed thereto in paragraph 54(h).

(u) "Proposed Transactions" means the proposed transactions described under the heading "Proposed Transactions" below.

(v) "Realty Lands" means:

XXXXXXXXXX

(w)"Share Pledge" means a pledge of the common shares of a Subsidiary by XXXXXXXXXX to and in favour of a Particular Lender, as continuing collateral security for all of XXXXXXXXXX obligations to such Particular Lender.

(x)"Share Put Agreement" means an agreement to be entered into between a Subsidiary, XXXXXXXXXX and a Particular Lender whereunder a Particular Lender may, in accordance with the terms thereof, require XXXXXXXXXX to acquire all of the Preferred Shares held by a Particular Lender for an amount equal to the issue price of the Preferred Shares plus accrued and unpaid dividends thereon plus any tax thereon.

(y) "XXXXXXXXXX Dividend Rate" means the dividend rate which will result in XXXXXXXXXX receiving the equivalent of a XXXXXXXXXX% interest rate compounded semi-annually after disposing of its Preferred Shares at closing. At the present time, this would translate into a dividend rate of XXXXXXXXXX% per annum fixed at the date the Preferred Shares are issued.

(z) "XXXXXXXXXX Loans" means the loans made by XXXXXXXXXX to XXXXXXXXXX in the aggregate amount of $XXXXXXXXXX as at XXXXXXXXXX, as more fully described in paragraph 14 below.

(aa) "Subsequent Purchaser" means any person that is a taxable Canadian corporation to whom a Particular Lender sells Preferred Shares.

(bb) "Subsidiary" means a corporation that will issue Preferred Shares in the Proposed Transactions.

(cc) "Support Agreement" means an agreement to be entered into between a Subsidiary, XXXXXXXXXX and each Particular Lender, the essential terms of which will include the following:

(i) XXXXXXXXXX will covenant to make periodic contributions of capital to a Subsidiary (as contributed surplus) sufficient to enable a Subsidiary to pay dividends on the Preferred Shares;

(ii) XXXXXXXXXX will covenant to repay, from time to time, sufficient amounts of the principal owing on the Acquired Debt held by a Subsidiary to enable a Subsidiary to effect any required redemptions of the Preferred Shares;

(iii) XXXXXXXXXX will covenant to use its Excess Cash Flow to repay principal owing on the Acquired Debt held by a Subsidiary to enable a Subsidiary to redeem Preferred Shares on a pro rata basis;

(iv) XXXXXXXXXX will covenant to fund all of the ongoing costs and expenses of the operation and administration of a Subsidiary by way of capital contributions to a Subsidiary (as contributed surplus); and

(v) XXXXXXXXXX and a Subsidiary will agree that all contributions of capital and all payments made to a Subsidiary by XXXXXXXXXX to meet XXXXXXXXXX obligations under the agreement will be regarded as funds to be held for the benefit of XXXXXXXXXX until such time as a Subsidiary requires such funds for its own use.

(dd) "taxable Canadian corporation" has the meaning ascribed thereto in paragraph 89(1)(i).

(ee) "Unanimous Shareholder Agreement" means an agreement to be entered into among a Subsidiary and its shareholders that constitutes a unanimous shareholder agreement under the XXXXXXXXXX and that, inter alia, restricts the business that a Subsidiary may carry on and the power of its directors to elect or appoint officers.

(ff) "Vacant Land Mortgages" means the mortgage referred to in paragraph 8 below.

Our understanding of the statements of facts and purpose of the proposed transactions is as follows:

Facts

1.XXXXXXXXXX was formed by amalgamation under the XXXXXXXXXX. It is a taxable Canadian corporation. XXXXXXXXXX.

XXXXXXXXXX is a taxable Canadian corporation, as those terms are defined in the Act.

XXXXXXXXXX operates in Canada through a branch.

Each of XXXXXXXXXX is a restricted financial institution and a specified financial institution as such terms are defined in subsection 248(1) and both deal at arm's length with XXXXXXXXXX.

2.The authorized capital of XXXXXXXXXX consists of an unlimited number of common, preference and Class XXXXXXXXXX shares.

The Class XXXXXXXXXX shares are non-voting common shares.

The preference shares are non-participating, entitled to a non-cumulative dividend of XXXXXXXXXX per share per annum, voting and are redeemable and retractable at $XXXXXXXXXX per share.

There are XXXXXXXXXX issued and outstanding common shares having an aggregate paid-up capital of $XXXXXXXXXX. The common shares are owned by:

			Name					Shares Held

XXXXXXXXXX

None of the Class XXXXXXXXXX or preference shares are issued or outstanding.

3. XXXXXXXXXX.

4.XXXXXXXXXX assets currently include the following:

			Buildings;

			Realty Lands;

			Joint Ventures;

			cash; 

			motor vehicles, furniture and equipment;

			deferred leasing costs;

			deferred financing costs;

			mortgages and loans receivable;

			rents receivable;

			management fees receivable;

			income taxes recoverable;

			prepaid expenses and sundry;

		one common share of XXXXXXXXXX

		XXXXXXXXXX Class XXXXXXXXXX preference, XXXXXXXXXX Class XXXXXXXXXX preference and XXXXXXXXXX common shares of XXXXXXXXXX

		XXXXXXXXXX common shares of XXXXXXXXXX

			XXXXXXXXXX Class XXXXXXXXXX shares of XXXXXXXXXX

			XXXXXXXXXX Class XXXXXXXXXX shares of XXXXXXXXXX

			XXXXXXXXXX

5. XXXXXXXXXX.

6.XXXXXXXXXX was incorporated under the XXXXXXXXXX. It is a taxable Canadian corporation. The authorized capital of XXXXXXXXXX consists of an unlimited number of common shares. There is one common share issued and outstanding which is owned by XXXXXXXXXX. XXXXXXXXXX has no assets. Its liabilities consist primarily of a loan payable to XXXXXXXXXX.

7.XXXXXXXXXX was incorporated under the XXXXXXXXXX. It is a taxable Canadian corporation. The authorized capital of XXXXXXXXXX consists of an unlimited number of common shares, an unlimited number of Class XXXXXXXXXX preference shares and an unlimited number of Class XXXXXXXXXX preference shares. The Class XXXXXXXXXX preference shares are non-voting, entitled to a cumulative preferential dividend of XXXXXXXXXX% per annum and are redeemable and retractable at $XXXXXXXXXX per share. The Class XXXXXXXXXX preference shares are voting, entitled to a cumulative dividend at the rate of XXXXXXXXXX% per annum and are redeemable and retractable at $XXXXXXXXXX per share. There are XXXXXXXXXX Class XXXXXXXXXX shares, XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX common shares outstanding. All of the outstanding shares are owned by XXXXXXXXXX. XXXXXXXXXX assets consist primarily of a receivable from XXXXXXXXXX. It has negligible liabilities.

8.XXXXXXXXXX was incorporated under the XXXXXXXXXX. It is a taxable Canadian corporation. The authorized capital of XXXXXXXXXX consists of XXXXXXXXXX common shares and XXXXXXXXXX non-voting, preference shares entitled to a non-cumulative preferential dividend of XXXXXXXXXX% per annum and redeemable and retractable at $XXXXXXXXXX. XXXXXXXXXX common shares are issued and outstanding and are XXXXXXXXXX owned by XXXXXXXXXX. XXXXXXXXXX assets consist of XXXXXXXXXX vacant land located in the XXXXXXXXXX and a loan receivable from XXXXXXXXXX. Its liabilities consist of a loan payable to XXXXXXXXXX and a first mortgage on the vacant land (the "Vacant Land Mortgage") held by those parties listed in Appendix II hereto. The principal amount outstanding as at XXXXXXXXXX. The mortgage bears interest at XXXXXXXXXX% per annum and comes due XXXXXXXXXX.

9.XXXXXXXXXX was incorporated under the XXXXXXXXXX. It is a taxable Canadian corporation. The authorized capital of XXXXXXXXXX consists of an unlimited number of common and Class XXXXXXXXXX shares. The Class XXXXXXXXXX shares are non-voting, entitled to a non-cumulative preferential monthly dividend at the rate of up to XXXXXXXXXX% per month and redeemable and retractable at the fair market value of the consideration received on the issuance of the shares. There are XXXXXXXXXX Class XXXXXXXXXX shares issued and outstanding which are all owned by XXXXXXXXXX. There are XXXXXXXXXX common shares outstanding and they are owned as follows:

			Name	Shares Held

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

10.XXXXXXXXXX was incorporated under the XXXXXXXXXX. It is a taxable Canadian corporation. The authorized capital of XXXXXXXXXX consists of an unlimited number of common and Class XXXXXXXXXX shares. The Class XXXXXXXXXX shares are non-voting, entitled to a non-cumulative preferential monthly dividend at the rate of up to XXXXXXXXXX% per month and redeemable and retractable at the fair market value of the consideration received on the issuance of the shares. There are XXXXXXXXXX Class XXXXXXXXXX shares issued and outstanding all of which are owned by XXXXXXXXXX. There are XXXXXXXXXX common shares outstanding and they are owned as follows:

			Name	Shares Held

XXXXXXXXXX

XXXXXXXXXX only asset is the lands and building located at XXXXXXXXXX. These assets were acquired by XXXXXXXXXX from XXXXXXXXXX in exchange for the Class XXXXXXXXXX shares.

XXXXXXXXXX

XXXXXXXXXX

11.XXXXXXXXXX was incorporated under the XXXXXXXXXX. It is a taxable Canadian corporation. The authorized capital of XXXXXXXXXX consists of XXXXXXXXXX common shares, XXXXXXXXXX Class XXXXXXXXXX shares and an unlimited number of Class XXXXXXXXXX shares. The Class XXXXXXXXXX shares are non-voting, entitled to a non-cumulative dividend at a rate between XXXXXXXXXX of the redemption amount per annum and are redeemable and retractable at $XXXXXXXXXX per share. The Class XXXXXXXXXX shares are non-voting, entitled to a non-cumulative dividend at the rate of $XXXXXXXXXX per month and are redeemable and retractable at $XXXXXXXXXX per share. There are XXXXXXXXXX common shares, XXXXXXXXXX Class XXXXXXXXXX shares and XXXXXXXXXX Class XXXXXXXXXX shares issued and outstanding. XXXXXXXXXX are owned by XXXXXXXXXX and XXXXXXXXXX are owned by XXXXXXXXXX. XXXXXXXXXX assets consist of a XXXXXXXXXX% interest in XXXXXXXXXX and cash. Its liabilities consist of advances by its shareholders and a mortgage payable to the XXXXXXXXXX which mortgage is due and payable XXXXXXXXXX. The mortgage is in good standing.

12.XXXXXXXXXX, though not mortgaged, are part of a lot including XXXXXXXXXX which is mortgaged to XXXXXXXXXX.

XXXXXXXXXX

13. XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

From the latter part of XXXXXXXXXX has been engaged in settling claims with creditors and in selling assets to generate money to pay down its bank line and other debts.

Over the next several years, XXXXXXXXXX expects to be able to sell some of its properties, the proceeds of which will be used to pay down its indebtedness.

XXXXXXXXXX intention remains to satisfy its creditors and use its remaining cash to provide adequate reserves for building maintenance, capital expenditures and its operational needs.

There is not sufficient cash flow available to service the debt of XXXXXXXXXX. The use of distress preferred shares will greatly improve XXXXXXXXXX ability to service its debt.

14.A description of the XXXXXXXXXX Loans and XXXXXXXXXX Loans XXXXXXXXXX proposes to refinance with distress preferred shares is as follows:

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

15. XXXXXXXXXX

16.In addition to amounts owing to XXXXXXXXXX is indebted to the following lenders:

XXXXXXXXXX

17.XXXXXXXXXX borrowed funds from XXXXXXXXXX on the security of the land located on

XXXXXXXXXX

18.In accordance with the net worth statements of the shareholders forwarded to Revenue Canada on XXXXXXXXXX none of the shareholders of XXXXXXXXXX have assets or net worth sufficient to materially alter the financial position of XXXXXXXXXX.

19.XXXXXXXXXX cash flow projections before and after the issuance of the Preferred Shares are set out below.

XXXXXXXXXX

The above excess cashflow and any additional cashflow that results from any future sales of XXXXXXXXXX property will be used to reduce the capital of, or redeem a portion of the Preferred Shares.

Proposed Transactions

20.XXXXXXXXXX will incorporate two new corporations (a "Subsidiary" or the "Subsidiaries") under the XXXXXXXXXX and will subscribe for XXXXXXXXXX common shares at a price of $XXXXXXXXXX per share. The authorized capital of a Subsidiary will consist of XXXXXXXXXX common shares and a specified number of Preferred Shares. The Preferred Shares will be entitled to cumulative preferential monthly cash dividends payable on the XXXXXXXXXX business day of each month at a rate per month equal to the XXXXXXXXXX Dividend Rate or the XXXXXXXXXX Dividend Rate, as the case may be. A Subsidiary will be a "single purpose company" and restricted by its articles from carrying on any business other than as required in the Proposed Transactions.

A Subsidiary will be a taxable Canadian corporation.

21.The authorized capital of a Subsidiary will consist of a class of common shares and one or more classes of Preferred Shares, as described below.

(a)The common shares of a Subsidiary will carry one vote per share at all class meetings of shareholders (other than class meetings for the Preferred Shares), and will be entitled, subject to the privileges of the Preferred Shares, to share equally in such dividends as may be declared thereon and in any distribution of the property and assets of such Subsidiary to its shareholders on its winding-up, liquidation or dissolution. All the issued common shares will be beneficially owned by XXXXXXXXXX.

(b)The terms and conditions of the Preferred Shares of a Subsidiary will be as follows:

i)They will rank ahead of the common shares with respect to the payment of dividends. The Preferred Shares issued to each Particular Lender shall be entitled to cumulative preferential monthly cash dividends at a rate per annum equal to such Particular Lender's Dividend Rate.

ii)In the event of the liquidation, dissolution or winding-up of a Subsidiary, the Holders will be entitled to receive, immediately prior to any distribution of property of such Subsidiary to its shareholders, all accrued and unpaid dividends (whether or not declared), and then, in priority to the holders of common shares, the issue price for such Preferred Shares and no more.

iii)The Holders will not generally be entitled to notice of, or to vote at, any meetings of shareholders of the Subsidiary. However, the Holders will be entitled to vote in certain circumstances and as required by law, and a class vote will be required to amend any of the terms attaching to the Preferred Shares.

iv)They will be redeemable, in whole or in part, at any time at the option of the Subsidiary for an amount equal to their issue price.

v)They will be retractable, in whole or in part, in certain circumstances at the option of the Holder for an amount equal to their issue price.

vi)So long as any such Preferred Share remains outstanding, the Subsidiary will not, without the prior written approval of all the Holders, create or issue any securities, pay or declare any dividends (other than dividends on the Preferred Shares), redeem or purchase any shares (except the Preferred Shares), retire or make any other capital distribution in respect of any shares (except as required by the terms attaching to the Preferred Shares), amend or repeal any of its articles or by-laws or pass any resolution or special resolution to approve or authorize any fundamental changes to or affecting such Subsidiary.

vii)In any event, on the XXXXXXXXXX following the date of issue by a Subsidiary of the Preferred Shares, any Preferred Shares remaining outstanding will be redeemed.

viii)They will be disposable or otherwise transferable by XXXXXXXXXX.

22.A Subsidiary will borrow from each Particular Lender on a demand basis an amount equal to the Indebtedness of such Particular Lender (the "Interim Loan"). The Interim Loan will be secured by a security interest in all the property of the Subsidiary.

23.The Subsidiary, XXXXXXXXXX and such Particular Lender will enter into an Assignment and Security Sharing Agreement in respect of such Indebtedness, and the Subsidiary will use all of the proceeds of the Interim Loan by endorsing the cheque referred to in paragraph 22 above to acquire from the Particular Lender pursuant to such agreement the Indebtedness of such Particular Lender and the related security. At the same time, the Subsidiary and the Particular Lender will enter into an Interim Debt Put Agreement relating to such Acquired Debt.

24.The Particular Lender will then subscribe for Preferred Shares of the Subsidiary for an aggregate subscription price equal to the amount of the Acquired Debt by endorsing the cheque referred to in paragraph 22 above of such Particular Lender and the Subsidiary will issue such shares to the Particular Lender.

25.The Subsidiary will immediately thereafter use the subscription proceeds from the issue of the Preferred Shares to repay the Interim Loan. Such repayment will be effected by the Subsidiary endorsing the cheque received by it (referred to in paragraph 24 above) as payable to or to the order of the Particular Lender.

26.The relevant parties will enter into a Share Put Agreement, Support Agreement, Indemnity Agreement, Debt Put/Call Agreement (superseding the Interim Debt Put Agreement) and Unanimous Shareholder Agreement.

27.All of the obligations of XXXXXXXXXX to the Particular Lender (including without limitation under the Share Put Agreement, the Debt Put/Call Agreement, the Support Agreement and the Indemnity Agreement to which they are party) will be secured by a pledge of the common shares of the Subsidiary pursuant to a Share Pledge.

28.Notwithstanding the terms and conditions of any Preferred Shares or any mandatory redemptions of any Preferred Shares that may be required by a Particular Lender, within 90 days following the end of each Fiscal Year all Excess Cash Flow of XXXXXXXXXX as at the end of such Fiscal Year shall be applied to redeem the Preferred Shares of each Subsidiary on a pro rata basis as between each Subsidiary. Proceeds received in a particular Fiscal Year with respect to the sale of a particular building shall not be included in excess cash flow. Such proceeds shall be used to redeem Preferred Shares of the appropriate Subsidiary.

29."Excess Cash Flow" in respect of a particular Fiscal Year means the changes in cash flow of XXXXXXXXXX from all sources for such Fiscal Year, as would be reported on a Consolidated Statement of Changes in Financial Position prepared in accordance with generally accepted accounting principles ("GAAP") if only directly and indirectly wholly-owned subsidiaries of XXXXXXXXXX and Subsidiaries were so included, but before outlays for:

a)the payment of dividends other than dividends paid on the Preferred Shares;

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

i) the purchase or redemption of any of the Preferred Shares, other than purchases or redemptions made in the Fiscal Year from a prior Fiscal Year's Excess Cash Flow,

ii) repayments of indebtedness (other than repayments in respect of the Indebtedness made from a prior Fiscal Year's Excess Cash Flow and other than payments to the holders of the Vacant Land Mortgage except out of proceeds of sale of all or part of the land in which the mortgage is security) in existence on Closing and incurred in the normal and ordinary course of business in existence at Closing to the extent that such debts are then due, including, without limiting the generality of the foregoing, indebtedness to XXXXXXXXXX in accordance with the provisions of the respective indebtedness in effect at the date of Closing;

iii) repayments of additional debt incurred

(A) to fund current operating requirements

(B) in connection with letters of credit or letters of guarantee obtained in the normal and ordinary course of businesses existing as at Closing,

(C) to fund repayments, expenditures, payments, loans, contributions of capital or distributions (including repayments of capital) referred to in subparagraphs (b)(ii) and (iv), and clause (b)(iii)(D),

(D) to fund repayments of any loan that was obtained to fund redemptions of Preferred Shares or dividend payments on Preferred Shares, or

(E) to enable a Subsidiary to redeem, or to pay dividends on, any Preferred Shares issued by a Subsidiary or to meet its costs and expenses.

Additional debt for this purpose shall not include debt used for the purpose of expanding the business of XXXXXXXXXX;

iv) expenditures or payments between XXXXXXXXXX and a Subsidiary,

v) reasonable capital expenditures, leasehold inducements, leasehold improvements, lease commissions or payments on capital account made or paid in the normal and ordinary course of businesses existing as at Closing, including, without limiting the generality of the foregoing: any such expenditures or payments incurred in connection with the sale of any capital asset, and discharge, commitment and other similar fees payable to any lender or in connection with any financing obtained by XXXXXXXXXX in the normal and ordinary course of operating its existing business,

vi) repayments of additional debt incurred for the specific purpose of making or paying such capital expenditures, leasehold inducements, leasehold improvements, lease commissions or payments on capital account,

vii) costs incurred, whether prior to or after the Closing, in connection with the capital and financial reorganization of XXXXXXXXXX described in this letter,

viii)payments made to honour any guarantee given by XXXXXXXXXX,

ix) payments under any of the indemnities of XXXXXXXXXX made by XXXXXXXXXX with respect to the Preferred Shares, and

x) costs and expenses (other than those funded from insurance proceeds) paid to repair or replace damage or destruction to real or personal property to the existing standard;

c) repayments of loans, capital contributions or other distributions to shareholders of XXXXXXXXXX other than payments to the holders of the Vacant Land Mortgage out of proceeds of sale of all or part of the land on which the mortgage is security, or redemptions or purchases for cancellation of any of the shares of XXXXXXXXXX; and

d) loans and payments to directors, officers and shareholders of XXXXXXXXXX or to other persons, firms or corporations, other than as set out in (iii) above and other than any loan to fund dividend payments on Preferred Shares issued by a Subsidiary and other than reasonable compensation for services rendered.

30.For the purposes of this definition of Excess Cash Flow:

(i)the foregoing shall be adjusted as necessary in order to prevent duplication or repeated counting of amounts;

(ii)additional debt shall not include a debt which arose as a result of the use of cash or funds for a purpose that is not envisaged herein,

iii)all amounts referred to in paragraph 29(b)(i) to (x) above or (vi) below shall be deducted in computing Excess Cash Flow whether or not deductible in accordance with generally accepted accounting principles in computing changes in cash flow on the Consolidated Statement of Changes in Financial Position,

iv)the first Fiscal Year of XXXXXXXXXX will be the period commencing on the Closing Date and ending on the first following XXXXXXXXXX,

v)Excess Cash Flow shall be reduced by a negative Excess Cash Flow arising in the immediately preceding Fiscal Year; and

vi)Excess Cash Flow shall not include reasonable working capital reserves, which amount will not exceed $XXXXXXXXXX at any time, $XXXXXXXXXX of which will be held in an escrow account by XXXXXXXXXX and will be released upon certain conditions being met. XXXXXXXXXX owns

XXXXXXXXXX

Accordingly, if excess cash flow is generated XXXXXXXXXX is anxious to retain it in a working capital reserve in order to fund the repairs required for the buildings.

31. XXXXXXXXXX.

The economy is still very fragile and while XXXXXXXXXX is optimistic that vacancies will remain low, a further downturn in the economy would reduce the projected cash flow or may require leasehold inducements, improvements and lease commissions in excess of those projected. The additional working capital reserve referred to above would further cushion XXXXXXXXXX in the event the actual renewals of leases are below budget.

32.XXXXXXXXXX intends to dispose of properties in order to generate the cash required for the expenditures referred to above.

33.Notwithstanding the foregoing, proceeds of insurance received in a particular Fiscal Year by XXXXXXXXXX in respect of damage or destruction to real or personal property shall not be included in Excess Cash Flow. Such proceeds shall at the option of the Particular Lender be used either to redeem Preferred Shares of the appropriate Subsidiary or set aside to repair or replace such property.

For greater certainty, cash that is subject to statutory trusts, such as pursuant to the XXXXXXXXXX, is not considered to be cash belonging to XXXXXXXXXX.

34.The Excess Cash Flow of XXXXXXXXXX will be applied to fund the redemption of the Classes of Preferred Shares issued by each Subsidiary in such manner as the Particular Lender may direct.

35.The redemption of Preferred Shares in accordance with the foregoing will be effected within 90 days following the end of each Fiscal Year commencing with the Fiscal Year ending XXXXXXXXXX.

36.Notwithstanding any other paragraph of this letter, a Subsidiary will be wound up without any undue delay after the time that is the earlier of:

a)60 days after the date on which all of the Preferred Shares are redeemed or cancelled or acquired under the Share Put Agreement; and

b)the date that is five years from the date of issue of the Preferred Shares.

Should the operation of law delay the redemption of the Preferred Shares or the winding-up of a Subsidiary, such redemption or winding-up of a Subsidiary will occur without any undue delay after the termination of such legal impediment.

Purpose of The Proposed Transactions

The proposed transactions are an integral part of the overall financial and operational restructuring currently being planned by XXXXXXXXXX. This restructuring is necessary to prevent projected payment defaults by XXXXXXXXXX on the Indebtedness and to cure existing payment defaults.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purposes of the proposed transactions, we confirm the following:

A.The Preferred Shares to be issued to XXXXXXXXXX and, where applicable, sold by XXXXXXXXXX to a Subsequent Purchaser, will be:

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

"exempt shares" pursuant to the definition thereof in subsection 112(2.6) for that same period and, accordingly, subsections 112(2.1), (2.2), (2.3) and (2.4) will not apply to deny the holder of such shares

a deduction under subsection 112(1), or under subsection 138(6), for dividends received or deemed to have been received on the Preferred Shares during such period.

B.No amount will be included in computing the income of a Subsidiary under paragraph 12(1)(c) or 12(1)(x), or subsections 12(3), 12(9) 16(1) or 246(1), or section 9 in respect of capital contributions made or required to be made by XXXXXXXXXX to a Subsidiary pursuant to the Support Agreement nor will any such amount constitute proceeds of disposition, as defined in section 54, to a Subsidiary from the disposition by it of any property,

C.No amount will be included in computing the income of a Subsidiary, or any holder of Preferred Shares, under subsection 56(2) in respect of capital contributions made or required to be made by XXXXXXXXXX to a Subsidiary pursuant to the Support Agreement.

D.The cost amount, within the meaning of subsection 248(1), to a Subsidiary of the Acquired Debt will, immediately after it is acquired from XXXXXXXXXX, be equal to the amount paid by a Subsidiary for the Acquired Debt.

E.Subject to paragraph 20(1)(e.1), expenses incurred by a Subsidiary in the course of issuing the Preferred Shares, will be deductible by a Subsidiary pursuant to and in accordance with paragraph 20(1)(e), to the extent such expenses are reasonable in the circumstances.

F.No amount will be included in the income of XXXXXXXXXX pursuant to either of subsections 15(1) or 246(1), and section 80 will not apply to XXXXXXXXXX, solely by virtue of the fact that no interest will be payable by XXXXXXXXXX to a Subsidiary on the Acquired Debt while held by a Subsidiary or by virtue of a Subsidiary's failure to demand payment on the Acquired Debt.

G.The cost amount, within the meaning of subsection 248(1), to XXXXXXXXXX of the Preferred Shares will, immediately after the time that the Preferred Shares are issued, be equal to the amount paid for such shares by XXXXXXXXXX.

H.Provided the Acquired Debt arose from one or more loans made by XXXXXXXXXX in the course of its insurance or money-lending businesses, and if XXXXXXXXXX reacquires the Acquired Debt from a Subsidiary pursuant to a Debt Put/Call Agreement, the Acquired Debt will be considered to have been acquired by XXXXXXXXXX in the ordinary course of its insurance or money lending businesses for purposes of paragraphs 20(1)(l) and 20(1)(p).

I.If XXXXXXXXXX reacquires the Acquired Debt from a Subsidiary, pursuant to a Debt Put/Call Agreement, the Acquired Debt will have a cost amount to XXXXXXXXXX, at the time of such acquisition by XXXXXXXXXX, equal to the amount paid by XXXXXXXXXX to a Subsidiary to purchase the Acquired Debt.

J.Subsection 112(4) will not apply, in respect of dividends received by XXXXXXXXXX on the Preferred Shares, to any loss realized by XXXXXXXXXX on the Acquired Debt subsequent to such Acquired Debt being reacquired by XXXXXXXXXX.

K.Provided that a Subsequent Purchaser of the Preferred Shares meets the requirements outlined in paragraph 6209(a) of the Income Tax Regulations (the "Regulations") and such Preferred Shares are not "prescribed securities" to such Subsequent Purchaser within the meaning of 6209(b) of the Regulations, such Preferred Shares will be "prescribed shares" to such Subsequent Purchaser, within the meaning of paragraph 6209(a) of the Regulations for the purpose of the definition of "lending asset" in subsection 248(1).

L.Subsection 245(2) will not apply, as a result of the proposed transactions in and of themselves, to redetermine the tax consequences confirmed in the advance income tax rulings given.

These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 and are binding on Revenue Canada, Taxation provided that the proposed transactions described herein are completed by XXXXXXXXXX.

Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.

Yours truly,

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