2010 Ruling 2010-0375301R3 - Loss Utilization and reorganization

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: Is the loss utilization proposed acceptable?

Position: Yes

Reasons: Standard - with on-loan features.

XXXXXXXXXX
									2010-037530
									XXXXXXXXXX 

XXXXXXXXXX , 2010

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Opco"), XXXXXXXXXX
XXXXXXXXXX ("Profitco"), XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-named taxpayers. In general terms, the Proposed Transactions involve the use of losses within a group of related corporations and include the unwinding of a structure currently in place.

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

(i) dealt with in an earlier return of Opco, Profitco, or a related person;

(ii) being considered by a tax services office or a taxation centre in connection with a tax return already filed by Opco, Profitco, or a related person;

(iii) under objection by Opco, Profitco, or a related person;

(iv) the subject of a previous ruling issued by the Income Tax Rulings Directorate to Opco, Profitco, or a related person; nor

(v) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired.

DEFINITIONS

(a) "ACB" means "adjusted cost base" as defined in section 54 of the Act;

(b) "Acquisico" means the corporation described in 23 below;

(c) "Acquisico Common Shares" means the common shares described in 23 below;

(d) "Acquisico Preferred Shares" means the preferred shares described in 23 below;

(e) "Act" means the "Income Tax Act", R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

(f) "affiliated person" has the meaning assigned by section 251.1 of the Act;

(g) "Annual Daylight Loan" means the loan described in 45 below;

(h) "Annual NIB Loan" means the loan described in 45 below;

(i) "arm's length" has the meaning assigned by subsection 251(1) of the Act;

(j) "Canco1" means XXXXXXXXXX ;

(k) "Canco2" means XXXXXXXXXX ;

(l) "Canco2 Class A Common Shares" means the common shares described in 2 below;

(m) "Canco2 Class D Preferred Shares" means the preferred shares described in 2 below;

(n) "CBCA" means "Canada Business Corporations Act", R.S.C. 1995, c. C-44, as amended;

(o) "cost amount" has the meaning assigned by subsection 248(1) of the Act;

(p) "CRA" means the "Canada Revenue Agency";

(q) "Daylight Loan1" has the meaning specified in 18 below;

(r) "Daylight Loan2" has the meaning specified in 37 below;

(s) "Daylight Loan3" has the meaning specified in 46 below;

(t) "Daylight Loan4" has the meaning specified in 46 below;

(u) "FMV" means "fair market value";

(v) "Newco" means the corporation described in 35 below;

(w) "Newco Common Shares" has the meaning specified in 35 below;

(x) "Newco Preferred Shares" has the meaning specified in 35 below;

(y) "non-capital losses" has the meaning assigned by subsection 111(8) of the Act;

(z) "Opco" means XXXXXXXXXX ;

(aa) "Opco Class A Common Shares" has the meaning specified in 6 below;

(bb) "Opco Class B Common Shares" has the meaning specified in 6 below;

(cc) "Opco Class C Preferred Shares" has the meaning specified in 6 below;

(dd) "Opco NIB Loan1" has the meaning specified in 8 below;

(ee) "Opco NIB Loan2" has the meaning specified in 38 below;

(ff) "Opco NIB Loan3" has the meaning specified in 41 below;

(gg) "Opco NIB Loan4" has the meaning specified in 46 below;

(hh) "Opco NIB Loan5" has the meaning specified in 46 below;

(ii) "Parent" means XXXXXXXXXX ;

(jj) "Profitco" means XXXXXXXXXX ;

(kk) "Profitco Class A Common Shares" has the meaning specified in 11 below;

(ll) "Profitco Class B Common Shares" has the meaning specified in 11 below;

(mm) "Profitco Class D Preferred Shares" has the meaning specified in 11 below;

(nn) "Profitco Loan1" has the meaning specified in 14 below;

(oo) "Profitco Loan2" has the meaning specified in 39 below;

(pp) "Profitco Note" has the meaning specified in 33 below;

(qq) "Proposed Transactions" mean the transactions described in 18 to 47 below;

(rr) "Pubco" means XXXXXXXXXX , a publicly-traded company the shares of which are listed on the XXXXXXXXXX Stock Exchange under the symbol of "XXXXXXXXXX ";

(ss) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(tt) "PUC" means "paid-up capital" as defined in subsection 89(1) of the Act;

(uu) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(vv) "SFI" means a "specified financial institution" as defined by subsection 248(1) of the Act; and

(ww) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

STATEMENT OF FACTS

1. Pubco is a public corporation. Canco1 is a holding company and a wholly-owned subsidiary of Pubco. Parent is a wholly-owned subsidiary of Canco1. Parent is a holding company which owns XXXXXXXXXX % of the common shares of Opco and other entities. Each of Pubco, Canco1 and Parent is a taxable Canadian corporation and has a taxation year end of XXXXXXXXXX .

2. Canco2 is a holding company and a wholly-owned subsidiary of Parent. Canco2's authorized capital includes, amongst other classes of shares:

• An unlimited number of Class A common shares conferring one vote per share ("Canco2 Class A Common Shares"). A holder of Canco2 Class A Common Shares is entitled to receive dividends in the discretion of the directors and is entitled to receive the remaining property of the corporation upon its winding-up or dissolution; and
• An unlimited number of Class D preferred shares that are non-voting, non-participating, redeemable and retractable ("Canco2 Class D Preferred Shares"). A holder of Canco2 Class D Preferred Shares is entitled to a monthly cumulative dividend equal to a prescribed rate applied on the redemption price of the Class D Preferred Shares.

3. The issued and outstanding share capital of Canco2 consists of XXXXXXXXXX Canco2 Class A Common Shares and XXXXXXXXXX Canco2 Class D Preferred Shares owned by Parent.

4. Canco2 is a taxable Canadian corporation and has a taxation year end of XXXXXXXXXX .

5. Opco exists under the CBCA and was formed on XXXXXXXXXX . XXXXXXXXXX . Opco is a taxable Canadian corporation. Its taxation year ends on XXXXXXXXXX . Opco has a permanent establishment only in the province of XXXXXXXXXX . Opco is served by the XXXXXXXXXX Tax Services Office and files its tax return with the XXXXXXXXXX Taxation Centre.

6. Opco's authorized capital includes, amongst other classes of shares:

• An unlimited number of Class A common shares conferring one vote per share ("Opco Class A Common Shares"). A holder of Opco Class A Common Shares is entitled to dividends in the discretion of the directors and is entitled to receive the remaining property of the corporation upon its winding-up or dissolution;
• An unlimited number of Class B common shares conferring XXXXXXXXXX votes per share to the extent that there are fewer than XXXXXXXXXX Opco Class A Common Shares outstanding plus one vote per XXXXXXXXXX additional Opco Class A Common Shares ("Opco Class B Common Shares"). A holder of Opco Class B Common Shares is entitled to dividends in the discretion of the directors and is entitled to receive the remaining property of the corporation upon its winding-up or dissolution; and
• An unlimited number of Class C preferred shares that are non-voting, non-participating, redeemable and retractable ("Opco Class C Preferred Shares"). A holder of Opco Class C Preferred Shares is entitled to a cumulative dividend in preference to all other classes of shares at a rate betweenXXXXXXXXXX % and XXXXXXXXXX %, to be fixed annually by the board of directors.

7. The issued and outstanding capital of Opco consists of XXXXXXXXXX Class A Common Shares and XXXXXXXXXX Class B Common Shares owned by Parent and XXXXXXXXXX Class C Preferred Shares owned by Profitco, an affiliated entity. For more than XXXXXXXXXX years, and at all times relevant to the present ruling request, Opco has been wholly-owned and controlled, directly or indirectly, by Pubco.

8. Opco has a demand loan payable to Parent ("Opco NIB Loan1"), which is non-interest bearing and has no specific terms of repayment. As of XXXXXXXXXX , the outstanding amount of Opco NIB Loan1, which fluctuates as funds are received from and repaid to Parent, was $XXXXXXXXXX .

9. Opco realized a non-capital loss of approximately $XXXXXXXXXX in XXXXXXXXXX . With the implementation of the transactions described in 18 to 21 below which effect the repayment of Profitco Loan1, but without the completion of the remaining transactions described in 22 to 47 below, Opco expects, based on the most recent XXXXXXXXXX -year forecast, to incur additional non-capital losses of approximately $XXXXXXXXXX in XXXXXXXXXX , $XXXXXXXXXX in XXXXXXXXXX and $XXXXXXXXXX in XXXXXXXXXX .

10. Profitco is the entity resulting from the amalgamation of XXXXXXXXXX and XXXXXXXXXX that occurred on XXXXXXXXXX . Profitco is incorporated under the CBCA and is a wholly-owned subsidiary of Canco2. One of the predecessors that formed Profitco was acquired by Canco2 in XXXXXXXXXX in the course of an arm's length transaction. XXXXXXXXXX

11. Profitco's authorized capital includes, amongst other classes of shares,:

• An unlimited number of Class A common shares conferring one vote per share ("Profitco Class A Common Shares"). A holder of Profitco Class A Common Shares is entitled to dividends in the discretion of the directors and is entitled to receive the remaining property of the corporation upon its winding-up or dissolution;
• An unlimited number of Class B common shares which are non-voting ("Profitco Class B Common Shares"). A holder of Profitco Class B Common Shares is entitled to dividends in the discretion of the directors and is entitled to receive the remaining property of the corporation upon its winding-up or dissolution; and
• An unlimited number of Class D preferred shares that are non-voting, non-participating, redeemable and retractable ("Profitco Class D Preferred Shares"). A holder of Profitco Class D Preferred Shares is entitled to a monthly non-cumulative dividend of XXXXXXXXXX % of the redemption amount thereof.

12. The issued and outstanding capital of Profitco consists of XXXXXXXXXX Profitco Class A Common Shares and XXXXXXXXXX Profitco Class D Preferred Shares owned by Canco2. Profitco is a taxable Canadian corporation. Its taxation year ends on XXXXXXXXXX . Profitco is serviced by the XXXXXXXXXX Tax Services Office and files its return with the XXXXXXXXXX Taxation Centre.

13. Profitco has a permanent establishment in each of the provinces of XXXXXXXXXX . The provincial allocation for the taxation year ended XXXXXXXXXX was XXXXXXXXXX % to the province of XXXXXXXXXX and XXXXXXXXXX % to the province of XXXXXXXXXX .

14. Profitco is indebted to Opco for an amount of $XXXXXXXXXX bearing interest at a rate to be determined before the end of XXXXXXXXXX of each year by the parties ("Profitco Loan1"). In the absence of an interest rate determination by the parties, the interest rate of the previous taxation year is deemed to be the rate applicable to the current taxation year. The interest rate on Profitco Loan1 for XXXXXXXXXX is XXXXXXXXXX %.

15. With the implementation of the transactions described in paragraphs 18 to 21 which effect the repayment of Profitco Loan1, but without the completion of the remaining transactions described in 22 to 47 below, it is expected that Profitco, based on the most recent XXXXXXXXXX -year forecast, will generate approximately $XXXXXXXXXX of taxable income in XXXXXXXXXX , $XXXXXXXXXX in XXXXXXXXXX and $XXXXXXXXXX in XXXXXXXXXX .

16. The external borrowings of Parent and its subsidiaries are made by Parent under credit agreements concluded by Parent with a syndicate of lenders. Thus, Parent finances its subsidiaries' activities through equity subscriptions and inter-company loans.

17. The borrowing capacity of Pubco and its subsidiaries significantly exceeds the maximum amount of $XXXXXXXXXX required to complete the Proposed Transactions. As of XXXXXXXXXX , Pubco had consolidated assets of approximately $XXXXXXXXXX and a net equity value of approximately $XXXXXXXXXX . The current market capitalization of Pubco is more than $XXXXXXXXXX .

PROPOSED TRANSACTIONS

18. Parent will borrow $XXXXXXXXXX on a "daylight loan" basis from an arm's length financial institution or from a related entity ("Daylight Loan1").

19. Parent will use the proceeds of Daylight Loan1 to subscribe for additional Canco2 Class A Common Shares.

20. Canco2 will use the proceeds of the common share issuance to subscribe for additional Profitco Class A Common Shares.

21. Profitco will pay Opco any accrued and unpaid interest on Profitco Loan1 and will also use the proceeds from the subscription by Canco2 to repay Profitco Loan1.

22. Opco will declare and pay a stock dividend on its Class C Preferred Shares in the amount of the accrued and unpaid dividends on the outstanding Opco Class C Preferred Shares by issuing additional Class C Preferred Shares to Profitco with an aggregate redemption value and PUC equal to the amount of the dividend. The stock dividend will satisfy Opco's obligation to pay all accrued dividends on the Opco Class C Preferred Shares.

23. Parent will incorporate a new wholly-owned subsidiary ("Acquisico") under the CBCA. Acquisico will be a taxable Canadian corporation. The taxation year end of Acquisico will be XXXXXXXXXX . Acquisico's share capital will include an unlimited number of common shares ("Acquisico Common Shares") and an unlimited number of preferred shares ("Acquisico Preferred Shares"). Acquisico will not carry on any business and its activities will be limited to acquiring the Opco Class C Preferred Shares held by Profitco.

Holders of Acquisico Common Shares will be entitled to one vote per share, dividends in the discretion of the directors, and the remaining property of the corporation upon its winding-up or dissolution.

The Acquisico Preferred Shares will be non-voting, redeemable and retractable for a redemption price equal to the FMV of the consideration for which such shares were issued. Holders of Acquisico Preferred Shares will be entitled to dividends at the discretion of the directors.

24. Parent will subscribe for one Acquisico Common Share for nominal consideration.

25. Opco will use the proceeds of Profitco Loan1 to subscribe for Acquisico Preferred Shares.

26. Acquisico will use the proceeds received from the subscription by Opco to acquire all of the Opco Class C Preferred Shares held by Profitco for $XXXXXXXXXX .

27. Parent will transfer its Acquisico Common Share to Opco in exchange for one Opco Class A Common Share.

28. Profitco will distribute the proceeds of disposition of its Opco Class C Preferred Shares to Canco2, as a return of PUC.

29. Canco2 will distribute the proceeds from the return of PUC to Parent, as a return of PUC.

30. Parent will use the proceeds from the return of PUC to repay Daylight Loan1.

31. Acquisico will reduce the stated capital of the Acquisico Common Share and Acquisico Preferred Shares to $XXXXXXXXXX per class, without consideration.

32. Opco, as sole shareholder of Acquisico, will pass a resolution authorizing and requiring Acquisico to be wound-up into Opco pursuant to subsection 88(1) of the Act. As a consequence, Acquisico's assets will be transferred to Opco, such that all of the Opco Class C Preferred Shares held by Acquisico will be cancelled by operation of law. Opco will also assume Acquisico's liabilities, if any.

33. Parent will assign Opco NIB Loan1 to Profitco in consideration for a demand interest-free promissory note having a principal amount equal to the FMV of Opco NIB Loan1 ("Profitco Note").

34. Parent will subscribe for Profitco Class B Common Shares for an amount equal to the FMV of Opco NIB Loan1. Parent will satisfy the subscription price payable by way of set-off against the amount owing under the Profitco Note.

35. Opco will incorporate a new wholly-owned subsidiary ("Newco") under the CBCA. Newco will be a taxable Canadian corporation. The taxation year end of Newco will be XXXXXXXXXX . Newco's share capital will include an unlimited number of common shares ("Newco Common Shares") and an unlimited number of preferred shares ("Newco Preferred Shares"). Newco will not carry on any business and its activities will be limited to making Opco NIB Loan3 (as described in 41 below) with the proceeds received upon the issuance of the Newco Preferred Shares.

Holders of Newco Common Shares will be entitled to one vote per share, dividends in the discretion of the directors, and the remaining property of the corporation upon its winding-up or dissolution.

The Newco Preferred Shares will be non-voting, non-participating, redeemable and retractable for the amount for which they are issued. A holder of Newco Preferred Shares will be entitled to cumulative dividends, calculated daily by reference to the redemption/retraction price of the Newco Preferred Shares. The dividend rate on the Newco Preferred Shares will be equal to the interest rate on Profitco Loan2, expected to be XXXXXXXXXX %, plus XXXXXXXXXX % (as described in 39 below).

36. Opco will subscribe for Newco Common Shares for nominal consideration.

37. Parent will borrow an amount not exceeding $XXXXXXXXXX on a "daylight loan" basis from an arm's length financial institution or from a related entity ("Daylight Loan2").

38. Parent will use the proceeds of Daylight Loan2 to make a demand interest-free loan to Opco ("Opco NIB Loan2") .

39. Opco will use the proceeds received from Opco NIB Loan2 to make a loan of an amount not exceeding $XXXXXXXXXX to Profitco, which will bear interest at an annual rate based on market conditions at the time the loan is made, expected to be XXXXXXXXXX %, considered by Opco to be a reasonable commercial rate in the circumstances ("Profitco Loan2"). Interest on Profitco Loan2 will be payable annually.

The terms of Profitco Loan2 will provide that Opco's recourse with respect to Profitco Loan2 will be limited to the Newco Preferred Shares (to be acquired with the proceeds of Profitco Loan2 as described in 40 below).

40. Profitco will use the proceeds received from Profitco Loan2 to subscribe for Newco Preferred Shares having an aggregate redemption/retraction value equal to the amount of such subscription. The PUC and the FMV of the Newco Preferred Shares will not exceed $XXXXXXXXXX .

41. Newco will use the proceeds received from the Newco Preferred Share subscription to make a demand interest-free loan of an amount not exceeding $XXXXXXXXXX to Opco ("Opco NIB Loan3").

42. The terms of Opco NIB Loan1 will be amended in order to provide that in the event of dissolution, winding-up, liquidation, insolvency or bankruptcy of Opco, Opco NIB Loan1 would be subordinated and postponed in favour of Opco NIB Loan3.

43. Opco will use the proceeds received from Opco NIB Loan3 to repay Opco NIB Loan2.

44. Parent will use the proceeds received from Opco NIB Loan2 to repay Daylight Loan2.

45. While Profitco Loan2 is outstanding, the following will occur:

(a) Parent will annually borrow an amount equal to the amount of dividends to be paid by Newco to Profitco in respect of the Newco Preferred Shares on a "daylight loan" basis from an arm's length financial institution or from a related entity ("Annual Daylight Loan").

(b) Parent will use the proceeds of Annual Daylight Loan, on an annual basis, to make interest-free loans to Opco ("Annual NIB Loan").

(c) Opco will agree to and will make a contribution of capital to Newco on an annual basis equal to the amount of dividends to be paid by Newco to Profitco in respect of the Newco Preferred Shares for so long as such preferred shares are outstanding. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the stated capital of Newco. The amount of the contribution of capital will be recorded as contributed surplus for accounting purposes. The contribution of capital will not be income of Newco pursuant to generally accepted accounting principles. Profitco will not claim, at any time, a capital loss in respect of its investment in the Newco Preferred shares.

(d) Newco will use the amount received as capital contributions to pay dividends to Profitco, on an annual basis, equal to the amount of the dividend payable on the Newco Preferred Shares.

(e) Profitco will pay to Opco, on an annual basis, the interest due pursuant to the terms of Profitco Loan2.

(f) Opco will repay Annual NIB Loan.

(g) Parent will repay Annual Daylight Loan.

46. The following transactions will occur when jointly determined by Opco, Profitco and Newco, but no later than XXXXXXXXXX to unwind the loss consolidation arrangement:

(a) Parent will borrow an amount equal to the contribution to be made by Opco to Newco equal to the accrued and unpaid dividends, if any, on the Newco Preferred Shares on a "daylight loan" basis from an arm's length financial institution or from a related entity ("Daylight Loan3").

(b) Parent will use the proceeds of Daylight Loan3 to make an interest-free loan to Opco ("Opco NIB Loan4").

(c) Opco will use the proceeds of Opco NIB Loan4 to make a contribution of capital to Newco in an amount equal to the amount of any accrued and unpaid dividends, if any, on the Newco Preferred Shares. No shares will be issued by Newco with respect to the contribution of capital and no amount will be added to the stated capital of Newco. The amount of the contribution of capital will be recorded as contributed surplus for accounting purposes. The contribution of capital will not be income of Newco pursuant to generally accepted accounting principles.

(d) Newco will pay the accrued dividends on the Newco Preferred Shares to Profitco.

(e) Profitco will pay the balance of any accrued and unpaid interest on Profitco Loan2.

(f) Opco will repay Opco NIB Loan4.

(g) Parent will repay Daylight Loan3.

(h) Parent will borrow an amount not exceeding $XXXXXXXXXX on a "daylight loan" basis from an arm's length financial institution or from a related entity ("Daylight Loan4").

(i) Parent will use the proceeds of Daylight Loan4 to make an interest-free loan to Opco ("Opco NIB Loan5").

(j) Opco will use the proceeds of Opco NIB Loan5 to repay Opco NIB Loan3.

(k) Newco will use the proceeds of repayment of Opco NIB Loan3 to redeem the Newco Preferred Shares held by Profitco.

(l) Profitco will use the proceeds from the redemption of the Newco Preferred Shares to repay Profitco Loan2.

(m) Opco will use the proceeds of Profitco Loan2 to repay Opco NIB Loan5.

(n) Parent will use the proceeds of Opco NIB Loan5 to repay Daylight Loan4.

47. Opco, as sole shareholder of Newco, will pass a resolution authorizing and requiring Newco to be wound-up into Opco pursuant to subsection 88(1). As a consequence, Newco's assets will be transferred to Opco and Opco will assume Newco's liabilities.

OTHER REPRESENTATIONS

48. Profitco, as well as all other taxpayers involved in the Proposed Transactions are, on the basis that they are related to a corporation described in paragraph (d) of the definition of a SFI, a SFI pursuant to paragraph (g) of that definition. It is however understood that Profitco will not acquire the Newco Preferred Shares in the ordinary course of its business.

49. None of the corporations involved in the Proposed Transactions has or will have entered into a "dividend rental arrangement" as defined by subsection 248(1) for the purposes of subsection 112(2.3) of the Act.

50. None of the shares on which a dividend is declared or paid in the course of the Proposed Transactions is subject to a guarantee agreement within the meaning of subsection 112(2.2) of the Act.

51. None of the issued preferred shares will be, at any time during the implementation of the Proposed Transactions:

(a) subject to any secured undertaking of the type described in paragraph 112(2.4)(a) of the Act; or

(b) issued for consideration that includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i) of the Act, other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b) of the Act); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii) of the Act.

52. The Proposed Transactions will not, in and of themselves, result in any of the taxpayers identified in this ruling being unable to pay their outstanding tax liabilities.

PURPOSE OF THE PROPOSED TRANSACTIONS

53. The purposes of the Proposed Transactions are to repay Profitco Loan1, to cancel the Opco Class C Preferred Shares and to implement an alternative structure to consolidate profits and losses within a group of related persons. The Proposed Transactions are intended to enable Opco to earn interest income on Profitco Loan2 and, thus, permit Profitco to utilize Opco's non-capital losses.

RULINGS GIVEN

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we rule as follows:

A. The provisions of paragraphs 40(2)(e.1) and 53(1)(f.1) of the Act will apply to the assignment of Opco NIB Loan1 from Parent to Profitco, as described in 33 above, such that (i) the capital loss realized by Parent on the disposition of the Opco NIB Loan1 will be deemed to be nil, and (ii) the amount of the loss so denied will be added to Profitco's ACB of the Opco NIB Loan1.

B. Provided that the Newco Preferred Shares continue to be held by Profitco for the purpose of gaining or producing income from property, the interest paid or payable on Profitco Loan2 will be deductible by Profitco in computing its income for a particular taxation year, in respect of such taxation year pursuant to paragraph 20(1)(c) of the Act to the extent that such amount does not exceed a reasonable amount.

C. No amount will be included in the income of Newco pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) of the Act in respect of the contributions of capital made by Opco as described in 45 and 46 above.

D. Dividends received by Profitco on the Newco Preferred Shares as described in paragraphs 45 and 46 above will be taxable dividends and as such included in Profitco's income, and such dividends will, pursuant to subsection 112(1) of the Act, be deductible in computing the taxable income of Profitco for the year in which the dividends are received and, for greater certainty, such deduction will not be denied by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4) of the Act.

E. Neither Part IV.1 nor Part VI.1 of the Act will apply to the dividends described in Ruling D above because the dividends will be excepted dividends within the meaning assigned by section 187.1 of the Act and excluded dividends within the meaning assigned by section 191(1) of the Act.

F. The provisions of subsections 15(1), 56(2), 69(4), 69(11) and 246(1) will not apply as a result of the Proposed Transactions, in and by themselves.

G. The provisions of subsection 69(1) of the Act will not apply to the Proposed Transactions described from 27 to 47 above, in and by themselves.

H. Subsection 245(2) of the Act will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transactions (other than those in 45, 46 and 47) are completed by XXXXXXXXXX .

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comments:

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

(b) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

(c) the provincial income tax implications relating to the allocation of income and expenses under the proposed transactions;

(d) the application or non-application of the general anti-avoidance provisions of any province; nor

(e) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
Manager
Corporate Financing Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch