2000 Ruling 2000-0025713 - XXXXXXXXXX CERTIFICATES

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: The corporation was a financing subsidiary of a XXXXXXXXXX company. Both XXXXXXXXXX and the corporation are insolvent. The XXXXXXXXXX is subject to a winding-up order; the corporation is bankrupt. XXXXXXXXXX To facilitate the wind-up of the corporation's affairs, the trustees of the corporation and XXXXXXXXXX agreed to a two-step distribution process. First, a sufficient amount would be set aside to meet the claims of XXXXXXXXXX . Any excess known at that time (the "initial distribution") would be available for distribution to the arm's length creditors of the companies (the "ALCs"). Each ALC would receive certificates ("XXXXXXXXXX Certificate") at that time acknowledging their right to a pro rata share in any subsequent surplus that should become available for distribution once the XXXXXXXXXX claims had been satisfied. It was expected, at the time the certificates were issued (XXXXXXXXXX ), that little to no such subsequent distribution would be made. The certificates were issued pursuant to a trust indenture and qualify as securities XXXXXXXXXX . The liabilities of the XXXXXXXXXX have now been satisfied and the amount expected to be distributed to the ALCs in satisfaction of their entitlements under the XXXXXXXXXX Certificates will result in full payment of the claims proven in the bankruptcy together with deemed interest. The representatives of the corporation are seeking a ruling that the payments made to those non-residents in satisfaction of their interests under the XXXXXXXXXX Certificates will not be subject to withholding tax.

Position: To the extent that the Act deems a payment to be made in satisfaction of the accrued interest component of a Proven Claim or in respect of interest deemed to be payable under the BIA, withholding tax must be remitted by the Indenture Trustee, except where the debt in respect of which a creditor has proven its claim was exempt from withholding tax under paragraph 212(1)(b).

Reasons: In consideration for receiving the initial distribution and the XXXXXXXXXX Certificates, each of the ALCs settled their proven claims. Had the proven claims been satisfied directly from the bankrupt estate, rather than through the XXXXXXXXXX Certificate mechanism, a component of each proven claim would have been income subject to tax. Section 76 applies where a security or other right is received by a person in satisfaction of a debt to include in income the value of the security or right, to the extent that there would have been an income inclusion had the debt been paid. Subsection 214(4) provides that, where section 76 would have applied had the person been resident, the issuer of the right or security is deemed to have made a payment to the non-resident in the amount that would have been the income inclusion under section 76. Subsection 76(2) provides that, if the debt was not payable at the time of issuance of the security or right, the income inclusion would take place in the year that the debt would have been payable. On the facts, the proven claims would have been payable at the time that they were enforceable, which is, in our view, when the trustee in bankruptcy had funds available for distribution. Therefore, the Indenture Trustee is deemed to have made a payment subject to withholding tax in the year that the funds become available for distribution. Subsection 214(4) further provides that the deemed payment is deemed to have been made in respect of the original debts of the ALCs; therefore, if the claim proven by a creditor was exempt from withholding tax, there is no withholding obligation to the Indenture Trustee in respect of any payment deemed to have been made to that creditor.

XXXXXXXXXX 							2000-002571

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: Advance income tax ruling request of XXXXXXXXXX, in
its capacity as trustee in bankruptcy of XXXXXXXXXX
XXXXXXXXXX (X Co.) and as administrator of X Co. under the Companies'
Creditors Arrangement Act, XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in your subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended ("the Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the relevant definitions, the facts, proposed transactions and the purpose of the proposed transactions is as follows:

DEFINITIONS

"ALC Allocation" means the amount of the Y Co. Residue to be paid to the estate of X Co., as described in paragraph 37;

"ALC Distribution" means the distribution of X Co.'s available liquid assets made to the Arm's Length Creditors upon implementation of the Plan, as described in paragraph 23;

"Arm's Length Creditors" means the creditors of X Co. described in paragraph 16;

"Available Assets" means all liquid assets of X Co. vested in the Trustee minus any reserves maintained by the Trustee for its costs as described in paragraph 40;

"BIA" means the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3;

"BIA Amount" means the amount calculated pursuant to the section 143 of the BIA in respect of the Proven Claims of the ALCs;

"CCAA" means the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36;

"X Co. Remaining Assets" means assets of X Co. that were not Available Assets at the Plan Implementation Date, as described in paragraph 40;

"Canadian Dollar Noteholders" means the holders of the promissory notes issued by X Co. described in paragraph 17;

"Certificate Payment Account" means the segregated account maintained by the Indenture Trustee containing funds to be distributed to the Certificateholders, as described further in paragraph 72;

"Certificateholders" means the registered holders of XXXXXXXXXX Certificates;

"Certificateholders' Representative" means XXXXXXXXXX;

"Class A Global Account" means the segregated account maintained by the Indenture Trustee containing funds to be distributed to holders of definitive Class A Certificates, as described further in paragraph 74;

"Class A Participation Units" means Participation Units evidenced by Class A XXXXXXXXXX Certificates;

"Class B Participation Units" means Participation Units evidenced by Class B XXXXXXXXXX Certificates;

"Class A XXXXXXXXXX Certificates" means the XXXXXXXXXX Certificates described in paragraph 60 and 61, below;

"Class B XXXXXXXXXX Certificates" means the XXXXXXXXXX Certificates described in paragraphs 60 and 61, below;

"Y Co. Residue" means any assets remaining in Y Co. after the claims of XXXXXXXXXX have been satisfied that are available for distribution to the remaining creditors of Y Co., as described in paragraph 36;

"Indenture" means the trust indenture entered into by X Co. and the Indenture Trustee XXXXXXXXXX;

"Indenture Trustee" means XXXXXXXXXX in its capacity as trustee under the terms of the Indenture;

"Interest Period" means, in respect of all XXXXXXXXXX Certificates, the period commencing on XXXXXXXXXX and ending on the date upon which the payments described in paragraph 67, other than amounts described in clause (a)(i) of that paragraph, have been made in full;

"Liquidator" means the liquidator of Y Co., as described in paragraph 5;

"Maximum Amount" means the maximum total amount which can be paid under the XXXXXXXXXX Certificates, as described further in paragraph 67;

"Noteholders" means the Canadian Dollar Noteholders and the Sterling Noteholders;

"Other ALCs" means the ALCs other than the Canadian Dollar Noteholders, the Sterling Noteholders, the Swap Claimants and the Z Co. Note Claimants;

"Participation Units" means the units allocated to each ALC, as described in paragraph 59;

"Plan" means the plan of compromise or arrangement for X Co. under the CCAA dated XXXXXXXXXX , as amended restated and supplemented;

"Proven Claim" of a Creditor means the amount of the Claim of such Creditor as at XXXXXXXXXX;

"Rehabilitator" means the liquidator of XXXXXXXXXX, as described in paragraph 13;

"XXXXXXXXXX Certificates" means the instruments evidencing an entitlement to share in any X Co. Remaining Assets and Y Co. Residue, as described in paragraph 39;

"Sterling Noteholders" means the holders of the promissory notes issued by X Co. as described further in paragraph 18;

"Swap Claimants" means the claimants under various X Co. derivative transactions outstanding at the date of the bankruptcy of X Co.;

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

"Trustee" means XXXXXXXXXX, Inc. in its capacity as trustee in bankruptcy of X Co. and as administrator of X Co. under the CCAA.

FACTS

The XXXXXXXXXX Group

1. XXXXXXXXXX (Y Co.), a taxable Canadian corporation, was incorporated under the laws of Canada on XXXXXXXXXX . Y Co. is a XXXXXXXXXX.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

The liquidation of Y Co.

4. XXXXXXXXXX.

5. XXXXXXXXXX The term "Liquidator" for the purposes of this ruling, will refer collectively to XXXXXXXXXX capacity as provisional liquidator of Y Co. and to XXXXXXXXXX in its prior capacity as agent for XXXXXXXXXX and in its current capacity as permanent liquidator of Y Co., as the case may be.

XXXXXXXXXX (X. Co.)

6. X Co. is incorporated under the laws of the Province of XXXXXXXXXX all the issued and outstanding shares of which are held by XXXXXXXXXX Both X Co. and XXXXXXXXXX are a "taxable Canadian corporation". XXXXXXXXXX is a subsidiary wholly-owned corporation of Y Co. Both X Co. and XXXXXXXXXX are members of "the Y Co.Group".

7. X Co.'s taxation year end is XXXXXXXXXX and it files its federal income tax returns with the XXXXXXXXXX Taxation Centre. X Co.'s Revenue Canada business account number is XXXXXXXXXX and it otherwise deals with the XXXXXXXXXX TSO.

8. X Co. was incorporated to meet the financial and cash management needs of Y Co. and most of the other members of the Y Co. Group by providing treasury, corporate finance and other financial management services. As part of these activities, X Co. participated in the raising of funds from arm's length creditors in the capital markets; loaned money to and borrowed money from Y Co. and other Y Co. Group members; and entered into various derivative transactions (e.g., foreign currency and interest rate swaps) with Y Co. and other Y Co. Group members from time to time. X Co.'s derivative activities also included providing services and products to arm's length parties.

9. XXXXXXXXXX.

XXXXXXXXXX

10. XXXXXXXXXX.

11. XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

XXXXXXXXXX ("Z Co.")

14. Z Co. was incorporated in XXXXXXXXXX by X Co.. All the issued and outstanding shares of Z Co. are held by X Co. such that it is a member of the Y Co. Group. At all relevant times, Z Co. was a resident of XXXXXXXXXX and not of Canada for purposes of the Act.

15. Concurrent to the liquidation proceedings of Y Co. and X Co., Z Co. was placed in liquidation under XXXXXXXXXX .

Claims relevant to the Bankruptcy of X Co.

16. For the purposes of this ruling, the claims in bankruptcy against X Co. can be divided into two classes. The first, Third Parties' claims are not relevant for the purposes of this ruling. The second are the claims of Arm's Length Creditors (ALCs). ALCs comprise all creditors of X Co., other than Third Parties, but do not include the Rehabilitator or the Liquidator. In particular, the ALCs include Noteholders and the Z Co. Claimants as described below, claimants under various X Co. derivatives transactions outstanding on the date of bankruptcy, and general creditors of X Co..

A. The Noteholders

17. On XXXXXXXXXX, X Co. issued XXXXXXXXXX debt securities in the form of $XXXXXXXXXX promissory notes due XXXXXXXXXX (the "Canadian Dollar Notes"). The Canadian Dollar Notes were issued pursuant to an Offering Memorandum dated XXXXXXXXXX as part of X Co.'s general corporate finance activities, and were guaranteed by Y Co..

18. On XXXXXXXXXX, X Co. also issued XXXXXXXXXX debt securities in the form of XXXXXXXXXX promissory notes due XXXXXXXXXX (the "Sterling Notes"). The Sterling Notes were issued pursuant to an Offering Circular dated XXXXXXXXXX as part of X Co.'s general corporate finance activities, and were guaranteed by Y Co..

19. As at XXXXXXXXXX, the total amounts outstanding under the Canadian Dollar Notes and Sterling Notes were as follows:

Principal 	 Interest
Canadian Dollar Notes           	XXXXXXXXXX
Sterling Notes                  		XXXXXXXXXX 

In the case of the Sterling Notes, these amounts are determined using a rate of exchange for converting Pounds Sterling amounts into Canadian Dollars of XXXXXXXXXX as contemplated by the Plan.

B. Z Co. Claimants

20. Z Co. was incorporated for the purpose of providing treasury services to XXXXXXXXXX members of the Y Co. Group that were previously provided by X Co.. Z Co. issued commercial paper ("Z Co. Notes") in XXXXXXXXXX. X Co. provided its corporate guarantee to the holders of the Z Co. Notes, to facilitate these borrowings. As a result of Z Co.'s insolvency there was a shortfall on the repayment of the Z Co. Notes out of the Z Co. estate. Therefore, persons having outstanding claims against Z Co. (the "Z Co. Claimants") filed claims against X Co.'s bankrupt estate under the terms of its guarantee for recovery of such shortfall.

The Plan of Compromise

21. On XXXXXXXXXX (the "Plan Implementation Date"), a plan of compromise or arrangement pursuant to the CCAA (the "Plan") was implemented by the various parties as part of a global final settlement of the claims (and potential claims) made against X Co., Y Co., and other Y Co. subsidiary companies in relation to the bankruptcy of X Co.. Besides the approvals by the affected parties required by the provisions of the CCAA, the Plan was subject to the approval of XXXXXXXXXX.

22. Under the terms of the Plan the Trustee oversees the administration of matters relating to the Plan and its implementation in its capacity as Administrator under the CCAA. The term "Trustee/Administrator" refers to the Trustee acting in its dual capacity as trustee in bankruptcy of X Co. and administrator of X Co. under the Plan. The four major categories of claimants affected under the Plan are (a) the Rehabilitator; (b) the Liquidator; (c) the ALCs; and d) the Third Parties.

23. Pursuant to the terms of the Plan the ALCs were entitled to receive a distribution (ALC Distribution) from X Co.'s available liquid assets consisting of the sum of the "ALC Dividend", the "Remainder Amount" and the "ALC Share" .

24. The Remainder Amount is defined under the Plan to mean the amount obtained by subtracting the amount of the "Noteholders' Entitlement" (see 33 below) from the "Liquidator's Dividend" (see 28 below).

25. The ALC Share is defined under the Plan to mean any entitlement of the ALCs to payments out of the "Contribution Amount" (see 29 below).

26. The ALC Dividend is defined under the Plan by the following formula:

XXXXXXXXXX.

27. Pursuant to the terms of the Plan the Rehabilitator was entitled to receive certain distributions from X Co.'s remaining available liquid assets described in the aggregate as the "Rehabilitator's Distribution". The Rehabilitator's Distribution consists of the sum of the "Rehabilitator's Dividend" and the "Rehabilitator's Share", and was required to be not less than a minimum amount of $XXXXXXXXXX (the "Rehabilitator's Minimum"). The Rehabilitator's Share is defined under the Plan to mean any entitlement of the Rehabilitator to payments out of the Contribution Amount. The Rehabilitator's Dividend is defined under the Plan by the following formula:

XXXXXXXXXX.

28. Pursuant to the terms of the Plan the Liquidator is entitled to receive a distribution from X Co.'s remaining available liquid assets described as the "Liquidator's Dividend". The Liquidator's Dividend is defined under the Plan by the following formula:

XXXXXXXXXX.

29. Pursuant to the terms of the Plan, the Liquidator is obliged to pay the Administrator the sum of $XXXXXXXXXX described as a "Contribution Amount" and the Administrator, on Plan Implementation Date is to divide the Contribution Amount into two separate amounts, referred to as the "ALC Share" and the "Rehabilitator's Share", in accordance with the terms of the Plan as follows:

(a) Firstly, the Contribution Amount is to be divided between the ALCs and/or the Rehabilitator sufficient to enable the sum of the ALC Distribution plus the Noteholders' Entitlement to equal the ALC Minimum and the Rehabilitator's Distribution to equal the Rehabilitator's Minimum;

(b) After computing the amounts in (a) above, the next $XXXXXXXXXX, if any, was to be paid to the ALCs; and

(c) If any amount remained, after computing the amounts in (a) and (b) above, such amount was to be divided between the ALCs (XXXXXXXXXX%) and the Rehabilitator (XXXXXXXXXX%).

30. The ALC Share was to be paid by the Administrator in the same manner as the ALC Dividend as described in 32 below. The Rehabilitator's Share was to be paid by the Administrator in the same manner as the Rehabilitator's Dividend as described in 32 below.

31. On the Plan Implementation Date the Administrator was to calculate the amount of the ALC Dividend, the Rehabilitator's Dividend and the Liquidator's Dividend in accordance with their respective entitlements under the Plan. The Administrator was also to determine the division of the Liquidator's Dividend into the Noteholders' Entitlement and the Remainder Amount in accordance with the respective provisions under the Plan.

32. The Administrator was to pay each Arm's Length Creditor its pro rata share of the ALC Dividend based upon the proportion their particular Proven Claim is of the aggregate amount of the Proven Claims of all ALCs. The Administrator was also to pay the Rehabilitator's Dividend to the Rehabilitator or as the Rehabilitator directed in writing.

33. The Liquidator was to assign the right to its entitlement of the Liquidator's Dividend as follows:

(a) A portion was to be assigned to the Noteholders (the "Noteholders' Entitlement") in recognition of claims they had asserted arising out of or in connection with the Y Co. Guarantees. This would result in a differential in recovery between the Noteholders and the other ALCs of XXXXXXXXXX% of the Noteholders' Proven Claims; and

(b) The remaining portion was to be assigned to the ALCs (the "Remainder Amount) in recognition of claims they had asserted arising out of or in connection with the Y Co. Guarantees.

34. The Administrator was to pay on behalf of the Liquidator in accordance with their respective entitlements under the Plan the amount of the Noteholders' Entitlement to the Noteholders' Representative and to each Arm's Length Creditor its pro rata share of the Remainder Amount based upon the proportion their particular Proven Claim was of the aggregate amount of the Proven Claims of all ALCs.

35. The Plan provided that the payment by the Administrator of the ALC Distribution, the Noteholders' Entitlement and the Rehabilitator's Distribution would be applied by X Co. and by the respective recipients in the following order until exhausted:

(a) firstly, to payment of that portion of the recipient's Proven Claim which does not represent interest;

(b) secondly, if any amount remained payable under the Plan, to payment of that portion of the Proven Claim which represented any amount in respect of accrued, compounded or unpaid interest, other than any amount that would, if paid, be subject to any deduction or withholding on account of tax under any Tax Act; and

(c) lastly, if any amount remained payable under the Plan, to payment of that portion of the Proven Claim which represented any amount that is subject to any deduction such order as the Administrator may designate.

36. After the above transactions under the Plan were completed and the XXXXXXXXXX, the Plan provided that, should there be any assets remaining in Y Co., including XXXXXXXXXX (the "Y Co. Residue"), the estate of X Co. would be entitled to share in distribution from the Y Co. Residue in the following manner:

(a) none of the XXXXXXXXXX would be payable to X Co.;

(b) of the next XXXXXXXXXX would be payable to X Co.; and

(c) of any amounts in excess of XXXXXXXXXX of such excess would be payable to X Co..

37. However, the maximum total amount of Y Co. Residue to be paid to the estate of X Co. (the "ALC Allocation") was limited by the formula

XXXXXXXXXX.

38. XXXXXXXXXX However, if any Y Co. Residue did exist, the amount in respect of the ALC Allocation would be paid to and beneficially received by the estate of X Co. as a contribution of capital.

39. In addition to the foregoing, the Plan provided for the issuance of XXXXXXXXXX Certificates, as part of the consideration to be provided to the ALCs of X Co. in satisfaction of their claims against X Co.. The XXXXXXXXXX Certificates, which would represent a right to receive any excess assets that may exist in X Co., would be issued by X Co. to the ALCs under the terms of a trust indenture (the "Indenture") in accordance with relevant securities regulations and in a form approved by XXXXXXXXXX. The XXXXXXXXXX Certificates so issued by X Co. would be marketable securities under the relevant securities regulations but would not constitute debt obligations of X Co..

40. It was uncertain on the Plan Implementation Date whether any assets would exist in X Co.'s estate after X Co. made its various distributions under the Plan and to other prior-ranking claimants that would allow X Co. to make any payment in respect of the settlement of the XXXXXXXXXX Certificates. Payments under the XXXXXXXXXX Certificates would be funded under the Plan out of X Co.'s assets that remained in X Co. after the Plan Implementation Date that were not Available Assets (liquid assets of X Co. less a reserve for certain costs) at that time (the "Remaining Assets"), if any, and the amount of Y Co. Residue, if any, paid to and received by X Co. as the ALC Allocation, as described in 37 above. The Trustee would be required to cause the amount of ALC Allocation to be remitted to the Indenture trustee for distribution under the XXXXXXXXXX Certificates.

41. The Trustee would be further obligated to cause the amount of X Co.'s Remaining Assets to be remitted to the Indenture trustee for distribution under the XXXXXXXXXX Certificates. The maximum amount that could be paid to an Arm's Length Creditor under the Plan would be limited to an amount equal to the amount of their Proven Claim, plus BIA interest. Consequently, the Plan contemplated that if all ALCs received XXXXXXXXXX Certificates, an ALC's share of the payments under the XXXXXXXXXX Certificates would not exceed the amount of their Proven Claim, plus BIA interest, less their proportionate share of any amount included in the ALC Distribution. (Paragraphs 62 and 63, below, describe the consequences of any ALC not receiving its share of XXXXXXXXXX Certificates.)

42. None of the Liquidator, the Rehabilitator or the Trustee/Administrator would be required to make any representation or guarantees or would be required to give any warranty with respect to the issuance of, or ability to transfer the XXXXXXXXXX Certificates, or as to the existence of a secondary market or the value of the XXXXXXXXXX Certificates, or the amount, if any, to be paid with respect thereto or the compliance with applicable laws, if any, in the creation, issuance and/or transfer of the XXXXXXXXXX Certificates. Moreover, pursuant to the Plan, each of the Rehabilitator and the Liquidator disclaimed any responsibilities or obligations with respect to the creation, issuance and/or transfer of XXXXXXXXXX Certificates or the creation of a Y Co. Residue. The XXXXXXXXXX Certificate Holders would have recourse only to (i) the amount of their ALC Allocation that arises from the required payment to X Co. of the Y Co. Residue from Y Co., if any, and (ii) X Co.'s Remaining Assets, if any, after deduction for the fees due to the XXXXXXXXXX Certificate Holders' Representative pursuant to the Plan, as described in 66 below. As a result, the fair market value of the XXXXXXXXXX Certificates on the date of issue was expected to be nominal having regard to their highly speculative nature.

43. XXXXXXXXXX which acted as the Noteholders' representative would be appointed as the "XXXXXXXXXX Certificate Holders' Representative", with the primary mandate to produce information for the XXXXXXXXXX Certificate Holders concerning the financial condition of the Y Co. estate. The XXXXXXXXXX Certificate Holders' Representative would be remunerated from a $XXXXXXXXXX fund to be established from the ALC Distribution to the ALCs. It would not be remunerated from the assets of Y Co.. The XXXXXXXXXX Certificate Holders' Representative would also be entitled to a success fee calculated in accordance with the terms of the Plan.

44. The Trustee and the ALCs would assign any and all claims and proceeds of claims against the Third Parties and certain other claims to the Rehabilitator and the Liquidator jointly or to a vehicle to be established by them. The Trustee would attribute nominal value to these rights in computing income for purposes of the Act. Orders of the appropriate courts would be sought to, among other things, provide that any judgments in favour of the Third Parties against X Co. on their claims-over would be satisfied by a credit which would decrease any judgment against the Third Parties by the Rehabilitator or the Liquidator.

45. The Plan also provided for the exchange of certain releases and the barring of certain claims which are not relevant for the purposes of this Ruling.

46. The Plan originally provided that it was to be implemented by XXXXXXXXXX, if a favorable income tax ruling was not received by each of the parties by XXXXXXXXXX.

47. In consideration of the extension of the Plan beyond XXXXXXXXXX , the ALCs became entitled to receive on or after the Plan Implementation Date an additional amount to be divided pro rata between them based upon the proportion which the Proven Claim of an Arm's Length Creditor was to the aggregate amount of Proven Claims of all of the ALCs, as follows:

(a) On the Plan Implementation Date, the Liquidator would provide to the Administrator, for distribution to the ALCs, the sum of XXXXXXXXXX

(b) XXXXXXXXXX.

48. As a result of the implementation of the Plan and the XXXXXXXXXX, all of the assets of the estate of X Co. would be distributed on or immediately after the Plan Implementation Date, subject to X Co.'s entitlement to a portion of the Y Co. Residue as described in 36 above and X Co. retaining the following assets (the"X Co. Estate Residue"):

(a) the Trustee would maintain reasonable reserves, in an amount to be determined XXXXXXXXXX prior to the Plan Implementation Date, for purposes of paying Trustee/Administrator costs and certain other costs or priority claims in respect of the X Co. estate after the Plan Implementation Date;

(b) X Co. would retain a contingent receivable in respect of claims made under litigation; and

(c) X Co. would retain a claim for a refund of over-paid taxes for its taxation year ended XXXXXXXXXX, which was, at the time, the subject of a Notice of Objection filed by X Co..

(d) Any X Co. Estate Residue realization after the Plan Implementation Date, together with any unexpended reserve for Trustee/Administrator costs, would be distributed to the XXXXXXXXXX Certificate Holders and the Rehabilitator according to the formula set out in the Plan.

49. The implementation of the Plan would be effected through the CCAA. X Co. would remain a bankrupt throughout implementation of the Plan and also after the distribution of X Co.'s assets under the Plan.

Implementation of the Plan

50. On XXXXXXXXXX, a report stating that the applicable conditions set out in the Plan were satisfied or waived in accordance with the Plan was filed with the XXXXXXXXXX Court. Accordingly, on that date, the order of the XXXXXXXXXX which sanctioned and approved the Plan and the Indenture became a Final Order approving the Plan, and thereby authorized that the assets of X Co. be distributed according to the terms thereof.

51. The Plan was implemented on the Plan Implementation Date in a manner and with effect as described above, at which time the Trustee gave directions to cause the ALC Distribution to be paid to the ALCs in the amount of $XXXXXXXXXX. Subsequently, certain additional cash payments were made to certain ALCs to correct clerical errors and in once case to satisfy a Proven Claim allowed after the Plan Implementation Date.

52. The Trustee gave directions to and instructed the Indenture Trustee to cause XXXXXXXXXX Certificates representing in the aggregate XXXXXXXXXX Units (defined below) to be issued to the ALCs. These amounts include units subsequently issued to certain ALCs to correct clerical errors and in one case to satisfy a Proven Claim allowed after the Plan Implementation Date.

53. The following summarizes the payment amounts described in paragraph 51 and issued Participation Units described in paragraph 52 to the various ALCs:

XXXXXXXXXX.

54. The cash payments and the issue of XXXXXXXXXX Certificates described in paragraphs 51, 52 and 53 were made in full satisfaction of the claims of the ALCs against X Co.. As a result of the final implementation of the Plan, all claims of the ALCs made against X Co. were settled. The ALCs also agreed not to seek any recovery or pursue any right, action or claim against X Co. other than as specifically provided for in the Plan.

The XXXXXXXXXX Certificates

55. The XXXXXXXXXX Certificates were issued pursuant to the Plan, and under the terms of the Indenture, in a form approved by the XXXXXXXXXX Court. The XXXXXXXXXX Certificates were issued in accordance with relevant securities regulations, and are marketable securities under such regulations. The Plan and the Indenture each expressly provides that the XXXXXXXXXX Certificates do not constitute debt obligations of X Co.

56. As noted in paragraph 36 the time the Plan was implemented, it was contemplated that, XXXXXXXXXX, there could be assets remaining in Y Co., XXXXXXXXXX Under the terms of the Plan, X Co. is entitled to a share of the Y Co. Residue (i.e., the ALC Allocation) for the benefit of the ALCs, up to a maximum amount as calculated in the manner set out in paragraph 36. Any ALC Allocation received by X Co. is required to be distributed to the Certificateholders.

57. In addition, the Certificateholders are entitled to receive distributions out of any X Co. Remaining Assets (i.e., other assets of X Co. not available for distribution on the Plan Implementation Date and not otherwise required for the administration of the estate of X Co.).

58. Under the Plan, the Trustee is required to cause the amount of any ALC Allocation received by X Co. to be remitted to the Indenture Trustee for distribution under the XXXXXXXXXX Certificates. The Trustee is further obligated to cause the amount of X Co.'s Remaining Assets to be remitted to the Indenture Trustee for distribution under the XXXXXXXXXX Certificates. Under the Plan, none of the Liquidator, the Rehabilitator or the Trustee is required to make any representation or guarantees or is required to give any warranty with respect to the issuance of, or ability to transfer, the XXXXXXXXXX Certificates, or as to the existence of a secondary market or the value of the XXXXXXXXXX Certificates, or the amount, if any, to be paid with respect thereto. Moreover, pursuant to the Plan, each of the Rehabilitator and the Liquidator disclaimed any responsibilities or obligations with respect to the creation, issuance and/or transfer of XXXXXXXXXX Certificates or the creation of a Y Co. Residue.

The Indenture

59. The Indenture was entered into under the terms of the Plan in a form approved by the XXXXXXXXXX Court. The Indenture provides that the XXXXXXXXXX Certificates are to be issued to the ALCs as "Participation Units". Participation Units were allocated to each Arm's Length Creditor on the basis of one unit for each $XXXXXXXXXX of that Arm's Length Creditor's Proven Claim in X Co. The Participation Units are not denominated in any dollar amount.

60. The Indenture creates two classes of XXXXXXXXXX Certificates: Class A and Class B. The form of each class of XXXXXXXXXX Certificate is prescribed by the Indenture. All of the ALCs were issued Class A XXXXXXXXXX Certificates. The Class B XXXXXXXXXX Certificates were issued only to the ALCs who were not Noteholders.

61. As noted in subparagraph 33(a), the Noteholders received from the cash distributions made on the Plan Implementation Date a positive differential in recovery relative to the other ALCs of XXXXXXXXXX% of the Noteholders' Proven Claims. It was therefore necessary that the issue of XXXXXXXXXX Certificates reflect the fact that the Noteholders received a cash distribution of XXXXXXXXXX% of their Proven Claims that was not received by the other ALCs. The Class B XXXXXXXXXX Certificates were issued to the ALCs other than the Noteholders. They represent Participation Units issued on account of the XXXXXXXXXX% of the Proven Claims of these ALCs which, unlike the Noteholders, was not paid to these persons on the Plan Implementation Date.

62. On the Plan Implementation Date, definitive Class A XXXXXXXXXX Certificates could not be issued to Noteholders as the Canadian Dollar Notes and the Sterling Notes were in bearer form. Until all of the Canadian Dollar Notes and Sterling Notes are surrendered, two global Class A Certificates (one with respect to the Canadian Dollar Notes and the other with respect to the Sterling Notes) were issued to the Indenture Trustee for Participation Units up to the amount of the Proven Claims of the Noteholders. As Noteholders tender their Canadian Dollar Notes and Sterling Notes for exchange into XXXXXXXXXX Certificates, definitive Class A XXXXXXXXXX Certificates are issued to them and the global Class A XXXXXXXXXX Certificates are reduced commensurably.

63. On XXXXXXXXXX, the Indenture was amended to provide that a Noteholder who elected to not receive definitive Class A Certificates to which the Noteholder would otherwise have been entitled may reverse such election on or before XXXXXXXXXX, by filing a revised election to receive such Class A Certificates. Such revised election is made effective as of the Plan Implementation Date by order of the XXXXXXXXXX Court. The receipt of such definitive Class A Certificates is deemed to occur as of XXXXXXXXXX. The Indenture was so amended to permit Noteholders who submitted prior elections in error to correct their mistake. The Indenture was also amended on XXXXXXXXXX to provide that if, as of XXXXXXXXXX, a Noteholder has elected not to receive definitive Class A Certificates, then effective XXXXXXXXXX the Indenture Trustee shall cause the Participation Units which would have been allocated in respect of such Noteholder's Claim to be reallocated pari passu to all remaining Certificateholders.

64. The Indenture provides that the XXXXXXXXXX Certificates are to be in registerable form. The Indenture Trustee maintains a central register at its principal office in XXXXXXXXXX and branch registers in XXXXXXXXXX . The register includes the names and latest known addresses of the holders of XXXXXXXXXX Certificates of each Class, particulars of the XXXXXXXXXX Certificates held by them, the transfer of all XXXXXXXXXX Certificates and the cancellation particulars of XXXXXXXXXX Certificates. No transfer of XXXXXXXXXX Certificates is effective against X Co. or the Indenture Trustee until it is recorded on the register. The Indenture Trustee can only make distributions under the Indenture to the registered holders of the XXXXXXXXXX Certificates.

65. The Indenture expressly confirms the provisions of the Plan that the XXXXXXXXXX Certificates do not constitute debt obligations of X Co., and provides that no interest is payable in respect of amounts, if any, distributed under XXXXXXXXXX Certificates.

66. The only entitlement of a Certificateholder is to share pro rata in respect of his Class in the amounts of Y Co. Residue received by X Co. and X Co. Remaining Assets available for distribution. The issued Class A XXXXXXXXXX Certificates rank pari passu with each other and the issued Class B XXXXXXXXXX Certificates rank pari passu with each other. The Class B XXXXXXXXXX Certificates rank subordinate to the Class A XXXXXXXXXX Certificates in respect of certain distributions (as defined in the definition of the "Maximum Amount" payable under the XXXXXXXXXX Certificates at paragraph 67, below).

67. Section 1.1 of the Indenture defines the "Maximum Amount" payable under a XXXXXXXXXX Certificate as:

(a) with respect to each holder of a Class A Certificate, the aggregate of

(i) $XXXXXXXXXX multiplied by the number of Participation Units represented by such holder's Certificate, and

(ii) in the event that the amounts described in paragraph (a)(i) and (b) of this definition are distributed in full, an amount equal to interest per annum calculated annually and for the Interest Period pursuant to section 143 of the BIA on the product of $XXXXXXXXXX multiplied by the number of Participation Units represented by such holder's Certificate (i.e., the BIA Amount); and

(b) with respect to each holder of a Class B Certificate, the product of $XXXXXXXXXX multiplied by the number of Participation Units represented by such holder's Certificate.

68. For the purposes of calculating the amount specified in items (a)(i) and (b) above, any monies distributed as fees to the Certificateholders' Representative under the terms of the Indenture are deemed to be amounts distributed to the Class A Certificateholders up to the amount calculated pursuant to paragraph (a)(i) above, and then to the Class B Certificateholders up to the amount calculated pursuant to paragraph (b) above, in each case pro rata based on the number of Participation Units held by each Certificateholder, if such amount is less than the Maximum Amount distributable to all Class A Certificateholders or all Class B Certificateholders, as the case may be.

69. On XXXXXXXXXX, the Indenture was amended to provide that, consistent with the ordering provision for payment of the ALC Distribution made pursuant to the Plan (see paragraph 35, above), the payment of any Distribution Amount shall be applied by X Co and by the respective recipients as having been paid on account of the following amounts in the following order until exhausted:

(a) firstly, that portion of the Proven Claims not satisfied by way of the ALC Allocation distribution as of the Plan Implementation Date which do not represent interest,

(b) secondly, that portion of Proven Claims not satisfied by way of the ALC Allocation distribution as of the Plan Implementation Date which represent any amount in respect of accrued, compounded or unpaid interest, other than any amount that would, if paid, be subject to any deduction or withholding on account of taxes under any Tax Act;

(c) thirdly, any BIA interest on Proven Claims represented by principal amounts of which the payment of interest thereon, if paid, not be subject to any deduction or withholding on account of taxes under any Tax Act; and

(d) fourthly, that portion of Proven Claims not satisfied by way of the ALC Allocation distribution as of the Plan Implementation Date and any other BIA interest on Proven Claims which represent any amount that is subject to any deduction or withholding on account of taxes under any Tax Act.

70. The Indenture identifies the source of funds for distribution to the holders of the XXXXXXXXXX Certificates as follows:

(a) the ALC Allocation, which is the amount of the X Co. share of the Y Co. Residue under the Plan; and

(b) the X Co. Remaining Assets.

71. The Indenture provides that X Co. shall cause any amounts receivable by it and payable to the Trustee for the benefit of the Certificateholders under the Plan, including, without limitation, X Co. Remaining Assets and the ALC Allocation, or any part thereof, to be directly received by the Indenture Trustee for deposit in an account (the "Certificate Payment Account"); provided that if any such proceeds are directly received by X Co., then such proceeds shall be held in trust for the benefit of the Certificateholders and X Co. shall, forthwith upon receipt of same, cause such proceeds to be remitted to the Trustee for deposit in the Certificate Payment Account.

72. The Certificate Payment Account is an account held by the Indenture Trustee to deposit all funds to be distributed to the Certificateholders. The Certificate Payment Account is defined in the Indenture as a segregated account to be separately identified and maintained by the Trustee for the benefit of the Certificateholders, and containing or to contain all cash comprising the X Co. Remaining Assets, the ALC Allocation, and any other amounts received by X Co. and which are required to be remitted to the Indenture Trustee pursuant to the Plan, and any proceeds of, or derived from, any of the foregoing, which proceeds are to be held in trust for the benefit of the Certificateholders in accordance with the terms of the Indenture.

73. Amounts credited or required to be credited to the Certificate Payment Account (each a "Distribution Amount") are to be distributed in the following order:

(a) first, from the Distribution Amount attributable to the ALC Allocation to the extent of available funds, and otherwise from the Distribution Amount generally to the extent of available funds, to the Indenture Trustee to pay any amounts for which the Indenture Trustee is entitled to be reimbursed under the terms of the Indenture;

(b) second, from the Distribution Amount attributable to the ALC Allocation to the extent of available funds, after giving effect to item (a), to the Certificateholders' Representative to pay any amounts for which the representative is entitled to be reimbursed under the terms of the Indenture;

(c) third, from the Distribution Amount after giving effect to items (a) and (b) above, the amount of fees payable to the Certificateholders' Representative determined in accordance with the Indenture; and

(d) fourth, after giving effect to items (a) to (c) above, to the Certificateholders up to the Maximum Amount payable under the XXXXXXXXXX Certificates in a manner prescribed by the Indenture. The amount so distributed to the Certificateholders is to be paid out in the order described in paragraphs 66, 67 and 69, above.

74. In the case of Noteholders who have made no election to obtain (or not obtain) definitive Class A Certificates, the amounts distributed on the Participation Units which would have been allocated in respect of such Noteholder's Proven Claim are paid to and maintained in the Class A Global Account. This account is defined in the Indenture as a segregated account to be separately identified and maintained by the Indenture Trustee for the benefit of Certificateholders whose Participation Units are represented by the global Class A Certificates. These amounts are in turn distributed to these persons at such time when they elect to receive definitive Class Certificates. The Indenture was amended on XXXXXXXXXX to provide that any such amounts paid to the Class A Global Account and not claimed as of ten years from the Plan Implementation Date to be distributed to all the holders of definitive Class Certificates pari passu notwithstanding that such holders may have received the "Maximum Amount" payable on their Class A Certificates.

75. The Indenture provides that no person other than X Co. has any obligation or liability to the Certificateholders in respect of the XXXXXXXXXX Certificates or amounts payable thereunder; provided, however, that the Indenture Trustee is obligated to distribute to the Certificateholders such monies as are received by it and which are distributable to the Certificateholders.

76. The Indenture provides that a XXXXXXXXXX Certificate shall be deemed to be outstanding until it is (a) cancelled, (b) deemed to be cancelled, (c) delivered to the Trustee for cancellation or (d) money for the payment of the Maximum Amount in respect thereof has been indefeasibly paid to the holder of the XXXXXXXXXX Certificate in immediately available funds. However, a XXXXXXXXXX Certificate in respect of which payments have been made in an aggregate amount less than the Maximum Amount that may be paid under such certificate is deemed to be outstanding only to the extent of the unpaid portion of the Maximum Amount relating thereto. Each XXXXXXXXXX Certificate is canceled on the earlier of the date upon which the Maximum Amount distributable pursuant to that XXXXXXXXXX Certificate has been distributed in full, and in respect of all outstanding XXXXXXXXXX Certificates, the date on which an order is made by the XXXXXXXXXX Court upon application by or on behalf of the Liquidator or the Certificateholders' Representative providing that no further distributions are to be made under or pursuant to the XXXXXXXXXX Certificates and that, subject to the terms of such order, all outstanding XXXXXXXXXX Certificates are of no further force or effect and are deemed to be cancelled.

Other Facts

77. The fair market value of the XXXXXXXXXX Certificates on their date of issue was considered to be nominal having regard to their highly speculative nature. Accordingly, in computing the income of X Co. for purposes of the Act for its XXXXXXXXXX taxation year, the Trustee allocated nominal value to the distribution of the XXXXXXXXXX Certificates for purposes of computing any gain to X Co. on the settlement of the Proven Claims. This caused X Co. to recognize significant taxable income on the settlement of those Proven Claims that represented obligations which were on income account for purposes of the Act.

78. Beginning in XXXXXXXXXX, the Indenture Trustee has recorded registered trades of XXXXXXXXXX Certificates. These are private trades, and the prices paid for the XXXXXXXXXX Certificates are not known in every case. Trading prices during the period of XXXXXXXXXX were in the range of approximately $XXXXXXXXXX, and have since increased.

79. All of the claims of the XXXXXXXXXX have been satisfied, whether by way of payment to such persons or by way of XXXXXXXXXX. The Rehabilitator has established that it held assets in excess of the amounts required to satisfy these claims. This surplus arises largely as a result of XXXXXXXXXX Accordingly, in XXXXXXXXXX, and as required under the terms of a Settlement Agreement, the Rehabilitator paid surplus in the amount of XXXXXXXXXX to the Liquidator for distribution to the claimants of Y Co.. It is likely that additional payments of XXXXXXXXXX surplus will be made to Y Co..

80. The Liquidator has announced that it has satisfied or will satisfy all of the claims of XXXXXXXXXX, and that it has surplus assets (including as a result of the payment(s) made to the Liquidator by the Rehabilitator of the Y Co. (US Branch) surplus). In the result, there is Y Co. Residue.

81. An initial payment of Y Co. Residue by Y. Co. to the Trustee was initiated by the Liquidator by way of a motion made to the XXXXXXXXXX Court, and an order was issued on XXXXXXXXXX to cause the Liquidator to pay to the Trustee the amount of $XXXXXXXXXX (the "Initial ALC Allocation").

82. The Initial ALC Allocation will be greater than the amount payable under the XXXXXXXXXX Certificates determined by reference to the amount of unpaid Proven Claims of the ALCs. Accordingly, the Interest Period will end on or about the day that the Initial ALC Allocation is proposed to be made, i.e., on XXXXXXXXXX so that that additional amount payable under the XXXXXXXXXX Certificates determined by reference to section 143 of the BIA will be determined.

83. It is anticipated that additional amounts of Y Co. Residue will become available in the future so that the Maximum Amount that can be distributed under the XXXXXXXXXX Certificates will likely be distributed.

PROPOSED TRANSACTION

84. It is proposed that the Liquidator will make a first payment of ALC Allocation to X Co. in an amount of $XXXXXXXXXX (the "Initial ALC Allocation") on XXXXXXXXXX. It is furthermore proposed that additional amounts of ALC Allocation will be paid by Y Co. to X Co. on subsequent dates as additional amounts of Y Co. Residue become available for these purposes.

85. On the receipt by X Co. of the Initial ALC Allocation and of any subsequent ALC Allocation amount, the Trustee will cause X Co. to pay such amount to the Indenture Trustee on account of X Co.'s obligations under the terms of the Plan and the Indenture.

86. None of the payments described in the foregoing paragraph will be deducted directly or indirectly in computing the income of X Co. for purposes of the Act in any taxation year, and will not otherwise be used to reduce the amount of any gain realized by X Co. or to increase the amount of any loss incurred by X Co..

87. On the receipt by the Indenture Trustee from X Co. of the Initial ALC Allocation, and on the receipt from X Co. of any subsequent ALC Allocation amount, the Indenture Trustee will forthwith distribute such amounts in accordance with paragraph 73, above.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to effect the payment and distribution to the Certificateholders by each of the Trustee and then the Indenture Trustee of the amount of any ALC Allocation received by X Co. from Y Co., all in accordance with the terms of the Plan and of the Indenture.

RULINGS

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

A. Pursuant to subsections 76(2) and 214(4), all payments received by the Indenture Trustee from X Co. as described in paragraphs 40 and 41 will be subject to subsections 76(1) and subsection 212(1).

B. For the purposes of ruling A, payments so received will be considered

(i) to have been received by each Certificateholder pro rata based on the number of Participation Units allocated to such Certificateholder relative to the total number of Participation Units issued,

(ii) first, in satisfaction of the principal component of the Proven Claims,

(iii) second, in satisfaction of the accrued interest component of the Proven Claims, and

(iv) with respect to the balance, as interest paid pro rata on all Proven Claims.

C. Pursuant to subsection 215(1), the Indenture Trustee is obligated to remit tax as provided for in subsection 212(1) with respect to amounts described in rulings B(iii) and (iv) above, which will constitute a portion of each payment described in ruling B(i) after payments equal to the amount described in ruling B(ii) have been received by the Indenture Trustee, other than such amounts that are in respect of Proven Claims, the principal portion of which is in respect of debt the interest upon which would have been exempt from withholding tax under paragraph 212(1)(b).

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions in respect of the Initial ALC Allocation referred to in paragraph 84 are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch