2001 Ruling 2000-0059543 - ASSUMPTION OF DEBT FOR ASSETS

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:

1) Whether adjusted cost base in the shares of transferee may be used to offset boot for the purposes of 85(1)(b).

2) Whether interest on debt assumed by transferee was deductible under paragraph 20(1)(c) notwithstanding that the aggregate adjusted cost base of the assets transferred was less than the amount of the debt assumed.

Position:

1) Yes
2) Yes

Reasons:

1) The elected amount was within the limits set out in subsection 85(1) and the result did not offend the object and purpose of paragraph 85(1)(b).

2) The fair market value of the assets acquired exceeded the amount of the debt assumed and the assets were used to earn income from business.

XXXXXXXXXX 		2000-005954

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

XXXXXXXXXX.

We are writing in response to your correspondence of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above referenced corporations. We also acknowledge your amended request of XXXXXXXXXX as well as our meetings and various telephone conversations with respect to this matter.

Definitions

In this advance income tax ruling:

"BCO" refers to XXXXXXXXXX;

"CCO" refers to XXXXXXXXXX;

"ECO" refers to XXXXXXXXXX;

"FCO" refers to XXXXXXXXXX;

"OPCO" refers to XXXXXXXXXX;

"Predecessor I" refers to XXXXXXXXXX;

"Predecessor II" refers to XXXXXXXXXX;

"Predecessor III" refers to XXXXXXXXXX;

"NRCO1" refers to XXXXXXXXXX;

"NRCO2" refers to XXXXXXXXXX;

"PARENT" refers to XXXXXXXXXX;

"PARENTXXXXXXXXXX" refers to XXXXXXXXXX, a wholly-owned subsidiary of PARENT;

"PARENT Subsidiaries" refers to all of the entities, whether corporations or partnerships, in which PARENT has a direct interest, except BCO, GP1, GP2, Partnerco1, Partnerco2 and any such entity which will be liquidated or is in the course of liquidation at the time of the transfer described in paragraph 45 hereof;

XXXXXXXXXX

"accumulated profits" means retained earnings computed in accordance with Canadian generally accepted accounting principles, except that the computation:

(i) is made on an unconsolidated basis with investments computed on a cost basis; and

(ii) does not include any appraisal surplus or profits resulting from non-arm's length transactions which transform appraisal surplus into profits on a non-taxable or tax-deferred basis;
and

"Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.

FACTS

1. To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this ruling letter:

a) is under objection;

b) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired;

c) is involved in an earlier return of one of the taxpayers or a related person or,

d) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by one of the taxpayers or a related person.

2. PARENT is a public corporation resident in Canada.

3. PARENT is a corporation continued by the amalgamation of Predecessor I and Predecessor II under the Canada Business Corporations Act pursuant to a certificate and articles of amalgamation dated XXXXXXXXXX.

4. Predecessor II was a corporation continued by the amalgamation of former Predecessor II and former Predecessor III pursuant to a plan of arrangement effective as at XXXXXXXXXX.

5. XXXXXXXXXX.

6. On XXXXXXXXXX, PARENT made an offer to the shareholders of BCO to acquire all of the issued and outstanding shares of the capital stock of BCO. On XXXXXXXXXX, PARENT's offer to purchase all of the issued and outstanding XXXXXXXXXX shares of the capital stock of BCO was extended to XXXXXXXXXX On XXXXXXXXXX, PARENT acquired approximately XXXXXXXXXX shares in the capital of BCO through the offer.

7. By XXXXXXXXXX, PARENT had acquired all of the issued and outstanding XXXXXXXXXX shares in the capital stock of BCO.

8. BCO was incorporated by letters patent dated XXXXXXXXXX. By certificate of continuance dated XXXXXXXXXX, BCO was continued under XXXXXXXXXX BCO is a taxable Canadian corporation. The principal asset of BCO is all of the issued and outstanding shares in the capital of CCO.

9. BCO holds all of the issued and outstanding shares in the capital of CCO, a corporation incorporated under the Canada Business Corporations Act. The principal asset of CCO consisted of all of the issued and outstanding shares in the capital of OPCO prior to the transactions and events described in the paragraphs that follow. OPCO is governed by XXXXXXXXXX CCO and OPCO are each a taxable Canadian corporation.

10. XXXXXXXXXX.

11. Prior to the transactions and events described in the paragraphs below, PARENT was indebted as follows:

a) Pursuant to the credit facilities provided for under a credit agreement dated as of XXXXXXXXXX among PARENT, as borrower, and XXXXXXXXXX, as administrative agent for the lenders, as same was amended as of XXXXXXXXXX (the "PARENT Bank Debt");

b) Pursuant to unsecured notes in the principal amount of US $XXXXXXXXXX issued by PARENT on XXXXXXXXXX under an indenture dated XXXXXXXXXX between PARENT and the XXXXXXXXXX, as trustee (the "XXXXXXXXXX Indenture"). The notes bear interest at the rate of XXXXXXXXXX% per annum (payable semi-annually) and mature on XXXXXXXXXX (the "XXXXXXXXXX Notes");

c) Pursuant to unsecured notes in the principal amount of US $XXXXXXXXXX issued by PARENT on XXXXXXXXXX under an indenture dated XXXXXXXXXX between PARENT and XXXXXXXXXX, as trustee (the "XXXXXXXXXX Indenture"). The notes bear interest at the rate of XXXXXXXXXX% per annum (payable, semi-annually) and mature on XXXXXXXXXX (the "XXXXXXXXXX Notes");

d) Pursuant to unsecured notes in the principal amount of US $XXXXXXXXXX issued by PARENT on XXXXXXXXXX under the XXXXXXXXXX Indenture. The notes bear interest at the rate of XXXXXXXXXX% per annum (payable, semi-annually) and mature on XXXXXXXXXX (the "XXXXXXXXXX Notes");

e) Pursuant to unsecured notes in the principal amount of US $XXXXXXXXXX issued by PARENT on XXXXXXXXXX , under the XXXXXXXXXX Indenture. The notes bear interest at the rate of XXXXXXXXXX % per annum (payable semi-annually) and mature on XXXXXXXXXX (the "XXXXXXXXXX Debentures");

f) Pursuant to unsecured notes in the principal amount of US $XXXXXXXXXX issued by PARENT on XXXXXXXXXX under the XXXXXXXXXX Indenture. The notes bear interest at the rate of XXXXXXXXXX% per annum (payable semi-annually) and mature on XXXXXXXXXX (the "XXXXXXXXXX Debentures");

g) Pursuant to unsecured notes in the principal amount of US $XXXXXXXXXX issued by PARENT on XXXXXXXXXX under the XXXXXXXXXX Indenture. The notes bear interest at the rate of XXXXXXXXXX% per annum (payable semi-annually) and mature on XXXXXXXXXX (the "XXXXXXXXXX Debentures");

h) Pursuant to unsecured notes in the principal amount of US $XXXXXXXXXX issued by PARENT on XXXXXXXXXX under the XXXXXXXXXX Indenture. The notes bear interest at the rate of XXXXXXXXXX% per annum (payable semi-annually) and mature on XXXXXXXXXX (the "XXXXXXXXXX Debentures"); and

i) Pursuant to XXXXXXXXXX% secured notes due XXXXXXXXXX originally issued by Predecessor II in the principal amount of US $XXXXXXXXXX under an Indenture dated as of XXXXXXXXXX between Predecessor II and XXXXXXXXXX, as Trustee (the "Senior Notes").

At the time of the issuance of the XXXXXXXXXX Debentures, the rate of exchange of the Canadian dollar to the US dollar was XXXXXXXXXX, based on the Bank of Canada noon rate.

At the time of the issuance of the XXXXXXXXXX Notes, the XXXXXXXXXX Notes and the XXXXXXXXXX Debentures, the rate of exchange of the Canadian dollar to the US dollar was XXXXXXXXXX, based on the Bank of Canada noon rate.

Hereinafter, the XXXXXXXXXX Notes, the XXXXXXXXXX Notes, the XXXXXXXXXX Notes, the XXXXXXXXXX Debentures, the XXXXXXXXXX Debentures and the XXXXXXXXXX Debentures are collectively referred to as the "PARENT Debt". Hereinafter, the PARENT Debt, XXXXXXXXXX Debentures and the Senior Notes are collectively referred to as the "PARENT Unsubordinated Debt".

The PARENT Debt, the XXXXXXXXXX Debentures, the XXXXXXXXXX Indenture and the XXXXXXXXXX Indenture are governed by the laws of the State of XXXXXXXXXX.

Under the terms of the PARENT Debt and the XXXXXXXXXX Debentures as set our in the XXXXXXXXXX Indenture and the XXXXXXXXXX Indenture, a transferee of all or substantially all of the assets of PARENT, as that phrase has been interpreted under the law governing the PARENT Debt and the XXXXXXXXXX Debentures, must assume the entire PARENT Debt and the XXXXXXXXXX Debentures.

12. OPCO, together with XXXXXXXXXX of its subsidiaries, was, prior to the transactions and events described in the paragraphs that follow, indebted under credit facilities provided for under a credit agreement dated as of XXXXXXXXXX among OPCO and the XXXXXXXXXX subsidiaries, as borrowers and guarantors, BCO, as guarantor, and XXXXXXXXXX, as administrative agent for the lenders (the "OPCO Bank Debt").

13. OPCO was, prior to the transactions and events described in the paragraphs that follow, indebted under XXXXXXXXXX% unsecured notes due XXXXXXXXXX in the principal amount of US $XXXXXXXXXX issued by XXXXXXXXXX . pursuant to a note purchase agreement dated XXXXXXXXXX between XXXXXXXXXX . and the note purchasers as amended and restated pursuant to an amended and restated note purchase agreement dated XXXXXXXXXX (the "XXXXXXXXXX Notes"). OPCO was indebted under the XXXXXXXXXX Notes because XXXXXXXXXX, formerly a wholly-owned subsidiary of OPCO, was wound-up into OPCO in XXXXXXXXXX.

14. The operations of PARENT in the XXXXXXXXXX are held by NRCO1, which was, prior the transactions and events described in the paragraphs that follow, a wholly-owned subsidiary of PARENT. The operations of BCO in the XXXXXXXXXX are held by NRCO2, which was, prior to the transactions and events described in the paragraphs that follow, a wholly-owned subsidiary of OPCO. Both NRCO1 and NRCO2 are corporations incorporated in and resident in the XXXXXXXXXX.

15. In order to consolidate the operations of PARENT and BCO in the XXXXXXXXXX, the following transactions have transpired:

a) On XXXXXXXXXX, PARENT transferred all of the issued and outstanding shares in the capital of NRCO1 to BCO in exchange for XXXXXXXXXX shares in the capital of BCO. PARENT and BCO will jointly elect, in prescribed form and within the time permitted, under section 85 in connection with this transfer and the elected amount will be equal to the adjusted cost base to PARENT of the transferred shares.

b) On XXXXXXXXXX, BCO transferred all of the issued and outstanding shares in the capital of NRCO1 to CCO in exchange for XXXXXXXXXX common shares in the capital of CCO. BCO and CCO will jointly elect in prescribed form and within the time permitted under section 85 in connection with this transfer and the elected amount will be equal to the adjusted cost base to BCO of the transferred shares.

c) On XXXXXXXXXX, CCO transferred all of the issued and outstanding shares in the capital of NRCO1 to OPCO in exchange for XXXXXXXXXX common shares in the capital of OPCO. CCO and OPCO will jointly elect in prescribed form and within the time permitted under section 85 in connection with this transfer and the elected amount will be equal to the adjusted cost base to CCO of the transferred shares. The paid-up capital, for tax and accounting purposes, of the common shares of OPCO was increased by an amount equal to the elected amount as a result.

d) On XXXXXXXXXX, OPCO transferred all of the issued and outstanding shares in the capital of NRCO1 to NRCO2 in exchange for XXXXXXXXXX common shares in the capital of NRCO2. Subsection 85.1(3) was applicable to this transfer.

e) On XXXXXXXXXX, ECO was incorporated under the Canada Business Corporations Act. OPCO holds all of the issued and outstanding shares in the capital of ECO consisting of XXXXXXXXXX common shares.

f) On XXXXXXXXXX, FCO was incorporated under the Canada Business Corporations Act. OPCO and ECO hold all of the issued and outstanding shares in the capital of FCO. OPCO held, prior to the transaction described in paragraph 15(g) below, XXXXXXXXXX common shares in the capital of FCO and ECO holds 1 preferred share in the capital of FCO.

g) OPCO transferred all of the issued and outstanding shares in the capital of NRCO2 to FCO in consideration for the issuance by FCO of preferred shares in its capital. OPCO and FCO will jointly elect in prescribed form and within the time permitted under section 85 in connection with this transfer and the elected amount will be equal to the adjusted cost base to OPCO of the transferred shares.

16. During XXXXXXXXXX, the PARENT Bank Debt, the OPCO Bank Debt, the XXXXXXXXXX Notes and the Senior Notes were repaid.

17. The articles of incorporation of OPCO were amended to add the following new classes of shares:

XXXXXXXXXX.

18. On XXXXXXXXXX, PARENT and OPCO formed "LP", a limited partnership governed by the XXXXXXXXXX. Each of PARENT and OPCO contributed $XXXXXXXXXX to LP as consideration for one unit each in LP.

19. On XXXXXXXXXX, PARENT transferred its XXXXXXXXXX to LP in consideration for the issuance by LP of partnership units having a fair market value equal to the fair market value of those transferred assets. PARENT, OPCO and LP will jointly elect in prescribed form and within the time permitted under subsection 96(4), pursuant to subsection 97(2) such that the elected amount will be equal to the aggregate of the estimated fair market value of the depreciable property transferred to LP and the cost amount to PARENT of each of the other assets transferred. If the fair market value of a particular property exceeds its capital cost to PARENT, the elected amount will be equal to that capital cost. Also, the elected amount for each property will be no less than the least of (i) the fair market value of the particular property, (ii) the capital cost to PARENT of the respective properties transferred to LP and (iii) the undepreciated capital cost to PARENT of all property of the particular class, immediately before the transfer.

20. PARENT transferred to OPCO its XXXXXXXXXX% interest in XXXXXXXXXX and a promissory note issued by XXXXXXXXXX to PARENT on XXXXXXXXXX in consideration for the issuance by OPCO of XXXXXXXXXX preferred shares in its capital having an aggregate redemption price equal to the aggregate fair market value of the XXXXXXXXXX% interest in XXXXXXXXXX and the promissory note. The XXXXXXXXXX preferred shares in the capital of OPCO bear a cumulative dividend at a rate in excess of the highest interest rate payable by PARENT on the PARENT Debt and the XXXXXXXXXX Debentures, (i.e. in excess of XXXXXXXXXX% per annum), calculated as a percentage of their redemption price. PARENT and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in connection with the transfer of the interest in XXXXXXXXXX and the elected amount will be equal to adjusted cost base to PARENT of the transferred interest in XXXXXXXXXX does not hold any debt issued by PARENT.

21. PARENT transferred all of the issued and outstanding shares in the capital of PARENT XXXXXXXXXX to OPCO in consideration for the issuance by OPCO of XXXXXXXXXX preferred shares in its capital having an aggregate redemption price equal to the fair market value of the PARENTXXXXXXXXXX shares transferred. The XXXXXXXXXX preferred shares in the capital of OPCO bear a cumulative dividend at a rate in excess of the highest interest rate payable by PARENT on the PARENT Debt and the XXXXXXXXXX Debentures, i.e. in excess of XXXXXXXXXX% per annum, calculated as a percentage of their redemption price. PARENT and OPCO will jointly elect, in prescribed form and within the time permitted under section 85 in connection with this transfer and the elected amount will be equal to the adjusted cost base to PARENT of the transferred PARENTXXXXXXXXXX shares.

22. On XXXXXXXXXX, PARENT transferred its XXXXXXXXXX to LP in consideration for the issuance by LP of additional partnership units having a fair market value equal to the fair market value of those transferred assets. PARENT, OPCO and LP will jointly elect, in prescribed form and within the time permitted under subsection 96(4), pursuant to subsection 97(2) such that the elected amount will be equal to the aggregate of the estimated fair market value of the depreciable property transferred to LP and the cost amount to PARENT of each of the other assets transferred. In each case, the agreed amount will not exceed the fair market value of the transferred property. If the fair market value of a particular property exceeds its capital cost to PARENT, the elected amount will be equal to that capital cost. Also, the elected amount for each property will be no less than the least of (i) the fair market value of the particular property, (ii) the capital cost to PARENT of the respective properties transferred to LP and (iii) the undepreciated capital cost to PARENT of all property of the particular class, immediately before the transfer.

23. ECO became a limited partner in LP on XXXXXXXXXX, subscribing for one unit in the capital of LP in consideration for the payment of $XXXXXXXXXX to LP.

24. OPCO was a general partner in LP. PARENT was also a general partner and had the exclusive right to manage the affairs of LP.

25. PARENT transferred all except one of its units in LP to OPCO in consideration for OPCO agreeing to assume PARENT's obligations in respect of interest and principal payments under the XXXXXXXXXX Debentures and the issuance by OPCO of XXXXXXXXXX preferred shares having an aggregate redemption price equal to the excess of the fair market value of the units of LP transferred to OPCO over the principal amount, in Canadian dollars, of the XXXXXXXXXX Debentures. The XXXXXXXXXX preferred shares of OPCO bear a cumulative dividend at a rate in excess of the highest rate payable by PARENT on the PARENT Debt and the XXXXXXXXXX Debentures, i.e. in excess of XXXXXXXXXX% per annum, calculated as a percentage of the redemption price of the XXXXXXXXXX preferred shares. PARENT and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in connection with this transfer and the elected amount will be equal to the adjusted cost base to PARENT of the transferred LP units.

26. The unit in the capital of LP held by ECO was transferred to OPCO on XXXXXXXXXX in consideration for the payment by OPCO of $XXXXXXXXXX.

27. PARENT transferred its one remaining unit in LP to OPCO on XXXXXXXXXX in consideration for the issuance by OPCO of XXXXXXXXXX preferred shares in its capital, having an aggregate redemption price equal to the fair market value of the LP unit transferred. The XXXXXXXXXX preferred shares of OPCO bear a non-cumulative dividend at a rate of XXXXXXXXXX% per month, calculated as a percentage of their redemption price. PARENT and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in connection with this transfer and the elected amount will be equal to the adjusted cost base to PARENT of the transferred LP unit.

28. After the consultations and negotiations with the relevant regulatory bodies with respect to the XXXXXXXXXX operations were completed, on XXXXXXXXXX PARENT transferred such of its XXXXXXXXXX with respect to the XXXXXXXXXX operations as were transferable, and as had not already been transferred to OPCO in consideration for the issuance by OPCO of XXXXXXXXXX preferred shares in its capital. The aggregate redemption price of the XXXXXXXXXX preferred shares is equal to the fair market value of those XXXXXXXXXX transferred. The XXXXXXXXXX preferred shares of OPCO bear a cumulative dividend at a rate in excess of the highest rate payable on the PARENT Debt and the XXXXXXXXXX Debentures (i.e. in excess of XXXXXXXXXX% per annum, calculated as a percentage of the redemption price of the XXXXXXXXXX preferred shares). PARENT and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in connection with this transfer and the elected amount will be nominal.

29. LP was dissolved and all of its assets and liabilities were distributed to OPCO when all XXXXXXXXXX had been assigned or reissued.

30. PARENT incorporated XXXXXXXXXX ("Partnerco1") under the Canada Business Corporations Act. Partnerco1 is a taxable Canadian corporation.

31. PARENT incorporated XXXXXXXXXX ("Partnerco2") under the Canada Business Corporations Act. Partnerco2 is a taxable Canadian corporation.

32. PARENT and Partnerco1 formed XXXXXXXXXX ("GP1") a general partnership governed by the laws of the Province of XXXXXXXXXX . Under the terms of the partnership agreement governing GP1, PARENT will, as managing partner, be responsible for the management and operation of the business of GP1.

33. PARENT and Partnerco2 formed XXXXXXXXXX ("GP2") a general partnership governed by the laws of the Province of XXXXXXXXXX. Under the terms of the partnership agreement governing GP2, PARENT will, as managing partner, be responsible for the management and operation of the business of GP2.

PROPOSED TRANSACTIONS

34. PARENT will borrow, from a financial institution, an amount not exceeding the total of CCO's stated or paid in capital in respect of its shares in the capital of OPCO and OPCO's accumulated profits (the "PARENT Overnight Loan"). PARENT will lend those funds to OPCO, at interest (the "OPCO Note"). The interest rate payable by PARENT to the financial institution will be less than that payable by OPCO pursuant to the OPCO Note. Based on estimates made by the taxpayers involved at the time this ruling was issued, it was anticipated that the amount of the PARENT Overnight Loan and amount of the OPCO Note would be in the range of $XXXXXXXXXX.

35. OPCO will by resolution, reduce its capital and declare and pay a dividend to CCO not exceeding its accumulated profits. The aggregate of the reduction of capital and the dividend will not be exceeded by the principal of the OPCO Note.

36. BCO and CCO will enter into a share exchange agreement whereby all of the issued and outstanding shares in the capital of CCO (all of which are held by BCO) will be exchanged for new common shares in the capital of CCO and new preferred shares in the capital of CCO having a fixed redemption price in an aggregate amount no greater than BCO's former adjusted cost base in respect of its shares in the capital of CCO. BCO and CCO will jointly elect, in prescribed form and within the time permitted under subsection 85(1) in respect of this share exchange such that BCO's proceeds of disposition in respect of the shares of CCO and BCO's aggregate adjusted cost base in respect of the new common shares and new preferred shares in CCO will be equal to BCO's former adjusted cost base in respect of the shares in CCO. BCO's adjusted cost base in respect of the new common shares will be nominal. The aggregate paid-up capital of the new common shares and the new preferred shares of CCO will be equal to their stated capital, subject to a reduction, if required, pursuant to subsection 85(2.1).

37. CCO will apply the funds received from OPCO on the reduction of capital and dividend referred to in paragraph 35 above, to redeem all or a portion of the new preferred shares in its capital held by BCO and, to the extent of any excess, declare and pay a dividend to BCO.

38. PARENT and BCO will enter into a share exchange agreement whereby all of the issued and outstanding shares in the capital of BCO will be exchanged for new common shares in the capital of BCO and new preferred shares in the capital of BCO having a fixed redemption price in an aggregate amount no greater than PARENT's former adjusted cost base in respect of the shares in the capital of BCO. PARENT and BCO will jointly elect, in prescribed form and within the time permitted, under subsection 85(1) in respect of the share exchange such that PARENT's proceeds of disposition in respect of the shares of BCO and PARENT's aggregate adjusted cost base in respect of the new common and the new preferred shares of BCO will be equal to PARENT's former adjusted cost base in respect of the shares in the capital of BCO having been exchanged. The aggregate adjusted cost base of the new preferred shares will be equal to their aggregate redemption price. The aggregate paid-up capital the new common shares and the new preferred shares of BCO will be equal to their stated capital, subject to reduction, if required, pursuant to subsection 85(2.1).

39. BCO will apply all of the funds received from CCO as redemption proceeds and as a dividend from CCO described in paragraph 37 above, to redeem a portion of the new preferred shares in the capital of BCO held by PARENT as a result of the transaction described in paragraph 38 above.

40. PARENT will repay the PARENT Overnight Loan with the funds received from BCO on the redemption of the new preferred shares in the capital of BCO as described in paragraph 39 above.

41. The articles of incorporation of OPCO will be amended to increase its authorized capital by an unlimited number of XXXXXXXXXX shares.

42. CCO and OPCO will enter into a share exchange agreement whereby all of the issued and outstanding shares in the capital of OPCO held by CCO will be exchanged for XXXXXXXXXX common shares in the capital of OPCO and XXXXXXXXXX preferred shares in the capital of OPCO having a fixed redemption price in an aggregate amount equal to the former adjusted cost base to CCO of the shares in the capital of OPCO formerly held by CCO. The XXXXXXXXXX preferred shares of OPCO bear a cumulative dividend at a rate in excess of the highest rate payable by PARENT on the PARENT Debt and the XXXXXXXXXX Debentures (i.e. in excess of XXXXXXXXXX% per annum, calculated as a percentage of the redemption price of the XXXXXXXXXX preferred shares). CCO and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in respect of this share exchange such that the proceeds of disposition to CCO in respect of the shares in OPCO and the aggregate adjusted cost base in respect of the XXXXXXXXXX common shares and the XXXXXXXXXX preferred shares in OPCO will be no greater than the adjusted cost base to CCO of the shares in OPCO immediately before the exchange. The aggregate adjusted cost base to CCO of the XXXXXXXXXX preferred shares will be equal to their aggregate redemption price. The aggregate paid-up capital of the XXXXXXXXXX common shares and the XXXXXXXXXX preferred shares of OPCO will be equal to their stated capital subject to reduction, if required, under subsection 85(2.1).

43. To the extent that any of the new preferred shares in the capital of CCO held by BCO (issued pursuant to the share exchange described in paragraph 36 above) remain outstanding after transaction 37 above, CCO will redeem them. In satisfaction of the redemption price, CCO will distribute to BCO a portion of the new XXXXXXXXXX preferred shares in the capital of OPCO having an aggregate redemption price equal to the redemption price payable by CCO to BCO. Any remaining XXXXXXXXXX preferred shares in the capital of OPCO held by CCO will be distributed as a dividend in kind by CCO to its sole shareholder BCO.

44. BCO will redeem such portion of the new preferred shares in its capital held by PARENT (issued pursuant to the share exchange described in paragraph 38 above) as have an aggregate redemption price of the XXXXXXXXXX preferred shares in the capital of OPCO received from CCO in the manner described in paragraph 43 above. In payment of the redemption price, BCO will transfer the XXXXXXXXXX preferred shares in the capital of OPCO to PARENT.

45. PARENT will transfer most of its remaining operating assets and the PARENT Subsidiaries (collectively, the "Assets") to GP1 in consideration for the issuance by GP1 of partnership units. PARENT, Partnerco1 and GP1 will jointly elect, in prescribed form and within the time limit permitted under subsection 96(4), pursuant to subsection 97(2) in respect of this transfer. The elected amount will be within the limits determined by sections 97 and 85. The provisions of paragraph 13(7)(e) will apply where the capital cost of a property (other than a XXXXXXXXXX property) transferred to GP1, determined without reference to that paragraph, exceeds the capital cost of such property to PARENT immediately before its disposition such that the capital cost to GP1 of such property will be deemed to be the amount that is equal to the capital cost of such property to PARENT plus XXXXXXXXXX of the amount by which PARENT's proceeds of disposition of such property exceed the capital cost of such property to PARENT.

The shares of the capital stock of any corporation held by PARENT and transferred to GP1 and the interests of PARENT in any of the other PARENT Subsidiaries are "capital property" as that term is defined in section 54 and subsection 248(1).

46. PARENT will transfer its operations situated in XXXXXXXXXX to GP2 in consideration for the issuance by GP2 of partnership units. PARENT, Partnerco2 and GP2 will jointly elect, in prescribed form and within the time permitted under subsection 96(4), pursuant to subsection 97(2) in respect of this transfer. The agreed amount in respect of each property transferred will be within the limits determined by sections 97 and 85. The provisions of paragraph 13(7)(e) will apply where the capital cost of a property (other than a XXXXXXXXXX property) transferred to GP2, determined without reference to that paragraph, exceeds the capital cost of such property to PARENT immediately before its disposition such that the capital cost to GP2 of such property will be deemed to be the amount that is equal to the capital cost of such property to PARENT plus XXXXXXXXXX of the amount by which PARENT's proceeds of disposition of such property exceed the capital cost of such property to PARENT .

47. PARENT will incorporate a corporation under the XXXXXXXXXX ("Holdco"). Holdco will be a "taxable Canadian corporation". PARENT will hold one common share in the capital of Holdco.

48. PARENT will subscribe for XXXXXXXXXX preferred shares in the capital of Holdco in consideration for the payment of $XXXXXXXXXX. The preferred shares will have a redemption price of $XXXXXXXXXX per share and will carry with them one vote per share.

49. PARENT will subscribe for XXXXXXXXXX preferred shares in the capital of OPCO having an aggregate redemption price equal to their subscription price which, in turn, shall be equal to the principal amount outstanding under the OPCO Note. The XXXXXXXXXX preferred shares in the capital of OPCO will bear a cumulative dividend at a rate in excess of the highest interest rate payable by PARENT on the PARENT Debt and the XXXXXXXXXX Debentures, (i.e. in excess of XXXXXXXXXX% per annum, calculated as a percentage of their redemption price).

50. In payment of the subscription price for the XXXXXXXXXX preferred shares in the capital of OPCO, PARENT will surrender the OPCO Note to OPCO.

51. PARENT will transfer the XXXXXXXXXX preferred shares in the capital of OPCO to Holdco in consideration for XXXXXXXXXX common shares of the capital stock of Holdco. PARENT and Holdco will jointly elect, in prescribed form and within the time permitted, under section 85 in connection with this transfer and the elected amount will be equal to the adjusted cost base to PARENT of the transferred shares.

52. PARENT will transfer its XXXXXXXXXX common shares in the capital of Holdco to GP1 in consideration for the issuance by GP1 of partnership units. PARENT, Partnerco1 and GP1 will jointly elect, in prescribed form and within the time permitted under subsection 96(4), pursuant to subsection 97(2) in respect of this transfer. The agreed amount will be equal to the adjusted cost base to PARENT in respect of the Holdco shares which shall be no greater than the fair market value of the Holdco shares. The shares in the capital stock of Holdco held by PARENT are "capital property" as that term is defined in section 54 and subsection 248(1).

53. PARENT will transfer all, except one of each, of its units in GP1 and GP2 to OPCO in consideration for the assumption by OPCO of the PARENT Debt and the issuance by OPCO of XXXXXXXXXX preferred shares in its capital having an aggregate redemption price equal to the excess of the fair market value of the GP1 and the GP2 units transferred over the principal amount, as measured in Canadian dollars at the time of the transfer, of the PARENT Debt assumed by OPCO. PARENT and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85(1) such that the proceeds of disposition to PARENT and the cost to OPCO of the GP1 and the GP2 units will be equal to the adjusted cost base to PARENT of the GP1 and the GP2 units immediately before the transfer. The elected amount will be no greater than the fair market value of the GP1 and the GP2 units transferred and no less than the principal amount, as measured in Canadian dollars at the time of the transfer, of the PARENT Debt assumed by OPCO.

The fair market value of the assets of GP1 and GP2, excluding the shares of Holdco, exceeds the principal amount of the PARENT Debt, measured in Canadian dollars at the time of the transfer of the units of GP1 and GP2 to OPCO.

54. Supplemental indentures (the "Supplemental Indentures") to both the XXXXXXXXXX Indenture and the XXXXXXXXXX Indenture will be executed by PARENT, OPCO, GP1 and the relevant trustees. The Supplemental Indentures will add OPCO as a debtor and provide that PARENT and OPCO will be jointly and severally liable for the PARENT Debt. GP1 will be added as a guarantor of the PARENT Debt. All covenants and undertakings other than liability for the principal of the debt and interest thereon will remain solely those of PARENT, on a consolidated basis, as they are now.

Under the laws of the State of XXXXXXXXXX, the execution of the Supplemental Indentures and the addition of OPCO as a debtor under the PARENT Debt will not result in:

a) a novation in respect of any portion of the PARENT Debt;

b) a substitution of all or any portion of the PARENT Debt by a new debt; or

c) a discharge, rescission or extinguishment of all or any portion of the PARENT Debt.

55. Once consultations and negotiations with the relevant regulatory bodies with respect to the XXXXXXXXXX have been completed and any necessary consents, including under the PARENT Debt, are obtained, PARENT will transfer such of its XXXXXXXXXX with respect to the assets of GP1 as are transferable, and as have not already been transferred, to OPCO in consideration for the issuance by OPCO of XXXXXXXXXX preferred shares in its capital. The aggregate redemption price of the XXXXXXXXXX preferred shares will be equal to the fair market value of the XXXXXXXXXX transferred. PARENT and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in connection with the transfer. The elected amount will be no greater than the fair market value of the XXXXXXXXXX transferred.

56. PARENT and Partnerco1 will then transfer their remaining units in GP1 to OPCO in consideration for the issuance by OPCO of XXXXXXXXXX preferred shares to PARENT and Partnerco1. The aggregate redemption price of the XXXXXXXXXX preferred shares will be equal to the fair market value of the partnership units transferred to OPCO by PARENT and Partnerco1. PARENT, Partnerco1 and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in respect of these transfers such that the proceeds of disposition to each of PARENT and Partnerco1 and the cost to OPCO of the transferred GP1 units will be equal to the respective adjusted cost base to PARENT and Partnerco1 of the transferred GP1 units. The elected amount will be no greater than the fair market value of the GP1 units transferred.

57. Immediately after the transfer described above, GP1 will be dissolved and all of its assets and liabilities will be distributed to OPCO, its sole remaining partner. Under the XXXXXXXXXX, GP1 will not be terminated by the union of all of the interests therein in OPCO. Rather, GP1 will be terminated under the XXXXXXXXXX only by the consent of OPCO. Subsequent to that consent, GP1's assets will be transferred to, and its liabilities assumed by, OPCO. Pursuant to subsection 98(1), notwithstanding the fact that upon the consent of OPCO, GP1 ceased to exist for the purposes of the XXXXXXXXXX, it will be deemed not to have ceased to exist for the purposes of the Act. Pursuant to subsection 99(1), GP1 will have a deemed year end immediately prior to the time it would, but for subsection 98(1), have ceased to exist. Pursuant to subparagraph 98(5)(b)(i), OPCO will be deemed to have a cost in depreciable property acquired from GP1 equal to its cost amount to GP1 immediately before GP1 ceased to exist for the purposes of the Act. Therefore if capital cost allowance is claimed by GP1 for the year deemed to have ended immediately before the time GP1 ceased to exist under the XXXXXXXXXX, such cost amount will, pursuant to the definition of "undepreciated capital cost" in subsection 13(21), have been reduced by the amount of such capital cost allowance.

58. The aggregate of each amount which is the cost amount to GP1, immediately before the dissolution of GP1, of each property distributed to OPCO on the dissolution and the amount of any other proceeds of the disposition of OPCO's interests in GP1 received by OPCO will be no greater than the total of the adjusted cost bases to OPCO, immediately before the dissolution of GP1, of OPCO's units in the capital of GP1.

59. The XXXXXXXXXX preferred shares in the capital of Holdco held by PARENT will be redeemed in consideration for the payment by Holdco of $XXXXXXXXXX to PARENT.

60. Holdco will be wound-up into OPCO in accordance with the XXXXXXXXXX Subsection 88(1) will apply to this winding up. The XXXXXXXXXX preferred shares in the capital of OPCO held by Holdco will be cancelled as a result of the wind-up of Holdco into OPCO.

61. Once consultations and negotiations with the relevant regulatory bodies with respect to the XXXXXXXXXX have been completed, PARENT will transfer such of its XXXXXXXXXX with respect to the assets of GP2 as are transferable, and as have not already been transferred, to OPCO in consideration for the issuance by OPCO of XXXXXXXXXX preferred shares in its capital. The aggregate redemption price of the XXXXXXXXXX preferred shares will be equal to the fair market value of the XXXXXXXXXX transferred. PARENT and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in connection with this transfer. The elected amount will be no greater than the fair market value of the XXXXXXXXXX transferred.

62. PARENT and Partnerco2 will then transfer their remaining units in GP2 to OPCO in consideration for the issuance by OPCO of XXXXXXXXXX preferred shares in its capital to PARENT and Partnerco2. The aggregate redemption price of the XXXXXXXXXX preferred shares will be equal to the fair market value of the units in GP2 transferred to OPCO. PARENT, Partnerco2 and OPCO will jointly elect, in prescribed form and within the time permitted, under section 85 in respect of these transfers such that the respective proceeds of disposition of PARENT and Partnerco2 and the cost to OPCO of the transferred GP2 units will be equal to the respective adjusted cost base to PARENT and to Partnerco2 in respect of the GP2 units transferred. The elected amount will be no greater than the fair market value of the GP2 units transferred.

63. Immediately after the transfer described above, GP2 will be dissolved and all of its assets and liabilities will be distributed to OPCO, its sole remaining partner. Under the XXXXXXXXXX, GP2 will not be terminated by the union of all of the interests therein in OPCO. Rather, GP2 will be terminated under the XXXXXXXXXX only by the consent of OPCO. Subsequent to that consent, GP2's assets will be transferred to, and its liabilities assumed by, OPCO. Pursuant to subsection 98(1), notwithstanding the fact that upon the consent of OPCO, GP1 ceased to exist for the purposes of the XXXXXXXXXX, it will be deemed not to have ceased to exist for the purposes of the Act. Pursuant to subsection 99(1), GP2 will have a deemed year end immediately prior to the time it would, but for subsection 98(1), have ceased to exist. Pursuant to subparagraph 98(5)(b)(i), OPCO will be deemed to have a cost in depreciable property acquired from GP2 equal to its cost amount to GP2 immediately before GP1 ceased to exist for the purposes of the Act. Therefore if capital cost allowance is claimed by GP2 for the year deemed to have ended immediately before the time GP2 ceased to exist under the XXXXXXXXXX, such cost amount will, pursuant to the description of "undepreciated capital cost" in subsection 13(21), have been reduced by the amount of such capital cost allowance.

64. The aggregate of each amount which is the cost amount to GP2, immediately before the dissolution of GP2, of each property distributed to OPCO on the dissolution and the amount of any other proceeds of the disposition of OPCO's interests in GP2 received by OPCO will be no greater than the total of the adjusted cost bases to OPCO, immediately before the dissolution of GP2, of OPCO's interests in GP2.

65. It is expected that the tax consequences of the use of GP1 and GP2 will be as described in paragraphs 57 and 63 above. In addition, pursuant to section 96, GP1 and GP2 must calculate their incomes for the years ended on those deemed year-ends. To the extent that the result is positive, it will be allocated to OPCO and added in computing the income of OPCO for the taxation year of OPCO during which the deemed year ends occur. To the extent that the result is negative, it will be allocated to OPCO and deducted in computing the income of OPCO for the taxation year of OPCO during which the deemed year ends occur.

66. In all cases, accumulated profits to be distributed by OPCO as dividends have been used for the purpose of earning income from business or property and not used to acquire property the income from which was exempt. Accounting profits have been computed on an unconsolidated basis with investments accounted for on a cost basis and without including appraisal surplus and profits resulting from non-arm's length transactions designed to transform appraisal surplus into profits.

Purpose of the Proposed Transactions

67. Both PARENT and BCO have their own distinct and separate manufacturing operations and subsidiaries, their own distinct and separate financial obligations, their own sets of creditors and credit agreements. This situation creates significant inefficiencies both from an operations standpoint and a credit management standpoint. The objective of the proposed transactions is to integrate the manufacturing operations and credit arrangements of both the PARENT and BCO group under one entity (i.e. OPCO). This will significantly reduce the administrative burden associated with the maintenance of two separate manufacturing groups and borrowing/lending groups. Furthermore, it will eliminate the structural subordination of creditors at the PARENT level vis-à-vis creditors at the OPCO level.

68. XXXXXXXXXX. It is also impossible to continue either one under the governing laws of the other. It is therefore necessary to proceed by way of a transfer of assets. This raises a number of difficulties with respect to the XXXXXXXXXX. The use of a partnership will permit income and losses from PARENT's manufacturing operations to be integrated into OPCO's income and losses from its manufacturing operations, prior to the completion of negotiations with regulatory bodies with respect to the XXXXXXXXXX and their transfers and re-issuances. As long as PARENT maintains an interest in the partnership XXXXXXXXXX, it is arguably not necessary to obtain any consents from the relevant regulatory bodies in respect of the transfer or re-issuance of XXXXXXXXXX.

69. There is no certainty as to when the transfer or re-issuance of XXXXXXXXXX will be completed. The use of a partnership allows the group to integrate the income and losses of the operations of both PARENT and OPCO without having to finalize, or, obtain the transfers or re-issuances of XXXXXXXXXX. PARENT may transfer the bulk of its interest in the partnership to OPCO as long as it maintains some interest, no matter how small, XXXXXXXXXX. Once the transfer or re-issuance of the XXXXXXXXXX is completed, PARENT may dispose of its remaining interest in the partnership and the partnership may be dissolved, its assets being transferred to OPCO, with OPCO becoming the manager and operator thereof.

70. The holders of the PARENT Debt will, of course, prefer to preserve the liability of PARENT while at the same time adding a debtor. Furthermore, they will prefer to maintain the liability of PARENT as it is a public company and the parent of the group. Also, as PARENT is a public company already subject to reporting obligations under securities laws and is the parent of the group, it will be more efficient for it to continue to comply with the reporting obligations under the terms of the PARENT Debt.

Rulings Given

Provided the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided the proposed transactions are completed in the manner described above, our rulings are as follows:

A. As a result of the redemption of the shares of BCO held by PARENT as described in paragraphs 39 and 44 above, the amount, if any, by which the amount paid by BCO to PARENT on each redemption exceeds the paid-up capital of the shares redeemed, shall be deemed by subsection 84(3) to be a dividend paid by BCO to PARENT. Subsection 55(2) will not apply to such dividend and it may be deducted by PARENT pursuant to subsection 112(1) and will by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 be excluded from the proceeds of disposition of the shares. The amount of any loss of PARENT from the disposition of the shares will be reduced by the amount deductible under subsection 112(1) pursuant to subsection 112(3) and will not be added to the adjusted cost base of shares of BCO owned by PARENT immediately after the disposition under the provisions of paragraph 40(3.6)(b).

B. As a result of the redemption of the shares of CCO held by BCO as described in paragraphs 37 and 43 above, the amount, if any, by which the amount paid by CCO to BCO on each redemption exceeds the paid-up capital of the shares redeemed, shall be deemed by subsection 84(3) to be a dividend paid by CCO to BCO. Subsection 55(2) will not apply to such dividend and it may be deducted by BCO pursuant to subsection 112(1) and will by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 be excluded from the proceeds of disposition of the shares. The amount of any loss of BCO from the disposition of the shares will be reduced by the amount deductible under subsection 112(1) pursuant to subsection 112(3) and will not be added to the adjusted cost base of shares of CCO owned by BCO immediately after the disposition under the provisions of paragraph 40(3.6)(b).

C. Subsection 85(1) will apply to the exchanges described in paragraphs 36, 38, and 42 above.

D. Provided that OPCO has a legal obligation to pay interest in respect of the OPCO Note, any such interest paid in the year or payable in respect of the year, not in excess of a reasonable amount, will be deductible in computing the income of OPCO under paragraph 20(1)(c).

E. Provided that OPCO continues to use its interests in GP1 and GP2 or the assets it receives on the wind-up of GP1, GP2 as described in paragraphs 57 and 63 above, for the purpose of gaining or producing income (other than income which is exempt from taxation) and provided OPCO has a legal obligation to pay interest in respect of the debt assumed by it as described in paragraphs 53 and 54 above, any such interest paid in the year or payable in respect of the year (depending on the method regularly followed by OPCO in computing its income for the purposes of the Act) by OPCO in respect of such debt (other than liabilities in respect of which PARENT was not entitled to deduct interest under paragraph 20(1)(c)), not in excess of a reasonable amount, will be deductible in computing the income of OPCO under paragraph 20(1)(c), both before and after the dissolution of GP1, GP2 and the winding-up of Holdco.

F. The assumption of the PARENT Debt by OPCO as described in paragraph 53 and 54 above, will not, in and by itself, result in the disposition of the PARENT Debt by the holders thereof for the purposes of section 54 or the issuance of new indebtedness for the purposes of subparagraph 212(1)(b)(vii).

G. To the extent that there has been fluctuation in the value of the U.S. dollar relative to the Canadian dollar between the time that any portion of the PARENT Debt was issued and the time it is assumed by OPCO, PARENT will have made a gain or sustained a loss as the case may be for the purposes of subsection 39(2).

H. Provided that OPCO continues to carry on the business of GP1 and GP2 subsequent to the completion of the proposed transactions, the provisions of subsection 98(5) will apply in respect of the cessation of GP1 and GP2 as described in paragraphs 57 and 63 above such that OPCO's proceeds of disposition of its interests GP1 and GP2 will be equal to its adjusted cost base in respect of those interests.

I. Subsection 84(3) will not apply to deem a dividend to have been paid to OPCO on the cancellation of the XXXXXXXXXX preferred shares in the capital of OPCO on the wind-up of Holdco.

J. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

The rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comment

Nothing in this letter should be construed as implying that the Agency has reviewed or is making a determination or ruling in respect of:

a) Whether the provisions of subsection 111(5) or subsection 245(2) would apply to deny a deduction by OPCO of the amount of a non-capital loss arising in a taxation year of OPCO ending after the acquisition of control of OPCO by PARENT, in a taxation year of OPCO ending before that time;

b) Any transaction that was completed prior to the date of this ruling, including, in particular, the assumption of the XXXXXXXXXX Debentures by OPCO and whether the interest thereon qualifies for a deduction under the provisions of paragraph 20(1)(c).

c) The law governing the PARENT Debt, specifically whether the Proposed Transactions result in the extinguishment or discharge of any part of the PARENT Debt and its substitution by new obligations under such law;

d) Any tax consequences with respect to the PARENT Debt other than specifically described in the rulings given above including whether interest paid on the PARENT Debt to a non-resident prior to the proposed transactions qualifies for the exemption from Part XIII tax payable pursuant to subparagraph 212(1)(b)(vii);

e) Any tax consequences in relation to any facts or proposed transactions referred to herein other than those specifically described in the rulings given.

Yours truly,

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