2002 Ruling 2002-0136163 - 1103(2d) Election on 1102(14) Property

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 CCRA.

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

Principal Issues: Whether a taxpayer was entitled to make an election under subsection 1103(2d) of the Regulations in respect of certain assets included in the former class that were acquired in a transaction to which subsection 1102(14) of the Regulations causing the assets to be assets of the former class instead of assets a new class.

Position: Favourable ruling given. The position taken in Technical Interpretation No. 5-9595 was reconsidered in giving this ruling.

XXXXXXXXXX 							2002-013616

XXXXXXXXXX , 2002

Dear Sirs:

Re: ADVANCE INCOME TAX RULING
XXXXXXXXXX
XXXXXXXXXX

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

You have advised that to the best of the knowledge of the taxpayers and yourselves:

(i) none of the issues involved in this ruling is under objection or appeal or is being considered by any district taxation offices or taxation centres of the Agency in connection with a tax return already filed; and

(ii) none of the issues involved in the rulings is the subject of any notice of objection or is under appeal.

You have advised that to the best of your knowledge and of each of the taxpayers, the Proposed Transactions will not have any impact on the ability to pay outstanding tax liabilities, if any, of any of the taxpayers.

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

DEFINITIONS

In this letter, the following terms have the meanings specified:

(a) "ACB" means "adjusted cost base" as that expression is defined in section 54;

(b) "Act" means the Income Tax Act, RSC 1985 (5th supp.), c.1, as amended to the date hereof, and, unless otherwise indicated, any reference to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the specified provision of the Act;

(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1);

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

(e) "Bco" means XXXXXXXXXX, and is more fully described in Paragraph 2;

(f) "Canadian partnership" has the meaning assigned by subsection 102(1);

(g) "CBCA" means the Canada Business Corporations Act, and, where applicable, its predecessor statutes;

(h) "CCA" means the amount that is deductible in respect of the capital cost of property, pursuant to paragraph 20(1)(a) of the Act and relevant Regulations;

(i) "Cco" means XXXXXXXXXX, and is more fully described in Paragraph 3;

(j) "cost amount" has the meaning assigned by subsection 248(1);

(k) "eligible property" has the meaning assigned by subsection 85(1.1);

(l) "FMV" means fair market value;

(m) "foreign affiliate" has the meaning assigned by subsection 95(1);

(n) "GP" means XXXXXXXXXX General Partnership, and is more fully described in Paragraph 16;

(o) "IF" means XXXXXXXXXX as more fully described in Paragraph 11;

(p) "IF Units" means the units of IF described in Paragraph 11;

(q) "Lenders" means one or more Canadian financial institutions;

(r) "mutual fund trust" has the meaning assigned by subsection 132(6);

(s) "net capital loss" has the meaning assigned by subsection 111(8) and subsection 248(1);

(t) "Newco" means the Canadian corporation described in Paragraph 19;

(u) "non-capital loss" has the meaning assigned by subsection 111(8);

(v) "Opco" means XXXXXXXXXX, and is more fully described in Paragraph 4;

(w) "OT" means the XXXXXXXXXX as more fully described in Paragraph 13;

(x) "OT Units" means the units of OT described in Paragraph 13;

(y) "Paragraph" means a numbered paragraph in this advance income tax ruling;

(z) "private corporation" has the meaning assigned by subsection 89(1);

(aa) "proceeds of disposition" has the meaning assigned by section 54;

(bb) "Pubco" means XXXXXXXXXX and is more fully described in Paragraph 1;

(cc) "Pubco Group" means Pubco and all corporations related thereto, including Opco, Bco, Cco, Sub1 and Sub2;

(dd) "public corporation" has the meaning assigned by subsection 89(1);

(ee) "PUC" means "paid-up capital" as that expression is defined in subsection 89(1);

(ff) XXXXXXXXXX;

(gg) "Regulations" means the Income Tax Regulations, CRC c. 945, in force at the relevant times;

(hh) "related" has the meaning assigned by section 251;

(ii) "related group" has the meaning assigned by subsection 251(4);

(jj) "Sale Accounts Payable" means the accounts payable pertaining to the operation of the Sale Assets;

(kk) "Sale Accounts Receivable" means the trade accounts receivable pertaining to the operation of the Sale Assets, other than those receivable from the Pubco Group;

(ll) "Sale Assets" means the assets described in Paragraph 4;

(mm) "Specified Assets" means Opco's accounts receivable from related parties and the Sale Accounts Receivable;

(nn) "Sub1" means the Canadian corporation described in Paragraph 24;

(oo) "Sub2" means the Canadian corporation described in Paragraph 31;

(pp) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(qq) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(rr) "taxable dividend" has the meaning assigned by subsection 89(1);

(ss) "Trustco" means XXXXXXXXXX;

(tt) "UCC" means "undepreciated capital cost" as that expression is defined in subsection 13(21);

(uu) "Underwriters" means XXXXXXXXXX;

(vv) "unit trust" has the meaning assigned by subsection 108(2); and

(ww) "Xco" means XXXXXXXXXX and is more fully described in Paragraph 15.

Unless otherwise indicated in this letter, all dollar amounts referred to herein are in Canadian dollars.

FACTS

1. Pubco is a public corporation and a taxable Canadian corporation. It serves as a holding company and also carries on the Canadian sales activities for a large corporate group, i.e., the Pubco Group. The Pubco Group operates XXXXXXXXXX business.

XXXXXXXXXX

Pubco resulted from the XXXXXXXXXX amalgamation of XXXXXXXXXX and XXXXXXXXXX under the CBCA. XXXXXXXXXX and XXXXXXXXXX were both public corporations. Pursuant to a plan of arrangement effective XXXXXXXXXX, former XXXXXXXXXX and XXXXXXXXXX amalgamated to form XXXXXXXXXX. XXXXXXXXXX was a public corporation.

As at XXXXXXXXXX, Pubco's issued and outstanding share capital consisted of approximately XXXXXXXXXX, widely held, common shares. No single person or related group owns more than 50% of the issued and outstanding common shares of Pubco.

Pubco anticipates that it will realize a large amount of non-capital losses in fiscal 2002 and 2003.

2. Bco was incorporated by letters patent dated XXXXXXXXXX issued under XXXXXXXXXX. By certificate of continuance dated XXXXXXXXXX, Bco was continued under XXXXXXXXXX. Bco is a taxable Canadian corporation and a subsidiary wholly-owned corporation of Pubco. Bco's principal asset is all the issued and outstanding shares of Cco. Bco is not a private corporation.

3. Cco is a taxable Canadian corporation. It has been a subsidiary wholly-owned corporation of Bco since XXXXXXXXXX. Cco was incorporated on XXXXXXXXXX and is governed by the CBCA. Cco is not a private corporation.

4. Opco is a taxable Canadian corporation. It has been a subsidiary wholly-owned corporation of Cco since XXXXXXXXXX. Opco is governed by the XXXXXXXXXX. Opco is not a private corporation.

In XXXXXXXXXX, Bco XXXXXXXXXX incorporated XXXXXXXXXX to build and operate the Sale Assets (as defined below). XXXXXXXXXX.

In XXXXXXXXXX, a subsidiary of XXXXXXXXXX acquired control of Bco and, consequently, of Opco XXXXXXXXXX. Further to such acquisition of control, XXXXXXXXXX made a designation pursuant to paragraph 111(4)(e) with respect to certain of its depreciable property, including some of the Sale Assets.

On XXXXXXXXXX, Bco acquired all of XXXXXXXXXX's XXXXXXXXXX% interest.

In XXXXXXXXXX, XXXXXXXXXX transferred certain depreciable property (including some of the Sale Assets) to a wholly-owned subsidiary, XXXXXXXXXX, pursuant to the provisions of section 85. The total of the agreed amounts in respect of the depreciable assets in classes 24, 27, 29 and 34 exceeded their total capital cost XXXXXXXXXX, thereby resulting in capital gains and recapture XXXXXXXXXX. In XXXXXXXXXX caused XXXXXXXXXX to be wound-up. XXXXXXXXXX.

On XXXXXXXXXX, XXXXXXXXXX were amalgamated under the XXXXXXXXXX to form Opco XXXXXXXXXX.
On XXXXXXXXXX, Opco acquired all of the shares of XXXXXXXXXX from its then parent corporation, Bco XXXXXXXXXX. On XXXXXXXXXX, Opco transferred its interest in XXXXXXXXXX to its parent company, Cco, in consideration for XXXXXXXXXX preferred share of Cco which had a redemption value equal to the FMV of the XXXXXXXXXX shares. This share was then redeemed. On XXXXXXXXXX, Opco and XXXXXXXXXX amalgamated. On XXXXXXXXXX, Opco's name was changed from XXXXXXXXXX to its present name.

Among Opco's assets is XXXXXXXXXX (the "Sale Assets"). The Sale Assets include all assets relating to the operation of XXXXXXXXXX.

The estimated capital cost of the Sale Assets that are depreciable property is $XXXXXXXXXX. These consist mainly of manufacturing and processing assets that were originally included in class 29 and that have been fully depreciated for tax purposes. From XXXXXXXXXX to XXXXXXXXXX, additions to these assets and acquisitions of other similar assets have been added to class 39 and, since XXXXXXXXXX, to class 43. The UCC of the class 43 assets of Opco as at XXXXXXXXXX exceeds $XXXXXXXXXX.

Acquisition of Bco

5. On XXXXXXXXXX, Pubco made an offer to the shareholders of Bco to acquire all of the issued and outstanding shares of Bco.

6. On XXXXXXXXXX, Pubco acquired approximately XXXXXXXXXX% of the issued and outstanding XXXXXXXXXX shares and approximately XXXXXXXXXX% of the issued and outstanding XXXXXXXXXX shares of Bco. On XXXXXXXXXX, Pubco acquired the remaining issued and outstanding XXXXXXXXXX shares and XXXXXXXXXX shares of Bco.

7. For each Bco share, former Bco shareholders received XXXXXXXXXX shares of Pubco and $XXXXXXXXXX in cash. No fractional shares of Pubco were issued. Instead, an additional cash payment was made based on a value of $XXXXXXXXXX per Pubco share. An offer was made to the former Bco shareholders to make a joint tax election with Pubco pursuant to subsection 85(1).

8. Pubco acquired the Bco shares directly from former Bco shareholders, with the exception of XXXXXXXXXX former Bco shareholders, who opted to use a so-called "Holdco alternative". Essentially, this alternative permitted Bco shareholders to participate in the offer by selling to Pubco shares of holding companies, which held only Bco shares, for the same consideration they would have received had they tendered the Bco shares directly on the offer. XXXXXXXXXX.

Corporate Integration Transactions

9. Following the acquisition of Bco and its affiliates, one of the key business objectives of Pubco was to integrate the operations of the Pubco Group with those of the companies so acquired in order to achieve operational synergies. To this end, a number of transactions were undertaken and completed in XXXXXXXXXX and XXXXXXXXXX, as described in the XXXXXXXXXX ruling letter XXXXXXXXXX. Since that time, all of the Canadian manufacturing operations of Pubco have been carried on by Opco and its subsidiaries.

10. Prior to the completion of the integration transactions, Pubco had XXXXXXXXXX operations. Following the completion thereof, all of Pubco's manufacturing operations were carried on by Opco. More particularly, Opco now operates XXXXXXXXXX facilities. It also operates or has interests in XXXXXXXXXX operations. These activities constitute a single, integrated operation.

11. In XXXXXXXXXX, IF, an inter vivos trust governed by the laws of the Province of XXXXXXXXXX, was established by a trust agreement (the "IF Trust Agreement"). IF owns all the units of OT, which is described at Paragraph 13.

The interest of each beneficiary is described by reference to units of IF ("IF Units"). Pursuant to the IF Trust Agreement, the IF Units represent the undivided beneficial interests of the holders thereof in IF. Each IF Unit carries one vote at meetings of IF unitholders and an IF unitholder is entitled to participate equally in distributions by IF and, in the event of any required distribution of all of the property of IF, in the net assets of IF after satisfaction of all of IF's liabilities. The IF Trust Agreement was executed prior to the filing of a prospectus since the issuer, being IF, must be constituted in order to file the prospectus. It is intended that IF will qualify as a unit trust and a mutual fund trust and it will elect accordingly under subsection 132(6.1)

A person dealing at arm's length with the Pubco Group settled IF by subscribing for XXXXXXXXXX IF Units for $XXXXXXXXXX.

12. In XXXXXXXXXX, the Lenders lent a total of approximately $XXXXXXXXXX to IF.

13. In XXXXXXXXXX, OT, an inter vivos trust governed by the laws of the Province of XXXXXXXXXX, was established by a trust agreement (the "OT Trust Agreement") for the purpose of acquiring, through an interest in GP, the Sale Assets. GP is described at Paragraph 16.

The interest of each beneficiary of OT is described by reference to units of OT ("OT Units"). Pursuant to the OT Trust Agreement, the OT Units represent the undivided beneficial interest of the holders thereof in OT. Each OT Unit carries one vote at meetings of OT unitholders and a OT unitholder is entitled to participate equally in distributions by OT and, in the event of any required distribution of all of the property of OT, in the net assets of OT after satisfaction of all of OT's liabilities.

A person dealing at arm's length with the Pubco Group settled OT by subscribing for XXXXXXXXXX OT Units for a total of $XXXXXXXXXX, which OT Units were then sold to IF for $XXXXXXXXXX.

14. In XXXXXXXXXX, IF lent approximately $XXXXXXXXXX to OT.

15. Xco is a taxable Canadian corporation incorporated under the CBCA. OT is the sole shareholder of Xco and owns XXXXXXXXXX common shares of Xco for which it paid $XXXXXXXXXX cash.

16. In XXXXXXXXXX, OT and Xco formed GP, a general partnership governed by the laws of the Province of XXXXXXXXXX. GP is a Canadian partnership. GP's year-end is XXXXXXXXXX. Xco acquired XXXXXXXXXX GP XXXXXXXXXX Units at $XXXXXXXXXX per unit ($XXXXXXXXXX in total) and OT will acquire XXXXXXXXXX GP XXXXXXXXXX Units at $XXXXXXXXXX per unit ($XXXXXXXXXX in total). Xco and OT thus have a XXXXXXXXXX% interest and a XXXXXXXXXX% interest in GP, respectively.

Pursuant to the partnership agreement, GP is entitled to issue two classes of units, the XXXXXXXXXX units and the XXXXXXXXXX units ("GP XXXXXXXXXX Units" and "GP XXXXXXXXXX Units", respectively). XXXXXXXXXX
XXXXXXXXXX

17. Pursuant to the partnership agreement, Xco is the managing partner of GP and, as such, is the sole person authorized to administer and bind the partnership. The Pubco Group neither manages nor controls Xco, GP or the Sale Assets.

18. In XXXXXXXXXX, GP commenced its business activities and purchased a depreciable property for cash for consideration equal to its FMV and leased said property to Opco on arm's length terms.

19. Pubco recently incorporated a new corporation under the CBCA ("Newco"). Newco is a taxable Canadian corporation. Newco's authorized capital consists of an unlimited number of common shares and an unlimited number of preferred shares. The common shares are voting and participating. The preferred shares are non-voting and redeemable and retractable for an amount equal to the FMV of the consideration received by Newco on their issuance. Pursuant to Newco's articles of incorporation, the preferred shares will entitle their holders to appoint a minority (XXXXXXXXXX) of Newco's directors. Pubco subscribed for XXXXXXXXXX common shares for $XXXXXXXXXX payable in cash.

20. Pubco then sold the common shares of Newco to OT for $XXXXXXXXXX. OT gave Pubco a $XXXXXXXXXX demand note (the "OT Note") as consideration.

21. Newco then purchased all of OT's shares of Xco for $XXXXXXXXXX cash.

22. Newco then wound-up Xco pursuant to the provisions of the CBCA and, as a result, acquired the XXXXXXXXXX GP XXXXXXXXXX Units and became the managing partner of GP and, as such, is the sole person authorized to administer and bind the partnership.

23. OT then repaid the OT Note with $XXXXXXXXXX cash.

24. Pubco recently incorporated a new corporation under the CBCA ("Sub1"). Sub1 is a taxable Canadian corporation.

Sub1's authorized capital consists of one class of an unlimited number of common shares (the "Sub1 Common Shares") and one class of an unlimited number of preferred shares (the "Sub1 Preferred Shares"), which shares have the following attributes:

(a) The Sub1 Common Shares are voting;

(b) The Sub1 Preferred Shares are (i) non-voting; (ii) redeemable and retractable, subject to applicable law, at any time for an amount equal to the amount for which they were issued and any unpaid dividends that have accumulated prior to their redemption or retraction; and (iii) entitled to a non-cumulative yearly dividend of XXXXXXXXXX% on the amount for which they were issued and will have a preference on dissolution over the Sub1 Common Shares for the return of the redemption amount plus any unpaid dividends.

No shares of Sub1 were issued on its incorporation. Pubco appointed the first directors of Sub1 at that time.

25. Pubco subscribed for XXXXXXXXXX Sub1 Common Shares for a total of $XXXXXXXXXX. The FMV and ACB to Pubco of the XXXXXXXXXX Sub1 Common Shares is $XXXXXXXXXX. Pursuant to subsection 26(3) of the CBCA, the amount added to the stated capital account maintained in respect of the Sub1 Common Shares was $XXXXXXXXXX.

26. Opco recently incorporated a new company under the XXXXXXXXXX ("Sub2"). Sub2 is a taxable Canadian corporation. Sub2's authorized capital includes an unlimited number of common shares and an unlimited number of preferred shares. No shares of Sub2 were issued on its incorporation. Opco appointed the first directors of Sub2 at that time.

26.1 Opco subscribed for XXXXXXXXXX common shares of Sub2 for a total of $XXXXXXXXXX. The FMV and ACB to Opco of the XXXXXXXXXX shares is $XXXXXXXXXX. Pursuant to XXXXXXXXXX, the amount added to the issued and paid-up share capital of Sub2 in respect of the issuance of the XXXXXXXXXX shares was $XXXXXXXXXX.

PROPOSED TRANSACTIONS

27. Prior to the transfer of the Sale Assets to Sub1, as described in Paragraph 28, Pubco will wind-up Bco. The shares of Bco held by Pubco will be cancelled as a result of the winding-up and Pubco will thereby acquire all of the shares of Cco.

A designation will be made by Pubco under the provisions of paragraph 88(1)(d) to increase, within the limits described in paragraph 88(1)(d), the ACB of the capital property (other than "ineligible property" as defined in paragraph 88(1)(c)) owned by Bco, namely the shares of Cco, immediately before the winding-up.

27.1 Immediately after the transaction referred to in Paragraph 27, Pubco will wind-up Cco. The shares of Cco held by Pubco will be cancelled as a result of the winding-up and Pubco will thereby acquire all of the shares of Opco.

A designation will be made by Pubco under the provisions of paragraph 88(1)(d) to increase, within the limits described in paragraph 88(1)(d), the ACB of the capital property (other than "ineligible property" as defined in paragraph 88(1)(c)) owned by Cco, namely the shares of Opco, immediately before the winding-up.

28. Opco will transfer to Sub1 the Sale Assets in consideration for Sub1's assumption of the Sale Accounts Payable, the issuance of a note (the "Sub1 Note 1") and the issuance of Sub1 Preferred Shares. The total FMV of the consideration given by Sub1 will be equal to the total FMV of the Sale Assets so transferred. Opco will receive share consideration in respect of each eligible property transferred to Sub1.

29. Opco and Sub1 will elect, jointly, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each eligible property that forms part of the Sale Assets by Opco to Sub1 as described in Paragraph 28. The agreed amount in respect of each property in respect of which a joint election is made will not be less than the lesser of the cost amount to Opco of the particular property and the FMV of the particular property at the time of the transfer. The agreed amount in respect of some properties in respect of which a joint election is made will exceed the capital cost of such properties in order to use the net capital losses in Opco. The agreed amount in respect of each eligible property will not be less than the non-share consideration received by Opco as consideration for that property.

For the purposes of subsection 26(3) of the CBCA, the amount that will be added, as a result of the acquisition of the Sale Assets by Sub1, to the stated capital account maintained in respect of the Sub1 Preferred Shares will not exceed the proceeds of disposition of the Sale Assets less the total of the amount of the Sale Accounts Payable and the Sub1 Note 1.

30. Pursuant to subsection 1103(2d) of the Regulations, Opco will elect in prescribed manner to transfer all of the Sale Assets included in the following classes, namely classes 2, 3, 6, 24, 27, 29, 34 and 39 (the "former classes") to the appropriate classes (the "present classes"), where these assets would have been included in the present classes had they been acquired at the time that the "new property" (within the meaning assigned by subsection 1103(2d) of the Regulations) was acquired and from the person from whom the new property was acquired. The above election will only be made with respect to property of a former class if the new property would have been included in the former class had it been acquired at the time said Sale Assets were acquired and from the person from whom said assets were acquired.

31. On the first business day immediately following the transfer of the Sale Assets as described in Paragraph 28, Sub1 will redeem all the issued and outstanding Sub1 Preferred Shares held by Opco at the aggregate FMV thereof, and in consideration therefor Sub1 will issue a non-interest-bearing demand promissory note (the "Sub1 Note 2") in favour of Opco having a principal amount equal to the redemption amount. Opco will accept the Sub1 Note 2 as full payment for the redemption price of the Sub1 Preferred Shares so redeemed.

32. Sub1 will then be wound-up into Pubco under the provisions of the CBCA. The XXXXXXXXXX Sub1 Common Shares held by Pubco will be cancelled as a result of the winding-up and Pubco will thereby acquire the Sale Assets.

33. On the date of closing, Pubco will sell the Sale Assets other than the Specified Assets to Sub2 at FMV. Sub2 will, as consideration for the transfer of such property, issue a note to Pubco (the "Sub2 Note").

34. On the same day, Pubco will repay to Opco both the Sub1 Note 1 and the Sub1 Note 2 (collectively, the "Sub1 Notes"). Such repayment shall be made by (i) the transfer and assignment to Opco of the Sub2 Note referred to in Paragraph 33 above; and (ii) the issuance to Opco of a note (the "Pubco Note") in an amount equal to the difference between the total of the Sub1 Notes and the Sub2 Note. The Sub1 Notes will thereupon be extinguished and cancelled for payment. Opco will accept the Sub2 Note and Pubco Note as payment of the Sub1 Notes.

35. Trustco will become the sole trustee of IF. Trustco will deal at arm's length with the settlor of IF and the Pubco Group. The directors of Newco will become the trustees of OT. They will deal at arm's length with the settlor of OT and the Pubco Group. Trustco, in its capacity of trustee of IF, and the trustees of OT will hire Newco to assist them in the administration of OT and IF.

36. On the same day, IF will make an initial public offering of IF Units to the public pursuant to a prospectus, and will pay the Underwriters' fees with the proceeds.

37. On the same day, IF will use the net funds received from the public to invest in OT. Approximately XXXXXXXXXX% thereof will be invested in XXXXXXXXXX notes bearing interest at XXXXXXXXXX% per annum secured by GP real property, and approximately XXXXXXXXXX% thereof in OT Units.

38. [Reserved]

39. Further to IF's investment in OT and on the same day, OT will use the funds so invested to subscribe for GP XXXXXXXXXX Units.

40. On the same day, GP will enter into a credit facility consisting of $XXXXXXXXXX of long-term debt and a $XXXXXXXXXX line of credit. It is anticipated that GP will draw down a first tranche of the long-term debt on the closing.

41. On the same day, Sub2 will sell the Sale Assets, other than the Specified Assets, to GP at FMV. As consideration for the transfer of such property, GP will assume the Sale Accounts Payable, pay Sub2 cash and issue to Sub2 GP XXXXXXXXXX Units. The total FMV of the consideration so paid will be equal to the FMV of the property so transferred. Sub2 will have less than a XXXXXXXXXX% interest in GP. OT will control GP.

Since it is the view of GP that GP and Sub2 deal at arm's length, GP will add the FMV of the Sale Assets so acquired that are depreciable properties to the UCC of their respective classes, without reduction under paragraph 13(7)(e). GP will apply the (half-year) rule in subsection 1100(2) of the Regulations in computing its CCA in the year of acquisition.

42. On the same day, Sub2 will partially repay the Sub2 Note to Opco.

43. Opco will transfer to Sub2 the balance of the Sub2 Note in exchange for common shares of Sub2. The Sub2 Note will be cancelled as a result.

44. [Reserved]

45. Sub2 will enter into the partnership agreement described in Paragraphs 16 and 17.

46. Pubco will repay the Pubco Note to Opco.

47. On the same day, Sub2 will subscribe for XXXXXXXXXX preferred shares of Newco for an amount equal to $XXXXXXXXXX. Pursuant to Newco's articles of incorporation, a majority of Newco's directors will be appointed by OT. Neither Sub2 nor the Pubco Group will control Newco as a result of such acquisition.

48. On the same day, Opco will use the cash received from Sub2 to reduce its indebtedness to third parties.

49. [Reserved]

50. Pubco and GP will enter into various XXXXXXXXXX agreements:

XXXXXXXXXX.

POST-CLOSING TRANSACTIONS

51. No earlier than XXXXXXXXXX months after the date of closing, except with the consent of the Underwriters:

(a) Sub2 may, at its discretion, exchange its GP XXXXXXXXXX Units for a note of OT; and

(b) either

(i) IF may complete a second public offering of its units and invest the proceeds thereof into OT, which, in turn, would repay the note issued in Paragraph 51(a); or

(ii) Sub2 may exchange the note of OT issued in Paragraph 51(a) for IF Units, which would then be sold for cash;

52. Further to the transactions described in Paragraph 51(a), the Newco preferred shares held by Sub2 will be sold to OT for cash consideration equal to their FMV.

53. Sub2 will then be wound-up into Opco pursuant to the XXXXXXXXXX.

54. In summary, the proceeds obtained by Pubco for its interest in the Sale Assets is an amount determined by negotiation with the Underwriters, based on current prevailing market conditions. XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

As a result of its numerous acquisitions, including those pertaining to the corporate integration transactions, Opco has incurred significant debt. In order to reduce its debt level, it has decided to divest itself of certain assets, namely the Sale Assets, via the transactions described below. XXXXXXXXXX. It was decided that the Sale Assets would be sold because the cash flow generated by them is expected to maximize the cash that will be available to reduce Opco's debt.

The purpose of first transferring the Sale Assets to Sub1 and winding-up Sub1 into Pubco is to consolidate profits and losses within the Pubco Group.

RULINGS REQUESTED AND GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividend that will be deemed by subsection 84(3) to be received as a result of the redemption described in Paragraph 31 above, provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the Proposed Transactions.

B. Provided that Opco elects in the manner described in subsection 1103(2d) of the Regulations, Opco will be considered to have transferred a particular property included in class 2, 3, 6, 24, 27, 29, 34 or 39 to the "present class", within the meaning of that expression in subsection 1103(2d), in relation to the particular property, before the disposition of such assets to Sub1, as described in Paragraph 28.

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

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

OTHER COMMENTS

Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency is making a determination or ruling in respect of:

(a) the cost or fair market value of any particular asset;

(b) the paid-up capital of any shares referred to herein;

(c) any tax consequences relating to the proposed transactions described herein other than those specifically described in the rulings given above; or

(d) whether any of the unrelated parties to the Proposed Transactions, deal with each other at arm's length.

In particular, without restricting the generality of the foregoing, we have not made a determination of:

? whether, pursuant to the rules contained in subsection 88(1), Pubco will be entitled to increase the ACB of capital property it acquires as a result of the winding-up of Bco and Cco;

? the tax consequences of the acquisition of the Sale Assets by a partnership owned directly and indirectly by trusts;

? whether the activities carried on by Opco represent a single business or separate businesses;

? whether the allocation of GP profits is reasonable;

? whether IF and OT are mutual fund trusts; or

? the tax consequences of the Post-Closing Transactions described in Paragraphs 51 to 54.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch