2002 Ruling 2002-0159043 - INNOVATIVE INSTRUMENT

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:

1. Whether the XXXXXXXXXX Note to be issued to a special purpose vehicle in a loan-backed innovative instrument financing will evidence borrowed money for the purpose of paragraph 20(1)(c).

2. Whether subsection 104(7.1) will apply to deny a deduction to the special purpose vehicle under paragraph 104(6)(b) of amounts payable to its unitholders.

Position:

1. Yes.

2. No.

XXXXXXXXXX 2002-015904

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge the information provided in 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 taxpayer 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 facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

"Accumulated Unpaid XXXXXXXXXX" means, at any time, an amount, if any, per Trust Security equal to the XXXXXXXXXX payable by the Trust thereon in respect of all previous Regular Distribution Dates remaining unpaid by the Trust;

"Automatic Exchange" has the meaning set out in paragraph 16 below;

"XXXXXXXXXX" means the XXXXXXXXXX (Canada);

"Capital Guidelines" means the guidelines issued by the Superintendent concerning the maintenance of adequate capital for Canadian chartered banks and federally-regulated trust and loan companies;

"Cash Redemption Price" means $XXXXXXXXXX together with any declared and unpaid dividends on Exchange Preferred Shares, as applicable;

"Common Share Conversion Rate" has the meaning set out in paragraph 29 below;

"Current XXXXXXXXXX" means, in respect of the period from and including the last Distribution Date, an amount per Trust Security XXXXXXXXXX pro-rated for the number of days elapsed from and including the last Distribution Date to but excluding the date of the redemption or termination, as the case may be, provided that there has not been a Distribution Diversion Event with respect to the Distribution Date that would next occur but for such redemption or termination;

"XXXXXXXXXX Note" has the meaning set out in paragraph 20 below;

XXXXXXXXXX;

"XXXXXXXXXX Note Early Redemption Price" means an amount equal to the greater of (A) the XXXXXXXXXX Note Redemption Price, and (B) XXXXXXXXXX;

"XXXXXXXXXX Note Interest Payment Date" means XXXXXXXXXX;

"XXXXXXXXXX Note Redemption Price" means $XXXXXXXXXX plus any accrued and unpaid interest thereon per $XXXXXXXXXX principal amount of the XXXXXXXXXX Note to be redeemed;

"Distribution Date" means XXXXXXXXXX;

"Distribution Diversion Date" means a Distribution Date in respect of which there has occurred a Distribution Diversion Event;

"Distribution Diversion Event" means XXXXXXXXXX Common Shares, in a particular period that is used to determine whether a Distribution Date is a Regular Distribution Date or a Distribution Diversion Date;

"Dividend Payment Date" means XXXXXXXXXX;

"Early Redemption Price" means an amount equal to the greater of (A) the Redemption Price, and (B) XXXXXXXXXX;

"Eligible Investments" means the Funding Note or any property, including money, securities, amounts receivable from unrelated third parties, mortgages, an interest in an Eligible Investment, and any debt obligation, that is a qualified investment under the Act for plans and funds described in subsection 204.4(1) (except where the qualification of such property contains conditions regarding the annuitant, the beneficiary, the employer or the subscriber under the plan or fund unless the Trust is satisfied that such conditions are satisfied), except that the XXXXXXXXXX Note will not be repaid with or converted or exchanged into debt of X.Co. or a related person and, following the maturity of the XXXXXXXXXX Note, the proceeds of repayment of the XXXXXXXXXX Note will not be invested in debt of X Co. or a related person;

"Exchange Preferred Shares" means, collectively, the Preferred Shares XXXXXXXXXX W and the Preferred Shares XXXXXXXXXX X;

"Exchange Trustee" has the meaning set out in paragraph 17 below;

"Funding Note" has the meaning set out in paragraph 20 below;

XXXXXXXXXX;

"Holder Exchange Right" has the meaning set out in paragraph 14 below;

XXXXXXXXXX;

"XXXXXXXXXX Event" means XXXXXXXXXX;

XXXXXXXXXX;

"Preferred Shares XXXXXXXXXX W" has the meaning set out in paragraph 2 below;

"Preferred Shares XXXXXXXXXX X" has the meaning set out in paragraph 2 below;

"Redemption Price" means $XXXXXXXXXX per Trust Security together with any Unpaid XXXXXXXXXX to the date of redemption;

"Regular Distribution Date" means a Distribution Date other than a Distribution Diversion Date;

XXXXXXXXXX;

"Share Exchange Agreement" has the meaning set out in paragraph 17 below;

"Special Security(ies)" has the meaning set out in paragraph 7 below;

"Superintendent" means the Superintendent of Financial Institutions (Canada);

"Surrender Price" has the meaning set out in paragraph 14 below;

XXXXXXXXXX;

"XXXXXXXXXX Event" means XXXXXXXXXX;

"Tier 1 Guidelines" means the interim guidelines issued by the Superintendent dated August 22, 2001 entitled "Innovative Tier 1 Capital - Interim Appendix to Guideline A Capital Adequacy Requirements (CAR) / Minimum Continuing Capital and Surplus Requirements (MCCSR)";

"Trust" has the meaning set out in paragraph 6 below;

"Trust Assets" means the property and assets of the Trust from time to time;

"Trustee" has the meaning set out in paragraph 6 below;

"Trust Security(ies)" has the meaning set out in paragraph 7 below;

XXXXXXXXXX

"Unpaid XXXXXXXXXX" means, XXXXXXXXXX;

"X Co." means XXXXXXXXXX; and

"X Co. Common Shares" has the meaning set out in paragraph 2 below.

Facts

1. X Co. is a XXXXXXXXXX. It is a taxable Canadian corporation and a public corporation within the meaning of subsection 89(1), with shares listed on the XXXXXXXXXX and other exchanges. The principal legislation governing the activities of X Co. is XXXXXXXXXX. X Co.'s business number is # XXXXXXXXXX, its Taxation Centre is XXXXXXXXXX, and its Tax Services Office is XXXXXXXXXX.

2. X Co.'s authorized capital includes an unlimited number of common shares (the "X Co. Common Shares") and an unlimited number of XXXXXXXXXX Preferred Shares, XXXXXXXXXX. X Co. Common Shares are widely held by members of the public. In connection with the proposed transactions, XXXXXXXXXX Preferred Shares, XXXXXXXXXX (the "Preferred Shares XXXXXXXXXX W") and XXXXXXXXXX Preferred Shares, XXXXXXXXXX (the "Preferred Shares XXXXXXXXXX X") have been or will be authorized.

3. XXXXXXXXXX.

4. In July of 1999, the Superintendent issued innovative Tier 1 capital guidelines governing the issue by Canadian banks of securities entitled to be treated as qualifying Tier 1 capital for purposes of the regulations under XXXXXXXXXX. In August of 2001, the Superintendent issued the Tier 1 Guidelines, which extended the application of the guidelines to address capital and surplus requirements of all federally-regulated financial institutions, including banks and life insurance companies, and made certain changes to the former guidelines.

5. XXXXXXXXXX.

Proposed Transactions

6. A trust (the "Trust") will be established by way of declaration of trust under the laws of XXXXXXXXXX and will be a resident of Canada for purposes of the Act. The trustee of the Trust (the "Trustee") will be the XXXXXXXXXX and is a resident of Canada. Beneficial interests in the Trust will be described by reference to units.

7. The Trust proposes to issue two classes of units XXXXXXXXXX, one to X Co. (the "Special Securities") and one to investors (the "Trust Securities"). The class of units to be issued to X Co. will be voting, will be owned at all material times by X Co., and will be issued in denominations of $XXXXXXXXXX per Special Security. It is currently estimated that the Special Securities will represent approximately XXXXXXXXXX% of all the issued units of the Trust, determined by fair market value and without regard to any voting rights attaching to units of the Trust. On or before the closing date for the sale of the Trust Securities, Special Securities will be issued to X Co. and paid for in cash.

8. The class of units to be issued to investors will be non-voting except in certain limited circumstances involving proposed changes to their terms and conditions. The Trust Securities will be offered to investors in Canada by way of prospectus, and will be issued in denominations of $XXXXXXXXXX per Trust Security and paid for in cash. The expected aggregate amount of the issue will be $XXXXXXXXXX.

9. On each Regular Distribution Date, holders of the Trust Securities will be entitled to receive a non-cumulative fixed cash distribution of approximately XXXXXXXXXX% per annum (the "XXXXXXXXXX"), if sufficient XXXXXXXXXX are available, and X Co., as holder of the Special Securities, will be entitled to receive the XXXXXXXXXX, if any, of the Trust remaining after payment of the XXXXXXXXXX. If, on any Regular Distribution Date, the XXXXXXXXXX are insufficient to pay in full the XXXXXXXXXX, the Trust will cause all of its XXXXXXXXXX, if any, to be payable to the holders of Trust Securities on a pro rata basis.

10. On each Distribution Diversion Date, the Trust will not pay the XXXXXXXXXX on the Trust Securities and X Co., as holder of the Special Securities, will be entitled to receive the XXXXXXXXXX, if any, of the Trust. Once a Distribution Diversion Event no longer exists, the XXXXXXXXXX will once again be payable by the Trust to holders of Trust Securities as described above in paragraph 9.

11. The Trust Assets will initially consist primarily of the XXXXXXXXXX Note. The Trust Assets will be limited to the XXXXXXXXXX Note (or the Preferred Shares XXXXXXXXXX W into which the XXXXXXXXXX Note may be converted), cash, and other Eligible Investments.

12. Except upon the occurrence of a XXXXXXXXXX Event or XXXXXXXXXX Event, Trust Securities will not be redeemable by the Trust until XXXXXXXXXX. On XXXXXXXXXX and on any Distribution Date thereafter, the Trust, at its option, and XXXXXXXXXX, and on not less that 30 days or more than 60 days prior notice to holders, may redeem all or part of the then outstanding Trust Securities for an amount in cash per Trust Security equal to the Early Redemption Price, if the Trust Securities are redeemed prior to XXXXXXXXXX and the Redemption Price, if the Trust Securities are redeemed on or after XXXXXXXXXX.

13. Upon the occurrence of a XXXXXXXXXX Event or a XXXXXXXXXX Event, the Trust, at its option, and XXXXXXXXXX, may redeem at any time all but not less than all of the Trust Securities for an amount in cash per Trust Security equal to the Early Redemption Price, if the Trust Securities are redeemed prior to XXXXXXXXXX, and the Redemption Price, if the Trust Securities are redeemed on or after XXXXXXXXXX.

14. Holders of Trust Securities will have the right (the "Holder Exchange Right"), at any time, to surrender all or part of their Trust Securities to the Trust at a price (the "Surrender Price"), for each Trust Security, equal to XXXXXXXXXX Preferred Shares XXXXXXXXXX W. X Co. will have the right, at any time before the exchange is completed, to arrange for a substituted purchaser to purchase Trust Securities tendered for exchange so long as the holder of the Trust Securities so tendered has not withheld consent to the purchase of its Trust Securities. If a substituted purchaser is found, the price to be paid to the holders of the Trust Securities so tendered will be not less XXXXXXXXXX.

15. The surrender of Trust Securities by a holder thereof to the Trust for Preferred Shares XXXXXXXXXX W upon exercise of the Holder Exchange Right as described above in paragraph 14 will be effected by the Trust:

(a) converting $XXXXXXXXXX principal amount of the XXXXXXXXXX Note held by it into XXXXXXXXXX Preferred Shares XXXXXXXXXX W in accordance with the terms thereof as set out below, for each Trust Security so surrendered, and

(b) redeeming each Trust Security so surrendered in consideration of the transfer to the holder thereof by the Trust of XXXXXXXXXX Preferred Shares XXXXXXXXXX W.

16. Upon the occurrence of a XXXXXXXXXX Event, each Trust Security will be exchanged automatically and mandatorily (the "Automatic Exchange") for XXXXXXXXXX Preferred Shares XXXXXXXXXX X.

17. The Automatic Exchange of Trust Securities for Preferred Shares XXXXXXXXXX X as described above in paragraph 16 will be effected pursuant to an agreement (the "Share Exchange Agreement") entered into between X Co., the Trust and a trustee for the holders of Trust Securities (the "Exchange Trustee"). Holders of Trust Securities will transfer their Trust Securities to X Co. and X Co. will issue Preferred Shares XXXXXXXXXX X to such holders

18. On and after XXXXXXXXXX, any outstanding Trust Securities may be purchased at any time, in whole or in part, by the Trust (at the direction of the holder of the Special Securities). The purchases may be made in the open market or by tender or private contract at any price.

19. As long as any Trust Securities are outstanding and held by persons other than X Co., the Trust may only be terminated XXXXXXXXXX (i) upon the occurrence of a XXXXXXXXXX Event or a XXXXXXXXXX Event prior to XXXXXXXXXX, or (ii) for any reason on XXXXXXXXXX or on any Distribution Date thereafter. Holders of Trust Securities will not be entitled to initiate proceedings for the termination of the Trust. Holders of outstanding Trust Securities XXXXXXXXXX and the holder of the Special Securities XXXXXXXXXX will rank pari passu in the distribution of the property of the Trust in the event of a termination of the Trust, after the discharge of the claims of creditors, if any. For this purpose, the entitlement of holders of the Trust Securities will be based on the Early Redemption Price, if the termination is as a result of action taken by X Co. and occurs prior to XXXXXXXXXX, and the Redemption Price, in all other cases. X Co. will agree in the Share Exchange Agreement that, so long as any Trust Securities are outstanding and held by persons other that X Co., X Co. will not approve the termination of the Trust unless the Trust has sufficient funds to pay the Early Redemption Price or the Redemption Price, as applicable.

20. X Co. proposes to issue a XXXXXXXXXX note (the "XXXXXXXXXX Note") to the Trust. The XXXXXXXXXX Note will bear interest at a fixed annual rate (equal to the XXXXXXXXXX on the Trust Securities), payable in equal semi-annual instalments in arrears on each XXXXXXXXXX Note Interest Payment Date. The XXXXXXXXXX Note will mature on XXXXXXXXXX. The Trust will subscribe for the XXXXXXXXXX Note using the proceeds from the issue of the Trust Securities. The proceeds from the subscription by X Co. for the Special Securities, together with a certain amount to be borrowed by the Trust from X Co. under a credit facility, will be used by the Trust to pay its expenses of the offering and to acquire a XXXXXXXXXX note (the "Funding Note") from X Co.

21. It is intended that the proceeds from the issue of the XXXXXXXXXX Note will be used by X Co. for the purpose of earning income (other than exempt income) from business or property.

22. Except upon the occurrence of a XXXXXXXXXX Event or XXXXXXXXXX Event, the XXXXXXXXXX Note will not be redeemable by X Co. prior to XXXXXXXXXX. On or after XXXXXXXXXX and on any XXXXXXXXXX Note Interest Payment Date thereafter, the XXXXXXXXXX Note will be redeemable at the option of X Co. in whole or in part, XXXXXXXXXX, for an amount in cash per $XXXXXXXXXX principal amount of the XXXXXXXXXX Note to be redeemed equal to the XXXXXXXXXX Note Early Redemption Price, if the XXXXXXXXXX Note is redeemed prior to XXXXXXXXXX, and the XXXXXXXXXX Note Redemption Price, if the XXXXXXXXXX Note is redeemed on or after XXXXXXXXXX. If X Co. redeems the XXXXXXXXXX Note, in whole or in part, the Trust will be required to redeem a corresponding amount of Trust Securities. The Trust will use the proceeds of redemption received in respect of the XXXXXXXXXX Note to make payment to the holders of the Trust Securities to be redeemed.

23. Upon the occurrence of a XXXXXXXXXX Event or a XXXXXXXXXX Event, X Co., at its option and XXXXXXXXXX, may redeem at any time the XXXXXXXXXX Note in whole (but not in part) for an amount in cash for each $XXXXXXXXXX principal amount of the XXXXXXXXXX Note to be redeemed equal to the XXXXXXXXXX Note Early Redemption Price, if the XXXXXXXXXX Note is redeemed prior to XXXXXXXXXX, and the XXXXXXXXXX Note Redemption Price, if the XXXXXXXXXX Note is redeemed on or after XXXXXXXXXX. If X Co. has redeemed the XXXXXXXXXX Note in whole, the Trust will be required to redeem all of the Trust Securities.

24. Each $XXXXXXXXXX principal amount of the XXXXXXXXXX Note will be convertible at any time at the option of the Trust into XXXXXXXXXX Preferred Shares XXXXXXXXXX W. The Trust will exercise its right to convert the XXXXXXXXXX Note in circumstances in which holders of Trust Securities exercise the Holder Exchange Right to acquire Preferred Shares XXXXXXXXXX W, so as to enable the Trust to fulfil its obligations under the Holder Exchange Right. Upon any such conversion of the XXXXXXXXXX Note, the Preferred Shares XXXXXXXXXX W so acquired by the Trust will be delivered to the holders of the Trust Securities who have exercised the Holder Exchange Right in accordance with their respective entitlements.

25. The XXXXXXXXXX Note will be a XXXXXXXXXX liability of X Co. Failure by X Co. to make payments or to satisfy its other obligations under the XXXXXXXXXX Note will not entitle the Trust to repayment of the XXXXXXXXXX Note. On maturity of the XXXXXXXXXX Note, X Co. will be required to pay the principal amount of the XXXXXXXXXX Note and any accrued and unpaid interest thereon to the Trust in cash.

26. Under the Share Exchange Agreement, X Co. will grant to the Trust the right to subscribe for Preferred Shares XXXXXXXXXX W in order to enable the Trust, following maturity of the XXXXXXXXXX Note, to satisfy its obligation to deliver Preferred Shares XXXXXXXXXX W in exchange for Trust Securities pursuant to the Holder Exchange Right. Accordingly, if, following maturity of the XXXXXXXXXX Note, a holder of Trust Securities exercises the Holder Exchange Right, the Trust will subscribe for and X Co. will issue Preferred Shares XXXXXXXXXX W, and the Preferred Shares XXXXXXXXXX W so acquired by the Trust will be delivered to the holders of the Trust Securities who have exercised the Holder Exchange Right in accordance with their respective entitlements.

27. Holders of Exchange Preferred Shares will be entitled to receive semi-annual non-cumulative preferential cash dividends, as and when declared by the Board of Directors of X Co. and XXXXXXXXXX, payable on each Dividend Payment Date. If the Board of Directors of X Co. does not declare the dividends, or any part thereof, on the Exchange Preferred Shares on or before the Dividend Payment Date for a particular semi-annual period, the rights of the holders of the Exchange Preferred Shares to receive such dividends, or any part thereof, for such semi-annual period will be extinguished. The rate of dividends on the Preferred Shares XXXXXXXXXX W and XXXXXXXXXX X will be approximately XXXXXXXXXX% and XXXXXXXXXX% respectively.

28. The Exchange Preferred Shares will not be redeemable by X Co. prior to XXXXXXXXXX. On XXXXXXXXXX and on any Dividend Payment Date thereafter, subject to the provisions of the XXXXXXXXXX and XXXXXXXXXX, X Co. may redeem all or any part, of the outstanding Exchange Preferred Shares by either (A) the payment of an amount per Exchange Preferred Share equal to the Cash Redemption Price, or (B) XXXXXXXXXX, including any applicable stock exchange, the delivery of that number of fully-paid and freely tradable X Co. Common Shares listed on a recognized stock exchange in Canada for each Exchange Preferred Share so redeemed determined by dividing the Cash Redemption Price by the Common Share Conversion Rate.

29. On XXXXXXXXXX and on any Dividend Payment Date thereafter, and provided that a XXXXXXXXXX Event has not occurred and is not then continuing, each Exchange Preferred Share will be convertible, at the option of the holder, for that number of fully-paid and freely tradable X Co. Common Shares listed on a recognized stock exchange in Canada for each Exchange Preferred Share so converted determined by dividing the Cash Redemption Price by an amount (the "Common Share Conversion Rate") equal to the greater of (i) $1.00 and (ii) an amount determined by reference to the trading price of X Co. Common Shares on the last trading day immediately before or a number of trading days before the date of conversion. Where a holder gives notice of exercise of the conversion right, X Co. may, XXXXXXXXXX, at its option either (i) redeem for cash on the business day after the date fixed for conversion all but not less than all of the Exchange Preferred Shares that are the subject of the applicable conversion notice, or (ii) cause the holder of such Exchange Preferred Shares to sell on the business day after the date fixed for conversion such Exchange Preferred Shares to another purchaser or purchasers for an amount in cash equal to the Cash Redemption Price.

30. On any issuance of Exchange Preferred Shares pursuant to the Holder Exchange Right or the Automatic Exchange, X Co. or the Trust, as the case may be, reserves the right not to deliver Exchange Preferred Shares to persons whose address is in, or X Co. or the Trust believes is resident in, a jurisdiction outside Canada to the extent that such issuance would require X Co. or the Trust to take any action to comply with securities, banking or analogous laws of such jurisdiction, or to any person who would as a result of such delivery become a person that exceeds a certain ownership threshold in respect of shares of any class of X Co. In such circumstances, the Exchange Trustee or the Trustee will hold the Exchange Preferred shares that would otherwise be delivered to such person as agent for such person, and the Exchange Trustee or the Trustee will attempt to sell such Exchange Preferred Shares on behalf of such person. On any issuance of X Co. Common Shares pursuant to X Co.'s redemption right in respect of the Exchange Preferred Shares or the holder's conversion right in respect of the Exchange Preferred Shares, X Co. reserves the right not to deliver X Co. Common Shares to such persons. Further, fractional X Co. Common Shares will not be issued and X Co. will pay cash in lieu of fractional shares on any such issue of common shares.

31. On and after XXXXXXXXXX, X Co. may at any time purchase for cancellation any Exchange Preferred Shares. The purchases may be made in the open market or by tender or private contract at any price.

32. In the event of the liquidation, dissolution or winding-up of X Co., the holders of the Exchange Preferred Shares will be entitled to receive $XXXXXXXXXX per Exchange Preferred Share, together with any declared and unpaid dividends thereon, before any amount will be paid or any assets of X Co. distributed to the holders of X Co. Common Shares or any other shares ranking junior to the Bank Exchange Preferred Shares. The holders of the Exchange Preferred Shares will not be entitled to share in any further distribution of the property or assets of X Co.

33. So long as any XXXXXXXXXX of Exchange Preferred Shares are outstanding, X Co. will not at any time without the approval of such XXXXXXXXXX of Exchange Preferred Shares (A) declare dividends on X Co. Common Shares or any other shares ranking junior to the XXXXXXXXXX of Exchange Preferred Shares, (B) redeem, purchase or otherwise retire any X Co. Common Shares or any other shares ranking junior to the XXXXXXXXXX of Exchange Preferred Shares, (C) redeem, purchase or otherwise retire less than all the XXXXXXXXXX of Exchange Preferred Shares, or (D) redeem, purchase or otherwise retire any other shares ranking on a parity with the XXXXXXXXXX of Exchange Preferred Shares. The above restrictions are subject to certain exceptions.

34. Holders of Exchange Preferred Shares will not have any voting rights except in certain extraordinary circumstances. X Co. will undertake to list on the TSX any Exchange Preferred Shares issued upon the exercise of the Holder Exchange Right or the occurrence of an Automatic Exchange. The terms and conditions of the Exchange Preferred Shares XXXXXXXXXX will require X Co. to make the election under subsection 191.2(1).

35. X Co. will agree in the Share Exchange Agreement that, if the Trust fails on any Regular Distribution Date to pay the XXXXXXXXXX on the Trust Securities in full, X Co. will not pay dividends on X Co. Common Shares and certain preferred shares of X Co. until a certain period of time following the Trust's failure to pay the XXXXXXXXXX in full on the Trust Securities, unless the Trust first pays such XXXXXXXXXX (or the unpaid portion thereof) to the holders of all outstanding Trust Securities.

Purpose of Proposed Transactions

36. The purpose of the proposed transactions is for X Co. to XXXXXXXXXX.

37. The provisions in the terms of the Trust Securities and Special Securities relating to distributions upon a Regular Distribution Date and a Distribution Diversion Date, and of the provisions of the Share Exchange Agreement relating to the Automatic Exchange, XXXXXXXXXX.

Rulings provided

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 provide further that the proposed transactions are carried out as described above, our Rulings are as follows:

We confirm that

A. provided that the proceeds from the issue of the XXXXXXXXXX Note referred to paragraph 20 above are used and continue to be used for the purpose of earning income from a business or property and the proceeds are not used to acquire a life insurance policy or property the income from which would be exempt, X Co. will be entitled, pursuant to paragraph 20(l)(c), to deduct in computing its income for a taxation year from business or property the amount paid in the year or payable in respect of the year (depending on the method regularly followed by X Co. in computing its income) as interest on the XXXXXXXXXX Note to the extent that the amount paid or payable is reasonable and is paid pursuant to a legal obligation to pay interest; and

B. subsection 104(7.1) will not apply to deny a deduction to the Trust under paragraph 104(6)(b) of amounts payable, as described in paragraph 9 above, to holders of the Trust Securities or the holder of the Special Securities referred to in paragraph 7 above.

Other comments

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

Yours truly,

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