2003 Ruling 2003-0003283 - Royalty - CRP

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:

(i) Can we rule that a particular royalty, relating to XXXXXXXXXX in Canada, will constitute a "XXXXXXXXXX "?

(ii) Can other revenues be included in the royalty up to 10% of the total of such revenues and production revenues as has historically been allowed?

(iii) Will an interest in the new trust be "foreign property"? Will units in the trust that holds the new trust be "foreign property"?

(iv) Does the loaning of funds by a mutual fund trust to a subsidiary to acquire special units of the new trust rather than acquiring these units directly constitute a "misuse or abuse" with regard to the Act, and especially the "foreign property" rules?

Position:

(i) No, however, an opinion was given that it will so qualify provided the amendments to the definition of that phrase are enacted substantially in the form released by the Department of Finance on December 20, 2002.

(ii) Yes. Proposed amendment is not intended to alter existing practice.

(iii) Yes and not necessarily. An interest in the new trust will be "foreign property", however, units in the trust holding the new trust will not be "foreign property" due to this factor unless the cost amount to the former trust of all such property (and other "foreign property") held by it exceeds 30% of the cost amount to it of all property held by it.

(iv) No, based upon the facts of this situation, including that the assets and activities of the subsidiary and the new trust are in Canada.

Reasons: Based upon the facts of the situation as well as the wording of the proposed amendments in question and other relevant provisions.

XXXXXXXXXX 2003-000328

XXXXXXXXXX, 2003

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above parties. We also acknowledge receipt of letters dated XXXXXXXXXX, as well as our various telephone conversations (XXXXXXXXXX) concerning this matter.

The above trust files its income tax returns with the XXXXXXXXXX Tax Centre, under account number XXXXXXXXXX, and is serviced by the XXXXXXXXXX Tax Services Office. The above corporation files its income tax returns with the XXXXXXXXXX Tax Centre, under account number XXXXXXXXXX, and is serviced by the XXXXXXXXXX Tax Services Office.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier tax return of the taxpayers or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) is under objection by the taxpayers or a related person;

(iv) is before the Courts or, if a judgement has been issued, the time limit for appeal to a higher Court has expired; or

(v) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate (except Ruling 1, Ruling 2 and Ruling 3, each as defined below).

Definitions

Unless otherwise stated, in this letter the following terms and expressions have the meanings specified below:

"A Co." means XXXXXXXXXX.

"ACB" means "adjusted cost base" as defined in section 54 of the Act.

XXXXXXXXXX

"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended to the date of this letter.

"B Co." means XXXXXXXXXX, the corporation formed on the amalgamation described in paragraph 10 below.

"C Co." means XXXXXXXXXX, a taxable Canadian corporation.

XXXXXXXXXX

"capital property" has the meaning assigned by section 54 of the Act.

"CBCA" means the Canada Business Corporations Act.

"Combination" means the transactions described in paragraph 14 below.

"Crown Agreement" means the agreement entitled the XXXXXXXXXX.

"CEC" has the meaning assigned the phrase "cumulative eligible capital" by subsection 14(5) of the Act.

"D Co." means XXXXXXXXXX, a taxable Canadian corporation.

"depreciable property" has the meaning assigned by subsection 13(21) of the Act.

"E Co." means XXXXXXXXXX, a taxable Canadian corporation.

"eligible capital property" has the meaning assigned by section 54 of the Act.

"eligible property" has the meaning assigned by subsection 85(1.1) of the Act.

"F Co." means XXXXXXXXXX, a taxable Canadian corporation all of the issued shares of which were held, at the time of the settlement of the New Trust, by an individual XXXXXXXXXX involved with the establishment of the New Trust.

"G Co." means XXXXXXXXXX, a taxable Canadian corporation all of the issued shares of which are owned by A Co.

"GORR" means a XXXXXXXXXX% gross overriding royalty which Partnership 2 is obligated to pay on its XXXXXXXXXX% undivided interest in the Project. The GORR is payable pursuant to an agreement known as the XXXXXXXXXX.

"mutual fund trust" has the meaning assigned by subsection 132(6) of the Act.

"New Trust" means XXXXXXXXXX, a trust settled under the laws of the Province of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX.

"private corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.

"Partnership 1" means XXXXXXXXXX (also referred to as the "Grand Partnership" in correspondence relating to this matter), a limited partnership formed under the laws of the Province of XXXXXXXXXX.

"Partnership 2" means XXXXXXXXXX (also referred to as the "Subsidiary Partnership" in correspondence relating to this matter), a limited partnership formed under the laws of the Province of XXXXXXXXXX.

"Partnership 3" means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX.

"Partnership 4" means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX.

"Project" means the XXXXXXXXXX.

"Projectco 1" means XXXXXXXXXX.

"Projectco 2" means XXXXXXXXXX.

"public corporation" has the meaning assigned to that expression by subsection 89(1) of the Act.

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

"Reclamation Trust" means the XXXXXXXXXX to be established by B Co. as described in paragraph 48 below.

"Regulations" means the Income Tax Regulations as amended to the date of this letter.

"Ruling 1" means the advance income tax ruling issued to X Co., et al, dated XXXXXXXXXX, including any amendments thereto.

"Ruling 2" means the advance income tax ruling issued to Y Co., et al, dated XXXXXXXXXX, including any amendments thereto.

"Ruling 3" means the advance income tax ruling issued to Trust 1, et al, dated XXXXXXXXXX, 2002, including any amendments thereto.

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

"Trust 1" means the trust originally established as the XXXXXXXXXX.

"Trust 2" means the trust originally established as the XXXXXXXXXX which was wound up, pursuant to the trust indenture which had governed its existence, following the Combination.

"Trustee 1" means XXXXXXXXXX, a corporation which has been a taxable Canadian corporation at all times relevant to this letter.

"Trustee" means XXXXXXXXXX, a corporation which has been a taxable Canadian corporation at all times relevant to this letter.

"UCC" has the meaning assigned to the phrase "undepreciated capital cost" by subsection 13(21) of the Act.

"X Co." means XXXXXXXXXX, a predecessor corporation to B Co.

"Y Co." means XXXXXXXXXX, a predecessor corporation to B Co.

"Z Co." means XXXXXXXXXX, a predecessor corporation to B Co.

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

Facts

1. The Project is located XXXXXXXXXX and is a joint venture owned in undivided interests, by XXXXXXXXXX participants (each a "Participant").

B Co. is a Participant in the Project, having an undivided interest of XXXXXXXXXX% therein.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. XXXXXXXXXX (the "Leases").

5. XXXXXXXXXX.

6. The Project is operated and managed by Projectco 1, a single purpose corporation having no significant assets, which corporation is owned by the Participants in the same proportion as their ownership of the Project. Projectco 2 also is a single purpose corporation owned by the Participants which was established XXXXXXXXXX. Each of these corporations is a taxable Canadian corporation.

7. The "Ownership and Management Agreement", to which all of the Participants are parties, sets forth the management structure of the Project.

The Project is governed by XXXXXXXXXX.

8. XXXXXXXXXX.

9. A Co. is a taxable Canadian corporation and a public corporation. A Co. is organized and existing under the CBCA. Its head office is located in XXXXXXXXXX. A Co.'s taxation year for the purposes of the Act ends on XXXXXXXXXX.

10. B Co. is a private corporation and a taxable Canadian corporation governed by the provisions of the XXXXXXXXXX. It has an authorized share capital consisting of an unlimited number of common shares and an unlimited number of preferred shares issuable in one or more series. B Co.'s taxation year for the purposes of the Act ends on XXXXXXXXXX.

B Co. was formed on a short-form amalgamation of X Co., Y Co. and Z Co., in accordance with the provisions of XXXXXXXXXX. This amalgamation was completed in the manner described in subsection 87(1) of the Act.

11. The issued share capital of B Co. consists of XXXXXXXXXX common shares all of which are owned by Trust 1. These shares are held by Trust 1 as capital property. These shares have an aggregate ACB and an aggregate PUC of $XXXXXXXXXX to the Trust 1.

12. The principal asset of B Co. is a XXXXXXXXXX% undivided interest in the assets of the Project (the "Existing Working Interest") and working capital relating to that operation.

By virtue of the Existing Working Interest, B Co. is a Participant, is subject to the Ownership and Management Agreement, XXXXXXXXXX. B Co.'s representative to this committee is selected by the Board of Directors of B Co. and is the individual who is the President and Chief Executive Officer of B Co. (with that person also being the current Chairman of the Project Management Committee). The individual referred to in the preceding sentence deals at arm's length for purposes of the Act with Trustee 1 and Trust 1.

B Co. carries on business as a Participant entitled to, in aggregate, the Existing Working Interest share of the revenues, and bearing, in aggregate, the Existing Working Interest share of the expenses, relating to the operations of the Project described in paragraph 2 above.

The business activities of B Co. also include the provision of management services to Trust 1 (as described in paragraph 17 below) for which it receives a management fee. Prior to termination on XXXXXXXXXX, an arrangement had existed under which A Co. had provided administrative services to Trust 1. At present, B Co. employs its own staff, leases office space and retains third parties (that deal at arm's length with Trustee 1, Trust 1 and B Co. for purposes of the Act) to provide services previously provided by A Co. under the above arrangement.

A Co. markets, for and on behalf of B Co., XXXXXXXXXX attributable to the Existing Working Interest (other than if the owner of "Royalty 1 or "Royalty 2", which are described in paragraphs 21 and 22 below, were to take its royalty share of the XXXXXXXXXX in kind, as it is entitled to do in certain special circumstances) pursuant to a marketing agreement (the "Marketing Agreement") between A Co. and B Co.

Under the Marketing Agreement, B Co. has appointed A Co. as its agent to market and sell B Co.'s share of production from the Project. Each of the Participants markets its own share of production from the Project plant; there is no common marketing arrangement. As such, A Co. makes all arrangements for the marketing of B Co.'s share of production including entering into sales agreements on behalf of B Co., arranging for storage and transportation of the product where necessary, and collecting the proceeds of sale and delivering same to B Co.

The board of directors of B Co. consists of XXXXXXXXXX members. The directors of B Co. are all individuals with experience in the XXXXXXXXXX industry that deal at arm's length with each of the Trustee and Trustee 1 for purposes of the Act. The directors of B Co. are not, and will not be, the agents of the holder of the common shares or of the preferred shares of B Co. (the latter to be issued as described in paragraph 35 below) in managing the business and affairs of B Co. No shareholder agreements have been, and it is not intended that any such agreements will be, entered into concerning the shares of B Co. In addition, the directors of B Co. are not, and will not be, bound by any instructions or orders from the shareholders who have elected them. While Trustee 1 has the ability to appoint all of the directors (upon the consent of the unitholders of Trust 1 pursuant to a resolution of such unitholders), it otherwise has no ability to manage or affect the management of B Co.

13. Respective XXXXXXXXXX% and XXXXXXXXXX% undivided working interests in the Project were owned by X Co. and Y Co. prior to the amalgamation described in paragraph 10 above.

As outlined in more detail in Ruling 1, X Co. had acquired its working interest in the Project in XXXXXXXXXX pursuant to an arrangement whereby XXXXXXXXXX sold to X Co. its XXXXXXXXXX% undivided working interest in the Project ("Working Interest 1") reserving a XXXXXXXXXX% net profit interest (the royalty so reserved being "Royalty 1"). Trust 1 had acquired Royalty 1 and all of the common shares of X Co. in XXXXXXXXXX.

As outlined in more detail in Ruling 2, Y Co. acquired its working interest in the Project on XXXXXXXXXX pursuant to an arrangement whereby A Co. sold to Y Co. its XXXXXXXXXX% undivided working interest in the Project ("Working Interest 2") reserving a XXXXXXXXXX % net profit interest (the royalty so reserved being "Royalty 2"). Trust 2 had acquired Royalty 2 and all of the common shares of Y Co. in XXXXXXXXXX.

14. On XXXXXXXXXX the Combination occurred whereby Trust 1 acquired all of the assets of Trust 2 (including Royalty 2 and all of the common shares in Y Co.) and assumed all of Trust 2's liabilities in exchange for Trust 1 issuing a number of units of Trust 1 equal to the number of units of Trust 2 outstanding immediately prior to that time.

In addition, on that date and as part of the Combination, Trust 2 acquired all of its outstanding units from the unitholders thereof (except for certain unitholders resident in the United States) for cancellation in exchange for units of Trust 1 on a one-for-one basis. No other consideration was given by Trust 2 to such unitholders for their units of Trust 2.

Trust 1 and Trust 2 jointly filed an election in respect of the Combination pursuant to paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(2) of the Act within the time required in that paragraph.

15. Immediately before the amalgamation referred to in paragraph 10 above, pursuant to which B Co. was formed, all of the issued shares of each of X Co. and Y Co. were owned by Z Co. Z Co. was a new corporation that Trust 1 caused to be incorporated under the XXXXXXXXXX. It was a private corporation and a taxable Canadian corporation. Z Co. was incorporated to facilitate the borrowing of certain funds and its establishment was a requirement imposed by the lenders to consolidate the borrowings relate to the operations of X Co. and Y Co. in one entity.

Pursuant to an agreement dated XXXXXXXXXX, between Trustee 1 (as trustee of Trust 1) and Z Co., all of the common shares of each of X Co. and Y Co. (collectively the "Shares") were sold by Trust 1 to Z Co. for consideration consisting solely of XXXXXXXXXX common shares of Z Co.

Trustee 1, as trustee of Trust 1, and Z Co. jointly elected under subsection 85(1) of the Act, within the time required under subsection 85(6) thereof, in respect of the above transfer at an aggregate elected amount of $XXXXXXXXXX which amount was equal to the aggregate ACB of the Shares to Trust 1 at the time of the transfer.

Immediately before the amalgamation referred to in paragraph 10 above (which resulted in the formation of B Co.), the issued share capital of Z Co. consisted of XXXXXXXXXX common shares all of which were owned by Trust 1. These shares were held by Trust 1 as capital property having an aggregate ACB and an aggregate PUC of $XXXXXXXXXX. On the amalgamation, all of the issued and outstanding shares of X Co. and Y Co. were cancelled (without any amount being paid in respect of such cancellation), and the issued and outstanding shares of Z Co. (being solely common shares) were unaffected. In particular, the shares of Z Co. were not cancelled on the merger and no shares of the capital stock of B Co. were issued in connection with the amalgamation.

16. Subject to the Royalty 1 and Royalty 2, the Existing Working Interest entitles B Co. to the following:

(a) an undivided XXXXXXXXXX% participating interest in the Project, being the right, title and interest in and to the Project of a Participant, including agreements relating to operations of the Project, XXXXXXXXXX shares in the capital stock of Projectco 1, and XXXXXXXXXX shares in the capital stock of Projectco 2;

(b) an undivided XXXXXXXXXX% interest in the "Project Technology" being, essentially, all information, inventions, and patents conceived, developed or obtained in connection with the operations of the Project at the expense of all of the Participants; and

(c) certain other assets relating to the Project.

17. B Co. provides management services to Trust 1 pursuant to a management agreement (the "Management Agreement"). The primary duties of B Co. under the Management Agreement are:

(i) ensuring that Trust 1 complies with continuous disclosure obligations;

(ii) providing investor relations services on behalf of Trust 1;

(iii) providing unitholders with the information required to be provided to them under Trust Indenture 1 (see paragraph 19 below), including income tax information;

(iv) arranging for meetings of unitholders on behalf of Trust 1; and

(v) arranging for distributions by Trust 1 to unitholders.

The Management Agreement may be terminated by Trust 1 at any time.

18. Trust 1 is an open-ended investment trust governed by the laws of the Province of XXXXXXXXXX with the sole beneficiaries of Trust 1 being the holders of the units thereof. The units of Trust 1 are listed for trading on the XXXXXXXXXX Stock Exchange and are widely held by the public.

Trust 1 is, and at all times relevant hereto has been, a mutual fund trust having a trustee that is a taxable Canadian corporation. The current trustee of Trust 1 is the Trustee 1.

19. Trust 1 was formed under the laws of the Province of XXXXXXXXXX pursuant to a trust indenture dated XXXXXXXXXX ("Trust Indenture 1"). It was originally established as a closed-ended investment trust but was converted into an open-ended investment trust on XXXXXXXXXX.

Trust Indenture 1 originally provided that Trust 1 was formed for the purpose of holding Royalty 1, as well as the common shares of X Co., and issuing trust units. Trust Indenture 1 was amended as a consequence of the Combination to also permit Trust 1 to hold Royalty 2 and all of the common shares of Y Co. The undertaking of Trust 1 has primarily been restricted to: its ownership of' Royalty 1 and XXXXXXXXXX% of the common shares of X Co.; its ownership of Royalty 1, Royalty 2 and all of the common shares of each of X Co., Y Co. and Z Co.; and, at present, its ownership of Royalty 1, Royalty 2 and all of the common shares of B Co. In particular, Trust 1 does not carry on any business and the only undertaking of Trust 1 is as described in paragraph 132(6)(b) of the Act.

Trust Indenture 1 provides that at no time may non-residents of Canada for purposes of the Act be the beneficial owner of, a majority of the units of the Trust. If the trustee thereof becomes aware that XXXXXXXXXX% or more of such trust units are owned by non-residents of Canada for purposes of the Act, the trustee can force a sale of such units as necessary to ensure that not more than XXXXXXXXXX% of such trust units are beneficially owned by non-residents of Canada for purposes of the Act.

20. The assets of Trust 1 consist of Royalty 1, Royalty 2, all the issued shares of B Co. (being XXXXXXXXXX common shares), indebtedness of B Co. (in the amount of approximately $XXXXXXXXXX at present) and all of the issued ordinary units (see paragraph 29 below) of the New Trust.

Notwithstanding the amalgamation referred to in paragraph 10 above, each of Royalty 1 and Royalty 2 remains a separate property of Trust 1 and a separate obligation of B Co. B Co. is obligated to make separate quarterly payments to Trust 1 pursuant to the provisions of Royalty 1 and Royalty 2, respectively.

Since the respective reservations of Royalty 1 and Royalty 2, as described in paragraph 13 above, no amendments have been made to the terms and conditions relevant to either such royalty which have materially impacted the calculation or payment of either of Royalty 1 or Royalty 2.

The terms of Royalty 1 and Royalty 2 remain as detailed in paragraphs 21 and 22, respectively, below. In the view of the management of B Co., to date there have been no significant differences in the calculation or in the administration of Royalty 1 or Royalty 2, nor will there be any significant differences in the foreseeable future.

21. The terms of Royalty 1 (the "Royalty 1 Provisions"), remain as detailed in Ruling 1 and entitle Trust 1 to receive, each calendar quarter, a payment from B Co. equal to XXXXXXXXXX% of the sale proceeds of XXXXXXXXXX products produced from the Leases in respect of Working Interest 1 during that quarter ("Royalty 1 Production Revenue") less XXXXXXXXXX% of the production expenses and costs attributable to Working Interest 1 during that quarter ("Royalty 1 Production Costs").

Royalty 1 also entitles the holder to XXXXXXXXXX% of other revenue (the "Royalty 1 Other Revenues") in respect of Working Interest 1 in each quarter. Trust 1's entitlement to XXXXXXXXXX% of the Royalty 1 Production Revenue and XXXXXXXXXX% of the Royalty 1 Other Revenues in respect of Working Interest 1 in each quarter is subject to the following:

(a) if Trust 1 elects to take XXXXXXXXXX in kind for the quarter, as it is entitled to do under the Royalty 1 Provisions in certain special circumstances, the Royalty 1 Production Revenue amount will not include the sale proceeds of such XXXXXXXXXX taken in kind; and

(b) the amount of the Royalty 1 Other Revenues will be reduced so that the Royalty 1 Other Revenues which would be included in Royalty 1 for the quarter would not exceed XXXXXXXXXX% of the total of the Royalty 1 Other Revenues for the quarter and the Royalty 1 Production Revenue for the quarter (any excess being "Royalty 1 Excess Revenues").

Any Royalty 1 Excess Revenues from the immediately preceding quarter are paid by B Co. into a reserve it established solely to fund the payment of the Royalty 1 Production Costs. This reserve is owned by B Co. and Trust 1 has no interest therein.

22. The terms of Royalty 2 (the "Royalty 2 Provisions") remain as detailed in Ruling 2 and entitle Trust 1 to receive, each calendar quarter, a payment from B Co. equal to the amount by which the "Royalty Revenues" for that quarter exceed the "Deductible Production Costs" for that quarter.

Royalty Revenues are defined in Ruling 2, essentially, as XXXXXXXXXX% of the sum of the Working Interest 2 share of: i) the proceeds from the sale of XXXXXXXXXX products produced from the Leases during the quarter in question (the "Royalty 2 Production Revenues"); and ii) other revenues for that quarter (these latter revenues being the "Royalty 2 Other Revenues").

Deductible Production Costs are defined in Ruling 2, essentially, as XXXXXXXXXX% of the costs and expenses attributable to Working Interest 2 during the quarter in question that are deductible under the Royalty 2 Provisions (the "Royalty 2 Production Costs").

Trust 1's entitlement to XXXXXXXXXX% of the above Royalty Revenues in respect of Working Interest 2 in each quarter is subject to the following:

(a) if Trust 1 elects to take XXXXXXXXXX in kind during a particular calendar quarter, as it is entitled to do under the Royalty 2 Provisions in certain special circumstances, the Royalty Revenues for that quarter will not include the gross sale proceeds receivable from the sale of such XXXXXXXXXX during that quarter; and

(b) the amount of Royalty 2 Other Revenues included in Royalty Revenues for any particular calendar quarter will not exceed XXXXXXXXXX% of the total of the Royalty 2 Other Revenues for that quarter and the Royalty 2 Production Revenues for that quarter.

The amount of any excess arising due to the limitation in (b) from the immediately preceding quarter is paid by B Co. into a reserve it established solely to fund the payment of the Royalty 2 Production Costs. This reserve is owned by B Co. and Trust 1 has no interest therein.

23. Historically, the Royalty 1 Other Revenues and the Royalty 2 Other Revenues have always been under the XXXXXXXXXX% limitations contained in part (b) to paragraphs 21 and 22, respectively. Furthermore, given the magnitude of revenues from sales of XXXXXXXXXX products, the prospect of exceeding those respective limitations in the future is unlikely.

24. Each of Royalty 1 and Royalty 2 is a XXXXXXXXXX.

25. Following a bidding process pursuant to which A Co. had originally indicated that it would entertain bids for its partnership interests rather than the underlying assets in the Project, B Co. entered into a purchase and sale agreement (the "Purchase and Sale Agreement") with A Co. dated XXXXXXXXXX. Under that agreement the base purchase price was $XXXXXXXXXX, subject to adjustments on closing.

A Co. deals at arm's length for purposes of the Act with each of B Co., Trust 1, the Trustee and Trustee 1.

26. At the time the Purchase and Sale Agreement was entered into, A Co. held its interest in the Project as follows:

(a) A Co. held a XXXXXXXXXX% interest, as a limited partner, in Partnership 1;

(b) C Co., a wholly-owned subsidiary of A Co., held the remaining XXXXXXXXXX% interest in Partnership 1 and was the general partner thereof;

(c) Partnership 1 held a XXXXXXXXXX% undivided interest in the Project as well as a XXXXXXXXXX% interest, as the general partner, in Partnership 2;

(d) Partnership 2 held a XXXXXXXXXX% undivided interest in the Project;

(e) D Co., a corporation which deals at arm's length with A Co. for purposes of the Act, held, and continues to hold, the remaining XXXXXXXXXX% interest, as a limited partner, in Partnership 2.

(f) Partnership 2's interest in the Project was (and remains) subject to its obligation to pay the GORR (which at that time was payable to A Co.).

27. B Co. had indicated to A Co. that it was bidding to acquire an indirect XXXXXXXXXX% interest in the Project but at that time was not prepared to purchase the interest that was held through Partnership 2. Accordingly, A Co. restructured its holdings to facilitate the sale of an indirect XXXXXXXXXX% interest and to separate Partnership 2 and the GORR.

In particular, prior to the closing of the Purchase and Sale Agreement, A Co.:

(a) caused Partnership 3 to be formed, with it as the limited partner having a XXXXXXXXXX% interest and with a newly incorporated corporation ("Newco"; a taxable Canadian corporation all the issued shares of which are owned by A Co.) being the general partner having a XXXXXXXXXX% interest;

(b) sold, at fair market value, a XXXXXXXXXX% interest in the GORR to Newco (for consideration consisting solely of shares of Newco), with A Co. and Newco then selling, at fair market value, all of their respective interests in the GORR to Partnership 3 for consideration consisting solely of units of Partnership 3; and

(c) caused Partnership 4 to be formed, with it as the limited partner having a XXXXXXXXXX% interest and with E Co. (a taxable Canadian corporation all the issued shares of which are owned by A Co.) being the general partner having a XXXXXXXXXX% interest.

28. Pursuant to the Purchase and Sale Agreement, A Co. undertook certain transactions prior to the closing of that agreement as follows:

(a) A Co. caused the settlement of the New Trust;

(b) A Co. sold, at fair market value, its XXXXXXXXXX% interest in Partnership 1 to the New Trust in exchange for consideration consisting of debt (being the "New Trust Debt") having a principal amount of $XXXXXXXXXX; XXXXXXXXXX ordinary units in the New Trust (the "New Trust Ordinary Units", estimated to have an aggregate fair market value and redemption amount of approximately $XXXXXXXXXX); XXXXXXXXXX Series 1 special units of the New Trust (the "New Trust Series 1 Special Units") having an aggregate redemption amount of $XXXXXXXXXX; and a promissory note, payable on demand, having a principal amount and fair market value of $XXXXXXXXXX (such amount being equal to the fair market value, at the time of the sale, of A Co.'s XXXXXXXXXX% interest in Partnership 1 less the aggregate fair market value at that time of all the other consideration given by the New Trust on such sale).

The New Trust Debt was issued under a note indenture and is evidenced by a promissory note, payable on demand, and bearing interest at a rate of XXXXXXXXXX% per annum.

(c) C Co. and the New Trust caused Partnership 1 to be dissolved pursuant to subsection 98(3) of the Act with a XXXXXXXXXX% and a XXXXXXXXXX% undivided interest in all the property and liabilities of Partnership 1 being distributed to or assumed by New Trust and C Co. (i.e., in proportion to their relative interests). One of the properties distributed to the New Trust and C Co. was a receivable from A Co. in the amount of $XXXXXXXXXX.

(d) The New Trust transferred, at fair market value, its undivided interest in Partnership 2, to Partnership 4 for consideration consisting of a promissory note, payable on demand, having a principal amount and fair market value of $XXXXXXXXXX. This obligation of Partnership 4 to the New Trust was settled in full, along with the obligation of the New Trust to A Co. evidenced by the promissory note issued to A Co. in part (b) of this paragraph and the obligation of A Co. to the New Trust described in (c) above, through transactions within the corporate group.

(e) C Co. transferred, at fair market value, its undivided interest in Partnership 2 to Partnership 4 for consideration consisting of a promissory note, payable on demand, having a principal amount and fair market value of $XXXXXXXXXX. This obligation of Partnership 4 to C Co. was settled in full through transactions within the corporate group.

As a result of the above transactions, the New Trust acquired a XXXXXXXXXX% undivided interest in the Project. As a result of the negotiations that led to the Purchase and Sale Agreement being entered into, B Co. was able to specify that the entity to hold the above interest would be a trust rather than a partnership or a corporation. The reason for the choice of a trust was that it was considered to provide better limited liability protection than a partnership (including a limited partnership) and that a trust was considered more suited to a situation involving an income fund than a corporation as the trust allows for the flow through of income.

Also as a result of the negotiations that led to the Purchase and Sale Agreement being entered into, B Co. was able to specify the debt\equity ratio and the types of equity of the New Trust.

29. The New Trust is an inter vivos commercial trust. The interests of the beneficiaries in the New Trust are described by reference to units thereof. The trustee of the New Trust is Trustee. Upon settlement of the New Trust [as referred to in part (a) of paragraph 28 above], each of F Co. and G Co. paid $XXXXXXXXXX in cash to Trustee and each received one ordinary unit in the New Trust. These two ordinary units were acquired by B Co. at the time of the closing of the Purchase and Sale Agreement (as described in paragraph 30 below).

The New Trust is authorized to issue an unlimited number of ordinary units (the "Ordinary Units") and special units (the "Special Units"). The Ordinary Units are entitled to XXXXXXXXXX and other distributions subject to the preferential rights of the Special Units; are entitled to receive the net assets of the trust upon the liquidation, winding up or dissolution of the New Trust, subject to the preferential rights of the Special Units and are voting (each Ordinary Unit being entitled to one vote). The Ordinary Units may be redeemed by the holder and may be redeemed by the issuer, in each case for an amount determined by formula that is intended to be equal to the fair market value of the unit at the time of such redemption.

The Special Units are issuable in series and the trustee may fix the rights and privileges of each series from time to time. All series however, will rank in priority of the Ordinary Units (the Special Units of each series ranking on a parity with the Special Units of every other series) with respect to payment of distributions and distributions of assets upon a liquidation dissolution or winding up of the New Trust.

Trustee has authorized two series of Special Units of which only Series 1 have been issued as noted in part (b) of paragraph 28 above. The terms of the Series 2 Special Units are the same as those described in this paragraph for the Series 1 Special Units. The terms of the Series 1 Special Units provide that each unit has a redemption amount of $XXXXXXXXXX and is entitled to a cumulative preferential distribution of XXXXXXXXXX% per annum, payable monthly, on such redemption amount (the Series 1 Special Units are not otherwise entitled to distributions). The holders are entitled to a preference on the liquidation, winding up or dissolution of the New Trust up to the amount of such redemption amount and may require the New Trust to redeem a Series 1 Special Unit on XXXXXXXXXX days notice. The New Trust may also redeem a Series 1 Special Unit on XXXXXXXXXX days notice. No payment or other distributions may be made to the holders of any other units of the New Trust if the effect would be that the net realizable value of the New Trust's assets would be less than the redemption amount of the Series 1 Special Units outstanding. No amendment may be made to the terms of the Series 1 Special Units without the approval of XXXXXXXXXX% of the holders of Series 1 Special Units voting separately (the Series 1 Special Units are otherwise non-voting).

The trust indenture pursuant to which the New Trust was created provides that at no time may non-residents of Canada for purposes of the Act be the beneficial owner of more than XXXXXXXXXX% of the Ordinary Units or more than XXXXXXXXXX% of the Special Units. If the trustee of the New Trust becomes aware that XXXXXXXXXX% or more of the Ordinary Units or the Special Units, as the case may be, are owned by non-residents of Canada for purposes of the Act, the trustee can force a sale of such units as necessary to ensure that not more than XXXXXXXXXX% of such trust units are beneficially owned by non-residents of Canada for purposes of the Act.

The New Trust is not a mutual fund trust, is not a registered investment under the Act, and units of the New Trust are "foreign property" as defined in subsection 206(1) of the Act.

The activities of the New Trust are restricted, essentially, to holding direct and indirect ownership and royalty interests in the Project and all activities ancillary and incidental thereto.

30. In the Purchase and Sale Agreement, the assets being sold to B Co. are referred to as the "Purchased Interests" which are defined to mean, essentially: i) all of the New Trust Debt, the New Trust Ordinary Units and the New Trust Series 1 Special Units owned by A Co. [such property being received by A Co. as partial consideration for the sale described in part (b) of paragraph 28 above]; ii) all of the issued shares of C Co.; and iii) the rights arising under an option agreement (the "Option"; see paragraph 33 below).

The Purchase and Sale Agreement closed on XXXXXXXXXX with the base purchase price being adjusted and allocated as follows:

	New Trust Ordinary Units			         $     XXXXXXXXXX
	New Trust Series 1 Special Units			  XXXXXXXXXX
	New Trust Debt					  XXXXXXXXXX
	C Co. shares						    XXXXXXXXXX
	Option							      XXXXXXXXXX 

							          $XXXXXXXXXX 

Pursuant to the Purchase and Sale Agreement, there may be further adjustments to the purchase price in the XXXXXXXXXX day period following the closing of that agreement.

31. The obligation of B Co. to pay the purchase price under the Purchase and Sale Agreement was satisfied on closing through a payment, in cash, from B Co. to A Co. in the amount of such purchase price.

In order to finance the above acquisition (including transaction costs and the provision of working capital), B Co. and Trust 1 undertook the following financing transactions:

(a) Trust 1 issued units pursuant to a private placement and a public offering for proceeds (net of expenses) of approximately $XXXXXXXXXX;

(b) Trust 1 advanced the net proceeds to B Co. against a promissory note, payable on demand and bearing interest at a rate of XXXXXXXXXX% per annum (a rate slightly higher than that payable by B Co. on its third party bank borrowings);

(c) B Co. borrowed approximately $XXXXXXXXXX from a syndicate of banks and lending institutions with which it deals at arm's length for purposes of the Act. This indebtedness was not secured but B Co. granted a negative pledge (which restricts its ability to grant security to any other party). The indebtedness was also secured by guarantees from the New Trust and C Co. after closing of the Purchase and Sale Agreement.

Under normal circumstances the equity raised by Trust 1 could have been used to directly acquire Special Units, Ordinary Units and debt of the New Trust. However, because of B Co.'s arrangements with its creditors this was not possible. B Co. is bound by a financing arrangement that requires a debt to equity ratio calculation. For these purposes the equity is considered to be the equity of Trust 1 (rather than B Co. itself) but the equity is limited to the equity that can be traced to Trust 1's investment in B Co. Accordingly, if Trust 1 were to raise equity funds and apply them to purchase securities of the New Trust directly, arguably the equity so raised would not count for purposes of the debt/equity ratio. Because of this problem equity funds raised by Trust 1 were contributed to B Co. by way of demand debt bearing interest at the rate of XXXXXXXXXX% per annum and those funds were then used by B Co. to purchase securities of the New Trust. As this particular financing arrangement is long term (approximately XXXXXXXXXX years) it is anticipated that B Co. will hold the Series 1 Special Units indefinitely.

32. Following the closing of the Purchase and Sale Agreement, B Co.:

(a) sold, at fair market value, all of the New Trust Ordinary Units to Trust 1 for a purchase price of $XXXXXXXXXX. The proceeds thus arising to B Co. were credited against the debt owing by B Co. to Trust 1 as evidenced by the promissory note described in part (b) of the preceding paragraph; and

(b) sold, at fair market value, all of the issued shares of C Co. to the New Trust for a purchase price of $XXXXXXXXXX. The consideration received by B Co. for this sale was a promissory note, payable on demand, having a principal amount and fair market value equal to the above purchase price and, after demand, bearing interest at a rate equal to the XXXXXXXXXX prime rate. The New Trust acquired the shares of C Co. as B Co. was not permitted to have any subsidiaries pursuant to its banking arrangements in force at the time of the sale. The principal asset of C Co. is a XXXXXXXXXX% undivided interest in the assets of the Project and working capital relating to that operation. As noted in paragraph 52 below, it is anticipated that the New Trust will sell the shares of C Co. to B Co. at a future time.

Each of these two transactions is subject to a price adjustment clause pursuant to which the parties agreed that if the price is determined to be greater or less than fair market value by bona fide agreement between the parties, by agreement with the Canada Customs and Revenue Agency or by a court of competent jurisdiction, the price will be adjusted to reflect the fair market value so determined.

The cost amount to Trust 1 of the New Trust Ordinary Units has not at any time exceeded XXXXXXXXXX per cent of the total cost amount of all of its property. In addition, the shares of B Co. have not at any time derived their value, directly or indirectly, primarily from units in the New Trust.

33. Under the Option, B Co. may, subject to certain terms and conditions, acquire from A Co. its XXXXXXXXXX% interest in Partnership 3 and all of the issued shares of Newco, as well as the XXXXXXXXXX% interest in Partnership 2 held by Partnership 4, for a base price of $XXXXXXXXXX subject to adjustments in respect of interest and effective date working capital. The Option is open until XXXXXXXXXX and if and when exercised would have an effective date of XXXXXXXXXX. If exercised, A Co. and B Co. have agreed to an allocation of $XXXXXXXXXX of the base price to the interest in Partnership 2 and $XXXXXXXXXX to the interest in Partnership 3 and the shares of Newco.

The Purchase and Sale Agreement further provides for a XXXXXXXXXX day standstill period following the closing date thereof during which A Co. will not sell, solicit or encourage a third party to acquire its interest in Partnership 2. Thereafter, A Co. may sell such interest, as well as its interest in Partnership 3 and the shares of Newco, provided it complies with the provisions of a first right of refusal in favour of B Co.

Proposed Transactions

34. The New Trust will sell, at fair market value, all of the XXXXXXXXXX% undivided interest in the Project it holds directly (the "New Working Interest") to B Co., reserving a royalty ("Royalty 3"), for a purchase price of approximately $XXXXXXXXXX.

In particular, under the "Working Interest Purchase Agreement" to be entered into between Trustee (as trustee of the New Trust) and B Co., the New Trust will agree to sell to B Co., reserving Royalty 3 to the New Trust in accordance with the "Royalty Provisions" to be attached as a schedule to that agreement, and B Co. will agree to purchase and acquire from the New Trust, subject to Royalty 3, the following:

(a) an undivided XXXXXXXXXX per cent "Participating Interest" in the Project (being the right, title and interest in and to the Project of a Participant) including the "Project Agreements" (being, essentially, all other agreements relating to the operations of the Project) and XXXXXXXXXX shares in the capital stock of Projectco 1;

(b) an undivided XXXXXXXXXX per cent interest in the "Project Technology" (being, essentially, all information, inventions, and patents conceived, developed or obtained in connection with the operations of the Project at the expense of all of the Participants);

(c) XXXXXXXXXX shares in the capital stock of Projectco 2; and

(d) the "Other Assets" (being, essentially, all of the interest of the New Trust at closing in all assets, properties and rights pertaining to the Project which are not specifically listed above).

The New Trust will incur costs related to the creation of Royalty 3 which it will treat as forming the cost of Royalty 3 for purposes of the Act.

35. The purchase price for the New Working Interest, being the price after the reservation of Royalty 3, will be paid by B Co. through the issuance to the New Trust of:

i) a promissory note, payable on demand and having a fair market value and principal amount of $XXXXXXXXXX ("Note 1"; the principal amount of Note 1 will not exceed the aggregate of the New Trust's UCC of capital property which is depreciable property, and its CEC, in respect of property forming part of the New Working Interest immediately before the sale); and

ii) Series 1 preferred shares in its capital stock having a fair market value and a redemption amount, in each case in aggregate, equal to the fair market value at the time of the sale of the New Working Interest (as burdened by Royalty 3) less the principal amount of Note 1 (the shares so issued being the "Preferred Shares").

The Preferred Shares will be redeemable by the holder and retractable by B Co. for the redemption amount and will bear a non-cumulative preferential dividend of XXXXXXXXXX% per annum on such redemption amount. The Preferred Shares will be entitled to a priority on the winding-up of B Co. for the redemption amount. The redemption amount will be fixed by the directors of B Co. at the time of issue of the Preferred Shares but under the terms of the shares will be subject to adjustment if it is determined by bona fide agreement between B Co. and the New Trust, by agreement between the New Trust, B Co. and the CCRA or by a court of competent jurisdictions, that the redemption amount was greater or less than the estimated fair market value of the New Working Interest (burdened by the Royalty 3) less the principal amount of Note 1. In the event of such determination any amounts paid on such shares (or payable) will be adjusted as required.

36. The New Trust and B Co. will jointly elect under subsection 85(1) of the Act, within the time referred to in subsection 85(6) of the Act, to transfer a property transferred as part of the sale of the New Working Interest described in paragraph 34 which constitutes an eligible property, at an amount which is:

(a) in the case of a XXXXXXXXXX property, $XXXXXXXXXX;

(b) in the case of a capital property (other than depreciable property of a prescribed class) or inventory, an amount equal to the lesser of the amounts referred to in subparagraphs 85(1)(c.1)(i) and (ii) of the Act;

(c) in the case of a depreciable property of a prescribed class of the New Trust, an amount equal to the least of the amounts referred to in subparagraphs 85(1)(e)(i) to (iii) of the Act; and

(d) in the case of an eligible capital property of the New Trust, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i) to (iii) of the Act.

The amount so agreed upon in respect of a particular asset will not be less than the fair market value, at the time of the sale, of the consideration (other than Preferred Shares) received by the New Trust therefore. However, in no case will the amount so agreed upon in respect of a particular asset exceed the fair market value of that asset at the time of the transfer.

The addition to the PUC of the Preferred Shares will not exceed the amount by which the aggregate agreed amounts under subsection 85(1) of the Act in respect of the eligible property exceeds the fair market value, and principal amount, of Note 1.

As a result of the above joint election, depreciable property will be acquired by B Co. at a capital cost less than its fair market value (determined without regard to Royalty 3).

37. The liability of the New Trust to B Co. under the New Trust Debt (which became a debt owing to B Co. upon its sale from A Co. as described in paragraph 30 above), and the liability of B Co. to the New Trust, evidenced by Note 1 issued as described in paragraph 35 above, will be settled in full through the set-off of such promissory notes and both such notes will be cancelled.

38. As noted in paragraph 34 above, Royalty 3 will be reserved by the New Trust on the sale of the New Working Interest to B Co. in accordance with the Royalty Provisions to be attached as a schedule to the Working Interest Purchase Agreement. The terms and provisions of Royalty 3 will be essentially the same as the terms and conditions of Royalty 2. The Royalty Provisions provide that Royalty 3 will not attach to or form part of the leases included in the New Working Interest and will not be a covenant attached to or running with the lands subject to those leases. Royalty 3 will not constitute any interest in land.

39. The terms of Royalty 3 will entitle the "Royalty Owner" (being the New Trust, after the reservation of Royalty 3 as described in paragraph 34 above, and its successors and assigns) to receive, each calendar quarter, a payment from the "Working Interest Owner" (being B Co., after the sale of the New Working Interest described in paragraph 34 above, and its successors and assigns) equal to the amount by which the "Royalty Revenues" for that quarter exceed the "Deductible Production Costs" for that quarter (such costs being subject to reduction for any portion thereof reimbursed by the Royalty Owner if XXXXXXXXXX were to be taken in kind by the Royalty Owner in the special circumstances described in paragraph 47 below).

40. Royalty Revenues will be defined in the Royalty Provisions to mean, in respect of a particular calendar quarter, XXXXXXXXXX% of the sum of the following:

(a) the "Production Revenues" for that quarter; and

(b) the "Other Revenues" for that quarter;

provided that:

(c) if the Royalty Owner elects to take XXXXXXXXXX in kind (in the special circumstances described in paragraph 47 below) during a particular calendar quarter, the Royalty Revenues for that quarter will not include the gross sale proceeds receivable from the sale of such XXXXXXXXXX during that quarter; and

(d) the amount of Other Revenues included in Royalty Revenues for any particular calendar quarter will not exceed XXXXXXXXXX% of the total of the Other Revenues for that quarter and the Production Revenues for that quarter.

41. Production Revenues will be defined in the Royalty Provisions to mean, in respect of a particular quarter, the gross sale proceeds receivable from the sale of the New Working Interest share of XXXXXXXXXX and "Other XXXXXXXXXX Products" during that quarter.

42. Other Revenues will be defined in the Royalty Provisions to mean, in respect of a particular quarter, the New Working Interest share of all revenues which accrue during that quarter (other than the gross sale proceeds receivable from the sale of XXXXXXXXXX and Other XXXXXXXXXX Products or income from the Reclamation Trust), including proceeds from:

(i) the sale or licensing of Project Technology [as described in part (b) to paragraph 16 above];

(ii) the processing or upgrading of XXXXXXXXXX for third parties;

(iii) the sale of XXXXXXXXXX and Other XXXXXXXXXX Products obtained from XXXXXXXXXX purchased from third parties and processed in the Project facilities;

(iv) any commodity, currency or interest rate hedge or swap transaction ("Swap Transactions");

(v) the sale of used or replaced equipment;

(vi) insurance proceeds; and

(vii) incentives, rebates and credits in respect of "Production Costs".

It is anticipated that revenues from Swap Transactions (see paragraph 49 below) will make up the largest proportion of any Other Revenues that accrue to B Co. At an exchange rate of $XXXXXXXXXX U.S. to $XXXXXXXXXX Cdn., it is estimated that the total amount of Other Revenues will be well under the XXXXXXXXXX% limitation contained in part (d) to paragraph 40 above. Furthermore, given the magnitude of revenues expected from sales of XXXXXXXXXX and other XXXXXXXXXX products, the prospect of exceeding such limitation in the future is unlikely.

43. Other XXXXXXXXXX Products will be defined in the Royalty Provisions to mean the New Working Interest share of marketable products other than XXXXXXXXXX. However, for greater certainty, proceeds from the sale of Other XXXXXXXXXX Products will only be included in the determination of Production Revenues to the extent such products are produced by the Project XXXXXXXXXX.

44. Deductible Production Costs will be defined in the Royalty Provisions to mean, in respect of a particular quarter and without duplication, (i) XXXXXXXXXX% of all "Production Costs" which are incurred in or relate to that quarter (including those paid by Projectco 1 on behalf of the New Working Interest Owner) except those paid with funds borrowed by the New Working Interest Owner, with distributions from the Reclamation Trust or with funds from the Reserve (see paragraph 46 below); and (ii) Deductible Production Costs which are carried forward from a preceding quarter.

45. Production Costs will be defined in the Royalty Provisions to mean, in respect of a particular quarter and without duplication, the following items:

(a) the New Working Interest share of all costs and expenses (including both operating costs and capital cost) in respect of XXXXXXXXXX, which are incurred or are attributable to that quarter, including:

(i) XXXXXXXXXX;

(ii) XXXXXXXXXX;

(iii) XXXXXXXXXX;

(iv) payments made pursuant to the Crown Agreement as well as royalty payments and other amounts payable (if any) pursuant to the Leases;

(v) XXXXXXXXXX;

(vi) XXXXXXXXXX;

(vii) costs of delivery and sale of XXXXXXXXXX and Other XXXXXXXXXX Products, including marketing fees;

(viii) insurance premiums and similar items and property, municipal, production, XXXXXXXXXX taxes and assessments in respect of lands subject to the Leases or operations thereon or the facilities relating to the Project;

(ix) cost and expenses of generating Other Revenues;

(x) all costs, expenses and other amounts payable in respect of third party claims arising in connection with the Project;

(xi) costs and expenses of XXXXXXXXXX and costs and expenses of land reclamation obligations associated with the Project;

(xii) amounts paid during that quarter in respect of the costs of acquiring interests in leases in XXXXXXXXXX (other than the purchase price of the New Working Interest);

(xiii) all other costs and expenses (including both operating costs and capital costs) which are payable pursuant to the leases, the Ownership and Management Agreement or the other agreements relating to the Project;

(b) contributions to the Reclamation Trust made during that quarter;

(c) amounts paid by the owner of the New Working Interest for that quarter relating to funds borrowed or available for borrowing to finance or refinance the purchase of the New Trust Series 1 Special Units and the New Trust Debt or to fund Production Costs;

(d) income taxes, capital taxes and other direct taxes paid by the owner of the New Working Interest during that quarter;

(e) payments to the Reserve made during that quarter;

(f) payments by the owner of the New Working Interest pursuant to the New Working Interest Purchase Agreement other than the purchase price of the New Working Interest; and

(g) any costs in respect of Swap Transactions;

(h) all costs and expenses not listed above related to the New Working Interest incurred by the owner of the New Working Interest during that quarter;

but shall not include the purchase price of the New Working Interest or the overhead and administration expenses of the owner of the New Working Interest incurred for its own account and not reasonably attributable to amounts included in the calculation of Royalty 3.

46. The Reserve will be established pursuant to the Royalty Provisions, by B Co. as the owner of the New Working Interest, to fund the payment of Production Costs. The Reserve shall be owned by B Co. (as the owner of the New Working Interest) and the New Trust (being the owner of Royalty 3) shall have no interest therein. Interest earned on funds in the Reserve will not form part of the Reserve and will be for the account of the owner of the New Working Interest.

The agreement for the purchase of the New Working Interest (the "Working Interest Purchase Agreement" referred to in paragraph 34 above) will require certain amounts to be paid into the Reserve (relating to adjustments concerning accounts receivable and payable, prepaid expenses as well as the assumption of certain liabilities) after which the following amounts are to be paid into the Reserve:

(a) the Other Revenues in excess of XXXXXXXXXX% of the total of the Other Revenues for the quarter and the Production Revenues for the quarter will be paid into the Reserve XXXXXXXXXX; and

(b) additional amounts will be paid into the Reserve if, as and when the owner of the New Working Interest determines, in its reasonable discretion, that it is prudent to do so in accordance with prudent business practices to provide for payment of Production Costs.

The owner of the New Working Interest may pay Production Costs with funds in the Reserve when, in the reasonable opinion of such owner, it is prudent to do so. The owner of the New Working Interest will not use the Reserve for any other purposes.

47. Under the Royalty Provisions, Royalty 3 also provides that the owner thereof is entitled, under certain conditions, to elect to take all, but not less than all, of its royalty share of the XXXXXXXXXX for a particular calendar quarter in kind and to arrange for the marketing of such share.

It is considered extremely unlikely that such an election would be made as the terms of Royalty 3 (as set out in the Royalty Provisions) would require the owner thereof to post an irrevocable letter of credit to ensure reimbursement to the owner of the New Working Interest for the Deductible Production Costs that would still be paid by that latter party and provide evidence that the owner of Royalty 3 has a marketing arrangement to dispose of the XXXXXXXXXX in accordance with the Ownership and Management Agreement relating to the Project.

48. Pursuant to the Working Interest Purchase Agreement relating to the sale of the New Working Interest described in paragraph 34 above, B Co. will be required to establish the Reclamation Trust prior to the closing of that agreement.

The Reclamation Trust will be formed under the laws of the Province of XXXXXXXXXX and will be a trust resident in that province. It will be established and maintained for the sole purpose of funding the New Working Interest share of reclamation costs of the XXXXXXXXXX comprising the Project.

49. B Co. may enter into transactions (referred to as "Swap Transactions") for the purposes of managing risks associated with fluctuations in interest rates, foreign exchange rates and commodity prices. The purpose and intent of any such transactions will not to speculate but to preserve the Canadian dollar value of B Co.'s share of production from the Project and mitigate against changes in interest rates.

50. After acquisition of the New Working Interest as described in paragraph 34 above, B Co. will carry on business as a Participant entitled to, in aggregate, the Existing Working Interest share and the New Working Interest share of the revenues, and bearing, in aggregate, the Existing Working Interest share and the New Working Interest share of the expenses, relating to the operations of the Project described in paragraph 2 above.

As is the case with the XXXXXXXXXX attributable to the Existing Working Interest, A Co. will market, for and on behalf of B Co., all of the XXXXXXXXXX attributable to the New Existing Working Interest (other than if the owner of Royalty 3 was to take its royalty share of the XXXXXXXXXX in kind, as it is entitled to do in special circumstances as described in paragraph 47 above) pursuant to the Marketing Agreement described in paragraph 12 above.

Financial projections, relating to B Co.'s ownership of the Existing Working Interest and the New Working Interest, indicate that, based upon reasonable assumptions (including those with regard to quantity of XXXXXXXXXX produced, price obtained therefor and expenses incurred to produce same), B Co.will derive income from those working interests after deducting all costs related thereto, including amounts arising under Royalty 1, Royalty 2 and Royalty 3. The business activities of B Co. will continue to include the provision of management services to Trust 1, as well as to the New Trust, for which it will receive respective management fees.

There is currently no intention to sell, now or in the foreseeable future, all or any portion of either the Existing Working Interest or the New Working Interest.

Purpose of the Proposed Transactions

51. The purpose of the proposed transactions is to ensure that after acquisition of the New Working Interest by B Co. a property and business structure can be established which mirrors as closely as possible the existing Trust 1/B Co. structure.

This structure is desirable for a number of reasons. It is essential that the New Working Interest being acquired be held by B Co. so that any liabilities from the Project including environmental liabilities will accrue to B Co. and will not become liabilities of the Trust or its unitholders. This limitation on liability is of key importance if the Trust is to maintain public trading in its units and issue units to fund this acquisition.

Besides providing limited liability protection to the Trust and its unitholders, the proposed structure has the advantage of being familiar to the Trust's unitholders and analysts who follow the trading of the Trust's units. It is believed that this structure will be of considerable assistance in maintaining the Trust's public profile. Additionally, B Co. is borrowing for the purposes of this acquisition and expects to borrow in the future for the Project operations. It was a term of B Co. obtaining financing that it must proceed with the proposed transactions as soon as possible after closing of the Purchase and Sale Agreement.

Additional Information

52. B Co. may exercise the Option before the end of XXXXXXXXXX and thereby acquire from A Co. its XXXXXXXXXX% interest in Partnership 3 and all of the issued shares of Newco, as well as the XXXXXXXXXX% interest in Partnership 2 held by Partnership 4.

After such a closing of the Option, it is anticipated that:

(a) B Co. would sell at fair market value its interest in Partnership 2 to the New Trust such that B Co. would retain a XXXXXXXXXX% interest as the only general partner and the New Trust would be a limited partner along with D Co.;

(b) B Co. would sell at fair market value all of its interest in Partnership 3 to Trust 1 and cause Newco to be wound-up into B Co. pursuant to the provisions of subsection 88(1) of the Act with Partnership 3 then being dissolved and Trust 1 acquiring at fair market value B Co.'s interest in the GORR such that Trust 1 would have full ownership of the GORR; and

(c) The New Trust would sell at fair market value all of the shares of C Co. to B Co. with, at some future point in time, C Co. being wound-up into B Co. pursuant to the provisions of subsection 88(1) of the Act.

53. It is also anticipated that the New Trust will make quarterly cash distributions to Trust 1, as the owner of the Ordinary Units, to coincide with distributions by Trust 1 to the holders of its units. In addition, it is anticipated that interest received by Trust 1 from B Co. pursuant to the promissory note issued as described in part (b) to paragraph 31 above, will also be used by Trust 1 to fund distributions to its unitholders.

It is further anticipated, that the distributions in respect of the Series 1 Special Units made by the New Trust to B Co., as the owner of the such units, will be made out of the net income of the New Trust, will not represent payments in respect of B Co.'s capital interest in the New Trust, and will be included in computing B Co.'s income for purposes of the Act.

Rulings Given

Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof, and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A. Provided the New Trust and B Co. jointly elect, under subsection 85(1) of the Act and within the time referred to in subsection 85(6) thereof, in the manner described in paragraph 36 above, the provisions of subsection 85(1) of the Act will apply to each transfer of a property transferred as part of the sale of the New Working Interest described in paragraph 34 above which constitutes an eligible property, such that the agreed amount in respect of each transfer of eligible property will be deemed to be the New Trust's proceeds of disposition and B Co.'s cost thereof pursuant to paragraph 85(1)(a) of the Act. In respect of depreciable property, to the extent that the New Trusts's capital cost exceeds the New Trust's proceeds of disposition of the property, B Co.'s capital cost of each such property will be determined in accordance with subsection 85(5).

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers.

B. B Co. will include its share of revenue and expenses from the Project regarding the New Working Interest in computing its income for a taxation year pursuant to section 9 of the Act. Provided that the facts concerning B Co.'s prospects for deriving income from the New Working Interest are as stated in paragraph 50 above, and that B Co. continues to carry on business as a Participant in the Project, B Co. will also be entitled to a deduction, in computing its income for a taxation year pursuant to section 9 of the Act, for the amounts of Royalty 3 paid or payable for that year.

C. Provided that the facts concerning B Co's prospects for deriving income from the New Working Interest are as stated in paragraph 50 above and that the property acquired by B Co. as a result of the acquisition of the New Working Interest described in paragraph 34 above, continues to be used, by B Co. for the purpose of gaining or producing income therefrom or from a business in respect of which the property is employed (other than income exempt from taxation under the Act), interest paid by B Co. in a taxation year, or payable in respect of the year (depending upon the method regularly followed by B Co. in computing its income), pursuant to a legal obligation to pay interest on the borrowed money, obtained to fund operating or capital costs relating to the New Working Interest and margin requirements related to the Swap Transactions, will be deductible under paragraph 20(1)(c) of the Act in computing B Co's income for that taxation year to the extent that the interest is reasonable in amount.

D. Royalty 3 will constitute a "specified royalty" within the definition of that term contained in subsection 1206(1) of the Regulations.

E. Subject to subsection 1204(4) of the Regulations, B Co. may include in computing its resource profits, as described in section 1210 of the Regulations, all amounts accruing to it in respect of the New Working Interest to the extent such amounts would qualify as resource profits pursuant to subsection 1204(1) of the Regulations.

In the determination of B Co's "adjusted resource profits" for a particular taxation year under subsection 1210(2) of the Regulations, B Co will be required to deduct the aggregate amount of Royalty 3 paid or payable by it to the New Trust in respect of that year.

F. In the determination of the New Trust's "adjusted resource profits" for a particular taxation year under subsection 1210(2) of the Regulations, the New Trust will be required to deduct 1/2 of all amounts included in computing its "gross resource profits" under subsection 1204(1) of the Regulations as amended, for that year in respect of Royalty 3.

G. The amounts of Royalty 3 received or receivable by the New Trust in a taxation year will be included in computing its income for the year pursuant to section 9 of the Act.

The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency (the "Agency") on May 17, 2002 and are binding on the Agency provided that the proposed acquisition of the New Working Interest, as described in paragraphs 34 and 35 above, is completed by XXXXXXXXXX.

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

Opinions

i) After the acquisition of the New Working Interest by B Co. as described in paragraphs 34 and 35 above, XXXXXXXXXX and after taking into account that Royalty 3 is a specified royalty as provided in ruling D above, will apply to B Co. in a taxation year in respect of the New Working Interest XXXXXXXXXX and provided that the New Trust was an assignee of A Co. and B Co. is an assignee of the New Trust in respect of such interest in the Project and that B Co. still retains a share in the Project in that taxation year.

ii) Provided that the proposed amendments to the Regulations released by the Department of Finance on December 20, 2002 come into force in substantially the same form as that in which they were released, it is our opinion that Royalty 3 will be considered a XXXXXXXXXX.

iii) Units in Trust 1 will constitute "foreign property" for purposes of Part XI of the Act at a particular time if, at that time, the cost amount to Trust 1 of all foreign property [as defined in subsection 206(1) of the Act] held by it (which includes units of the New Trust) exceeds 30% of the cost amount to it of all property held by it.

The foregoing opinions are not advance income tax rulings and, as explained in paragraph 21 of Information Circular 70-6R5 referred to above, are not binding on the Agency.

Other Comments

1. Nothing in this ruling should be construed as implying that the Agency has agreed to the cost or fair market value at any particular time of any property referred to herein.

2. The above rulings and opinions do not imply approval, acceptance or confirmation of any tax implications to any taxpayer in respect of the facts and proposed transactions described herein, except to the extent expressly stated in the rulings and opinions given herein. In particular, we are not expressing any opinion or providing any rulings in respect of the transactions described in paragraphs 25 through 33 as well as paragraphs 52 and 53 above, or as to whether the Reclamation Trust referred to in paragraph 48 above will qualify as a "qualifying environmental trust" as defined in subsection 248(1) of the Act.

3. You have informed us, as stated in paragraph 35 above, that there is a price adjustment clause to adjust the redemption amount of the Preferred Shares if it is determined that the FMV of the consideration for which such shares were issued is other than what it is determined to be at the time of their issue. There is also a reference to price adjustment clause in paragraph 32 above. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration will be effective retroactively to the time of the issuance of the Preferred Shares.

Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the Agency with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

4. You have also informed us, as stated in paragraph 52 above, that B Co. may exercise the Option before the end of 2003, with it being indicated in the description of the Option at paragraph 33 above that upon exercise the Option would have an effective date of February 1, 2003. Nothing in this letter should be construed as confirmation, express or implied, the income tax consequences flowing from the exercise of the Option, or that such transaction will be effective retroactively for purposes of the Act.

5. The transactions in respect of which we are not expressing any opinion or providing any rulings, as noted in comment 2 above, include the borrowings of funds by B Co. described in parts (b) and (c) of paragraph 31 above which are used, in part, to acquire the New Trust Series 1 Special Units.

As noted in paragraph 53 above, it is anticipated that distributions to B Co. as the owner of the New Trust Series 1 Special Units will not be in respect of B Co.'s capital interest in the New Trust. However, if such a distribution were to involve a return of capital to B Co. as the owner of the New Trust Series 1 Special Units (without a disposition of any portion of such property) it may be appropriate, depending upon a review of all the relevant facts, to consider that an income-earning purpose would not be met by B Co. with regard to such returned capital. In addition, if such a distribution were to involve a return of capital to B Co. as the owner of the New Trust Series 1 Special Units (with a disposition of any portion of such property) the current use of the borrowed money with regard to such returned capital would need to be determined, in order to consider whether an income-earning purpose would be met by B Co. with regard to such use.

It should also be noted that, on February 18, 2003, as part of the presentation of the Federal budget, the Department of Finance published the following statement concerning the deductibility of interest:

Recent court decisions have raised uncertainties as to how taxpayers are to treat expenses, in particular interest, in computing income from a business or property for purposes of the Income Tax Act. Most notably, these decisions could lead to inappropriate tax results where a taxpayer derives a tax loss by deducting interest expenses, even if under any objective standard there is no reasonable expectation that the taxpayer would earn any income (as opposed to capital gains), or where the presence or the prospect of revenue (as opposed to income net of expenses) is enough to conclude that an expenditure was incurred "for the purpose of earning income".

Neither of these results is consistent with appropriate tax policy, nor would they have been generally expected under prior law and practice. Therefore legislative amendments to the Income Tax Act will be considered in order to provide continuity in this important area of the law. Before finalizing any proposals, however, the Department of Finance will release them for public consultation, with a general goal of ensuring that they restore continuity with the expected consequences before these recent court decisions.

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