2003 Ruling 2003-0013723 - XXXXXXXXXX

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: In-house loss utilization.

Position: Favourable Rulings provided.

Reasons: The law. Fairly standard issues.

XXXXXXXXXX 2003-001372

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling is:

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

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

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

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

(iv) the subject to a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayers have also represented that the proposed transactions described herein will not result in any taxpayer described herein being unable to pay its outstanding tax liabilities.

DEFINITIONS

In this letter all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified:

(a) "Aco" means XXXXXXXXXX;

(b) "Aco Demand Loan" has the meaning assigned by Paragraph 16;

(c) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act and the regulations thereunder are referred to as the "Regulations";

(d) "affiliated persons" has the meaning assigned by subsection 251.1(1);

(e) "Bco" means XXXXXXXXXX;

(f) "Bco Demand Loan" has the meaning assigned by Paragraph 16;

(g) "CBCA" means the Canada Business Corporations Act as amended;

(h) "Cco" means XXXXXXXXXX;

(i) "Cco Demand Loan" has the meaning assigned by Paragraph 16;

(j) "Daylight Loan A" has the meaning assigned by Paragraph 15;

(k) "Daylight Loan B" has the meaning assigned by Paragraph 15;

(l) "Daylight Loan C" has the meaning assigned by Paragraph 15;

(m) "Daylight Loan" means any of Daylight Loan A, Daylight Loan B, or Daylight Loan C and "Daylight Loans" has the meaning assigned by Paragraph 15;

(n) "Demand Loan" means any of Aco Demand Loan, Bco Demand Loan or Cco Demand Loan and "Demand Loans" has the meaning assigned by Paragraph 16;

(o) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(p) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(q) "forgiven amount" has the meaning assigned by subsection 80(1) or 80.01(1);

(r) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(s) "Holdco" means XXXXXXXXXX;

(t) "NewcoA" has the meaning assigned by Paragraph 12;

(u) "NewcoA Common Shares" has the meaning assigned by Paragraph 12;

(v) "NewcoA Preferred Shares" has the meaning assigned by Paragraph 12;

(w) "NewcoB" has the meaning assigned by Paragraph 13;

(x) "NewcoB Common Shares" has the meaning assigned by Paragraph 13;

(y) "NewcoB Preferred Shares" has the meaning assigned by Paragraph 13;

(z) "NewcoC" has the meaning assigned by Paragraph 14;

(aa) "NewcoC Common Shares" has the meaning assigned by Paragraph 14;

(bb) "NewcoC Preferred Shares" has the meaning assigned by Paragraph 14;

(cc) "Newco Common Shares" refers collectively to the NewcoA Common Shares, NewcoB Common Shares and NewcoC Common Shares;

(dd) "Newco Preferred Shares" refers collectively to the NewcoA Preferred Shares, NewcoB Preferred Shares and NewcoC Preferred Shares;

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

(ff) "paid-up capital" has the meaning assigned by subsection 89(1);

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

(hh) "principal amount" has the meaning assigned by subsection 248(1);

(ii) "Proposed Transactions" means the transactions described in Paragraph 12 to Paragraph 25;

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

(kk) "series of transactions or events" means "series of transactions or events" for purposes of the Act as modified by subsection 248(10);

(ll) "Sisterco" means XXXXXXXXXX;

(mm) "specified financial institution" has the meaning assigned by subsection 248(1);

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

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

(pp) "Topco" means XXXXXXXXXX;

(qq) "Topco Demand LoanA" has the meaning assigned by Paragraph 18;

(rr) "Topco Demand LoanB" has the meaning assigned by Paragraph 18;

(ss) "Topco Demand LoanC" has the meaning assigned by Paragraph 18; and

(tt) "Topco Demand Loan" means any of Topco Demand LoanA, Topco Demand LoanB or Topco Demand LoanC, which are collectively referred to as the "Topco Demand Loans".

FACTS

1. Topco was incorporated under the CBCA in XXXXXXXXXX. Topco is a public corporation and a taxable Canadian corporation.

2. Topco has a XXXXXXXXXX taxation year-end, files its tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. Topco's federal tax account number is XXXXXXXXXX.

3. Topco, directly and through its subsidiaries, carries on business as an XXXXXXXXXX. All of Topco's taxable income is earned in XXXXXXXXXX for the purposes of Part IV of the Regulations. Topco is also a holding corporation for various direct and indirect subsidiaries.

4. Topco owns all of the shares of the capital stock of Holdco. Holdco is a taxable Canadian corporation that was formed XXXXXXXXXX under the Business Corporations Act (XXXXXXXXXX) as a result of the amalgamation of XXXXXXXXXX and its wholly-owned subsidiary, XXXXXXXXXX. Holdco owns all of the shares of the capital stock of each of Aco, Bco and Cco. Holdco has the same mailing address as Topco.

5. Holdco also owns all the shares of the capital stock of various corporations other than Aco, Bco and Cco, including Sisterco. At XXXXXXXXXX, Sisterco had non-capital loss carryforwards of approximately $XXXXXXXXXX. All of Sisterco's income is earned in XXXXXXXXXX for the purposes of Part IV of the Regulations.

Sisterco may be amalgamated with Aco prior to the completion of the Proposed Transactions described below. The amalgamation of Aco and Sisterco is not related to the Proposed Transactions described in this letter.

6. Each of Aco, Bco and Cco and Sisterco was incorporated under the CBCA. Each of Aco, Bco, Cco and Sisterco have the same mailing address as Topco and are taxable Canadian corporations.

7. (a) Aco has a XXXXXXXXXX taxation year-end, files its tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. The federal tax account number of Aco is XXXXXXXXXX.

(b) Bco has a XXXXXXXXXX taxation year-end, files its tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. The federal tax account number of Bco is XXXXXXXXXX.

(c) Cco has a XXXXXXXXXX taxation year-end, files its tax returns at the XXXXXXXXXX TC and is serviced by the XXXXXXXXXX TSO. The federal tax account number of Cco is XXXXXXXXXX.

8. (a) Aco carries on business as a XXXXXXXXXX. All of Aco's taxable income is earned in XXXXXXXXXX for the purposes of Part IV of the Regulations.

(b) Bco carries on business as a XXXXXXXXXX. All of Bco's taxable income is earned in XXXXXXXXXX for the purposes of Part IV of the Regulations.

(c) Cco carries on business as a XXXXXXXXXX. All of Cco's taxable income is earned in XXXXXXXXXX for the purposes of Part IV of the Regulations.

9. As at XXXXXXXXXX, Topco had non-capital losses carried forward of approximately $XXXXXXXXXX. These losses are summarized as follows:

Taxation Year Amount of Loss

XXXXXXXXXX

It is estimated that Topco's income in the next few years will not be sufficient to utilize the non-capital losses and undeducted expenses currently available to it.

10. Topco's XXXXXXXXXX taxation year-end resulted from an acquisition of control that occurred on XXXXXXXXXX. The XXXXXXXXXX non-capital losses resulted from Topco carrying on a business of providing all the strategic, human resources, information technology, finance and general management functions for all the operating groups within the XXXXXXXXXX group of companies around the world. That business continued unchanged after XXXXXXXXXX .

11. (a) Aco is in a taxable position for Canadian income tax purposes. The federal taxable income reported by Aco for its taxation years XXXXXXXXXX, respectively. Aco's federal taxable income for the year ended XXXXXXXXXX is expected to be approximately $XXXXXXXXXX. Aco's estimated federal taxable income for its taxation year ended XXXXXXXXXX is expected to be in excess of the interest charged annually on the Aco Demand Loan.

(b) Bco is in a taxable position for Canadian income tax purposes. The federal taxable income reported by Bco for its taxation years XXXXXXXXXX , respectively. Bco's estimated federal taxable income for its taxation year ended XXXXXXXXXX is expected to be approximately $XXXXXXXXXX . Bco's estimated federal taxable income for its taxation year ended XXXXXXXXXX is expected to be in excess of the interest charged annually on the Bco Demand Loan.

(c) Cco is in a taxable position for Canadian income tax purposes. The federal taxable income reported by Cco for its taxation years XXXXXXXXXX, respectively. Cco's estimated federal taxable income for its taxation year ended XXXXXXXXXX is expected to be approximately $XXXXXXXXXX. Cco's estimated federal taxable income for its taxation year ended XXXXXXXXXX is expected to be in excess of the interest charged annually on the Cco Demand Loan.

PROPOSED TRANSACTIONS

12. Topco will incorporate a new company ("NewcoA") under the CBCA. NewcoA will have a XXXXXXXXXX taxation year-end and will be a taxable Canadian corporation.

The authorized share capital of NewcoA will consist of an unlimited number of common shares ("NewcoA Common Shares") and an unlimited number of redeemable and retractable preferred shares ("NewcoA Preferred Shares"). The NewcoA Preferred Shares will have rights and restrictions described as follows:

(a) the shares will be non-participating and non-voting;

(b) the shares will be entitled to an annual cumulative dividend rate, applied to the redemption amount of the shares. The aggregate redemption amount of the shares will equal the aggregate fair market value of the consideration for which such shares were issued. The dividend rate will be equal to the rate of interest that will be charged on the Aco Demand Loan plus XXXXXXXXXX % as determined at the time of the Proposed Transactions; and

(c) the shares will be redeemable at any time at the option of the holder or NewcoA for an amount equal to the aggregate redemption amount and any unpaid dividends, by NewcoA:

(i) paying cash equal to the aggregate redemption amount and any unpaid dividends;

(ii) assigning all or a portion of the Topco Demand LoanA with a principal amount and fair market value equal to the aggregate redemption amount of the shares so redeemed and paying cash equal to any unpaid dividends; or

(iii) setting off amounts owing under the Aco Demand Loan having a principal amount and fair market value equal to the aggregate redemption amount of the NewcoA Preferred Shares so redeemed in circumstances where NewcoA has become the holder of the Aco Demand Loan, and paying cash equal to any unpaid dividends.

The terms of the Topco Demand Loan and the Aco Demand Loan will provide that if Aco becomes the holder of the Topco Demand LoanA, the Topco Demand LoanA can, at the option of either Topco or Aco, be set off against the Aco Demand Loan.

Topco will subscribe for one NewcoA Common Share for $XXXXXXXXXX on incorporation.

13. Topco will incorporate a new company ("NewcoB") under the CBCA. NewcoB will have a XXXXXXXXXX taxation year-end and will be a taxable Canadian corporation.

The authorized share capital of NewcoB will consist of an unlimited number of common shares ("NewcoB Common Shares") and an unlimited number of redeemable and retractable preferred shares ("NewcoB Preferred Shares"). The NewcoB Preferred Shares will have rights and restrictions described as follows:

(a) the shares will be non-participating and non-voting;

(b) the shares will be entitled to an annual cumulative dividend rate, applied to the redemption amount of the shares. The aggregate redemption amount of the shares will equal the aggregate fair market value of the consideration for which such shares were issued. The dividend rate will be equal to the rate of interest that will be charged on the Bco Demand Loan plus XXXXXXXXXX % as determined at the time of the Proposed Transactions. The dividend rate will be determined at the time of the Proposed Transactions; and

(c) the shares will be redeemable at any time at the option of the holder or NewcoB for an amount equal to the aggregate redemption amount and any unpaid dividends, by NewcoB:

(i) paying cash equal to the aggregate redemption amount and any unpaid dividends;

(ii) assigning all or a portion of the Topco Demand LoanB with a principal amount and fair market value equal to the aggregate redemption amount of the shares so redeemed and paying cash equal to any unpaid dividends; or

(iii) setting off amounts owing under the Bco Demand Loan having a principal amount and fair market value equal to the aggregate redemption amount of the NewcoB Preferred Shares so redeemed in circumstances where NewcoB has become the holder of the Bco Demand Loan, and paying cash equal to any unpaid dividends.

The terms of the Topco Demand LoanB and the Bco Demand Loan will provide that if Bco becomes the holder of the Topco Demand LoanB, the Topco Demand LoanB can, at the option of either Topco or Bco, be set off against the Bco Demand Loan.

Topco will subscribe for one NewcoB Common Share for $XXXXXXXXXX on incorporation.

14. Topco will incorporate a new company ("NewcoC") under the CBCA. NewcoC will have a XXXXXXXXXX taxation year-end and will be a taxable Canadian corporation.

The authorized share capital of NewcoC will consist of an unlimited number of common shares without par value ("NewcoC Common Shares") and an unlimited number of redeemable and retractable preferred shares ("NewcoC Preferred Shares"). The NewcoC Preferred Shares will have rights and restrictions described as follows:

(a) the shares will be non-participating and non-voting;

(b) the shares will be entitled to an annual cumulative dividend rate, applied to the redemption amount of the shares. The aggregate redemption amount of the shares will equal the aggregate fair market value of the consideration for which such shares were issued. The dividend rate will be equal to the rate of interest that will be charged on the Cco Demand Loan plus XXXXXXXXXX % as determined at the time of the Proposed Transactions. The dividend rate will be determined at the time of the Proposed Transactions; and

(c) the shares will be redeemable at any time at the option of the holder or NewcoC for an amount equal to the aggregate redemption amount and any unpaid dividends, by NewcoC:

(i) paying cash equal to the aggregate redemption amount and any unpaid dividends;

(ii) assigning all or a portion of the Topco Demand LoanC with a principal amount and fair market value equal to the aggregate redemption amount of the shares so redeemed and paying cash equal to any unpaid dividends; or

(iii) setting off amounts owing under the Cco Demand Loan having a principal amount and fair market value equal to the aggregate redemption amount of the NewcoC Preferred Shares so redeemed in circumstances where NewcoC has become the holder of the Cco Demand Loan, and paying cash equal to any unpaid dividends.

The terms of the Topco Demand LoanC and the Cco Demand Loan will provide that if Cco becomes the holder of the Topco Demand LoanC, the Topco Demand LoanC can, at the option of either Topco or Cco, be set off against the Cco Demand Loan.

Topco will subscribe for one NewcoC Common Share for $XXXXXXXXXX on incorporation.

15. Topco will borrow three different amounts (Daylight Loan A for an amount not exceeding $XXXXXXXXXX; Daylight Loan B for an amount not exceeding $XXXXXXXXXX; and Daylight Loan C for an amount not exceeding $XXXXXXXXXX) on a daylight basis from an arm's-length financial institution (collectively the "Daylight Loans").

16. Topco will lend on a demand basis, the proceeds from Daylight Loan A to Aco; the proceeds from Daylight Loan B to Bco; and the proceeds from Daylight Loan C to Cco (respectively, the "Aco Demand Loan", "Bco Demand Loan" and "Cco Demand Loan", and collectively, the "Demand Loans"). The terms of each of the Demand Loans will be as follows:

(a) the Demand Loans will be subordinated to external debt;

(b) the Demand Loans will bear interest at a commercial rate that an arm's length third party lender would charge such borrower on such indebtedness issued under similar circumstances at the time the particular Demand Loan is granted. The interest will be payable annually in arrears; and

(c) repayment of the Demand Loans may be settled in cash or, if Aco becomes the holder of the Topco Demand LoanA, Bco becomes the holder of the Topco Demand LoanB, or Cco becomes the holder of the Topco Demand LoanC, the respective Demand Loan can, at the option of either Topco or Aco, Bco or Cco, as the case may be, be set off against the respective Topco Demand Loan.

Based on financial projections for Aco, Bco and Cco, each company has the financial capacity to pay the interest on the respective Demand Loan from its own cash flow (i.e. its net accounting income before depreciation and taxes). Topco has provided confirmation, in a letter from XXXXXXXXXX, that Aco could support additional debt of up to $XXXXXXXXXX; Bco could support additional debt of up to $XXXXXXXXXX; and Cco could support additional debt of up to $XXXXXXXXXX, all at an interest rate of approximately XXXXXXXXXX% to XXXXXXXXXX%.

17. (a) Aco will use the proceeds of the Aco Demand Loan to subscribe for NewcoA Preferred Shares having an aggregate redemption amount, stated capital and paid-up capital equal to the principal amount of the Aco Demand Loan. Dividends on the NewcoA Preferred Shares will be paid annually. The dividends will be funded by capital contributions made by Topco as described in Paragraph 21(a).

(b) Bco will use the proceeds of the Bco Demand Loan to subscribe for NewcoB Preferred Shares having an aggregate redemption amount, stated capital and paid-up capital equal to the principal amount of the Bco Demand Loan. Dividends on the NewcoB Preferred Shares will be paid annually. The dividends will be funded by capital contributions made by Topco as described in Paragraph 21(b).

(c) Cco will use the proceeds of the Cco Demand Loan to subscribe for NewcoC Preferred Shares having an aggregate redemption amount, stated capital and paid-up capital equal to the principal amount of the Cco Demand Loan. Dividends on the NewcoC Preferred Shares will be paid annually. The dividends will be funded by capital contributions made by Topco as described in Paragraph 21(c).

18. (a) NewcoA will lend to Topco the subscription proceeds received in Paragraph 17(a) in Canadian dollars on an interest-free demand basis (the "Topco Demand LoanA"). The terms of the Topco Demand LoanA will also provide that if Aco becomes the holder of the Topco Demand LoanA, the Topco Demand LoanA can, at the option of either Topco or Aco, be set off against the Aco Demand Loan.

(b) NewcoB will lend to Topco the subscription proceeds received in Paragraph 17(b) in Canadian dollars on an interest-free demand basis (the "Topco Demand LoanB"). The terms of the Topco Demand LoanB will also provide that if Bco becomes the holder of the Topco Demand LoanB, the Topco Demand LoanB can, at the option of either Topco or Bco, be set off against the Bco Demand Loan.

(c) NewcoC will lend to Topco the subscription proceeds received in Paragraph 17(c) in Canadian dollars on an interest-free demand basis (the "Topco Demand LoanC"). The terms of the Topco Demand LoanC will also provide that if Cco becomes the holder of the Topco Demand LoanC, the Topco Demand LoanC can, at the option of either Topco or Cco, be set off against the Cco Demand Loan.

19. Topco will use the proceeds from the Topco Demand LoanA, Topco Demand LoanB and Topco Demand LoanC to repay the respective Daylight Loan.

20. (a) Aco will pay interest to Topco on the Aco Demand Loan annually.

(b) Bco will pay interest to Topco on the Bco Demand Loan annually.

(c) Cco will pay interest to Topco on the Cco Demand Loan annually.

21. (a) Topco will agree to and will make capital contributions to NewcoA on an annual basis equal to the amount of dividends to be paid by NewcoA to Aco in respect of the NewcoA Preferred Shares for so long as such preferred shares are outstanding. Topco will have a source of income, independent of its indirect investment in Aco, sufficient to fund the amount of the annual capital contributions to NewcoA in excess of the interest income it will receive on the Aco Demand Loan.

(b) Topco will agree to and will make capital contributions to NewcoB on an annual basis equal to the amount of dividends to be paid by NewcoB to Bco in respect of the NewcoB Preferred Shares for so long as such preferred shares are outstanding. Topco will have a source of income, independent of its indirect investment in Bco, sufficient to fund the amount of the annual capital contributions to NewcoB in excess of the interest income it will receive on the Bco Demand Loan.

(c) Topco will agree to and will make capital contributions to NewcoC on an annual basis equal to the amount of dividends to be paid by NewcoC to Cco in respect of the NewcoC Preferred Shares for so long as such preferred shares are outstanding. Topco will have a source of income, independent of its indirect investment in Cco, sufficient to fund the amount of the annual capital contributions to NewcoC in excess of the interest income it will receive on the Cco Demand Loan.

22. (a) NewcoA will use the amounts received as capital contributions in Paragraph 21(a) to pay dividends on the NewcoA Preferred Shares to Aco on an annual basis.

(b) NewcoB will use the amounts received as capital contributions in Paragraph 21(b) to pay dividends on the NewcoB Preferred Shares to Bco on an annual basis.

(c) NewcoC will use the amounts received as capital contributions in Paragraph 21(c) to pay dividends on the NewcoC Preferred Shares to Cco on an annual basis.

23. Once Topco has decided to unwind the Proposed Transactions with Aco in whole or in part:

(a) Aco will pay the balance of any accrued and unpaid interest on the portion of the Aco Demand Loan settled as described in Paragraph 23(e);

(b) Topco will make capital contributions to NewcoA equal to the amount of any accrued and unpaid dividends on the NewcoA Preferred Shares;

(c) NewcoA will pay the balance of any accrued and unpaid dividends on the NewcoA Preferred Shares redeemed as described in Paragraph 23(d);

(d) NewcoA will redeem all or a portion of the NewcoA Preferred Shares held by Aco and settle the amount owing on redemption by assigning a corresponding amount of the Topco Demand LoanA to Aco;

(e) Aco will repay all or a portion of the Aco Demand Loan equal to the amount of NewcoA Preferred Shares redeemed as described in Paragraph 23(d) by setting off the amount owing to Topco with a corresponding amount of the Topco Demand LoanA and such portions of the Topco Demand LoanA and the Aco Demand Loan will be cancelled; and

(f) once all of the NewcoA Preferred Shares held by Aco have been redeemed and all of the Topco Demand LoanA has been assigned to Aco as described in Paragraph 23(d) and Paragraph 23(e), NewcoA will be wound up into Topco pursuant to the CBCA.

24. Once Topco has decided to unwind the Proposed Transactions with Bco in whole or in part:

(a) Bco will pay the balance of any accrued and unpaid interest on the portion of the Bco Demand Loan settled as described in Paragraph 24(e);

(b) Topco will make capital contributions to NewcoB equal to the amount of any accrued and unpaid dividends on the NewcoB Preferred Shares;

(c) NewcoB will pay the balance of any accrued and unpaid dividends on the NewcoB Preferred Shares redeemed as described in Paragraph 24(d);

(d) NewcoB will redeem all or a portion of the NewcoB Preferred Shares held by Bco and settle the amount owing on redemption by assigning a corresponding amount of the Topco Demand LoanB to Bco;

(e) Bco will repay all or a portion of the Bco Demand Loan equal to the amount of NewcoB Preferred Shares redeemed as described in Paragraph 24(d) by setting off the amount owing to Topco with a corresponding amount of the Topco Demand LoanB and such portions of the Topco Demand LoanB and the Bco Demand Loan will be cancelled; and

(f) once all of the NewcoB Preferred Shares held by Bco have been redeemed and all of the Topco Demand LoanB has been assigned to Bco as described in Paragraph 24(d) and Paragraph 24(e), NewcoB will be wound up into Topco pursuant to the CBCA.

25. Once Topco has decided to unwind the Proposed Transactions with Cco in whole or in part:

(a) Cco will pay the balance of any accrued and unpaid interest on the portion of the Cco Demand Loan settled as described in Paragraph 25(e);

(b) Topco will make capital contributions to NewcoC equal to the amount of any accrued and unpaid dividends on the NewcoC Preferred Shares;

(c) NewcoC will pay the balance of any accrued and unpaid dividends on the NewcoC Preferred Shares redeemed as described in Paragraph 25(d);

(d) NewcoC will redeem all or a portion of the NewcoC Preferred Shares held by Cco and settle the amount owing on redemption by assigning a corresponding amount of the Topco Demand LoanC to Cco;

(e) Cco will repay all or a portion of the Cco Demand Loan equal to the amount of NewcoC Preferred Shares redeemed as described in Paragraph 25(d) by setting off the amount owing to Topco with a corresponding amount of the Topco Demand LoanC and such portions of the Topco Demand LoanC and the Cco Demand Loan will be cancelled; and

(f) once all of the NewcoC Preferred Shares held by Cco have been redeemed and all of the Topco Demand LoanC has been assigned to Cco as described in Paragraph 25(d) and Paragraph 25(e), NewcoC will be wound up into Topco pursuant to the CBCA.

ADDITIONAL INFORMATION

26. Topco, Aco, Bco, Cco, NewcoA, NewcoB, and NewcoC are neither specified financial institutions nor financial intermediary corporations.

27. None of the issued shares referred to herein (including the shares to be issued as described in the Proposed Transactions) is or will be, at any time during the implementation of the Proposed Transactions described herein:

(a) the subject of a dividend rental agreement; or

(b) the subject of any undertaking that is a guarantee agreement.

28. None of the issued shares of NewcoA, NewcoB or NewcoC are or will be, at any time during the implementation of the Proposed Transactions described herein:

(a) the subject of any undertaking; or

(b) issued for consideration;

except as described herein.

29. Topco, Aco, Bco and Cco are affiliated persons.

30. (a) Each of Topco and NewcoA will agree with Aco that NewcoA shall be a single purpose company, shall have no liabilities and shall not carry on (and Topco will not cause to carry on) any business other than that contemplated by the Proposed Transactions.

(b) Each of Topco and NewcoB will agree with Bco that NewcoB shall be a single purpose company, shall have no liabilities and shall not carry on (and Topco will not cause to carry on) any business other than that contemplated by the Proposed Transactions.

(c) Each of Topco and NewcoC will agree with Cco that NewcoC shall be a single purpose company, shall have no liabilities and shall not carry on (and Topco will not cause to carry on) any business other than that contemplated by the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. The overall purpose of the Proposed Transactions is to effectively consolidate profits and losses in an affiliated group by enabling Topco to earn sufficient interest income, over a period of time, so as to utilize its accumulated non-capital losses (that are not restricted by the acquisition of control rules) and any non-capital losses that it may otherwise incur in future taxation years.

In order to undertake the Proposed Transactions in a legally effective manner, it is necessary to incorporate NewcoA, NewcoB and NewcoC (described in Paragraph 12, Paragraph 13 and Paragraph 14, respectively) to enable Aco, Bco and Cco to hold an interest in NewcoA Preferred Shares, NewcoB Preferred Shares and NewcoC Preferred Shares, respectively. Under subsection 30(1) of the CBCA, Aco, Bco and Cco are precluded from acquiring and holding shares in Topco.

The purpose of making capital contributions to NewcoA, NewcoB and NewcoC (as described in Paragraph 21) versus subscribing for additional Newco Common Shares, is to ensure that NewcoA, NewcoB and NewcoC will not be precluded from declaring dividends on the NewcoA Preferred Shares, NewcoB Preferred Shares and NewcoC Preferred Shares, respectively. In the case of the issuance of additional Newco Common Shares, the realizable value of the assets of NewcoA (i.e., Topco Demand LoanA), NewcoB (i.e., Topco Demand LoanB) or NewcoC (i.e., Topco Demand LoanC), as the case may be, after the payment of a dividend would be less than the aggregate of the respective entity's liabilities and the stated capital of both the Newco Common Shares and the Newco Preferred Shares.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. The dividends received by Aco, Bco, and Cco, as described in Paragraphs 22, 23(c), 24(c) and 25(c) will be taxable dividends that will, pursuant to subsection 112(1), be deductible in computing the taxable income of Aco, Bco and Cco, respectively for the year in which such dividends are received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4).

B. Aco, Bco, and Cco, will not be subject to tax under Part IV.1 in respect of the dividends described in Ruling A because such dividends will be "excepted dividends" by virtue of paragraph (b) of that definition in section 187.1.

C. NewcoA, NewcoB and NewcoC will not be subject to tax under Part VI.1 in respect of the dividends described in Ruling A because such dividends will be "excluded dividends" pursuant to paragraph (a) of that definition in subsection 191(1).

D. Provided that Aco, Bco and Cco have a legal obligation to pay interest on the respective Demand Loan issued in Paragraph 16, and that Aco, Bco and Cco continue to hold the respective Newco Preferred Shares described in Paragraph 12, Paragraph 13 and Paragraph 14, each of Aco, Bco and Cco will be entitled, pursuant to paragraph 20(1)(c), to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by Aco, Bco and Cco, respectively, in computing its income for purposes of the Act) in respect of the year on the respective Demand Loan or (ii) a reasonable amount in respect thereof.

E. No amount will be included in the income of NewcoA, NewcoB or NewcoC pursuant to section 9, paragraphs 12(1)(c) or 12(1)(x) in respect of the capital contributions to each such Newco described in Paragraphs 21, 23(b), 24(b) and 25(b).

F. The set-off of all or any part of the Topco Demand Loan against the corresponding amount of the respective Demand Loan described in Paragraphs 23(e), 24(e) and 25(e) will not give rise to a forgiven amount. None of Topco, Aco, Bco, Cco, NewcoA, NewcoB or NewcoC will realize any gain or incur any loss as a result of the set-offs and cancellations.

G. Provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the taxable dividends described in Ruling A above, then, by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to those dividends. For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

H. The provisions of subsection 88(1) will apply to the winding-up of NewcoA, NewcoB and NewcoC into Topco described in Paragraphs 23(f), 24(f) and 25(f).

I. The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

J. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 and are binding on the CCRA provided that the proposed transactions, other than those described in Paragraphs 20 to 25 above, are completed by XXXXXXXXXX. These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter should be construed as implying that the CCRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) the amount of any non-capital loss or any other amount of any corporation referred to herein;

(c) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions; or

(d) any other tax consequence relating to the facts, proposed transactions, other information or any transactions or events, taking place either prior to the proposed transactions or subsequent to the proposed transactions, whether described in this letter or not other than those specifically described in the rulings given above.

Yours truly,

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