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:

Where a lease is amended to add an option to purchase and to increase the annual lease payments to reflect such option, are the increased payments deductible under section 9 to the lessee?

Position:

No, the increased annual payments are considered to be made in respect of the option.

Reasons: FMV of the lease payments.

XXXXXXXXXX 							2003-002803

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("B Co")
XXXXXXXXXX ("A Co")

This is in reply to your letters of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above named corporations.

To the best of your knowledge, and that of B Co and A Co, none of the issues involved in this ruling contained herein is:

(i) is in an earlier return of B Co or A Co or of a person related to either B Co or A Co;

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

(iii) is under objection by B Co or by A Co or by a related person;

(iv) is before the courts; or if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) is the subject of a previously issued ruling.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

"A Co" means XXXXXXXXXX;

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

"B Co" means the XXXXXXXXXX;

"B Co XXXXXXXXXX" means the B Co building situated on the XXXXXXXXXX and office facilities of B Co;

"B Co XXXXXXXXXX Lease" means the ground lease dated XXXXXXXXXX from B Co, as landlord, to A Co (XXXXXXXXXX), as tenant, of the B Co XXXXXXXXXX (and the subjacent lands);

"B Co XXXXXXXXXX Sublease" means the sublease dated XXXXXXXXXX from XXXXXXXXXX, as trustee XXXXXXXXXX, as sublandlord, to B Co, as subtenant, of the B Co XXXXXXXXXX;

"C Co" means XXXXXXXXXX; and

"CCRA" means the Canada Customs and Revenue Agency;

XXXXXXXXXX;

"Co-tenant" means either Z Co or D Co as nominee for A Co, as the context indicates, and "co-tenants" means Z Co and D Co as nominee for A Co;

"D Co" means XXXXXXXXXX;

"disposition" has the meaning assigned by subsection 248(1) of the Act;

"E Co" means XXXXXXXXXX;

XXXXXXXXXX;

"XXXXXXXXXX First Lease" means the lease dated XXXXXXXXXX between B Co, as landlord, and the XXXXXXXXXX Co-tenants, as tenants, demising the XXXXXXXXXX;

"XXXXXXXXXX Lease" means the XXXXXXXXXX First Lease, as amended and assigned.

XXXXXXXXXX;

"XXXXXXXXXX Co-tenants" means D Co, XXXXXXXXXX and Z Co, as the original co-tenants under the XXXXXXXXXX First Lease;

"XXXXXXXXXX Co-tenants" means D Co and XXXXXXXXXX, as the original co-tenants under the XXXXXXXXXX First Lease;

"XXXXXXXXXX First Lease" means the lease dated XXXXXXXXXX between B Co, as landlord, and the XXXXXXXXXX Co-tenants, demising the XXXXXXXXXX.

"XXXXXXXXXX Lease" means the XXXXXXXXXX First Lease, as amended and assigned.

"subsidiary wholly-owned corporation" has the meaning assigned in subsection 248(1) of the Act;

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

XXXXXXXXXX

XXXXXXXXXX

"Z Co" means XXXXXXXXXX.

FACTS

A Co

1. A Co is a subsidiary wholly-owned corporation of the XXXXXXXXXX and is a taxable Canadian corporation.

2. A Co's business number is XXXXXXXXXX A Co files its tax return at the XXXXXXXXXX Taxation Centre. The head office of A Co is located at XXXXXXXXXX.

3. The principal business of A Co consists of XXXXXXXXXX.

B Co

4. B Co is a corporation continued under XXXXXXXXXX B Co is a taxable Canadian corporation.

5. B Co's business number is XXXXXXXXXX . B Co files its tax return at the XXXXXXXXXX Taxation Centre. The head office of B Co is located at XXXXXXXXXX.

6. B Co is a corporation XXXXXXXXXX.

7. XXXXXXXXXX.

8. XXXXXXXXXX, B Co currently operates XXXXXXXXXX offices within Canada, as well as various offices overseas. B Co's offices in XXXXXXXXXX are located at XXXXXXXXXX.

C Co

9. C Co is a corporation continued under XXXXXXXXXX.

10. XXXXXXXXXX.

D Co

11. D Co is a corporation incorporated pursuant to the XXXXXXXXXX. Its registered office is at XXXXXXXXXX.

12. D Co is a subsidiary wholly-owned corporation of A Co and is a taxable Canadian corporation.

E Co

13. E Co is a taxable Canadian corporation and is a subsidiary wholly-owned corporation of XXXXXXXXXX.

Z Co.

14. Z Co is a corporation incorporated pursuant to the XXXXXXXXXX. Its registered office is XXXXXXXXXX.

15. Z Co is a subsidiary wholly-owned corporation of C Co and is a taxable Canadian corporation.

Background to the XXXXXXXXXX

16. XXXXXXXXXX.

17. XXXXXXXXXX.

18. XXXXXXXXXX.

19. XXXXXXXXXX.

20. XXXXXXXXXX.

21. XXXXXXXXXX.

22. XXXXXXXXXX.

23. XXXXXXXXXX.

24. Assuming that all payments of interest and principal are made by XXXXXXXXXX as scheduled, the B Co XXXXXXXXXX Sublease and the B Co XXXXXXXXXX Lease will each expire on XXXXXXXXXX.

25. Initially, pursuant to the XXXXXXXXXX First Lease, the XXXXXXXXXX was leased by B Co, as landlord, to XXXXXXXXXX, as to an undivided XXXXXXXXXX% interest, D Co as nominee for A Co and partnerships whose interests A Co subsequently acquired, as to an undivided XXXXXXXXXX % interest, and Z Co as to an undivided XXXXXXXXXX% interest. The XXXXXXXXXX First Lease expires on XXXXXXXXXX.

26. Pursuant to an assignment and assumption agreement dated XXXXXXXXXX. Currently, the XXXXXXXXXX Lease demises the XXXXXXXXXX to Z Co as to an undivided XXXXXXXXXX%, and to D Co, as nominee for A Co, as to the remaining undivided XXXXXXXXXX% interest.

27 The XXXXXXXXXX Lease is a "triple net" lease (so that the tenants thereunder are responsible for all realty taxes and operating expenses, etc.), expiring on XXXXXXXXXX, with a base rent of $XXXXXXXXXX per annum. There is no option for the co-tenants under the XXXXXXXXXX Lease to purchase B Co's reversionary freehold interest in the XXXXXXXXXX at any time.

28 Initially, the XXXXXXXXXX was leased by B Co, as landlord, to XXXXXXXXXX, as to an undivided XXXXXXXXXX% interest and D Co as nominee for A Co and a partnership whose interest A Co subsequently acquired, as to an undivided XXXXXXXXXX% interest pursuant to the XXXXXXXXXX First Lease. The XXXXXXXXXX First Lease expires on XXXXXXXXXX.

29 Pursuant to an assignment and assumption agreement dated XXXXXXXXXX. Currently, the XXXXXXXXXX Lease demises the XXXXXXXXXX to D Co, as nominee for and on behalf of A Co, as to the entire leasehold interest.

30 The XXXXXXXXXX Lease is a "triple net" lease (so that the tenant thereunder is responsible for all realty taxes and operating expenses, etc.), expiring co-terminus with the XXXXXXXXXX Lease on XXXXXXXXXX, with a base rent of $XXXXXXXXXX per annum. There is no option for the tenant under the XXXXXXXXXX Lease to purchase B Co's reversionary freehold interest in the XXXXXXXXXX at any time.

31 B Co and A Co deal at arm's length, within the meaning given thereto by subsection 251(1) of the Act.

PROPOSED TRANSACTIONS

32 On XXXXXXXXXX, B Co signed letters of intent with A Co to amend the XXXXXXXXXX Lease and the XXXXXXXXXX Lease (the "Letters of Intent" and each a "Letter of Intent"). The principal purpose of the amendments is to reduce the term of each lease and increase the annual basic rent payable. B Co and A Co, in the case of the XXXXXXXXXX Lease and B Co, A Co and Z Co, in the case of the XXXXXXXXXX Lease intend to enter into definitive lease amending agreements sometime in XXXXXXXXXX, but with economic effect from XXXXXXXXXX, on terms and conditions that reflect the terms provided for in the Letters of Intent. B Co and the co-tenants in the case of the XXXXXXXXXX Lease and B Co and A Co in the case of the XXXXXXXXXX Lease intend that these leases will remain in effect, notwithstanding the amendments and deletions thereto as described herein.

33. Amendments to XXXXXXXXXX Lease and Related Documents: The Letter of Intent related to the XXXXXXXXXX Lease provides, as a general principle, that all existing rights, obligations and liabilities of B Co and the co-tenants, as well as all other third parties, under or in respect of the XXXXXXXXXX Lease and/or related documents shall be preserved, except as otherwise expressly provided for. Without limiting the foregoing, the Letter of Intent related to the XXXXXXXXXX provides that:

(i) All existing provisions in respect of the assignment of the XXXXXXXXXX Lease by the co-tenants, or the entering into of any subleases, or Change of Control of the co-tenants, and other restrictions on transfers (including mortgaging) shall remain in full force and effect.

(ii) No third parties who have any liabilities or obligations under the XXXXXXXXXX Lease and/or related documents shall be released from such liabilities or obligations either as a result of the transactions contemplated herein or otherwise and A Co shall, at its own cost, obtain all necessary documentation and approvals from such third parties to ensure this is the case, which documentation and approvals must be satisfactory to B Co, in its sole and unfettered discretion.

(iii) B Co shall retain its rights in respect of the XXXXXXXXXX provided for in the XXXXXXXXXX Lease (XXXXXXXXXX).

(iv) The provisions in the XXXXXXXXXX Lease in respect of recourse against the co-tenants shall remain in force. The provisions in the XXXXXXXXXX Lease in respect of the Deposit, as applicable, shall be deleted; and

(v) The provisions in the XXXXXXXXXX Lease providing B Co with XXXXXXXXXX therein shall remain in full force and effect.

34. The Letter of Intent relating to the XXXXXXXXXX Lease provides that, subject to these general principles, effective as of the Closing Date as defined in the Letter of Intent but which is anticipated to be sometime in XXXXXXXXXX (but with such adjustments and assurances as may be necessary to produce the same effects as if these amendments had occurred on XXXXXXXXXX (the "Effective Date")), the XXXXXXXXXX Lease and other related documents are to be amended as set out below:

(i) The Term shall be reduced to expire on XXXXXXXXXX, the maturity date of B Co's XXXXXXXXXX permanent financing.

(ii) From and after the Effective Date, the requirement that A Co pay XXXXXXXXXX Land Rent, XXXXXXXXXX shall all be deleted and replaced by an annual minimum basic rental of approximately $XXXXXXXXXX payable by the co-tenants in equal monthly instalments of approximately $XXXXXXXXXX in advance on the first day of each and every month during the Term commencing as of the Effective Date. In addition, B Co's XXXXXXXXXX shall be deleted. For greater certainty, however, the XXXXXXXXXX Lease is to continue to be a completely carefree and triple net lease to the Landlord and the provisions of XXXXXXXXXX Lease shall remain in full force.

(iii) The co-tenants shall have an irrevocable option to purchase all of B Co's right, title and interest in the XXXXXXXXXX effective on the date of expiry of the XXXXXXXXXX Lease for a fixed purchase price of $XXXXXXXXXX. This option to purchase may be exercised only by the co-tenants delivering notice in writing to B Co not later than XXXXXXXXXX days prior to the expiry date of the XXXXXXXXXX Lease and not earlier than XXXXXXXXXX days prior to such expiry date.

(iv) Any financing of the XXXXXXXXXX by the co-tenants shall in all respects be subordinate to B Co's freehold interest.

(v) As a general principle, B Co will not be involved in, or have any rights of approval in respect of, XXXXXXXXXX, except that B Co will have rights of approval in respect of XXXXXXXXXX. These rights in favour of B Co will be structured to continue in perpetuity, notwithstanding XXXXXXXXXX.

(vi) B Co shall release its XXXXXXXXXX Lease.

(vii) B Co and the co-tenants have agreed to work co-operatively to attempt to effect the transactions provided for in the Letter of Intent and the definitive agreement and registrations on title in a manner that protects the other's interests and minimizes transaction costs for the other party, provided that doing so does not result in the former incurring greater costs or in any adverse effect upon the former's existing rights or obligations, or anything which is inconsistent with the provisions of the Letter of Intent relating to the XXXXXXXXXX.

35. The actual amendments, including deletions, proposed to be made to the XXXXXXXXXX Lease are described below, all of which amendments and deletions will be effective as of the date of the Agreement to Amend the XXXXXXXXXX Lease (the "Amendment Date"):

(i) Section XXXXXXXXXX provides that the co-tenants will pay to the landlord XXXXXXXXXX Land Rent, XXXXXXXXXX. Section XXXXXXXXXX provides for monthly XXXXXXXXXX Land Rent to be payable by the co-tenants at the rate of $XXXXXXXXXX per square foot of Allocated Non-Residential Gross Floor Area for the XXXXXXXXXX, per annum.

The definition of "XXXXXXXXXX Land Rent" in XXXXXXXXXX Lease and the covenant to pay XXXXXXXXXX Land Rent by the co-tenants in Sections XXXXXXXXXX Lease will be amended to provide that, on and after the Amendment Date, the co-tenants shall pay XXXXXXXXXX Land Rent to the landlord equal to $XXXXXXXXXX per annum payable in equal monthly instalments of approximately $XXXXXXXXXX, representing an annual increase in XXXXXXXXXX Land Rent of $XXXXXXXXXX and a monthly increase in XXXXXXXXXX Land Rent of $XXXXXXXXXX (such monthly increase in the amount of the XXXXXXXXXX Land Rent is sometimes hereinafter referred to as the "XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase" and the amount of such monthly XXXXXXXXXX Land Rent prior to such increase, being $XXXXXXXXXX, is sometimes hereinafter referred to as the "Current XXXXXXXXXX Monthly XXXXXXXXXX Land Rent"). In addition, to reflect the fact that the landlord and the co-tenants intend that this amendment will be economically effective as of the Effective Date, the co-tenants will agree to pay to the landlord on the Amendment Date, as rent, a lump sum amount equal to the amount by which A exceeds B where:

A is the aggregate of the XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increases for the period commencing XXXXXXXXXX to and including the month in which the Amendment Date in respect of the XXXXXXXXXX Lease occurs together with interest on each such XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase at the rate of XXXXXXXXXX% per month, calculated monthly for the period commencing with the first day of the month in which any such payment of the XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase would have been payable if the Amendment Date in respect of the XXXXXXXXXX Lease had occurred on XXXXXXXXXX to and including the Amendment Date,

and,

B is $XXXXXXXXXX;

such lump sum amount being the "XXXXXXXXXX Adjustment" in respect of the XXXXXXXXXX Lease estimated to be $XXXXXXXXXX (assuming an Amendment Date of XXXXXXXXXX).

(ii) Pursuant to Section XXXXXXXXXX and the definition of "Lease Commencement Date" in subsection XXXXXXXXXX the term of the lease commenced on XXXXXXXXXX and expires on XXXXXXXXXX;

The term of the lease will be amended by changing its expiration date from XXXXXXXXXX to XXXXXXXXXX in Section XXXXXXXXXX of the lease.

(iii) The following provisions of the XXXXXXXXXX Lease will be deleted consequential to the elimination of XXXXXXXXXX:

XXXXXXXXXX.

(iv) Article XXXXXXXXXX will be deleted in its entirety.

(v) XXXXXXXXXX.

This right to XXXXXXXXXX shall be amended.

(vi) The co-tenants will be granted an option (sometimes referred to herein as "Original XXXXXXXXXX Option") to purchase the landlord's interest in the XXXXXXXXXX by adding the Original XXXXXXXXXX Option to the XXXXXXXXXX Lease as new Article XXXXXXXXXX. The co-tenants will agree to pay to the landlord the sum of $XXXXXXXXXX on the Amendment Date as specific consideration for the grant of the Original XXXXXXXXXX Option. The exercise price of the Original XXXXXXXXXX Option is $XXXXXXXXXX and it will be exercisable by the co-tenants between XXXXXXXXXX by the delivery by the co-tenants to the landlord of a Notice setting forth the co-tenants' intention to exercise the Original XXXXXXXXXX Option; provided that, the Original XXXXXXXXXX Option shall automatically be terminated concomitant with the termination of the XXXXXXXXXX Lease in accordance with the terms of the XXXXXXXXXX Lease (e.g., if the XXXXXXXXXX Lease is terminated by the landlord by reason of the co-tenants' failure to pay rent).

If the Original XXXXXXXXXX Option is exercised, the purchase will be effected on an "as is, where-is" basis. Provided that the Original XXXXXXXXXX Option is not terminated by reason of the termination of the XXXXXXXXXX Lease prior to its exercise, B Co expects the co-tenants to exercise the Original XXXXXXXXXX Option within the time and in the manner permitted by Article XXXXXXXXXX and to thereby ultimately acquire B Co's interest in the XXXXXXXXXX.

(vii) XXXXXXXXXX.

This provision will be deleted.

(viii) XXXXXXXXXX.

This provision will be amended XXXXXXXXXX is carried out.

36. The co-tenants, together with other interested parties, entered into a co-owners agreement dated XXXXXXXXXX which governs their relationship, inter se, as tenants-in-common, in the XXXXXXXXXX Lease, as amended. In conjunction with the proposed amendments to the XXXXXXXXXX Lease described herein, the co-tenants and C Co entered into an agreement dated XXXXXXXXXX, the salient terms and provisions of which are as follows:

XXXXXXXXXX.

37. Amendments to XXXXXXXXXX Lease and Related Documents: The Letter of Intent related to the XXXXXXXXXX Lease provides, as a general principle, that all existing rights, obligations and liabilities of B Co and A Co, under or in respect of the XXXXXXXXXX Lease and/or related documents shall be preserved, except as otherwise expressly provided for. Without limiting the foregoing, the Letter of Intent related to the XXXXXXXXXX Lease provides that:

(i) All existing provisions in respect of the assignment of the XXXXXXXXXX Lease by the tenant, or the entering into of any subleases, or Change of Control of the tenant, and other restrictions on transfers (including mortgaging) shall remain in full force and effect.

(ii) No third parties who have any liabilities or obligations under the XXXXXXXXXX Lease and/or related documents shall be released from such liabilities or obligations either as a result of the transactions contemplated by the Letter of Intent or otherwise and A Co shall, at its own cost, obtain all necessary documentation and approvals from such third parties to ensure this is the case, which documentation and approvals must be satisfactory to B Co, in its sole and unfettered discretion.

(iii) B Co shall retain its rights in respect of XXXXXXXXXX provided for in the XXXXXXXXXX Lease (XXXXXXXXXX).

(iv) The provisions in the XXXXXXXXXX Lease in respect of recourse against the tenant shall remain in force.

(v) The provisions in the XXXXXXXXXX Lease in respect of the Deposit, as applicable, shall be deleted.

38. The Letter of Intent related to the XXXXXXXXXX Lease provides that, subject to these general principles, effective as of the Closing Date as defined in the Letter of Intent but which is anticipated to be sometime in XXXXXXXXXX (but with such adjustments and assurances as may be necessary to produce the same effects as if these amendments had occurred on XXXXXXXXXX (the "Effective Date")) the XXXXXXXXXX Lease and other related documents are to be amended as set out below:

(i) The Term shall be reduced to expire on XXXXXXXXXX, the maturity date of B Co's XXXXXXXXXX permanent financing.

(ii) From and after the Effective Date, the requirement that A Co pay XXXXXXXXXX shall all be deleted and replaced by an annual minimum basic rent of approximately $XXXXXXXXXX payable by A Co in equal monthly instalments of approximately $XXXXXXXXXX in advance on the first day of each and every month during the Term commencing as of the Effective Date. In addition, B Co's XXXXXXXXXX shall be deleted. For greater certainty, however, the XXXXXXXXXX Lease shall continue to be a completely carefree and triple net lease to the Landlord and the provisions of Section XXXXXXXXXX of the XXXXXXXXXX Lease shall remain in full force.

(iii) A Co shall have an irrevocable option to purchase all of B Co's right, title and interest in the XXXXXXXXXX effective on the date of expiry of the XXXXXXXXXX Lease for a fixed purchase price of $XXXXXXXXXX. This option to purchase may be exercised only by A Co delivering notice in writing to B Co not later than XXXXXXXXXX days prior to the expiry date of the XXXXXXXXXX Lease and not earlier than XXXXXXXXXX days prior to such expiry date.

(iv) Any financing of the XXXXXXXXXX by A Co shall in all respects be subordinate to B Co's freehold interest.

(v) As a general principle, B Co will not be involved in, or have any rights of approval in respect of, XXXXXXXXXX of the XXXXXXXXXX, except that B Co will have rights of approval in respect of XXXXXXXXXX. These rights in favour of B Co will be structured to continue in perpetuity, XXXXXXXXXX .

(vi) B Co shall release its right of first refusal in respect of a transfer by the tenant of its interest in the XXXXXXXXXX Lease.

(vii) Each of B Co and A Co shall work co-operatively to attempt to effect the transactions provided for in the Letter of Intent and the definitive agreement and registrations on title in a manner that protects the other's interests and minimizes transaction costs for the other party, provided that doing so does not result in the former incurring greater costs or in any adverse effect upon the former's existing rights or obligations, or anything which is inconsistent with the provisions of the Letter of Intent relating to the XXXXXXXXXX.

39. The actual amendments, including deletions, proposed to be made to the XXXXXXXXXX Lease are described below, all of which amendments and deletions will be effective as of the date of the Agreement to Amend the XXXXXXXXXX Lease (which date is also referred to as the "Amendment Date"):

(i) Section XXXXXXXXXX provides that the tenant will pay to the landlord XXXXXXXXXX Land Rent, XXXXXXXXXX. Section XXXXXXXXXX provides for monthly XXXXXXXXXX Land Rent to be payable by the tenant at the rate of $XXXXXXXXXX per square foot of Allocated Non-Residential Gross Floor Area for the XXXXXXXXXX, per annum.

The definition of "XXXXXXXXXX Land Rent" in paragraph XXXXXXXXXX of the XXXXXXXXXX Lease and the covenant to pay XXXXXXXXXX Land Rent by the tenant in Sections XXXXXXXXXX of the XXXXXXXXXX Lease will be amended to provide that, on and after the Amendment Date, the tenant shall pay XXXXXXXXXX Land Rent to the landlord equal to $XXXXXXXXXX per annum payable in equal monthly instalments of approximately $XXXXXXXXXX, representing an annual increase in XXXXXXXXXX Land rent of $XXXXXXXXXX and a monthly increase in XXXXXXXXXX Land Rent of $XXXXXXXXXX (such monthly increase in the amount of the XXXXXXXXXX Land Rent is sometimes hereinafter referred to as the "XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase" and the amount of such monthly XXXXXXXXXX Land Rent prior to such increase, being $XXXXXXXXXX, is sometimes hereinafter referred to as the "Current XXXXXXXXXX Monthly XXXXXXXXXX Land Rent"). In addition, to reflect the fact that the landlord and the tenant intend that this amendment will be economically effective as of the Effective Date, the tenant will agree to pay to the landlord on the Amendment Date, as rent, a lump sum amount equal to the amount by which A exceeds B where:

A is the aggregate of the XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increases for the period commencing XXXXXXXXXX to and including the month in which the Amendment Date in respect of the XXXXXXXXXX lease occurs together with interest on each such XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase at the rate of XXXXXXXXXX% per month, calculated monthly for the period commencing with the first day of the month in respect of which any such XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase would have been payable if the Amendment Date in respect of the XXXXXXXXXX Lease had occurred on XXXXXXXXXX to and including the Amendment Date,

and,

B is $XXXXXXXXXX;

such lump sum amount being the "XXXXXXXXXX" in respect of the XXXXXXXXXX Lease estimated to be $XXXXXXXXXX (assuming an Amendment Date of XXXXXXXXXX).

(ii) Pursuant to Section XXXXXXXXXX and the definition of "XXXXXXXXXX" in paragraph XXXXXXXXXX the term of the lease commenced on XXXXXXXXXX and expires on XXXXXXXXXX.

The term of the XXXXXXXXXX Lease will be amended by changing the expiration date of the lease from XXXXXXXXXX to XXXXXXXXXX in Section XXXXXXXXXX of the lease.

(iii) The following provisions of the XXXXXXXXXX Lease will be deleted consequential to the elimination of XXXXXXXXXX and the removal of rights of first refusal:

XXXXXXXXXX.

(iv) Article V XXXXXXXXXX, will be deleted in its entirety.

(v) XXXXXXXXXX.

(vi) The tenant will be granted an option (sometimes referred to herein as "Original XXXXXXXXXX Option" to purchase the landlord's interest in the XXXXXXXXXX Lease by adding the Original XXXXXXXXXX Option to the XXXXXXXXXX Lease as a new Article XXXXXXXXXX. The tenant will agree to pay to the landlord the sum of $XXXXXXXXXX on the Amendment Date as specific consideration for the granting of the Original XXXXXXXXXX Option. The exercise price of the Original XXXXXXXXXX Option is $XXXXXXXXXX and it will be exercisable by the tenant between XXXXXXXXXX and XXXXXXXXXX by the delivery by the tenant to the landlord of a Notice setting forth the tenant's intention to exercise the Original XXXXXXXXXX Option; provided that, the Original XXXXXXXXXX Option shall automatically be terminated concomitant with the termination of the XXXXXXXXXX Lease in accordance with the terms of the XXXXXXXXXX Lease (e.g., if the XXXXXXXXXX Lease is terminated by the landlord by reason of the tenant's failure to pay rent).

If the Original XXXXXXXXXX Option to purchase is exercised, the purchase will be effected on an "as-is, where-is" basis. Provided that the Original XXXXXXXXXX Option is not terminated by reason of the termination of the XXXXXXXXXX Lease prior to its exercise, B Co expects the tenant to exercise the Original XXXXXXXXXX Option within the time and in the manner permitted by Article XXXXXXXXXX and to thereby ultimately acquire the B Co's interest in the XXXXXXXXXX.

40. Contemporaneously with the execution of the Letters of Intent, B Co entered into additional letters of intent with XXXXXXXXXX ("Y Co") and A Co in respect of the XXXXXXXXXX, wherein B Co set forth the basis upon which it would sell the XXXXXXXXXX to Y Co and would sell the XXXXXXXXXX to A Co. Y Co is affiliated with XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

41. The purpose of the proposed transactions is to provide B Co with additional cash flow to, inter alia, assist it in satisfying its financial obligations in respect of the permanent financing respecting the B Co XXXXXXXXXX with the enhanced lease income it will receive from the XXXXXXXXXX.

RULINGS GIVEN:

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the transactions are completed as proposed, we rule as follows:

A. Provided the proposed amendments and deletions to the XXXXXXXXXX Lease and the XXXXXXXXXX Lease as contemplated in the Letters of Intent and as described in paragraphs 33 to 39 above, are made as described, each of these leases will remain in effect and the relationship between B Co and A Co will continue to be that of lessor and lessee, in respect of each lease and, accordingly, for the purposes of the Act, the aforesaid amendments and deletions will not, in and of themselves, result in being characterized as agreements of purchase and sale (i.e. an acquisition and disposition for purposes of the Act) of B Co's reversionary freehold interest in the real property that is the subject matter of each lease to the co-tenants or the tenant, as the case may be.

B. The granting of the Original XXXXXXXXXX Option and the Original XXXXXXXXXX Option by B Co as described in paragraphs 35 and 39 herein, will, in each case, be considered by reason of subsection 49(1) of the Act to be a disposition of property by B Co in its taxation year in which the Amending Date occurs, and the adjusted cost base of each such option to B Co immediately before each such grant is nil.

C. In addition to the amount of $XXXXXXXXXX received by B Co as specific consideration for the granting of the Original XXXXXXXXXX Option, B Co will be deemed for the purposes of the Act to have received additional proceeds of disposition in respect of the grant of the Original XXXXXXXXXX Option equal to the amount of the XXXXXXXXXX Adjustment as described in paragraph 35 above, and accordingly, will realize a capital gain for purposes of the Act equal to the aggregate of such amounts in its taxation year in which the Amendment Date occurs.

D. In addition to the amount of $XXXXXXXXXX received by B Co as specific consideration for the granting of the Original XXXXXXXXXX Option, B Co will be deemed for the purposes of the Act to have received additional proceeds of disposition in respect of the grant of the Original XXXXXXXXXX Option equal to the amount of the XXXXXXXXXX Adjustment as described in paragraph 39 above, and accordingly, will realize a capital gain for purposes of the Act equal to the aggregate of such amounts in its taxation year in which the Amendment Date occurs.

E. Any XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase payments described in paragraph 33 above or XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase payments described in paragraph 39 above received at any time by B Co in respect of any period after the Amendment Date of the XXXXXXXXXX Lease or the XXXXXXXXXX Lease, as the case may be, shall, except in the taxation year of B Co in which the Original XXXXXXXXXX Option or the Original XXXXXXXXXX Option, as the case maybe, is exercised each be treated for the purposes of subsection 49(5) of the Act as a payment in respect of extension at that time of the Original XXXXXXXXXX Option or the Original XXXXXXXXXX Option, as the case may be, with the following results:

(i) for the purposes of subsection 49(1) of the Act, each XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase payment or XXXXXXXXXX Monthly XXXXXXXXXX Land rent Increase payment, as the case may be, shall be deemed to be proceeds of disposition in respect of the grant of an option by B Co at the time of receipt by B Co of each such payment;

(ii) pursuant to subsection 49(1) of the Act, the adjusted cost base of each such option described in paragraph (i) immediately above shall have an adjusted cost base to B Co immediately before such grant of nil;

(iii) each XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase payment or XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase payment, as the case may be, shall be a capital gain for purposes of the Act realized by B Co at the time of its receipt by B Co; and

(iv) for the purposes of subsection 49(3) of the Act and subparagraph (b)(iv) of the definition of "disposition" in subsection 248(1) of the Act, the Original XXXXXXXXXX Option or the Original XXXXXXXXXX Option, as the case may be, and each extension thereof shall be deemed, in each case, to be the same option.

F. In addition to the amount of $XXXXXXXXXX paid by A Co as specific consideration for the grant of the Original XXXXXXXXXX Option, the cost to A Co of its interest in the Original XXXXXXXXXX Option at any time after the Amendment Date in respect of the XXXXXXXXXX Lease shall, for the purposes of the Act, include the aggregate of the following amounts paid by A Co to B Co, namely, (i) the XXXXXXXXXX Adjustment and (ii) the sum of all XXXXXXXXXX Monthly Land Rent Increases made up to and including that time, XXXXXXXXXX.

G. For the purposes of subparagraph 12(1)(x)(vi) of the Act, any XXXXXXXXXX shall reduce, for the purpose of an assessment that may be made under the Act, the cost of that option to A Co and accordingly XXXXXXXXXX will not be included in computing the income of A Co when received by it.

H. In addition to the amount of $XXXXXXXXXX paid by A Co as specific consideration for the grant of the Original XXXXXXXXXX Option, the cost to A Co of the Original XXXXXXXXXX Option at any time after the Amendment Date in respect of the XXXXXXXXXX lease shall, for the purposes of the Act, include the aggregate of the following amounts paid by A Co to B Co, namely (i) the XXXXXXXXXX Adjustment and (ii) the sum of all XXXXXXXXXX Monthly Land Rent Increases made up to and including that time.

I. Provided that A Co's XXXXXXXXXX % share of the Current XXXXXXXXXX Monthly XXXXXXXXXX Land Rent or A Co's Current XXXXXXXXXX Land Rent payable in respect of any period on or after the date of the issuance of this ruling is incurred by A Co for the purpose of gaining or producing income from a business or property of A Co, such payments will be deductible by A Co, pursuant to subsection 9(1) of the Act, for the purpose of computing its income from such business or property, as the case may be.

J. Each payment of Current XXXXXXXXXX Monthly XXXXXXXXXX Land Rent and Current XXXXXXXXXX Monthly XXXXXXXXXX Land Rent received or receivable by B Co will be includible in computing the income of B Co when received or receivable as rent under section 9 of the Act in respect of the XXXXXXXXXX or the XXXXXXXXXX , as the case may be.

K. Upon the exercise by A Co of its interest in the Original XXXXXXXXXX Option, the cost for purposes of the Act of its interest in the XXXXXXXXXX acquired upon the exercise of such option shall be the aggregate of the following amounts, namely (i) the exercise price paid by it under the Original XXXXXXXXXX Option and (ii) the cost to it for the purposes of the Act of the Original XXXXXXXXXX Option determined in accordance with Ruling F above.

L. Upon the exercise by A Co of the Original XXXXXXXXXX Option, the cost for purposes of the Act of its interest in the XXXXXXXXXX acquired upon the exercise of such option shall be the aggregate of the following amounts, namely (i) the exercise price paid by it under the Original XXXXXXXXXX Option and (ii) the cost to it for the purposes of the Act of the Original XXXXXXXXXX Option determined in accordance with Ruling H above.

M. Upon the exercise by the co-tenants of the Original XXXXXXXXXX Option, notwithstanding paragraph 49(3)(a) of the Act, B Co shall, by reason of subsection 248(28) of the Act, only be required to include as proceeds of disposition of its interest in the XXXXXXXXXX the exercise price paid to it under the option and the aggregate of the XXXXXXXXXX Monthly XXXXXXXXXX Land Increase payments as described in paragraph 35 received or receivable in the year of disposition, except to the extent that, pursuant to subsection 49(4) of the Act and within the time and in the manner described in paragraph 49(4)(c) of the Act, B Co files an amended tax return for its taxation year in which the Original XXXXXXXXXX Option was granted or for any of its subsequent taxation years in which that option is considered to have been extended for the purposes of the Act excluding from its income for those taxation years the proceeds of disposition received or deemed by subsections 49(5) and 49(1) of the Act to have been received, in those taxation years from the grant or deemed grants of an option, in which case, B Co shall include in computing its proceeds of disposition of its interest in the XXXXXXXXXX the aggregate amount of the proceeds so excluded from its income of such taxation years by reason of such amended income tax returns.

N. Upon the exercise by a tenant of the Original XXXXXXXXXX Option, notwithstanding paragraph 49(3)(a) of the Act, B Co shall, by reason of subsection 248(28) of the Act, only be required to include as proceeds of disposition of its interest in the XXXXXXXXXX, the exercise price paid to it under that option and the aggregate of the XXXXXXXXXX Monthly XXXXXXXXXX Land Rent Increase payments received or receivable in the year of disposition, except to the extent that, pursuant to subsection 49(4) of the Act and within the time and in the manner described in paragraph 49(4)(c) of the Act, B Co files an amended income tax return for its taxation year in which the Original XXXXXXXXXX Option was granted or for any subsequent taxation years in which that option is considered to have been extended for the purposes of the Act excluding from its income for those taxation years the proceeds of disposition received or deemed by subsections 49(5) and 49(1) of the Act to have been received, in those taxation years from the grant or deemed grants of an option, in which case, B Co shall include in computing its proceeds of disposition of its interest in the XXXXXXXXXX the aggregate amount of the proceeds so excluded from its income for such taxation years by reason of such amended tax returns.

O. Subsection 245(2) of the Act will not apply as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

These rulings are given subject to the general limitations and qualifications set forth in Information circular 70-6R5 dated May 17, 2002 issued by the CCRA, and are binding provided the leases are amended as described above and provided the proposed transactions other than the Determination Event as described in paragraph 36 are completed by XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not to the Act.

Yours truly,

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