2005 Ruling 2004-0070981R3 - Conversion to MFT

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.

Principal Issues: 1. Deductibility of interest on debt issued to shareholders of public corporation in the course of a conversion to an income trust structure. 2. Characterization of a net revenue interest as a XXXXXXXXXX . 3. Application of GAAR to deduction of XXXXXXXXXX arising from non-arm's-length transfer of XXXXXXXXXX .

Position: 1. Interest is deductible. 2. Opinion is that net revenue interest will be XXXXXXXXXX . 3. GAAR is applicable.

Reasons: 1. Paragraph 21 of IT-533. 2. Meets the requirements of proposed amendment. 3. Transfer of XXXXXXXXXX results in a misuse of the provisions of the Act and an abuse having regard to the provisions of the Act read as a whole.

XXXXXXXXXX 2004-007098

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX ("Opco") (XXXXXXXXXX )
XXXXXXXXXX ("Sub 1") (XXXXXXXXXX )
XXXXXXXXXX ("Sub 2") (XXXXXXXXXX )
XXXXXXXXXX ("Sub 3") (XXXXXXXXXX )
(collectively, the "Taxpayers")

We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Taxpayers and the Trust and AcquisitionCo, which are the entities that are to be created in connection with the Proposed Transactions described below. Reference is made to our various telephone conversations, e-mail correspondence and your written submissions of XXXXXXXXXX. You have advised us that to the best of your knowledge, and that of the Taxpayers involved, none of the issues contained herein:

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

(b) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the Taxpayers or a related person;

(c) is under objection by the Taxpayers or a related person;

(d) is before the Courts; and

(e) is the subject of an advance income tax ruling previously issued by the Income Tax Rulings Directorate.

You have further advised that to the best of your knowledge, and that of the Taxpayers involved, none of the issues contained herein will have an impact on the existing tax liabilities of the Taxpayers.

You have advised us that the Taxpayers currently file their Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and that their Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office. The address for each of the Taxpayers is XXXXXXXXXX.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars, all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supplement) (the "Act") and all terms referenced in quotations have the statutory meaning ascribed to them in the relevant legislation.

DEFINITIONS

(a) "AcquisitionCo" means the wholly-owned subsidiary of the Trust described in Paragraph 18;

(b) "Amalco" means the corporation resulting from the amalgamation of Opco, AcquisitionCo, Sub 1 and Sub 2 as described in Paragraph 44;

(c) "arm's length" is a determination made in accordance with subsection 251(1) and, in addition, for the purposes of applying sections 84.1 and 212.1, is a determination made with reference to subsections 84.1(2), 84.1(2.01) and 84.1(2.2) and subsection 212.1(3), respectively;

(d) "BCA" means Business Corporations Act XXXXXXXXXX;

(e) XXXXXXXXXX;

(f) "XXXXXXXXXX/day" means XXXXXXXXXX per day;

(g) XXXXXXXXXX;

(h) "capital property" has the meaning assigned by section 54;

(i) XXXXXXXXXX;

(j) XXXXXXXXXX;

(k) XXXXXXXXXX;

(l) "depreciable property" has the meaning assigned by subsection 13(21);

(m) "Income Tax Regulations" means the Income Tax Regulations, C.R.C. 945;

(n) "Information Circular" means the information circular described in Paragraph 19;

(o) "Mature Assets" means the XXXXXXXXXX acquired by Opco from the Partnership as described in Paragraph 21, which represents substantially all of the XXXXXXXXXX held by the Partnership and Opco and its subsidiaries at the commencement of the transactions described herein and will include XXXXXXXXXX subsequently acquired by Opco (or Amalco);

(p) "Non-Resident Shareholders" means the holders of Opco Common Shares who are not residents of Canada for the purposes of the Act;

(q) "Opco Common Shares" means the common shares of Opco referred to in Paragraph 1;

(r) "Option Common Shares" are Opco Common Shares acquired by a Resident Shareholder on a qualifying acquisition that was the subject of an election made in accordance with subsection 7(10) and held continuously by such Resident Shareholder to the time of the transactions described in Paragraph 26;

(s) "Paragraph" means a numbered paragraph in this letter;

(t) "Partnership" means the XXXXXXXXXX;

(u) "Plan of Arrangement" means the arrangement described in Paragraph 19;

(v) "principal business corporation" has the meaning assigned by subsection XXXXXXXXXX;

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

(x) "qualifying acquisition" has the meaning assigned by subsection 7(9);

(y) "Redemption Price" means the price for which Trust Units that are tendered for retraction by a Unitholder may be redeemed as described in Paragraph 14;

(z) "Resident Shareholders" means the holders of Opco Common Shares who are residents of Canada for the purposes of the Act;

(aa) "Royalty" means the net revenue interest described in Paragraphs 29 to 35;

(bb) "specified member" has the meaning assigned by subsection 248(1);

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

(dd) "taxable Canadian property" has the meaning assigned by subsection 248(1);

(ee) "Trust" means the XXXXXXXXXX;

(ff) "Trust Deed" means the trust indenture of the Trust that is described in Paragraphs 14, 15 and 17;

(gg) "Trust Notes" means the notes of AcquisitionCo that are described in Paragraph 24;

(hh) "Trust Units" means the units of the Trust that are described in Paragraph 14; and

(ii) "Unitholder" means a holder of Trust Units.

FACTS

1. Opco is a corporation formed under the laws of the Province of XXXXXXXXXX. It is a public corporation, a taxable Canadian corporation and a principal-business corporation. As at XXXXXXXXXX common shares of Opco were issued and outstanding ("Opco Common Shares"). The Opco Common Shares are traded on the XXXXXXXXXX Stock Exchange.

2. Sub 1 is a wholly-owned subsidiary of Opco and is a taxable Canadian corporation, a public corporation and a principal-business corporation. The shares of Sub 1 previously traded on the XXXXXXXXXX Stock Exchange and were acquired by Opco for consideration of cash and Opco Common Shares in XXXXXXXXXX.

3. Sub 3 is a wholly-owned subsidiary of Opco and is a taxable Canadian corporation. The shares of Sub 3 were acquired in an arm's length transaction in XXXXXXXXXX.

4. Sub 2 is a wholly-owned subsidiary of Opco and is a taxable Canadian corporation.

5. The Trust and AcquisitionCo are to be created or organized as part of the Proposed Transactions as set forth below.

6. The Partnership is a general partnership governed under the laws of the Province of XXXXXXXXXX. The members of the Partnership are Opco (as to an approximate XXXXXXXXXX% interest), Sub 1 (as to an approximate XXXXXXXXXX % interest), Sub 3 (as to an approximate XXXXXXXXXX% interest) and Sub 2 (as to an approximate XXXXXXXXXX% interest). Opco is the managing partner of the Partnership and, in the opinion of Opco, none of the members of the Partnership are specified members.

7. Opco, Sub 1, Sub 2 and Sub 3 carry on the business of XXXXXXXXXX through the Partnership.

8. Substantially all of the assets of the Partnership constitute (i) XXXXXXXXXX , (ii) depreciable property that is described in Class XXXXXXXXXX of Schedule II of the Income Tax Regulations, (iii) inventory and other working capital; and (iv) receivables from its members.

9. The average production from assets held by the Partnership during XXXXXXXXXX was approximately XXXXXXXXXX/day.

10. Opco and Sub 2 hold XXXXXXXXXX totalling in excess of XXXXXXXXXX.

11. Opco has existing bank indebtedness of approximately $XXXXXXXXXX as of XXXXXXXXXX.

12. The fiscal periods of Opco, Sub 1, Sub 2 and Sub 3 end on XXXXXXXXXX of each year. The fiscal period of the Partnership ends on XXXXXXXXXX of each year.

PROPOSED TRANSACTIONS

13. The Trust will be organized as a trust under the laws of the Province of XXXXXXXXXX. Opco will settle the Trust with a contribution of cash that is necessary to defray the Trust's costs of implementing the Proposed Transactions. The initial beneficiary of the Trust will be a charitable organization or another person that deals at arm's length with Opco. The trustees of the Trust will be a person or persons resident in Canada such that the Trust will be a resident of Canada for purposes of the Act.

14. The trust indenture that governs the creation of the Trust and establishes the terms of the Trust (the "Trust Deed") will specify that all interests in the Trust will be divided into units ("Trust Units"). The Trust Deed will further mandate that XXXXXXXXXX% of Trust Units will have rights attached whereby a holder of Trust Units (a "Unitholder") will be entitled to require that the Unitholder's Trust Units be redeemed upon demand at a price per Trust Unit (the "Redemption Price") which is the least of:

(i) XXXXXXXXXX% of the market price, which will be defined as the weighted average trading price of the Trust Units during the 10 day trading period of Trust Units on the XXXXXXXXXX Stock Exchange or such other exchange as is designated by the Trust Deed commencing on the date immediately after the Trust Units are tendered for redemption;

(ii) XXXXXXXXXX% of the closing price of the Trust Units on the date the Trust Units are tendered for redemption; and

(iii) XXXXXXXXXX% of the closing price of the Trust Units on the date of redemption, which date will be no later than the end of the month immediately following the month in which the Unitholder tendered the Trust Units for redemption.

15. The Trust will be obligated to pay the Redemption Price to redeeming Unitholders in cash up to a monthly aggregate cash payment limit of $XXXXXXXXXX. To the extent that the cash payment limit would be exceeded in a particular month, the Redemption Price of the Trust Units tendered for retraction that would cause such limit to be exceeded will be satisfied by the distribution of certain debt securities of AcquisitionCo (or Amalco) (the "Redemption Notes").

16. The term of the Redemption Notes will be no more than XXXXXXXXXX years and the interest rate thereon will be set by the directors of AcquisitionCo (or Amalco) to approximate prevailing interest rates on debt instruments having equivalent terms and conditions. The Redemption Notes will either be purchased by the Trust with cash on hand or will be purchased by offsetting other indebtedness of AcquisitionCo (or Amalco) to the Trust. The Redemption Notes distributed to a particular redeeming Unitholder will have a face amount equal to the Redemption Price of the Trust Units tendered for retraction by that particular Unitholder, as determined in Paragraph 14.

17. The Trust Deed will contain provisions requiring that non-resident ownership be monitored and provisions allowing the Trust to limit non-resident ownership to XXXXXXXXXX% of the Trust Units outstanding at any particular time.

18. AcquisitionCo will initially be established as a wholly-owned subsidiary of the Trust. The Trust will subscribe for common shares of AcquisitionCo, thereby providing AcquisitionCo with an amount sufficient to defray AcquisitionCo's costs of completing the Proposed Transactions. AcquisitionCo will be a taxable Canadian corporation.

19. An arrangement will be proposed between the Trust and Opco (hereinafter referred to as the "Plan of Arrangement"). The Plan of Arrangement will be undertaken pursuant to XXXXXXXXXX of the BCA and will generally entail a requirement of a favourable vote by XXXXXXXXXX of Opco's shareholders and, if required, holders of options to acquire Opco Common Shares, voting together at a meeting called for such purpose and an order of the Court of Queen's Bench of the Province of XXXXXXXXXX. An information circular describing the Proposed Transactions and soliciting a favourable vote will be mailed to Opco's shareholders (the "Information Circular"). Provided that a favourable vote on the Proposed Transactions is received, the transactions described in the Paragraphs below will occur in sequential order unless otherwise indicated.

20. Each of the members of the Partnership, other than Opco, will contribute any XXXXXXXXXX and related depreciable property owned by them at the commencement of the Proposed Transactions as an additional capital contribution to the Partnership. For each transfer of property, the member contributing the property to the Partnership and the other members of the Partnership will jointly elect in prescribed form within the time referred to in subsection 96(4) to have subsection 97(2) apply with respect to the transfer.

21. Opco will purchase substantially all of the XXXXXXXXXX of the Partnership, including the XXXXXXXXXX contributed to the Partnership in Paragraph 20, in consideration for a promissory note (the "Acquisition Note"). Opco will enter into a lease with the Partnership on terms equivalent to those between parties dealing at arm's length whereby Opco agrees to lease the depreciable property of the Partnership required to operate such XXXXXXXXXX. Opco will agree to pay a fair market value rental for the use of the Partnership's depreciable property. The rental rate payable by Opco under the terms of the lease will be based on a XXXXXXXXXX -year useful life discounted to provide a XXXXXXXXXX to XXXXXXXXXX% rate of return to the Partnership.

22. The Acquisition Note will have as its principal amount the fair market value of the portion of the Mature Assets acquired from the Partnership. The Acquisition Note will have a maturity date of XXXXXXXXXX and will bear interest at a rate that is reasonable in the context of its duration and other terms and conditions. This rate is estimated to be between XXXXXXXXXX% and XXXXXXXXXX%. The final rate will be set at an arm's length market rate for comparable debt instruments based on the opinion of Opco's financial advisors. An amount not exceeding $XXXXXXXXXX of the principal amount of the Acquisition Note will be prepayable at the option of Opco (or Amalco). The Acquisition Note will be subordinated to both Opco's bank indebtedness and other senior indebtedness for borrowed money.

23. AcquisitionCo will acquire Opco Common Shares (other than Option Common Shares) from Resident Shareholders, in consideration for the following:

(a) common shares of AcquisitionCo (as to XXXXXXXXXX% of the consideration); and

(b) a series of notes (the "Trust Notes") which have a principal amount in the aggregate equal to XXXXXXXXXX% of the fair market value of the Opco Common Shares received.

24. The Trust Notes will be due on XXXXXXXXXX and will bear interest at a reasonable rate applicable to debt instruments of similar terms (including terms of subordination, credit-worthiness and maturity). This rate of interest is currently estimated at between XXXXXXXXXX% and XXXXXXXXXX%, and will be established in consultation with Opco's financial advisors. The rate of interest will be a fair market value rate of interest based on opinions rendered by the Trust's independent investment advisors. The selection of the maturity date on the Trust Notes is based on the long-term nature of Opco's assets. The Trust Notes will be subordinated to Opco's bank indebtedness.

25. At the same time as the acquisitions described in Paragraph 23, the Opco Common Shares held by Non-Resident Shareholders will be acquired by AcquisitionCo in consideration for Trust Notes that have a principal amount equal to the fair market value of the Opco Common Shares.

26. To provide holders of Option Common Shares with the opportunity to continue to defer the gains that arose on the acquisition of Option Common Shares, AcquisitionCo will subscribe for Trust Units equal to the fair market value of the Option Common Shares in exchange for the issuance of Trust Notes having a principal amount equal to the fair market value of the Option Common Shares. Holders of Option Common Shares will then exchange their Option Common Shares for the Trust Units acquired by AcquisitionCo such that each holder of Option Common Shares will receive Trust Units from AcquisitionCo having a fair market value equal to the fair market value of the holder's Option Common Shares.

27. For the purposes of the Plan of Arrangement, the fair market value of the Opco Common Shares will be determined as the weighted average trading price of the Opco Common Shares on the XXXXXXXXXX Stock Exchange for the five trading days prior to the implementation of the Plan of Arrangement.

28. The former Resident Shareholders who transferred their Opco Common Shares for Trust Notes and common shares of AcquistionCo will transfer such securities to the Trust in exchange for Trust Units having a fair market value equal to that of the Trust Notes and common shares of Amalco so transferred. The former Non-Resident Shareholders who transferred their Opco Common Shares for Trust Notes will transfer their Trust Notes to the Trust in exchange for Trust Units having a fair market value equal to that of the Trust Notes so transferred.

29. Opco will grant a net revenue interest (the "Royalty") in respect of the Mature Assets to AcquisitionCo in exchange for an interest-bearing note that is payable on demand. The applicable interest rate will be set at a reasonable rate applicable to short-term debt instruments of similar terms (including terms of subordination and credit worthiness). The rate will be established in consultation with Opco's financial advisors.

30. In consideration for a reduction of the amount due under the Trust Notes, AcquisitionCo will transfer the Royalty to the Trust. The reduction in the principal amount of the Trust Notes on the transfer of the Royalty to the Trust will be equal to the fair market value of the Royalty at the time of the transfer.

31. The Royalty will be computed as XXXXXXXXXX% of the excess of:

(a) revenue (gross proceeds from the sale of XXXXXXXXXX and all other substances (including XXXXXXXXXX), XXXXXXXXXX, produced in association therewith ("production revenue")) from the Mature Assets (being "XXXXXXXXXX"); minus

(b) the lease payments made by Opco (or Amalco) to the Partnership under the terms of the lease described in Paragraph 21;

(c) other operating costs in respect of the Mature Assets;

(d) general and administrative costs incurred by Opco in respect of the operation of the Mature Assets;

(e) principal and interest paid on the Acquisition Note;

(f) principal and interest payments on other indebtedness incurred which relate to the Mature Assets, but excluding principal payments on Opco's indebtedness to its lenders at the date of implementation of the Plan of Arrangement;

(g) capital expenditures in respect of Mature Assets;

(h) royalties payable to third parties (including the Crown) in respect of the Mature Assets;

(i) any taxes or other levies payable by Opco which reasonably relate to production from the Mature Assets; and

(j) any other costs not specifically identified herein which reasonably relate to the operation, acquisition and ownership of the Mature Assets,

to the extent paid out of production revenue.

32. The Royalty will be calculated by Opco in respect of each calendar month. If in any particular calendar month the total of amounts calculated under paragraphs (b) to (j) in respect of the month exceed the amount determined in (a) for such month, the excess will be carried forward and will be applied to reduce the amount of any future payments that Opco would otherwise owe to the Trust in respect of the Royalty for a subsequent month.

33. Revenue, proceeds and other receipts in respect of commodity, currency or interest rate hedges or swaps, insurance proceeds, sales of any assets (whether tangible or intangible) that are used for the purpose of earning production revenue from the Mature Assets and incentives, rebates and credits in respect of costs identified in paragraphs (b) to (j) of the description of the Royalty in Paragraph 31, do not constitute production revenue and are thereby excluded from the calculation of amounts payable to the Trust under the Royalty. Such receipts will be retained by Opco.

34. Less than XXXXXXXXXX% of the amount payable by Opco to the Trust under the Royalty for any particular month, prior to taking into account the application of any excess described in Paragraph 32 in respect of a previous month, will be comprised of amounts that are paid out of or from the proceeds of production revenues (i) in respect of substances XXXXXXXXXX or (ii) from Mature Assets XXXXXXXXXX.

35. At the time the Royalty is acquired by the Trust, the Mature Assets will be "XXXXXXXXXX" of Opco described in XXXXXXXXXX With respect to the Mature Assets that would constitute XXXXXXXXXX of Opco XXXXXXXXXX, such Mature Assets will account for less than XXXXXXXXXX% of the average production from the Mature Assets, expressed in terms of Opco's XXXXXXXXXX/day, at the time Opco grants the Royalty to AcquisitionCo. It is not expected that the production from such Mature Assets will vary significantly in proportion to the total production from the Mature Assets by Opco from time to time.

36. The Royalty Agreement will provide that the proceeds from the disposition of any XXXXXXXXXX subject to the Royalty that are not used by Opco to acquire other XXXXXXXXXX within a XXXXXXXXXX month period following the disposition will be used to retire the amount of any interest and principal owing in respect of the Acquisition Note. XXXXXXXXXX percent of any remaining proceeds will be allocated and paid to the Trust with the remaining XXXXXXXXXX% of such proceeds to be retained by Opco.

37. The amount of any remaining proceeds from the disposition of XXXXXXXXXX subject to the Royalty that are to be allocated to the Trust does not constitute production revenue and represents the Trust's proceeds for the partial disposition of its interest in the Royalty.

38. The Royalty Agreement will provide that, in consideration for an obligation to make subsequent payments from the Trust from time to time equal to the increase in value of the Royalty resulting therefrom, the Royalty will also attach to XXXXXXXXXX subsequently acquired by Opco. In addition, the Mature Assets may be augmented by purchases of assets funded by additional indebtedness and the Royalty will attach to such subsequently acquired assets.

39. The Trust will have its Trust Units listed on the XXXXXXXXXX Stock Exchange.

40. The Partnership will distribute its revenue (consisting of interest and principal payments on the Acquisition Note and leasing revenues) to its members periodically. Prior to the amalgamation described in Paragraph 44, such revenue will be used by Opco to pay dividends to AcquisitionCo and to incur expenditures relating to the Mature Assets.

41. Opco will pay dividends to AcquisitionCo in an amount in excess of the interest payable on the Trust Notes in order to fund such interest payments to the Trust.

ADDITIONAL INFORMATION

42. No combination of fewer than XXXXXXXXXX holders of Opco Common Shares will hold more than XXXXXXXXXX% of the Opco Common Shares immediately before the dispositions of Opco Common Shares described in Paragraphs 23 and 25.

43. In computing the income of the Trust for the purposes of the Act, the Trust will compute its income from the Royalty on an accrual basis such that any amount that becomes receivable by the Trust in respect of the Royalty will be included in the income of the Trust at the time the amount becomes receivable.

44. Opco, AcquisitionCo, Sub 1 and Sub 2 will be amalgamated on XXXXXXXXXX in a short-form vertical amalgamation under section 184 of the BCA to form a new corporation ("Amalco").

45. Amalco's first fiscal period will end at XXXXXXXXXX. The Partnership's fiscal period will continue to end on XXXXXXXXXX of each calendar year.

46. The "Risk Factors" section of the Information Circular will contain a statement acknowledging that the purchase of XXXXXXXXXX by Opco from the Partnership described in Paragraph 21 will increase the XXXXXXXXXX of Opco, determined without reference to subsection 245(2), by an amount equal to the fair market value of those XXXXXXXXXX, but that the CRA has ruled that subsection 245(2) will apply to disallow the deduction of amounts claimed by Opco pursuant to XXXXXXXXXX for the taxation years of Opco and Amalco ending prior to XXXXXXXXXX to the extent such amounts can reasonably be considered to relate to the increase of the XXXXXXXXXX of Opco resulting from the purchase. The statement will also indicate the approximate amount of federal and provincial taxes that would be payable by Opco as a result of disallowing the deductions of amounts claimed under XXXXXXXXXX in computing Opco's income. The estimate of the tax payable by Opco will be expressed in terms of the federal and provincial taxes that would be payable as a consequence of disallowing the deduction of XXXXXXXXXX of an amount claimed by Opco pursuant to XXXXXXXXXX and, on the assumption that Opco claimed the maximum amounts that are deductible pursuant to XXXXXXXXXX for its XXXXXXXXXX taxation years, determined without reference to subsection 245(2), the federal and provincial taxes that would be payable by Opco as a result of disallowing the deduction of the full amount of Opco's claims pursuant to those provisions insofar as the amount of such claims can reasonably be considered to relate to the increase in Opco's XXXXXXXXXX as a consequence of the purchase of XXXXXXXXXX described in Paragraph 21.

47. The summary portion of the Information Circular will contain a reference to the disclosure in the "Risk Factors" section of the Information Circular described in Paragraph 46. Such reference will indicate that the CRA has ruled that subsection 245(2) will apply with respect to the amounts that may be claimed as deductions by XXXXXXXXXX pursuant to XXXXXXXXXX in XXXXXXXXXX taxation years.

48. In computing its income for its fiscal periods ending in XXXXXXXXXX, Opco may claim amounts under XXXXXXXXXX that are less than the maximum amounts that may be deducted under those provisions, determined without reference to subsection 245(2).

REASONS FOR THE PROPOSED TRANSACTIONS

XXXXXXXXXX.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, and subject to the comments set out below, our rulings are as follows:

A. The proceeds of disposition for Opco Common Shares disposed of by a Resident Shareholder to AcquisitionCo who held such Opco Common Shares as capital property at the time of the disposition in exchange for consideration consisting solely of common shares of AcquisitionCo and Trust Notes as described in Paragraph 23, will, provided the Resident Shareholder deals at arm's length with AcquisitionCo at the time of the disposition, be equal to the fair market value of the common shares of AcquisitionCo and Trust Notes so received, and the aggregate cost of the common shares of AcquisitionCo and the Trust Notes to the Resident Shareholder, determined immediately after the exchange, will be an equivalent amount.

B. The proceeds of disposition for Opco Common Shares disposed of by a Non-Resident Shareholder who held such Opco Common Shares as capital property at the time of the disposition to AcquisitionCo in exchange for consideration consisting of Trust Notes as described in Paragraph 25, will, provided the Non-Resident Shareholder deals at arm's length with AcquisitionCo at the time of the disposition, be equal to the fair market value of the Trust Notes so received, and the aggregate cost of the Trust Notes to the Non-Resident Shareholder, determined immediately after the exchange, will be an equivalent amount.

C. Provided that AcquisitionCo (and subsequent to the amalgamation described in Paragraph 44, Amalco) has a legal obligation to pay interest on the Trust Notes and provided that the Opco Common Shares (and subsequent to the amalgamation described in Paragraph 44, Opco's assets) continue to be held for the purpose of gaining or producing income (other than income which would be exempt), AcquisitionCo (or Amalco) will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable on the Trust Notes in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c).

D. Provided that Opco (and subsequent to the amalgamation described in Paragraph 44, Amalco) has a legal obligation to pay interest on the Acquisition Note and provided that the Mature Assets continue to be held by Opco (or Amalco) for the purpose of gaining or producing income (other than income which would be exempt), Opco (or Amalco) will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable on the Acquisition Note in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c).

E. In computing the income of Opco (and subsequent to the amalgamation described in Paragraph 44, Amalco) from the business in which the Mature Assets are used by Opco to gain or produce income in a particular taxation year, Opco (or Amalco) will be entitled to deduct amounts that Opco (or Amalco) pays or becomes obligated to pay under the Royalty, as described in Paragraphs 29 to 35, in the particular year, to the extent Opco (or Amalco) was not entitled to deduct such amounts in a previous taxation year.

F. Subsection 245(2) will apply to redetermine the amounts that may otherwise be deducted pursuant to XXXXXXXXXX in computing the income of Opco or Amalco. The deduction of any amount claimed by Opco or Amalco pursuant to XXXXXXXXXX will be disallowed if it can reasonably be considered to relate to the increase in the XXXXXXXXXX of Opco as a consequence of the purchase of XXXXXXXXXX described in Paragraph 21.

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

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

OPINION

Provided that the proposed amendments to the Act released by the Department of Finance on February 27, 2004 come into force in substantially the same form as that in which they were released, it is our opinion that the Royalty will be considered a XXXXXXXXXX that was included with such proposed amendments and that the Trust will be entitled to add an amount to its XXXXXXXXXX equal to the fair market value of the Royalty at the time the Trust acquires the Royalty from AcquisitionCo.

COMMENTS

Nothing in this letter should be construed as implying that the Canada Revenue Agency has considered, examined, or agreed to or ruled on:

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

(b) whether any of the parties to the transactions described herein deal at arm's length;

(c) whether the Opco Common Shares are taxable Canadian property to any Non-Resident Shareholder;

(d) the deductibility of any amounts payable by Opco (or Amalco) to the Partnership pursuant to the leasing arrangements described in Paragraph 21;

(e) whether subsection 7(1.5) applies to the disposition of any Option Common Shares described in Paragraph 26;

(f) whether the amount of any payment made by the Trust pursuant to the Royalty Agreement described in Paragraph 38 will be XXXXXXXXXX of the Trust and whether the Royalty will continue to be a XXXXXXXXXX of the Trust as a consequence of such payment or as a consequence of the subsequent acquisition of Mature Assets;

(g) any provincial tax consequences of the proposed transactions; and

(h) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above.

Yours truly,

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