2005 Ruling 2004-0105461R3 - Rent prepayment

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: income tax treatment of rent prepayment

Position: 12(1)(a) inclusion, 20(1)(m) reserve

Reasons: regardless of whether income is property income or business income, if person carries on business 12(1)(a) may apply

XXXXXXXXXX 							2004-010546

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX,
XXXXXXXXXX,
XXXXXXXXXX,
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above taxpayers, and our subsequent correspondence.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request are:

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

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

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

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

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

DEFINITIONS

In this letter, the following terms have the following meanings:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof. All statutory references in this letter are to the Act, unless stated otherwise;

(b) "Area" means the XXXXXXXXXX;

(c) "Building" means the XXXXXXXXXX building which is located on the Land;

(d) "Canco" means XXXXXXXXXX, as described in Paragraphs 2, 3, 6 and 7. Canco's head office is located at XXXXXXXXXX. The TSO and TC which are responsible for Canco are the XXXXXXXXXX TSO and XXXXXXXXXX TC. Canco's business number is XXXXXXXXXX.

References to Canco (where appropriate) are references to Canco on behalf of the Family;

(e) "CCPC" or "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) of the Act;

(f) "City" means the City of XXXXXXXXXX, in the Province;

(g) "Corporate Act" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

(h) "CRA" means the Canada Revenue Agency;

(i) "Creditor" means the XXXXXXXXXX;

(j) "Development" means the Building and all additional structures, enclosed and open area walkways and other improvements at any time and from time to time erected, constructed or situated upon or under the Land during the Term of the Ground Lease;

(k) "DevelopmentCo" means the XXXXXXXXXX, as described in Paragraph 8. DevelopmentCo is a corporation incorporated under the Provincial Corporate Act and has as its sole shareholder XXXXXXXXXX. The shareholders of XXXXXXXXXX are XXXXXXXXXX.

(l) "Development Agreement" means the agreement entered into between DevelopmentCo and ManageCo dated XXXXXXXXXX relating to the construction of the Development (including the redevelopment of the Building), as more particularly described in Paragraph 17;

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

(n) "Family" means the Mr. A Family Trust, Mr. B Family Trust, Mr. C Family Trust and W, X, Y and Z;

(o) "foreign country" means the United States of America;

(p) "Gross Revenue" means all amounts received by Canco in its capacity as a sublandlord of the Development;

(q) "Ground Lease" means the ground lease entered into in respect of the Land and the Development between DevelopmentCo as landlord and Canco (on behalf of the Family) as tenant dated XXXXXXXXXX as amended XXXXXXXXXX and as further described in Paragraphs 15 and 16;

(r) "Ground Lease Base Rent" means in each Operating Year the sum of $XXXXXXXXXX adjusted annually as at XXXXXXXXXX on the basis of the latest XXXXXXXXXX month change then recorded in the consumer price index for the City, to a maximum change in any one Operating Year of XXXXXXXXXX percent;

(s) "Ground Lease Common Area Costs Payment" means Canco's proportionate share of DevelpmentCo's common area costs in each Operating Year as determined in accordance with the Ground Lease;

(t) "Ground Lease Participation Rent" means in any Operating Year, the sum of the following: XXXXXXXXXX;

(u) "Ground Lease Term" means the term of the Ground Lease being a period of XXXXXXXXXX years, which term commenced on XXXXXXXXXX;

(v) "Headsublease" means the headsublease to be entered into between Canco and the Trust, as described in Paragraph 24;

(w) "Headsublease Base Rent" means in each Headsublease Operating Year the sum of $XXXXXXXXXX;

(x) "Headsublease Common Area Costs Payment" means an amount equal to Canco's proportionate share of DevelopmentCo's common area costs in each Headsublease Operating Year as determined in accordance with the Ground Lease, and which will become the responsibility of the Trust pursuant to the terms of the Headsublease;

(y) "Headsublease Gross Revenue" means all amounts received by the Trust in its capacity as sublandlord of the Development;

(z) "Headsublease Net Lease Income" means in any Headsublease Operating Year the Headsublease Gross Revenue for the year but excluding prepaid rents collected, less Headsublease Operating Costs;

(aa) "Headsublease Net Participation Income" means in any Headsublease Operating Year the Headsublease Net Lease Income from the Headsublease less the amount for "Future Subtenant Inducements" (as defined in the Headsublease) for that Headsublease Operating Year;

(bb) "Headsublease Operating Costs" means in any Headsublease Operating Year the operating costs of the Trust with respect to the Development;

(cc) "Headsublease Operating Year" means a period of twelve (12) months under the Headsublease;

(dd) "Headsublease Term" means the term of the Headsublease commencing on the date of implementation of the proposed transactions and ending on XXXXXXXXXX, as further described in Paragraph 24(a);

(ee) "individuals" means Mr. A, Mr. B., Mr. C, and Mr. D;

(ff) "Land" means certain land situate in the City in the Province that is registered in the name of DevelopmentCo and is legally described as XXXXXXXXXX;

(gg) "ManageCo" means XXXXXXXXXX, as described in Paragraph 14. ManageCo is a corporation that was incorporated under the Provincial Corporate Act, all of the shares of which are owned equally by Mr.A Co #1, Mr. B Co #1, and Mr. C Co #1;

(hh) "Mr. A" means XXXXXXXXXX. Mr. A is resident in Canada;

(ii) "Mr. A Co #1" means XXXXXXXXXX, which is a corporation incorporated under the Provincial Corporate Act, the shares of which are owned by XXXXXXXXXX and the Mr. A Family Trust. XXXXXXXXXX is a corporation incorporated under the Provincial Corporate Act, the shares of which are wholly owned by the wife of Mr. A;

(jj) "Mr. A Co #2" means XXXXXXXXXX, which is a corporation incorporated under the Provincial Corporate Act, the shares of which are owned by the Mr. A Family Trust;

(kk) "Mr. A Family Trust" means the XXXXXXXXXX, a trust formed on XXXXXXXXXX by Settlor and Mr. A (as trustee) generally for the benefit of the children and other issue of Mr. A;

(ll) "Mr. B" means XXXXXXXXXX. Mr. B is resident in Canada;

(mm) "Mr. B Co #1" means XXXXXXXXXX, which is a corporation incorporated under the Provincial Corporate Act, the shares of which are wholly owned by the wife of Mr.B;

(nn) "Mr. B Co #2" means XXXXXXXXXX, which is a corporation incorporated under the Provincial Corporate Act, the shares of which are owned by XXXXXXXXXX and the Mr. B Family Trust. XXXXXXXXXX is a corporation incorporated under the Provincial Corporate Act and is wholly owned by the wife of Mr. B;

(oo) "Mr. B Family Trust" means the XXXXXXXXXX, a trust formed on XXXXXXXXXX by Settlor and Mr. B (as trustee) generally for the benefit of the children and other issue of Mr. B;

(pp) "Mr. C" means XXXXXXXXXX. Mr. C is resident in Canada;

(qq) "Mr. C Co #1" means Maryland Enterprises Inc., which is a corporation incorporated under the Provincial Corporate Act, the shares of which are wholly owned by the wife of Mr.C;

(rr) "Mr C Co #2" means XXXXXXXXXX, which is a corporation incorporated under the Provincial Corporate Act, the shares of which are owned by XXXXXXXXXX and the Mr. C Family Trust. XXXXXXXXXX is a corporation incorporated under the Provincial Corporate Act and is wholly owned by the wife of Mr. C;

(ss) "Mr. C Family Trust" means the XXXXXXXXXX, a trust formed on XXXXXXXXXX by Settlor and Mr. C (as trustee) generally for the benefit of the children and other issue of Mr. C;

(tt) "Mr. D" means XXXXXXXXXX. Mr. D is resident in the foreign country;

(uu) "Net Lease Income" means in any Operating Year the Gross Revenue for the year but excluding prepaid rents collected, less Operating Costs;

(vv) "Net Participation Income" means in any Operating Year the Net Lease Income from the Ground Lease less the amount for "Future Subtenant Inducements" (as defined in the Ground Lease) for that Operating Year;

(ww) "Operating Costs" means in any Operating Year the operating costs of Canco with respect to the Development;

(xx) "Operating Year" means a period of twelve (12) months under the Ground Lease;

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

(zz) "Personal Trusts" means the Mr. A Family Trust, the Mr. B Family Trust, and the Mr. C Family Trust;

(aaa) "Plan of Arrangement" means the plan of arrangement which was implemented by PublicCo, the Trust and the shareholders of PublicCo prior to the proposed transactions, as described in Paragraph 21;

(bbb) "Proposed Transactions" means the transactions described in Paragraphs 24 to 26;

(ccc) "Province" means the Province of XXXXXXXXXX;

(ddd) "Provincial Corporate Act" means XXXXXXXXXX;

(eee) "PublicCo" means XXXXXXXXXX, as described in Paragraphs 9 to 12. PublicCo is a corporation that was incorporated under the Corporate Act on XXXXXXXXXX. PublicCo completed its initial public offering as a capital pool company on XXXXXXXXXX and its shares have been listed for trading on the XXXXXXXXXX since XXXXXXXXXX.

PublicCo's head office is located at XXXXXXXXXX. The TSO and TC that are responsible for PublicCo are the XXXXXXXXXX TSO and XXXXXXXXXX TC. PublicCo's business number is XXXXXXXXXX.

(fff) "public corporation" has the meaning in subsection 89(1) of the Act;

(ggg) "Settlor" means XXXXXXXXXX;

(hhh) "Sublease" means a grant of rights by Canco or the Trust to any Subtenant to sublease and occupy any part of the Development (other than the Headsublease between Canco and the Trust);

(iii) "Subtenant" means any person, firm or corporation to whom Canco or the Trust grants rights with respect to any part of the Development by way of lease, sublease, grant of licence or grant of concession (other than the Trust as subtenant pursuant to the Headsublease);

(jjj) "taxable Canadian corporation" or "TCC" has the meaning in subsection 89(1) of the Act;

(kkk) "TC" means Taxation Centre;

(lll) "Term" means the term of the Ground Lease, being a term of XXXXXXXXXX years which commenced on XXXXXXXXXX, as further described in Paragraph 16(a);

(mmm) "Trust" means the XXXXXXXXXX, as described in Paragraph 13;

(nnn) "TSO" means Tax Services Office;

(ooo) "T" "U" and "V" means XXXXXXXXXX; and

(ppp) "W" "X" "Y" and "Z" means XXXXXXXXXX.

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

FACTS

(a) The Parties

1. Mr. A, Mr. B, Mr. C, and Mr. D are brothers.

2. Canco was incorporated under the Provincial Corporate Act on XXXXXXXXXX. Canco is a CCPC and a TCC.

3. Canco's taxation year end is XXXXXXXXXX.

4. As described in Paragraph 7, Canco acts as a bare trustee. Canco is owned equally by each of three corporations and a group of individuals, as follows: Mr. A Co #2, Mr. B Co #2, Mr. C Co #2, and XXXXXXXXXX.

5. DevelopmentCo holds a freehold title interest in the Land and the Development. A freehold title to the Land has been issued to DevelopmentCo by the City Land Titles Office under title number XXXXXXXXXX.

6. Canco holds a XXXXXXXXXX-year leasehold interest in the Land and the Development by virtue of the Ground Lease which Canco entered into with DevelopmentCo. The general terms and conditions of the Ground Lease are set forth in Paragraphs 15 and 16. Aside from holding the leasehold interest in the Land and Development, Canco does not carry on any other activities. A leasehold title to the Land has been issued to Canco by the City Land Titles Office under title number XXXXXXXXXX.

7. While Canco is the registered holder of the leasehold interest, Canco holds its interest as bare trustee for the benefit of the Family in the following proportions: XXXXXXXXXX% for each of the Mr. A Family Trust, the Mr. B Family Trust and the Mr. C Family Trust and XXXXXXXXXX% for each of W, X, Y, and Z.

8. DevelopmentCo was incorporated generally for the purpose of redeveloping and revitalizing an area of the City known as the Area, which area includes the Land.

9. PublicCo is both a public corporation and a TCC. Since the inception of PublicCo its principal business has been the identification and evaluation of assets or businesses for the purpose of completing a "Qualifying Transaction" (required for capital pool companies).

10. PublicCo's year end is XXXXXXXXXX.

11. There are currently approximately XXXXXXXXXX shares of PublicCo issued and outstanding. Less than XXXXXXXXXX% of the issued shares of PublicCo are owned by the Family or any person or entity related to them. The directors of PublicCo are Mr. A, Mr. C, and T, U and V. None of T, U and V is related to any of the Family.

12. On XXXXXXXXXX, PublicCo completed a "Qualifying Transaction", being the acquisition (through a bare trustee corporation) of a commercial real estate property in XXXXXXXXXX. PublicCo currently does not carry on any other business or own any other significant assets.

13. Trust is a trust that was formed under the laws of the Province. The trustees of the Trust are Mr. A, Mr. C, and T, U and V.

14. ManageCo engages in the management of the Development pursuant to a management agreement entered into with Canco.

(b) The Ground Lease and the Development Agreement

15. DevelopmentCo and Canco entered into the Ground Lease effective XXXXXXXXXX. On XXXXXXXXXX DevelopmentCo and Canco entered into an agreement to amend the Ground Lease.

16. The general terms of the Ground Lease can be summarized as follows:

(a) DevelopmentCo, as the owner of freehold interest in the Land, granted a leasehold interest in the Land to Canco for the Term. The Term of the Ground Lease was initially for XXXXXXXXXX years commencing on XXXXXXXXXX and ending XXXXXXXXXX. The Term was extended to end on XXXXXXXXXX (a total of XXXXXXXXXX years) by the terms of the XXXXXXXXXX amending agreement.

(b) Canco took possession of the Land on XXXXXXXXXX pursuant to the Ground Lease and ManageCo was required to immediately commence development and construction of the Development in accordance with the terms of the Development Agreement. The Development Agreement was executed by DevelopmentCo and ManageCo concurrently with the Ground Lease.

(c) Title to and ownership of the Development and all alterations, additions, changes and improvements are at all times during the Term vested in Canco. Upon termination of the Ground Lease, title to and ownership of the Development and all alterations, changes, substitutions or improvements shall become the absolute property of DevelopmentCo upon payment to Canco of the sum of $XXXXXXXXXX.

(d) Canco does not have any right or entitlement under the terms of the Ground Lease to acquire the freehold interest in the Land from DevelopmentCo either during the Term or after the expiry of the Term.

(e) The terms of the Ground Lease provide that Canco is required to pay the Ground Lease Base Rent, the Ground Lease Participation Rent and the Ground Lease Common Area Costs Payment to DevelopmentCo each year during the Term.

(f) The terms of the Ground Lease provide that the Ground Lease Base Rent is payable by Canco to DevelopmentCo in equal monthly instalments; provided that at any time during the first XXXXXXXXXX years of the Term, Canco has the right to pay DevelopmentCo, in addition to the monthly instalments, the sum of $XXXXXXXXXX as prepaid rent following which Canco's obligation to pay the Ground Lease Base Rent terminates for the balance of the Term. The Ground Lease also provides that such amount may be paid in partial instalments which will reduce the Ground Lease Base Rent by the appropriate percentage. (Canco exercised its right to prepay the Ground Lease Base Rent (as that right was amended) in XXXXXXXXXX. The prepayment of Base Rent is described in further detail in Paragraph 19.)

(g) The terms of the Ground Lease provide that Ground Lease Participation Rent is payable by Canco to DevelopmentCo calculated at the rate of XXXXXXXXXX percent of the Net Lease Income over a certain threshold and XXXXXXXXXX percent of the Net Participation Income over a certain threshold in each Operating Year. Payment of Ground Lease Participation Rent is to be made in monthly instalments in each Operating Year, based on an estimate made by Canco at the end of the immediately preceding Operating Year. Adjustments to the instalments may be made throughout the Operating Year, with a final adjustment based on the actual Net Lease Income being made following the end of each Operating Year.

(h) The terms of the Ground Lease provide that the Ground Lease Common Area Costs Payment is payable by Canco to DevelopmentCo during each Operating Year. Payment of the Ground Lease Common Area Costs Payment is to be made in monthly instalments in each Operating Year, based on an estimate made by DevelopmentCo at the end of the immediately preceding Operating Year. Adjustment of the actual Ground Lease Common Area Costs Payment payable by Canco based on DevelopmentCo's calculations shall be made following the end of each Operating Year.

(i) The Ground Lease is an absolutely net lease to DevelopmentCo. All costs, expenses and obligations relating to the Development or in connection with any business carried on are payable by Canco (except for certain costs and expenses specifically excluded in the Ground Lease).

(j) As security for the payment of rent and the performance of Canco's obligations under the Ground Lease and the Development Agreement, Canco executed and delivered to DevelopmentCo an assignment of the Subleases.

(k) Canco has the right pursuant to the terms of the Ground Lease at any time and from time to time to sublet the whole or any part of the Development without the consent, approval or permission of DevelopmentCo provided that no Sublease gives any Subtenants rights or privileges greater than those granted to Canco under the Ground Lease. The Ground Lease provides that Canco shall own the entire leasehold interest in the Land during the Term except that it may assign the whole or any part of its interest in the Ground Lease to an affiliated or subsidiary company. Apart from the foregoing Canco shall not assign or otherwise dispose of its interest in the Ground Lease or any part thereof, without the consent of DevelopmentCo first being obtained in writing, which consent shall not unreasonably be withheld.

17. Concurrently with entering into the Ground Lease, DevelopmentCo and ManageCo entered into the Development Agreement for the construction of the Development. Construction of the Development has now been completed and the conditions of the Development Agreement have been substantially met. The costs of the Development have been added by the Family to Class 1 for purposes of claiming capital cost allowance.

18. In order to finance the construction of the Development, Canco mortgaged its leasehold interest in the Land to the Creditor. The initial amount of the mortgage was approximately $XXXXXXXXXX. Following a number of refinancings, the balance outstanding is approximately $XXXXXXXXXX.

19. On XXXXXXXXXX DevelopmentCo, ManageCo and Canco entered into an agreement to reduce the amount required to be paid to fully prepay the Ground Lease Base Rent pursuant to the terms of the Ground Lease from $XXXXXXXXXX to $XXXXXXXXXX. The Ground Lease Base Rent was prepaid in accordance with the agreement and thereafter Canco has not paid and is not required to pay Ground Lease Base Rent to DevelopmentCo.

20. On XXXXXXXXXX DevelopmentCo and Canco entered into an agreement that, in lieu of the continued periodic payment of Ground Lease Participation Rent pursuant to the terms of the Ground Lease, Canco would be entitled to make a lump sum prepayment of $XXXXXXXXXX to DevelopmentCo. Canco paid $XXXXXXXXXX to DevelopmentCo during XXXXXXXXXX as a prepayment of Ground Lease Participation Rent and thereafter has not paid and is not required to pay Ground Lease Participation Rent to DevelopmentCo under the Ground Lease.

(c) Other Relevant Facts

21. Prior to implementation of the Proposed Transactions, PublicCo entered into a Plan of Arrangement with the Trust pursuant to which, among other things, the common shareholders of PublicCo exchanged their shares of PublicCo on a "one for one" basis for units of the Trust.

22. Prior to implementation of the Proposed Transactions, the Trust also completed a public offering of XXXXXXXXXX trust units for aggregate gross proceeds of $XXXXXXXXXX. The Trust intends to use the offering proceeds to fund additional acquisitions of property. The only units of the Trust that will be issued and outstanding immediately prior to the Proposed Transactions will be the units issued in exchange for shares of PublicCo pursuant to the Plan of Arrangement and the units that were issued and sold pursuant to the public offering.

23. The Plan of Arrangement was conditional on the prior completion of the public offering but was not conditional on the completion of the Proposed Transactions.

PROPOSED TRANSACTIONS

24. Canco will enter into the Headsublease with the Trust with respect to the Land and the Development. The general terms of the Headsublease can be summarized as follows:

(a) The term of the Headsublease will be the Headsublease Term, which ends one year before the Ground Lease Term.

(b) The City Land Titles Office will be requested to issue a subleasehold title to the Trust as evidence of its subleasehold interest in the Land and the Development.

(c) The Trust will not have any right or entitlement under the terms of the Headsublease to acquire the leasehold interest in the Land or the Development from Canco either during the Headsublease Term or after the expiry of the Headsublease Term.

(d) The terms of the Headsublease will provide that the Trust, upon paying rent and other charges, shall have the quiet enjoyment of the demised premises during Headsublease Term.

(e) The terms of the Headsublease will provide that the Trust is required to pay the Headsublease Base Rent and the Headsublease Common Area Costs Payment to Canco each year during the Headsublease Term. Such rental rates will be calculated by way of an appropriate capitalization rate of the fair market value of the Headsublease leasehold interest. The parties may agree on an additional payment of rent in the form of Headsublease participation rent.

(f) The terms of the Headsublease will provide that the Headsublease Base Rent is payable by the Trust to Canco in twelve (12) equal monthly instalments on the first day of each month for each Headsublease Operating Year provided that at any time during the first XXXXXXXXXX years of the Headsublease Term, the Trust will have the right to pay Canco, in addition to the monthly instalments, the sum of $XXXXXXXXXX as prepaid Headsublease Base Rent following which the Trust's obligation to pay the Headsublease Base Rent will terminate for the balance of the Headsublease Term. When the prepayment is made, the Family will retire their existing mortgage with the Creditor and may use additional funds to subscribe for units of the Trust. The Trust intends to make such a prepayment.

(g) The terms of the Headsublease will provide that in the event that the Ground Lease is terminated, Canco must account to the Trust for any prepayment of the Base Rent.

(h) The terms of the Headsublease will provide that the Headsublease Common Area Costs Payment is payable by the Trust to Canco during each Headsublease Operating Year. Payment of the Headsublease Common Area Costs Payment is to be made in monthly instalments in each Headsublease Operating Year, based on an estimate made by Canco at the end of the immediately preceding Headsublease Operating Year. Adjustment of the actual Headsublease Common Area Costs Payment payable by the Trust based on Canco's calculations shall be made following the end of each Headsublease Operating Year.

(i) The Headsublease is an absolutely net lease to Canco. All costs, expenses and obligations relating to the Land and the Development or in connection with any business carried on are payable by the Trust (except for certain costs and expenses specifically excluded in the Headsublease).

(j) As security for the payment of rent and the performance of the Trust's obligations under the Headsublease, the Trust will be required to execute and deliver to Canco an assignment of the Subleases entered into by the Trust.

(k) The Trust may pursuant to the terms of the Headsublease at any time and from time to time sublet the whole or any part of the Development without the consent, approval or permission of Canco provided that no Sublease gives any Subtenants rights or privileges greater than those granted to the Trust under the Headsublease. The Headsublease will provide that the Trust shall own the entire subleasehold interest in the Land and Development during the Headsublease Term and that it may assign the whole or any part of its interest in the Headsublease to an affiliated or subsidiary company. Apart from the foregoing the Trust shall not assign or otherwise dispose of its interest in the Headsublease or any part thereof, without the consent of Canco first being obtained in writing, which consent shall not unreasonably be withheld but provided that such consent shall be subject to the further consent of DevelopmentCo.

(l) The Headsublease will provide that the Development will continue to be professionally managed, and that the consent of Canco, acting reasonably, will be required to any management agreement. Current management of the Development is performed for Canco by ManageCo and it is expected that ManageCo will continue to manage the Development for the Trust following the Proposed Transactions.

(m) The Headsublease will also provide for additional covenants, obligations and indemnities which are not specifically pertinent to this ruling request and have not been summarized herein.

25. Each of the Subtenants will be requested to enter into a conditional surrender agreement pursuant to which Canco, the Trust and the Subtenant will agree as follows:

(a) The Subtenant will surrender its subleasehold interest pursuant to its Sublease on the condition that a new subleasehold interest will be granted to it on identical terms by the Trust;

(b) Canco and the Trust will enter into the Headsublease;

(c) The Trust will immediately following the later of the commencement of the Headsublease Term and the execution of the conditional surrender agreement by all parties thereto, enter into a new Sublease with the Subtenant on terms identical to the Subtenant's surrendered Sublease.

26. Should any of the Subtenants not provide a conditional surrender of their subleasehold interest prior to the grant to the Trust of the Headsublease, then the Headsublease will be granted subject to the subleasehold interest of that Subtenant. On the expiry of the term of the Sublease, the terms of the Headsublease will provide for the automatic grant by Canco to the Trust of a subleasehold interest for the balance of the Headsublease Term in the premises occupied by that Subtenant. Any new Sublease or renewal thereof entered into with respect to such premises will thenceforth be entered into with the Trust as Sublandlord.

OTHER INFORMATION

27. In a few years the Personal Trusts may transfer their assets - including their interests in the Ground Lease and the Headsublease - to the beneficiaries of the Personal Trusts. At that time and subsequently, the Personal Trusts will not carry on business. At a later date, the Personal Trusts may be wound-up and their properties distributed to the beneficiaries of the Personal Trusts.

PURPOSE OF PROPOSED TRANSACTIONS

28. The Family believes that the public structure of the Trust will facilitate greater participation by the public in the Development.

29. PublicCo and the current directors, including Mr. A and Mr. C, wish to enter into the Proposed Transactions in order to secure for the Trust a relatively new real estate investment trust, investment in a prominent and successful property in the City. The long term of the Headsublease and the location and reputation of the Development would make it a flagship leasehold interest for the Trust which will assist in its promotion, development and growth. Growth is particularly important to the Trust at the initial stage in order to allow it to acquire additional properties and diversify its property investments.

30. Finally, the Proposed Transactions will relieve Canco and the Family of active involvement in the Development.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant warranties on page 1 of this advance income tax ruling, as well as all of the relevant facts, proposed transactions and 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 entering into of the Headsublease will not cause a "disposition" (within the meaning of subsection 248(1) of the Act) by Canco or the Family of their leasehold interest in the Land or their interest in respect of the Development.

B. Any prepayment (the "prepayment") of the Headsublease Base Rent (as described in Paragraph 24 (f)) will have the following income tax consequences:

(i) the prepayment will be included in computing the income of the Personal Trusts from a business or property pursuant to paragraph 12(1)(a) and a deduction under subparagraph 20(1)(m)(iii) will be available; and

(ii) subject to paragraph 18(1)(a) and section 67, the Trust will be entitled to deduct the prepayment over the Headsublease Term pursuant to subsections 9(1) and 18(9) of the Act;

C. As a result of the Proposed Transactions, in and of themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above.

CAVEAT

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CRA on May 17, 2002, and are binding provided the Canco contracts with the Trust in respect of the Headsublease described in Paragraph 24 on or before XXXXXXXXXX and any prepayment by the Trust of Headsublease Base Rent (as described in subparagraph (f) of Paragraph 24) is made on or before XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the accuracy of any amounts referred to in this letter;

(ii) the GST implications of any of the proposed transactions;

(iii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein, and , in particular, any income tax consequences in respect of the Ground Lease.

OPINIONS

In our opinion, if a trust that received a prepayment of rent disposes of all of its interests in a lease in respect of which the prepayment was made (the "disposal") and does not carry on business, then pursuant to subsection 9(1) there would be included in computing the trust's income for a particular year that portion of the prepayment of rent that would be for the use or possession of the property that is the subject of the lease for that year. In such a case, the trust would include in income each year after the disposal the pro-rated portion of the prepayment over the remaining term of the lease.

In our opinion, if a trust that received a prepayment of rent is wound-up before the termination of the related lease, the beneficiaries of the trust will include in income each year after such winding-up the amount of the pro-rated portion of the prepayment over the remaining term of the lease, with each beneficiary of the trust including the proportion of the prepayment in income that reflected its interest in the trust immediately before the winding-up of the trust.

The opinions expressed above are provided in accordance with paragraph 22 of the Circular. These opinions do not constitute a binding advance income tax ruling and are not binding on the CRA.

Yours truly,

XXXXXXXXXX
Manager
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate