7 July 2005 Income Tax Severed Letter 2005-0117901R3 - Income trust reorganization

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.

SUMMARY: Income trust reorganization—ITA-80, 132.2, 253.1, 132(6)—Advance income tax ruling—Whether transferring the business of an income trust's corporate subsidiary to a partnership on a rollover basis using s. 85, subsec. 97(2) and s. 132.2 meets the requirements of the Act and is within policy. Before the proposed transactions, the trust owns notes and shares of the corporate subsidiary that carries on a business. At the end of the proposed transactions, it owns a limited partnership interest and shares of the general partner of a partnership that carries on that business. Incidental issues include the mutual fund trust status of the trust (s. 253.1 and governance of the corporate general partner), forgiveness of debt, shareholder and unitholder benefits and cost base of the partnership interest held by the trust.

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.

The following document was issued prior to the September 19, 2005 announcement that the provision of advance income tax rulings on income trusts and other flow-through entities would be postponed while the Department of Finance consultations are underway and until the government announces what action it may take.

PRINCIPAL ISSUES: Whether transfering the business of the income trust's corporate subsidiary to a partnership on a rollover basis using sections 85, 97(2) and 132.2 meets the requirements of the act and is within policy. Before the proposed transactions, the trust owns notes and shares of the corporate subsidiary that carries on a business. At the end of the proposed transactions, it owns a limited partnership interest and shares of the general partner of a partnership that carries on that business. Incidental issues include the mutual fund trust status of the trust (section 253.1, governance of the corporate general partner), forgivance of debt, shareholder and unitholder benefits and cost base of the partnership interest held by the trust.

POSITION: The proposed transactions are within policy and rulings on the various rollover provisions and section 245 are granted.

REASONS: No phantom losses will arise as a result of the amendments to section 132.2 announced on July 18, 2005. The trustees of the trust do not form the majority of the directors of the corporate general partner.

XXXXXXXXXX 2005-011790

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling

XXXXXXXXXX—Trust Account Number XXXXXXXXXX (XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)

XXXXXXXXXX.—Business Number XXXXXXXXXX (XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers. We also acknowledge our meetings, subsequent telephone conversations and correspondence concerning your request. The documents submitted with your request are part of this document only to the extent described herein.

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:
• a) in an earlier return of the taxpayers or related persons;
• b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;
• c) under objection by the taxpayers or related persons;
• d) before the courts; or
• e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons. In this document, all monetary amounts are expressed in Canadian dollars.

In this document, unless otherwise indicated, all statute references are to theIncome Tax Act(R.S.C. 1985, 5th Supplement, c. 1, as amended, the “Act”) or to theIncome Tax Regulations(the “Regulations”).

Definitions

In this letter unless otherwise expressly stated:
• “adjusted cost base” has the meaning assigned by section 54;
• “Administration Agreement” means that administration agreement pursuant to which the Manager is responsible for providing administrative services to the Fund;
• “agreed amount” in respect of an asset means the amount that the transferor and the transferee of the asset agree upon in their election under subsection 85(1) or 97(2), as the case may be, in respect of that asset;
• “Amalco MFC” means a newly created corporation to be formed by amalgamating Opco and MFC as described in paragraph 22;
• “Amalco MFC Class A Share” means a class A share in the capital of Amalco MFC having the same terms as those of an MFC Class A Share;
• “Amalco MFC Class B Share” means a class B share in the capital of Amalco MFC having the same terms as those of an MFC Class B Share;
• “Amalco MFC Common Share” means a common share in the capital of Amalco MFC having the same terms as those of an MFC Common Share;
• “Board of Directors” means the board of directors of Opco, which, in accordance with the articles of the company and the provisions of the Governance Agreement, consist of XXXXXXXXXX living individuals;
• “Business” means the business of XXXXXXXXXX, and related services, for the purpose of earning income therefrom pursuant to Contracts and otherwise;
• “Contracts” means the contracts between Opco and its customers pursuant to which a customer is charged fees by Opco for XXXXXXXXXX, and related services, XXXXXXXXXX;
• “cost amount” has the meaning assigned by subsection 248(1);
• “deferred income plans” means any of RRSPs, RESPs, RRIFs or DPSPs;
• “Depot” means XXXXXXXXXX;
• “DPSP” means deferred profit sharing plan as defined in subsections 147(1) and 248(1);
• “Distributable Cash” means, generally, the cash available to the Fund for distribution to Unitholders, as determined under the terms of the Fund Declaration of Trust;
• “Exchange 1” means the XXXXXXXXXX Stock Exchange;
• “Exchange 2’ means the XXXXXXXXXX Stock Exchange;
• “Exchange Agreement” means the agreement between the Fund and the Trust pursuant to which the Fund may transfer part of its LP Units to the Trust in consideration for the issuance by the Trust of Trust Notes, for the purpose of delivering such Trust Notes as an in specie payment on the redemption of Fund Units;
• “Fair market value” means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arms length and under no compulsion to act, expressed in terms of cash;
• “First Act” means XXXXXXXXXX;
• “Fund” means the XXXXXXXXXX;
• “Fund Declaration of Trust” means the declaration of trust made as of XXXXXXXXXX under the laws of the Province of XXXXXXXXXX as amended from time to time. The last amendment to the Declaration of Trust is dated XXXXXXXXXX;
• “Fund Trustees” means the trustees of the Fund which hold the Fund property and conduct and manage the affairs of the Fund in accordance with and subject to the provisions of the Fund Declaration of Trust. All Fund Trustees are living individuals and hold office until the next annual general meeting of Unitholders or until their successors are duly elected or appointed;
• “Fund Unit” means a unit of the Fund, each such unit representing an equal undivided beneficial interest therein;
• “Governance Agreement” means the agreement dated XXXXXXXXXX between the Manager, Opco and the Fund as shareholder of Opco, under the terms of which the Manager is entitled to designate XXXXXXXXXX of Opco's XXXXXXXXXX directors. The terms of the Governance Agreement provide that it will remain in force for so long as the Management Agreement remains in force;
• “GP Interest” means a XXXXXXXXXX% interest in the Partnership as set out in the LP Agreement, including the right to receive allocations or distributions of XXXXXXXXXX% of the net income or net loss (determined in accordance with GAAP) or of the income or loss (determined in accordance with the Act) in respect of any fiscal period of the Partnership. The GP Interest was acquired by GPCo in consideration for a $XXXXXXXXXX contribution to the Partnership;
• “GP Unit” means a unit described in paragraph 12(c)(ii) below and all additional units issued by the Partnership pursuant to the terms of the Partnership agreement to GPCo;
• “GPCo” means XXXXXXXXXX., a corporation incorporated on XXXXXXXXXX pursuant to the relevant provisions of the First Act;
• “Lease” means the land lease agreement entered into between the Lessor and Opco in respect of the Depot. The current period of the Lease expires in XXXXXXXXXX with XXXXXXXXXX option available to Opco. XXXXXXXXXX. Opco is to pay all charges and taxes, and is required to keep all structures at the Depot in good repair. At the end of the lease, Opco is to restore the site to the same condition as at the commencement of the Lease unless the Lessor chooses to exercise a right to acquire the Depot at fair value;
• “Lessor” means the XXXXXXXXXX;
• “LP Agreement” means the agreement governed by the laws of the province of XXXXXXXXXX and entered into by GPCo and Opco on XXXXXXXXXX to create and establish the Partnership;
• “LP Interest” means a XXXXXXXXXX% interest in the Partnership as set out in the LP Agreement, including the right to receive allocations or distributions of XXXXXXXXXX% of the net income or net loss (determined in accordance with GAAP) or of the income or loss (determined in accordance with the Act) in respect of any fiscal period of the Partnership. The LP Interest was acquired by Opco in consideration for a $XXXXXXXXXX contribution to the Partnership;
• “LP Note” means a demand, non-interest bearing promissory note to be issued by the Partnership as described in paragraphs 13(a)(ii), 13(b) and 24(c) and having the principal amount set out in those paragraphs;
• “LP Unit” means the interest described in paragraph 12(c)(i) below and all additional units issued by the Partnership pursuant to the terms of the Partnership agreement to the Fund or to another limited partner in the Partnership described in paragraph 9(b);
• “Management Agreement” means that agreement pursuant to which the Manager provides executive management and other services to Opco;
• “Management Information Circular” means the management information circular dated XXXXXXXXXX and described in paragraph 17.
• “Manager” means XXXXXXXXXX. It was incorporated in XXXXXXXXXX. The Manager formerly owned Opco. The Manager's shares were formerly listed for trading on Exchange 1 and Exchange 2 under the symbol XXXXXXXXXX. It is contemplated that the Manager may, in connection with the Proposed Transactions or in the near future, assign its rights and obligations under the Management Agreement, the Administration Agreement and the Governance Agreement to a related corporation that meets the conditions described in paragraphs 5 and 6, and that would agree to replace it as manager under those agreements. Accordingly, Manager means XXXXXXXXXX, and/or its assignee;
• “MFC” means a corporation newly incorporated under the laws of the First Act as described in paragraph 17 below;
• “MFC Class A Share” means a class A share in the capital of MFC the terms of which include the following characteristics: non-voting; entitle the holder to dividends as and when declared by the board of directors; redeemable and retractable (under no circumstances may MFC suspend its redemption); entitle the holder to receive the redemption price upon receipt of the share by MFC; redemption price equal to the fair market value of any consideration paid to acquire such share on issuance; redemption price payable in cash or by the transfer of Fund Units; on the dissolution of MFC, entitle the holder to the redemption price in preference to any participation on the MFC Common Shares and rank equally with the MFC Class B Shares; “MFC Class B Share” means a class B share in the capital of MFC the terms of which include the following characteristics: non-voting; entitle the holder to dividends, as and when declared by the board of directors; redeemable and retractable (under no circumstances may MFC suspend their redemption); entitle the holder to receive the redemption price upon receipt of The Share by MFC; redemption price equal to the fair market value of any consideration paid to acquire such share on issuance; redemption price payable in cash or by the transfer of Fund Units; on the dissolution of MFC, entitle the holder to the redemption price in preference to any participation on the MFC Common Shares and rank equally with the MFC Class A Shares;
• “MFC Common Share” means a common share in the capital of MFC the terms of which include the following characteristics: one vote per share; entitle the holder to dividends, as and when declared by the board of directors; redeemable at the demand of the holder for a redemption price of $XXXXXXXXXX; and on the dissolution of MFC, entitle the holder to share ratably in any remaining assets of MFC;
• “Note Trustee” means XXXXXXXXXX or its successors as trustee under the Trust Note Indenture. Pursuant to the Trust Note Indenture, the Note Trustee will administer the registered ownership of the Trust Notes, once any such Trust Notes are issued, and the distribution of interest payments under the Trust Notes;
• “Opco” means XXXXXXXXXX., the wholly-owned corporate subsidiary of the Fund that is a taxable Canadian corporation resulting from an amalgamation under the laws of XXXXXXXXXX. Its mailing address is XXXXXXXXXX. Opco has been in the business of XXXXXXXXXX since XXXXXXXXXX;
• “Opco Notes” means any one or all of the Opco Sub-Notes and the Opco Senior Notes. As at XXXXXXXXXX, the Fund owned Opco Notes having a principal amount and adjusted cost base of $XXXXXXXXXX;
• “Opco Senior Notes” means the unsecured subordinated notes of Opco bearing interest at a rate of XXXXXXXXXX%, maturing in XXXXXXXXXX, and standing in priority to the Opco Sub-Notes;
• “Opco Shares” means the issued and outstanding class B common shares of Opco. As at XXXXXXXXXX, the Fund owned all the XXXXXXXXXX outstanding Opco Shares having an adjusted cost base and paid-up capital of $XXXXXXXXXX;
• “Opco Sub-Notes” means the unsecured subordinated notes of Opco bearing interest at a maximum rate of XXXXXXXXXX%, and maturing in XXXXXXXXXX;
• “Operating Assets” means the Depot, the Lease, the Contracts, and all of the working capital, machinery, equipment, fixtures, inventories, licenses, contracts, intangibles and any other property owned by Opco and necessary for the conduct and management of the Business. The Operating Assets have an aggregate fair market value greater than their aggregate cost amount (approximately $XXXXXXXXXX as of the most recent fiscal year of Opco ended XXXXXXXXXX);
• “Partnership” means the partnership described in paragraph 9 below created by entering into the LP Agreement and formed when a certificate signed by GPCo was filed under Part 3 of the Second Act;
• “Personnel” means all employees and independent contractors with which Opco has an independent or collective employment or services contract agreement and who are employed or engaged in the conduct or management of the Business;
• “private corporation” has the meaning assigned by subsection 89(1);
• “proceeds of disposition” has the meaning assigned by section 54;
• “Proposed Amendments” means the Legislative Proposals released by the Department of Finance on July 18, 2005;
• “Proposed Transactions” means the transactions contemplated by paragraphs12 to 34 below;
• “public corporation” has the meaning assigned by subsection 89(1);
• “qualified investment” has the meaning assigned by subsection 146(1) in respect of an RRSP, by subsection 146.1(1) in respect of an RESP, by subsection 146.3(1) in respect of an RRIF, or by section 204 in respect of an DPSP, as the case may be;
• “related persons”, or persons related to each other, has the meaning assigned by subsection 251(2);
• “Resident” and “Non-resident” respectively means a person who resides or does not reside in Canada for purposes of the Act;
• “Right of Redemption” means the right of a Unitholder to redeem Fund Units pursuant to and subject to the provisions of the amendments to the Fund Declaration of Trust described in paragraph 12 below;
• “Right of Renunciation” means the right of a Unitholder that is a Subsidiary of the Fund to renounce, release, surrender and cancel, for no consideration, all rights and benefits in and to Fund Units specified in a delivered written notice of renunciation;
• “RESP” means registered education savings plan as defined in subsection 146.1(1);
• “RRIF” means registered retirement income fund as defined in subsection 146.3(1);
• “RRSP” means registered retirement savings plan as defined in subsection 146(1);
• XXXXXXXXXX;
• “Subsidiary” of the Fund means any entity, corporation, trust, or partnership in which the Fund holds, either directly or indirectly (through one or more Subsidiaries), 95% or more of the beneficial interest therein, including, without limitation: in respect of a corporation, 95% or more of the shares of each class of the corporation; in respect of a trust, 95% or more of the beneficial interest in the trust; and, in respect of a partnership, 95% or more of the partnership units or interest in the partnership;
• “taxpayer” has the meaning assigned by subsection 248(1);
• “Trust” means XXXXXXXXXX, an unincorporated open-ended limited purpose trust established under the laws of XXXXXXXXXX. None of the Fund Trustees will act as trustees of the Trust;
• “Trust Declaration of Trust” means the declaration of trust to be made by the trustees of the Trust to hold in trust any and all property of the Trust, and to distribute any income and gains therefrom, for the benefit of the holder of Trust Units. Under the Trust Declaration of Trust, the trustees of the Trust may issue an unlimited number of Trust Units and Trust Notes;
• “Trust Note Indenture” means the trust indenture to be entered into between the Trust and the Note Trustee providing for the issuance of Trust Notes;
• “Trust Notes” means notes of the Trust issued pursuant to the Trust Note Indenture, the terms of which include the following characteristics: interest bearing at prime lending rate plus XXXXXXXXXX%, payable monthly in arrears; unsecured; redeemable at any time at the option of the Trust prior to maturity; subordinated and having a maturity no later than the second anniversary of the date of their issuance. Pursuant to the terms of the Trust Note Indenture, the Trust Notes will be reserved by the Trust to be issued exclusively to the Fund pursuant to the Exchange Agreement;
• “Trust Unit” means a trust unit of the Trust, each such unit representing an equal undivided beneficial interest therein. Each Trust Unit will be transferable and will entitle the holder to one vote; and
• “Unitholder” means a holder of Fund Units.

Facts
• 1. The Manager, through its subsidiaries, XXXXXXXXXX and the operation of the Depot.
2. The following representations are made in respect of the Fund:
• a) The Fund qualifies as a unit trust under paragraph 108(2)(a) and as a mutual fund trust within the meaning assigned by subsection 132(6).
• b) All the Fund Trustees are Residents.
• c) Under the Fund Declaration of Trust, the Fund may issue an unlimited number of Fund Units. Each Fund Unit is transferable, entitles the holder to one vote and is redeemable at the demand of the holder.
• d) Fund Units are widely held by the public and, to the knowledge of the Fund Trustees, there is no direct or indirect beneficial owner of, nor any person who exercises control or direction over, Fund Units carrying more than 10% of the votes and value of outstanding Fund Units.
• e) The Fund is not established or maintained primarily for the benefit of Non-residents and to the knowledge of the Fund Trustees, Non-residents are collectively beneficial owners of less than 49% of the Fund Units.
• f) The Fund qualifies and is registered as a registered investment for deferred income plans pursuant to section 204.4.
• g) Pursuant to the terms of the Fund Declaration of Trust, the Fund is required to make quarterly cash distributions of Distributable Cash to the Unitholders for each taxation year of the Fund.
• h) The Fund's taxation year within the meaning assigned by subsection 249(1) ends on XXXXXXXXXX.
• 3. The Fund used the net Units issuance proceeds (after deducting fees payable to the underwriters and the expenses for the offering) to acquire the Opco Shares (which were all the issued and outstanding shares) and the Opco Notes from the Manager. The purchase was made at fair market value for cash consideration and resulted in a taxable purchase and sale. The estimated fair market value of the Opco Shares and the Opco Notes (based on the total market capitalization) exceeds the aggregate adjusted cost base of the Opco Shares and the Opco Notes ($XXXXXXXXXX as at XXXXXXXXXX).
• 4. Opco duly filed an election pursuant to subsection 89(1) to cease to be a public corporation on XXXXXXXXXX.
5. The Manager is not related nor affiliated with the Fund and its ongoing relationship with the Fund can be summarized as follows:
• a) The entity that controls the Manager is part of a related group that also holds an equity interest in the Fund.
• b) The Manager provides administrative services to the Fund under the terms of the Administration Agreement. The Manager is entitled to fixed fees, cost reimbursements and, in certain circumstances, incentive fees.
6. The Manager's ongoing relationship with Opco can be summarized as follows:
• a) The Manager is entitled to designate XXXXXXXXXX of Opco's XXXXXXXXXX directors under the terms of the Governance Agreement.
• b) The Manager provides management services to Opco under the terms of the Management Agreement. The Manager is entitled to fixed fees, cost reimbursements and, in certain circumstances, incentive fees.
7. The relevant information in respect of Opco can be summarized as follows:
• a) Opco's last taxation year within the meaning assigned by subsection 249(1) ended XXXXXXXXXX.
• b) Opco owns all the Operating Assets.
• c) Opco has cash balances on hand.
• d) Opco operates the Business.
• 8. Opco incorporated GPCo and subscribed to one common share thereof for nominal cash.
9. Opco and GPCo created the Partnership. The Partnership is a limited partnership under the terms of the Second Act and a Canadian partnership pursuant to subsection 102(1). Pursuant to the LP Agreement:
• a) GPCo owns the GP Interest. GPCo is the only general partner, is vested with the exclusive conduct and management of the partnership business and is entitled to vote in its capacity as general partner.
b) Opco owns the LP Interest. Opco is currently the only limited partner. The LP Agreement indicates that Opco and any other eventual limited partner:
• i) have a liability in respect of the debts, liabilities and obligations of the Partnership which is limited to the amount that it contributed to the Partnership plus any undistributed income. Should the limited partner's liability not be limited in such way, GPCo is required to indemnify the limited partner unless such liability arises out of any act or omission of the limited partner;
• ii) cannot control or manage the Business;
• iii) cannot execute any document binding the Partnership or GPCo;
• iv) cannot undertake any obligation or responsibility on behalf of the Partnership;
• v) cannot bring any action for partition or sale of property of the Partnership; and
• vi) cannot take any action which jeopardizes the status of the Partnership as a limited partnership.
• 10. The Fund obtained approval of the Unitholders for the reorganization of the Fund, as described in the Management Information Circular, by way of special resolution at the last special and annual general meeting of Unitholders.
• 11. Opco obtained necessary approvals for the assignment of the Lease and for such other of the Proposed Transactions as might require approvals, consents or releases, from the Lessor or from any other person.

Proposed Transactions

Unless otherwise specified, the Proposed Transactions will take place in the order described below:
12. The following preliminary steps will be undertaken:
a) The Fund Declaration of Trust will be amended to:
• i) Amend the provisions of the Right of Redemption relating to Fund Units to provide that in-kind proceeds of redemption may be paid by delivery of Trust Notes.
• ii) Add a Right of Renunciation and a consolidation mechanism for the Fund Units.
• iii) Provide that the amount of any capital gains realized by the Fund as a result of any disposition of property by the Fund undertaken pursuant to the Exchange Agreement to permit the payment of in-kind redemption proceeds to Unitholders may, for purposes of computing the net income of the Fund under the Act, be treated as being part of the amount paid to such Unitholders proportionate to the number of Units of each such Unitholder redeemed by the Fund. The Fund Declaration of Trust will also indicate that such portion of the gain will be designated by the Fund to be a taxable capital gain for the year of each particular Unitholder.
• Unitholders will not be entitled to any proceeds of disposition as a result of those changes and their Units will not be redeemed or cancelled.
• b) The Management Agreement, the Administration Agreement and the Governance Agreement will be amended and adjusted to reflect the Proposed Transactions. The Partnership, Opco, GPCo, the Fund and the Manager will agree that the rights and obligations of Opco under the Management Agreement and the Governance Agreement, will be assigned and assumed by the Partnership and GPCo as the case may be. Consequent to these assignments and the attendant amendment to the agreements, the Manager will be entitled to designate the majority of GPCo's directors, and the Trustees shall exercise their votes or influence over GPCo to elect the directors so designated by the Manager pursuant to the terms of the relevant agreements. The Fund Trustees will not form a majority of the directors of GPCo. The board of directors of GPCo will have the powers and authority to manage the business and affairs of GPCo, and GPCo will, pursuant to the LP Agreement, administer, manage, control and operate the Business for and on behalf of the Partnership. The Fund Trustees, in their capacity as Trustees of the Fund, will not have or limit such powers and authority.
c) The LP Agreement will be amended to provide that:
• i) The LP Interest will be divided into a certain number of LP Units.
• ii) The GP Interest will be divided into a certain number of GP Units.
• iii) Additional LP Units and GP Units may be issued.
13. Opco and the Partnership will enter into an agreement of purchase and sale pursuant to which:
a) All the Operating Assets will be sold and transferred to the Partnership at a purchase price equal to their fair market value and Opco will receive consideration having the same fair market value. The consideration received will be:
• i) the assumption of all of Opco's liabilities and obligations other than the Opco Notes;
• ii) the issuance of an LP Note having a principal amount equal to the cost of the Operating Assets less the sum of the Opco's liabilities and obligations assumed; and
• iii) the issuance of LP Units for a value equal to the excess of the fair market value of the Operating Assets over the principal amount of liabilities described in (i) and of the note described in (ii).
• b) Opco will transfer its cash balance to the Partnership in consideration for an additional LP Note.
• c) All Personnel and all employment and services contracts governing the Personnel will be transferred or assigned from Opco to GPCo on behalf of the Partnership. The Partnership will immediately succeed Opco in respect of any arrangement entered into with the Personnel as a result of the acquisition of Opco's Business by the Partnership.
• 14. Opco and the Partnership will jointly elect under subsection 97(2), in prescribed form and within the time referred to in subsection 96(4), to have the provisions of subsection 97(2) apply to the transfer of the Operating Assets. The election will meet the requirements indicated in paragraphs 85(1)(a) to (f), the agreed amount will not exceed the fair market value of all of the Operating Assets and will not be subject to one of the adjustments indicated in those paragraphs. Opco and the Partnership may also file subsection 20(24) and section 22 elections as considered appropriate by the parties at the time of the transfer.
• 15. The Partnership will conduct the Business.
• 16. Opco will repay a portion of the principal amount outstanding on the Opco Senior Notes equal to the principal amount of the LP Notes described in paragraphs 13(a)(ii) and 13(b) by assigning those notes to the Fund.
• 17. The Fund will incorporate MFC by subscribing to one MFC Common Share for cash of $XXXXXXXXXX. The Fund will subscribe for a number of MFC Class A Shares equal to the number of Fund Units then outstanding for cash of approximately $XXXXXXXXXX. The issuance of the MFC Class A Shares and subsequent transactions will be completed in accordance with the Management Information Circular containing prospectus level disclosure filed with a securities regulator in a province of Canada and Exchange 1, though they are not required to accept it for filing. The Management Information Circular has been provided to Unitholders to enable them to make informed decisions as to the merits of the Proposed Transactions.
• 18. MFC's only undertaking will be restricted, pursuant to its constating documents, to the investing of its funds in property, other than real property, including the Opco Shares, the Opco Notes, the LP Units, and cash and similar investments. The authorized share capital of MFC will consist of an unlimited number of MFC Common Shares, MFC Class A Shares and MFC Class B Shares.
• 19. The Fund will distribute to the Unitholders the MFC Class A Shares previously acquired as described in paragraph 17 as a return of capital. Each Unitholder will receive a number of MFC Class A Shares equal to the number of Fund Units owned by such holder immediately before this distribution. The securities register of MFC will reflect the ownership by the Unitholders of such MFC Class A Shares. The number of Fund Units owned by each Unitholder will not be reduced as a result of this distribution. Immediately after the distribution, at least XXXXXXXXXX Unitholders will each own not less than XXXXXXXXXX MFC Class A Shares having an aggregate fair market value of not less than $XXXXXXXXXX. For purposes of satisfying these tests, Unitholders would exclude insiders (within the meaning assigned by subsection 4803(1) of the Regulations) of MFC, but would include groups of Unitholders that collectively meet such requirements, as determined in accordance with subsections 4803(3) and 4803(4) of the Regulations.
• 20. Following the distribution of the MFC Class A Shares described in paragraph 19, and prior to the amalgamation described in paragraph 22, MFC will elect to be a public corporation pursuant to paragraph (b) of the definition of “public corporation” in subsection 89(1). The MFC Class A Shares will be the class of shares designated under paragraph 4800(1)(a) of the Regulations in such election.
21. The Fund and MFC will enter into an agreement of purchase and sale under which:
• a) The Fund will transfer to MFC all of the Opco Shares and Opco Notes for a purchase price equal to the aggregate fair market value of each property so transferred.
• b) MFC will satisfy the purchase price by issuing MFC Class B Shares to the Fund with an aggregate redemption price equal to that aggregate fair market value. The aggregate redemption price will not be less than the aggregate principal amount of the Opco Notes.
• c) The Fund will jointly elect with MFC, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer described in a) above. The agreed amount in respect of the Opco Shares and Opco Notes will be an amount not less than the lesser of the cost amount and the fair market value, and will not exceed the fair market value of, each respective property.
22. On the day following the day on which the election described in paragraph 20 is made, MFC and Opco (hereinafter referred to as “predecessor corporations”) will undertake a vertical short-form amalgamation under the provisions of the First Act to form Amalco MFC in such a manner that:
• a) All of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations held immediately before the amalgamation will become property of Amalco MFC by virtue of the amalgamation;
• b) All of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco MFC by virtue of the amalgamation;
• c) All of the Opco Shares and Opco Notes held by MFC immediately prior to the amalgamation will be cancelled by virtue of the amalgamation;
• d) In accordance with the provisions of the First Act, the articles of amalgamation of Amalco MFC will be the same as the articles of MFC, and Amalco MFC will not issue any securities in connection with the amalgamation; and
• e) From the time of amalgamation, Amalco MFC will not have any activity or undertaking other than the ownership of the LP Units formerly owned by Opco and the cash formerly owned by MFC, and the completion of the ensuing Proposed Transactions.
23. At a moment that will constitute the “transfer time” within the meaning of section 132.2, Amalco MFC and the Fund will enter into an agreement of purchase and sale under which:
• a) Amalco MFC will transfer all or substantially all of its property, namely the LP Units and the cash received on the subscription of MFC Class A Shares as described in paragraph 17, to the Fund.
• b) In consideration for that transfer, the Fund will issue a number of Fund Units equal to the number of Fund Units outstanding immediately prior to that moment, less the amount obtained when the principal amount of the LP Notes described in paragraphs 13(a)(ii) and 13(b) is divided by the trading price of the Fund Units immediately prior to that moment.
• c) The Fund Units so issued shall have an aggregate fair market value equal to the aggregate of the fair market value of the LP Units acquired and the amount of cash referred to in paragraph a).
24. The Fund and the Partnership will enter into an agreement of purchase and sale under which:
• a) The Fund will transfer to the Partnership all of the Amalco MFC Class B Shares acquired by the Fund in paragraph 21.
• b) The purchase price will equal to the fair market value of the Amalco MFC Class B Shares.
c) The consideration will be paid by:
• i) the issuance of an additional LP Note by the Partnership having a principal amount equal to the cost amount of the Amalco MFC Class B Shares; and
• ii) the issuance of LP Units for a value equal to the excess of the redemption price of the Amalco MFC Class B Shares over the principal amount of the additional LP Note described in (i) above.
• d) The Fund and the Partnership will jointly elect under subsection 97(2), in prescribed form and within the time referred to in subsection 96(4), to have the provisions of subsection 97(2) apply to the transfer of the Amalco MFC Class B Shares. The agreed amount in respect of the Amalco MFC Class B Shares will be an amount not less than the lesser of the cost amount and the fair market value, and will not exceed the fair market value of the Amalco MFC Class B Shares.
• 25. Within XXXXXXXXXX days after the day that includes the transfer time described in paragraph 23, Amalco MFC will redeem all of the issued and outstanding Amalco MFC Class A Shares. As consideration for the redemption, Amalco MFC will distribute Fund Units (previously acquired from the Fund as described in paragraph 23) to each holder of Amalco MFC Class A Shares on a pro-rata basis based on total issued and outstanding Amalco MFC Class A Shares and Amalco MFC Class B Shares. At the time of redemption of the Amalco MFC Class A Shares, such shares will be listed by Exchange 1.
• 26. At or about the same time and also within XXXXXXXXXX days after the day that includes the transfer time described in paragraph 23, Amalco MFC will redeem all of the issued and outstanding Amalco MFC Class B Shares owned by the Partnership. As consideration for the redemption, Amalco MFC will distribute Fund Units (previously acquired from the Fund as described in paragraph 23) to the Partnership on a pro-rata basis based on total issued Amalco MFC Class A Shares and Amalco MFC Class B Shares that were outstanding immediately prior to the redemption described in paragraph 25.
• 27. Upon receipt of the Fund Units, the Partnership will, pursuant to the Right of Renunciation, immediately renounce, release and surrender all of its interest in the Fund (income, capital and otherwise). As a consequence, those Fund Units held by the Partnership shall be cancelled. The Partnership shall not renounce, release or surrender its interest in favor of any particular person, and shall not receive any consideration from the Fund or any other person in respect of this renouncement and surrender.
• 28. Immediately after the Partnership's renunciation of its interest in the Fund, the outstanding Fund Units will be consolidated such that the total number of Fund Units outstanding after the consolidation will be equal to the total number of Fund Units outstanding immediately prior to the Proposed Transactions. All of the Fund Units will be consolidated on the same basis and there will be no change in the total capital of the Fund or to the rights of Unitholders or their percentage interests in the Fund as a consequence of the consolidation.
• 29. Prior to the dissolution of Amalco MFC described in paragraph 34, Amalco MFC will jointly elect with the Fund, in prescribed form and within the time referred to in paragraph (c) of the definition of qualifying exchange in subsection 132.2(2), to have the provisions of section 132.2 apply to the transfer of the property described in paragraph 23.
• 30. The Partnership will redeem a portion of the LP Notes outstanding and held by the Fund and will issue additional LP Units to the Fund in consideration for such redemption.
• 31. The Trust will be settled pursuant to the terms of the Trust Declaration of Trust by a Resident third party who will settle $XXXXXXXXXX of cash on the trustees of the Trust and will receive one Trust Unit.
• 32. The Fund will subscribe for one Trust Unit for $XXXXXXXXXX consideration. The initial Trust Unit issued to the settlor described in paragraph 31 will be repurchased in cash by the Trust at its original subscription price.
• 33. Following the settlement of the Trust and subsequent transactions described in paragraph 32, the Trust will enter into the Trust Note Indenture and the Fund and the Trust will enter into the Exchange Agreement.
• 34. In due course the Fund will resolve to liquidate and dissolve Amalco MFC by special resolution under the applicable provisions of the First Act. The one common share of Amalco MFC owned by the Fund will at such future time be cancelled and any remaining properties of Amalco MFC, expected to consist principally of one common share of GPCo, will be distributed to the Fund on the wind-up. Such dissolution and transfer of the one common share of GPCo will occur after the election described in paragraph 29 is filed and more than XXXXXXXXXX months after the date of the transfer described in paragraph 13 in order to ensure that such transfer does not result in the imposition of provincial social services tax.

Purpose of the Proposed Transactions

To accommodate the increasing requirements of its customers, Opco is investigating the need to upgrade the Depot and invest in additional equipment. In addition, the Fund and Opco have pursued and continue to pursue expansion opportunities for the Business, including geographic diversification at XXXXXXXXXX outside of XXXXXXXXXX, diversification into XXXXXXXXXX. All of the foregoing would require additional capital investment by the Fund. The Fund has determined that a modern trust-on-partnership structure would better accommodate the future expansion objectives and would be well perceived by the capital markets. However, the Fund considers that it would be inefficient to administer the Business through the current Opco structure while administering future expansion investments through an alternative more flexible vehicle. The Fund therefore desires to establish the Trust and the Partnership as an effective investment vehicle for the purpose of pursuing expansion opportunities, and considers it desirable that the Business be transferred, pursuant to the Proposed Transactions, to the Partnership to provide maximum flexibility in structuring future investment opportunities.

In addition, pursuant to the terms of the Opco Notes, in XXXXXXXXXX and from time to time thereafter, the Board of Directors of Opco and the Fund Trustees will be required to consider the need to refinance or repay the Opco Notes, after jointly undertaking a review of Opco's facilities and operations, the prevailing economic conditions at that time relating to the coal industry, the business prospects of Opco, and the likelihood of repayment of the Opco Notes. In anticipation of the potential requirement to refinance or repay the Opco Notes as early as XXXXXXXXXX, the Board of Directors and the Fund Trustees have considered alternatives that would allow for a current restructuring of the Opco Notes to provide a sustainable long-term capital structure for the Business, while continuing the objective of maximizing cash distributions to Unitholders. The Proposed Transactions will result in a restructuring of the Opco Notes which will achieve the financing objectives of the Fund in respect of the ownership and operation of the Business.

The purpose of the Proposed Transactions is thus to maximize Unitholder value and to increase the value of the Business by providing for a single structure to fund future expansion opportunities, by anticipating the future requirement to refinance the Opco Notes, and by providing a more flexible legal and operating structure in the form of a modern income trust model that the public markets currently demand.

Rulings

Provided the above statements of facts, Proposed Transactions and purposes thereof are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:
• A. The Proposed Transactions will not, in and by themselves, adversely affect the qualification of Amalco MFC as a mutual fund corporation within the meaning of subsection 131(8) or the qualification of the Fund as a mutual fund trust within the meaning of subsection 132(6).
• B. The Fund will not be considered to have disposed of its property and resettled a new trust by virtue of the amendments to the Fund Declaration of Trust described in paragraph 12.
• C. The amendment of the Fund Declaration of Trust to change the terms of the redemption feature as described in paragraph 12(a)(i) will satisfy the requirements of subparagraph 108(2)(a)(i) for purposes of determining whether the Fund qualifies as a unit trust.
• D. Existing Unitholders will not be considered to have disposed of any portion of their Units by virtue of the amendment to the Right of Redemption of the Fund Units in paragraph 12(a)(i), the addition of the Right of Renunciation as described in paragraph 12(a)(ii), the other related changes to the Fund Declaration of Trust described in paragraph 12(a)(iii), the consolidation of Fund Units described in paragraph 28.
E. Provided the Partnership is a Canadian partnership as defined in subsection 102(1) immediately after the transfers described in paragraphs 13 and 24 the provisions of subsection 97(2) and consequently, paragraphs 85(1)(a) to (f), other than paragraph 85(1)(e.2), read in the manner set out in paragraph 97(2)(a), will apply to the transfer:
• (a) by Opco of its Operating Assets to the Partnership as described in paragraph 13; and
• (b) by the Fund of its Amalco MFC Class B Shares as described in paragraph 24;

such that the elected agreed amounts in respect of each transfer, or the deemed agreed amount, will be deemed to be the proceeds of disposition for the particular transferred property to each transferor and the cost to each transferee for the particular transferred property.

• F. Provided that the property transferred is an eligible property within the meaning assigned by subsection 85(1.1), subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer by the Fund of its Opco Shares and Opco Notes to MFC as described in paragraph 21 such that the agreed amounts in respect of each transfer will be deemed to be the proceeds of disposition for the particular transferred property to the Fund and the cost to MFC for the particular transferred property.
G. Provided that:
• (a) at the moment of the transfer described in paragraph 23 Amalco MFC is a mutual fund corporation within the meaning assigned by subsection 131(8) and the Fund is a mutual fund trust within the meaning assigned by subsection 132(6);
• (b) the property transferred at that moment has a fair market value of at least 90% of the fair market value of all property owned by Amalco MFC at that moment; and
• (c) Amalco and the Fund jointly elect by timely filing a prescribed form under paragraph (c) of the definition of “qualifying exchange” in subsection 132.2,

the transfer described in paragraph 23 will constitute a “qualifying exchange” within the meaning of subsection 132.2(2), such that the rules in subsection 132.2(1) will apply to:

• • the transfer of the property from Amalco MFC to the Fund described in paragraph 23;
• • the purchase for cancellation by Amalco MFC of the Amalco MFC Class A shares and Amalco MFC Class B shares described in paragraphs 25 and 26; and
• • the transfer of the Fund Units from Amalco MFC to holders of the Amalco MFC Class A shares and the Amalco MFC Class B shares described in paragraphs 25 and 26.
• Any losses that may be incurred by a taxpayer as a result of the application of section 132.2, including losses that may result from the cost of a property that is set by that section, will be denied if the taxpayer is subject to the application of sub-paragraph 132.2(3)(g)(iv) as proposed to be amended by subsection 72(1) of the Proposed Amendments and consequently will not result in an adjustment to the adjusted cost base of the LP Units under subparagraph 53(2)(c)(i).
H. Provided that the fair market value of the LP Units equals the principal amount of the redeemed portion of the LP Notes, all as described above in paragraph 30,
• (i) such redemption will not, in and of itself, result in a forgiven amount within the meaning of sections 80 and 80.01, and
• (ii) the adjusted cost base of the Fund's LP Units will be increased in an amount equal to the principal amount of the redeemed portion of the LP Notes.
• I. The Fund's registration as a “registered investment” under section 204.4 will not be revoked pursuant to subsection 204.4(3) solely as a result of the Proposed Transactions,
• J. The provisions of subsections 15(1), 56(2), 56(4), 69(4), 105(1) or 246(1) will not apply in respect of the renunciation described in paragraph 27. For greater certainty, GPCo and the Partnership will not be considered or deemed to have received proceeds of disposition and the Fund will not be considered to have received an amount or benefit in respect of that renunciation.
• K. Subsection 245(2) will not be applied as a result of the Proposed Transactions in and by themselves to redetermine the tax consequences confirmed in the rulings provided above.
• The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, subject to the caveat in the post amble of Ruling G and opinion A below. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and Proposed Transactions described herein other than those described in the rulings given. In particular, we express no opinion in ruling A or the other rulings with respect to whether the Fund qualifies as a mutual fund trust within the meaning of subsection 132(6) or whether MFC or Amalco MFC qualifies as a mutual fund corporation within the meaning of subsection 131(8).
• Paragraph 107(1)(e) and subsection 107(1.2) as proposed by subsections 95(1) and 95(2) of the Proposed Amendments, if enacted, will apply to Unitholders who hold Fund Units on account of inventory.
• 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.
• As indicated in Information Circular 70-6R5, we do not rule on matters involving the determination of the fair market value of property, including the determination of the fair market value of the LP Units, the MFC Class B Shares or the Amalco MFC Class B Shares redemption amount.

OPINIONS
A. Provided that:
• (a) at the moment of the transfer described in paragraph 23 Amalco MFC is a mutual fund corporation within the meaning assigned by subsection 131(8) and the Fund is a mutual fund trust within the meaning assigned by subsection 132(6);
• (b) the property transferred at that moment has a fair market value of at least 90% of the fair market value of all property owned by Amalco MFC at that moment; and
(c) Amalco and the Fund jointly elect by timely filing a prescribed form under paragraph (c) of the definition of “qualifying exchange” in subsection 132.2, as that subsection is proposed to be amended by subsection 72(1) of the Proposed Amendments, the transfer described in paragraph 23 will constitute a “qualifying exchange” within the meaning of subsection 132.2(1), as that subsection is proposed to be amended by subsection 72(1) of the Proposed Amendments, such that the rules in subsections 132.2(3) and (4), as proposed to be amended by subsection 72(1) of the Proposed Amendments will apply to:
• •the transfer of the property from Amalco MFC to the Fund described in paragraph 23;
• • the purchase for cancellation by Amalco MFC of the Amalco MFC Class A Shares and Amalco MFC Class B Shares and the transfer of the Fund Units from Amalco MFC to holders of the Amalco MFC Class A Shares and the Amalco MFC Class B Shares as described in paragraphs 25 and 26; and
• • the transactions described in paragraph 27.

Yours truly,

XXXXXXXXXX

Director

International and Trusts Division

Income Tax Rulings Directorate

Policy and Planning Branch