2005 Ruling 2005-0126801R3 - Income 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.

Principal Issues: 1. Will subsection 104(7.1) of the Act will apply to the trust?

2. Will the trust qualify as a "unit trust" under subparagraph 108(2)(a)(i) of the Act?

Position: 1. No.

2. Yes.

Reasons: 1. Multi-class structured trusts may be permissible so long as the units aren't structured with the objective of giving an interest in the capital of the trust that exceeds the income entitlement of the class. In this instance, the main purpose of the creation of two classes is to protect the public investor after the acquisition of a business through the purchase of shares in case the value paid for the shares is too high because of a wrong estimation. Furthermore, the percentage interest in the income of the trust for a class may be equal or approximately equal to the percentage interest in the capital of the trust for that same class.

2. Based on previous rulings, it is our view that the trust will be a unit trust under subparagraph 108(2)(a)(i) of the Act because the requirements of the provision has been met notwithstanding illiquid assets would be received by the trust unitholders upon the redemption of the trust units.

XXXXXXXXXX 2005-012680

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - XXXXXXXXXX

This is in response to your letter dated XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayer.

We understand that to the best of your knowledge and that of the above-noted taxpayer involved none of the issues involved in this ruling is:

(i) relevant to a tax return previously filed by the taxpayer or a related person;

(ii) under consideration by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person (as defined in the Act);

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

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

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person.

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

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

(b) "Amalco" means the new corporation formed upon the amalgamation of Acquireco 1, Acquireco 2, XXXXXXXXXX, Holdings and Opco;

(c) "Amalco Common Shares" means common shares of Amalco;

(d) "Amalco Notes" means notes issued by Amalco, as defined in paragraph 44;

(e) XXXXXXXXXX;

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

(g) "EBITDA" means Earnings Before Interest, Taxes, Depreciation and Amortization;

(h) "Existing Shareholders" means XXXXXXXXXX;

(i) "Exchangeable Shareholders" means the Tax-Deferred Shareholders and XXXXXXXXXX;

(j) "Fund" means the XXXXXXXXXX;

(k) "Holdings" means XXXXXXXXXX;

(l) "Initial Class B Unitholders" means XXXXXXXXXX;

(m) "Opco" means XXXXXXXXXX;

(n) "Preferred Shareholder" means XXXXXXXXXX;

(o) "Redemption Date" means the date on which the Trust Unit was surrendered for redemption;

(p) "Redemption Price" means the lesser of:

(i) XXXXXXXXXX% of the market price of a Trust Unit calculated as of the Redemption Date;

(ii) XXXXXXXXXX% of the closing market price on the Redemption Date.

(q) "Tax-Deferred Shareholders" means the Existing Shareholders other than XXXXXXXXXX;

(r) "Trust Unit" means the trust units of the Fund (other that the Special Voting Units) described in the declaration of trust dated XXXXXXXXXX.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

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

FACTS

1. Holdings is a Canadian resident corporation formed under the laws of XXXXXXXXXX. The issued and outstanding shares of Holdings consists of common shares and Class A preferred shares.

2. The issued and outstanding common shares of Holdings are held by the Existing Shareholders as follows:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

3. All of the issued and outstanding Class A preferred shares of Holdings are held by the Preferred Shareholder.

4. The only assets of Holdings are XXXXXXXXXX common shares and XXXXXXXXXX Class A preferred shares in Opco, representing all of the issued and outstanding shares in Opco.

5. Opco is a Canadian resident corporation formed under the laws of XXXXXXXXXX. Opco carries on an XXXXXXXXXX business (the "Business") in XXXXXXXXXX.

6. The President and Chief Executive Officer of Opco is XXXXXXXXXX. The shares of XXXXXXXXXX, a corporation formed under the laws of Canada, are owned by his wife, XXXXXXXXXX.

7. XXXXXXXXXX is a partnership, all the members of which are XXXXXXXXXX resident in Canada and exempt from tax under Part I under the Act.

8. The Fund is an open-ended limited purpose trust established under the laws of the Province of XXXXXXXXXX pursuant to a declaration of trust dated XXXXXXXXXX (the "Fund Deed"). The initial trustee of the Fund is a resident of Canada. Pursuant to the Fund Deed, a majority of the trustees of the Fund must be residents of Canada. The Fund is resident in Canada. The head office of the Fund is located at XXXXXXXXXX. The Fund files its returns with and is located within the area serviced by the XXXXXXXXXX Tax Services Office.

9. Beneficial interests in the Fund are divided into interests of two classes, described and designated in the Fund Deed as "Trust Units" and "Special Voting Units".

10. Pursuant to the Fund Deed, the Trust Units, inter alia:

(a) represent an undivided beneficial interest in any distributions from the Fund (whether of net income or net realized capital gains, other than net realized capital gains distributed to redeeming unitholders) and in the net assets of the Fund in the event of the termination or winding-up of the Fund;

(b) entitle the holders thereof to one vote for each whole Trust Unit held at all meetings of unitholders; and

(c) are redeemable by the holders thereof.

11. Pursuant to the Fund Deed, the Trust Units will be redeemable at any time on demand by the holders thereof upon delivery of written notice to the Fund. Upon receipt of a redemption notice by the Fund, all rights to and under the Trust Units tendered for redemption shall be surrendered and the holder thereof shall be entitled to receive a price per Unit equal to the Redemption Price.

12. The Trust Units will be redeemable at any time at the demand of the holders thereof for cash equal to the Redemption Price provided that the total amount payable by the Fund in respect of the Trust Units tendered for redemption in the same calendar month shall not exceed $XXXXXXXXXX, although the trustees of the Fund may, in their sole discretion, waive this limitation in respect of any month. Payment of the Redemption Price will be made no later than the last day of the month following the month in which the Trust Units are tendered for redemption.

13. If the prescribed monthly cash redemption limit is exceeded, and in certain other circumstances described in the Fund Deed (i.e., when the Trust Units are not listed or suspended for trading), each Trust Unit tendered for redemption will, subject to any applicable regulatory approvals, be redeemed by way of a distribution in specie of a pro rata number of Amalco Common Shares and Amalco Notes held by the Fund. No fractional Amalco Common Shares or Amalco Notes in integral multiples of less than $XXXXXXXXXX will be distributed and, where the securities to be received by the redeeming unitholder include a fraction of a share or a principal amount less than a multiple of $XXXXXXXXXX, such number shall be rounded down to the next lowest whole number or multiple of $XXXXXXXXXX, as the case may be, with the balance of the Redemption Price to be paid in immediately available funds.

14. Pursuant to the Fund Deed, holders of Special Voting Units of the Fund will not be entitled to any beneficial interest in any distribution from the Fund whether of net income, net realized capital gains or other amounts, or in the net assets of the Fund in the event of a termination or winding up of the Fund.

15. The Special Voting Units will only be issued in connection with or in relation to Exchangeable Shares (defined below in paragraph 25) for the sole purpose of providing voting rights at the Fund level to holders of such Exchangeable Shares. Each Special Voting Unit will entitle the holder thereof to a number of votes at any meeting of the unitholders of the Fund equal to the number of Class A Units which would have been acquired upon the exchange of the Exchangeable Share to which the Special Voting Unit relates immediately prior to the record date of such meeting. The Special Voting Units will automatically be transferred upon a transfer of the Exchangeable Shares in connection with which such Special Voting Units were issued, provided that upon the redemption or exchange of the Exchangeable Share pursuant to its terms, the associated Special Voting Unit shall immediately be cancelled without any further action of the trustees of the Fund or the former holder of the Special Voting Units.

PROPOSED TRANSACTIONS

16. The Fund Deed will be amended (the "New Fund Deed") to create three classes of units, described as "Class A Units", "Class B Units" and "Special Voting Units", which will replace the two classes referred to in paragraph 9 above. In this letter, any Class A Unit or Class B Unit of the Fund is referred to as a "Unit", and collectively the "Units". The Class A Units will have the same attributes as Trust Units, as described in paragraph 10 above and the attributes of the Special Voting Units will remain unchanged from those described in paragraphs 14 and 15 above. Pursuant to the New Fund Deed, the Class B Units will:

(a) represent an undivided beneficial interest in certain distributions from the Fund (whether of net income or net realized capital gains, other than net realized capital gains distributed to redeeming unit holders) and in a certain percentage of the net assets of the Fund in the event of the termination or winding-up of the Fund, as more particularly described below;

(b) entitle the holders thereof to one vote for each whole Class B Unit held at all meetings of unit holders; and

(c) be redeemable by the holders thereof.

Except as set out below, the Class B Units will be identical to the Class A Units.

17. In general, until the subordination arrangements terminate pursuant to paragraph 20 or 22 below, distributions to holders of Class B Units will be subordinate to distributions to holders of Class A Units such that holders of Class A Units will be entitled to receive monthly cash distributions equal to a specified amount (the "Monthly Target") per Class A Unit, which is expected to be $XXXXXXXXXX, in priority to any distribution being paid to holders of Class B Units (subject to a XXXXXXXXXX limitation on any accrued distribution deficiencies, as described in paragraph 18 below).

18. Cash distributions on the Units will be made in the following priority:

(a) holders of Class A Units will be entitled to receive monthly distributions equal to the Monthly Target or, if the Trustees determine that there is insufficient cash to make distributions in such amount, such lesser amount as is determined to be available;

(b) at the end of each fiscal quarter of the Fund, including the fiscal quarter ending on the fiscal year end, distributions will be made in the following order of priority:

(i) in payment of the monthly distribution to the holders of Class A Units as described above, for the month then ended;

(ii) to the holders of Class A Units, to the extent that monthly per unit distributions in respect of the XXXXXXXXXX period then ended were not made or were made in amounts less than the Monthly Target per Class A Unit, the amount of any deficiency;

(iii) to holders of Class B Units in a per unit amount equal to XXXXXXXXXX times the Monthly Target or, if there is insufficient cash to make distributions in such amount, such lesser amount as is distributable;

(iv) to the holders of Class B Units, to the extent that per unit distributions in respect of any fiscal quarter(s) during the XXXXXXXXXX period then ended were not made or were made in amounts less than the amount referred to in paragraph (iii) per Class B Unit, the amount of such deficiency; and

(v) to the extent of any excess, proportionately to the holders of Class A Units and Class B Units.

After the subordination arrangements in respect of Class B Units have terminated (as described in paragraph 20), cash distributions shall be paid to the holders of Class A Units and holders of Class B Units pro rata.

19. As described above, the target distribution entitlement on the Class A Units and Class B Units, respectively, will be cumulative, such that the amount of any deficiency in actual distributions to holders of Class A Units and Class B Units (relative to the target distributions) will accumulate for a period of XXXXXXXXXX. Payments of deficiencies in distributions on the Class A Units will be made in priority to distributions on the Class B Units. Unitholders will not be entitled to receive any distribution pursuant to paragraph 18 above in respect of any deficiency not satisfied within XXXXXXXXXX of the date it arose.

20. The subordination arrangements will terminate on the date (the "Subordination End Date") which is the XXXXXXXXXX on which the closing of the Offering (as defined in paragraph 27) occurs (the "Closing Date") on which both of the following conditions (the "Subordination Threshold") are satisfied:

(a) the Fund has earned EBITDA for the immediately preceding fiscal year (based on audited consolidated financial statements of the Fund) of at least $XXXXXXXXXX, and

(b) average monthly cash distributions of at least the Monthly Target per Class A Unit have been paid by the Fund on the Class A Units and average quarterly cash distributions of at least XXXXXXXXXX times the Monthly Target per Class B Unit have been paid by the Fund on the Class B Units, in each case for the XXXXXXXXXX period ending on the last day of the month immediately preceding such date.

21. At any time on or after the Subordination End Date, the Class B Units will be exchangeable at the option of the holder for Class A Units on a one-for-one basis. (For greater certainty, Class B Units will be prohibited from being exchanged into Class A Units prior to the Subordination End Date, except at a reduced exchange ratio in accordance with the provisions described in paragraph 22 below.)

22. If the Subordination End Date has not occurred by the XXXXXXXXXX anniversary of the Closing Date, each holder of the Class B Units will have the option, at any time after such date and before the Subordination End Date, to terminate the subordination of any or all of the Class B Units held by it by exchanging such Class B Units for Class A Units at a reduced exchange ratio based on the following formula (the "Class B Exchange Formula"):

A
×
C
B

1.

1.

where:

A = the average quarterly per unit cash distributions paid on the Class B Units for the XXXXXXXXXX period ending on the last day of the fiscal quarter immediately preceding such time; and

B = the amount of $XXXXXXXXXX per share, being XXXXXXXXXX times the Monthly Target, the target average quarterly per unit distributions payable on the Class B Units; and

C = the number of Class B Units being transferred in exchange for Class A Units by the holders of Class B Units at that time;

provided that the Class B Units may not, in any event, be exchangeable for Class A Units on more than a one-for-one basis. The purpose of the foregoing adjustment to the exchange ratio is to proportionately reduce the entitlement of the holders of Class B Units to Class A Units in the event they exchange Class B Units for Class A Units after the XXXXXXXXXX anniversary of the Closing Date but before the Subordination End Date to the extent that average quarterly cash distributions paid on the Class B Units are less than the target average quarterly distributions of $XXXXXXXXXX per unit (i.e. XXXXXXXXXX times the Monthly Target).

23. Class B Units are redeemable at any time on demand by the holders thereof in the same manner and on the same terms as the Class A Units, except that, if the redemption occurs at any time prior to the Subordination End Date, the redemption price per Class B Unit will be adjusted as follows:

(a) If the redemption does not occur within the XXXXXXXXXX period commencing at the beginning of the first full fiscal quarter immediately following the Offering (as defined in paragraph 27) (the "Initial XXXXXXXXXX Period"), the redemption price per Class B Unit will be the redemption price applicable to a Class A Unit on the date of redemption multiplied by the fraction A/B, as such fraction is defined under the Class B Exchange Formula (in paragraph 22), provided that the fraction A/B may not in any event be greater than one; and

(b) If the redemption occurs on or before the end of the Initial XXXXXXXXXX Period, the redemption price per Class B Unit will be the redemption price applicable to a Class A Unit on the date of the redemption multiplied by the fraction X/Y where:

X = the average quarterly per unit cash distributions paid on the Class B Units during the Initial XXXXXXXXXX Period; and

Y = the amount of $XXXXXXXXXX , being XXXXXXXXXX times the Monthly Target, the target average quarterly per unit distributions payable on the Class B Units;

provided that the fraction X/Y may not in any event be greater than one. In such circumstances, each Class B Unit tendered for redemption will be redeemed in consideration for a note issued by the Fund (the ''Class B Redemption Note''), which will be an unsecured subordinated obligation of the Fund, the principal amount of which will be undeterminable until the end of the Initial XXXXXXXXXX Period. The Class B Redemption Note will bear interest at a market rate to be determined by the trustees of the Fund at the time of issuance thereof, provided that the amount of interest, if any, that will accrue in respect of the Class B Redemption Note will not exceed the amount of cash that would have been distributed on the Class B Units so redeemed (determined in accordance with the paragraphs 17 to 19 above) during the period the Class B Redemption Note was outstanding. Payment of principal and interest on the Class B Redemption Notes will be subordinate to the prior payment of all other indebtedness of the Fund. Immediately after the principal amount of the particular Class B Redemption Note is determined, the redeeming unit holder will, at the option of the Trustees of the Fund, receive cash and/or a combination of Amalco Common Shares and Amalco Notes in full payment of the Class B Redemption Note plus accrued interest thereon.

24. In the event of a termination or wind-up of the Fund:

(a) a holder of Class B Units which remain subject to subordination at such time will only be entitled to receive the same share of the net assets of the Fund as would have been received had they elected to terminate such subordination at the time of the termination or winding-up of the Fund;

(b) a holder of a Class B Redemption Note will only be entitled to receive pari passu with holders of Class A Units and holders of Class B Units, the same share of the net assets of the Fund (before paying, retiring or discharging or making provision for the payment, retirement or discharge of any amount owing in respect of any Class B Redemption Notes outstanding) as would have been received had the holder continued to hold the Class B Units so redeemed (for the Class B Redemption Note) and elected to terminate the subordination provisions thereof at the time of the termination or winding-up of the Fund; and

(c) holders of Class B Units not subject to subordination will share rateably with the holders of Class A Units.

25. The Fund will incorporate three subsidiaries ("Acquireco 1", "Acquireco 2" and "Exchangeco") under the laws of XXXXXXXXXX and will subscribe for one common share in each subsidiary. The authorized share capital of Acquireco 1 will also include an unlimited number of exchangeable shares (such shares, together with any shares of any successor corporation with substantially similar terms are referred to in this letter as "Exchangeable Shares").

26. An Exchangeable Share is intended to have substantially the same economic value as a Class B Unit. The terms of the Exchangeable Shares will provide that:

(a) at any time on or after the Subordination End Date defined above in paragraph 20, a holder of Exchangeable Shares will be entitled to cause all or a portion of the holder's Exchangeable Shares to be redeemed in consideration for that number of Class A Units which is equal to (a) the product of the exchange ratio (the "Exchange Ratio") in effect under the terms at the time of the exchange and (b) the number of Exchangeable Shares being redeemed (subject to customary anti-dilution adjustments);

(b) at any time prior to the Subordination End Date:

(i) a holder of Exchangeable Shares will be entitled to require Acquireco 1 to redeem all or a portion of the holder's Exchangeable Shares for Class B Units on the basis of the Exchange Ratio in effect at the time of the exchange; and

(ii) a holder of Exchangeable Shares will be entitled to require Acquireco 1 to redeem a portion of the holder's Exchangeable Shares for Class A Units on the basis of the Exchange Ratio in effect at the time of the exchange, provided that immediately following the redemption of such portion, the aggregate of:

(A) the number of Class B Units held by the holder (such Class B Units having been acquired upon the exchange of the Exchangeable Shares); and

(B) the number of Exchangeable Shares held by the holder multiplied by the Exchange Ratio in effect at the time of the exchange;
is equal to or greater than the number of Exchangeable Shares held by such holder on the completion of the Offering (as defined below in paragraph 27);

(c) a holder's rights of retraction referred to in (a) and (b) above are subject, however, to the Fund's or Exchangeco's overriding right to acquire the Exchangeable Share from the holder in consideration for that number of Class A or Class B Units deliverable upon the redemption;

(d) holders of Exchangeable Shares will be entitled to receive a quarterly cash dividend if, as and when declared by the board of directors of Acquireco 1, in an amount per share equal to the cash distributions paid in respect of such quarter on the Class B Units that the Exchangeable Share is then exchangeable for. To the extent such amounts are not declared and paid as dividends on the Exchangeable Shares, Acquireco 1 will set aside and retain such amounts and the Exchange Ratio will be adjusted to account for distributions paid on the Class B Units. On closing of the Offering (as defined below in paragraph 27), the Exchange Ratio will be XXXXXXXXXX. The Exchange Ratio will be increased on each date that the Fund pays distributions on the Class B Units by an amount, rounded to the nearest five decimal places, equal to a fraction (a) having as its numerator, the amount of the distribution paid per Class B Unit on such date multiplied by the Exchange Ratio in effect immediately prior to the distribution, and (b) having as its denominator, the market price of a Class A Unit on such date;

(e) Acquireco 1 will be entitled to acquire all but not less than all of the issued and outstanding Exchangeable Shares at any time in consideration for Class B Units based on the Exchange Ratio in effect at such time if such Exchangeable Shares represent XXXXXXXXXX% or less of the Class A Units on a fully diluted basis. Acquireco's right of redemption is subject, however, to the Fund's and Exchangeco's right to acquire all but not less than all of the Exchangeable Shares then outstanding in consideration for that number of Class B Units deliverable upon the redemption;

(f) if the Subordination End Date has not occurred by the XXXXXXXXXX anniversary of the Closing Date, a holder of Exchangeable Shares will have the option, at any time after such date and before the Subordination End Date, to terminate the subordination of any or all of its Exchangeable Shares by redeeming at that time all or any portion of its Exchangeable Shares for Class A Units at an Exchange Ratio that is reduced proportionately to reflect any shortfall from the target cash distribution (described in paragraph 20(b)). Specifically, the number of Class A Units for which such Exchangeable Shares may be redeemed will be determined by the following formula:

A
×
C
×
D
B

1.

1.

1.

1.

where:

A = the average quarterly per unit cash distributions paid on the Class B Units for the XXXXXXXXXX period ending on the last day of the fiscal quarter immediately preceding such time;

B = the amount of $XXXXXXXXXX per share, being XXXXXXXXXX times the Monthly Target, the target average quarterly per unit distributions payable on the Class B Units;

C = the number of Exchangeable Shares being redeemed in consideration for Class A Units by the holders of Exchangeable Shares at that time; and

D = the Exchange Ratio then in effect;

provided that the Exchangeable Shares may not, in any event, be redeemable for Class A Units on the basis of a ratio that is higher than the Exchange Ratio then in effect. The purpose of the foregoing adjustment to the Exchange Ratio is to proportionately reduce the entitlement of the holders of Exchangeable Shares to Class A Units in the event they redeem Exchangeable Shares in consideration for Class A Units after the XXXXXXXXXX anniversary of the Closing Date but before the Subordination End Date to the extent that average quarterly distributions made on the Class B Units are less than the target average quarterly distributions of $XXXXXXXXXX per unit (i.e. XXXXXXXXXX times the Monthly Target); and

(g) in the event of the liquidation, dissolution or winding-up of Acquireco 1, a holder of Exchangeable Shares will be entitled to receive from Acquireco 1, in respect of each such Exchangeable Share, an amount per share (the "Liquidation Amount") equal to the amount determined by multiplying the Exchange Ratio on the last business day prior to the effective date of such liquidation, dissolution or winding-up by the fair market value of a Class B Unit, which payment shall be satisfied by Acquireco 1 delivering that number of Class B Units equal to the Exchange Ratio as at the effective date of such event. The holder's right to receive the Liquidation Amount is subject to the Fund's and Exchangeco's overriding right to purchase from all but not less than all of the holders of Exchangeable Shares (other than the Fund and Exchangeco) all but not less than all of the Exchangeable Shares then outstanding on payment to each holder of an amount per Exchangeable Share equal to the Liquidation Amount, to be satisfied by the delivery of that number of Class B Units equal to the Exchange Ratio on such last business day and in accordance with the provisions governing the Exchangeable Shares, and upon the exercise of this right, the holders thereof will be obligated to sell such Exchangeable Shares to Exchangeco.

27. The Fund will raise money through an initial public offering of its Class A Units at a price of $XXXXXXXXXX per unit pursuant to the terms of a prospectus to be filed with the securities regulatory authority of each province and territory of Canada (the "Offering"). The Class A Units will be listed on the XXXXXXXXXX Stock Exchange. (The Class B Units will not be listed on the XXXXXXXXXX Stock Exchange.)

28. As a result of the Offering, it is expected that following the closing of the Offering there will be at least 150 holders of Class A Units, each of whom will hold 100 Class A Units having an aggregate fair market value of not less than $500.00. It is anticipated that the Class A Units issued in connection with the Offering will be widely held by the public.

29. Acquireco 1 will subscribe for Special Voting Units of the Fund for a nominal subscription price (for delivery to those Existing Shareholders who will receive Exchangeable Shares, as described below under paragraphs 30 and 31). The fair market value of the special voting units issued by the Fund will be 5% or less of the fair market value of all of the issued units of the trust.

30. XXXXXXXXXX will sell all of the issued and outstanding shares of XXXXXXXXXX to Acquireco 1 for a purchase price satisfied by the issuance by Acquireco 1 of Exchangeable Shares (and a corresponding number of Special Voting Units) and a note (the "XXXXXXXXXX Note"). XXXXXXXXXX and Acquireco 1 will jointly file an election under subsection 85(1) of the Act in respect of the transfer.

31. Each of the Tax-Deferred Shareholders will sell a portion of its common shares in Holdings to Acquireco 1 in consideration for Exchangeable Shares of Acquireco 1 (and corresponding Special Voting Units), which will reflect the retained interest of the Tax-Deferred Shareholders in the Fund. Each Tax-Deferred Shareholder and Acquireco 1 may jointly file an election under subsection 85(1) or (2) of the Act. The Exchangeable Shareholders will hold Exchangeable Shares.

32. The Fund, Exchangeco, the Exchangeable Shareholders and Aquireco 1 will enter into an exchange and support agreement, pursuant to which the Exchangeable Shareholders will have the right to require the Fund or Exchangeco to exchange the Exchangeable Shares for Fund Units in certain limited circumstances (e.g. in the case of insolvency of Acquireco 1) and the Fund would undertake to use best efforts to ensure that Acquireco 1 will be able to make all payments required pursuant to the terms of the Exchangeable Shares (including the payment of Fund Units on a redemption of the Exchangeable Shares).

33. The Tax-Deferred Shareholders will sell their remaining shares in Holdings to the Fund for cash. The transaction is not a tax-deferred transaction.

34. XXXXXXXXXX will sell its common shares in Holdings to the Fund for cash and Class B Units.

35. The Preferred Shareholder will sell all of its Class A preferred shares in Holdings to the Fund for cash. The transaction is not a tax-deferred transaction.

36. The consideration received by each of the Existing Shareholders (as described above) for the shares that it held in Holdings will reflect the fair market value of such Shares.

37. XXXXXXXXXX will sell the XXXXXXXXXX Note to the Fund for cash in an amount equal to its principal amount.

38. The Fund will make a loan to Opco (the "Opco Loan") in an amount equal to its cash remaining after the payments described in paragraphs 33 to 36 and after payment of its transaction fees and costs. The Opco Loan will mature on the XXXXXXXXXX anniversary of the date of the loan, and will bear interest at a rate of XXXXXXXXXX% per annum payable monthly in arrears on the XXXXXXXXXX day of each calendar month. Opco will use the proceeds of the loan to repay external debt, fund its deal costs and for use in the Business. It is expected that the amount of the Opco Loan will be approximately $XXXXXXXXXX and the amount of the external debt repaid by the Opco Loan will be approximately $XXXXXXXXXX.

39. XXXXXXXXXX will be required to hold a subordinated interest in the Fund and will subscribe for Class B Units from the Fund in fulfilment of this requirement. It is expected that XXXXXXXXXX will subscribe approximately XXXXXXXXXX Class B Units at $XXXXXXXXXX per unit.

40. As a result of the foregoing transactions, the Initial Class B Unitholders will hold Class B Units of the Fund.

41. The interests of the Exchangeable Shareholders and the Initial Class B Unitholders (collectively, the "Vendors") in Acquireco 1 and the Class B Units, respectively, immediately after the Closing of the Offering will represent approximately XXXXXXXXXX% of the Fund on a fully diluted basis, unless the Over-Allotment Option (described below in paragraph 42) is exercised.

42. The Vendors will grant the underwriters of the Offering an option (the "Over-Allotment Option"), exercisable for XXXXXXXXXX days following the closing of the Offering, to acquire additional Class A Units equal to approximately XXXXXXXXXX% of the Fund on a fully-diluted basis (alternatively expressed, equal to XXXXXXXXXX% of the Vendors' retained interest in the Fund on a fully-diluted basis). If the Over-Allotment Option is exercised, the proceeds therefrom will be used by the Fund (i) to repurchase the relevant portion of the Class B Units held by each Initial Class B Unitholder and (ii) to subscribe for common shares or debt of Exchangeco the proceeds from which will be used to purchase from each Exchangeable Shareholder the relevant portion of Exchangeable Shares held by it. If the Over-Allotment Option is exercised in full, the Vendors' interests will represent approximately XXXXXXXXXX% of the Fund on a fully-diluted basis.

43. The Fund will transfer the common shares and the Class A preferred shares of Holdings held by it to Acquireco 2 in consideration for common shares and debt issued by Acquireco 2. The terms of the debt will be the same as the terms of the Opco Loan. Even if a gain is not expected on the transfer of the shares, the Fund and Acquireco 2 intend to file a protective section 85 election in respect of the transfer.

44. Acquireco 1, Acquireco 2, XXXXXXXXXX, Holdings and Opco will amalgamate to form Amalco under the laws of Canada. Upon the amalgamation (the "Amalgamation"),

(a) each holder of Exchangeable Shares of Acquireco 1 will receive exchangeable shares of Amalco with substantially similar terms (also referred to hereinafter as the "Exchangeable Shares") on a one-for-one basis in consideration for Exchangeable Shares of Acquireco 1;

(b) the Fund will receive common shares of Amalco ("Amalco Common Shares") in consideration for all the shares of Acquireco 1 and Acquireco 2 held by the Fund;

(c) the shares of XXXXXXXXXX, Holdings and Opco will be cancelled; and

(d) the debt owing to the Fund by Opco and Acquireco 2 will become debt of Amalco, and in order to evidence such debt, Amalco will issue notes with substantially similar terms (the "Amalco Notes") to the Fund pursuant to a note indenture (the "Note Indenture").

45. Pursuant to the terms of the Amalco Notes and the Note Indenture, the Amalco Notes will have the following terms and conditions:

(a) the Amalco Notes to be issued to the Fund upon the amalgamation described in paragraph 44 will mature on the XXXXXXXXXX anniversary of the date of issuance and will bear interest at a rate of XXXXXXXXXX % per annum payable monthly in arrears on the XXXXXXXXXX day of the following calendar month; and

(b) the Amalco Notes will be redeemable at any time at the option of Amalco prior to maturity.

46. Amalco Common Shares and Amalco Notes, which would be distributed in certain circumstances to holders of Units in connection with an in specie redemption of such Units, will not be listed on any stock exchange and no market is expected to develop in such securities, and they may be subject to resale restrictions under applicable securities laws. Such securities would generally not be qualified investments for deferred income plans.

PURPOSE OF PROPOSED TRANSACTIONS

47. The purpose of the proposed transactions is for the Fund to acquire the Business through a purchase of the shares of Holdings in a manner that protects public investors in the Fund. Pursuant to the proposed transaction, the Vendors will sell, and public investors (by investing in the Fund) will acquire, a majority indirect interest in the Business. As in all income fund transactions, the fair market value of the acquired business to public investors will be equal to a multiple of the distributable cash estimated to be generated by such business. A portion of the purchase price paid to the Vendors will be paid in the form of Exchangeable Shares to defer a taxable disposition, and in the form of Class B Units. In order to protect the public holders of Class A Units from the risk that the distributable cash realized by the Fund is less than the amount estimated for the purposes of determining the value of the Business, the Class B Units and Exchangeable Shares received by the Vendors will be subordinated to the Class A Units. In particular, distributions of cash (whether on account of income or capital) on the Class B Units held by the Vendors (and any distributions on the Exchangeable Shares or accretions to the Exchange Ratio) will be proportionally reduced and subordinated to the distributions on the Class A Units until such projected value has been demonstrated.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of 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 follows:

A. Subsection 104(7.1) of the Act will not apply to the Fund; and

B. At the time immediately following the completion of the proposed transactions, the Fund will qualify as a "unit trust" pursuant to subparagraph 108(2)(a)(i) of the Act.

Nothing in this Advance Income Tax Ruling should be construed as implying that we are ruling on, or have considered, or discussed with you any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the Rulings given above. More particularly, no Ruling is provided herein with respect to:

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

(ii) Any transaction or potential transaction referred to in paragraphs 15, 23, 25, 26, 30, 31, 33 to 35, 37 to 39, 42 to 44 above;

(iii) Any interest deductibility issues;

(iv) The termination of the subordination of any or all of the Class B Units described in paragraph 22 above. The question of whether the termination will give rise to a disposition of the Class B Units was not raised as an issue and we have not been asked to provide any rulings in respect thereof; or

(v) The application of section 245 of the Act.

The Rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the proposed transactions described above are completed on or before XXXXXXXXXX.

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Section manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch