2005 Ruling 2005-0151751R3 - interest deductibility; XXXXXXXXXX

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. Whether GAAR applies where parent of XXXXXXXXXX company borrows to XXXXXXXXXX.

2. Will the transfer of legal title to the Security Assets from ForeignCo #3 to the Custodian constitute a disposition?

3 Does draft para 95(2)(a) of the Feb 27, 2004 proposed amendments apply to that proportion of the income or loss of ForeignCo #3 that can reasonably be considered to be related to the active business carried on by XXXXXXXXXX? What is the proportion?

4. Is that proportion of the income or loss discussed in Issue #3 above included in computing the "earnings" or "loss" from an active business income of ForeignCo #3 within the meaning of draft subsection 5907(1) per the draft amendments?

5. Will all of the gains realized on the Swaps be included in draft subpara (b)(ii) of the description of "D" in draft subsection 93(2) of the proposed amendments?

Position: 1. No.

2. No

3. Yes.The amount of ForeignCo #3's XXXXXXXXXX will be considered to be directly related to the active business activities of XXXXXXXXXX.

4. Yes

5. No

Reasons: 1. XXXXXXXXXX

2. The transfer does not result in a change in the beneficial ownership of the Security Assets. Ss 248(25.2) will also apply so that the trust is deemed to deal with the property as agent for the transferor until there is a subsequent change in its beneficial ownership.

3. The income or loss that is directly related to XXXXXXXXXX active business activities fits within the provisions of draft paragraph 95(2)(a) of the February 27, 2004 proposed amendments.

4. The income or loss that is included in draft paragraph 95(2)(a) of the February 27, 2004 proposed amendments is also included in the definition of "earnings" and "loss" in subsection 5907(1) of the Regulations as described in the February 27, 2004 proposed amendments.

5. Any gains under the Swaps in relation to amounts that are payable or receivable on a periodic basis will not be included in the computation of any loss realized by PublicCo upon the disposition of the ForeignCo #3 Holdco shares held by it.

XXXXXXXXXX 								2005-015175

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Rulings
XXXXXXXXXX
XXXXXXXXXX

We are writing in response to your firm's letter of XXXXXXXXXX, as amended XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above taxpayers.

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 taxpayers or a related person;

(iv) subject to a ruling previously issued to the taxpayers or a related person 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.

Dollar amounts referred to herein are Canadian dollars except as otherwise provided.

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) XXXXXXXXXX;

(c) "arm's length" has the meaning assigned by section 251 of the Act;

(d) XXXXXXXXXX;

(e) XXXXXXXXXX;

(f) "CanSub" means XXXXXXXXXX.

CanSub is a XXXXXXXXXX. CanSub was formed on the amalgamation, XXXXXXXXXX.

XXXXXXXXXX.

XXXXXXXXXX

The TSO and TC responsible for CanSub are the XXXXXXXXXX TSO and the XXXXXXXXXX TC. CanSub's business number is XXXXXXXXXX;

(g) "CanSub #2" means XXXXXXXXXX;

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

(i) "certain persons" means XXXXXXXXXX

(j) XXXXXXXXXX;

(k) XXXXXXXXXX;

(l) "Contracts" are XXXXXXXXXX;

(m) "controlled foreign affiliate" has the meaning assigned by subsection 95(1) of the Act;

(n) "Corporate Act" means the XXXXXXXXXX

(o) "CRA" means Canada Revenue Agency;

(p) XXXXXXXXXX;

(q) "Custodian" means the custodian under the Trust Indenture, as referred to in Paragraph 32;

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

(s) "Estimated Amount" means XXXXXXXXXX. The amount XXXXXXXXXX is determined under the Rules;

(t) "Existing Security" means XXXXXXXXXX;

(u) "Existing Service Agreement" means the existing XXXXXXXXXX agreement between XXXXXXXXXX and Foreign Co #2;

(v) "Fee" means XXXXXXXXXX;

(w) XXXXXXXXXX;

(x) "financial requirements" means XXXXXXXXXX;

(y) XXXXXXXXXX.

(z) "ForeignCo #2" means XXXXXXXXXX, as described more fully in Paragraph 11. XXXXXXXXXX;

(aa) "ForeignCo #2 Holdco" means XXXXXXXXXX., as described more fully in Paragraph 12;

(bb) "ForeignCo #3" means XXXXXXXXXX.

XXXXXXXXXX;

(cc) "ForeignCo #3 Holdco" means the corporation described in Paragraph 18;

(dd) "ForeignCo #4" means XXXXXXXXXX, as described more fully in Paragraph 17;

(ee) XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

(ff) XXXXXXXXXX;

(gg) "foreign country #1" means the XXXXXXXXXX;

(hh) "foreign country #2" means XXXXXXXXXX;

(ii) "foreign country #3" means XXXXXXXXXX;

(jj) XXXXXXXXXX.;

(kk) "GAAP" means those accounting principles which are recognized as being generally accepted, as published in (with respect to Canadian GAAP) the Handbook of the Canadian Institute of Chartered Accountants Generally Accepted Accounting Principles XXXXXXXXXX;

(ll) "Group" means the XXXXXXXXXX group of companies;

(mm) "XXXXXXXXXX Contracts" means the XXXXXXXXXX;

(nn) XXXXXXXXXX;

(oo) "Investment Assets" means the income earning investments of ForeignCo #3 as discussed in Paragraph 24, including the Security Assets. It is anticipated that ForeignCo #3 will invest in corporate and treasury bonds of foreign country #1;

(pp) "Liabilities" means XXXXXXXXXX;

(qq) "Location #1" means XXXXXXXXXX;

(rr) "Location #2" means XXXXXXXXXX;

(ss) "Location #3" means XXXXXXXXXX;

(tt) XXXXXXXXXX;

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

(vv) "principal amount" has the meaning assigned by subsection 248(1) of the Act;

(ww) "Proposed Amendments" means the proposed amendments to the foreign affiliate provisions of the Act released in draft form on February 27, 2004;

(xx) "Proposed Security" means the XXXXXXXXXX, as described more fully in Paragraph 30;

(yy) "Proposed Service Agreement" means the XXXXXXXXXX agreement between XXXXXXXXXX and ForeignCo #3 in respect of XXXXXXXXXX Contracts XXXXXXXXXX, as discussed in Paragraph 27;

(zz) "Proposed Transactions" means the transactions described in Paragraphs 18 to 34;

(aaa) "PublicCo" means XXXXXXXXXX.

The TSO and TC responsible for PublicCo are the XXXXXXXXXX TSO and the XXXXXXXXXX TC. PublicCo's business number is XXXXXXXXXX;

(bbb) "public corporation" has the meaning assigned by subsection 89(1) and section 141 of the Act;

(ccc) XXXXXXXXXX;

(ddd) "Reasons" means XXXXXXXXXX

(eee) XXXXXXXXXX;

(fff) "Regulations" means the Income Tax Regulations issued pursuant to the Act and draft regulations under the Act that have not yet been promulgated; and prescribed means prescribed under the Regulations as so defined;

(ggg) "Rules" means XXXXXXXXXX;

(hhh) "Secured Amount" has the meaning set out in Paragraph 30;

(iii) "Security #1" means XXXXXXXXXX;

(jjj) "Security Assets" means the Investment Assets held by the Custodian pursuant to the Trust Indenture as described in Paragraph 32;

(kkk) "XXXXXXXXXX Notes" has the meaning set out in Paragraph 19;

(lll) "Service" or "Services" means XXXXXXXXXX;

(mmm) "Service Policies" has the meaning set out in Paragraph 28;

(nnn) "Service Provider" means XXXXXXXXXX;

(ooo) XXXXXXXXXX;

(ppp) XXXXXXXXXX;

(qqq) "stakeholders" means XXXXXXXXXX;

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

(sss) "Swaps" means cross-currency swap arrangements described in Paragraph 26;

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

(uuu) "taxation year" has the meaning assigned by section 249 of the Act;

(vvv) "TC" means Taxation Centre;

(www) "Trust Indenture" means the trust indenture described in Paragraph 32;

(xxx) XXXXXXXXXX;

(yyy) "TSO" means Tax Services Office.

Our understanding of the Facts and Proposed Transactions is as follows:

FACTS

PublicCo

1. PublicCo is a taxable Canadian corporation and a public corporation. XXXXXXXXXX. PublicCo has issued and outstanding common shares and XXXXXXXXXX Preferred Shares. The common shares of the capital stock of PublicCo are listed on stock exchanges.

2. PublicCo is a holding corporation for CanSub and its various Canadian and international subsidiaries. PublicCo is also a holding corporation for CanSub #2, and its various Canadian and international subsidiaries, including ForeignCo #4.

CanSub

3. CanSub is a taxable Canadian corporation, XXXXXXXXXX. CanSub is a subsidiary wholly-owned corporation of PublicCo. CanSub has issued and outstanding common shares and XXXXXXXXXX preferred shares, all of which are owned by PublicCo. Shares of CanSub are capital property of PublicCo.

4. CanSub carries on the XXXXXXXXXX business in Canada XXXXXXXXXX in accordance with the provisions of the Corporate Act XXXXXXXXXX.

5. CanSub does not carry on the operations of XXXXXXXXXX

6. XXXXXXXXXX

7. XXXXXXXXXX

8. XXXXXXXXXX offers, XXXXXXXXXX in foreign country #1, XXXXXXXXXX Contracts.

9. XXXXXXXXXX obtains Services with respect to the XXXXXXXXXX Contracts with unaffiliated Service Providers.

10. XXXXXXXXXX is permitted to XXXXXXXXXX required by the Rules through Service agreements with an authorized Service Provider or through Service agreements with unauthorized Service Providers that are secured either by Security #1 XXXXXXXXXX or by authorized investments held in a form of "trust"/security arrangement XXXXXXXXXX ForeignCo #2 and ForeignCo #2 Holdco

11. In order to continue to XXXXXXXXXX Contracts on an economically viable basis XXXXXXXXXX entered into Service arrangements with ForeignCo #2.

ForeignCo #2 is a XXXXXXXXXX company and is not an authorized Service Provider XXXXXXXXXX. ForeignCo #2 has only common shares issued and outstanding all of which are owned by Foreign Co #2 Holdco. Foreign Co #2 is not resident in Canada for purposes of the Act and has XXXXXXXXXX. Foreign Co #2 carries on the XXXXXXXXXX business and provides Services outside Canada, including other direct business with non-Location #3 clients.

12. ForeignCo #2 Holdco is incorporated under the laws of Location #2, is not resident in Canada for purposes of the Act and is a subsidiary wholly-owned corporation of CanSub. Only common shares of ForeignCo #2 Holdco are issued and outstanding. The shares of ForeignCo #2 Holdco are capital property to CanSub.

13. Since ForeignCo #2 is not an authorized Service Provider XXXXXXXXXX, it is required to secure its obligations to XXXXXXXXXX under the Existing Service Agreement XXXXXXXXXX under the Rules. Accordingly, the Existing Service Agreement requires ForeignCo #2 to provide to XXXXXXXXXX Security #1 in the Estimated Amount. Accordingly, ForeignCo #2 and PublicCo have obtained Existing Security XXXXXXXXXX. To provide credit enhancement, PublicCo is a co-applicant for the Existing Security. PublicCo includes a commercially reasonable arm's length guarantee fee in computing its income under the Act for each taxation year in respect of which it is a co-applicant. The Existing Security will be called upon by XXXXXXXXXX to the extent ForeignCo #2 fails to XXXXXXXXXX under the Existing Service Agreement.

14. As at XXXXXXXXXX, ForeignCo #2 has provided US$XXXXXXXXXX in Existing Security as security for its obligations. The amount required to be secured is expected to increase by approximately US $XXXXXXXXXX per quarter through XXXXXXXXXX as the market for XXXXXXXXXX Contracts continues to experience significant growth, and is projected to peak at approximately US$XXXXXXXXXX in XXXXXXXXXX.

15. XXXXXXXXXX, currently Services XXXXXXXXXX for XXXXXXXXXX Contracts of XXXXXXXXXX to ForeignCo #2, pursuant to XXXXXXXXXX Service agreement between ForeignCo #2 and XXXXXXXXXX, dated XXXXXXXXXX, as amended XXXXXXXXXX (the "Existing Service Agreement"). Pursuant to the Existing Service Agreement, XXXXXXXXXX. The Existing Service Agreement provides for the payment by XXXXXXXXXX to ForeignCo #2 of XXXXXXXXXX for Service coverage, which XXXXXXXXXX is an arm's length commercially reasonable amount. The Existing Service Agreement provides that XXXXXXXXXX will be payable by ForeignCo #2, XXXXXXXXXX has the unconditional option to XXXXXXXXXX under the Existing Service Agreement if ForeignCo #2 becomes insolvent or increases the Fee or in certain other specified circumstances.

ForeignCo #3

16. PublicCo incorporated ForeignCo #3 pursuant to legislation in foreign country #3. ForeignCo #3 will be XXXXXXXXXX. The authorized capital of ForeignCo #3 consists of an unlimited number of designated as no par value common shares, denominated in US dollars. Pursuant to the terms and conditions of the common shares of ForeignCo #3, dividends may be paid on such shares from time to time in the discretion of the board of directors of ForeignCo #3. The initial issued capital of ForeignCo #3 will consist of US$XXXXXXXXXX of common shares that will be issued to PublicCo. The XXXXXXXXXX must approve this initial investment by PublicCo in ForeignCo #3. The subscription price paid by PublicCo for the common shares of ForeignCo #3 will be added to the stated capital account of ForeignCo #3 maintained under applicable corporate law of foreign country #3. The authorized capital of ForeignCo #3 will be amended to provide for separate classes of preferred shares as described in Paragraph 23. ForeignCo #3 will not be resident in Canada and will be resident in foreign country #3 for purposes of the Act.

ForeignCo #4

17. ForeignCo #4 is a subsidiary of PublicCo. It was incorporated under the laws of Location #2 and is not a resident of Canada for purposes of the Act. It carries on the business of providing XXXXXXXXXX advisory services to the Group and to unrelated parties.

PROPOSED TRANSACTIONS

18. PublicCo will incorporate ForeignCo #3 Holdco under the laws of foreign country #3 as a subsidiary wholly-owned corporation of PublicCo. ForeignCo #3 Holdco will not be resident in Canada for purposes of the Act. The authorized capital of ForeignCo #3 Holdco will consist of an unlimited number of designated as no par value common shares, denominated in US dollars.

19. XXXXXXXXXX cannot borrow funds and use those funds to acquire assets to deposit in a trust XXXXXXXXXX for the Reasons.

PublicCo will offer XXXXXXXXXX Notes for investment to the public in Canada either by way of prospectus or private placement. The XXXXXXXXXX Notes issued in XXXXXXXXXX will be issued in Canadian dollars, will have a principal amount equal to the Canadian dollar equivalent of approximately US$XXXXXXXXXX, and will mature in XXXXXXXXXX years. It is anticipated that interest on the XXXXXXXXXX Notes will be payable semi-annually in arrears on specified dates in each year at a fixed interest rate to be determined based on market conditions at the time of issuance of the XXXXXXXXXX Notes. The terms of the XXXXXXXXXX Notes issued in XXXXXXXXXX will provide that PublicCo will be entitled to repay the XXXXXXXXXX Notes at par after XXXXXXXXXX years, after which date the interest rate will be a floating rate equal to the banker's acceptance rate plus an additional amount.

XXXXXXXXXX, depending on XXXXXXXXXX requirements and the development of the business of XXXXXXXXXX in respect of the XXXXXXXXXX Contracts.

20. XXXXXXXXXX.

21. PublicCo will use the aggregate gross proceeds raised by it from the issuance of the XXXXXXXXXX Notes issued in XXXXXXXXXX to make a payment under the Swaps described in Paragraph 26.

PublicCo will use the US dollar amount received by it under the Swaps to subscribe for common shares of ForeignCo #3 Holdco for a subscription price equal to the fair market value thereof for the purpose of earning income therefrom. The subscription price paid by PublicCo for the shares of ForeignCo #3 Holdco will be added to the stated capital account of ForeignCo #3 Holdco maintained under applicable corporate law of foreign country #3.

22. PublicCo will use other funds to subscribe for additional common shares of ForeignCo #3 in the amount required XXXXXXXXXX. The subscription price paid by PublicCo for the common shares of ForeignCo #3 will be added to the stated capital of ForeignCo #3 maintained under applicable corporate law of foreign country #3. In order for Publico not to XXXXXXXXXX, in light of the proposed transactions set out herein, ForeignCo #3 must have this amount of capital on hand in excess of the aggregate of the Security Assets and XXXXXXXXXX. If this same amount of capital were on hand in PublicCo, rather than ForeignCo #3, there would be a negative impact on PublicCo's XXXXXXXXXX.

23. ForeignCo #3 Holdco will use the aggregate US dollar subscription proceeds described in Paragraph 21 to subscribe for a separate class of preferred shares of ForeignCo #3. The preferred shares will be non-voting, will pay dividends from time to time in the discretion of the board of directors of ForeignCo #3 and will be redeemable at any time at the option of the issuer for an aggregate US dollar redemption price equal to the subscription price plus any declared but unpaid dividends. It is anticipated that the aggregate dividends paid will be in excess of the amount of interest payable on the XXXXXXXXXX Notes. The subscription price paid by ForeignCo #3 Holdco for the preferred shares of ForeignCo #3 will be added to the stated capital account of ForeignCo #3 maintained under the applicable corporate law of foreign country #3. Dividends received by ForeignCo #3 Holdco on the preferred shares will be used by it to pay dividends on its common shares.

24. ForeignCo #3 will use the aggregate subscription proceeds described in Paragraphs 22 and 23, as well as revenue generated by it and not used to pay dividends, to acquire the Investment Assets. The Investment Assets will be managed by ForeignCo #4, on behalf of ForeignCo #3, in exchange for a commercially reasonable arm's length fee. ForeignCo #3 will use income from the Investment Assets and other income of ForeignCo #3 to pay dividends on its issued and outstanding preferred shares. Such dividends will be paid in US dollars. ForeignCo #3 will use the Investment Assets as security under the Proposed Service Agreement as described in Paragraph 32, to XXXXXXXXXX referred to in Paragraph 22, and to XXXXXXXXXX described in Paragraph 29 arising from the Proposed Service Agreement.

25. The cash flows from the Security Assets will be matched with the XXXXXXXXXX Notes. At the time the XXXXXXXXXX Notes are to be repaid, the Security Assets matched to the XXXXXXXXXX Notes will be disposed of. The proceeds obtained by ForeignCo #3 on the disposition of the Security Assets will be used by ForeignCo #3 to redeem the preferred shares held by ForeignCo #3 Holdco. Such amounts will be paid in US dollars. ForeignCo #3 Holdco will then be wound up into PublicCo and the common shares held by PublicCo in ForeignCo #3 Holdco will be cancelled. PublicCo will use the US dollars received on the wind-up of ForeignCo #3 Holdco in the manner described in Paragraph 26.

26. PublicCo will enter into Swaps with arm's length counterparties to hedge its investment in ForeignCo #3 Holdco. The settlement and cash flows of the Swaps will be matched with the dividends anticipated to be paid on and with the proceeds from the cancellation of the common shares of ForeignCo #3 Holdco. In accordance with the terms of the Swaps, the principal amount of the XXXXXXXXXX Notes will be exchanged on entering into the Swaps and on settlement of the Swaps, and payments will be payable and receivable by PublicCo on a periodic basis during the term of the Swaps. As described in Paragraph 21, PublicCo will use the Canadian dollar proceeds from the issuance of the XXXXXXXXXX Notes to satisfy its obligation to make a payment on entering into the Swaps. PublicCo will use the US dollar dividends received from ForeignCo #3 Holdco to satisfy its obligations to make the periodic payments under the Swaps. It will use the Canadian dollar amounts received by it under the Swaps to satisfy its obligation to pay interest on the XXXXXXXXXX Notes. On settlement of the Swaps, ForeignCo #3 will redeem the preferred shares held by ForeignCo #3 Holdco. PublicCo will then wind-up ForeignCo #3 Holdco and use the US dollar funds received by it on the wind-up to satisfy its obligation to make a payment under the Swaps. It will use the Canadian dollar amounts received by it on settlement of the Swaps to satisfy its obligation to repay the XXXXXXXXXX Notes.

XXXXXXXXXX

27. ForeignCo #3 will enter into the Proposed Service Agreement with XXXXXXXXXX in respect of XXXXXXXXXX Contracts XXXXXXXXXX. The Proposed Service Agreement will replace the Existing Service Agreement XXXXXXXXXX. There will be no substantive changes XXXXXXXXXX under the Proposed Service Agreement, except XXXXXXXXXX the form of security to be provided by ForeignCo #3 to XXXXXXXXXX for its Service obligations.

28. In particular, pursuant to the Proposed Service Agreement, XXXXXXXXXX The Proposed Service Agreement provides for the payment by XXXXXXXXXX, to ForeignCo #3 of a Fee, which Fee is an arm's length commercially reasonable amount. XXXXXXXXXX. The Proposed Service Agreement provides that XXXXXXXXXX. The Proposed Service Agreement may be terminated in the circumstances and in the manner as set out in that Agreement.

29. In addition to the Security Assets and the capital required to be maintained by XXXXXXXXXX as described in Paragraph 22, ForeignCo #3 will be required to maintain amounts XXXXXXXXXX with respect to the Proposed Service Agreement. It will fund these XXXXXXXXXX requirements from revenue generated by it.

30. The Service obligations of ForeignCo #3 under the Proposed Service Agreement will be secured through a combination of Proposed Security and Security Assets. Each quarter, XXXXXXXXXX (the "Secured Amount") and ForeignCo #3 will then advise XXXXXXXXXX of the amount of Proposed Security and Investment Assets that will be provided as security under the Proposed Service Agreement XXXXXXXXXX. The Proposed Service Agreement will provide that, XXXXXXXXXX in accordance with the Rules, the total amount of Security Assets will be equal to, or greater than, XXXXXXXXXX% times the amount by which (i) the Secured Amount exceeds (ii) the amount payable under the Proposed Security provided by ForeignCo #3.

31. It is intended that over the term of the Proposed Service Agreement, ForeignCo #3 will gradually increase the amount of the Security Assets to represent approximately XXXXXXXXXX percent of the Secured Amount. Correspondingly ForeignCo #3 will reduce the amount payable under the Proposed Security. It is intended that the total amount of Investment Assets at any time will be no greater than the Secured Amount (less the amount payable under the Proposed Security), plus the amount of capital ForeignCo #3 is required to maintain XXXXXXXXXX and the amount required to XXXXXXXXXX. If necessary as a result of a disposition of the Security Assets in the circumstances described in Paragraph 25, ForeignCo #3 will temporarily increase the amount payable under the Proposed Security to the extent required to comply with its obligations under the Proposed Service Agreement XXXXXXXXXX.

32. ForeignCo #3 will enter into the Trust Indenture with the Custodian, a major financial institution in foreign country #1, and XXXXXXXXXX under which the Custodian will have custody of the Security Assets, which are certain Investment Assets. The Trust Indenture will be entered into to XXXXXXXXXX.

Under the Trust Indenture, legal title to the Security Assets will be transferred to the Custodian, and the Custodian will be required to hold the Security Assets for XXXXXXXXXX to secure the obligations of ForeignCo #3 to XXXXXXXXXX under the Proposed Service Agreement, and in all other respects for XXXXXXXXXX ForeignCo #3. The transfer of legal title of the Security Assets to the Custodian does not release ForeignCo #3 from its obligations under the Proposed Service Agreement. The Trust Indenture provides that, subject to the security interest of XXXXXXXXXX in the Security Assets, ForeignCo #3 will be treated as the sole owner of the Security Assets. At no time during the term of the Trust Indenture will the incidents of ownership of the Security Assets, other than legal title, be transferred from ForeignCo #3 to any of the other parties to the Trust Indenture. The Security Assets will be deposited with the Custodian and will be held by the Custodian for the sole use and enjoyment of ForeignCo #3 during the entire term of the Trust Indenture, subject only to the security interest of XXXXXXXXXX. Income earned on the Security Assets will not be held by the Custodian but will be paid over to ForeignCo #3.

33. ForeignCo #3 has, under the Trust Indenture, the right, at any time without the approval of XXXXXXXXXX, to replace Security Assets with assets at least equal in value, and to withdraw Security Assets valued in excess of the value required to be maintained under the Trust Indenture and the Proposed Service Agreement XXXXXXXXXX. There is no change in the beneficial ownership of the Security Assets when they are transferred by ForeignCo #3 to the Custodian or transferred to ForeignCo #3 by the Custodian. The Custodian is also the agent or nominee of ForeignCo #3, and acts only on instructions from ForeignCo #3. The Trust Indenture can be terminated on the consent of both ForeignCo #3 and XXXXXXXXXX.

In the event that ForeignCo #3 becomes insolvent, or in certain other specified default circumstances set out in the Proposed Service Agreement XXXXXXXXXX, ForeignCo #3 will not be permitted to use the Security Assets and the Custodian will cease to take instructions from ForeignCo #3 and will take instructions from XXXXXXXXXX. The Security Assets may be drawn upon by XXXXXXXXXX to the extent necessary to satisfy the obligations of ForeignCo #3 under the Proposed Service Agreement as stipulated in the Trust Indenture. XXXXXXXXXX must make a demand for payment first against the Proposed Security, and then against the Security Assets.

34. The Existing Service Agreement between XXXXXXXXXX and ForeignCo #2 will be terminated in accordance with its provisions after XXXXXXXXXX and the Proposed Service Agreement has been executed. In consideration for the release of its obligations under the Existing Service Agreement XXXXXXXXXX, ForeignCo #2 will pay to XXXXXXXXXX amounts XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

35. XXXXXXXXXX

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 Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below:

A. Provided that PublicCo has a legal obligation to pay interest on the XXXXXXXXXX Notes, as described in paragraph 19 hereof, and PublicCo continues to hold the common shares of ForeignCo #3 Holdco, as described in paragraph 21 hereof, in computing PublicCo's income for a taxation year from a business or property, PublicCo will be entitled, pursuant to paragraph 20(1)(c), to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by PublicCo in computing its income for the purposes of the Act) in respect of the year on the XXXXXXXXXX Notes, or (ii) a reasonable amount in respect thereof.

B. Amounts receivable or payable by PublicCo on a periodic basis pursuant to and during the term of the Swaps will be on income account, and any gains (or losses) in respect thereof will be included in (or deducted from) PublicCo's income pursuant to subsection 9(1) in accordance with the method regularly followed by PublicCo in computing its income for the purposes of the Act.

C. By reason of paragraph (k) of the definition of "disposition" in subsection 248(1), the transfer of legal title to the Security Assets from ForeignCo #3 to the Custodian pursuant to the Trust Indenture as described in Paragraphs 32 and 33, will not for purposes of the Act, result in a disposition of the Security Assets by ForeignCo #3.

D. Subsection 248(25.2) will apply to deem the Custodian to deal with the Security Assets as agent for ForeignCo #3 for the period described in that subsection.

E. Subsection 245(2) will not apply as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences in the rulings given.

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 that the Proposed Transactions occur 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.

OPINIONS

I. The income or loss derived by ForeignCo #3 from the Fee payable by XXXXXXXXXX, and the income or loss of ForeignCo #3, derived from the investment of that proportion of the income from the investment of the Fee and the Investment Assets, in these opinions referred to as the "Investment Property", that the aggregate of the Security Assets, the amount of capital that ForeignCo #3 is required to maintain XXXXXXXXXX, and XXXXXXXXXX is of the Investment Property, will be included in computing the income from an active business of ForeignCo #3, pursuant to XXXXXXXXXX draft subparagraph 95(2)(a)(i) of the Proposed Amendments, XXXXXXXXXX. Similarly, the same proportion of Investment Property will be "excluded property" of ForeignCo #3, within the meaning thereof in the draft definition of that term in subsection 95(1) of the Proposed Amendments. Accordingly, that proportion of the income or loss derived from the Investment Property, or the income or loss and the capital gain or capital loss from the disposition of the Investment Property will not be included in computing the foreign accrual property income of ForeignCo #3.

II. The income or loss derived by ForeignCo #3, from that proportion of the income from the investment of the Investment Property that the aggregate of the Security Assets, the amount of capital that ForeignCo #3 is required to maintain XXXXXXXXXX, and the XXXXXXXXXX is of the Investment Property, will be included in computing the earnings or loss of ForeignCo #3 from an active business, within the meaning of the draft definition of "earnings" and the draft definition of "loss" in subsection 5907(1) of the Regulations as described in the Proposed Amendments.

III. The amount of any gain realized by PublicCo under the Swaps, at the time that ForeignCo #3 Holdco is wound up and that is realized in reference to the proceeds from the cancellation of the common shares of ForeignCo #3 Holdco, will be included in the formula for computing the amount of any loss realized by PublicCo on the disposition of the shares of ForeignCo #3 Holdco pursuant to subparagraph (b)(ii) of the description of 'D' in subsection 93(2) of the Proposed Amendments. However, any gain realized by PublicCo under the Swaps that is in relation to amounts that are payable or receivable on a periodic basis during the term of the Swaps will not be included in the formula for computing the amount of any loss realized by PublicCo on the disposition of the shares of ForeignCo #3 Holdco pursuant to subparagraph (b)(ii) of the description of 'D' in subsection 93(2) of the Proposed Amendments.

The above opinions are based on the assumption that the proposed amendments to subsection 93(2), subsection 95(1) and subsection 95(2) of the Act and subsection 5907(1) of the Income Tax Regulations, released by the Department of Finance on February 27, 2004, will be enacted in substantially the same form as proposed. As indicated in paragraph 22 of Information Circular 70-6R5, an expression of opinion is not an advance income tax ruling and, accordingly, is not binding on the CRA.

Yours truly,

XXXXXXXXXX
Manager
Corporate Financing Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate