2006 Ruling 2005-0160541R3 - 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.

Principal Issues: Whether transferring 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.

Position: The proposed transactions meet the requirement of the Act and rulings on the various rollover provisions and section 245 are granted.

Reasons: The provisions of the Act; the trustees of the trust do not form the majority of the directors of the corporate general partner.

XXXXXXXXXX 2005-016054

XXXXXXXXXX, 2006

Dear Sir:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent correspondence in connection with your request. As indicated in a conversation with you on XXXXXXXXXX your file (2005-013581) was closed as a result of the moratorium on advanced income tax rulings involving flow-through entities announced by the Minister of Finance on September 19, 2005. As per your request, your file has been re-activated, as file 2005-016054, in XXXXXXXXXX when the moratorium was lifted.

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 a related person;

b) being considered by a tax services office or tax centre in the connection with a previously filed tax return of the taxpayers or a related person;

c) under objection by the taxpayers or a related person;

d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and

e) the subject of a ruling previously issued by this Directorate.

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

Definitions

In this letter unless otherwise expressly stated:

(a) all monetary amounts are expressed in Canadian dollars;

(b) "acquisition time" has the meaning assigned in paragraph 132.2(1)(a) and means the time that is immediately after the time that is immediately after the transfer time. It also means the time at which Amalco MFC redeems the Amalco MFC Class A Shares as described in paragraph 31 below;

(c) "adjusted cost base" has the meaning assigned by section 54;

(d) "affiliated persons" has the meaning assigned by section 251.1;

(e) "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 the amount that the transferor and all the other members of the partnership agree upon in their election under subsection 97(2), as the case may be, in respect of that asset;

(f) "Amalco MFC" means a newly created corporation to be formed by amalgamating Opco and MFC pursuant to the relevant provisions of the XXXXXXXXXX and in accordance with the provisions of subsection 87(1). Amalco MFC is a resident of Canada;

(g) "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;

(h) "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;

(i) "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;

(j) "Board of Directors" means the board of directors of Opco, which consists of XXXXXXXXXX individuals;

(k) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(l) "Canadian partnership" has the meaning assigned by subsection 102(1);

(m) "capital property" has the meaning assigned by section 54 and subsection 248(1);

(n) "cash subscription proceeds" means the cash subscription proceeds received by MFC from the issuance of MFC Class A Shares, as described in paragraph 24 below;

(o) "cost amount" has the meaning assigned by subsection 248(1);

(p) "deferred income plans" means any of RRSPs, RESPs, RRIFs or DPSPs;

(q) "DPSP" means deferred profit sharing plan as defined in subsections 147(1) and 248(1);

(r) "Distributable Cash" means, generally, the cash available to the Fund for distribution to Unitholders. The amount of cash distributed per Fund Unit is equal to a pro rata share of interest and principal repayments on the Opco Notes and distributions on or in respect of the Opco Common Shares owned by the Fund less expenses of the Fund, including amounts which may be paid in connection with any cash redemption of Fund Units. The distribution policy of Opco is to distribute all of its available cash annually, subject to applicable law, by way of monthly return of capital or dividends on the Opco Common Shares after satisfaction of its bank financing and other debt service obligations, if any, satisfaction of its interest, including interest on the Opco Notes, and other expense obligations and any principal repayments in respect of the Opco Notes considered advisable by the board of directors of Opco and subject to Opco retaining such reasonable working capital reserves as may be considered appropriate by the board of directors;

(s) "eligible capital property" has the meaning assigned by section 54 and subsection 248(1);

(t) "eligible property" has the meaning assigned by subsection 85(1.1);

(u) "Exchange Agreement" means the agreement between the Fund and the Trust to be entered into as part of the Proposed Transactions pursuant to which, in the event of an in specie payment of the redemption price for Fund Units redeemable by a Unitholder, the Fund may transfer LP Units and/or LP Notes 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 to such redeeming Unitholder;

(v) "fair market value" means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of cash;

(w) "Fund" means the XXXXXXXXXX , an open-ended, limited purpose mutual fund unit trust established under the laws of the Province of XXXXXXXXXX on
XXXXXXXXXX pursuant to the Fund Declaration of Trust. The Fund was created to invest in common shares and unsecured subordinated notes of Opco (previously "XXXXXXXXXX") which then acquired substantially all the assets and assumed certain liabilities of XXXXXXXXXX. Immediately after such transaction, Opco changed its name to XXXXXXXXXX;

(x) "Fund Declaration of Trust" means the Declaration of Trust dated XXXXXXXXXX, as amended and restated as of XXXXXXXXXX and as further amended on XXXXXXXXXX and on XXXXXXXXXX;

(y) "Fund Trustee" means XXXXXXXXXX;

(z) "Fund Unit" means a trust unit of the Fund, each such unit representing an equal undivided beneficial interest therein;

(aa) "GPCo" means the corporation formed by the Fund as described in paragraph 16 below, which acts as general partner of the Partnership;

(bb) "insider" has the meaning assigned to "insider of a corporation" by Regulation 4803(1);

(cc) "inventory" has the meaning assigned by subsection 248(1);

(dd) "LP Unit" means the interest of a limited partner in the Partnership's capital, designated as an LP Unit, and issued as such, pursuant to the terms of the Partnership agreement;

(ee) "LP Note" and "LP Notes" means singularly or collectively those demand, interest bearing promissory notes to be issued by the Partnership having the principal amounts and in the manner described in paragraph 19 of the Proposed Transactions;

(ff) "MFC" means a corporation newly incorporated under the laws of the XXXXXXXXXX;

(gg) "MFC Class A Share" means a class A share in the capital of MFC the terms of which will include the following characteristics: non-voting; entitle the holder to dividends, as and when declared by the board of directors; redeemable and retractable; entitle the holder to receive the redemption price upon receipt of a Class A share by MFC; have a redemption price equal to the fair market value of any consideration paid to acquire such share on issuance; the redemption price will be payable in cash, or satisfied by the transfer of Fund Units; under no circumstances may MFC suspend their redemption; and on the dissolution of MFC, entitle the holder to the redemption price in preference to any participation on the common shares and will rank equally with the MFC Class B Shares;

(hh) "MFC Class B Share" means a class B share in the capital of MFC the terms of which will include the following characteristics: non-voting; entitle the holder to dividends, as and when declared by the board of directors; redeemable and retractable; entitle the holder to receive the redemption price upon receipt of a Class B Share by MFC; have a redemption price equal to the fair market value of any consideration paid to acquire such share on issuance; the redemption price will be payable in cash, or satisfied by the transfer of Fund Units; under no circumstances may MFC suspend their redemption; and on the dissolution of MFC, entitle the holder to the redemption price in preference to any participation on the common shares and will rank equally with the MFC Class A Shares;

(ii) "MFC Common Share" means a common share in the capital of MFC whose terms will entitle the holder to one vote; dividends, as and when declared by the board of directors of MFC; and which will be redeemable at the demand of the holder for a redemption price of $XXXXXXXXXX; and, on the dissolution of MFC, will entitle the holder to share ratably in any remaining assets of MFC;

(jj) "mutual fund corporation" has the meaning assigned by subsection 131(8);

(kk) "mutual fund trust" has the meaning assigned by subsection 132(6);

(ll) XXXXXXXXXX;

(mm) "Old XXXXXXXXXX" means XXXXXXXXXX, formerly known as XXXXXXXXXX, that changed its name to XXXXXXXXXX after the transfer of its assets to Opco;

(nn) "Opco" means XXXXXXXXXX, previously XXXXXXXXXX, the wholly-owned corporate subsidiary of the Fund that is a taxable Canadian corporation;

(oo) "Opco Common Shares" means the issued and outstanding common shares of Opco;

(pp) "Opco Notes" means the notes issued under the Opco Notes Indenture;

(qq) "Opco Notes Indenture" means the Note Indenture made on XXXXXXXXXX between Opco and the Opco Notes Trustee. Pursuant to the Opco Notes Indenture, Opco is authorized to issue an unlimited aggregate principal amount of notes which will mature on XXXXXXXXXX, subject to prepayment from time to time as considered advisable by the board of directors of Opco and subject to extension in certain circumstances. The Opco Notes bear interest at the rate of XXXXXXXXXX% per annum. The Opco Notes are redeemable at the option of Opco prior to maturity. If Opco has available cash, but is prohibited from declaring or paying a dividend or reducing its stated capital under applicable corporate law, the board of directors of Opco may make principal repayments on the Opco Notes to the extent of such available cash. The Opco Notes are unsecured debt obligations of Opco and are subordinate in right of payment to other direct unsecured indebtedness and all secured debt of Opco;

(rr) "Opco Notes Trustee" means XXXXXXXXXX;

(ss) "open-end unit trust" means a unit trust that qualifies as a unit trust under paragraph 108(2)(a);

(tt) "Operating Assets" means accounts receivable, inventories, prepaid expenses, property, plant and equipment, goodwill and other intangible assets and any other property owned by Opco and necessary for the conduct and management of Opco's business, other than cash;

(uu) "Partnership" means a limited partnership formed under the laws of XXXXXXXXXX, between GPCo and Opco as described in paragraph 18 below;

(vv) "private corporation" has the meaning assigned by subsection 89(1);

(ww) "proceeds of disposition" has the meaning assigned by section 54;

(xx) "Proposed Amendments" means the Legislative Proposals released by the Department of Finance on July 18, 2005, that includes proposed amendments to section 132.2 of the Act;

(yy) "Proposed Transactions" means the transactions contemplated in paragraphs 16 to 42 below;

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

(aaa) "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;

(bbb) "qualifying exchange" has the meaning assigned by subsection 132.2(2);

(ccc) "Regulations" means the Income Tax Regulations (Canada);

(ddd) "related persons", or persons related to each other, has the meaning assigned by subsection 251(2);

(eee) "Reorganization" means the reorganization of the Opco and the Fund as contemplated by the Proposed Transactions;

(fff) "resident" and "non-resident" of Canada mean, respectively, resident and non-resident of Canada for purposes of the Act;

(ggg) "Right of Redemption" means the right of redemption of a Unitholder to redeem Fund units pursuant to and subject to the provisions of the amendments to be made to the Fund Declaration of Trust;

(hhh) "RESP" means registered education savings plan as defined in subsection 146.1(1);

(iii) "RRIF" means registered retirement income fund as defined in subsection 146.3(1);

(jjj) "RRSP" means registered retirement savings plan as defined in subsection 146(1);

(kkk) "Securities Document" means a prospectus, registration statement or similar document to be filed with one or more securities commissions or other securities regulators in one or more of the provinces of Canada, and in accordance with which the MFC Class A Shares will be issued, and where a prospectus exemption is available, the Securities Document will be the Management Information Circular;

(lll) "XXXXXXXXXX U.S.'' means XXXXXXXXXX in the United States;

(mmm) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) and 248(1);

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

(ooo) "taxation year" has the meaning assigned by subsection 249(1);

(ppp) "taxpayer" has the meaning assigned by subsection 248(1);

(qqq) "transfer time" has the meaning assigned in the definition of "qualifying exchange" in subsection 132.2(2) and means the time at which Amalco MFC transfers all or substantially all of its property to the Fund as described in paragraph 30 as a part of the qualifying exchange;

(rrr) "Trust" means XXXXXXXXXX, an unincorporated open-ended limited purpose trust established under the laws of the Province of XXXXXXXXXX;

(sss) "Trust Declaration of Trust" means the Declaration of Trust to be made by the Trustees to hold in trust any and all property of the Trust, and any income and gains therefrom, for the benefit of the Trust Unitholders;

(ttt) "Trust Note Indenture" means the trust indenture to be entered into between the Trust and the Note Trustee providing for the issuance of the Trust Notes;

(uuu) "Trust Notes" means notes of the Trust issued pursuant to the Trust Note Indenture, the terms of which include the following characteristics: interest-bearing notes issuable in series at the discretion of the Trustees; unsecured; redeemable at any time at the option of the Trust prior to maturity and subordinated. 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;

(vvv) "Trust Unit" means a trust unit of the Trust, each such unit representing an equal undivided beneficial interest therein;

(www) "Trust Unitholder" means a holder of Trust Units;

(xxx) "Trustee(s)" means the Canadian resident corporation incorporated under the laws of XXXXXXXXXX and/or any Canadian resident individuals who will act as a trustee of the Trust in accordance with and subject to the provisions of the Trust Declaration of Trust;

(yyy) XXXXXXXXXX

(zzz) "unit trust" has the meaning assigned by subsection 108(2); and

(aaaa) "Unitholder" means a holder of Fund Units;

Facts

1. The Fund is an open-end unit trust that qualifies as a mutual fund trust. Fund Units are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX and are qualified investments for deferred income plans.

2. The Fund's last taxation year ended XXXXXXXXXX.

3. 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.

4. Fund Units are widely held by the public and, to the knowledge of the administrator of the Fund, there is only one direct or indirect beneficial owner of, or person who exercises control or direction over, Fund Units carrying more than 10% of the votes and value of outstanding Fund Units with such Unitholder owning less than 11% of outstanding Fund Units.

5. The Fund is not maintained primarily for the benefit of non-resident persons, and partnerships other than Canadian partnerships, and to the knowledge of the administrator of the Fund, non-residents of Canada and partnerships other than Canadian partnerships are collectively beneficial owners of less than 49% of the Fund Units.

6. The Fund trustee is XXXXXXXXXX and the Fund is administered by Opco.

7. Pursuant to the terms of the Fund Declaration of Trust, the Fund is required to make monthly cash distributions of Distributable Cash to the Unitholders for each fiscal year of the Fund.

8. The Fund was created in XXXXXXXXXX to acquire XXXXXXXXXX% of the issued and outstanding common shares and unsecured subordinated notes of Opco. The Fund currently holds XXXXXXXXXX Opco Common Shares (representing XXXXXXXXXX shares of Opco) having an adjusted cost base of $XXXXXXXXXX and a fair market value of approximately $XXXXXXXXXX and $XXXXXXXXXX principal amount of Opco Notes.

9. Opco is a private corporation incorporated under the XXXXXXXXXX on XXXXXXXXXX as XXXXXXXXXX. Opco acquired all of the assets and certain of the liabilities of its parent, Old XXXXXXXXXX and Old XXXXXXXXXX changed its name to XXXXXXXXXX. In connection with these transactions, the articles of Opco were subsequently amended on XXXXXXXXXX to change the name of XXXXXXXXXX to XXXXXXXXXX.

10. Old XXXXXXXXXX was a corporation incorporated in XXXXXXXXXX under the XXXXXXXXXX by an investor group led by members of management of the Canadian subsidiary of a US corporation XXXXXXXXXX U.S. Old XXXXXXXXXX was incorporated to purchase the Canadian business branch operations from XXXXXXXXXX U.S. Old XXXXXXXXXX acquired an exclusive and perpetual license agreement that allowed it to use all patents, trademarks and technology, advertising and marketing materials developed or acquired by XXXXXXXXXX U.S. relating to XXXXXXXXXX.

11. The Fund's acquisition of Opco was financed by the public issue of Fund Units. In XXXXXXXXXX, a total of XXXXXXXXXX Fund Units were offered to the public on an initial public offering at a price of $XXXXXXXXXX each. The net proceeds available to the Fund were used by the Fund to acquire the common shares of Opco and the Opco Notes from Opco and Old XXXXXXXXXX at their fair market value.

12. As at XXXXXXXXXX, the total market capitalization of the Fund was approximately $XXXXXXXXXX, based on a closing trading price per Fund Unit of $XXXXXXXXXX and XXXXXXXXXX total outstanding Fund Units.

13. As of its fiscal year ended XXXXXXXXXX, Opco owned Operating Assets having an aggregate cost amount of approximately $XXXXXXXXXX. The estimated aggregate fair market value of the Operating Assets exceeds their aggregate cost amount.

14. Opco administers a registered combined non-contributory defined benefit and defined contribution pension plan for substantially all of its full-time employees. Under the registered defined benefit plan segment, benefits are based upon earnings and years of credited service. Opco also sponsors a retirement compensation arrangement ("RCA") for certain senior officials. The RCA provides benefits in addition to the Opco pension plans. In addition, Opco funds a multiemployer defined benefit pension plan for certain employees. Based on the most recent actuarial valuations, Opco will be required to make additional contributions, in respect of both current and retired employees, to the defined benefit plans and the RCA to fund deficiencies in these plans over the next several years. These additional contributions may be made by Opco prior to the Proposed Transactions. If the contributions are not made prior to the Proposed Transactions, the obligation to make these contributions will be assumed by the Partnership upon the assets transfer described in paragraph 19 below.

Proposed Transactions

Unless otherwise specified, the proposed transactions will take place in the order described below:

15. On XXXXXXXXXX, the Fund will seek approval for the Proposed Transactions at a special meeting of Unitholders. In advance of the Unitholders meeting, the Fund has prepared the Securities Document for distribution to Unitholders and has filed it with one or more provincial securities commissions. All of the Proposed Transactions that follow will occur sometime shortly after obtaining Unitholder approval, subject to having obtained a satisfactory Advance Income Tax Ruling from Canada Revenue Agency.

16. The Fund will incorporate a wholly-owned subsidiary under the XXXXXXXXXX, hereinafter referred to as GPCo. The Fund will subscribe for XXXXXXXXXX common shares of GPCo for $XXXXXXXXXX.

17. The directors of Opco will be the directors of GPCo. The board of directors of GPCo will consist of one or more persons, the majority of which will not also serve as trustees of the Fund. The board of directors of GPCo will have the powers and authority to manage the business and affairs of GPCo, and GPCo will administer, manage, control and operate the business of the Partnership (as defined in paragraph 18 below). In addition, the Fund and GPCo will enter into an administration agreement by virtue of which GPCo will agree to provide the administration services to the Fund that were previously provided to the Fund by Opco as referred to in paragraph 6 above. The trustees of the Fund, in their capacity as trustees of the Fund, will not have or take action to limit the powers and authority of GPCo in respect of the Partnership.

18. Opco and GPCo will form a limited partnership under the laws of XXXXXXXXXX, ("the Partnership") pursuant to which GPCo is the general partner and Opco is a limited partner by subscription for a LP Unit in consideration for a nominal capital contribution. Pursuant to the terms of the Partnership agreement, the income and loss of the Partnership for each fiscal period will be allocated XXXXXXXXXX% to the limited partner and XXXXXXXXXX% to the general partner. The general partner is entitled to vote in its capacity as general partner.

The limited partnership agreement will indicate that Opco and any eventual limited partner:

a) 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;

b) cannot control or manage the Business;

c) cannot execute any document binding the Partnership or GPCo;

d) cannot undertake any obligation or responsibility on behalf of the Partnership;

e) cannot bring any action for partition or sale of property of the Partnership; and

f) cannot take any action which jeopardizes the status of the Partnership as a limited partnership.

19. Opco and the Partnership will enter into an agreement of purchase and sale pursuant to which all of Opco's Operating Assets will be sold and transferred to the Partnership at a respective purchase price equal to the fair market value of the respective Operating Assets and Opco will receive consideration for each asset having the same fair market value. The aggregate consideration received will be:

a) the assumption of all of Opco's liabilities and obligations, including any obligations of Opco under the registered pension and RCA plans, as described in paragraph 14 above, other than the Opco Notes;

b) the issuance of an LP Note having a principal amount and a fair market value equal to the cost amount of the Operating Assets less the sum of Opco's liabilities and obligations assumed; and

c) the issuance of LP Units having a fair market value equal to the excess of the fair market value of the transferred assets over the principal amount of liabilities assumed and the LP Note issued.

Opco will also subscribe for an additional amount of LP Note in consideration for the transfer of cash balances to the Partnership (less any amount of cash needed to satisfy any tax liabilities). Opco will hold only LP Units, as sole limited partner, and LP Notes, and Opco will not be a general partner of the Partnership. Opco's liability as a member of the Partnership will be limited under the legislation governing the Partnership.

20. The agreement of purchase and sale described in paragraph 19 above will provide for the transfer of all personnel, and the assignment of all employment and services contracts governing the personnel, from Opco to GPCo on behalf of the Partnership. The Partnership will immediately succeed Opco as employer of the personnel as a result of the acquisition of Opco's business by the Partnership pursuant to the terms of the purchase and sale agreement.

21. Opco and GPCo 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 agreed amount in each joint election will not be less than the least of

a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii), in the case of eligible capital property;

b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii), in the case of depreciable property of a prescribed class; and

c) the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the fair market value of the property transferred, nor will it be less than the amount permitted under paragraph 85(1)(b).

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.

22. Opco will repay a portion of the principal amount outstanding to the Fund on the Opco Notes equal to the principal amount of the LP Notes. Repayment of such amount will be effected by Opco assigning the LP Notes to the Fund.

23. The Fund will incorporate MFC by subscribing for one MFC Common Share for nominal consideration. 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.

24. In accordance with the Securities Document, the Fund will subscribe for a number of MFC Class A Shares equal to the number of Fund Units then outstanding for nominal cash consideration to be determined at a future date. As at XXXXXXXXXX, the Fund had XXXXXXXXXX issued and outstanding Units.

A prospectus exemption will be available under applicable provincial securities laws in respect of the issuance of MFC Class A Shares and subsequent transactions. Pursuant to the exemption, a Management Information Circular issued by the Fund containing prospectus level disclosure will be filed with the provincial securities commission and the XXXXXXXXXX and provided to Unitholders so that they are able to make informed decisions as to the merits of the Reorganization. The issuance of the MFC Class A Shares and subsequent transactions will be completed in accordance with the Management Information Circular. The Management Information Circular is required by law to be filed with provincial securities commissions and the XXXXXXXXXX in order for the offering of the MFC Class A Shares to be exempt from prospectus filing requirements, but the Management Information Circular is not required by law to be accepted for filing by the provincial securities commissions.

25. The Fund will distribute to Unitholders, as a return of capital, the MFC Class A Shares previously acquired as described in paragraph 24 above. Each Unitholder will be entitled to a number of MFC Class A Shares equal to the number of Fund Units owned by such holder immediately before this distribution.

26. The MFC Class A Shares will be listed on the XXXXXXXXXX immediately upon their issuance, although such shares will not appear on the XXXXXXXXXX publicly disseminated trading list.

27. The Fund and MFC will enter into an agreement of purchase and sale under which the Fund will transfer to MFC all of the Opco Shares and Opco Notes for a purchase price equal to the respective fair market value of each property so transferred. MFC will satisfy the purchase price by issuing MFC Class B Shares to the Fund with an aggregate redemption price equal to the aggregate fair market value of the Opco Shares and Opco Notes, which aggregate redemption price will not be less than the aggregate principal amount of the Opco Notes.

28. 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 of the Opco Shares and Opco Notes as described in paragraph 27 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.

29. MFC and Opco (hereinafter referred to as "predecessor corporations") will undertake a vertical short-form amalgamation under the provisions of the XXXXXXXXXX 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; and

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.

In accordance with the provisions of the XXXXXXXXXX, 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.

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.

30. Amalco MFC and the Fund will enter into an agreement of purchase and sale under which Amalco MFC will transfer all or substantially all of its property, namely all of the LP Units and the cash subscription proceeds, to the Fund in consideration for the issuance by the Fund of such number of Fund Units equal to the number of Fund Units outstanding immediately prior to this transfer, plus the amount obtained when the cash subscription proceeds is divided by the trading price of the Fund Units immediately prior to this transfer and less the amount obtained when the principal amount of the LP Notes is divided by the trading price of the Fund Units immediately prior to this transfer. The Fund Units so issued shall have an aggregate fair market value equal to the fair market value of the LP Units and the cash acquired. Such sale of LP Units for Fund Units would occur at the "transfer time" in a qualifying exchange within the meaning of section 132.2. For greater certainty, the transfer time will happen immediately before the end of the day of the transfer.

31. At the beginning of the day following the transfer time described in paragraph 30 above, i.e. on the acquisition time, 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 30 above) 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.

32. At or about the same time and within 60 days of the transfer time described in paragraph 30 above, Amalco MFC will redeem all of the issued and outstanding Amalco MFC Class B Shares owned by the Fund. As consideration for the redemption, Amalco MFC will distribute Fund Units (previously acquired from the Fund as described in paragraph 30 above) to the Fund 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 31 above. The Fund Units received by the Fund will be cancelled upon receipt.

33. Immediately following the transactions described in paragraphs 30 through 32 above, 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.

34. Following the transactions described in paragraphs 30 through 32 above, but prior to the dissolution of Amalco MFC described in paragraph 39 below, 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 LP Units, as described in paragraph 30 above.

35. A newly formed unincorporated, limited purpose trust (the "Trust") will be established under the laws of a Canadian Province pursuant to a declaration of trust. A Canadian resident third party settlor will settle $XXXXXXXXXX of cash on the Trustee(s) and will receive one Trust Unit in order to establish the Trust pursuant to the terms of the Trust Declaration of Trust.

36. The Fund will subscribe for one Trust Unit for $XXXXXXXXXX consideration. The initial Trust Unit issued to the settlor described in paragraph 35 above will be repurchased in cash by the Trust at its original subscription price.

37. Following the settlement of the Trust and subsequent transactions described in paragraphs 35 and 36 above, the Trust will enter into the Trust Note Indenture and the Fund and the Trust will enter into the Exchange Agreement.

38. The Partnership may, at some subsequent date, redeem all or part of the LP Notes and issue additional LP Units to the Fund in consideration.

39. In due course, the Fund will, by special resolution, resolve to liquidate and dissolve Amalco MFC under the applicable provisions of the XXXXXXXXXX. 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 will be distributed to the Fund on the wind-up.

40. In connection with the above steps, the Fund Declaration of Trust will be amended prior to the commencement of the Proposed Transactions to:

a) Provide for a consolidation mechanism for the Fund Units; and

b) Amend the provisions of the Right of Redemption relating to payment of in specie proceeds upon a redemption to provide that such in specie proceeds of redemption may be paid by delivery of Trust Notes in replacement of the current right to receive in specie proceeds of redemption by way of delivery of Opco Shares and Opco Notes.

Unitholders will not be entitled to any proceeds of disposition as a result of those changes and their Fund Units will not be redeemed or cancelled.

41. The approval of the holders of the Fund Units, by way of special resolution, will be sought prior to the implementation of the Proposed Transactions.

42. The Partnership will make additional contributions, in respect of both current and retired employees, to the defined benefit plans and the RCA to fund deficiencies in these plans over the next several years.

Purpose of the Proposed Transactions

The Fund believes that a modern trust-on-partnership structure is being demanded by the capital markets and that the Proposed Transactions must be implemented to be competitive in such markets.

The revised structure would also better accommodate any future expansion opportunities. The Fund considers that it would be inefficient to administer Opco's business through the current Opco structure while administering any future expansion investments through an alternative more flexible vehicle.

The purpose of the Proposed Transactions is thus to maximize Unitholder value and to respond to the demands of the capital markets. The Proposed Transactions would provide for a single structure to fund any future expansion opportunities and would provide 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 purpose 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 mutual fund trust within the meaning of subsection 132(6). For greater certainty, section 253.1 will apply such that the holding of the LP Units by Amalco MFC or the Fund will not, in and of itself, cause us to consider that Amalco MFC or the Fund is carrying on the business or activity of the Partnership for the purposes of subsection 131(8)or 132(6).

B. Provided that:

(a) at the moment of the transfer described in paragraph 30, 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 MFC 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 30 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 30;

? the purchase for cancellation by Amalco MFC of the Amalco MFC Class A shares and Amalco MFC Class B shares described in paragraphs 31 and 32; and

? the transfer of the Fund Units from Amalco MFC to holders of Amalco MFC Class A shares and the Amalco MFC Class B shares described in paragraphs 31 and 32.

C. Provided that the requisite elections are made in the prescribed form and within the prescribed time period and provided that the property transferred is an eligible property, 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 27 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.

D. Provided the Partnership is a Canadian partnership immediately after the transfers described in paragraph 19, the provisions of subsection 97(2) and consequently, paragraph 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 by Opco of its Operating Assets that are capital property, Canadian resource property, foreign resource property, eligible capital property or inventory to the Partnership as described in paragraph 19 above 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. For greater certainty, the cost amount to Opco of the LP Notes described in paragraph 19b) will be equal to the principal amount of those notes by virtue of paragraph 85(1)(f).

E. Existing Unitholders will not be considered to have disposed of any portion of their Fund Units by virtue of the distribution of MFC Class A Shares as a return of capital described in paragraph 25, the amendment to the Right of Redemption of the Fund Units, the consolidation of Fund Units described in paragraph 33 and the other related changes to the Fund Declaration of Trust described in paragraph 40.

F. The Fund will not be considered to have disposed of its property and resettled a new trust solely by virtue of the amendments to the Fund Declaration of Trust mentioned in paragraph 40 above.

G. The amendment of the Fund Declaration of Trust to change the terms of the redemption feature as described in paragraph 40 will satisfy the requirements of subparagraph 108(2)(a)(i) for purposes of determining whether the Fund qualifies as a unit trust.

H. At the time of the redemption described in paragraph 31, the Amalco MFC Class A shares will not be taxable Canadian property of a taxpayer and, therefore, would not be subject to the requirements of section 116 provided that at any time during the 60-month period that ends at the time of the redemption, the taxpayer, persons with whom the taxpayer did not deal at arm's length, or the taxpayer together with all such persons owned less than 25% of the issued shares of any class of capital stock of the corporation.

I. Future contributions to the registered pension plans, required to be paid by the Partnership by virtue of the agreement provided for in paragraph 19 to fund deficiencies in these plans will be deductible by the Partnership pursuant to paragraph 20(1)(q) of the Act if the contributions are in respect of current employees and former employees of the Partnership (employees who had retired after the assumption of the business by the Partnership).

J. The provisions of subsection 15(1), 56(2), 56(4), 69(1), 69(4), 105(1) or 246(1) will not apply as a result of the Proposed Transaction in and by themselves.

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 rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described above. Facts and proposed transactions in the documents submitted with your request not described above do not form part of the facts and proposed transactions on which these rulings are based and any reference to these documents is provided solely for the convenience of the reader.

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 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 Amalco MFC qualifies as a mutual fund corporation within the meaning of subsection 131(8).

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 A Shares or the Amalco MFC Class B Shares redemption amount.

OPINIONS

A. Provided that:

(a) at the moment of the transfer described in paragraph 30, 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 MFC and the Fund jointly elect by timely filing a prescribed form under paragraph (c) of the definition of "qualifying exchange" in subsection 132.2(1), as that subsection is proposed to be amended by subsection 130(1) of the Proposed Amendments, the transfer described in paragraph 30 will constitute a "qualifying exchange" within the meaning of subsection 132.2(2), as that subsection is proposed to be amended by subsection 130(1) of the Proposed Amendments, such that the rules in subsection 132.2(3) and (4), as proposed to be amended by subsection 130(1) of the Proposed Amendments will apply to:

? the transfer of the property from Amalco MFC to the Fund described in paragraph 30;

? the purchase for cancellation by Amalco MFC of the Amalco MFC Class A Shares and Amalco MFC Class B Shares as described in paragraphs 31 and 32; 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 31 and 32.

Yours truly,

XXXXXXXXXX
Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch