2008 Ruling 2007-0255401R3 - Swap Termination

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. Are the periodic payments or receipts under the swap deductible or included in income under section 9?

2. Is the termination payment on account of capital?

3. Is the gain or loss on the foreign exchange subject to 39(2)?

4. Are the new loans at a lower interest rate deductible under 20(1)(c)?

Position: 1.YES 2. YES 3. YES 4. YES

Reasons: 1. No lender borrower relationship - adventure in the nature - 2.follows what it hedges
3.Imperial Oil Decision
4. Funds still used in the business

XXXXXXXXXX 							2007-025540

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX . ("Parentco")
XXXXXXXXXX . ("NR Subco")
XXXXXXXXXX . ("Opco") BNXXXXXXXXXX
XXXXXXXXXX . ("Holdco") BNXXXXXXXXXX
XXXXXXXXXX ("XXXXXXXXXX Co") BNXXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and further to information supplied by e-mail on XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-named taxpayers.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request herein are:

(i) dealt with in an earlier return of Parentco, NR Subco, Opco, Holdco, XXXXXXXXXX Co, or a related person;

(ii) being considered by a tax services office or a taxation centre in connection with a tax return already filed by Parentco, NR Subco, Opco, Holdco, XXXXXXXXXX Co or a related person;

(iii) under objection by Parentco, NR Subco, Opco, Holdco, XXXXXXXXXX Co or a related person;

(iv) the subject of a previous ruling issued by the Income Tax Rulings Directorate to Parentco, NR Subco, Opco, Holdco, XXXXXXXXXX Co or a related person; nor

(v) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired.

Definitions:

(a) XXXXXXXXXX;

(b) "Act" means the Income Tax Act (Canada) and the regulations thereto, as amended, and unless otherwise stated, every reference herein to a part, division, subdivision, section, subsection, paragraph, subparagraph or clause is a reference to the corresponding provision of the Act;

(c) "affiliated" has the meaning described in section 251.1 of the Act;

(d) "Aggregate Settlement Payment" means the Canadian dollar denominated payment which XXXXXXXXXX Co will pay to NR Subco pursuant to the Swap Termination Agreement, and which will include the Notional Principal Commutation Payment and the Periodic Commutation Payment, on the basis described in 24 below;

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

(f) "avoidance transaction" has the meaning assigned by subsection 245(3) of the Act;

(g) "Code" means the Internal Revenue Code (United States) and the regulations promulgated thereunder, as amended;

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

(i) "DCL Regulations" the regulations which have been recently promulgated by the US Treasury and Internal Revenue Service under section 1503(d) of the Code addressing dual consolidated losses;

(j) "Debt Assumption XXXXXXXXXX Co Agreement" means the agreement which will be entered into between NR Subco and, pursuant to which NR Subco will agree to assume the obligations of XXXXXXXXXX Co under the Public Notes and the Indenture, effective on the Debt Assumption Date, in exchange for a payment by XXXXXXXXXX Co to NR Subco of the Debt Assumption Payment, as described in 23 below;

(k) "Debt Assumption Date" means the date that NR Subco will assume the obligations of XXXXXXXXXX Co under the Public Notes and the Indenture and XXXXXXXXXX Co will be correspondingly released and discharged, pursuant to the Debt Assumption Agreement, which date shall be immediately after the payment by XXXXXXXXXX Co of any interest accruing on the Public Notes on the next Interest Payment Date following the receipt of the Rulings;

(l) "Debt Assumption Payment" means the payment which will be made by XXXXXXXXXX Co to NR Subco pursuant to the Debt Assumption Agreement, on the basis described in 23 below;

(m) "FMV" means fair market value, being that amount at which property would be transferred by a willing buyer to a willing seller, in an open and unrestricted market, between informed parties under no compulsion to act;

(n) "Holdco" means XXXXXXXXXX;

(o) "Holdco Notes" means the two Canadian-dollar denominated interest-bearing promissory notes issued by Holdco to XXXXXXXXXX Co, to evidence monies previously borrowed by Holdco from XXXXXXXXXX Co, on the basis described in the Previous Ruling and summarized in 12 and 16 below;

(p) "Holdco Preferred Shares" means Class A Preferred Shares without nominal or par value in the capital of Holdco which have limited voting rights, bear floating rate cumulative dividends and are redeemable and retractable at a fixed redemption amount of CDN$XXXXXXXXXX per share;

(q) "Indenture" means the trust indenture dated as of XXXXXXXXXX between XXXXXXXXXX Co, as issuer, and XXXXXXXXXX as trustee, pursuant to which XXXXXXXXXX Co issued Public Notes with an aggregate Principal Amount of US$XXXXXXXXXX , as supplemented by the first supplemental indenture dated as of XXXXXXXXXX, pursuant to which XXXXXXXXXX Co issued further Public Notes with an aggregate Principal Amount of US$XXXXXXXXXX;

(r) "Interest Payment Date" means each date that accrued interest is paid by XXXXXXXXXX Co under the Public Notes, being XXXXXXXXXX of each year;

(s) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(t) "Notional Principal Payments" means the amounts that XXXXXXXXXX Co and Parentco have agreed to pay, in Canadian dollars and US dollars, respectively, on the maturity date of the Public Notes pursuant to the Swap Arrangements, on the basis described in 10(b) below;

(u) "Notional Principal Commutation Payment" means the amount that XXXXXXXXXX Co will pay to NR Subco pursuant to the Swap Termination Agreement, which will compensate NR Subco for not receiving net payments of Notional Principal Payments under the Swap Arrangements, on the basis described in 24(a) below;

(v) "NR Subco" means XXXXXXXXXX;

(w) "NR Subco-XXXXXXXXXX Co Contribution Agreements" means the two agreements between NR Subco and XXXXXXXXXX Co, pursuant to which NR Subco has agreed to make certain payments to XXXXXXXXXX Co in exchange for certain property, or shares in the capital, of XXXXXXXXXX Co, as described in 11 and 17 below;

(x) "NR Subco-XXXXXXXXXX Co Subscription Agreement" means the agreement which will be entered into between NR Subco and XXXXXXXXXX Co, pursuant to which NR Subco will agree to subscribe for, and XXXXXXXXXX Co will agree to issue, XXXXXXXXXX Co Class A Shares in exchange for payment of the Subscription Price, on the basis described in 22 below;

(y) XXXXXXXXXX;

(z) "XXXXXXXXXX Co" means XXXXXXXXXX;

(aa) "XXXXXXXXXX Co Class A Shares" means Class A common shares without nominal or par value in the capital of XXXXXXXXXX Co, which class of shares will be authorized on the basis described in 21 below;

(bb) "XXXXXXXXXX Co Class A PUC Reduction Amount" means the amount by which the PUC of the issued XXXXXXXXXX Co Class A Shares will be reduced by virtue of the XXXXXXXXXX Co Class A PUC Reduction Resolution, on the basis described in 27 below;

(cc) "XXXXXXXXXX Co Class A PUC Reduction Resolution" means the special resolution of the sole shareholder of XXXXXXXXXX Co to effect the reduction of the PUC of the issued XXXXXXXXXX Co Class A Shares, which is referred to in 27 below;

(dd) "XXXXXXXXXX Co Loan Amount" means the amount to be loaned by NR Subco to XXXXXXXXXX Co pursuant to the XXXXXXXXXX Co-NR Subco Loan Agreement, on the basis described in 25 below;

(ee) "XXXXXXXXXX Co Note" means the Canadian dollar denominated interest-bearing promissory note to be issued by XXXXXXXXXX Co to NR Subco, to evidence the monies to be borrowed by XXXXXXXXXX Co from NR Subco, on the basis described in 25 below;

(ff) "XXXXXXXXXX Co NPV PUC Reduction Amount" means the amount by which the PUC of the issued XXXXXXXXXX Co NPV Shares will be reduced by virtue of the XXXXXXXXXX Co NPV PUC Reduction Resolution, on the basis described in 26 below;

(gg) "XXXXXXXXXX Co NPV PUC Reduction Resolution" means the special resolution of the sole shareholder of XXXXXXXXXX Co to effect the reduction of the PUC of the issued XXXXXXXXXX Co NPV Shares, which is referred to in 26 below;

(hh) "XXXXXXXXXX Co NPV Shares" means common shares without nominal or par value in the capital of XXXXXXXXXX Co;

(ii) "XXXXXXXXXX Co PV Shares" means common shares with a par value of CDN$XXXXXXXXXX per share in the capital of XXXXXXXXXX Co;

(jj) "XXXXXXXXXX Co thin-capitalization equity value" means the aggregate of the amounts described in subparagraph 18(4)(a)(ii) of the Act in respect of XXXXXXXXXX Co;

(kk) "XXXXXXXXXX Co-NR Subco Loan Agreement" means the agreement between NR Subco and XXXXXXXXXX Co, pursuant to which NR Subco will make a loan to XXXXXXXXXX Co, on the basis described in 25 below;

(ll) "Opco" means XXXXXXXXXX;

(mm) "outstanding debts to specified non-residents" has the meaning assigned by subsection 18(5) of the Act;

(nn) "Parentco" means XXXXXXXXXX;

(oo) "Periodic Commutation Payment" means the amount that XXXXXXXXXX Co will pay to NR Subco pursuant to the Swap Termination Agreement, which will compensate NR Subco for not receiving net payments of Periodic Payments under the Swap Arrangements, on the basis described in 24(b) below;

(pp) "Periodic Payments" means the periodic payments XXXXXXXXXX Co and Parentco agreed to pay, in Canadian dollars and US dollars, respectively, on each Interest Payment Date pursuant to the Swap Arrangements, on the basis described in 10(c) below;

(qq) "permanent establishment" has the meaning assigned by Article V of the Treaty;

(rr) "person" has the meaning assigned by subsection 248(1) of the Act;

(ss) "Previous Ruling" means Advance Tax Ruling 2001-009728 dated XXXXXXXXXX, 2001, which was issued by the CRA in respect of certain of the Canadian federal income tax considerations arising from the implementation of the Previous Ruling Transactions;

(tt) "Previous Ruling Transactions" means the transactions which were previously undertaken by the parties which were the subject of the Previous Ruling, and which are summarized in 8 to 13 below;

(uu) "Principal Amount" means the principal amount of each Public Note, the Holdco Notes, or the XXXXXXXXXX Co Note, as the case may be, as defined in subsection 248(1) of the Act;

(vv) "Proposed Transactions" means the transactions which are described in 21 to 30 below;

(ww) "public corporation" has the meaning assigned by subsection 89(1) of the Act;

(xx) "Public Noteholders" means the persons who hold the Public Notes;

(yy) "Public Notes" means the US dollar denominated promissory notes issued by XXXXXXXXXX Co to the Public Noteholders pursuant to the Indenture, on the basis described in the Previous Ruling and summarized in 8 and 9 below;

(zz) "PUC" means "paid-up capital" as that expression is defined in subsection 89(1) of the Act;

(aaa) "Rulings" means the rulings which are given in this letter;

(bbb) "Subscription Price" means the Canadian dollar denominated subscription price to be paid by NR Subco to acquire XXXXXXXXXX Co Class A Shares pursuant to the NR Subco-XXXXXXXXXX Co Subscription Agreement, on the basis described in 22 below;

(ccc) "Swap Arrangements" means the ISDA (Multicurrency - Cross Border) Master Agreement between Parentco and XXXXXXXXXX Co, dated XXXXXXXXXX, together with the schedule related thereto dated XXXXXXXXXX and the confirmations related thereto dated XXXXXXXXXX , each as amended from time to time, pursuant to which Canadian and US dollar payments are made, on the basis described in the Previous Ruling and summarized in 10 and 18 below;

(ddd) "Swap Termination Agreement" means the agreement which will be entered into between XXXXXXXXXX Co and NR Subco which will provide for the early termination of the Swap Arrangements and the close-out of the payment obligations thereunder at such time as XXXXXXXXXX Co is released and discharged from its obligations under the Public Notes and the Indenture, on the basis described in 24 below;

(eee) "tax benefit" has the meaning assigned by subsection 245(1) of the Act;

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

(ggg) "taxation year" has the meaning assigned by subsection 249(1) of the Act; and

(hhh) "Treaty" means the Canada-United States Tax Convention (1980).

Facts:

1. Parentco is a corporation, which was formed pursuant to the XXXXXXXXXX. Parentco is a non-resident and does not carry on business in Canada for the purposes of the Act and does not have a permanent establishment in Canada. Parentco is a resident of the United States for the purposes of the Code and the Treaty, with its head office located at XXXXXXXXXX. The common shares of Parentco are widely held by members of the public and are listed for trading on the XXXXXXXXXX Stock Exchange. Parentco is directly, and indirectly through subsidiary corporations, engaged in XXXXXXXXXX.

2. NR Subco is a corporation, which was formed pursuant to the XXXXXXXXXX. NR Subco is a non-resident and does not carry on business in Canada for the purposes of the Act and does not have a permanent establishment in Canada. NR Subco is a resident of the United States for the purposes of the Code and the Treaty, with its head office located at XXXXXXXXXX. All of the issued shares of NR Subco are owned by Parentco. NR Subco functions as a holding company, which makes investments in debt and equity securities of related and unrelated corporations.

3. XXXXXXXXXX Co was incorporated as an unlimited liability company under the XXXXXXXXXX on XXXXXXXXXX. XXXXXXXXXX Co is a taxable Canadian corporation and is not a public corporation. XXXXXXXXXX Co has a taxation year-end of XXXXXXXXXX. The mailing address of XXXXXXXXXX Co is XXXXXXXXXX and its registered office is located at XXXXXXXXXX. XXXXXXXXXX Co files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office. The authorized capital of XXXXXXXXXX Co consists of XXXXXXXXXX common shares without nominal or par value ("XXXXXXXXXX Co NPV Shares") and XXXXXXXXXX common shares with par value of Cdn$XXXXXXXXXX per share ("XXXXXXXXXX Co PV Shares"). All of the issued XXXXXXXXXX Co NPV Shares, consisting of XXXXXXXXXX shares, and all of the issued XXXXXXXXXX Co PV Shares, consisting of XXXXXXXXXX shares, are owned by NR Subco. XXXXXXXXXX Co functions as a holding company, which makes investments in debt and equity securities of related corporations. The assets of XXXXXXXXXX Co consist primarily of shares in Holdco, the Holdco Notes, and cash.

4. As at XXXXXXXXXX, the PUC of the XXXXXXXXXX Co NPV Shares was approximately CDN$XXXXXXXXXX. It is anticipated that the PUC of the XXXXXXXXXX Co NPV Shares, determined as of the time of the commencement of the implementation of the Proposed Transactions, will not be materially less than the amount of PUC, determined as of XXXXXXXXXX, and is expected to be greater than the amount indicated above.

5. As at XXXXXXXXXX, the XXXXXXXXXX Co thin-capitalization equity value was approximately CDN$XXXXXXXXXX . It is anticipated that the XXXXXXXXXX Co thin-capitalization equity value, determined as of the time of the commencement of the implementation of the Proposed Transactions, will not be materially less than the amount of the XXXXXXXXXX Co thin-capitalization equity value, determined as of XXXXXXXXXX, and is expected to be greater than the amount indicated above.

6. Holdco is a corporation which was formed pursuant to the XXXXXXXXXX on XXXXXXXXXX and which is a taxable Canadian corporation and is not a public corporation. Holdco has a taxation year-end of XXXXXXXXXX. The mailing address of Holdco is XXXXXXXXXX. Holdco files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office. The authorized capital of Holdco consists of an unlimited number of common shares without nominal or par value and an unlimited number of Holdco Preferred Shares. All of the issued shares of Holdco are owned by XXXXXXXXXX Co. Holdco functions as a holding company, which makes investments in debt and equity securities of related corporations. The assets of Holdco consist primarily of shares and debt in Opco and cash.

7. Opco is a corporation which was formed pursuant to the XXXXXXXXXX on XXXXXXXXXX and which is a taxable Canadian corporation and is not a public corporation. Opco has a taxation year-end of XXXXXXXXXX. The mailing address of Opco is XXXXXXXXXX. Opco files its tax returns at the XXXXXXXXXX Taxation Centre and it deals with the XXXXXXXXXX Tax Services Office. The authorized capital of Opco consists of an unlimited number of common shares. All of the issued shares of Opco are owned by Holdco. Opco is engaged in the XXXXXXXXXX.

The following resulted from transactions that were implemented upon receipt of the Previous Ruling.

8. XXXXXXXXXX Co is a party to the Indenture, pursuant to which XXXXXXXXXX Co borrowed the aggregate amount of US$XXXXXXXXXX from the US capital markets, evidenced by the issuance of promissory notes (the "Public Notes"). The borrowings by XXXXXXXXXX Co evidenced by the Public Notes occurred at two separate times (each issuance referred to herein as a "tranche"):

(a) On XXXXXXXXXX, XXXXXXXXXX Co issued Public Notes having an aggregate Principal Amount of US$XXXXXXXXXX. At that time, the applicable foreign currency exchange rate was US$1 = CDN$XXXXXXXXXX and the Canadian dollar equivalent of US$XXXXXXXXXX was CDN$XXXXXXXXXX; and

(b) On XXXXXXXXXX , XXXXXXXXXX Co issued further Public Notes having an aggregate Principal Amount of US$XXXXXXXXXX . At that time, the applicable foreign currency exchange rate was US$1 = CDN$XXXXXXXXXX and the Canadian dollar equivalent of US$XXXXXXXXXX was CDN$XXXXXXXXXX.

9. The principal terms and conditions of the borrowing evidenced by the issuance of the Public Notes, as contained in the Indenture and the Public Notes include, inter alia:

(a) The Public Notes are governed by the laws of XXXXXXXXXX;

(b) The maturity date of the Public Notes is XXXXXXXXXX;

(c) The Principal Amount of each Public Note is US$XXXXXXXXXX or an integral multiple thereof;

(d) Interest on the Principal Amount of the Public Notes accrues on a daily basis until paid, at a rate equal to XXXXXXXXXX% per annum. Such interest is computed on the basis XXXXXXXXXX (each an "Interest Payment Date");

(e) Except in the case of enumerated events of default, no portion of the Principal Amount of the Public Notes is due and payable prior to the maturity date of the Public Notes, and on such date, the full amount of such Principal Amount, together with any accrued and unpaid interest thereof, will be due and payable;

(f) The Principal Amount of the Public Notes is subject to prepayment by XXXXXXXXXX Co, prior to the maturity date upon the payment by XXXXXXXXXX Co of a "make whole" premium;

(g) The obligations of XXXXXXXXXX Co to make principal and interest payments on the indebtedness evidenced by the Public Notes is unconditionally guaranteed by Parentco; and

(h) Upon the satisfaction of certain conditions described in the Indenture, XXXXXXXXXX Co is permitted to assign all of its obligations under the Public Notes to Parentco or any of Parentco's subsidiaries (including NR Subco), after which assignment and assumption, the assignee will succeed to, and be substituted for, XXXXXXXXXX Co and XXXXXXXXXX Co will be discharged and released from its liability under the Public Notes and the Indenture.

10. Concurrently with each tranche of issuance of Public Notes, XXXXXXXXXX Co and Parentco entered into cross-currency swap agreements (the "Swap Arrangements") under the terms of a master swap agreement modeled on the International Swap Dealers Association, Inc. Master Agreement with a schedule and a confirmation letter specifying its particular terms. The purpose of the Swap Arrangements was to enable XXXXXXXXXX Co to borrow, under the Public Notes, in the US public markets, while being able to meet its US dollar interest and principal payment obligations in relation to the Public Notes and to hedge any foreign exchange exposure related to such US dollar payment obligations. The principal terms and conditions of the Swap Arrangements are summarized below:

(a) The term of the Swap Arrangements corresponds with the term of each of the borrowings evidenced by the Public Notes;

(b) XXXXXXXXXX Co and Parentco agreed to make a final exchange on the maturity date of the Public Notes, whereby:

i) in respect of the Swap Arrangement entered into on XXXXXXXXXX, XXXXXXXXXX Co would pay to Parentco an aggregate amount of CDN$XXXXXXXXXX and Parentco would pay to XXXXXXXXXX Co an aggregate amount of US$XXXXXXXXXX , and

ii) in respect of the Swap Arrangement entered into on XXXXXXXXXX, XXXXXXXXXX Co would pay to Parentco an aggregate amount of CDN$XXXXXXXXXX and Parentco would pay to XXXXXXXXXX Co an aggregate amount of US$XXXXXXXXXX

(collectively, the "Notional Principal Payments").

The quantum of the Notional Principal Payments was established based on market foreign currency exchange rates at the time each of the Swap Arrangements was entered into;

(c) XXXXXXXXXX Co agreed to pay to Parentco aggregate fixed payments at an annual rate of XXXXXXXXXX% (in respect of the Swap Arrangement entered into on XXXXXXXXXX ) and XXXXXXXXXX% (in respect of the Swap Arrangement entered into on XXXXXXXXXX) of the Canadian dollar Notional Principal Payment and Parentco agreed to pay to XXXXXXXXXX Co aggregate fixed payments at an annual rate of XXXXXXXXXX% of the US dollar Notional Principal Payment (the "Periodic Payments"). The Periodic Payments are to be paid on each Interest Payment Date, up to such time as the Swap Arrangements are terminated. The quantum of the Periodic Payments was based on the difference between market Canadian interest rates and market US interest rates at the time each of the Swap Arrangements was entered into; and

(d) Each of the Swap Arrangements provides that the agreement could be transferred by either party with written consent of the other party.

11. Concurrently with the entry into each of the Swap Arrangements, NR Subco and XXXXXXXXXX Co entered into an agreement (collectively, the "NR Subco-XXXXXXXXXX Co Contribution Agreements") whereunder NR Subco agreed to make payments to XXXXXXXXXX Co, either as the subscription price of XXXXXXXXXX Co NPV Shares or XXXXXXXXXX Co PV Shares, or as the purchase price of Holdco Preferred Shares, at the option of XXXXXXXXXX Co. Such payments have been made, in cash or by the delivery of negotiable instruments, by NR Subco, on or before each Interest Payment Date, in amounts equal to the Canadian dollar Periodic Payments payable by XXXXXXXXXX Co to Parentco under the Swap Arrangements. The purpose of the NR Subco-XXXXXXXXXX Co Contribution Agreements was to enable NR Subco to either increase its equity interest in XXXXXXXXXX Co or to acquire property from XXXXXXXXXX Co and to ensure that XXXXXXXXXX Co would have sufficient funds to enable it to make the requisite Canadian dollar Periodic Payments under the Swap Arrangements.

12. The borrowed monies evidenced by the issuance of each tranche of Public Notes were used by XXXXXXXXXX Co for the purpose of making interest-bearing loans to Holdco, as evidenced by the Holdco Notes. Each Holdco Note has substantially similar terms. The principal terms and conditions of the borrowing evidenced by the issuance of the Holdco Notes include, inter alia:

a) Each Holdco Note is governed by the laws of the Province of XXXXXXXXXX;

b) The maturity date of the Holdco Notes is the same date as the maturity date of the Public Notes;

c) The aggregate Principal Amount of the Holdco Notes is equal to the Canadian dollar equivalent of the US dollars borrowed pursuant to the Public Notes, as determined at the time of the issuance of each Holdco Note;

d) Interest on the Principal Amount of the Holdco Notes accrues on a daily basis until paid. Such interest is computed on the basis of XXXXXXXXXX. Unless Holdco is in default under the Holdco Notes, such interest is paid and satisfied by the issuance and delivery by Holdco to XXXXXXXXXX Co, of fully paid and non-assessable Holdco Preferred Shares having a FMV and PUC equal to the amount of accrued interest on each interest payment date;

e) Interest on the Holdco Note issued on XXXXXXXXXX accrues at a rate equal to XXXXXXXXXX%;

f) Interest on the Holdco Note issued on XXXXXXXXXX accrues at a rate equal to XXXXXXXXXX%; and

g) Except on the occurrence of a specified event of default, no portion of the Principal Amount of the Holdco Notes is due and payable prior to the maturity date of the Holdco Notes, and on such date, the full amount of such Principal Amount will be due and payable in cash.

As a consequence, XXXXXXXXXX Co has earned interest income on the Holdco Notes, which is in excess of its interest payment obligations under the Public Notes.

13. In the Previous Ruling, the CRA confirmed that, provided that XXXXXXXXXX Co has a legal obligation to pay interest on the Public Notes and that the Holdco Notes continue to be held by XXXXXXXXXX Co for the purpose of gaining or producing income, XXXXXXXXXX Co would be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c) of the Act.

14. All or substantially all of the holders of the Public Notes (the "Public Noteholders") are non-residents of Canada and each deals at arm's length with XXXXXXXXXX Co. Interest paid on the Public Notes by XXXXXXXXXX Co to each Public Noteholder who is a non-resident of Canada and who deals at arm's length with XXXXXXXXXX Co, at the time of the payment, was, prior to January 1, 2008 exempt from Canadian withholding tax under paragraph 212(1)(b) of the Act by virtue of subparagraph 212(1)(b)(vii) of the Act.

15. Holdco used the proceeds from the Holdco Notes to make loans to Opco. Those funds were, and continue to be, used by Opco for the purpose of earning income from a business or property in the course of XXXXXXXXXX.

16. Effective XXXXXXXXXX, XXXXXXXXXX Co and Holdco agreed to amend the terms of each Holdco Note such that, unless Holdco is in default thereunder, interest on the unpaid portion of the Principal Amount shall, at the times and on the dates specified in the Holdco Notes, be paid and satisfied by Holdco, at Holdco's sole option, in cash or by the issuance and delivery by Holdco to XXXXXXXXXX Co of fully paid Holdco Preferred Shares having a FMV and PUC of an amount equal to the accrued interest on the payment date, or in a combination thereof. The amending agreements provided that such amendment shall not be and shall not be deemed to be a discharge, rescission, extinguishment, novation or substitution of the indebtedness evidenced by the Holdco Notes and that such indebtedness continues to be the same obligation. The purpose of the amendment to the Holdco Notes was to permit Holdco to pay its interest obligations in either cash or by the issuance of Holdco Preferred Shares.

17. Effective XXXXXXXXXX, NR Subco and XXXXXXXXXX Co entered into an agreement to amend the rights and obligations of both parties under the NR Subco-XXXXXXXXXX Co Contribution Agreements, such that the contribution obligations of NR Subco do not apply to the extent that interest under the Holdco Notes is paid and satisfied by Holdco in cash. The amending agreements provided that the amendments evidenced the same contractual arrangements as originally evidenced by the Contribution Agreements and that the amendments shall not be and shall not be deemed to be a discharge, rescission, extinguishment, novation or substitution of the Contribution Agreements.

18. Effective XXXXXXXXXX, NR Subco and Parentco entered into an assumption agreement, whereunder NR Subco agreed to assume the rights and obligations of Parentco under the Swap Arrangements, with XXXXXXXXXX Co's consent. Based on the advice of an independent financial advisor, the amount that NR Subco would have been required to pay an arm's length person in the position of Parentco to assume the rights and obligations under the Swap Agreements was determined to be approximately CDN$XXXXXXXXXX and NR Subco satisfied its obligation to pay such amount by issuing shares of its capital stock to Parentco. It was further determined that, on the basis that XXXXXXXXXX Co's position under the Swap Arrangements is "under water" and thus XXXXXXXXXX Co was not disadvantaged from the assignment, on arm's length terms, no amount needed to be paid to XXXXXXXXXX Co to compensate it for the assignment or its consent thereto.

19. Section XXXXXXXXXX of the XXXXXXXXXX of XXXXXXXXXX Co permits the members of XXXXXXXXXX Co to, by special resolution, amend the XXXXXXXXXX of XXXXXXXXXX Co to increase the share capital of XXXXXXXXXX Co by the creation of new shares, of such amount as the members think expedient.

20. Section XXXXXXXXXX of the XXXXXXXXXX of XXXXXXXXXX Co permits XXXXXXXXXX Co to, by special resolution, reduce its share capital in any way, including on the reduction of the paid-up capital of shares of any class or series.

Proposed Transactions:

21. NR Subco, as the sole shareholder of XXXXXXXXXX Co, will pass a special resolution pursuant to section XXXXXXXXXX of the XXXXXXXXXX of XXXXXXXXXX Co to increase the authorized capital of XXXXXXXXXX Co by creating a new class of shares (the "XXXXXXXXXX Co Class A Shares").

22. NR Subco and XXXXXXXXXX Co will enter into a subscription agreement (the "NR Subco-XXXXXXXXXX Co Subscription Agreement"), whereby NR Subco will agree, effective on the Debt Assumption Date, to subscribe for a number of XXXXXXXXXX Co Class A Shares for an aggregate subscription price equal to the amount of the Debt Assumption Payment plus the amount of the Aggregate Settlement Payment (the "Subscription Price"), anticipated to be in the range of CDN$XXXXXXXXXX (which amount will vary based on the exact timing of the Debt Assumption Date). The number of XXXXXXXXXX Co Class A Shares that will be issued to NR Subco will be determined by dividing the Subscription Price by the FMV of one XXXXXXXXXX Co Class A Share on the date of the subscription. The PUC of the XXXXXXXXXX Co Class A Shares will be increased by the amount of the Subscription Price. The purpose of the NR Subco-XXXXXXXXXX Co Subscription Agreement is to enable NR Subco to increase its equity interest in XXXXXXXXXX Co and to ensure that XXXXXXXXXX Co will have sufficient funds to enable it to make the Debt Assumption Payment under the Debt Assumption Agreement and the Aggregate Settlement Amount under the Swap Termination Agreement.

23. XXXXXXXXXX Co and NR Subco will enter into an agreement (the "Debt Assumption Agreement") whereby NR Subco will agree, subject to the completion of the transactions outlined in 22 and 24 to 27 below and the satisfaction of the conditions in the Indenture, to assume the obligations of XXXXXXXXXX Co under the Public Notes and the Indenture, in exchange for the payment of the Debt Assumption Payment by XXXXXXXXXX Co to NR Subco, such assumption of liability to be effective immediately after the payment by XXXXXXXXXX Co of any interest accruing on the Public Notes on the next Interest Payment Date under the Public Notes after the receipt of the Rulings (the "Debt Assumption Date"). The amount of the Debt Assumption Payment will be determined based on the advice of an independent financial advisor, having regard to the circumstances of the Public Debt, including the fluctuations as between current interest rates and the interest rate attached to the Public Notes (i.e., a current market interest rate would generally be anticipated to be lower than the interest rate attached to the Public Notes), with a view to establishing a price that is equal to the amount that an arm's length person would require to be paid to assume the obligations under the Public Notes. The Debt Assumption Payment is anticipated to be in the range of US$XXXXXXXXXX, but will vary based on the exact timing of the Debt Assumption Date. The purpose of the Debt Assumption Agreement is to ensure that Parentco is in compliance with the DCL Regulations, by having the indebtedness evidenced by the Public Notes and the related interest expense be, at all times after the Debt Assumption Date, reflected on the books and records of a US Corporation (i.e., NR Subco) and not on the books and records of XXXXXXXXXX Co. The Debt Assumption Agreement will restructure the indebtedness evidenced by the Public Notes such that recourse of the Public Noteholders under the Public Notes is limited to NR Subco (under the terms of the Public Notes) and to Parentco (under the terms of the guarantee) and that XXXXXXXXXX Co is released from liability thereunder.

24. XXXXXXXXXX Co and NR Subco will enter into an agreement providing for the early termination of the Swap Arrangements (the "Swap Termination Agreement"). The Swap Termination Agreement will provide for the early termination of the Swap Arrangements and close-out of the payment obligations thereunder at such time as XXXXXXXXXX Co is discharged from its obligations under the Public Notes (i.e., on the Debt Assumption Date). The purpose of the Swap Termination Agreement is to terminate the Swap Arrangements, as XXXXXXXXXX Co will have no further need for US dollars once it has been discharged from liability under the Public Notes and the Indenture. The date on which the Swap Arrangements are proposed to be terminated precedes the original termination date of such arrangements. The net amount that XXXXXXXXXX Co will be required to pay to NR Subco (or that NR Subco will be required to pay XXXXXXXXXX Co) (in aggregate, the "Aggregate Settlement Payment") will be ascertained by the application under each Swap Arrangements of standard "make-whole" practices and procedures. In essence, each stream of net remaining cash flows under the Swap Arrangements (i.e., the Notional Principal Payments and the Periodic Payments) will be valued as of the Debt Assumption Date, using a mark-to-market approach, and the net amount is paid by one party to the other on termination. It is anticipated that XXXXXXXXXX Co will be required to make, rather than receive, the Aggregate Settlement Payment because prevailing exchange and interest rates will be used to estimate the payments that XXXXXXXXXX Co and NR Subco would each have made under the Swap Arrangements if such swaps were not terminated. Assuming that the exchange rate used in the calculation is US$XXXXXXXXXX equals CDN$XXXXXXXXXX (in respect of the Swap Arrangement entered into on XXXXXXXXXX ) or US$XXXXXXXXXX equals CDN$XXXXXXXXXX (in respect of the Swap Arrangement entered into on XXXXXXXXXX ), the calculation will assume that XXXXXXXXXX Co would have been required under the Swap Arrangements to make aggregate net payments to NR Subco in respect of the Notional Principal Payments and the Periodic Payments. As a consequence, on the premature termination of the Swap Arrangements, XXXXXXXXXX Co will be required to make an Aggregate Settlement Payment to NR Subco to compensate it for not receiving the anticipated net Notional Principal Payments and net Periodic Payments. It is anticipated that the Aggregate Settlement Payment will be in the range of CDN$XXXXXXXXXX , but will vary based on the exact timing of the Debt Assumption Date, which amount will be subdivided into two components:

(a) An amount that will compensate NR Subco under each Swap Arrangement for not receiving net payments of the Notional Principal Payments (the "Notional Principal Commutation Payment"), anticipated to be in the range of CDN$XXXXXXXXXX (which amount will vary based on the exact timing of the Debt Assumption Date); and

(b) An amount that will compensate NR Subco under each Swap Arrangement for not receiving net payments of the Periodic Payments (the "Periodic Commutation Payment"), anticipated to be in the range of CDN$XXXXXXXXXX (which amount will vary based on the exact timing of the Debt Assumption Date).

25. XXXXXXXXXX Co and NR Subco will enter into an agreement (the "XXXXXXXXXX Co-NR Subco Loan Agreement") whereunder XXXXXXXXXX Co will agree to borrow and NR Subco will agree to lend, effective as of the Debt Assumption Date, the XXXXXXXXXX Co Loan Amount, which will be equal to the aggregate of the XXXXXXXXXX Co NPV PUC Reduction Amount as described in 26 below and the XXXXXXXXXX Co Class A PUC Reduction Amount as described in 27 below. The principal terms and conditions of the XXXXXXXXXX Co-NR Subco Loan Agreement will be as follows:

a) The borrowed monies will be used by XXXXXXXXXX Co for the purpose of making payment of the XXXXXXXXXX Co NPV PUC Reduction Amount and XXXXXXXXXX Co Class A PUC Reduction Amount to NR Subco in accordance with the provisions of the XXXXXXXXXX Co NPV PUC Reduction Resolution and the XXXXXXXXXX Co Class A PUC Reduction Resolution;

b) Upon the advance of the XXXXXXXXXX Co Loan Amount, XXXXXXXXXX Co will issue a promissory note (the "XXXXXXXXXX Co Note") to NR Subco with a Principal Amount equal to the XXXXXXXXXX Co Loan Amount;

c) The maturity date of the XXXXXXXXXX Co Note will be XXXXXXXXXX;

d) Interest on the Principal Amount of the XXXXXXXXXX Co Note will accrue on a daily basis until paid at a rate which will be determined by an independent financial advisor as an arm's length rate, which is anticipated to be in the range of XXXXXXXXXX%, and, in any event, will be lower than the rate of interest which accrues to XXXXXXXXXX Co on the Holdco Notes. Such interest will be computed on the basis of XXXXXXXXXX. Interest will be paid to NR Subco net of applicable Canadian withholding tax;

e) No portion of the Principal Amount of the XXXXXXXXXX Co Note will be due and payable prior to the maturity date of the XXXXXXXXXX Co Note, and on such date, the full amount of such Principal Amount will be due and payable in cash. Any accrued and unpaid interest on such date will also be paid at that time;

f) If any event of default occurs and is continuing, NR Subco may, upon written notice to that effect, declare the Principal Amount of the XXXXXXXXXX Co Note, together with all accrued interest thereon, to be immediately due and payable. In such event, all such amounts shall be payable in cash. For this purpose, any of the following will constitute an event of default:

i) A failure of XXXXXXXXXX Co to pay the Principal Amount of, and any accrued interest on, the XXXXXXXXXX Co Note when due;

ii) A failure of XXXXXXXXXX Co to comply with any covenant contained in the XXXXXXXXXX Co-NR Subco Loan Agreement or the XXXXXXXXXX Co Note, and the continuation of such failure for more than XXXXXXXXXX days after the receipt of written notice of such failure; and

iii) certain events of bankruptcy, insolvency or reorganization of XXXXXXXXXX Co; and

g) The indebtedness evidenced by the XXXXXXXXXX Co Note will be subordinated to all present and future senior debt obligations of XXXXXXXXXX Co.

26. NR Subco, as the sole shareholder of XXXXXXXXXX Co, will pass a special resolution (the "XXXXXXXXXX Co NPV PUC Reduction Resolution") pursuant to section XXXXXXXXXX of the XXXXXXXXXX of XXXXXXXXXX Co to reduce the capital of the issued XXXXXXXXXX Co NPV Shares by an amount (the "XXXXXXXXXX Co NPV PUC Reduction Amount") equal to slightly less than the PUC of the XXXXXXXXXX Co NPV Shares immediately prior to the XXXXXXXXXX Co NPV PUC Reduction Resolution, such reduction of capital to be effective as of the Debt Assumption Date. The XXXXXXXXXX Co NPV PUC Reduction Amount will not exceed the PUC of the XXXXXXXXXX Co NPV Shares immediately prior to the passing of the XXXXXXXXXX Co NPV PUC Reduction Resolution. The cash proceeds received by XXXXXXXXXX Co upon the issuance of XXXXXXXXXX Co NPV Shares were used by XXXXXXXXXX Co for the purpose of earning income from business or property, including for the purpose of meeting its Periodic Payment obligations under the Swap Arrangements. To the extent that any XXXXXXXXXX Co NPV Shares were issued for property other than cash, such property was used by XXXXXXXXXX Co for the purposes of earning income therefrom. For greater certainty, none of the PUC of the XXXXXXXXXX Co NPV Shares, which is to be reduced pursuant to the XXXXXXXXXX Co NPV PUC Reduction Resolution, has been used by XXXXXXXXXX Co for the purpose of earning income which is exempt from tax under the Act.

27. NR Subco, as the sole shareholder of XXXXXXXXXX Co, will pass a special resolution (the "XXXXXXXXXX Co Class A PUC Reduction Resolution") pursuant to section XXXXXXXXXX of the XXXXXXXXXX of XXXXXXXXXX Co to reduce the capital of the issued XXXXXXXXXX Co Class A Shares by an amount (the "XXXXXXXXXX Co Class A PUC Reduction Amount") equal to the aggregate of the amount of the Debt Assumption Payment and the Aggregate Settlement Payment less the XXXXXXXXXX Co NPV PUC Reduction Amount, such reduction of capital to be effective as of the Debt Assumption Date. The XXXXXXXXXX Co Class A PUC Reduction Amount will not exceed the PUC of the XXXXXXXXXX Co Class A Shares immediately prior to the passing of the XXXXXXXXXX Co Class A PUC Reduction Resolution. The cash proceeds, which will be received by XXXXXXXXXX Co upon the issuance of XXXXXXXXXX Co Class A Shares will be used by XXXXXXXXXX Co for the purpose of earning income from business or property, including for the purpose of paying the Debt Assumption Payment and the Aggregate Settlement Payment. For greater certainty, none of the PUC of the XXXXXXXXXX Co Class A Shares, which is to be reduced pursuant to the XXXXXXXXXX Co Class A PUC Reduction Resolution will have been used by XXXXXXXXXX Co for the purpose of earning income which is exempt from tax under the Act.

28. The purpose of the XXXXXXXXXX Co NPV PUC Reduction Resolution, the XXXXXXXXXX Co Class A PUC Reduction Resolution and the XXXXXXXXXX Co-NR Subco Loan Agreement is to replace a portion of XXXXXXXXXX Co's equity capitalization with interest-bearing debt such that the interest-bearing debt previously evidenced by the Public Notes will be replaced with the interest-bearing debt evidenced by the XXXXXXXXXX Co Note.

29. XXXXXXXXXX Co's indebtedness to NR Subco, as evidenced by the XXXXXXXXXX Co Note, will constitute an outstanding debt to a specified non-resident. The Principal Amount of the XXXXXXXXXX Co Note, together with other outstanding debts to a specified non-resident of XXXXXXXXXX Co, will not exceed two times the amount of XXXXXXXXXX Co's thin-capitalization equity value.

30. On the Debt Assumption Date, the following transactions will be undertaken in the order listed:

a) NR Subco will pay the Subscription Price to XXXXXXXXXX Co and XXXXXXXXXX Co will issue the XXXXXXXXXX Co Class A Shares to NR Subco, pursuant to the terms of the NR Subco-XXXXXXXXXX Co Subscription Agreement;

b) XXXXXXXXXX Co will use the requisite portion of the proceeds from the NR Subco-XXXXXXXXXX Co Subscription Agreement to pay the Aggregate Settlement Payment to NR Subco pursuant to the Swap Termination Agreement;

c) XXXXXXXXXX Co will use the requisite portion of the proceeds from the NR Subco-XXXXXXXXXX Co Subscription Agreement to pay the Debt Assumption Payment to NR Subco. Thereafter, XXXXXXXXXX Co will be absolutely discharged from its obligations under the Public Notes and the Indenture and the indebtedness evidenced by the Public Notes and the related interest liability will no longer be reported on the books and records of XXXXXXXXXX Co;

d) NR Subco will advance the XXXXXXXXXX Co Loan Amount to XXXXXXXXXX Co, as contemplated by the XXXXXXXXXX Co-NR Subco Loan Agreement, and XXXXXXXXXX Co will issue the XXXXXXXXXX Co Note; and

e) XXXXXXXXXX Co will use the XXXXXXXXXX Co Loan Amount to pay the XXXXXXXXXX Co NPV PUC Reduction Amount and the XXXXXXXXXX Co Class A PUC Reduction Amount to NR Subco.

Additional Information:

31. The implementation of the Proposed Transactions will not have any impact on outstanding tax liabilities, under the Act, of any taxpayer referred to in Part II hereof.

Purpose of the Proposed Transactions:

32. The purpose of the Proposed Transactions is to ensure that Parentco is in compliance with the DCL Regulations, by ensuring that the indebtedness evidenced by the Public Notes and the related interest expense is reflected on the books and records of a US Corporation (i.e., NR Subco or Parentco) and not on the books and records of XXXXXXXXXX Co. The Proposed Transactions will restructure the indebtedness evidenced by the Public Notes such that recourse of the Public Noteholders under the Public Notes will be limited to NR Subco (under the terms of the Public Notes) and to Parentco (under the terms of the guarantee) and that XXXXXXXXXX Co is discharged and released from liability thereunder.

Rulings Given:

Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we rule as follows:

A. No portion of the Aggregate Settlement Payment paid by XXXXXXXXXX Co to NR Subco pursuant to the Swap Termination Agreement, as described in 24 above, will be subject to withholding tax pursuant to Part XIII of the Act.

B. On the termination of the Swap Arrangements, the Periodic Commutation Payment, as described in 24(b) above, will be considered to be paid by XXXXXXXXXX Co on income account pursuant to section 9 of the Act and will, accordingly, be deductible by XXXXXXXXXX Co.

C. On the termination of the Swap Arrangements, XXXXXXXXXX Co will be considered to have realized a capital loss pursuant to subsection 39(2) of the Act in an amount equal to the Notional Principal Commutation Payment, as described in 24(a) above, and such capital loss will not be denied under paragraph 40(2)(g) of the Act nor by virtue of subsections 40(3.3) and (3.4) of the Act.

D. Any gain which is realized by XXXXXXXXXX Co from the payment of the Debt Assumption Payment, as described in 23 above, and resulting discharge from its obligations under the Public Notes and the Indenture that results from the fluctuation in the value of US dollars relative to Canadian dollars from the date of issuance of the Public Notes to the Debt Assumption Date, will, by virtue of subsection 39(2) of the Act, be deemed to be a capital gain of XXXXXXXXXX Co from the disposition of US dollars.

E. Provided that the PUC of the XXXXXXXXXX Co NPV Shares immediately prior to the passing of the XXXXXXXXXX Co NPV PUC Reduction Resolution is at least equal to the XXXXXXXXXX Co NPV PUC Reduction Amount and that the PUC of the XXXXXXXXXX Co Class A Shares immediately prior to the passing of the XXXXXXXXXX Co Class A PUC Reduction Resolution is at least equal to the XXXXXXXXXX Co Class A PUC Reduction Amount, which amounts are to be paid by XXXXXXXXXX Co to NR Subco, interest payable in respect of a taxation year on the borrowed money, which is evidenced by the XXXXXXXXXX Co Note, and which is used for the purpose of making the payment of the XXXXXXXXXX Co NPV PUC Reduction Amount and the XXXXXXXXXX Co Class A PUC Reduction Amount, will be deductible by XXXXXXXXXX Co in such taxation year pursuant to paragraph 20(1)(c) of the Act.

F. None of the provisions of subsections 15(1), 56(2) and 246(1) of the Act will be applicable in respect of any of the Proposed Transactions.

G. As a result of the Proposed Transactions, in and of themselves, subsection 245(2) of the Act will not be applied to re-determine the tax consequences of any of the Proposed Transactions.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch