2008 Ruling 2008-0273471R3 - XXXXXXXXXX Ruling Request

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: (1) Whether the amount of interest and related fees payable by a foreign affiliate (ForOp) on two types of debt will be deductible by ForOp in computing the amounts prescribed to be its earnings from an active business, carried on by it in a country? (2) Will the income earned by XXXXXXXXXX on the two types of debt be included in computing its income from an active business pursuant to clause 95(2)(a)(ii)(B)? (3) Is subsection 95(6) applicable to the proposed transactions? (4) Is the interest that is paid or payable in on the New Opco Demand Loans, the Finco Subco Loans and the Third-Party Loan deductible to the relevant party under paragraph 20(1)(c)? (5) Would an amount be included in the income of New Cansub pursuant to section 9, paragraph 12(1)(x) or paragraph 12(1)(c) in respect of the contributions of capital that will be made by New Canco? (6) Will subsection 112(2.1), 112(2.2) or 112(2.4) apply to deny the deduction of the dividends received by New Opco on the New Cansub Preferreds? (7) Will the dividends received by New Opco on the New Cansub Preferreds be subject to Part IV.I or VI.1? (8) Should GAAR apply to the loss utilization scheme discussed? (9) Does section 18.2 apply to the paragraph 20(1)(c) deductions made by New Canco in respect of New XXXXXXXXXX inter-affiliate loan to ForOp?

Position: (1) Yes. (2) Yes. (3) No. (4) Yes. (5) No. (6) No. (7) No, but we won't give ruling. (8) No. (9) Yes, for taxation years that begin after 2011.

Reasons: (1) ForOp is an FA and is required to compute its income under XXXXXXXXXX tax law and the amounts are deducible under that law. (2) The application of clause 95(2)(a)(ii). (3) This scenario generally falls within example 2 in ITTN 36; further, any potential benefit is minimal due to the required ratio of fixed debt (XXXXXXXXXX ) to XXXXXXXXXX debt (XXXXXXXXXX ). (4) Plain reading of paragraph 20(1)(c) and it is within policy of CRA loss consolidations. (5) Standard ruling. (6) Standard ruling. (7) The result is obvious so we won't give it. (8) Standard ruling for loss consolidations. (9) Plain reading of 18.2.

XXXXXXXXXX 									2008-027347 

XXXXXXXXXX, 2008

XXXXXXXXXX :

Re: XXXXXXXXXX
Business number: XXXXXXXXXX ; and
New Canco (company to be formed); and
New Cansub (company to be formed) (the "Taxpayers")

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named Taxpayers. We also acknowledge our subsequent conversations (XXXXXXXXXX ).

We understand that, to the best of your knowledge and that of the Taxpayers, none of the issues involved in the ruling request is:

(i) in an earlier return of the Taxpayers or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayers or a related person,
(iii) under objection by the Taxpayers or a related person, or
(iv) before the courts.

You have indicated that you have obtained the following rulings in respect of issues related to the following taxpayers:

1. XXXXXXXXXX
2. XXXXXXXXXX

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Definitions

In this letter, the following terms have the meanings specified:

XXXXXXXXXX

"ACB" has the meaning assigned to "adjusted cost base" by section 54;

"Active Business" has the meaning assigned by subsection 95(1);

"Affiliated Person" has the meaning of assigned by subsection 251.1(1);

"Availability Period" means the period between the XXXXXXXXXX ;

"Base Equity Value" means, on any Interest Payment Date and for the purpose of calculating the Priority Dividend and XXXXXXXXXX , the aggregate of the
value of:

• US$XXXXXXXXXX (the amount that the parties agreed was the value of the rights, intangibles and goodwill of the Project);
• all cash contributed to the share capital of ForOp by the shareholders; and
• the XXXXXXXXXX contributions;

"Daylight Loan Facility" will consist of amounts loaned to New Canco by a member of the Parent Group, no shares of which are held directly or indirectly by Holdco or New Canco, or, alternatively, by third party lenders;

XXXXXXXXXX

"Earnings" has the meaning assigned by subsections 5907(1) and 5907(2) of the Regulations;

"Finco" means XXXXXXXXXX ;

"Finco Subco" means XXXXXXXXXX ;

"Forco" means XXXXXXXXXX

"Forco Finance" means XXXXXXXXXX ;

"Foreign Affiliate" has the meaning assigned by subsection 95(1);

"ForOp" means XXXXXXXXXX

"ForsubA" means XXXXXXXXXX

"ForsubB" means XXXXXXXXXX

"Forsub2" means XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

"Holdco" means XXXXXXXXXX

"Holdco2" means XXXXXXXXXX

"Holdco3" means XXXXXXXXXX

XXXXXXXXXX

"Interest Payment Dates" means XXXXXXXXXX ;

"Interest Period" each Interest Period shall be of XXXXXXXXXX months' duration. Each Interest Period shall start on a Utilisation Date and end on the next Interest Payment date. Any Interest Period which would otherwise extend beyond the first Repayment Date shall be of such duration that it shall end on the first Repayment Date. Each Interest Period thereafter shall be of XXXXXXXXXX months duration and end on the next Repayment Date;

"XXXXXXXXXX Debt Facility" means the debt facility described in paragraphs 51 to 72 herein;

"XXXXXXXXXX Loan" means a loan made under the XXXXXXXXXX Debt Facility agreement;

"Loss" has the meaning assigned by subsection 5907(1) of the Regulations;

"Letter of Interpretation" means the "letter of interpretation" issued by XXXXXXXXXX , with respect the taxation of ForOp;

"New XXXXXXXXXX " means XXXXXXXXXX ;

"New Canco" means a Subsidiary Wholly-owned Corporation to be formed by Subco;

"New Cansub" means a Subsidiary Wholly-owned Corporation to be formed by New Canco;

"New Opco" means XXXXXXXXXX ;

"Non-capital Loss" has the meaning assigned by subsection 111(8);

"Non-Treatyco1" means XXXXXXXXXX ;

"Non-Treatyco2" means XXXXXXXXXX ;

XXXXXXXXXX

"Opco" means the company that before its amalgamation with Holdco2 and Holdco3 was XXXXXXXXXX

"Parentco" means XXXXXXXXXX

"Parentco Group" means XXXXXXXXXX and all corporations under its control;

"XXXXXXXXXX Finance Plan" has the meaning described in paragraphs 27 to 32 herein;

"Priority Dividend" means amounts payable on the common shares and on any Interest Payment Date will be the lower of:

• The Project Cash Flows available on that Interest Payment Date; and
• XXXXXXXXXX % of the Base Equity Value multiplied by the number of days in the Interest Period ending on such Interest Payment Date and divided by 365;

"Project" is described in paragraphs 18 to 26 herein;

"Project Cash Flows" means, on an Interest Payment Date, the net cash flows of ForOp over the period starting on the previous Interest Payment Date and ending on such Interest Payment Date, such net cash flows being calculated on the basis of the following items:

• net cash inflow from operating activities after payment of taxes;
• plus or minus, as the case may be, working capital variations;
• plus, cash inflows attributable to exceptional and extraordinary items (i.e. not cash from direct operations), but excluding such items which constitute new funds (such as new funds from new financings or new sources not otherwise listed would be excluded);
• plus, sale of tangible or intangible fixed assets other than assets which do not relate to the project facilities;
• less, payments to acquire or sustain fixed assets or payments to acquire tangible or intangible assets, but excluding payments not related to project facilities; and
• less, certain payments made under finance leases;

"Proposed Transactions" means the transactions described in paragraphs 78 through 96 herein;

"PUC" has the meaning assigned to "paid-up capital" by subsection 89(1);

"Qualifying Interest" has the meaning assigned by paragraph 95(2)(m) and subsection 95(2.2);

"Regulations" means the Income Tax Regulations, CRC, c. 945;

"Related Persons" has the meaning assigned by subsection 251(2);

"Repayment Date" means a date when the principal and interest are to be paid on the XXXXXXXXXX Debt Facility and XXXXXXXXXX Debt Facility. The payments are based on a XXXXXXXXXX year amortization period for the XXXXXXXXXX Debt Facility and XXXXXXXXXX year amortization period for the XXXXXXXXXX Debt Facility, and in each case to be made twice a year. The first payment is to begin on XXXXXXXXXX for the XXXXXXXXXX Loan and on XXXXXXXXXX for the XXXXXXXXXX Loan and the last payments are to be made on XXXXXXXXXX , assuming there are no early repayments;

"Ruling" means the XXXXXXXXXX issued by the Government of XXXXXXXXXX with respect to the taxation of ForOp;

"XXXXXXXXXX Debt Facility" is the debt facility described in paragraphs 41 to 50 herein;

"XXXXXXXXXX Loan" means a loan made under the XXXXXXXXXX Debt Facility agreement;

"Subco" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX ;

"Subco2" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX ;

"Subsidiary Wholly-owned Corporation" has the meaning assigned by subsection 248(1);

"Tax Incentive" means the XXXXXXXXXX tax incentive supporting the XXXXXXXXXX ;

"Tax Incentive Financing" means the financing program for the Project's XXXXXXXXXX supported by the XXXXXXXXXX and described in paragraphs 33 through 40;

"XXXXXXXXXX Investors" XXXXXXXXXX investors that invest in the XXXXXXXXXX ;

"TCC" has the meaning assigned to "taxable Canadian corporation" by subsection 89(1);

"Termination Date" means the on XXXXXXXXXX for both the XXXXXXXXXX Debt and the XXXXXXXXXX Debt;

"Treaty" means the convention between Canada and XXXXXXXXXX for the avoidance of the double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, as amended by the protocol signed XXXXXXXXXX ;

"Utilisation" means a utilisation of the XXXXXXXXXX Debt Facility or of the XXXXXXXXXX Debt Facility; and
"Utilisation Date" means the date on which a Utilisation is, or is to be, made.

Facts

Our understanding of the facts are as follows:

(i) General overview of Corporate Entities

1. Parentco is a public corporation incorporated under the laws of XXXXXXXXXX The ordinary shares of Parentco are listed on the XXXXXXXXXX .

2. XXXXXXXXXX

3. Subco is a Subsidiary Wholly-owed Corporation of Parentco. Subco was incorporated in XXXXXXXXXX and is a non-resident of Canada.

4. Subco owns XXXXXXXXXX % of the issued and outstanding shares of Subco2. Subco2 was incorporated in XXXXXXXXXX and is a non-resident of Canada.

5. Holdco is a Subsidiary Wholly-owned Corporation of Subco2. Holdco is a TCC that was incorporated under the XXXXXXXXXX .

6. Holdco2 was a Subsidiary Wholly-owned Corporation of Holdco. Holdco2 was a TCC that was incorporated under the XXXXXXXXXX .

7. Holdco3 was a Subsidiary Wholly-owned Corporation of Holdco2. Holdco3 was a TCC that was incorporated under the XXXXXXXXXX .

8. XXXXXXXXXX . On XXXXXXXXXX , following the implementation of the various steps of the XXXXXXXXXX . New Opco is not a "restricted financial institution" as defined in subsection 248(1).

9. Finco is a corporation incorporated under the XXXXXXXXXX . Finco is a Subsidiary Wholly-owned Corporation of Holdco and is a TCC.

10. Finco Subco is a corporation incorporated under the XXXXXXXXXX . Finco Subco is a Subsidiary Wholly-owned Corporation of Finco and is a TCC.

11. Parentco, Subco, Subco2, Holdco, Finco, Finco Subco and New Opco are each Affiliated Persons and Related Persons to each other.

12. ForsubB (formerly ForsubA) is a Subsidiary Wholly-owned Corporation of New Opco. ForsubA was a non-resident of Canada. ForsubB is a non-resident of Canada.

13. ForOp is a corporation incorporated under the laws of XXXXXXXXXX . ForsubB owns XXXXXXXXXX % of the issued and outstanding common shares of ForOp and XXXXXXXXXX owns the other XXXXXXXXXX %.

14. XXXXXXXXXX is a corporation incorporated under the laws of XXXXXXXXXX is controlled by XXXXXXXXXX . Neither Parentco nor any entities controlled by Parentco hold any interest in XXXXXXXXXX .

15. Forsub2 is a corporation incorporated under the laws of XXXXXXXXXX and a Subsidiary Wholly-owned Corporation of New Opco. Forsub2 is a non-resident of Canada.

16. Forco Finance, is a corporation incorporated under the XXXXXXXXXX . Forco Finance is a non-resident of Canada and Subsidiary Wholly-owned Corporation of Forsub2. XXXXXXXXXX . Forco Finance is also a lender under the XXXXXXXXXX Debt Facility agreement.

17. XXXXXXXXXX is a corporation incorporated in XXXXXXXXXX and a Subsidiary Wholly-owned Corporation of New Opco. XXXXXXXXXX is a non-resident of Canada.

(ii) Facts relating to the Project

18. The Project involves the XXXXXXXXXX The Project entails investment of approximately US$XXXXXXXXXX to be majority-funded by XXXXXXXXXX.

19. For the purpose of the eventual possible implementation of the Project, ForOp was set up in XXXXXXXXXX by ForsubA and XXXXXXXXXX .

20. According to a XXXXXXXXXX agreement dated XXXXXXXXXX , as amended on XXXXXXXXXX contributed to ForOp all the shares in XXXXXXXXXX , for a value of approximately US$XXXXXXXXXX , in exchange for a XXXXXXXXXX % equity interest in ForOp. XXXXXXXXXX is a non-resident of Canada.

21. According to a XXXXXXXXXX agreement dated XXXXXXXXXX , as amended on XXXXXXXXXX , ForsubA contributed to ForOp all the shares in Forco, a XXXXXXXXXX company, that was a non-resident of Canada XXXXXXXXXX , for a value of approximately US$XXXXXXXXXX , in exchange for a XXXXXXXXXX % equity interest in ForOp.

22. Forco and Forco Finance entered into XXXXXXXXXX loan facility agreement for an aggregate draw amount of up to US$XXXXXXXXXX for the purpose of financing XXXXXXXXXX the Project (the "XXXXXXXXXX Credit Facility").

23. Only approximately $XXXXXXXXXX of the $XXXXXXXXXX Credit Facility was used by Forco.

24. XXXXXXXXXX

25. On XXXXXXXXXX , Parentco and ForOp agreed in principal on a term sheet for the XXXXXXXXXX Finance Plan.

26. XXXXXXXXXX

(iii) Facts relating to the XXXXXXXXXX Finance Plan

27. The XXXXXXXXXX Finance Plan comprises the following components:

i) XXXXXXXXXX ;
ii) XXXXXXXXXX ;
iii) a XXXXXXXXXX Debt Facility of US$XXXXXXXXXX ; and
iv) a XXXXXXXXXX Debt Facility of US$XXXXXXXXXX .

28. XXXXXXXXXX

29. XXXXXXXXXX

30. XXXXXXXXXX

31. XXXXXXXXXX

32. XXXXXXXXXX

(vi) XXXXXXXXXX

33. XXXXXXXXXX

34. XXXXXXXXXX

35. XXXXXXXXXX

36. XXXXXXXXXX

37. XXXXXXXXXX

38. XXXXXXXXXX

39. XXXXXXXXXX

40. XXXXXXXXXX

(v) Facts relating to the XXXXXXXXXX Debt Facility

41. Non-Treatyco1 is a corporation incorporated under the laws of the XXXXXXXXXX and is owned XXXXXXXXXX % XXXXXXXXXX .

42. Non-Treatyco2 is a corporation incorporated under the laws of XXXXXXXXXX . Non-Treatyco2 is a non-resident of Canada and a Subsidiary Wholly-owned Corporation of Non-Treatyco1. Non-Treatyco2 in a non-resident of Canada and has recently been continued under the laws of XXXXXXXXXX .

43. The XXXXXXXXXX Debt Facility agreement was signed between ForOp, as "Borrower", and XXXXXXXXXX Lender".

44. Under the agreement, each XXXXXXXXXX Lender may, at any time, but subject to the Borrower's prior consent, assign or transfer any of its rights and obligations under the XXXXXXXXXX Debt Facility agreement to any other person, provided that no prior consent shall be necessary where the transfer is to an affiliated person of the XXXXXXXXXX Lender.

45. The rate of interest on each XXXXXXXXXX Loan for each Interest Period will be XXXXXXXXXX % per annum (the "Interest on the XXXXXXXXXX Debt").

46. Interest owing on an Interest Payment Date XXXXXXXXXX .

47. The XXXXXXXXXX Debt Facility will be repaid over the amortization period as outlined in the definition of Repayment Date.

48. XXXXXXXXXX

49. On XXXXXXXXXX , Forco Finance lent US$XXXXXXXXXX to ForOp pursuant to the XXXXXXXXXX Debt Facility. XXXXXXXXXX .

50. In accordance with the XXXXXXXXXX Debt Facility agreement, ForOp will pay to the XXXXXXXXXX Lenders a XXXXXXXXXX fee computed at the rate of XXXXXXXXXX percent per annum on the available XXXXXXXXXX Loan Facility for the Availability Period. ForOp will also pay to each XXXXXXXXXX Lender a XXXXXXXXXX fee equal to XXXXXXXXXX percent of each XXXXXXXXXX Lender's commitment.

(vi) Facts relating to the XXXXXXXXXX Debt Facility

51. XXXXXXXXXX is a company incorporated under the laws of XXXXXXXXXX and is a subsidiary of XXXXXXXXXX .

52. The XXXXXXXXXX Debt Facility agreement was signed between ForOp, as "Borrower", and Non-Treatyco2 XXXXXXXXXX , each as a "XXXXXXXXXX Lender".

53. The interest payable on each XXXXXXXXXX Loan for each Interest Period is the aggregate of (the "Interest on the XXXXXXXXXX Loan"):

(i) a fixed coupon calculated on the basis of a rate of XXXXXXXXXX % per annum on the amount of the XXXXXXXXXX Loan outstanding at the end of such Interest Period (the "Fixed Coupon"); and

(ii) XXXXXXXXXX :

a. Project Cash Flows after payment of:

I. the XXXXXXXXXX Loan service;
II. the XXXXXXXXXX Loan service (i.e., the Fixed Coupon); and
III. any Priority Dividend due on that Interest Payment Date;

b. multiplied by the amount of XXXXXXXXXX Loan outstanding (increased, as the case may be, XXXXXXXXXX ) owing on the previous Interest Payment Date,

c. divided by the sum of the XXXXXXXXXX Loan outstanding and the Base Equity Value.

54. Fixed Coupons will accrue from the date on which XXXXXXXXXX Loans are made available until the full repayment of the XXXXXXXXXX Loans.

55. Any Fixed Coupon accrued on an Interest Payment Date falling during the Availability Period will be capitalised and added to the outstanding principal amount of the XXXXXXXXXX Debt Facility on that date.

56. Any Fixed Coupon accrued on an Interest Payment Date falling after the end of the Availability Period will be payable on such Interest Payment Date.

57. In the event a Fixed Coupon remains unpaid on an Interest Payment Date falling after the end of the Availability Period, the payment of such Fixed Coupon will be deferred to the following Interest Payment Date. It will be paid to the extent that there is cash available for the payment of the following amounts:

(i) the XXXXXXXXXX Loan Service;
(ii) any previously deferred Fixed Coupon; and
(iii) any scheduled or deferred principal repayment due.

58. Any Fixed Coupon deferred on an Interest Payment Date and remaining unpaid on the following Interest Payment Date will be capitalised on that following date and added to the XXXXXXXXXX Loans outstanding.

59. XXXXXXXXXX Coupons will be payable on each Interest Payment Date on which the Borrower will generate sufficient Project Cash Flows to pay them until the Termination Date.

60. The XXXXXXXXXX Debt Facility will be repaid over the amortization period as outlined in the definition of Repayment Date.

61. XXXXXXXXXX

62. Non-Treatyco2 and XXXXXXXXXX shall participate in each Utilisation request at a proportion of XXXXXXXXXX % for Non-Treatyco2 and XXXXXXXXXX % XXXXXXXXXX . However, XXXXXXXXXX does not have an obligation to provide funds upon a Utilisation request, only participating at its option under each Utilisation request tranche.

63. In the event that XXXXXXXXXX does not participate, or participates for an amount lower that its full entitlement, Non-Treatyco2 will cover the shortfall.

64. In accordance with the XXXXXXXXXX Debt Facility agreement, each XXXXXXXXXX Lender may, at any time but subject to the Borrower's prior consent, assign or transfer any of its rights and obligations under the agreement to any person, provided that no prior consent shall be necessary where the transfer or assignment is to an affiliated person of the XXXXXXXXXX Lender.

65. XXXXXXXXXX

66. XXXXXXXXXX

67. XXXXXXXXXX

68. XXXXXXXXXX

69. XXXXXXXXXX

70. XXXXXXXXXX

71. XXXXXXXXXX

72. Under the XXXXXXXXXX Debt Facility agreement, ForOp will pay to each XXXXXXXXXX Lender a fee XXXXXXXXXX .

(vi) Facts relating to the taxation of ForOp in XXXXXXXXXX

73. XXXXXXXXXX

74. XXXXXXXXXX

75. XXXXXXXXXX

76. XXXXXXXXXX

77. The amounts of interest and fees payable by ForOp on the XXXXXXXXXX Debt Facility and on the XXXXXXXXXX Debt Facility (including amounts of Fixed Coupons and XXXXXXXXXX ) will be deductible in the calculation of its taxable income/loss. XXXXXXXXXX .

Proposed Transactions

78. Subco will incorporate New Canco under the XXXXXXXXXX and subscribe for common shares of New Canco for nominal value. The authorised share capital of New Canco will consist of common shares only.

79. New Canco will incorporate New XXXXXXXXXX (XXXXXXXXXX , and subscribe for common shares of New XXXXXXXXXX for nominal value. The authorised share capital of New XXXXXXXXXX will consist of common shares only. New XXXXXXXXXX will be resident in XXXXXXXXXX .

80. Finco Subco will borrow, over time, funds from arm's-length third-party lenders with the following terms (the "Third-party Loans"):

(a) denominated in XXXXXXXXXX ;

(b) XXXXXXXXXX ; and.

(c) the obligation of Finco Subco to pay the Third-party Loans may be assumed by a related party at the option of the Parentco Group.

The proceeds from the Third-party Loans may be loaned to Holdco to fund the Daylight Loan Facility prior to being returned to Finco Subco to fund the Finco Subco Loans (as defined in paragraph 87 below).

81. New Canco will incorporate New Cansub under the XXXXXXXXXX and subscribe for common shares of New Cansub for nominal value. New Cansub's authorized share capital will consist of an unlimited number of common shares and preferred shares (the "New Cansub Preferreds"). Each common share of New Cansub will entitle the holder to one vote. The holder of New Cansub's common shares will be entitled to receive dividends if, as and when declared at the discretion of New Cansub's directors, and will be entitled to receive the remaining property of New Cansub upon its winding-up or dissolution. New Cansub will not be a "financial intermediary corporation" as defined in subsection 191(1).

82. New Canco will borrow, over time and under the Daylight Loan Facility ("Daylight Loans") and lend an amount equivalent to the funds borrowed under the Daylight Loans to New Opco (the "New Opco Demand Loans") at interest. The New Opco Demand Loans shall be denominated in XXXXXXXXXX .

83. New Opco will use the proceeds from the New Opco Demand Loans to invest in New Cansub Preferreds. The dividend rate on the New Cansub Preferreds will be of sufficient magnitude such that New Opco will earn a positive amount in excess of the interest it incurs on the New Opco Demand Loans.

84. The New Cansub Preferreds will have the following attributes:

a) non-voting;

b) entitled to a cumulative dividend. The dividends payable will be calculated by reference to the redemption price of the New Cansub Preferreds and a floating rate XXXXXXXXXX % in excess of the interest rate payable on the New Opco Demand Loans (defined in paragraph 82 above):

c) redeemable at the option of issuer for an amount equal to the issue price in Canadian dollars plus any accrued but unpaid dividends, by New Cansub;

d) retractable at any time at the option of the holder for an amount equal to the issue price in Canadian dollars plus any accrued but unpaid dividends; and,

e) entitled to priority over the common shares of New Cansub and all other shares ranking junior to the New Cansub Preferreds with respect to the payment of dividends and the distribution of assets of New Cansub in the event of any liquidation, dissolution or winding-up of New Cansub or other distribution of assets of New Cansub among its shareholders for purposes of winding-up its affairs.

85. New Cansub will loan in Canadian dollars the proceeds of the New Cansub Preferreds subscriptions interest-free to New Canco (the "Interest-free Loans 2"). New Canco will enter into a support agreement whereby it will undertake to capitalize New Cansub to the extent New Cansub requires funds to meet its financing obligations (e.g., paying dividends on its preferred shares).

86. New Canco will repay each Daylight Loan with the proceeds received from New Cansub in respect of the Interest-free Loans 2.

87. Finco Subco will lend the proceeds of the Third-party Loans to New Canco (the "Finco Subco Loans"). The Finco Subco Loans will have arm's length terms and an interest rate sufficient for Finco Subco to earn a positive return on the Third-party Loans.

88. New Canco will lend the proceeds it receives in respect of the Finco Subco Loans to New XXXXXXXXXX interest-free ("Interest-free Loans 1"). Interest-free Loans 1 will be non-interest-bearing and denominated XXXXXXXXXX .

89. New XXXXXXXXXX will lend the proceeds of Interest-free Loans 1 to ForOp according to either of the XXXXXXXXXX Debt Facility or the XXXXXXXXXX Debt Facility.

90. Within XXXXXXXXXX years of the date of this ruling, the percentage of XXXXXXXXXX Debt XXXXXXXXXX in Canada will be within XXXXXXXXXX percentage points of the percentage of XXXXXXXXXX Debt in Canada. For example if XXXXXXXXXX % of the total of XXXXXXXXXX Debt is done through Canada then at least XXXXXXXXXX %, but no more than XXXXXXXXXX %, of the total of XXXXXXXXXX Debt XXXXXXXXXX would also need to be done through Canada. For this purpose "debt done through Canada" would include XXXXXXXXXX Debt or XXXXXXXXXX Debt held by a direct or indirect subsidiary of Holdco or of New Canco.

91. ForOp will use the proceeds of the XXXXXXXXXX Debt Facility and/or the XXXXXXXXXX Debt Facility received from New XXXXXXXXXX to finance XXXXXXXXXX .

92. Until such time that New Canco begins to receive cash flows from its investment XXXXXXXXXX , its interest requirements on the Third-party Loans and any other cash shortfalls shall be funded by interest-free loans provided by Subco and/or New Opco.

93. New Opco will pay interest owing to New Canco on the New Opco Demand Loans in accordance with their terms.

94. To the extent that, on the date dividends are to be paid by New Cansub on the New Cansub Preferreds, New Cansub does not have sufficient cash on hand, or is not able to legally pay dividends, New Canco will contribute such additional funds to New Cansub in the form of contributions of capital as are required to enable the payment of such dividends. Until XXXXXXXXXX begins to generate cash flows, the primary source of this cash will be from interest receipts as described in paragraph 93 above.

95. No shares will be issued by New Cansub with respect to these contributions of capital and no amount will be added to New Cansub's stated capital accounts or to its PUC. The amount of each contribution of capital will be recorded by New Cansub as contributed surplus for accounting purposes. These contributions of capital will not be treated as income of New Cansub pursuant to generally accepted accounting principles in Canada.

96. New Cansub will pay dividends to New Opco on the New Cansub Preferreds in accordance with their terms.

Purpose of the Proposed Transactions

97. XXXXXXXXXX

98. The XXXXXXXXXX main purpose of the Proposed Transactions is to utilize losses that are anticipated to be incurred by New Canco in respect of the proposed investment in the Project. The expected results of this transaction are:

(a) New Canco will earn interest income from New Opco on the New Opco Demand Loan, which will serve to offset the interest expenses on its Finco Subco Loans;
(b) New Opco will receive dividend income on its investment in the New Cansub Preferreds; and
(c) New Cansub will have the financial capacity to pay dividends on the New Cansub Preferreds from capital contributions made by New Canco.

Additional Representations

99. The Proposed Transactions described herein will occur in the order presented.

100. The New Cansub Preferreds that will be issued, as described in paragraphs 83- 84 above, will not be, at any time during the implementation of the Proposed Transactions described herein,

(a) the subject of a "dividend rental arrangement" as defined in subsection 248(1);
(b) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(c) issued for consideration that is or includes:

• an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or
• any right of the type described in subparagraph 112(2.4)(b)(ii).

101. New XXXXXXXXXX will be a Foreign Affiliate of New Canco in respect of which New Canco will have a Qualifying Interest throughout the year.

102. ForOp is a Foreign Affiliate of New Opco in respect of which New Opco will have a Qualifying Interest throughout the year. ForOp will use the proceeds from the XXXXXXXXXX Debt Facility and the XXXXXXXXXX Debt Facility for the purpose of earning income from an Active Business.

103. Pursuant to paragraph 95(2)(n) and for the purpose of paragraph 95(2)(a), ForOp will be a Foreign Affiliate of New Canco in respect of which New Canco will have Qualifying Interest throughout the year.

104. ForOp is resident only in XXXXXXXXXX under common law principles.

105. The ACB in the New Cansub shares that will arise from contributions of capital by New Canco as described in paragraph 95 above will not be used by New Canco, or any present or future related or affiliated party of New Canco, to generate capital losses or otherwise shelter gains in the affiliated group from taxation.

106. None of the Proposed Transactions will be undertaken to carry a Non-Capital Loss forward beyond the original carry-forward period that would have otherwise applied to New Canco.

107. New Opco has permanent establishments in XXXXXXXXXX respectively, of its taxable income is allocable to those provinces based on Opco's XXXXXXXXXX income tax returns.

108. New Cansub and New Canco will have permanent establishments only in the Province of XXXXXXXXXX .

Rulings Given

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

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the terms are as described above, we rule as follows:

A. Pursuant to subparagraph 95(2)(a)(ii) to the extent such amounts would otherwise be included in computing the income or loss of New XXXXXXXXXX from property, there shall be included in computing its income or loss from active business the income or loss derived by it from amounts paid or payable by ForOp in respect of:

a. the Interest on the XXXXXXXXXX Debt, (which includes amounts XXXXXXXXXX as outlined above in paragraph 46);
b. the Interest on the XXXXXXXXXX Debt, (which includes amounts XXXXXXXXXX and deferred as outlined in paragraphs 55 and 58, and 57 respectively);
c. the XXXXXXXXXX fees described in paragraphs 50 and 72 above; and
d. the XXXXXXXXXX fees described in paragraphs 50 and 72 above.

B. The income or loss of New XXXXXXXXXX derived from the amounts paid to it by ForOp described in Ruling A above shall be included in computing the taxable surplus of New XXXXXXXXXX for the purposes of subsection 5907(1) of the Income Tax Regulations.

C. Subsection 95(6) will not be applicable as a result of the Proposed Transactions in and by themselves.

D. To the extent the interest paid or payable by Finco Subco on the Third-party Loans is paid pursuant to a legal obligation to pay interest, the interest paid on the money borrowed in paragraph 80 above, for the purposes of making the Finco Subco Loans to New Canco, will be deductible pursuant to paragraph 20(1)(c).

E. To the extent the interest paid or payable by New Canco on the Finco Subco Loans is paid pursuant to a legal obligation to pay interest, the interest paid on the money borrowed in paragraph 87 above for the purposes of making the Interest-free Loans 1 to New XXXXXXXXXX will be deductible pursuant to paragraph 20(1)(c), as long as all the share of New XXXXXXXXXX continue to be held by New Canco.

F. For taxation years beginning after XXXXXXXXXX , section 18.2 will apply to restrict the amount of interest deductible by New Canco referred to in Ruling E above.

G. To the extent the interest paid or payable by New Opco on the New Opco Demand Loans is paid pursuant to a legal obligation to pay interest, the interest paid on the money borrowed in paragraph 82 above for the purposes of acquiring the New Cansub Preferreds will be deductible pursuant to paragraph 20(1)(c).

H. In respect of the contributions of capital made by New Canco as described in paragraphs 94-95 above, no amount will be included in the income of New Cansub pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x).

I. The dividends (or deemed dividends, if any) received by New Opco on the New Cansub Preferreds, as described in paragraph 96 above, will be taxable dividends that will be deductible pursuant to subsection 112(1) in computing the taxable income of New Opco for the taxation year in which the dividends are received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2) or 112(2.4).

J. Subsection 245(2) will not be applicable as a result of the Proposed Transactions in and by themselves to re-determine the tax consequences confirmed in the rulings given above.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the Proposed Transactions commence before XXXXXXXXXX . In addition, nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of:

(a) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;
(b) the application or non-application of the general anti-avoidance provisions of any province; and
(c) the application of subsection 247(2) to the Proposed Transactions.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

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