2009 Ruling 2008-0284621R3 - Loss Utilization

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: Is the Loss utilization arrangement acceptable?

Position: Yes

Reasons: Meets the technical requirements of the provisions.

XXXXXXXXXX 						2008-028462					

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling with respect to the above-noted taxpayers. We also acknowledge the additional information provided to us in your letters of submission dated XXXXXXXXXX , as well as during our various telephone and email conversations (XXXXXXXXXX ) the last of which was on XXXXXXXXXX .

To the best of your knowledge, and that of the above-noted taxpayers, none of the issues involved in this advance income tax ruling request are:

(i) in an earlier return of any of the above-noted taxpayers or a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of any of the above-noted taxpayers or a related person;
(iii) under objection by any of the above-noted taxpayers or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously issued to any of the above-noted taxpayers by the Income Tax Rulings Directorate.

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.

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

Definitions

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

a) "Aco" means XXXXXXXXXX corporation described more fully in 2 below;

b) "Additional Bco Preferred Shares" means the preferred shares of Bco that Aco subscribes for as described in 29 below;

c) "affiliated persons" has the meaning assigned by subsection 251.1(1);

d) "arm's length" has the meaning assigned by subsection 251(1);

e) "Bco" means XXXXXXXXXX , a corporation described more fully in 8 below;

f) "Bco/Aco Loan" means the loan made by Bco to Aco as described in 25 below;

g) "Bco Daylight Loan" means the loan made by Dco to Bco as described in 24 below;

h) "Bco Losses" means the non-capital losses of Bco described in 10 below;

i) "Bco Preferred Shares" means the preferred shares of Bco that Aco subscribes for as described in 26 below;

j) "Cco" means XXXXXXXXXX corporation described more fully in 12 below;

k) "Cco/Aco Loan" means the loan made by Cco to Aco as described in 29 below;

l) "Cco Daylight Loan" means the loan made by Dco to Cco as described in 28 below;

m) "Cco Preferred Shares" means the preferred shares of Cco that Bco subscribes for as described in 31 below;

n) "Dco" means XXXXXXXXXX ., as described more fully in 1 below;

o) "Dco Daylight Loan" means the loan made to Dco by an arm's length financial institution as described in 19 below;

p) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

q) "Eco" means XXXXXXXXXX ., a corporation described more fully in 4 below;

r) "Eco/Aco Loan" means the loan made by Eco to Aco as described in 21 below;

s) "Eco Daylight Loan" means the loan made by Dco to Eco as described in 20 below;

t) "Eco Losses" means the non-capital losses of Eco described in 6 below;

u) "Eco Preferred Shares" means the preferred shares of Eco that Aco subscribes for as described in 21 below;

v) "ESubco" means XXXXXXXXXX , a corporation described more fully in 4 below;

w) "excepted dividends" has the meaning assigned by section 187.1;

x) "excluded dividends" has the meaning assigned by subsection 191(1);

y) "financial institution" has the meaning assigned by subsection 142.2(1);

z) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

aa) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

bb) XXXXXXXXXX

cc) XXXXXXXXXX

dd) "non-capital loss" has the meaning assigned by subsection 111(8);

ee) XXXXXXXXXX

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

gg) "Proposed Transactions" means the transactions described in 19 to 40;

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

ii) "Regulations" mean the Income Tax Regulations, Consolidated Regulations of Canada, Chapter 945, as amended;

jj) "related persons" has the meaning assigned by subsection 251(2);

kk) "specified financial institution" has the meaning assigned by subsection 248(1);

ll) "subject corporation" has the meaning assigned by subsection 186(3);

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

nn) "substantial interest" has the meaning assigned by subsection 191(2);

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

pp) "taxable dividend" has the meaning assigned by subsection 89(1); and

qq) "taxation year" has the meaning assigned by section 249.

Facts

1. Dco is incorporated under the laws of Canada. Dco is a XXXXXXXXXX through its subsidiaries, including Aco and Cco. Dco is a public corporation and a taxable Canadian corporation. Each class of the issued shares of Dco is listed on the XXXXXXXXXX Stock Exchange. Dco's address is XXXXXXXXXX and it files its tax returns with the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

2. Aco is a XXXXXXXXXX . Aco carries on the business of XXXXXXXXXX . Aco is a public corporation, a taxable Canadian corporation, XXXXXXXXXX Aco is a subsidiary wholly-owned corporation of Dco. Aco's address is XXXXXXXXXX and it files its tax returns with the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

3. The taxation year of Aco ends on XXXXXXXXXX . At the end of its XXXXXXXXXX taxation year, Aco did not have any non-capital losses available to it, nor does it expect to have any non-capital losses available to it in XXXXXXXXXX and subsequent years.

4. Eco was incorporated under the laws of Canada. Currently, the only business of Eco is the holding of securities of its subsidiaries, including all of the common shares of ESubco, XXXXXXXXXX . Eco is a taxable Canadian corporation and XXXXXXXXXX . Eco's address is XXXXXXXXXX and it files its tax returns with the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

5. The authorized capital of Eco consists of an unlimited number of common shares and an unlimited number of preferred shares issuable in series. All of the issued and outstanding common shares of Eco are owned by Aco. There are no preferred shares of Eco that are issued and outstanding.

6. The taxation year of Eco ends on XXXXXXXXXX . Eco holds income-producing investments, including its equity investments in its subsidiary, ESubco. As a result of Eco's expenses incurred for general corporate purposes, including its investments in ESubco, Eco has incurred non-capital losses of approximately $XXXXXXXXXX that remain unused as at the end of its XXXXXXXXXX taxation year (the "Eco Losses"). Approximately $XXXXXXXXXX of the Eco Losses will expire before XXXXXXXXXX if they remain unused by Eco and the balance will expire after XXXXXXXXXX if they remain unused by Eco.

7. Eco has been affiliated with Aco since the Eco group was acquired by the Aco group in XXXXXXXXXX , and Eco's available non-capital losses were incurred after that time.

8. Bco was incorporated under the XXXXXXXXXX , for the purpose of becoming the parent company of Cco XXXXXXXXXX . Currently, the only business of Bco is the holding of securities of its subsidiaries, including all of the common shares of Cco. Bco is a taxable Canadian corporation XXXXXXXXXX . Bco's address is XXXXXXXXXX and it files its tax returns with the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

9. The authorized capital of Bco consists of an unlimited number of common shares and an unlimited number of preferred shares issuable in series. There are issued and outstanding XXXXXXXXXX common shares of Bco, XXXXXXXXXX Series XXXXXXXXXX preferred shares of Bco and XXXXXXXXXX Series XXXXXXXXXX preferred shares of Bco. All of the issued common shares and the Series XXXXXXXXXX preferred shares of Bco are owned by Aco . The Series XXXXXXXXXX preferred shares of Bco are listed and posted for trading on the XXXXXXXXXX Stock Exchange.

10. The taxation year of Bco ends on XXXXXXXXXX . Bco holds income-producing investments, including its equity investments in Cco. As a result of Bco's expenses incurred for general corporate purposes, including investments in its subsidiaries, Bco has incurred non-capital losses of approximately $XXXXXXXXXX that remain unused as of the end of its XXXXXXXXXX taxation year (the "Bco Losses"). The Bco Losses will expire at the end of XXXXXXXXXX if they remain unused by Bco.

11. Bco has been affiliated with Aco since Bco was acquired by the Aco group on XXXXXXXXXX , and Bco's available non-capital losses were incurred after that time.

12. XXXXXXXXXX

13. Cco carries on the business of XXXXXXXXXX in Canada and internationally XXXXXXXXXX . Cco is a public corporation, a taxable Canadian corporation, XXXXXXXXXX . Cco's address is XXXXXXXXXX and it files its tax returns with the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

14. The authorized capital of Cco consists of an unlimited number of common shares and an unlimited number of Class A shares, Class B shares, Class C shares, Class D shares, Class E shares and Class F shares, each issuable in series. There are issued and outstanding XXXXXXXXXX common shares of Cco, XXXXXXXXXX Class XXXXXXXXXX Series XXXXXXXXXX shares of Cco and XXXXXXXXXX Class XXXXXXXXXX preferred shares of Cco, all of which are owned by Bco.

15. The taxation year of Cco ends on XXXXXXXXXX . At the end of its XXXXXXXXXX taxation year, Cco did not have any non-capital losses available to it, nor does it expect to have any non-capital losses available to it in XXXXXXXXXX . However, Cco has available to it additional deductions of at least $XXXXXXXXXX of the Act as at the end of its XXXXXXXXXX taxation year.

16. Cco has been affiliated with Aco since Bco was acquired by the Aco group on XXXXXXXXXX and Cco's available XXXXXXXXXX have increased by over $XXXXXXXXXX since that time.

17. Based on its existing assets and resources, (i) Aco is in a position to increase its current arm's length borrowings by an amount in excess of the total amount of the Eco/Aco Loan, the Bco/Aco Loan and the Cco/Aco Loan, supported by a guarantee from Dco, and (ii) Aco is in a position to pay interest on the Eco/Aco Loan, the Bco/Aco Loan and the Cco/Aco Loan without relying on the dividends payable on the Eco Preferred Shares, the Bco Preferred Shares and the Additional Bco Preferred Shares. Moreover, based on its existing assets and resources, Dco is in a position to increase its current arm's length borrowings by an amount in excess of the total amount of the Eco/Aco Loan, the Bco/Aco Loan and the Cco/Aco Loan.

18 It is expected that Aco will have sufficient annual income for tax purposes, before claiming discretionary deductions, to fully utilize the interest expense as described in 34 to 36 below.

Proposed Transactions

Dco Daylight Loan

19. Dco will borrow an amount not exceeding $XXXXXXXXXX on a "daylight loan" basis from an arm's-length financial institution (the "Dco Daylight Loan"). The terms of the Dco Daylight Loan will be commercial arm's length terms.

The Eco Transactions

20. Dco will use approximately $XXXXXXXXXX of the proceeds received from the Dco Daylight Loan to make an interest-free loan to Eco (the "Eco Daylight Loan"). The Eco Daylight Loan will be repayable, in whole or in part, on demand by Dco or at any time at Eco's option.

21. Eco will use the entire proceeds received from the Eco Daylight Loan to make a loan to Aco (the "Eco/Aco Loan"). Simple interest will accrue on the Eco/Aco Loan at an arm's length market rate determined at the time the Eco/Aco Loan is made (expected to be in the range of XXXXXXXXXX % - XXXXXXXXXX %). Interest on the Eco/Aco Loan will be payable annually on specified dates each year. The Eco/Aco Loan will have a term of approximately XXXXXXXXXX , and its principal amount will be repayable at any time, in whole or in part, at Aco's option.

22. Aco will use the entire proceeds of the Eco/Aco Loan to subscribe for preferred shares of Eco (the "Eco Preferred Shares") having an aggregate redemption price equal to the subscription price of those shares. The PUC of the Eco Preferred Shares will be equal to their aggregate redemption price. The Eco Preferred Shares will not have a retraction right on the part of the holder or a fixed date for redemption, and will be redeemable at the option of the issuer on XXXXXXXXXX days' notice. Aco will be entitled to cumulative dividends on the Eco Preferred Shares, calculated daily by reference to the redemption price of the Eco Preferred Shares at a rate equal to the interest rate on the Eco/Aco Loan plus an appropriate amount (which will be not less than XXXXXXXXXX % per annum) to be determined based on market conditions at the time of issuance. The amount of dividends received by Aco on the Eco Preferred Shares held by Aco will be sufficient to permit Aco to realize a profit on its investment in the Eco Preferred Shares net of any interest on the Eco/Aco Loan and any other expenses expected to be incurred by Aco in connection with that investment.

23. Eco will use the entire proceeds of Aco's subscription for the Eco Preferred Shares to repay the Eco Daylight Loan to Dco.

The Bco Transactions

24. Dco will use approximately $XXXXXXXXXX of the proceeds received from the Dco Daylight Loan to make an interest-free loan to Bco (the "Bco Daylight Loan"). The Bco Daylight Loan will be repayable, in whole or in part, on demand by Dco or at any time at Bco's option.

25 Bco will use the entire proceeds received from the Bco Daylight Loan to make a loan to Aco (the "Bco/Aco Loan"). Simple interest will accrue on the Bco/Aco Loan at an arm's length market rate determined at the time the Bco/Aco Loan is made (expected to be in the range of XXXXXXXXXX % - XXXXXXXXXX %). Interest on the Bco/Aco Loan will be payable annually on specified dates each year. The Bco/Aco Loan will have a term of approximately XXXXXXXXXX years, and its principal amount will be repayable at any time, in whole or in part, at Aco's option.

26. Aco will use the entire proceeds of the Bco/Aco Loan to subscribe for shares of a newly-created series of or newly-created class of preferred shares of Bco (the "Bco Preferred Shares") having an aggregate redemption price equal to the subscription price of those shares. The PUC of the Bco Preferred Shares will be equal to their aggregate redemption price. The Bco Preferred Shares will not have a retraction right on the part of the holder or a fixed date for redemption, and will be redeemable at the option of the issuer on XXXXXXXXXX days' notice. Aco will be entitled to cumulative dividends on the Bco Preferred Shares, calculated daily by reference to the redemption price of the Bco Preferred Shares at a rate equal to the interest rate on the Bco/Aco Loan plus an appropriate amount (which will be not less than XXXXXXXXXX % per annum) to be determined based on market conditions at the time of issue. The amount of dividends received by Aco on the Bco Preferred Shares held by Aco will be sufficient to permit Aco to realize a profit on its investment in the Bco Preferred Shares net of any interest on the Bco/Aco Loan and any other expenses expected to be incurred by Aco in connection with that investment.

27. Bco will use the entire proceeds of Aco's subscription for the Bco Preferred Shares to repay the Bco Daylight Loan to Dco.

The Cco Transactions

28. Dco will use the balance of approximately $XXXXXXXXXX of the proceeds received from the Dco Daylight Loan to make an interest-free loan to Cco (the "Cco Daylight Loan"). The Cco Daylight Loan will be repayable, in whole or in part, on demand by Dco or at any time at Cco's option.

29. Cco will use the entire proceeds received from the Cco Daylight Loan to make a loan to Aco (the "Cco/Aco Loan"). Simple interest will accrue on the Cco/Aco Loan at an arm's length market rate determined at the time the Cco/Aco Loan is made (expected to be in the range of XXXXXXXXXX % - XXXXXXXXXX %). Interest on the Cco/Aco Loan will be payable annually on specified dates each year. The Cco/Aco Loan will have a term of approximately XXXXXXXXXX years, and its principal amount will be repayable at any time, in whole or in part, at Aco's option.

30. Aco will use the entire proceeds of the Cco/Aco Loan to subscribe for additional shares of a newly-created series of or newly-created class of preferred shares of Bco (the "Additional Bco Preferred Shares") having an aggregate redemption price equal to the subscription price of those shares. The PUC of the Additional Bco Preferred Shares will be equal to their aggregate redemption price. The Additional Bco Preferred Shares will not have a retraction right on the part of the holder or a fixed date for redemption, and will be redeemable at the option of the issuer on XXXXXXXXXX days' notice. Aco will be entitled to cumulative dividends on the Additional Bco Preferred Shares, calculated daily by reference to the redemption price of the Additional Bco Preferred Shares at a rate equal to the interest rate on the Cco/Aco Loan plus an appropriate amount (which will be not less than XXXXXXXXXX % per annum) to be determined based on market conditions at the time of issuance. The amount of dividends received by Aco on the Additional Bco Preferred Shares held by Aco will be sufficient to permit Aco to realize a profit on its investment in the Additional Bco Preferred Shares net of any interest on the Cco/Aco Loan and any other expenses expected to be incurred by Aco in connection with that investment.

31. Bco will use the entire proceeds of Aco's subscription for the Additional Bco Preferred Shares to subscribe for shares of a newly-created series of or newly-created class of preferred shares of Cco (the "Cco Preferred Shares") having an aggregate redemption price equal to the subscription price of those shares. The PUC of the Cco Preferred Shares will be equal to their aggregate redemption price. The Cco Preferred Shares will not have a retraction right on the part of the holder or a fixed date for redemption, and will be redeemable at the option of the issuer on XXXXXXXXXX days' notice. Bco will be entitled to cumulative dividends on the Cco Preferred Shares at a rate equal to the rate at which dividends are payable on the Additional Bco Preferred Shares.

32. Cco will use the entire proceeds of Bco's subscription for the Cco Preferred Shares to repay the Cco Daylight Loan to Dco.

Repayment of Dco Daylight Loan

33. Dco will use the proceeds of repayment of the Eco Daylight Loan, the Bco Daylight Loan and the Cco Daylight Loan to repay the Dco Daylight Loan to the arm's-length financial institution.

Payments of Interest and Dividends

34. In each taxation year during which the Eco/Aco Loan is outstanding, Aco will pay interest to Eco semi-annually in accordance with the terms of the loan, and Eco will include the interest in its income. Eco will apply the Eco Losses to reduce its income for the relevant taxation year to a nominal amount to the extent the Eco Losses remain unused and are available to it at the end of the taxation year.

35. In each taxation year during which the Bco/Aco Loan is outstanding, Aco will pay interest to Bco semi-annually in accordance with the terms of the loan, and Bco will include the interest in its income. Bco will apply the Bco Losses to reduce its income for the relevant taxation year to a nominal amount to the extent the Bco Losses remain unused and are available to it at the end of the taxation year.

36. In each taxation year during which the Cco/Aco Loan is outstanding, Aco will pay interest to Cco semi-annually in accordance with the terms of the loan, and Cco will include the interest in its income. Cco will claim a XXXXXXXXXX , to reduce its income for the relevant taxation year to a nominal amount to the extent such a deduction is available to it at the end of the taxation year.

37. It is expected that dividends will be paid on the Eco Preferred Shares, the Bco Preferred Shares, the Additional Bco Preferred Shares and the Cco Preferred Shares at the rates and at the times provided for under the terms of the shares.

Repayment of Eco/Aco Loan and Redemption of Eco Preferred Shares

38. Before XXXXXXXXXX , (i) Aco will pay any accrued and unpaid interest on the Eco/Aco Loan, (ii) Eco will pay any accrued but unpaid dividends on the Eco Preferred Shares and redeem such shares, (iii) upon such redemption, Eco will issue a demand promissory note to Aco for an amount equal to the redemption price of the shares redeemed and those shares will be cancelled, (iv) immediately thereafter, Aco will exercise its right to repay the Eco/Aco Loan, and (v) by agreement between Aco and Eco, the Eco/Aco Loan and the demand promissory note issued by Eco to Aco will be repaid by way of set off, and (vi) the demand promissory note issued by Eco to Aco and the Eco/Aco Loan will be cancelled.

Repayment of Bco/Aco Loan and Redemption of Bco Preferred Shares

39. Before XXXXXXXXXX , (i) Aco will pay any accrued and unpaid interest on the Bco/Aco Loan, (ii) Bco will pay any accrued but unpaid dividends on the Bco Preferred Shares and redeem such shares, (iii) upon such redemption, Bco will issue a demand promissory note to Aco for an amount equal to the redemption price of the shares redeemed and those shares will be cancelled, (iv) immediately thereafter, Aco will exercise its right to repay the Bco/Aco Loan, and (v) by agreement between Aco and Bco, the Bco/Aco Loan and the demand promissory note issued by Bco to Aco will be repaid by way of set off, and (vi) the demand promissory note issued by Bco to Aco and the Bco/Aco Loan will be cancelled.

Repayment of Cco/Aco Loan and Redemption of Cco Preferred Shares and Additional Bco Preferred Shares

40. Within the three year period following the implementation of the Proposed Transactions, (i) Aco will pay any accrued and unpaid interest on the Cco/Aco Loan, (ii) Cco will pay any accrued but unpaid dividends on the Cco Preferred Shares and redeem such shares, (iii) upon such redemption, Cco will issue a demand promissory note to Bco for an amount equal to the redemption price of the shares redeemed and those shares will be cancelled, (iv) Bco will pay any accrued but unpaid dividends on the Additional Bco Preferred Shares and redeem such shares, (v) Bco will deliver the Cco demand promissory note to Aco in payment of the redemption proceeds of the Additional Bco Preferred Shares, (vi) immediately thereafter, Aco will exercise its right to repay the Cco/Aco Loan, and (vii) by agreement between Aco and Cco, the Cco/Aco Loan and the Cco demand promissory note delivered by Bco to Aco will be repaid by way of set off, and (viii) the demand promissory note issued by Cco, and held by Aco, and the Cco/Aco Loan will be cancelled.

Additional Information

41. Based on its existing assets and resources, Eco is in a position to fund the dividends on the Eco Preferred Shares from its own earnings (to the extent such dividends exceed the interest received on the Eco/Aco Loan).

42. Based on its existing assets and resources, Bco is in a position to fund the dividends on the Bco Preferred Shares from its own earnings (to the extent such dividends exceed the interest received on the Bco/Aco Loan). Furthermore, Bco is in a position to fund the dividends on the Additional Bco Preferred Shares from its own earnings (to the extent such dividends exceed the dividends received on the Cco Preferred Shares).

43. Based on its existing assets and resources, Cco is in a position to fund the dividends on the Cco Preferred Shares from its own earnings (to the extent such dividends exceed the interest received on the Cco/Aco Loan).

44. The Eco Preferred Shares, the Bco Preferred Shares, the Additional Bco Preferred Shares, and the Cco Preferred Shares will not at any time throughout the series of transactions that includes the Proposed Transactions be:

i) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
ii) the subject of a dividend rental arrangement;
iii) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
iv) issued for consideration that is or includes:

A) 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
B) any right of the type described in subparagraph 112(2.4)(b)(ii).

45. The amount of

i) in the case of Eco, the Eco Preferred Shares;
ii) in the case of Bco, the Bco Preferred Shares and the Additional Bco Preferred Shares; and
iii) in the case of Cco, the Cco Preferred Shares;

will, in each case, be reported as preferred shares in the equity section of the Balance Sheet of its financial statements and at the end of any taxation year will, in each case, be required to be included in its "capital" for that taxation year within the meaning of section 190.13.

46. Dco, Aco, Eco, Bco and Cco are affiliated persons and related persons and will be, throughout the series of transactions that includes the Proposed Transactions, affiliated persons and related persons.

47. XXXXXXXXXX

48. XXXXXXXXXX

49. Aco will not acquire the Eco Preferred Shares, the Bco Preferred Shares and the Additional Bco Preferred Shares in the ordinary course of the business carried on by Aco. Bco will not acquire the Cco Preferred Shares in the ordinary course of the business carried on by Bco.

50. All of Dco's annual gross revenue is allocated to the province of XXXXXXXXXX .

51. Aco's annual gross Canadian revenue in its XXXXXXXXXX taxation year was allocated among the following provinces and territories in the specified percentages: XXXXXXXXXX This allocation does not differ materially from year to year.

52. All of Eco's annual gross revenue is allocated to the province of XXXXXXXXXX .

53. All of Bco's annual gross revenue is allocated to the province of XXXXXXXXXX .

54. Cco's annual gross Canadian revenue in its XXXXXXXXXX taxation year was allocated among the following provinces and territories in the specified percentages: XXXXXXXXXX This allocation does not differ materially from year to year.

55. The Proposed Transactions will not result in any of the Taxpayers being unable to pay their outstanding tax liabilities.

Purpose of the Proposed Transactions

56. The purpose of the Proposed Transactions is (i) to allow Eco, Bco and Cco to earn income from the Eco/Aco Loan, the Bco/Aco Loan and the Cco/Aco Loan, respectively, and to use some of the Eco Losses available to Eco, the Bco Losses available to Bco and XXXXXXXXXX , and (ii) to reduce Aco's taxable income by the amount of interest paid by it on the Eco/Aco Loan, the Bco/Aco Loan and the Cco/Aco Loan. As subsidiaries of a widely-held public corporation, it is very important that the tax recovery associated with such losses be recognized by Eco, Bco and Cco for financial reporting purposes. However, for financial reporting purposes, the tax recovery associated with the Eco Losses available to Eco, the Bco Losses available to Bco and the XXXXXXXXXX available to Cco cannot be recognized by Eco, Bco and Cco, respectively, unless they are able to demonstrate that it is more likely than not that there will be sufficient taxable income on an ongoing basis to utilize those deductions under the applicable tax law.

Rulings

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

A. Provided that Aco has a legal obligation to pay interest on the Eco/Aco Loan, that the interest paid or payable is reasonable, and that the Eco Preferred Shares continue to be held by Aco, Aco will be entitled, pursuant to paragraph 20(1)(c), to deduct in computing its income for a taxation year the lesser of (i) the interest paid or payable (depending on the method regularly followed by Aco in computing its income for the purposes of the Act) on the Eco/Aco Loan in respect of the taxation year, and (ii) a reasonable amount in respect thereof.

B. Provided that Aco has a legal obligation to pay interest on the Bco/Aco Loan, that the interest paid or payable is reasonable, and that the Bco Preferred Shares continue to be held by Aco, Aco will be entitled, pursuant to paragraph 20(1)(c), to deduct in computing its income for a taxation year the lesser of (i) the interest paid or payable (depending on the method regularly followed by Aco in computing its income for the purposes of the Act) on the Bco/Aco Loan in respect of the taxation year, and (ii) a reasonable amount in respect thereof.

C. Provided that Aco has a legal obligation to pay interest on the Cco/Aco Loan, that the interest paid or payable is reasonable, and that the Additional Bco Preferred Shares continue to be held by Aco, Aco will be entitled, pursuant to paragraph 20(1)(c), to deduct in computing its income for a taxation year the lesser of (i) the interest paid or payable (depending on the method regularly followed by Aco in computing its income for the purposes of the Act) on the Cco/Aco Loan in respect of the taxation year, and (ii) a reasonable amount in respect thereof.

D. The dividends received by Aco on the Eco Preferred Shares, the Bco Preferred Shares and the Additional Bco Preferred Shares will be taxable dividends that will be deductible pursuant to XXXXXXXXXX .

E. The dividends received by Bco on the Cco Preferred Shares will be taxable dividends that will be deductible pursuant to XXXXXXXXXX .

F. The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

G. 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 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 commenced 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 ruling provided herein.

Comments

Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination or ruling in respect of:

(a) the fair market value or adjusted cost base of any property or the paid up capital of any shares referred to herein;
(b) the amount of any non-capital loss, policy reserve or any other amount of any corporation referred to herein;
(c) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;
(d) the application or non-application of the general anti-avoidance provisions of any province; nor,
(e) any tax consequences in relation to any facts or Proposed Transactions referred to herein other than those specifically described in the rulings given.

Yours truly,

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate