2009 Ruling 2008-0297571R3 - Loss

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 loss consolidation scheme acceptable?

Position: Yes

Reasons: Within established procedures.

XXXXXXXXXX 						2008-029757

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 (the "Taxpayers"). We also acknowledge the additional information provided to us in your letter of submission dated XXXXXXXXXX , as well as by various emails, the last of which was received on XXXXXXXXXX .

This letter is based solely on the facts and proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

To the best of your knowledge, and that of the Taxpayers, none of the issues involved in this advance income tax ruling are:

(i) in an earlier return of any of the 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 Taxpayers or a related person;

(iii) under objection by any of the 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 Taxpayers by the Income Tax Rulings Directorate.
(However, see the comments below regarding the Prior Ruling.)

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 ., a taxable Canadian corporation XXXXXXXXXX ;

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

(c) "Agreeing Province" means a Province that has entered into an agreement with the Government of Canada under which the Government of Canada will collect taxes payable under the income tax statute of that Province and will make payments to that Province in respect of the taxes so collected;

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

(e) "Amount" means the amount of the stated capital reduction of Lossco's common shares as described in 18 below;

(f) "BCo" means XXXXXXXXXX ., a taxable Canadian corporation XXXXXXXXXX ;

(g) XXXXXXXXXX ;

(h) "CCo" means XXXXXXXXXX ., a taxable Canadian corporation XXXXXXXXXX ;

(i) "Demand Loan" has the meaning assigned in 24 below;

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

(k) "eligible dividend" has the meaning assigned by subsection 89(1);

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

(m) "forgiven amount" has the meaning assigned by subsection 80.01(1);

(n) "General Anti-avoidance Provision of an Agreeing Province" means:

(i) British Columbia: Section 68.1, Income Tax Act, R.S.B.C. 1996, c. 215, as amended to the date of this letter;

(ii) Manitoba: Section 53.1, Income Tax Act, C.C.S.M. 1988, c. I10, as amended to the date of this letter;

(iii) New Brunswick: Section 123, New Brunswick Income Tax Act, S.N.B. 2000, c. N-6.001, as amended to the date of this letter;

(iv) Newfoundland; Section 88, Income Tax Act, 2000, S.N.L. 2000, c. I-1.1, as amended to the date of this letter;

(v) Northwest Territories: Section 56.2, Income Tax Act, R.S.N.W.T. 1988, c. I-1, as amended to the date of this letter;

(vi) Nova Scotia: Section 80A, Income Tax Act, R.S.N.S., 1989, c. 217, as amended by to the date of this letter;

(vii) Ontario: Section 110, Taxation Act, 2007, S.O. 2007, c. 11, Sch. A, as amended to the date of this letter;

(viii) Prince Edward Island: Section 83, Income Tax Act, R.S.P.E.I. 1988, c. I-1, as amended to the date of this letter;

(ix) Saskatchewan: The Income Tax Act, 2000, S.S. 2000, c. I-2.01, assented to June 27, 2000, as amended to the date of this letter; and
(x) Yukon: Section 55.1, Income Tax Act, R.S.Y. 2002, c. 118, as amended to the date of this letter;

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

(p) "Interest-Free Loan" has the meaning assigned in 26 below;

(q) "Loan 1" has the meaning assigned in 16 below and the total cumulative amount of Loan 1 and Loan 2 will not exceed $XXXXXXXXXX ;

(r) "Loan 2" has the meaning assigned in 23 below and the total cumulative amount of Loan 1 and Loan 2 will not exceed $XXXXXXXXXX ;

(s) "Lossco" XXXXXXXXXX ., a corporation more fully described in 3 below;

(t) "net capital loss" has the meaning assigned by subsection 111(8);

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

(v) XXXXXXXXXX ;

(w) "Opco" means XXXXXXXXXX ;

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

(y) "principal amount" has the meaning assigned by subsection 248(1);

(z) "Prior Ruling" means a previous tax ruling issued by the Income Tax Rulings Directorate to Protifco and Lossco on XXXXXXXXXX , as XXXXXXXXXX . The structure created by the profit and loss consolidation transactions that were the subject of the Prior Ruling has since been largely unwound in accordance with paragraph 18 of the Prior Ruling, although the structure could have remained in place until XXXXXXXXXX ;

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

(bb) "Profitco" means XXXXXXXXXX , a corporation more fully described in 1 below;

(cc) "Profitco Loan" means the loan described in 19 below;

(dd) "Project" means XXXXXXXXXX ;

(ee) "Province" means XXXXXXXXXX ;

(ff) "Provincial Government" means the Government of the Province of XXXXXXXXXX

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

(hh) "restricted financial institution" has the meaning assigned by subsection 248(1);

(ii) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

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

(kk) "stated capital" has the meaning assigned by XXXXXXXXXX or XXXXXXXXXX , as the case may be;

(ll) "Subco" means the new corporation described in 21 below;

(mm) "Subco Preferred Shares" has the meaning assigned in 21 below;

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

(oo) "taxable dividend" has the meaning assigned by subsection 89(1).

Facts

1. Profitco is a taxable Canadian corporation and a private corporation. Profitco was incorporated under the XXXXXXXXXX and has a XXXXXXXXXX year end. Profitco's principal business address is XXXXXXXXXX . It deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Profitco's Business Number is XXXXXXXXXX .

2. Profitco was established XXXXXXXXXX

3. Lossco is a taxable Canadian corporation and a private corporation with a XXXXXXXXXX year end. Lossco's principal business address is XXXXXXXXXX . It deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Lossco's Business Number is XXXXXXXXXX .

4. Lossco was incorporated on XXXXXXXXXX

5. The authorized share capital of Lossco consists of XXXXXXXXXX

6. The PUC of the Lossco XXXXXXXXXX

7. The ACB to ACo of the XXXXXXXXXX Lossco common shares is $XXXXXXXXXX ; the ACB to BCo of the XXXXXXXXXX Lossco common shares is $XXXXXXXXXX ; and the ACB to CCo of the XXXXXXXXXX Lossco common shares is $XXXXXXXXXX .

8. Lossco acts as a holding company that owns all of the issued and outstanding shares of Profitco and, through Profitco, XXXXXXXXXX

9. Lossco regularly receives cash from Profitco in the form of interest and dividends. For the years XXXXXXXXXX , Lossco has paid the following dividends to its common shareholders:

Year
Amount
Dividends
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

10. Lossco's total indebtedness outstanding at XXXXXXXXXX was approximately $XXXXXXXXXX , all of which has been borrowed from arm's length lenders and is used for the purpose of earning income from a business or property (other than exempt income or to acquire a property the income from which would be exempt or to acquire a life insurance policy). The cash interest cost to Lossco of servicing this debt is approximately $XXXXXXXXXX per month. Lossco has loaned approximately $XXXXXXXXXX to Profitco from amounts derived from Lossco's borrowings and this amount continues to be outstanding. The structure created by the profit and loss consolidation transactions that were the subject of the Prior Ruling resulted in an additional interest bearing loan of approximately $XXXXXXXXXX made by Lossco to Profitco during the period from XXXXXXXXXX to XXXXXXXXXX . After XXXXXXXXXX , the structure was largely unwound and the amount of such loan is now $XXXXXXXXXX .

11. Lossco has incurred non-capital losses in previous taxation years (derived primarily from net interest expense) and is expected to incur additional non-capital losses which will be derived primarily from net interest expense.

12. Lossco's non-capital losses as of XXXXXXXXXX , are approximately $XXXXXXXXXX . Its non-capital losses by year of origin are as follows:

Year of Origin
Amount
Non-Capital Losses
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

Lossco estimates that it will have additional non-capital losses derived primarily from net interest expense (including, commencing in XXXXXXXXXX , net interest expense on Loan 1, as described in 16 below) in each of the years from XXXXXXXXXX to XXXXXXXXXX (not including the impact of the profit and loss consolidation transactions described below) as follows:

Year of Origin
Amount
Non-Capital Losses
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

Lossco is not expected to utilize any of its non-capital losses (assuming the profit and loss consolidation transactions described below are not undertaken).

13. Profitco also had non-capital losses as of XXXXXXXXXX of approximately $XXXXXXXXXX which were derived from the structure created by the profit and loss consolidation transactions that were the subject of the Prior Ruling. Its non-capital losses by year of origin are as follows:

Year of Origin
Amount
Non-Capital Losses
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX

Profitco utilized all of its non-capital losses by the end of its XXXXXXXXXX taxation year so that it had no remaining non-capital losses at the end of its XXXXXXXXXX taxation year. Profitco projects that it will have taxable income in years from XXXXXXXXXX through XXXXXXXXXX in the aggregate amount of approximately $XXXXXXXXXX which should be sufficient to offset Lossco's non-capital losses through the profit and loss consolidation transactions described below.

14. All of Lossco's losses and all of Profitco's income and losses have been and will be allocated to the Province of XXXXXXXXXX for provincial tax purposes.

15. Lossco has been advised by its investment bankers, XXXXXXXXXX , that it has the capacity based on its current financial position, to borrow an amount in excess of the aggregate of the amount of its current outstanding indebtedness and the amount of the additional proposed borrowings described below under "Proposed Transactions" (i.e., Loans 1 and 2). A letter has been obtained from XXXXXXXXXX which confirms the amount of Lossco's borrowing capacity.

Proposed Transactions

Part I. Borrowings to Return Capital

16. Lossco will borrow an amount not exceeding $XXXXXXXXXX from arm's length lenders ("Loan 1").

17. Lossco will establish a bank account ("Bank Account 1") at a financial institution, into which approximately $XXXXXXXXXX of the proceeds of Loan 1 will be deposited. No other amounts will be deposited into Bank Account 1. The proceeds of Loan 1 that are deposited into Bank Account 1 will be used only for the purpose of returning capital to the common shareholders described in the next paragraph.

18. The Lossco common shareholders will pass a special resolution to reduce the stated capital of Lossco's common shares by approximately $XXXXXXXXXX and Lossco will pay this Amount pro rata to the common shareholders. Lossco will use approximately $XXXXXXXXXX of the proceeds of Loan 1 on deposit in Bank Account 1 to pay the Amount pro rata to its common shareholders.

Part II. Borrowings for Certain Purpose

19. Lossco will establish a second bank account ("Bank Account 2") at a financial institution into which approximately $XXXXXXXXXX of the proceeds of Loan 1 will be deposited. No other amounts will be deposited into Bank Account 2. The proceeds of Loan 1 that are deposited into Bank Account 2 will be used by Lossco only for certain specific and limited purposes, including the following: (i) servicing cash interest costs of approximately $XXXXXXXXXX per month (which will increase to approximately $XXXXXXXXXX per month following the borrowing of Loan 1 as noted in 16 above) on its indebtedness; and (ii) making an interest bearing loan to Profitco (the "Profitco Loan") which Profitco will use in its business of XXXXXXXXXX . The interest rate on the Profitco Loan will be higher than the interest rate payable by Lossco on Loan 1.

Part III. Payment of Dividends

20. Lossco will use a portion of the cash it will receive from Profitco during a period of approximately XXXXXXXXXX to pay dividends during that period to its common shareholders in an aggregate amount of approximately $XXXXXXXXXX . Lossco will not use the funds on deposit in either of Bank Account 1 or Bank Account 2 to pay such dividends.

Part IV. Profit and Loss Consolidation Transactions

21. Lossco will incorporate a new corporation under the XXXXXXXXXX ("Subco"). Subco will have a XXXXXXXXXX year end and will be a taxable Canadian corporation and a private corporation. The authorized share capital of Subco will consist of an unlimited number of common shares without nominal or par value and an unlimited number of redeemable and retractable preferred shares (the "Subco Preferred Shares"). Lossco will subscribe for one common share of Subco for $XXXXXXXXXX on the incorporation of Subco.

22. The Subco Preferred Shares will be:

(a) non-participating and non-voting;

(b) entitled to an annual cumulative dividend rate, applied to the redemption amount (as described in 25 below) of the shares, equal to the interest rate applicable to the Demand Loan (as described in 24 below) plus XXXXXXXXXX %. The dividend rate will be determined at the time of the implementation of the proposed transactions described under this heading, i.e., Part IV. The dividends accruing in a taxation year of Profitco will be payable as described in 25 below;

(c) redeemable at any time at the option of Subco for an amount equal to the redemption amount and any unpaid dividends, by Subco:

(i) paying cash equal to such amount; or

(ii) assigning the Interest-Free Loan to Profitco and paying cash equal to any unpaid dividends; and

(d) retractable at any time at the option of the holder for an amount equal to the aggregate redemption amount and any unpaid dividends by Subco, by Subco assigning the Interest-Free Loan to Profitco and paying cash equal to any unpaid dividends, unless Subco:

(i) pays cash equal to such amount; or

(ii) sets off amounts owing under the Demand Loan against the redemption amount of the Subco Preferred Shares in circumstances where Subco has become the holder of the Demand Loan, and pays cash equal to any unpaid dividends.

The terms of the Interest-Free Loan and the Demand Loan will provide that if Profitco becomes the holder of the Interest-Free Loan, the Interest-Free Loan may, at the option of either Lossco or Profitco, be set off against the Demand Loan.

23. Lossco will borrow an amount, not exceeding $XXXXXXXXXX less the amount of Loan 1, on a daylight basis from an arm's length financial institution ("Loan 2").

24. Lossco will lend the proceeds received from Loan 2 to Profitco on a subordinated demand basis (the "Demand Loan"). The Demand Loan will bear interest at a rate not in excess of the commercial rate applicable for such loan. The interest rate will be ultimately determined at the time the proposed transactions described under this heading, i.e., Part IV, are entered into. Based on the information received from XXXXXXXXXX , Lossco's investment bankers, the interest rate is expected to be not greater than XXXXXXXXXX %. The terms of the Demand Loan will provide that repayment may be made in cash, by delivering the Subco Preferred Shares, or by way of set-off against the Interest-Free Loan.

25. Profitco will use the proceeds of the Demand Loan to subscribe for Subco Preferred Shares having an aggregate redemption amount and paid-up capital equal to the principal amount of the Demand Loan. Dividends on the Subco Preferred Shares will be paid on the same day that the interest on the Demand Loan is paid. The dividends will be funded by capital contributions made by Lossco to Subco.

26. Subco will lend the subscription proceeds received from the issuance of the Subco Preferred Shares to Lossco on an interest-free demand basis (the "Interest-Free Loan"). The terms of the Interest-Free Loan will allow Lossco to repay the Interest-Free Loan by assigning the Demand Loan to Subco. Lossco will use the proceeds from the Interest-Free Loan to repay Loan 2.

27. Lossco will agree to and will make contributions of capital to the Subco common share capital on the same day that the interest on the Demand Loan is to be paid, equal to the amount of dividends to be paid by Subco to Profitco in respect of the Subco Preferred Shares for so long as such Subco Preferred Shares are outstanding. The contributions of capital by Lossco to Subco will not be income to Subco pursuant to generally accepted accounting principles. Lossco will not be required to make such contributions of capital where Subco is no longer paying dividends to Profitco.

28. Subco will use amounts received as capital contributions from Lossco to pay dividends on the Subco Preferred Shares owned by Profitco.

29. Profitco will pay interest to Lossco on the Demand Loan.

30. Once sufficient income has been earned by Lossco to fully utilize its non-capital losses, and/or Profitco or Lossco has decided to unwind the proposed transactions in whole or in part, but no later than XXXXXXXXXX years after the implementation of the proposed transactions:

(a) Lossco will make capital contributions to the common share capital of Subco equal to the amount of any accrued and unpaid dividends on the Subco Preferred Shares;

(b) Subco will declare and pay the balance of any accrued and unpaid dividends on the Subco Preferred Shares;

(c) Profitco will pay the balance of any accrued and unpaid interest on the Demand Loan;

(d) Subco will redeem all or a portion of the Subco Preferred Shares held by Profitco and will settle the amount owing on the redemption by assigning a corresponding amount of the Interest-Free Loan to Profitco; and

(e) Profitco will repay all or a portion of the Demand Loan equal to the amount of the Subco Preferred Shares redeemed above by setting off the amount owing to Lossco with a corresponding amount of the Interest-Free Loan, and such portions of the Interest-Free Loan and the Demand Loan will be cancelled.

31. Once all of the Subco Preferred Shares held by Profitco have been redeemed and all of the Interest-Free Loan has been assigned to Profitco, as described above, Subco will be wound up into Lossco pursuant to XXXXXXXXXX .

Additional Information

32. There are no significant transactions that are contemplated prior to the time of the proposed transactions and there are no transactions contemplated after the completion of the proposed transaction that are part of the series of transactions or events that includes the proposed transactions.

33. None of Profitco, Lossco or any corporation to which either is related is a specified financial institution, restricted financial institution or a financial intermediary corporation.

34. None of the issued shares referred to herein are or will be, at any time during the implementation of the proposed transactions:

(a) the subject of any undertaking that is a guarantee agreement;

(b) the subject of a dividend rental arrangement;

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(d) issued for consideration that is or includes:

(i) 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

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii) held on condition that it or property substituted therefore may revert or pass to Profitco or a person to be determined by Profitco.

35. Profitco and Lossco are affiliated persons.

36. Neither Lossco nor Profitco has any outstanding tax liabilities that could be affected by the proposed transactions.

37. Profitco and Lossco do not expect to obtain any reduction of the Province of XXXXXXXXXX capital taxes as a result of the proposed transactions described above under heading Part IV, entitled "Profit and Loss Consolidation Transactions". Based on a pro-forma calculation of the Province of XXXXXXXXXX capital tax, the proposed transactions described under heading Part IV will be capital tax neutral for each of Profitco and Lossco and Subco will not be liable for the Province of XXXXXXXXXX capital tax as a result of the proposed transactions described under heading Part IV.

38. Each of Lossco, Profitco and Subco will agree that Subco will be a single purpose company, that Subco will have no liabilities and that Subco will carry on no activities other than those contemplated in the proposed transactions.

39. Lossco will not, at any time, dispose of its investment in Subco other than as described in 31 above.

40. To the extent that dividends paid by Subco to Profitco qualify as eligible dividends, Subco would provide the appropriate notice to Profitco to designate the dividends as eligible dividends.

Purpose of the Proposed Transactions

41. The purposes of the proposed transactions described under headings Part I, Part II and Part III are generally (i) to permit Lossco to borrow the amount of approximately $XXXXXXXXXX of funds represented by Loan 1 in such a manner that the interest on the borrowed funds will be deductible in computing Lossco's income pursuant to paragraph 20(1)(c), and (ii) to permit Lossco to make a distribution of a corresponding amount to its shareholders. In this regard, the proposed transactions have been structured to permit the tracing of the use of the proceeds of Loan 1 (by means of the use of Bank Account 1 and Bank Account 2 as described herein) to specific "eligible" uses such that interest on Loan 1 will be deductible in computing Lossco's income.

42. The overall purpose of the proposed transactions described under heading Part IV is to enable Lossco to earn sufficient interest income, over a period of time, so as to utilize some or all of its non-capital losses, including non-capital losses that will be created by the interest expense on Lossco's current borrowings and the additional borrowings of $XXXXXXXXXX (i.e., Loan 1) contemplated by the proposed transactions.

43. The purpose of making capital contributions to the common share capital of Subco, as described in 27 and 30 above (as opposed to subscribing for additional common shares of Subco), is to ensure that Subco will not be precluded from declaring dividends on the Subco Preferred Shares pursuant to XXXXXXXXXX . If additional common shares of Subco were issued, the realizable value of Subco's assets would be less than the aggregate of its liabilities and its stated capital of both common shares and Subco Preferred Shares.

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. To the extent that the stated capital of the Lossco common shares, immediately prior to the reduction in stated capital described in 18 above, is greater than or equal to the Amount plus $XXXXXXXXXX , Lossco will be entitled, pursuant to paragraph 20(1)(c), to deduct in computing its income, the lesser of (i) the interest paid or payable (depending on the method regularly followed by Lossco in computing its income for purposes of the Act) on the portion of Loan 1 that is used to pay the Amount, and (ii) a reasonable amount in respect thereof.

B. Provided that the amount paid by Lossco on the reduction in stated capital described in 18 above will not exceed the amount by which the PUC of Lossco's common shares will be reduced, the payment of the Amount will not, in and of itself, result in Lossco being deemed by paragraph 84(4)(a) to have paid, or Lossco's common shareholders being deemed by paragraph 84(4)(b) to have received, a dividend.

C. The provisions of subparagraph 53(2)(a)(ii) will apply to reduce the ACB of the common shares of Lossco to the Lossco shareholders upon the payment of the Amount made by Lossco, by the amount of such payment received by each such shareholder.

D. Provided that the portion of the proceeds of Loan 1 that is deposited into Bank Account 2 as described in 19 above, is used for the purpose of earning income from a business or property (other than exempt income or to acquire a property the income from which would be exempt or to acquire a life insurance policy), Lossco will be entitled, pursuant to paragraph 20(1)(c), to deduct in computing its income the lesser of (i) the interest paid or payable (depending on the method regularly followed by Lossco in computing its income for purposes of the Act) on the portion of the proceeds of Loan 1 that is deposited into Bank Account 2 as described in 19 above, and (ii) a reasonable amount in respect thereof.

E. The dividends paid by Lossco to its common shareholders as described under heading Part III, entitled "Payment of Dividends", will be taxable dividends that will be deductible pursuant to subsection 112(1) in computing the common shareholders' taxable income for the year in which such dividends are received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4).

F. The dividends received by Profitco, described in 25 and 30 above, will be taxable dividends that will be deductible pursuant to subsection 112(1) in computing Profitco's taxable income for the year in which the dividend is received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4).

G. Provided that Profitco has a legal obligation to pay interest on the Demand Loan and Profitco continues to hold the Subco Preferred Shares, Profitco will be entitled, pursuant to paragraph 20(1)(c), to deduct in computing its income the lesser of (i) the interest paid or payable (depending on the method regularly followed by Profitco in computing its income for purposes of the Act) in respect of the year on the Demand Loan, or (ii) a reasonable amount in respect thereof.

H. No amount will be included in the income of Subco pursuant to section 9 or paragraphs 12(1)(c) or 12(1)(x) in respect of contributions of capital described in 27 and 30 above.

I. The provisions of subsections 15(1), 56(2), and 246(1) will not apply to the proposed transactions, in and by themselves.

J. Subsection 245(2) will not apply to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given herein.

K. The General Anti-avoidance Provision of an Agreeing Province will not be applied, as a result of the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above, in respect of a taxation year for which such Province was an Agreeing Province.

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, excluding 30 and 31 above, are entered into 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 or any other amount of any corporation referred to herein; nor

(c) 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