2010 Ruling 2009-0332571R3 - Loss consolidation - related or affiliated

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: Should GAAR be applied to a proposed loss consolidation arrangement between related (but not affiliated) corporations?

Position: No.

Reasons: The transfer of losses between related, but not affiliated, corporations should not result "in an abuse having regard to [the provisions of the Act]...read as a whole", for the purposes of subsection 245(4), because specific provisions such as subsections 111(4) to (5.5), 256(7), 191.3(1), 112(2.4), paragraph 55(3.1)(c), section 80.04 etc. allow loss utilization transactions between related corporations, while only subsection 69(11) does not allow rollover where property is transferred to a person other than a person that is affiliated with the transferor.

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX 							2009-033257
XXXXXXXXXX 							XXXXXXXXXX
								XXXXXXXXXX
XXXXXXXXXX , 2010

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling
XXXXXXXXXX - Business Number: XXXXXXXXXX ;
XXXXXXXXXX - Business Number:XXXXXXXXXX ;
XXXXXXXXXX - Business Number: XXXXXXXXXX ;
XXXXXXXXXX - Business Number: XXXXXXXXXX , and
XXXXXXXXXX - Business Number: XXXXXXXXXX .
Tax Services Office: XXXXXXXXXX
Tax Centre: XXXXXXXXXX .

This is in reply to your letters of XXXXXXXXXX and XXXXXXXXXX in respect of your request for an advance income tax ruling on behalf of the above noted-taxpayers. We also acknowledge the information provided to us in your electronic correspondence and during various telephone conversations (XXXXXXXXXX / XXXXXXXXXX ) in connection with your ruling request.

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

(i) dealt with in an earlier return 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 the taxpayers or a related person;

(iii) under objection by 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, and

(v) the subject of a previous ruling issued to the taxpayers or a related person by the Income Tax Rulings Directorate.

IDENTIFICATION OF THE PARTIES

In this letter, unless otherwise expressly stated:

(a) "ChildrenA" means the children of Mr. A who are XXXXXXXXXX (CA1), XXXXXXXXXX (CA2) and XXXXXXXXXX (CA3) who are all resident of Canada;

(b) "ChildrenB" means the children of Mr. B who are XXXXXXXXXX (CB1) and XXXXXXXXXX (CB2) who are all resident of Canada;

(c) "HA" means XXXXXXXXXX , a corporation incorporated under the QCA, as more particularly described in Paragraph 1 hereof;

(d) "HASub" means XXXXXXXXXX , a controlled subsidiary of HA, governed by Canadian corporate law as more particularly described in Paragraph 3 hereof;

(e) "HASub2" means XXXXXXXXXX , a wholly-owned subsidiary of HA, governed by Canadian corporate law and referred to in Paragraph 1 hereof;

(f) "HB" means XXXXXXXXXX , a corporation incorporated under the QCA, as more particularly described in Paragraph 4 hereof;

(g) "HBSub" means XXXXXXXXXX , a controlled subsidiary of HB, incorporated under the QCA as more particularly described in Paragraph 5 hereof;

(h) "HA1" means XXXXXXXXXX , a private holding corporation governed by Canadian corporate law that is jointly owned by Mr. A and Mrs A and is referred to in Paragraph 8 hereof;

(i) "HA2" means XXXXXXXXXX , a private holding corporation governed by Canadian corporate law that is owned by CA2 and is referred to in Paragraph 8 hereof;

(j) "HA3" means XXXXXXXXXX , a private holding corporation governed by Canadian corporate law that is owned by CA1 and is referred to in Paragraph 8 hereof;

(k) "HA4" means XXXXXXXXXX , a private holding corporation governed by Canadian corporate law that is owned by CA3 and is referred to Paragraph 8 hereof;

(l) "HB1" means XXXXXXXXXX , a private holding corporation incorporated under the QCA which is owned by Mrs. B and is referred to in Paragraph 6 hereof;

(m) "HB2" means XXXXXXXXXX , a private holding corporation governed by Canadian corporate law which is owned by CB1 and is referred to in Paragraph 6 hereof;

(n) "HB3" means XXXXXXXXXX , a private holding corporation governed by Canadian corporate law which is owned by CB2 and is referred to in Paragraph 6 hereof;

(o) "HB4" means XXXXXXXXXX a private holding corporation incorporated under the QCA which is owned by Mr. B and is referred in Paragraph 6 hereof;

(p) "Lossco" means XXXXXXXXXX , a corporation incorporated under the CBCA more fully described in Paragraph 9 hereof;

(q) "LP1" means XXXXXXXXXX , a Canadian partnership described in Paragraph 10;

(r) "LP2" means XXXXXXXXXX , a Canadian partnership described in Paragraph 10;

(s) "LP3" means XXXXXXXXXX , a Canadian partnership described in Paragraph 10;

(t) "LP4" means XXXXXXXXXX , a Canadian partnership described in Paragraph 10;

(u) "LP5" means XXXXXXXXXX , a Canadian partnership described in Paragraph 10;

(v) "LP6" means XXXXXXXXXX , a Canadian partnership described in Paragraph 10;

(w) "LP7" means XXXXXXXXXX , a Canadian partnership described in Paragraph 10;

(x) "Mr. A" means XXXXXXXXXX , a resident of Canada;

(y) "Mrs. A" means XXXXXXXXXX , a Canadian resident and the spouse of Mr. A;

(z) "Mr. B" means XXXXXXXXXX , a resident of Canada;

(aa) "Mrs. B" means XXXXXXXXXX , a Canadian resident, the spouse of Mr. B and the sister of Mr. A;

(bb) "PHA" means XXXXXXXXXX is a corporation incorporated under the CBCA as more particularly described in Paragraph 7;

(cc) "Pubco" means XXXXXXXXXX , a public corporation whose shares are listed on a prescribed stock exchange and which is referred to in Paragraph 1 and 4 hereof;

(dd) "TrustA" means XXXXXXXXXX , a personal inter-vivos trust, resident of Canada, established by trust indenture for the benefit of the members of the XXXXXXXXXX family and referred to in Paragraph 1 hereof;

(ee) "TrustB1" means XXXXXXXXXX , a personal inter-vivos, trust, resident of Canada, established by trust indenture for the benefit of the members of the XXXXXXXXXX family and referred to in Paragraph 4 hereof;

(ff) "TrustB2" means XXXXXXXXXX , a personal inter-vivos trust, resident of Canada, established by trust indenture for the benefit of the members of the XXXXXXXXXX family and referred to in Paragraph 4 hereof;

(gg) "TrustB3" means XXXXXXXXXX , a personal inter-vivos trust, resident of Canada, established by trust indenture for the benefit of the members of the CB2 family and as referred in Paragraph 4 hereof; and

(hh) "TrustB4" means XXXXXXXXXX , a personal inter-vivos trust, resident of Canada, established by trust indenture for the benefit of the members of the CB1 family and referred to in Paragraph 4 hereof.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified hereunder:

(a) "Act" means the Income Tax Act, RSC 1985 (5th supp.), c.1, as amended to the date hereof, and, unless otherwise indicated, all statutory references are to the Act;

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

(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) "Canadian partnership" has the meaning assigned by subsection 248(1);

(f) "CBCA" means the Canada Business Corporations Act, and, where applicable, its predecessor statutes;

(g) "CRA" means Canada Revenue Agency;

(h) "Daylight Loan1" means the loan made by a financial institution to Lossco described in Paragraph 15 below;

(i) "Daylight Loan2" means the loan made by a financial institution to Lossco described in Paragraph 22 below;

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

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

(l) "GAAR" means general anti-avoidance rule;

(m) "HASub Loan" means the loan made by Lossco described in Paragraph 16(a);

(n) "HBSub Loan" means the loan made by Lossco described in Paragraph 16(b);

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

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

(q) "Paragraph" means a numbered paragraph in this advance income tax ruling;

(r) "Proposed Transactions" mean the transactions described herein in Paragraphs 14 to 22;

(s) "Preferred Shares1" means the preferred shares of Lossco described in Paragraph 14(a);

(t) "Preferred Shares2" means the preferred shares of Lossco described in Paragraph 14(b);

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

(v) "QCA" means the Companies Act (Québec);

(w) "related" has the meaning assigned by section 251;

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

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

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

Unless otherwise indicated in this letter, all dollar amounts referred to herein are in Canadian dollars.

Our understanding of the facts, Proposed Transactions and the purposes of the Proposed Transactions are as follows:

FACTS

1. HA is a private corporation and a TCC. HA is an investment holding company. Its main assets are the shares of Lossco, investments in several public and private corporations and certain short term investments. HA and HASub2 together own more than XXXXXXXXXX % of the common shares of Pubco. The authorized capital of HA consists of the following:

(a) Class A shares, non-voting, participating;

(b) Class B shares, non-voting, non-cumulative dividend of XXXXXXXXXX %, redeemable and retractable at an amount equal to the fair market value of the consideration received upon issuance;

(c) Class C shares, non-voting, non-cumulative dividend of XXXXXXXXXX %, redeemable and retractable at an amount equal to the fair market value of the consideration received upon issuance;

(d) Class D shares, non-voting, non-cumulative dividend of XXXXXXXXXX %, redeemable and retractable at an amount equal to the fair market value of the consideration received upon issuance;

(e) Class E shares, non-voting, non-cumulative dividend of XXXXXXXXXX %, redeemable and retractable at an amount equal to the fair market value of the consideration received upon issuance;

(f) Class F shares, non-voting, non-cumulative dividend of XXXXXXXXXX %, redeemable and retractable at an amount equal to the fair market value of the consideration received upon issuance;

(g) Class G shares, voting and non-participating;
The issued share capital of HA is held as follows:

Shareholder		Class A Shares	Classes B, C, D, E	Class G Share
			and F Shares	

Trust A		XXXXXXXXXX 		XXXXXXXXXX Class D		-

PHA		        -			XXXXXXXXXX Classes B, 		-
      					E and F; and 

      					XXXXXXXXXX  Class C		

Mr. A. - XXXXXXXXXX C XXXXXXXXXX

Mr. A owns all the voting shares outstanding of HA. HA's fiscal period ends on XXXXXXXXXX . HA's sole permanent establishment is in the Province of Quebec.

2. The arm's-length borrowings capacity of HA and Lossco is estimated to be at least $XXXXXXXXXX . HA and Lossco currently have certain undrawn credit arrangements sufficient to borrow at least $XXXXXXXXXX .
As a result of the arrangements described herein, HA and Lossco are in a position to increase their current arm's length borrowings by at least $XXXXXXXXXX (including the undrawn credit of at least $XXXXXXXXXX ).

3. HASub is a private corporation and a TCC which has been incorporated in XXXXXXXXXX . The authorized capital of HASub consists of the following:

(a) Class A common shares, voting and participating;

(b) Class B common shares, voting and participating;

(c) Class C preferred shares, voting and redeemable by the company at an amount equal to the redemption price;

(d) Class D preferred shares, voting, non-cumulative dividend at the rate equal to the preferential rate applicable on commercial loan of the financial institution of the company less XXXXXXXXXX % and redeemable by the company and upon demand of the holder at an amount equal to the redemption price;

(e) Class E preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % per month and redeemable upon demand of the holder at an amount equal to the redemption price;

(f) Class F preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % per month and redeemable upon demand of the holder at an amount equal to the redemption price;

(g) Class G preferred shares, non-voting, non-cumulative dividend at the rate equal to the preferential rate applicable on commercial loan of the financial institution of the company plus XXXXXXXXXX % and redeemable upon demand of the holder at an amount equal to the redemption price;

(h) Class H preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company and upon demand of the holder at an amount equal to the redemption price; and

(i) Class I preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company at an amount equal to the redemption price.

HA subscribed to XXXXXXXXXX class A common shares of HASub. HASub's fiscal period ends on XXXXXXXXXX . In XXXXXXXXXX , HASub acquired the limited partnership units of LP1, LP2, LP3, LP4, LP5, LP6 and LP7 from Mr. A, Mrs. A, CA1, CA2 and CA3. As sole consideration, HASub issued Class F preferred shares to each of Mr. A, Mrs. A, CA1, CA2 and CA3 which have a fair market value equal to the fair market value of the units so transferred. Each transferor and HASub jointly elected in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the units.
Presently, the issued share capital of HASub is held as follows:

     Shareholder		Class A Common Shares	      Class F P-S
HA		    		XXXXXXXXXX
Mr. A									XXXXXXXXXX
Mrs. A								XXXXXXXXXX
CA1									XXXXXXXXXX
CA2									XXXXXXXXXX
CA3									XXXXXXXXXX 	

HA owns all the voting shares outstanding of HASub. HASub has a nil non-capital loss balance as it was incorporated in XXXXXXXXXX . It is expected that the income of HASub, including the income allocated by LP1, LP2, LP3, LP4, LP5, LP6 and LP7 following the Proposed Transactions, will be sufficient to fully utilize the interest paid or payable on the HASub Loan described in Paragraph 16(a) below. HASub's sole permanent establishment is in the Province of Quebec.

4. HB is a private corporation and a TCC. HB is an investment holding company. Its main assets are investments in several public and private corporations and certain short term investments. HB owns common shares of Pubco having substantial value. The authorized capital of HB consists of the following:

(a) Common shares, voting and participating;

(b) Class A preferred shares, voting, non-cumulative dividend of XXXXXXXXXX % and redeemable at an amount equal to $XXXXXXXXXX per share;

(c) Class B preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company at an amount equal to the redemption price;

(d) Class C preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company at an amount equal to the redemption price;

(e) Class D preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company at an amount equal to the redemption price;

(f) Class E preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company at an amount equal to the redemption price;

(g) Class F preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company at an amount equal to the redemption price;

(h) Class G preferred shares, non-voting, having the right to capital dividends equal to certain life insurance proceeds and redeemable by the company at an amount equal to the redemption price;

(i) Class H preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable at an amount equal to the redemption price;

(j) Class I preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % per month and redeemable at an amount equal to the redemption price;

(k) Class J preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % per month and redeemable at an amount equal to the redemption price; and

(l) Class K preferred shares, non-voting, non-cumulative dividend and redeemable at an amount equal to the redemption price.
The issued share capital of HB is held as follows:

Shareholder	Common Shares	Class A P-S		Other Classes
Mr. B.		-		XXXXXXXXXX 		XXXXXXXXXX C;											XXXXXXXXXX D;
								XXXXXXXXXX E; 											XXXXXXXXXX  F;
				               		XXXXXXXXXX  I; and
				               		XXXXXXXXXX  J.

Mrs. B.		-		XXXXXXXXXX 		XXXXXXXXXX B;
								XXXXXXXXXX D; and											XXXXXXXXXX  J.

Trust B1     XXXXXXXXXX          -				-

Trust B2     XXXXXXXXXX          -				-

Trust B3     XXXXXXXXXX          -				-

Trust B4     XXXXXXXXXX          -				-

HB1               -		   -		      XXXXXXXXXX  K

HB2               -              -		      XXXXXXXXXX  K

HB3               -	         -	            XXXXXXXXXX  K

HB4               -	         -	            XXXXXXXXXX  K

All the voting rights of the outstanding voting shares of HB are equally divided between Mr. B and Mrs B. HB's fiscal period ends on XXXXXXXXXX . HB's sole permanent establishment is in the Province of Quebec.

5. HBSub is a private corporation and a TCC which has been incorporated in XXXXXXXXXX . The authorized capital of HBSub consists of the following:

(a) Class A common shares, voting and participating;

(b) Class B common shares, voting and participating;

(c) Class C preferred shares, voting, redeemable by the company at an amount equal to the redemption price;

(d) Class D preferred shares, voting, non-cumulative dividend at the rate equal to the preferential rate applicable on commercial loan of the financial institution of the company less XXXXXXXXXX % and redeemable by the company and upon demand of the holder at an amount equal to the redemption price;

(e) Class E preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % per month and redeemable upon demand of the holder at an amount equal to the redemption price;

(f) Class F preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % per month and redeemable upon demand of the holder at an amount equal to the redemption price;

(g) Class G preferred shares, non-voting, non-cumulative dividend at the rate equal to the preferential rate applicable on commercial loan of the financial institution of the company plus XXXXXXXXXX % and redeemable upon demand of the holder at an amount equal to redemption price;

(h) Class H preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company and upon demand of the holder at an amount equal to the redemption price; and

(i) Class I preferred shares, non-voting, non-cumulative dividend of XXXXXXXXXX % and redeemable by the company at an amount equal to the redemption price.

HB subscribed to XXXXXXXXXX class A common shares of HBSub. HBSub's fiscal period ends on XXXXXXXXXX . In XXXXXXXXXX , HBSub acquired the limited partnership units of LP1, LP2, LP3, LP6 and LP7 from Mr. B, Mrs. B, CB1 and CB2. As sole consideration, HBSub issued Class F preferred shares to each of Mr. B, Mrs. B, CB1 and CB2 which have a fair market value equal to the fair market value of the units so transferred. Each transferor and HBSub jointly elected in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the units.

Presently, the issued share capital of HBSub is held as follows:

Shareholder		Class A Common Shares		Class F P-S
HB                 XXXXXXXXXX 				-
Mr. B				-		            XXXXXXXXXX
Mrs. B			-		            XXXXXXXXXX
CB1				-		            XXXXXXXXXX
CB2				-		            XXXXXXXXXX 	

HB owns all the voting shares outstanding of HBSub. HBSub has a nil non-capital loss balance as it was incorporated in XXXXXXXXXX . It is expected that the income of HBSub, including the income allocated by LP1, LP2, LP3, LP6 and LP7 following the Proposed Transactions, will be sufficient to fully utilize the interest paid or payable on the HBSub Loan described in Paragraph 16(b) below. HBSub's sole permanent establishment is in the Province of Quebec.

6. HB1, HB2, HB3 and HB4 are TCCs and personal holding corporations owned by Mrs. B, CB1, CB2 and Mr. B, respectively.

7. PHA is a private corporation and a TCC. PHA is a family holding corporation with the following shareholders:

Shareholder %
HA1 XXXXXXXXXX
HA2 XXXXXXXXXX
HA3 XXXXXXXXXX
HA4 XXXXXXXXXX
100%

8. Each of HA1, HA2, HA3 and HA4 is a TCC and a personal holding corporation. HA1 is jointly owned by Mr. A and Mrs. A. HA2, HA3 and HA4 are owned respectively by CA2, CA1 and CA3.

9. Lossco is a private corporation and a TCC that has been engaged in the XXXXXXXXXX business for several years. Lossco's fiscal period ends on XXXXXXXXXX . As at XXXXXXXXXX , the authorized capital of Lossco consists in common shares, series 1 preferred shares, and series 2 preferred shares. HA owns XXXXXXXXXX common shares representing XXXXXXXXXX % of the common shares issued and outstanding. In addition, HA owns all the series 1 and series 2 preferred shares issued and outstanding.

As at XXXXXXXXXX , Lossco has a non-capital loss balance of approximately $XXXXXXXXXX , of which $XXXXXXXXXX is not restricted by the acquisition of control rules in subsections 111(5) and 88(1.1). Lossco's sole permanent establishment is in the Province of Quebec.

10. Each of LP1, LP2, LP3, LP4, LP5, LP6 and LP7 is a Canadian partnership and is a limited partnership formed under, and governed by, the laws of the province of Québec. The partnerships operate XXXXXXXXXX businesses exclusively in the province of Quebec. The capital structure of each limited partnership consists of general and limited partnership units. HASub, HBSub and HB own the following percentage of the total limited partnership unit in LP1, LP2, LP3, LP4, LP5, LP6 and LP7:

Unitholder     LP1	LP2	LP3	LP4	LP5		LP6		LP7
HASub          XXX %	XXX %	XXX %	XXX %	XXX %		XXX %		XXX %
HBSub.         XXX %	XXX %	XXX %	 -	 -		XXX %		XXX %
HB              -		 -	 -	 -	XXX %		 -		 -

Each limited partnership interest held by HASub, HBSub and HB in each of LP1, LP2, LP3, LP4, LP5, LP6, and LP7 constitutes a capital property.

Each of LP1, LP2, LP3, LP4, LP5, LP6 and LP7 is governed by a limited partnership agreement which provides that the income or loss of the limited partnership is divided and borne by each partner in proportion such partner's participation in the limited partnership. It is expected that each of LP1, LP2, LP3, LP4, LP5, LP6 and LP7 will in the future earn income that will be allocated to partners pursuant to the limited partnership agreement. The fiscal period of each of LP1, LP2, LP3, LP4, LP5, LP6 and LP7 ends on XXXXXXXXXX .

11. Mr. A, Mrs. A, Mr. B and Mrs. B are each related persons to each other given that Mr. A and Mrs. B are siblings. Each of HA, HASub and Lossco is related to HB and HBSub by virtue of subparagraph 251(2)(c)(ii).

12. None of HA, HASub, HB, HBSub and Lossco is or will be a specified financial institution.

13. None of HA, HASub, HB, HBSub and Lossco is or will be a financial intermediary corporation.

PROPOSED TRANSACTIONS

14. Lossco will amend its articles of incorporation to create two new classes of preferred shares with the following characteristics:

(a) An unlimited number of Preferred Shares1 that are non-voting, non-participating, redeemable and retractable at any time at the request of the holder for an amount equal to the fair value of the consideration received upon issuance. The Preferred Shares1 will provide a cumulative dividend at rate of XXXXXXXXXX % per annum payable on the XXXXXXXXXX day of XXXXXXXXXX .

(b) An unlimited number of Preferred Shares2 that are non-voting, non-participating, redeemable and retractable at any time at the request of the holder for an amount equal to the fair value of the consideration received upon issuance. The Preferred Shares2 will provide a cumulative dividend at a rate of XXXXXXXXXX % per annum payable on the XXXXXXXXXX day of XXXXXXXXXX .

15. Lossco will borrow an amount of $XXXXXXXXXX on a "daylight loan" basis from an arm's-length financial institution (the "Daylight Loan1") with the guarantee of HA. The amount borrowed by Lossco will be based on and will not exceed the borrowing capacity of HA and Lossco, which is estimated to be at least $XXXXXXXXXX dollars. The interest rate on the Daylight Loan1 will be a commercial arm's-length rate.

16. Lossco will use the proceeds received from the Daylight Loan1 to make two non-recourse loans as follows:

(a) A loan of $XXXXXXXXXX to HASub (the "HASub Loan"). Simple interest will accrue daily on the HASub Loan at a rate of XXXXXXXXXX % per annum. Such interest will be paid annually on the XXXXXXXXXX day of XXXXXXXXXX .

(b) A loan of $XXXXXXXXXX to HBSub (the "HBSub Loan"). Simple interest will accrue daily on the HBSub Loan at a rate of XXXXXXXXXX % per annum. Such interest will be paid annually on the XXXXXXXXXX day of XXXXXXXXXX .

17. HASub will use the proceeds received from the HASub Loan to subscribe for Preferred Shares1 of Lossco having an aggregate redemption/retraction price equal to the amount contributed ($XXXXXXXXXX ). The PUC and the fair market value of the Preferred Shares1 will be $XXXXXXXXXX . HASub will be entitled to cumulative dividends, calculated daily by reference to the redemption/retraction price of the Preferred Shares1 at a rate equal to the interest rate on the HASub Loan plus XXXXXXXXXX of a percent (XXXXXXXXXX %).

18. HBSub will use the proceeds received from the HBSub Loan to subscribe for Preferred Shares2 in Lossco having an aggregate redemption/retraction price equal to the amount contributed ($XXXXXXXXXX ). The PUC and the fair market value of the Preferred Shares2 will be $XXXXXXXXXX . HBSub will be entitled to cumulative dividends, calculated daily by reference to the redemption/retraction price of the Preferred Shares2 at a rate equal to the interest rate on the HBSub Loan plus XXXXXXXXXX of a percent (XXXXXXXXXX %).

19. Lossco will use its proceeds from issuing the Preferred Shares1 and Preferred Shares2 to repay the Daylight Loan1.

20. On the XXXXXXXXXX day of XXXXXXXXXX in each year where the HASub Loan is outstanding, HASub will pay the accrued interest on the HASub Loan to Lossco. Upon receipt of the interest on the HASub Loan and subject to any applicable solvency tests, Lossco will distribute to HASub, by way of dividend on the Preferred Shares1, the amount received plus a small mark-up.

21. On the XXXXXXXXXX day of XXXXXXXXXX in each year where the HBSub Loan is outstanding, HBSub will pay the accrued interest on the HBSub Loan to Lossco. Upon receipt of the interest on the HBSub Loan and subject to any applicable solvency tests, Lossco will distribute to HBSub, by way of dividend on the Preferred Shares2, the amount received plus a small mark-up.

22. Once the interest income has reached or exceeded the amount required to utilize Lossco's available tax attributes, but no later than XXXXXXXXXX years after the implementation of the proposed transactions, the following transactions may be implemented:

(a) HASub will pay the unpaid interest on the HASub Loan to Lossco. Upon receipt of the interest on the HASub Loan and subject to any applicable solvency tests, Lossco will distribute to HASub, by way of dividend on the Preferred Shares1, the amount received plus a small mark-up;

(b) HBSub will pay the unpaid interest on the HBSub Loan to Lossco. Upon receipt of the interest on the HBSub Loan and subject to any applicable solvency tests, Lossco will distribute to HBSub, by way of dividend on the Preferred Shares2, the amount received plus a small mark-up;

(c) Lossco will borrow an amount on a "daylight loan" basis from an arm's-length financial institution (the "Daylight loan2") and will use the funds to redeem its Preferred Shares1 and Preferred Shares2 held by HASub and HBSub respectively;

(d) HASub and HBSub will use the funds received in (c) to repay the HASub Loan and the HBSub Loan to Lossco; and

(e) Lossco will use the funds received on the repayment of the HASub Loan and the HBSub Loan to repay the Daylight loan2.

OTHER REPRESENTATIONS

23. None of HA, HASub, HB or HBSub will make a capital contribution payment to compensate Lossco for the use of its available tax attributes.

24. The Preferred Shares1 and the Preferred Shares2, which will be issued as described in Paragraphs 17 and 18, will not be, at any time during the implementation of the Proposed Transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as 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 that includes:

i. an obligation of the type described in subparagraph 112(2.4)(b)(i); or

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

PURPOSE OF THE PROPOSED TRANSACTIONS

25. The purpose of the Proposed Transactions is to achieve a tax consolidation of Lossco, HASub and HBSub without resorting to an amalgamation, which would not be possible for commercial reasons. The tax consolidation is achieved by having Lossco earn interest income on the HASub Loan and HBSub Loan, thus permitting Lossco to use its non-capital losses that are not restricted by 111(5) as well as its current losses, and by having HASub and HBSub incur an interest expense to reduce their taxable income (including the income allocated by LP1, LP2, LP3, LP4, LP5, LP6 or LP7).

RULINGS GIVEN

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

A. Provided that HASub has the legal obligation to pay interest on the HASub Loan, and that the Preferred Shares1 of Lossco continue to be held by HASub, HASub will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable (depending on the method regularly followed by HASub in computing its income for the purposes of the Act) in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c).

B. The dividends received by HASub on its Preferred Shares1 of Lossco as described in Paragraph 20 hereof will be taxable dividends that will, pursuant to subsection 112(1), be deductible in computing the taxable income of HASub 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) or 112(2.4).

C. Provided that HBSub has the legal obligation to pay interest on the HBSub Loan and that the Preferred Shares2 of Lossco continue to be held by HBSub, HBSub will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable (depending on the method regularly followed by HBSub in computing its income for the purposes of the Act) in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c).

D. The dividends received by HBSub on its Preferred Shares2 of Lossco as described in Paragraph 21 hereof will be taxable dividends that will, pursuant to subsection 112(1), be deductible in computing the taxable income of HBSub 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) or 112(2.4) of the Act.

E. The provisions of subsections 15(1), 56(2) and 246(1) will not apply as a result of the Proposed Transactions in and by themselves.

F. Lossco will be entitled to deduct under paragraph 111(1)(a) in computing its taxable income such portion as it may claim of its non-capital losses subject to the carry forward limitation in this paragraph and within the restrictions imposed by subsection 111(5) and 88(1.1).

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

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions described in Paragraphs 14 to 22 above are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

(b) the fair market value of any property referred to herein;

(c) the application or non-application of the general anti-avoidance provisions of any province; and

(d) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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