2012 Ruling 2010-0386201R3 - Tower structure capitalized by interest-free loans

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

Principal Issues: (1) Whether income of FA Opco from carrying on its business operations in relation to the O&M Agreement will be regarded as "income from an active business" (95(1))? (2) Whether 95(2)(a)(ii)(B) and 95(2)(a)(ii)(D) requalification rules will apply? (3) Whether 95(2)(i) will apply to deem any gain or loss realized on the settlement of interest-free loans made to capitalized the structure (Loans) to be gain or loss from disposition of "excluded property" (95)(1)? (4) Whether 39(1) and 39(2) will apply in respect of any gain or loss realized on the settlement of Loans? (5) Whether 40(2)(g)(ii) will apply in respect of any loss realized on the settlement of Loans? (6) Whether 17(1) will apply to result in an inclusion in computing the income of ULC? (7) Whether 112 and 113 will apply in respect of dividend paid by LLC and ULC? (8) Whether 20(1)(c) will apply? (9) Whether 245(2) and 247(2)?

Position: (1) Yes. (2) Yes. (3) Yes. (4) Yes. (5) No. (6) No. (7) Yes. (8) Yes. (9) No, subject to caveat.

Reasons: Application of the Act and previous interpretation.

XXXXXXXXXX
2010-038620

Attention: XXXXXXXXXX

XXXXXXXXXX, 2012

Dear Sir:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers and your revised request sent to our attention on XXXXXXXXXX. We acknowledge receipt of the additional information that you provided.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayer or a Related Person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a Related Person;

(iii) is under objection by the taxpayer or a Related Person; or

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired.

Unless otherwise stated, all statutory references herein are to the provisions of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this advance income tax ruling ("Act").

For greater certainty, all the documents and correspondence submitted in support of your request are part of this letter only to the extent described herein, and any reference to these documents is provided solely for the convenience of the reader. The rulings given herein are based solely on the facts, proposed transactions and the purpose of the proposed transactions described below.

DEFINITIONS

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

(a) "Arm's Length" has the meaning assigned by subsection 251(1);

(b) "Canco" means XXXXXXXXXX;

(c) "Cansub" means XXXXXXXXXX (formerly XXXXXXXXXX);

(d) "Client" means XXXXXXXXXX;

(e) "Controlled Foreign Affiliate" has, unless otherwise specified, the meaning assigned by subsection 95(1);

(f) "CRA" means the Canada Revenue Agency;

(g) "EBITDA" means earnings before interest, taxes, depreciation and amortization;

(h) "Excluded Property" has the meaning assigned by subsection 95(1);

(i) "FA Holdco" means XXXXXXXXXX;

(j) "FA Opco" means XXXXXXXXXX, a corporation incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX;

(k) "FA Subco" means XXXXXXXXXX;

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

(m) "Foreign Country" means XXXXXXXXXX;

(n) "Foreign Jurisdiction" means XXXXXXXXXX;

(o) "LLC" means XXXXXXXXXX, a limited liability company formed on XXXXXXXXXX and governed by the laws of XXXXXXXXXX;

(p) "LLLP" means XXXXXXXXXX, the limited liability limited partnership formed by Canco and Cansub on XXXXXXXXXX;

(q) "Qualifying Interest" has the meaning assigned by paragraph 95(2)(m);

(r) "Regulations" means the Income Tax Regulations, Consolidated Regulations of Canada chapter 945;

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

(t) "Senior Lenders" means XXXXXXXXXX;

(u) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1);

(v) "Treaty" means the Convention between Canada and the United States of America with respect to Taxes on Income and on Capital signed on September 26, 1980, as Amended by the Protocols Signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29 1997 and September 21, 2007;

(w) "ULC" means XXXXXXXXXX Unlimited Liability Company, an unlimited liability company incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX.

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

FACTS

1. Canco is a Taxable Canadian Corporation that has direct and indirect business interests in Canada and abroad in XXXXXXXXXX, both directly and through subsidiary corporations, including foreign affiliates. The Canco group of corporations XXXXXXXXXX The group XXXXXXXXXX.

Canco files its tax returns with the XXXXXXXXXX Taxation Centre under Business Account Number XXXXXXXXXX and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. Canco is a privately owned company with the majority of the issued and outstanding shares owned by investment funds managed by XXXXXXXXXX ("Manager 1") and XXXXXXXXXX ("Manager 2"). Investment funds managed by Manager 1 own approximately XXXXXXXXXX% of Canco's common shares and their unit holders are primarily individual investors. Investment funds managed by Manager 2 own approximately XXXXXXXXXX% of Canco's common shares and their unit holders are primarily institutional investors. All other shareholders own approximately XXXXXXXXXX% of Canco's common shares. On XXXXXXXXXX, investment funds managed by Manager 2 acquired all of the common shares owned by the funds managed by Manager 1.

3. Canco owns all of the issued and outstanding shares of Cansub, a Taxable Canadian Corporation.

4. Canco owns all of the issued and outstanding shares of FA Holdco, a corporation incorporated under the laws of the Foreign Jurisdiction.

5. FA Holdco owns all of the issued and outstanding shares of FA Subco, a corporation incorporated under the laws of the Foreign Jurisdiction.

6. On XXXXXXXXXX, FA Subco incorporated FA Opco under the laws of the Foreign Jurisdiction.

7. FA Subco owns all of the issued and outstanding shares of FA Opco.

8. On XXXXXXXXXX, Canco and Cansub entered into a limited partnership agreement governed by the laws of the Foreign Jurisdiction forming LLLP. Cansub was designated as the general partner and Canco was designated as the only limited partner. Under the Foreign Jurisdiction's laws, LLLP elected to be a "limited liability limited partnership".

9. On XXXXXXXXXX, LLLP formed ULC. Upon incorporation, LLLP subscribed for XXXXXXXXXX common shares of ULC in exchange for $XXXXXXXXXX U.S. dollars ("USD$").

10. LLLP owns all of the issued and outstanding shares of ULC.

11. On XXXXXXXXXX, ULC formed LLC, a limited liability company governed by the laws of the Foreign Jurisdiction. Upon formation, ULC contributed USD$XXXXXXXXXX to LLC and received XXXXXXXXXX shares of LLC in exchange. Amongst other provisions, the Limited Liability Agreement states the following:

XXXXXXXXXX

12. ULC owns all of the issued and outstanding shares of LLC.

13. Each of LLC, FA Holdco, FA Subco and FA Opco is a non-resident corporation that is resident in the Foreign Country for the purposes of the Act and is or would be resident in the Foreign Country for the purposes of the Treaty if it were treated as a corporation for the Foreign Country federal income tax purposes. Each such corporation is a Foreign Affiliate and a Controlled Foreign Affiliate of Canco, in respect of which Canco has a Qualifying Interest at all times from the formation of the relevant entity. LLC is also a Foreign Affiliate and a Controlled Foreign Affiliate of ULC, in respect of which ULC has a Qualifying Interest at all times from the formation of LLC. Further, each of FA Holdco, FA Subco and FA Opco is deemed to be a Foreign Affiliate of ULC in respect of which it has a Qualifying Interest at all relevant times pursuant to and for the purposes described in paragraph 95(2)(n). All or substantially all of the fair market value of the property of FA Opco and of each other Foreign Affiliate referred to herein will be Excluded Property at all relevant times.

14. On XXXXXXXXXX, LLC and FA Subco entered into a loan agreement (the "XXXXXXXXXX LLC - FA Subco Loan Agreement"). Under the terms of the agreement, LLC agreed to loan FA Subco USD$XXXXXXXXXX. The agreement requires principal repayments equal to XXXXXXXXXX% of the original principal amount during the first year, XXXXXXXXXX% of the original principal amount during the second year, XXXXXXXXXX% of the original principal amount during the third year, XXXXXXXXXX% of the original principal amount during the fourth year and XXXXXXXXXX% of the original principal amount during the fifth year. Any remaining principal balance of the loan, together with all accrued and unpaid interest thereon, and any and all other amounts payable under this agreement shall be repaid on XXXXXXXXXX. The loan is interest-bearing at a rate of interest equal to the sum of either a specified "LIBOR rate" or a specified "Prime Rate" plus an "Applicable Margin", taking into account that the "Applicable Margin" means XXXXXXXXXX% plus an "Applicable Pricing Rate" as specified under the terms of the Credit Agreement refer to in paragraph 18 below.

15. On XXXXXXXXXX, FA Subco and FA Opco entered into a loan agreement (the "FA Subco – FA Opco Loan Agreement"). Under the terms of the agreement, FA Subco agreed to loan FA Opco up to USD$XXXXXXXXXX on a revolving basis. The loan is repayable on the earlier of demand by FA Subco or XXXXXXXXXX. The loan is interest-bearing at a rate of interest equal to the sum of either a specified "LIBOR rate" or a specified "Prime Rate" plus an "Applicable Margin", taking into account that the "Applicable Margin" means an "Applicable Pricing Rate" as specified under the terms of the Credit Agreement referred to in paragraph 18 below.

16. On XXXXXXXXXX, Canco issued additional common shares and debentures to Canco's existing shareholders, directors and employees in exchange for $XXXXXXXXXX Canadian dollars ("CAD$").

17. On XXXXXXXXXX, Canco contributed CAD$XXXXXXXXXX cash to LLLP in exchange for XXXXXXXXXX partnership units and Cansub contributed CAD$XXXXXXXXXX cash to LLLP in exchange for XXXXXXXXXX partnership units.

18. On XXXXXXXXXX, Senior Lenders, Canco and LLLP entered into a Credit Agreement (the "Credit Agreement"), which provides LLLP with a revolving credit facility (the "Revolving Facility") and two separate term facilities ("Term Facility 1" and "Term Facility 2"). The Revolving Facility provides a credit facility of CAD$XXXXXXXXXX, Term Facility 1 provides a term credit facility of USD$XXXXXXXXXX and Term Facility 2 provides a term credit facility of USD$XXXXXXXXXX; only LLLP is able to borrow funds under Term Facility 1 and Term Facility 2. The whole or any part of the Revolving Facility, Term Facility 1 or Term Facility 2 may be repaid at any time, subject to certain conditions. All obligations due and payable under the Credit Agreement must be paid on or before XXXXXXXXXX. In addition, Term Facility 1 and Term Facility 2 require the following payments:

a. principal repayments equal to XXXXXXXXXX% of the original principal amount on XXXXXXXXXX (for a total of XXXXXXXXXX%), together with all accrued and unpaid interest and fees thereon and other obligations relating thereto;

b. principal repayments equal to XXXXXXXXXX% of the original principal amount on XXXXXXXXXX (for a total of XXXXXXXXXX%), together with all accrued and unpaid interest and fees thereon and other obligations relating thereto;

c. principal repayments equal to XXXXXXXXXX% of the original principal amount on XXXXXXXXXX (for a total of XXXXXXXXXX%), together with all accrued and unpaid interest and fees thereon and other obligations relating thereto;

d. principal repayments equal to XXXXXXXXXX% of the original principal amount on XXXXXXXXXX (for a total of XXXXXXXXXX%), together with all accrued and unpaid interest and fees thereon and other obligations relating thereto; and.

e. any remaining principal balance of the loan, together with all accrued and unpaid interest thereon, and any and all other amounts payable under this agreement on XXXXXXXXXX.

Interest will be calculated and charged on all loans covered by the Credit Agreement using one of the following methodologies more extensively presented in the agreement:

a. Canadian Prime Rate Loans - Interest will be charged on any funds which are advanced or converted into Canadian dollars (the "Canadian Prime Rate Loans") at a rate equal to a specified Canadian prime rate plus an applicable pricing rate; the applicable pricing rate for Canadian Prime Rate Loans is anywhere from XXXXXXXXXX% to XXXXXXXXXX% and is determined by the ratio of the group's senior debt (refers generally to all debts of Canco and its subsidiaries other than any debt they owe each other) to EBITDA.

b. U.S. Base Rate Loans - Interest will be charged on any funds which are advanced or converted into U.S. dollars (the "U.S. Base Rate Loans") at a rate equal to a specified U.S. base rate plus an applicable pricing rate; the applicable pricing rate for U.S. Base Rate Loans is anywhere from XXXXXXXXXX% to XXXXXXXXXX% and is determined by the ratio of the group's senior debt to EBITDA.

c. LIBOR Loans - Interest will be charged on any funds which are advanced or converted into U.S. dollars with respect to which the borrower has specified that interest is to be calculated by reference to the LIBOR Rate (the "LIBOR Loans") at a rate equal to a specified LIBOR rate plus an applicable pricing rate; the applicable pricing rate for LIBOR Loans is anywhere from XXXXXXXXXX% to XXXXXXXXXX% and is determined by the ratio of the group's senior debt to EBITDA.

19. On XXXXXXXXXX, under the terms of the Credit Agreement (Term Facility 1), LLLP borrowed USD$XXXXXXXXXX (the "XXXXXXXXXX Advance").

20. On XXXXXXXXXX, LLLP and ULC entered into a loan agreement (the "LLLP – ULC Loan Agreement") whereby LLLP agreed to advance up to USD$XXXXXXXXXX to ULC, as and when requested by ULC before XXXXXXXXXX. Any funds advanced under the agreement are to be non-interest bearing, repayable on written demand in USD$, and if not earlier demanded, shall be due and payable on XXXXXXXXXX. Under the terms of the agreement, LLLP advanced USD$XXXXXXXXXX to ULC on XXXXXXXXXX, in two separate tranches of USD$XXXXXXXXXX and USD$XXXXXXXXXX (the "XXXXXXXXXX LLLP – ULC Loan").

21. On XXXXXXXXXX, ULC and LLC entered into a loan agreement (the "ULC - LLC Loan Agreement") whereby ULC agreed to advance up to USD$XXXXXXXXXX to LLC, as and when requested by LLC before XXXXXXXXXX. Any funds advanced under the agreement are to be non-interest bearing, repayable on written demand in USD$, and if not earlier demanded, shall be due and payable on XXXXXXXXXX. Under the terms of the agreement, ULC advanced USD$XXXXXXXXXX to LLC on XXXXXXXXXX, in two separate tranches of USD$XXXXXXXXXX and USD$XXXXXXXXXX (the "XXXXXXXXXX ULC – LLC Loan").

22. On XXXXXXXXXX, under the terms of the XXXXXXXXXX LLC – FA Subco Loan Agreement, LLC advanced USD$XXXXXXXXXX to FA Subco in two separate tranches of USD$XXXXXXXXXX and USD$XXXXXXXXXX (the "XXXXXXXXXX LLC – FA Subco Loan").

23. On XXXXXXXXXX, under the terms of the FA Subco – FA Opco Loan Agreement, FA Subco advanced USD$XXXXXXXXXX to FA Opco (the "XXXXXXXXXX FA Subco – FA Opco Loan").

24. On XXXXXXXXXX, FA Subco subscribed for USD$XXXXXXXXXX of additional common shares of FA Opco.

25. On XXXXXXXXXX, FA Opco entered into a XXXXXXXXXX-year Operations and Management Agreement (the "O&M Agreement") with the XXXXXXXXXX whereby FA Opco agreed to XXXXXXXXXX certain utility systems owned by Client.

26. Client is an XXXXXXXXXX, which operates XXXXXXXXXX, that is not a Related Person in respect of Canco or of any Foreign Affiliate of Canco, and with which all such entities deal at Arm's Length at all relevant times.

27. Pursuant to the O&M Agreement, FA Opco was granted the sole and exclusive right to: XXXXXXXXXX. The O&M Agreement required FA Opco to advance USD$XXXXXXXXXX (collectively the "Concession Advances"). FA Opco is to be compensated for the services it provides under the agreement using a standard regulatory compensation model; as such, the agreement requires that Client make the following payments to FA Opco:

XXXXXXXXXX

28. On XXXXXXXXXX and as required by the O&M Agreement, FA Opco makes the first Concession Advance to Client, in the amount of USD$XXXXXXXXXX.

29. On XXXXXXXXXX, FA Opco had cash balance of approximately USD$XXXXXXXXXX, including funds borrowed on a short-term basis from a related company for the purpose of funding the second Concession Advance to Client (the "Short-Term Intercompany Loan").

30. On XXXXXXXXXX, as required by the O&M Agreement, FA Opco made the second Concession Advance to Client in the amount of USD$XXXXXXXXXX.

31. In XXXXXXXXXX, under the terms of the Credit Agreement (Term Facility 2), LLLP borrowed an additional USD$XXXXXXXXXX (the "XXXXXXXXXX Advance").

32. In XXXXXXXXXX, LLLP used the majority of the proceeds from the XXXXXXXXXX Advance to make an advance of USD$XXXXXXXXXX to ULC pursuant to the terms of the LLLP – ULC Loan Agreement (the "XXXXXXXXXX LLLP - ULC Loan").

33. In XXXXXXXXXX, ULC used the proceeds of the XXXXXXXXXX LLLP - ULC Loan to make an advance of USD$XXXXXXXXXX to LLC pursuant to the ULC - LLC Loan Agreement (the "XXXXXXXXXX ULC - LLC Loan").

34. In XXXXXXXXXX, LLC used the proceeds of the XXXXXXXXXX ULC - LLC Loan to make a USD$XXXXXXXXXX loan to FA Subco (the "XXXXXXXXXX LLC – FA Subco Loan"). The terms and conditions of the loan were similar to the terms and conditions of the XXXXXXXXXX LLC – FA Subco Loan Agreement, including the maturity date established on XXXXXXXXXX. The loan is interest-bearing at a rate of interest equal to the sum of either a specified "LIBOR rate" or a specified "Prime Rate" plus an "Applicable Margin", taking into account that the "Applicable Margin" means XXXXXXXXXX% plus an "Applicable Pricing Rate" as specified under the terms of the Credit Agreement referred to in paragraph 18 above.

35. In XXXXXXXXXX, FA Subco used a portion of the proceeds from the XXXXXXXXXX LLC – FA Subco Loan to make a loan of USD$XXXXXXXXXX to FA Opco (the "XXXXXXXXXX FA Subco – FA Opco Loan") pursuant to the terms of the FA Subco – FA Opco Loan Agreement.

36. In XXXXXXXXXX, FA Subco used the remaining proceeds from the XXXXXXXXXX LLC – FA Subco Loan to subscribe for USD$XXXXXXXXXX of additional common shares of FA Opco.

37. In XXXXXXXXXX, FA Opco used the proceeds of the XXXXXXXXXX FA Subco – FA Opco Loan, and of the XXXXXXXXXX share subscription described in paragraph 36 above, for the purpose of repaying the Short-Term Intercompany Loan.

38. Between XXXXXXXXXX and XXXXXXXXXX, FA Opco made interest payments of USD$XXXXXXXXXX to FA Subco under the terms of the FA Subco – FA Opco Loan Agreement.

39. Between XXXXXXXXXX and XXXXXXXXXX, FA Subco made interest payments of USD$XXXXXXXXXX and principal payments of USD$XXXXXXXXXX to LLC under the terms of LLC – FA Subco Loans.

40. Between XXXXXXXXXX and XXXXXXXXXX, LLLP made interest payments of USD$XXXXXXXXXX and principal payments of USD$XXXXXXXXXX to the Senior Lenders as required by the terms of the Credit Agreement.

41. Between XXXXXXXXXX and XXXXXXXXXX, Client made payments totaling USD$XXXXXXXXXX to FA Opco as required by the terms of the O&M Agreement.

42. In XXXXXXXXXX, LLC made a loan of USD$XXXXXXXXXX to FA Subco (the "XXXXXXXXXX LLC – FA Subco Loan"). The terms and conditions of the loan were similar to the terms and conditions of the XXXXXXXXXX LLC – FA Subco Loan Agreement, including the maturity date established on XXXXXXXXXX. The loan is interest-bearing at a rate of interest equal to the sum of either a specified "LIBOR rate" or a specified "Prime Rate" plus an "Applicable Margin", taking into account that the "Applicable Margin" means XXXXXXXXXX% plus an "Applicable Pricing Rate" as specified under the terms of the Credit Agreement referred to in paragraph 18 above.

43. In XXXXXXXXXX, FA Subco used a portion of the proceeds from the XXXXXXXXXX LLC – FA Subco Loan to make a loan of USD$XXXXXXXXXX to FA Opco (the "XXXXXXXXXX FA Subco – FA Opco Loan") pursuant to the terms of the FA Subco – FA Opco Loan Agreement.

44. In XXXXXXXXXX, FA Subco used the remaining proceeds from the XXXXXXXXXX LLC – FA Subco Loan to subscribe for USD$XXXXXXXXXX of additional common shares of FA Opco.

45. In XXXXXXXXXX and as required by the O&M Agreement, FA Opco used the proceeds of the XXXXXXXXXX FA Subco – FA Opco Loan, the proceeds of the XXXXXXXXXX share subscription described in paragraph 44 above, and additional cash on hand, for the purpose of making the third Concession Advance to Client, in the amount of USD$XXXXXXXXXX.

46. From XXXXXXXXXX until the implementation of the proposed transactions described below, FA Opco, FA Subco, LLC and ULC have not paid any dividends.

47. On or about XXXXXXXXXX, LLLP made an interest payment of approximately USD$XXXXXXXXXX to the Senior Lenders pursuant to the terms of the Credit Agreement.

48. On or about XXXXXXXXXX, FA Subco made an interest payment of USD$XXXXXXXXXX to LLC pursuant to the terms of LLC – FA Subco Loans.

49. On or about XXXXXXXXXX, FA Opco made an interest payment of USD$XXXXXXXXXX to FA Subco pursuant to the terms of the FA Subco – FA Opco Loan Agreement.

PROPOSED TRANSACTIONS

50. On or about XXXXXXXXXX, LLC will declare and pay a dividend of USD$XXXXXXXXXX to ULC.

51. On or about XXXXXXXXXX, ULC will declare and pay a dividend of USD$XXXXXXXXXX to LLLP.

52. The XXXXXXXXXX ULC – LLC Loan and the XXXXXXXXXX ULC – LLC Loan will be settled on XXXXXXXXXX in accordance with the terms of the ULC - LLC Loan Agreement.

53. The XXXXXXXXXX LLC – FA Subco Loan, the XXXXXXXXXX LLC – FA Subco Loan and the XXXXXXXXXX LLC – FA Subco Loan will be settled on XXXXXXXXXX in accordance with the terms of the relevant loan agreement.

54. The XXXXXXXXXX LLLP - ULC Loan and the XXXXXXXXXX LLLP - ULC Loan will be settled on XXXXXXXXXX in accordance with the terms of the LLLP - ULC Loan Agreement.

55. The XXXXXXXXXX Advance and the XXXXXXXXXX Advance will be settled on XXXXXXXXXX in accordance with the terms of the Credit Agreement.

56. XXXXXXXXXX, LLLP will make interest payments to Senior Lenders in accordance with the terms of the Credit Agreement.

57. XXXXXXXXXX, FA Subco will make interest payments to LLC in accordance with the terms of the relevant loan agreement.

58. XXXXXXXXXX, FA Opco will make interest payments to FA Subco in accordance with the terms of the FA Subco – FA Opco Loan Agreement.

PURPOSE OF THE PROPOSED TRANSACTIONS

The principal purpose of the proposed interest payments is to pay interest on loans which were advanced to finance the Concession Advances to Client. The principal purpose of the dividends to be paid by LLC and ULC is to return profits.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, proposed transactions and the purpose of the proposed transactions, provided further that the proposed transactions are completed in the manner described above and there are no other transactions which may be relevant to the rulings requested, our rulings are as follows:

A. The income of FA Opco from carrying on its business operations in relation to the O&M Agreement will be regarded as "income from an active business" carried on by FA Opco in the Foreign Country, within the meaning of that definition in subsection 95(1) and for the purposes of Part LIX of the Regulations.

B. Income derived by FA Subco from the interest payments described in paragraph 58 will be included in computing the income from an active business of FA Subco, for its taxation year in which the payment will be received, in accordance with subclause 95(2)(a)(ii)(B)(I) and in computing the "earnings" from an active business of FA Subco and its "exempt earnings" in accordance with the definitions in Part LIX of the Regulations.

C. Income derived by LLC from the interest payments described in paragraph 57 will be included in computing the income from an active business of LLC, for its taxation year in which the payment will be received, in accordance with the following provisions:

(1) subclause 95(2)(a)(ii)(B)(I) to the extent of the portion of the interest paid or payable by FA Subco in respect of the portion of the proceeds from LLC – FA Subco Loans that were used by FA Subco in the relevant period to earn income from the XXXXXXXXXX FA Subco – FA Opco Loan, the XXXXXXXXXX FA Subco – FA Opco Loan, and the XXXXXXXXXX FA Subco – FA Opco Loan, and

(2) clause 95(2)(a)(ii)(D) to the extent of the portion of the interest paid or payable by FA Subco in respect of the portion of the proceeds from LLC – FA Subco Loans that were used by FA Subco in the relevant period to subscribed for additional common shares of FA Opco as described in paragraphs 24, 36 and 44, provided that the FA Subco common shares continue to be Excluded Property and FA Subco and FA Opco continue to meet the conditions in that clause with respect to their residence and being subject to taxation in the Foreign Country,

and such interest will be included in computing the "earnings" from an active business of LLC and its "exempt earnings" in accordance with the definitions in Part LIX of the Regulations.

D. Provided that the XXXXXXXXXX LLC – FA Subco Loan and the XXXXXXXXXX LLC – FA Subco Loan continue to constitute Excluded Property to LLC, paragraph 95(2)(i) will apply to deem any gain or loss realized by LLC on the settlement of the XXXXXXXXXX ULC – LLC Loan and the XXXXXXXXXX ULC – LLC Loan described in paragraph 52 to be a gain or loss from the disposition of Excluded Property.

E. Provided that the XXXXXXXXXX FA Subco – FA Opco Loan, the XXXXXXXXXX FA Subco – FA Opco Loan, the XXXXXXXXXX FA Subco – FA Opco Loan, and the shares of FA Opco, continue to constitute Excluded Property to FA Subco, paragraph 95(2)(i) will apply to deem any gain or loss realized by FA Subco on the settlement of the XXXXXXXXXX LLC – FA Subco Loan, the XXXXXXXXXX LLC – FA Subco Loan and the XXXXXXXXXX LLC – FA Subco Loan described in paragraph 53 to be a gain or loss from the disposition of Excluded Property.

F. The following gain or loss will be accounted for under subsection 39(1) or (2), as the case may be:

(1) provided that ULC continues to hold the XXXXXXXXXX ULC - LLC Loan and the XXXXXXXXXX ULC - LLC Loan as capital property, any gain or loss realized by ULC on the settlement of those loans described in paragraph 52;

(2) any loss or gain realized by ULC on the settlement of the XXXXXXXXXX LLLP - ULC Loan and the XXXXXXXXXX LLLP - ULC Loan described in paragraph 54;

(3) provided that LLLP continues to hold the XXXXXXXXXX LLLP - ULC Loan and the XXXXXXXXXX LLLP - ULC Loan as capital property, any gain or loss realized by LLLP on the settlement of those loans described in paragraph 54;

(4) any loss or gain realized by LLLP on the settlement of the XXXXXXXXXX Advance and the XXXXXXXXXX Advance described in paragraph 55.

G. Subparagraph 40(2)(g)(ii) will not apply to deny any loss that may be realized by LLLP on the settlement of the XXXXXXXXXX LLLP - ULC Loan or the XXXXXXXXXX LLLP - ULC Loan described in paragraph 54, nor to deny any loss that may be realized by ULC on the settlement of the XXXXXXXXXX ULC - LLC Loan or the XXXXXXXXXX ULC - LLC Loan described in paragraph 52.

H. Based on the definition of "controlled foreign affiliate" within the meaning of subsection 17(15) as extended by subsection 17(13), section 17 will not apply to result in an inclusion in computing the income of ULC in respect of an amount owed under the terms of either the XXXXXXXXXX ULC - LLC Loan, the XXXXXXXXXX ULC - LLC Loan, the XXXXXXXXXX LLC – FA Subco Loan, the XXXXXXXXXX LLC – FA Subco Loan, the XXXXXXXXXX FA Subco – FA Opco Loan or the XXXXXXXXXX FA Subco – FA Opco Loan, by virtue of the application of subsection 17(3) or subparagraph 17(8)(a)(i), as the case may be.

I. Provided that LLC derives only income as contemplated by the facts and the proposed transactions described above, the dividend described in paragraph 50 that will be received by ULC will be included in its income and will, in accordance with paragraph 113(1)(a), be deductible in computing ULC's taxable income for its taxation year in which the dividend will be received.

J. The dividend described in paragraph 51 that will be included in the income of Canco and Cansub will be deductible in computing the taxable income of Canco and Cansub in accordance with subsection 112(1) for their taxation year in which the dividends are received.

K. Provided that LLLP has a legal obligation to pay interest in accordance with the terms of the Credit Agreement and that the ULC common shares continue to be held by LLLP for the purpose of gaining or producing income, in computing its income for a taxation year in application of the rules set by subsection 96(1), LLLP will be entitled to deduct, pursuant to paragraph 20(1)(c), the lesser of (i) the interest paid in the year or payable in respect of the year pursuant to the XXXXXXXXXX Advance and the XXXXXXXXXX Advance in accordance with the terms of the Credit Agreement (depending on the method regularly followed by LLLP in computing its income for the purposes of the Act) or (ii) a reasonable amount in respect thereof.

L. Provided that LLC is a "controlled foreign affiliate" of ULC for the purpose of section 17 throughout the period during which amounts are owed under the terms of the XXXXXXXXXX ULC - LLC Loan and the XXXXXXXXXX ULC - LLC Loan, and that those amounts are amounts described in paragraph 17(8)(a), subsection 247(2) will not apply to adjust the amount of interest paid, payable or accruing in the year on those amounts owed in accordance with subsection 247(7).

M. Subsection 245(2) will not be applied to the completed and proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are entered into before XXXXXXXXXX.

OPINION

In our opinion, paragraph 95(2)(i) would apply to deem any gain or loss realized by FA Opco on the settlement of the XXXXXXXXXX FA Subco – FA Opco Loan, the XXXXXXXXXX FA Subco – FA Opco Loan and the XXXXXXXXXX FA Subco – FA Opco Loan, made in accordance with the terms and conditions of the FA Subco – FA Opco Loan Agreement, to be a gain or loss from the disposition of Excluded Property if FA Opco continues to use the proceeds of the XXXXXXXXXX FA Subco – FA Opco Loan, the XXXXXXXXXX FA Subco – FA Opco Loan and the XXXXXXXXXX FA Subco – FA Opco Loan for the purpose of earnings income from an active business carried on by it.

CAVEAT

The above-noted rulings and opinion are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. Nothing in this letter should be construed as implying that the CRA has considered, examined, agreed to or ruled on whether transfer pricing practices of entities in this letter are in accordance with section 247, or whether subsection 247(2) applies to the transactions described in this Ruling letter, except to the extent addressed by ruling L.

Without restricting the generality of the preceding statement, it should be noted that nothing in this letter should be interpreted as confirming, either expressly or implicitly, that the CRA has agreed to, reviewed or has made any determination in respect of the following:

1. dividends on any share of any corporation mentioned above, except to the extent addressed by rulings I and J,

2. the application of subsection 20(12),

3. any foreign tax credit claim in accordance with section 126,

4. whether the facts, completed transactions and proposed transactions described herein are, or would be undertaken for fair market value considerations,

5. the reasonability of all amounts paid or received,

6. any other tax consequences relating to the facts, completed transactions, proposed transactions or subsequent to the proposed transactions, whether described in this letter or not, other than those specifically described in the rulings given above,

7. the application of subsection 245(2) in respect of any provision subject to the caveat.

Yours truly,

XXXXXXXXXX
Manager
for Director
International & Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch