2012 Ruling 2011-0416921R3 - Loss consolidation

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: Loss consolidation

Position: Favourable rulings issued.

Reasons: Meets statutory and administrative requirements.

XXXXXXXXXX 

									2011-041692

XXXXXXXXXX 2012

Dear XXXXXXXXXX :

Re: XXXXXXXXXX Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information provided in correspondence and telephone conversations concerning your request. The information contained in documents submitted with your request forms part of this ruling only to the extent it is expressly referred to or described herein.

To the best of your knowledge and that of the above-referenced taxpayers, none of the issues involved in this ruling is:

(i) dealt with in an earlier return of any of the above-referenced taxpayers, or a related person,

(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of any of the above- referenced taxpayers or a related person,

(iii) under objection or appeal by any of the above-referenced 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 by the Income Tax Rulings Directorate.

Further, the above-referenced taxpayers have advised that the Proposed Transactions described herein will not result in the taxpayers or any related person herein being unable to pay its outstanding tax liabilities.

Unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (the “Act”), and the Income Tax Regulations thereunder are referred to as the “Regulations”.

Unless otherwise noted, all references to currency are to Canadian dollars.

DEFINITIONS

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

“adjusted cost base” has the meaning assigned by section 54;

“affiliated persons” has the meaning assigned by subsection 251.1(1);

“agreed amount” means the amount that a transferor and transferee have agreed upon in a joint election under subsection 85(1) in respect of a transfer of eligible property;

“arm’s length” has the meaning assigned by section 251;

“BCA1” means the Canada Business Corporations Act, R.S.C. 1985 c. C.44;

“BCA2” means the XXXXXXXXXX

“capital property” has the meaning assigned by section 54;

“Contribution Loan” has the meaning described in Paragraph 21;

“CRA” means the Canada Revenue Agency;

“Daylight Loan” has the meaning assigned in Paragraph 16;

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

“eligible property” has the meaning assigned by subsection 85(1.1);

“excepted dividends” has the meaning assigned by section 187.1;

“excluded dividends” has the meaning assigned by subsection 191(1);

“fair market value” means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash;

“guarantee agreement” has the meaning assigned by subsection 112(2.2);

“Lossco” means a corporation to be incorporated by Parent as described in Paragraph 13;

“Lossco Common Shares” has the meaning assigned in Paragraph 15;

“Lossco Loan” has the meaning assigned in Paragraph 17;

“Newco” means a corporation to be incorporated by Parent as described in Paragraph 9;

“Newco Common Shares” has the meaning assigned in Paragraph 37;

“Newco Note” has the meaning assigned in Paragraph 30(a);

“Newco Preferred Shares” has the meaning assigned in Paragraph 18;

“non-capital loss” has the meaning assigned by subsection 111(8);

“paid-up capital” has the meaning assigned by subsection 89(1);

“Paragraph” means a numbered paragraph in this letter;

“Parent” means XXXXXXXXXX , a corporation described in Paragraph 1;

“Parent Group” means Parent and the Canadian and non-resident corporations controlled directly and indirectly by Parent;

“Parent Loan” has the meaning assigned in Paragraph 19;

“principal amount” has the meaning assigned by subsection 248(1);

“private corporation” has the meaning assigned by subsection 89(1);

“proposed acquisition” has the meaning assigned in Paragraph 47.1;

“Proposed Transactions” means the transactions described in Paragraphs 9 to 38;

“related persons” has the meaning assigned by subsection 251(2);

“Second Contribution Loan” has the meaning assigned in Paragraph 26;

“specified financial institution” has the meaning assigned by subsection 248(1);

“Subsidiary” means XXXXXXXXXX , a corporation described in Paragraph 6;

“Subsidiary’s 2004 Non-Capital Loss Deductions” has the meaning assigned in Paragraph 47(a);

“Subsidiary’s 2005 Non-Capital Loss Deductions” has the meaning assigned in Paragraph 47(b);

“Subsidiary’s 2007 Non-Capital Loss Deductions” has the meaning assigned in Paragraph 47(c);

“Subsidiary’s 2008 Non-Capital Loss Deductions” has the meaning assigned in Paragraph 47(d);

“Subsidiary’s 2009 Non-Capital Loss Deductions” has the meaning assigned in Paragraph 47(e);

“Subsidiary’s 2010 Non-Capital Loss Deductions” has the meaning assigned in Paragraph 47(f);

“Subsidiary’s 2011 Non-Capital Loss Deductions” has the meaning assigned in Paragraph 47(g);

“Subsidiary Special Share” has the meaning assigned in Paragraph 32;

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

“taxable Canadian corporation” has the meaning assigned by subsection 89(1);

“taxable dividend” has the meaning assigned by subsection 89(1);

“taxation year” has the meaning assigned by section 249; and

“term preferred share” has the meaning assigned by subsection 248(1).

FACTS

1. Parent was incorporated under the BCA1 and is a taxable Canadian corporation and a private corporation. Parent’s fiscal period ends on XXXXXXXXXX . The authorized capital of Parent includes common shares, and preferred shares each issuable in one or more series. Currently, XXXXXXXXXX common shares and XXXXXXXXXX preferred shares of Parent are issued and outstanding. Parent files its tax returns with the XXXXXXXXXX Tax Centre and its income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. The share capital of Parent is held by approximately XXXXXXXXXX minority shareholders who are employees, former employees or descendants of XXXXXXXXXX . There is no person that beneficially owns more than XXXXXXXXXX % of the shares of Parent.

3. Parent’s primary assets are comprised of shares of the various subsidiary corporations in the Parent Group. Parent’s income is in the form of dividends which are deductible for tax purposes by virtue of subsection 112(1). However, Parent incurs interest expense and administrative expenses for general corporation purposes. As a result, Parent generates a non-capital loss on an annual basis.

4. The non-capital losses of Parent carried forward from prior years are as follows:

 Year of origin	Non-Capital Loss XXXXXXXXXX 		XXXXXXXXXX 

* estimate

5. It is projected that Parent will incur non-capital losses of approximately $XXXXXXXXXX for each of the XXXXXXXXXX and XXXXXXXXXX taxation years, without considering the Proposed Transactions.

6. Subsidiary was incorporated under the BCA2 and is a taxable Canadian corporation. Subsidiary’s fiscal period ends on XXXXXXXXXX . Subsidiary is a subsidiary wholly-owned corporation of Parent. The authorized capital of Subsidiary is XXXXXXXXXX common shares. Parent holds, as capital property, XXXXXXXXXX common shares, representing all of the issued and outstanding shares of Subsidiary. Subsidiary files its tax returns with the XXXXXXXXXX Tax Centre and its income tax affairs are administered by the XXXXXXXXXX Tax Services Office.

7. XXXXXXXXXX

8. Subsidiary’s taxable income is estimated to be $XXXXXXXXXX in each of its XXXXXXXXXX and XXXXXXXXXX taxation years without considering the Proposed Transactions.

PROPOSED TRANSACTIONS

9. Parent will incorporate Newco under the BCA2. Newco will be a taxable Canadian corporation. The taxation year of Newco will end on XXXXXXXXXX . The authorized share capital of Newco will consist of an unlimited number of common shares and preferred shares. The activities of Newco will be limited to the activities of investing the proceeds it receives upon the issuance of the Preferred Shares to Lossco, as described in Paragraph 18, in the Parent Loan, as described in Paragraph 19

10. The common shares of Newco will be voting and have a par value of $XXXXXXXXXX per share. The holders of common shares will be entitled to dividends at the discretion of the directors, and, subject to the rights of the holders of the preferred shares, to receive, in the event of the liquidation, dissolution or winding-up of Newco, the assets and property of Newco available for distribution.

11. The preferred shares of Newco will be without par value and will be non- voting shares. The preferred shares will be redeemable and retractable for a redemption price equal to the fair market value of the consideration for which the shares are issued. The holders of preferred shares will be entitled to cumulative dividends, calculated daily by reference to the redemption/retraction price of the preferred shares at a rate equal to the sum of the interest rate on the Lossco Loan plus XXXXXXXXXX %. The dividends on the preferred shares will be payable semi-annually.

12. Parent will subscribe for one common share of Newco for $XXXXXXXXXX . Parent will hold the common share of Newco as capital property and will control Newco.

13. Parent will incorporate Lossco under the BCA2. Lossco will be a taxable Canadian corporation. The taxation year of Lossco will end on XXXXXXXXXX . The activities of Lossco will be limited to investing the proceeds it receives from Parent upon the issuance of the Lossco Loan, as described in Paragraph 17, in the Newco Preferred Shares, as described in Paragraph 18.

14. The authorized share capital of Lossco will consist of an unlimited number of common shares. The common shares will be without par value and will be voting shares. The holders of common shares will be entitled to dividends at the discretion of the directors.

15. Parent will subscribe for common shares of Lossco for nominal consideration (the “Lossco Common Shares”). Parent will hold the Lossco Common Shares as capital property and will control Lossco.

16. Parent will borrow approximately $XXXXXXXXXX from an arm’s-length financial institution on a daylight loan basis (the “Daylight Loan”) on arm’s- length commercial terms customary for this type of loan. Parent will have the borrowing capacity to borrow the amount of the Daylight Loan from an arm’s- length financial institution. The exact principal amount of Daylight Loan will be finalized when the Proposed Transactions are implemented

17. Parent will use the entire proceeds received from the Daylight Loan to make a loan to Lossco (the “Lossco Loan”). The Lossco Loan will bear interest at a rate which will not exceed what would be a reasonable commercial rate in these circumstances. Interest on the Lossco Loan will be payable semi- annually on specified dates each year or such time that the Lossco Loan is repaid.

18. Lossco will use the entire proceeds received from the Lossco Loan to subscribe for preferred shares of Newco (the “Newco Preferred Shares”) having an aggregate redemption/retraction price and fair market value equal to the subscription proceeds. The full amount of the subscription proceeds will be added to the stated capital of the Newco Preferred Shares and will form part of the permanent capital of Newco. The paid-up capital of the Newco Preferred Shares will be equal to their redemption/retraction amount.

19. Newco will use the entire proceeds received on the subscription of the Newco Preferred Shares to make a non-interest bearing loan to Parent (the “Parent Loan”). The Parent Loan will be payable, in whole or in part, on demand.

20. Parent will use the entire proceeds received from the Parent Loan to repay the Daylight Loan.

21. On a semi-annual basis, while the Lossco Loan is outstanding, Parent will borrow from an arm’s-length financial institution on a daylight loan basis (the “Contribution Loan”) on arm’s-length commercial terms customary for this type of loan and will use the borrowed funds to make contributions of capital to Newco in an amount equal to the dividends payable by Newco on the Newco Preferred Shares. Parent will have the borrowing capacity to borrow the amount of the capital contributions from an arm’s-length financial institution. One common share will be issued by Newco with respect to the contributions of capital and only the par value of the common share issued, being $XXXXXXXXXX , will be added to the stated capital account for the common shares of Newco. The remaining amount received by Newco will be added to the contributed surplus account for Newco. The contributions of capital will not be treated as income of Newco pursuant to generally accepted accounting principles.

22. Upon receipt of the contributions of capital, described in Paragraph 21, Newco will use the amount received to pay all accrued and unpaid dividends on the Newco Preferred Shares.

23. Upon receipt of the payment of the dividends, described in Paragraph 22, Lossco will pay all accrued and unpaid interest due and payable on the Lossco Loan, pursuant to the terms of the Lossco Loan.

24. Upon receipt of the payment of the interest, described in Paragraph 23, Parent will repay the Contribution Loan.

25. The transactions described in Paragraphs 26 to 38 will occur no later than XXXXXXXXXX .

26. Parent will borrow from an arm’s-length financial institution on a daylight loan basis (the “Second Contribution Loan”) on arm’s-length commercial terms customary for this type of loan and will use the borrowed funds to make a contribution of capital to Newco in an amount equal to the amount of any accrued and unpaid dividends on the Newco Preferred Shares. Parent will have the borrowing capacity to borrow the amount of the capital contributions from an arm’s-length financial institution. One common share will be issued by Newco with respect to the contribution of capital and only the par value of the common share, being $XXXXXXXXXX , will be added to the stated capital account for the common shares of Newco. The contribution of capital will not be treated as income of Newco pursuant to generally accepted accounting principles.

27. Upon receipt of the contribution of capital, described in Paragraph 26, Newco will use the amount received to pay all accrued and unpaid dividends on the Newco Preferred Shares.

28. Upon receipt of the dividends described in Paragraph 27, Lossco will pay all accrued and unpaid interest due and payable on the Lossco Loan, pursuant to the terms of the Lossco Loan.

29. Upon receipt of the payment of the interest, described in Paragraph 28, Parent will repay the Second Contribution Loan.

30. Immediately thereafter, the Parent Loan and the Lossco Loan will be repaid and the Newco Preferred Shares will be redeemed in the following manner:

(a) Newco will redeem the Newco Preferred Shares in consideration for a non-interest bearing promissory note (the “Newco Note”). The Newco Note will have a principal amount and fair market value equal to the redemption amount and fair market value of the Newco Preferred Shares redeemed;

(b) Lossco will repay the Lossco Loan by assigning the Newco Note to Parent in full satisfaction of the amount due under the Lossco Loan. The Lossco Loan will be cancelled;

(c) Parent and Newco will agree to set-off the amounts due under the Newco Note against the amount due under the Parent Loan as payment in full. The obligations under the Newco Note and the Parent Loan will be cancelled.

31. The articles of Subsidiary will be amended to create a new class of preferred shares, without par value, of which an unlimited number will be authorized to be issued. The preferred shares will be non-voting. The preferred shares will be redeemable and retractable for an amount equal to the fair market value of the consideration for which the shares are issued.

32. Parent will transfer to Subsidiary the Lossco Common Shares in exchange for one preferred share of Subsidiary (the “Subsidiary Special Share”) having a redemption/retraction price equal to the fair market value of the Lossco Common Shares so transferred. The fair market value of the Lossco Common Shares will be determined taking into consideration interest rates, the amount and estimated time of utilization of the non-capital losses of Lossco and other factors. The adjusted cost base of the Lossco Common Shares will be less than the fair market value of the Lossco Common Shares at the time of the disposition.

33. Parent and Subsidiary will file a joint election, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of the Lossco Common Shares to Subsidiary. The agreed amount in respect of the Lossco Common Shares transferred will be equal to the adjusted cost base of the Lossco Common Shares, by virtue of paragraph 85(1)(c.1).

34. Subsidiary will add to its stated capital account maintained for the Subsidiary Special Share the agreed amount pursuant to subsection 85(1), as referred to in Paragraph 33. For greater certainty, the increase to the paid-up capital of the Subsidiary Special Share will not exceed the maximum amount that could be added to the paid-up capital of such share, having regard to subsection 85(2.1).

35. Subsidiary will redeem for cash consideration the Subsidiary Special Share issued to Parent, as described in Paragraph 32, for an amount equal to its redemption amount, as described in Paragraph 31.

36. Subsidiary will cause Lossco to be wound-up. The assets of Lossco will be distributed to Subsidiary and its liabilities, if any, will be assumed by Subsidiary. Lossco will be dissolved within a short period of time thereafter.

37. Subsidiary will subscribe for common shares of Newco for fair market value consideration. Newco will subsequently purchase for cancellation common shares of Newco held by Parent (the “Newco Common Shares”) for consideration equal to the fair market value of the Newco Common Shares at the time of the purchase for cancellation. At the time of the purchase for cancellation of the Newco Common Shares, the fair market value of the Newco Common Shares will be less than the adjusted cost base of the Newco Common Shares, resulting in a capital loss.

38. Subsidiary will cause Newco to be wound-up. The assets of Newco will be distributed to Subsidiary and its liabilities, if any, will be assumed by Subsidiary. Newco will be dissolved within a short period of time thereafter.

ADDITIONAL INFORMATION

39. Parent and Subsidiary are specified financial institutions. Newco and Lossco will be specified financial institutions.

40. The Newco Preferred Shares and the Subsidiary Special Share will be term preferred shares.

41. The Newco Preferred Shares that will be acquired by Lossco will not be acquired in the ordinary course of Lossco’s business. The Subsidiary Special Share that will be acquired by Parent will not be acquired in the ordinary course of Parent’s business.

42. Neither the Newco Preferred Shares nor the Subsidiary Special Share will be, at any time during the implementation of the Proposed Transactions described herein:

(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).

43. Parent and Subsidiary are related persons and affiliated persons. Parent, Subsidiary, Lossco and Newco will be, throughout the series of transactions that includes the Proposed Transactions, related persons and affiliated persons. Parent and Subsidiary will continue to be related persons and affiliated persons for the period ending XXXXXXXXXX .

44. The taxable income of Newco, Lossco, Subsidiary and Parent for XXXXXXXXXX and future taxation years is expected to be fully allocated to XXXXXXXXXX .

45. Parent and Subsidiary are not financial institutions, as defined in subsection 190(1), for purposes of Part VI tax. Newco and Lossco will not be financial institutions, as defined in subsection 190(1), for purposes of Part VI tax.

46. At the time of the Proposed Transactions, Newco will have the financial capacity to satisfy the applicable solvency test under the BCA2 required to pay the dividends on the Newco Preferred Shares described in Paragraphs 22 and 27.

47. The aggregate amount of Subsidiary’s XXXXXXXXXX non-capital loss (arising from the Proposed Transactions upon the winding-up of Lossco) that Subsidiary deducts in computing its income for any of its taxation years that end no later than

(a) XXXXXXXXXX taxation years after the end of Parent’s XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ) (“Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions”) will not be less than $XXXXXXXXXX ;

(b) XXXXXXXXXX taxation years after the end of Parent’s XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ) (“Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions”) will not be less than $XXXXXXXXXX ;

(c) XXXXXXXXXX taxation years after the end of Parent’s XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ) (“Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions”) will not be less than $XXXXXXXXXX

(d) XXXXXXXXXX taxation years after the end of Parent’s XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ) (“Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions”) will not be less than $XXXXXXXXXX ;

(e) XXXXXXXXXX taxation years after the end of Parent’s XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ) (“Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions”) will not be less than $XXXXXXXXXX ;

(f) XXXXXXXXXX taxation years after the end of Parent’s XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ) (“Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions”) will not be less than $XXXXXXXXXX ; and

(g) XXXXXXXXXX taxation years after the end of Parent’s XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ) (“Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions”) will not be less than the aggregate of $XXXXXXXXXX and the amount of the non-capital loss carried forward from Parent’s XXXXXXXXXX taxation year that Parent deducts in computing its taxable income for the XXXXXXXXXX taxation year.

47.1 XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

48. The purpose of the Proposed Transactions is to allow for the consolidation of the non-capital losses of Parent and the taxable income of Subsidiary. Subsidiary wishes to use the non-capital losses from prior years of Parent, as described in Paragraph 4, as well as the non-capital loss that would otherwise have been incurred by Parent in XXXXXXXXXX and XXXXXXXXXX to offset its taxable income in XXXXXXXXXX and future taxation years.

49. The Lossco Loan is being made to Lossco, instead of having Parent make the Lossco Loan directly to Subsidiary, due to constraints related to Subsidiary’s specific debt covenants.

50. The purpose of incorporating Newco is to have Newco issue the Newco Preferred Shares to Lossco rather than having Lossco issue preferred shares to Parent, which would result in corporate incest.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. Provided Lossco has a legal obligation to pay interest on the Lossco Loan, and Lossco continues to hold the Newco Preferred Shares it acquires, in the manner described in Paragraph 18, for the purpose of gaining or producing income from property, Lossco will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year (depending on the method regularly followed by Lossco in computing its income for the purposes of the Act), the lesser of

(a) the interest paid or payable on the Lossco Loan in respect of that taxation year; and

(b) a reasonable amount in respect thereof.

B. No amount will be included in the income of Newco, pursuant to section 9, paragraph 12(1)(c) or 12(1)(x), in respect of the contributions of capital to be made by Parent to Newco as described in Paragraphs 21 and 26.

C. The dividends received by Lossco on Newco Preferred Shares, as described in Paragraphs 22 and 27, will be taxable dividends and such dividends will,

(a) pursuant to subsection 112(1), be deductible in computing the taxable income of Lossco for the taxation year in which the dividends were received, and for greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4);

(b) not be subject to tax under Part IV.1 and Part VI.1; and

(c) not be subject to tax under Part IV, except to the extent that paragraph 186(1)(b) applies to impose such tax.

D. Subsection 84(3) will apply to the redemption of the Subsidiary Special Share, described in Paragraph 35, to deem Subsidiary to have paid and Parent to have received a dividend equal to the amount, if any, by which the amount paid upon such redemption exceeds the paid-up capital in respect of such shares immediately before such redemption, and any such dividend:

(a) will be included in computing the income of Parent pursuant to subsection 82(1) and paragraph 12(1)(j);

(b) will be deductible by Parent pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) and (2.4);

(c) will be excluded in determining the proceeds of disposition, to Parent, of the shares so redeemed pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;

(d) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which such dividend is deemed to have been received,

(e) will not be subject to tax under Part IV, except to the extent that paragraph 186(1)(b) applies to impose such tax; and

(f) will not be subject to tax under Parts IV.1 and Part VI.1.

E. Provided that Parent and Subsidiary jointly file an election pursuant to subsection 85(1) within the time allowed by subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply so that the agreed amount in respect of Parent’s transfer of the Lossco Common Shares to Subsidiary, described in Paragraph 32, will be deemed to be Parent’s proceeds of disposition and Subsidiary’s cost of the Lossco Common Shares pursuant to paragraph 85(1)(a).

F. Provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the Proposed Transactions, then by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Rulings C and D. For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

G. Provided that the requirements of paragraphs 88(1.1)(a) and (b) are satisfied, subsection 88(1.1) will apply after the winding up of Lossco into Subsidiary, described in Paragraph 36, to permit Subsidiary to deduct the non-capital losses of Lossco in computing its income for any taxation year commencing after the commencement of the winding-up, subject to the limitations in paragraph 88(1.1)(e) and section 111. For this purpose, Lossco will not be considered to have been wound up until it has been formally dissolved.

H. By virtue of paragraph 40(3.6)(a), the capital loss incurred by Parent on the purchase for cancellation of the Newco Common Shares, as described in Paragraph 37, will be deemed to be nil. Paragraph 40(3.6)(b) and paragraph 53(1)(f.2) will not apply to add the capital loss denied under paragraph 40(3.6)(a) to the adjusted cost base of a class of the capital stock of Newco owned by Parent immediately after the disposition. For greater certainty, subsections 40(3.3) and 40(3.4) will not apply with respect to Parent’s capital loss on the purchase for cancellation of the Newco Common Shares.

I. Subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply to the Proposed Transactions in and by themselves.

J. The provisions of subsection 245(2) will not apply, as a result of the Proposed Transactions, in and by themselves, to redetermine 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 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 and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

1. Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) the amount of any non-capital loss or any other tax account of any corporation referred to herein;

(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the 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, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

2. It is our view that if

(a) Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions are less than $XXXXXXXXXX , as described in Paragraph 47(a);

(b) Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions are less than $XXXXXXXXXX , as described in Paragraph 47(b);

(c) Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions are less than $XXXXXXXXXX , as described in Paragraph 47(c);

(d) Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions are less than $XXXXXXXXXX , as described in Paragraph 47(d);

(e) Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions are less than $XXXXXXXXXX , as described in Paragraph 47(e);

(f) Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions are less than $XXXXXXXXXX , as described in Paragraph 47(f); or

(g) Subsidiary’s XXXXXXXXXX Non-Capital Loss Deductions are less than the amount described in Paragraph 47(g);

there could be an inappropriate “refreshing” of Parent’s non-capital losses as a consequence of the Proposed Transactions, with the result that subsection 245(2) could apply to redetermine the consequences confirmed in the Rulings provided above.

Yours truly,

XXXXXXXXXX for Division Director Reorganizations Division Income Tax Rulings Directorate Legislative Policy and Regulatory Affairs Branch