2012 Ruling 2012-0452821R3 - Forgiveness of debt

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: In a recapitalization of a corporation contemplated by a Plan of Arrangement and the debts forgiven occurs immediately before the acquisition of control 1) is there a settlement of notes? 2) does paragraph 111(4)(d) apply?

Position: YES

Reasons: The New Aco shares will be delivered in satisfaction of the principal amount of the notes and the ordering respects the law and the transaction is very similar to one we previously ruled on.

XXXXXXXXXX
2012-045282

XXXXXXXXXX, 2012

Dear Sir:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Aco")

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-named taxpayers. We acknowledge e-mails and telephone conversations (XXXXXXXXXX) and (XXXXXXXXXX) on the subject.

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

(i) dealt with in an earlier return of Aco or a related person;
(ii) being considered by a tax services office or a taxation centre in connection with a tax return already filed by Aco or a related person;
(iii) under objection by Aco, or a related person;
(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate to Aco or a related person; nor
(v) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired.

None of the transactions will impact the currently outstanding tax liabilities, if there are any, of the parties to the ruling.
Unless otherwise noted, all references to currency are to Canadian dollars.

DEFINITIONS

In this letter, the following items have the meaning specified below:

(a) "Aco" means XXXXXXXXXX, the corporation formed as a result of the amalgamation of XXXXXXXXXX;

(b) "Aco Exchangeable Debentures" means XXXXXXXXXX-year exchangeable debentures with a principal amount of $XXXXXXXXXX to be issued by Aco, bearing interest at an annual rate of XXXXXXXXXX% in cash or XXXXXXXXXX% in additional Aco Exchangeable Debentures, exchangeable at the option of the holder into common shares of New Aco, and exchangeable at the option of Aco at maturity into common shares of New Aco;

(c) "Aco First Ranking Preferred Shares" means the new voting preferred shares in the capital of Aco to be created by the amendment to the articles of Aco and entitling its holder to a first-ranking liquidation preference for an amount per share equal to the consideration received by Aco for such share at the time of its issuance;

(d) "Aco Senior Notes" means XXXXXXXXXX-year senior secured notes with a principal amount of $XXXXXXXXXX, bearing an interest rate of XXXXXXXXXX% per annum, payable quarterly, redeemable at the option of Aco after XXXXXXXXXX years at face value, plus accrued and unpaid interest, if any, to the date of cancellation;

(e) "Acquisition of Control Taxation Year" means the taxation year ending immediately before the acquisition of control of Aco and each of its controlled subsidiaries as per paragraph 249(4)(a) of the Act;

(f) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof. Unless otherwise stated, all statutory references are to the Act and all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

(g) "Adjusted cost base" ("ACB") has the meaning assigned by section 54 of the Act;

(h) "Affected Unsecured Debt" means collectively, the Medium Term Notes, Convertible Debentures and the Bank Indebtedness related to the Credit Agreement;

(i) "Affiliated" has the meaning assigned by subsection 251.1(1) of the Act;

(j) "Arrangement" means an arrangement under Section 192 of the CBCA on the terms and subject to the conditions set out in the Plan of Arrangement, subject to any amendments or variations thereto made in accordance with the Plan of Arrangement or made at the direction of the Court in the Interim Order or the Final Order;

(k) "Bco" means XXXXXXXXXX, the corporation described in 13 below;

(l) "Bco Notes" has the meaning given to it in 22 below;

(m) "Bank Indebtedness" has the meaning specified in 21 below;

(n) "Board of Directors" means the board of directors of Aco prior to the Effective Date and the board of directors of New Aco after the Effective Date;

(o) "Capital loss" has the meaning assigned by paragraph 39(1)(b) of the Act;

(p) "Capital property" has the meaning assigned by section 54 of the Act;

(q) "CBCA" means Canada Business Corporation Act. R.S.C. 1995, c. C-44, as amended;

(r) "CDN$" or "$" means Canadian dollars;

(s) "CEC" means cumulative eligible capital and has the meaning assigned by subsection 14(5) of the Act;

(t) "Certificate" means the certificate of arrangement giving effect to the Arrangement;

(u) "Circular" means the management proxy circular regarding, inter alia, the Recapitalization, distributed to Securityholders in connection with the Shareholders' Meeting and the Debtholders' Meeting;

(v) "Commercial debt obligation" has the meaning assigned in subsection 80(1) of the Act;

(w) "Commercial obligation" has the meaning assigned in subsection 80(1) of the Act;

(x) "Convertible Debentures" has the meaning specified in 19 below;

(y) "Convertible Debenture Indenture" means the trust indenture, dated XXXXXXXXXX, among Aco, Y Income Fund, Y Trust and the BNY Trust Company of Canada in respect of the Convertible Debentures, as supplemented by the first supplemental trust indenture dated XXXXXXXXXX between Aco and the BNY Trust Company of Canada;

(z) "Court" means the XXXXXXXXXX;

(aa) "Cco" means XXXXXXXXXX;

(bb) "Cco Notes" has the meaning assigned in 14 below;

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

(dd) "Credit Agreement" means the second amended and restated credit agreement, dated XXXXXXXXXX, including, inter alia, Aco, as borrower, the XXXXXXXXXX and the Lenders, as defined in the Credit Agreement, as amended;

(ee) "Cumulative Redeemable First Preferred Shares" means, collectively, the Series 1 Redeemable First Preferred Shares, the Series 2 Redeemable First Preferred Shares, the Series 3 Redeemable First Preferred Shares, the Series 4 Redeemable First Preferred Shares, the Series 5 Redeemable First Preferred Shares, the Series 6 Redeemable First Preferred Shares and the Series 7 Redeemable First Preferred Shares of Aco;

(ff) "Dco" means XXXXXXXXXX;

(gg) "Debtholders" means holders of the Affected Unsecured Debt;

(hh) "Debtholders' Meeting" means the meeting of Debtholders that will be held pursuant to an Interim Order of the Court to consider and, if advisable, to approve the Arrangement and to consider such other matters as may properly come before such meeting;

(ii) "Disposition" has the meaning assigned by subsection 248(1) of the Act;

(jj) "Effective Date" means the date showing on the Certificate stating the date on which the Plan of Arrangement becomes effective in accordance with the CBCA;

(kk) "Existing Common Shareholders" means the holders of Existing Common Shares;

(ll) "Existing Equity Securities" has the meaning specified in 10 below;

(mm) "Existing Shareholders" means the holders of the Existing Equity Securities;

(nn) "Final Order" means the final order of the Court approving the Arrangement as such order may be amended at any time prior to the Effective Date or, if appealed, then unless such appeal is withdrawn or denied, as granted or affirmed;

(oo) "FMV" means fair market value;

(pp) "Forgiven amount" has the meaning assigned by subsection 80(1) of the Act;

(qq) "Interim Order" means the interim order of the Court to be issued, pursuant to section 192 of the CBCA, as the same may be amended;

(rr) "Laws" means all statutes, codes, regulations, statutory rules, orders, decrees, published policies, published guidelines and terms and conditions of any grant of approval, permission, authority or license of any governmental authority, and the term "applicable" with respect to such Laws, and in the context that refers to one or more Persons, means that such Laws apply to such Person or Persons or its or their business, undertaking, property or securities and emanate from a governmental authority having jurisdiction over the Person or Persons or its or their business, undertaking, property or securities (all references herein to a specific statute being deemed to include all applicable rules, regulations, rulings, orders and forms made of promulgated under such statute and the published policies and published guidelines of the governmental authorities administering such statute);

(ss) "Medium Term Notes" means the notes described in 16 below;

(tt) "MTN Indenture" means the trust indenture, dated XXXXXXXXXX, among XXXXXXXXXX, Y Income Fund and Bco, in respect of the Medium Term Notes, as supplemented by the first supplemental trust indenture dated XXXXXXXXXX among Aco, Bco and XXXXXXXXXX;

(uu) "Mco" means XXXXXXXXXX, further described in 13 below;

(vv) "MLP" means XXXXXXXXXX;

(ww) "Newco1" means XXXXXXXXXX, a newly incorporated wholly-owned subsidiary of Aco incorporated under the CBCA;

(xx) "New Aco" means XXXXXXXXXX, a new corporation incorporated under the CBCA;

(yy) "New Aco Common Shares" means the common shares in the capital of New Aco to be created and issued in connection with the Recapitalization;

(zz) "New Employee Incentive Plan" means the new employee incentive plan, the principal terms of which are described in a supplement to the Plan of Arrangement;

(aaa) "Non-capital losses" has the meaning assigned by subsection 111(8) of the Act;

(bbb) "Options" means the outstanding options issued under the XXXXXXXXXX Stock Option Plan of Aco and the XXXXXXXXXX Stock Option Plan of Aco;

(ccc) "Order" means any order of the Court in these proceedings including, without limitation, the Interim Order and the Final Order;

(ddd) "Paid-up capital" has the meaning assigned by subsection 89(1) of the Act;

(eee) "Person" means any individual, firm, partnership, joint venture, venture capital fund, association, trust, trustee, executor, administrator, legal personal representative, estate, group, body corporate (including a limited liability company and an unlimited liability company), corporation, unincorporated association or organization, governmental authority, syndicate or other entity, whether or not having legal status;

(fff) "Plan of Arrangement" means the plan of arrangement in respect of the Arrangement, a draft of which will be appended to the Circular;

(ggg) "Proceeds of Debtholder Exchange" has the meaning specified in 45 below;

(hhh) "Proposed Transactions" means the proposed transactions described from 41 to 46 below;

(iii) "Public corporation" has the meaning assigned by subsection 89(1) of the Act;

(jjj) "Recapitalization" means the transactions contemplated by the Plan of Arrangement;

(kkk) "Record Date" means the date for determining those Securityholders entitled to receive notice and to vote at the Shareholders' Meeting and the Debtholders' Meeting;

(lll) "Related" has the meaning assigned by subsection 251(2) of the Act;

(mmm) "RSUs" means the outstanding restricted share units issued under the Restricted Share Unit Plan of Aco;

(nnn) "Securityholders" means the Debtholders and Existing Shareholders;

(ooo) "Series 1 Redeemable First Preferred Shares" means the preferred shares of Aco described in 3 below;

(ppp) "Series 2 Redeemable First Preferred Shares" means the preferred shares of Aco described in 4 below;

(qqq) "Series 3 Redeemable First Preferred Shares" means the preferred shares of Aco described in 5 below;

(rrr) "Series 4 Redeemable First Preferred Shares" means the preferred shares of Aco described in 6 below;

(sss) "Series 5 Redeemable First Preferred Shares" means the preferred shares of Aco described in 7 below;

(ttt) "Series 6 Redeemable First Preferred Shares" means the preferred shares of Aco described in 8 below;

(uuu) "Series 7 Redeemable First Preferred Shares" means the preferred shares of Aco described in 9 below;

(vvv) "Shareholders' Meeting" means the meeting of the Existing Shareholders to be held pursuant to the CBCA and to the Interim Order to consider and, if advisable, to approve the Arrangement and to consider such other matters as may properly come before such meeting;

(www) "TCC" means taxable Canadian corporation and has the meaning assigned by subsection 89(1) of the Act;

(xxx) "TSO" means a CRA tax services office;

(yyy) "UCC" means undepreciated capital cost and has the meaning assigned by subsection 13(21) of the Act;

(zzz) "US$" or "U.S. dollars" means United States dollars;

(aaaa) "Wco" means XXXXXXXXXX, a corporation described in 28 below;

(bbbb) "Yco" means XXXXXXXXXX, a predecessor corporation of Aco (before the amalgamation of XXXXXXXXXX, Yco and XXXXXXXXXX), and previously designated as XXXXXXXXXX prior to the change of name undertaken on XXXXXXXXXX;

(cccc) "Y Income Fund" means XXXXXXXXXX;

(dddd) "Y LLC" means XXXXXXXXXX, the corporation described in 26 below;

(eeee) "Y Trust" means XXXXXXXXXX;

(ffff) "YUSco" means XXXXXXXXXX, the corporation described in 26 below;

(gggg) YUS Note" has the meaning given to it in 27 below;

(hhhh) XXXXXXXXXX;

(iiii) XXXXXXXXXX;

(jjjj) XXXXXXXXXX;

(kkkk) "XXXXXXXXXX Note" has the meaning given to it in 29 below;

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

STATEMENT OF FACTS

1. Aco is a public corporation and a TCC governed by the CBCA. Aco's offices are located at XXXXXXXXXX. Aco is served by the XXXXXXXXXX TSO and the XXXXXXXXXX Taxation Centre. The shares of Aco are listed and posted for trading on XXXXXXXXXX.

Aco's consolidated revenues for its financial year ended XXXXXXXXXX totalled $XXXXXXXXXX with a consolidated net loss amounting to $XXXXXXXXXX.

2. Aco has authorized capital consisting of the following:

(i) an unlimited number of voting and participating common shares (otherwise referred to herein as the "Existing Common Shares");

(ii) an unlimited number of pari passu Cumulative Redeemable First Preferred Shares issuable in series of which (1) a fixed number of XXXXXXXXXX Series 1 Shares has been authorized; (2) a fixed number of XXXXXXXXXX Series 2 Shares has been authorized; (3) a fixed number of XXXXXXXXXX Series 3 Shares has been authorized; (4) a fixed number of XXXXXXXXXX Series 4 Shares has been authorized; (5) a fixed number of XXXXXXXXXX Series 5 Shares has been authorized; (6) a fixed number of XXXXXXXXXX Series 6 Shares has been authorized; and (7) a fixed number of XXXXXXXXXX Series 7 Shares has been authorized.

3 The Series 1 Redeemable First Preferred Shares of Aco are non-voting and entitle the holder to a cumulative dividend of $XXXXXXXXXX per share per annum, payable quarterly. Since XXXXXXXXXX, Aco may, at its option, redeem at par for cash the Series 1 shares, in whole or in part. Also, since XXXXXXXXXX, and prior to XXXXXXXXXX, Aco may, at its option, exchange the outstanding Series 1 shares, in whole or in part, into common shares of Aco, subject to a $XXXXXXXXXX floor conversion price ratio. On or after XXXXXXXXXX, each preferred share is redeemable, at the option of the holder, at a price equal to $XXXXXXXXXX per share plus any accrued and unpaid dividends in arrears. Dividends are no longer paid on the Series 1 Redeemable First Preferred Shares of Aco.

4. The Series 2 Redeemable First Preferred Shares of Aco are non-voting and entitle the holder to a cumulative dividend of $XXXXXXXXXX per share per annum, payable quarterly. On or after XXXXXXXXXX, Aco may, at its option, redeem for cash the Series 2 shares, in whole or in part at a decreasing premium until XXXXXXXXXX and at par thereafter. Also, on or after XXXXXXXXXX, and prior to XXXXXXXXXX, Aco may, at its option, exchange the outstanding Series 2 shares, in whole or in part, into common shares of Aco, subject to a $XXXXXXXXXX floor conversion price ratio. On or after XXXXXXXXXX, each preferred share is redeemable, at the option of the holder, at a price equal to $XXXXXXXXXX per share plus any accrued and unpaid dividends in arrears. Dividends are no longer paid on the Series 2 Redeemable First Preferred Shares of Aco.

5. The Series 3 Redeemable First Preferred Shares of Aco are non-voting and entitle the holder to a cumulative dividend of $XXXXXXXXXX per Series 3 share per annum, payable quarterly, for the initial XXXXXXXXXXe year period ending XXXXXXXXXX. The dividend rate will be reset on XXXXXXXXXX and every XXXXXXXXXX years thereafter. On XXXXXXXXXX, and on XXXXXXXXXX every XXXXXXXXXX years thereafter, Aco may, at its option, redeem at par for cash the Series 3 shares, in whole or in part. On XXXXXXXXXX, each preferred share is convertible, at the option of the holder, into Series 4 preferred shares on a one to one basis. Dividends are no longer paid on the Series 3 Redeemable First Preferred Shares of Aco.

6. The Series 4 Redeemable First Preferred Shares of Aco are non-voting and entitle the holder to a cumulative floating quarterly dividend. On XXXXXXXXXX, and on XXXXXXXXXX every XXXXXXXXXX years thereafter, Aco may, at its option, redeem at par for cash the Series 4 shares, in whole or in part. Dividends are no longer paid on the Series 4 Redeemable First Preferred Shares of Aco.

7. The Series 5 Redeemable First Preferred Shares of Aco are non-voting and entitle the holder to a cumulative dividend of $XXXXXXXXXX per Series 5 share per annum, payable quarterly, for the initial XXXXXXXXXX year period ending XXXXXXXXXX. The dividend rate will be reset on XXXXXXXXXX and every XXXXXXXXXX years thereafter. On XXXXXXXXXX, and on XXXXXXXXXX every XXXXXXXXXX years thereafter, Aco may, at its option, redeem at par for cash the Series 5 shares, in whole or in part. On XXXXXXXXXX, each preferred share is convertible, at the option of the holder, into Series 6 preferred shares on a one to one basis. Dividends are no longer paid on the Series 5 Redeemable First Preferred Shares of Aco.

8. The Series 6 Redeemable First Preferred Shares of XXXXXXXXXX are non-voting and entitle the holder to a cumulative floating quarterly dividend. On XXXXXXXXXX, and on XXXXXXXXXX every XXXXXXXXXX years thereafter, Aco may, at its option, redeem at par for cash the Series 6 shares, in whole or in part. Dividends are no longer paid on the Series 6 Redeemable First Preferred Shares of Aco.

9. The Series 7 Redeemable First Preferred Shares of Aco are non-voting and entitle the holder to a cumulative dividend of $XXXXXXXXXX per share per annum, payable quarterly. The Series 7 shares are exchangeable into common shares of Aco at a ratio of one preferred share for one common share of Aco. Dividends are no longer paid on the Series 7 Redeemable First Preferred Shares of Aco. Although dividends are no longer paid, the Series 1 to Series 7 Redeemable First Preferred Shares dividends have been cumulating.

10. Aco has issued and outstanding XXXXXXXXXX Existing Common Shares, XXXXXXXXXX Series 1 Redeemable First Preferred Shares, XXXXXXXXXX Series 2 Redeemable First Preferred Shares, XXXXXXXXXX Series 3 Redeemable First Preferred Shares, XXXXXXXXXX Series 5 Redeemable First Preferred Shares and XXXXXXXXXX Series 7 Redeemable First Preferred Shares (collectively ‘‘Existing Equity Securities''). No Series 4 and Series 6 Redeemable First Preferred Shares were issued and outstanding.

To the knowledge of the directors and executive officers of Aco, no person beneficially owns, directly or indirectly, or controls or directs XXXXXXXXXX% or more of the voting rights attached to all Existing Common Shares.

11. Prior to the Proposed Transactions, Aco had a capital loss carry-forward balance of approximately $XXXXXXXXXX and a CEC balance of approximately $XXXXXXXXXX.

12. Aco owns investments in XXXXXXXXXX wholly-owned subsidiaries: Bco, YUSco, XXXXXXXXXX, Dco and XXXXXXXXXX. These investments are capital properties of Aco. Aco's ACB in its investments is estimated to be respectively $XXXXXXXXXX, while the FMV of such investments is estimated to be significantly less than their respective ACB (and possibly XXXXXXXXXX). Dividends amounting to $XXXXXXXXXX were paid over the years to Aco on the shares of BCo and were subject to subsection 112(3) of the Act.

13. Bco is a subsidiary of Aco (XXXXXXXXXX and Dco currently own some preferred shares of Bco). Bco is a TCC, is currently an unlimited liability company governed by the laws of XXXXXXXXXX was continued under the CBCA in XXXXXXXXXX to facilitate the Arrangement. Bco is XXXXXXXXXX. Bco is also XXXXXXXXXX through Mco, XXXXXXXXXX. Bco's offices are located at XXXXXXXXXX. Bco is served by the XXXXXXXXXX TSO and the XXXXXXXXXX Taxation Centre. Bco's business number is XXXXXXXXXX. Bco's taxation year-end is the XXXXXXXXXX.

14 Prior to the transactions described in 31 to 33 below, Aco owned all of the issued and outstanding shares of Cco, XXXXXXXXXX. Aco's ACB in the shares of Cco was approximately $XXXXXXXXXX while their FMV was estimated to be significantly less than the ACB.

The tax attributes of Cco prior to the transactions described in 31 to 33 below (based on the tax returns filed for the XXXXXXXXXX taxation years) should be as follows (approximates only):

Corporation
Tax Attribute
Amount
Cco
Non-Capital Losses Balance
$XXXXXXXXXX

CEC Balance
$XXXXXXXXXX

UCC of Depreciable Properties
$XXXXXXXXXX

Prior to the transactions described in 31 to 33 below, Cco had issued and outstanding promissory notes in excess of $XXXXXXXXXX payable to Aco (‘‘Cco Notes''). The Cco Notes were capital property to Aco and commercial obligations of Cco. The ACB of Cco Notes for Aco was equal to their principal amount. The aggregate FMV of the Cco Notes did not exceed their principal amount.

As part of a transaction undertaken in XXXXXXXXXX, the terms of the Cco Notes were amended from interest bearing to non-interest bearing. This amendment did not cause a novation of such Cco Notes.

15. Aco owns all of the issued and outstanding shares of XXXXXXXXXX and Dco.

16. Medium Term Notes were issued in series between XXXXXXXXXX by Yco, a predecessor corporation of Aco. Under subsection 87(7) of the Act, they were assumed by Aco. Prior to the Proposed Transactions, Aco has the following Medium Term Notes (collectively referred to as the "Medium Term Notes") issued and outstanding:

Series
Principal Amount
Interest Rate
Maturity
Series 2
$ XXXXXXXX
XXXXXXXXX%
XXXXXXXXXX
Series 3
$ XXXXXXXX
XXXXXXXXX%
XXXXXXXXXX
Series 4
$ XXXXXXXX
XXXXXXXXX%
XXXXXXXXXX
Series 5
$ XXXXXXXX
XXXXXXXXX%
XXXXXXXXXX
Series 7
$ XXXXXXXX
XXXXXXXXX%
XXXXXXXXXX
Series 8
$ XXXXXXXX
XXXXXXXXX%
XXXXXXXXXX
Series 9
$ XXXXXXXX
XXXXXXXXX%
XXXXXXXXXX
Series 10
$ XXXXXXXX
XXXXXXXXX%
XXXXXXXXXX
The terms and conditions of the Medium Term Notes are governed by the MTN Indenture. All Series of Medium Term Notes are unsecured and are unconditionally guaranteed by Aco, Bco, Cco and YUSco as to the payment of principal and interest.

The Medium Term Notes are not listed on any stock exchange although they may be publicly traded.

17. The Medium Term Notes are not convertible into equity of Aco.

18. The proceeds from the Medium Term Notes were used by Aco to fund the business operations of its subsidiaries, to repay existing debts and to finance business acquisitions. Medium Term Notes qualify as commercial obligations of Aco. The interest on the Medium Term Notes is deductible under paragraph 20(1)(c) of the Act.

19. On XXXXXXXXXX Yco, a predecessor corporation of Aco, issued unsecured convertible subordinated debentures with a principal amount of $XXXXXXXXXX (‘‘Convertible Debentures''). The Convertible Debentures bear interest payable semi-annually at a rate of XXXXXXXXXX% per annum and mature on XXXXXXXXXX. Proceeds from the Convertible Debentures were used by Yco essentially to redeem equivalent convertible debentures issued previously to fund operations and acquisitions. The Convertible Debentures qualify as commercial obligations of Aco. The interest on the Convertible Debentures is deductible under paragraph 20(1)(c) of the Act.

20. The Convertible Debentures may be exchanged at any time, at the option of the holder, for common shares of Aco at an exchange price of $XXXXXXXXXX per share on and after XXXXXXXXXX and prior to XXXXXXXXXX, the Convertible Debentures may be redeemed in whole or in part from time to time at the option of Aco at a price equal to their principal amount plus accrued and unpaid interest, provided that the current market price of the common shares preceding the date on which the notice of redemption is given is not less than XXXXXXXXXX% of the exchange price. On and after XXXXXXXXXX, the Convertible Debentures may be redeemed in whole or in part from time to time at the option of Aco at a price equal to their principal amount plus accrued interest. Aco may also, at its option and subject to certain conditions, elect to satisfy its obligation to repay all or any portion of the principal amounts and interest of the Convertible Debentures that are to be redeemed or repaid at maturity, by issuing common shares of Aco. The number of shares a holder will receive in respect of each Convertible Debenture will be determined by dividing the principal amount of the Convertible Debentures that are to be redeemed or repaid at maturity by XXXXXXXXXX% of the market price of the common shares.

21. Aco has in place a senior unsecured credit facility totalling $XXXXXXXXXX. Prior to the Proposed Transactions, Aco had drawn on its existing credit facility an amount of approximately $XXXXXXXXXX (‘‘Bank Indebtedness'').

Proceeds from the Bank Indebtedness were used by Aco for general corporate purposes. The Bank Indebtedness qualifies as commercial obligations of Aco. The interest on the Bank Indebtedness is deductible under paragraph 20(1)(c) of the Act.

22. Bco has issued and has outstanding interest-bearing promissory notes in excess of $XXXXXXXXXX payable to Aco and XXXXXXXXXX (‘‘Bco Notes''). The Bco Notes are capital property to Aco and XXXXXXXXXX and are commercial obligations of Bco. The ACB of the Bco Notes for Aco and XXXXXXXXXX is equal to their principal amount. The aggregate FMV of the Bco Notes does not exceed their principal amount.

23. The tax attributes of Aco's wholly-owned subsidiaries prior to the Proposed Transactions (based on the tax returns filed for the XXXXXXXXXX taxation years) should be as follows (approximates only):

Corporation
Tax Attribute
Amount

Bco
Capital Losses Balance
$XXXXXXXXXX

CEC Balance (4/3)
$XXXXXXXXXX

UCC of Depreciable Properties
$XXXXXXXXXX

It should be noted that Bco's CEC balance reflects CRA's adjustments per latest notice of reassessment. However, Bco has filed a notice of objection in response of the reassessment.

In addition, it is worth mentioning that Bco's tax attributes will be increased by Cco's tax attributes indicated in 14 above as a result of the transaction described in 33 below.

24. Bco owns several investments in wholly-owned and jointly-owned subsidiaries. The table below provides an overview of such investments as well as Bco's approximate ACB. These investments are capital properties of Bco.

Corporation
ACB
Mco (XXXX% Interest)
-
MLP (XXXX% Interest)
-
XXXX (XXXX% Interest)
$XXXXXXXX
XXXX (XXXX% Interest)
$XXXXXXXX

25. YUSco is a U.S. resident corporation for both Canadian and U.S. tax purposes. Its sole significant assets are the following:

(i) XXXXXXXXXX% of the issued and outstanding shares of Y LLC;

(ii) shares representing a XXXXXXXXXX% interest in XXXXXXXXXX; and

a receivable from Y LLC in the amount of approximately US$XXXXXXXXXX and some cash.

26. Y LLC is a corporation formed under the XXXXXXXXXX laws and is resident in the U.S. for Canadian tax purposes. Y LLC carries on an active business pursuant to the meaning of subsection 95(1) of the Act. The ACB to YUSco of its shares in Y LLC is approximately US$XXXXXXXXXX, while the FMV is estimated to be significantly less than its ACB (XXXXXXXXXX).

27. Aco has a promissory note receivable from YUSco in the amount of approximately US$XXXXXXXXXX ("YUSco Note").

28. Wco is a wholly-owned subsidiary of XXXXXXXXXX and a TCC. The ACB of the Wco shares is approximately $XXXXXXXXXX and the FMV is estimated to be significantly less than its ACB. Prior to the Proposed Transactions, Wco had a UCC balance of approximately $XXXXXXXXXX and a CEC balance of approximately $XXXXXXXXXX (approximates only).

29. XXXXXXXXXX is a wholly-owned subsidiary of Aco and a TCC. XXXXXXXXXX has issued and has outstanding a promissory note in excess of $XXXXXXXXXX payable to Aco (‘‘XXXXXXXXXX Note''). The XXXXXXXXXX Note was used to fund business operations of XXXXXXXXXX.

The XXXXXXXXXX Note is a capital property to Aco and a commercial obligation of XXXXXXXXXX. The ACB of the XXXXXXXXXX Note for Aco is equal to its principal amount. The FMV of the XXXXXXXXXX Note is estimated to be significantly less than its ACB (XXXXXXXXXX).

As part of a transaction undertaken on XXXXXXXXXX, the terms of the XXXXXXXXXX Note were amended from an interest bearing note to a non-interest bearing note. This amendment did not cause a novation of the XXXXXXXXXX Note.

30. In XXXXXXXXXX, Aco transferred to XXXXXXXXXX some of the Bco Notes in consideration for the issuance by XXXXXXXXXX of additional common shares. Immediately before such transfer, the interest rate on the notes to be transferred was increased to XXXXXXXXXX%. This increase did not cause a novation of such Bco Notes.

31. In XXXXXXXXXX, Aco transferred to Bco all the issued and outstanding shares of Cco and the Cco Notes in consideration of the issuance by Bco of additional common shares.

32. In XXXXXXXXXX, the paid-up capital of each class of shares in the capital of Cco was reduced to $XXXXXXXXXX for no payment.

33. In XXXXXXXXXX, Cco was wound-up into Bco, its sole shareholder, under subsection 88(1) of the Act. By virtue of the winding-up, Cco distributed all of its property to Bco and Bco assumed all of the liabilities of Cco. Election under subsection 80.01(4) of the Act will be filed with respect to the settlement of the Cco Notes upon the wind-up.

34. Prior to the Proposed Transactions contemplated in the Arrangement, the paid-up capital of each class of shares in the capital of XXXXXXXXXX will be reduced to $XXXXXXXXXX for no payment.

Thereafter, XXXXXXXXXX will be wound-up into Aco, its sole shareholder, under subsection 88(1) of the Act. By virtue of the winding-up, XXXXXXXXXX will distribute all of its property to Aco and Aco will assume all of the liabilities of XXXXXXXXXX. Election under subsection 80.01(4) of the Act will be filed with respect to the settlement of the XXXXXXXXXX Note upon the wind-up.

35. Prior to the Proposed Transactions contemplated in the Arrangement, Bco will cancel its preferred shares owned by XXXXXXXXXX and Dco for no consideration.

36. Prior to the Proposed Transactions contemplated in the Arrangement, Aco will transfer all issued and outstanding shares of XXXXXXXXXX and Dco to Bco in consideration of the issuance by Bco of additional common shares.

37. Prior to the Proposed Transactions contemplated in the Arrangement, the paid-up capital of each class of shares in the capital of XXXXXXXXXX and Dco will be reduced to $XXXXXXXXXX for no payment.

38. Prior to the Proposed Transactions contemplated in the Arrangement, XXXXXXXXXX and Dco will be wound-up into Bco, their sole shareholder, under subsection 88(1) of the Act. By virtue of the winding-up, XXXXXXXXXX and Dco will distribute all of their respective properties to Bco and Bco will assume all of the liabilities of XXXXXXXXXX and Dco, respectively.

39. A significant portion of the Affected Unsecured Debt is reflected in the tax basis in shares and debts of Aco's operating subsidiaries. Prior to the Proposed Transactions, Aco's ACB in the Bco Notes is in excess of $XXXXXXXXXX while its ACB in the shares of Bco is approximately $XXXXXXXXXX. Tax attributes of Aco's subsidiaries are described above and are significantly less than the cumulative ACB in the shares and the Bco Notes combined.

Background of the Recapitalization and financial difficulty of Aco

40. XXXXXXXXXX.

Existing Common Shares of Aco are currently trading around XXXXXXXXXX per share while they were trading around XXXXXXXXXX per share one year ago, reflecting a significant decrease in its market capitalisation which is now slightly over $XXXXXXXXXX, compared to more than XXXXXXXXXX in XXXXXXXXXX. It should also be noted that the Medium Term Notes are now trading at a significant incremental discount varying from XXXXXXXXXX% to XXXXXXXXXX% of their principal amount.

XXXXXXXXXX.

The Recapitalization will accomplish a significant de-leveraging of Aco's consolidated balance sheet. Aco's consolidated long-term debt will be reduced from approximately $XXXXXXXXXX to approximately $XXXXXXXXXX, significantly reducing debt service obligations. XXXXXXXXXX.

PROPOSED TRANSACTIONS

41. Prior to the Effective Date, the following transactions will take place:

a. New Aco is incorporated under the CBCA, with an authorized share capital which shall include the New Aco Common Shares as well as preferred shares issuable in series. New Aco will be formed for the sole purpose of effecting the Arrangement and will not carry on any business prior to the Effective Date, other than in connection with the Arrangement, and will have no material assets or liabilities;
b. Newco1 is incorporated under the CBCA. The authorized share capital of Newco1 will consist of an unlimited number of common shares and an unlimited number of preferred shares.

Preliminary Steps to the Arrangement:

42. Aco will transfer to Newco1 the Bco Notes with the exception of certain selected notes in consideration for the issuance by Newco1 of XXXXXXXXXX common shares.

43. Aco will transfer to Bco its common shares of Newco1 in consideration for a nominal number of common shares of Bco.

44. The paid-up capital of the common shares in the capital of Newco1 will be reduced to $XXXXXXXXXX for no payment. Immediately after, the shareholder of Newco1 (Bco) will pass a resolution authorizing the wind-up and the dissolution of Newco1. Newco1 will then distribute all of its property to Bco and Bco will assume all of the liabilities of Newco1, if any. The shares of Newco1 will be cancelled.

Bco will elect, in prescribed form to have the rules in subsection 80.01(4) of the Act apply with respect to the settlement of the Bco Notes transferred in the transaction described above as a result of the wind-up of Newco1.

Steps of the Arrangement:

45. On the Effective Date, the following shall occur as the steps of the Arrangement, in the following order and sequence without any further act or formality:

a. Amendment to the articles of Aco creating the Aco First Ranking Preferred Shares;
b. XXXXXXXXXX;
c. The holders of RSUs surrender their RSUs in consideration for the payment in cash of the volume weighted average price of the underlying Existing Common Shares for the five trading days immediately preceding the day before the Effective Date. Bco, as administrator of the RSU plan, instructs the trustee to donate the Existing Common Shares it holds in connection with the RSU plan to Aco for cancellation for no consideration. The Options and RSUs are cancelled for no consideration and the XXXXXXXXXX stock option plan of Aco, the XXXXXXXXXX stock option plan of Aco and the RSU plan of Aco are cancelled;
d. The Convertible Debentures of each Debtholder is converted into Existing Common Shares on the basis of XXXXXXXXXX Existing Common Shares for each $XXXXXXXXXX of Convertible Debenture converted;
e. Aco pays in cash, any accrued and unpaid interest at (but not including) the Effective Date to the Debtholders that hold Medium Term Notes and Bank Indebtedness;
f. Aco shall pay, deliver and issue and New Aco shall, for the benefit of Aco and on its behalf, pay, deliver and issue to the Debtholders in exchange for their Affected Unsecured Debt, their pro rata share of the following:

i. an amount of $XXXXXXXXXX in cash;
ii. the Aco Senior Notes;
iii. the Aco Exchangeable Debentures; and
iv. XXXXXXXXXX New Aco Common Shares
(Hereinafter collectively referred to as the "Proceeds of Debtholder Exchange")

In consideration for the New Aco Common Shares issued and delivered to the Debtholders by New Aco on behalf and for the benefit of Aco, Aco issues to New Aco XXXXXXXXXX Aco First Ranking Preferred Shares and a note with an aggregate FMV equal to the FMV of the New Aco Common Shares issued to the Debtholders;

g. The Credit Agreement (related to the Bank Indebtedness), the MTN Notes, the MTN Indenture, the Convertible Debentures and the Convertible Debenture Indenture, including the covenants thereof and all obligations, liabilities and indebtedness of the Aco group under the Credit Agreement, the Medium Notes and the MTN Indenture, as applicable, as guarantors of the obligations related thereto, are irrevocably and finally terminated, extinguished and cancelled;
h. The Existing Equity Securities shall be purchased by Aco and New Aco shall, for the benefit of Aco and on its behalf, pay, deliver and issue to the Existing Shareholders their pro-rata share of XXXXXXXXXX New Aco Common Shares and XXXXXXXXXX cashless warrants to acquire up to XXXXXXXXXX% (on a fully diluted basis) of the equity of New Aco after the payment of the Senior Notes and the Exchangeable Debentures, in exchange for their Existing Equity Securities which shall be cancelled upon acquisition;

i. The board of directors of New Aco is replaced;
j. XXXXXXXXXX.

46. Immediately following the completion of the transactions described above, the issued and outstanding share capital of New Aco will be as follows:

a) [XXXXXXXXXX%] by holders of the Affected Unsecured Debt; and

b) [XXXXXXXXXX%] by holders of the Existing Equity Securities.

PURPOSE OF THE PROPOSED TRANSACTIONS

47. XXXXXXXXXX.

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. Paragraph 40(2)(e.1) of the Act will apply to the disposition of the Bco Notes by Aco to Newco1 as described in 42 above such that the capital loss realized by Aco on the disposition of the Bco Notes will be deemed to be XXXXXXXXXX.

B. Paragraph 53(1)(f.1) of the Act will apply with respect to any capital loss referred to in Ruling A above, such that Newco1's ACB in respect of the Bco Notes will include the amount of the capital loss, if any, that would otherwise have been realized by Aco on the transfer.

C. Provided the election referred to in subsection 80.01(4) of the Act is filed in a timely manner, the extinguishment of the Bco Notes as a result of the wind-up of Newco 1 as described in 44 above will not give rise to a "forgiven amount" within the definition of that term in subsection 80(1) of the Act, for Bco.

D. Provided that paragraph 20(1)(c) or 20(1)(d) of the Act applied in respect of interest paid or payable on the Affected Unsecured Debt, paragraph 20(1)(c) and subsection 20(3) of the Act will continue to apply in respect of interest paid or payable by Aco on the Aco Senior Notes and the Aco Exchangeable Debentures.

E. The provisions of subsections 111(4) to 111(5.4) of the Act will apply in respect of the acquisition of control that will occur pursuant to the transactions described above. More specifically, paragraph 111(4)(d) of the Act will apply to deem each amount required by paragraph 111(4)(c) of the Act to be deducted in computing the ACB to Aco of a property to be a capital loss of Aco for the Acquisition of Control Taxation Year from the disposition of the property. In applying the forgiven amount following the ordering provided in paragraph 80(2)(c) of the Act, these capital losses will form part of Aco's capital losses for the Acquisition of Control Taxation Year for the purposes of subsection 80(12) of the Act.

F. The settlement of the Affected Unsecured Debt described in 45 above will result in a forgiven amount as defined under subsection 80(1) of the Act. The forgiven amount will be applied as described in section 80 of the Act and in accordance with Ruling E above.

G. Subsection 245(2) of the Act will not apply to redetermine the tax consequences described in the rulings above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are 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, 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 fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

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

(c) the provincial income tax implications relating to the allocation of income and expenses under the proposed transactions; nor

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

Yours truly,

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