2013 Ruling 2012-0458091R3 - XXXXXXXXXX - 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: Whether a loss consolidation could be set up using a limited partnership of Profitcos (the "New LP") to acquire preferred shares from Losscos using money borrowed from such Losscos (the "NewLP Loans"). The Profitcos would utilize the losses from the limited partnership related to the interest payable on the NewLP Loans and the Losscos would utilize their losses to offset the interest income earned on the NewLP Loans.

Position: Yes.

Reasons: The ruling conforms to our requirements for these types of rulings.

XXXXXXXXXX 2012-045809

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX and its affiliates (See Appendix A attached.)

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the "Taxpayers"). We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of Taxpayers, none of the issues involved in the ruling request is:

i. in an earlier return of any of the Taxpayers or a related person;
ii. being considered by a tax services office or a tax centre in connection with a tax return already filed by any of the Taxpayers or a related person;
iii. under objection by any of the Taxpayers or a related person;
iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. the subject of a ruling previously issued by the Directorate to any of the Taxpayers or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

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

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

Definitions

The following definitions have been used in this letter:

(a) “ACo” means XXXXXXXXXX;

(b) “Acquisition of Control” means the acquisition of the Losscos by the Parent on XXXXXXXXXX;

(c) “arm’s length” has the meaning assigned by subsection 251(1);

(d) “BCo” means XXXXXXXXXX;

(e) “Canadian partnership” has the meaning assigned by subsection 102(1);

(f) “CBCA” means the Canadian Business Corporations Act, RSA 1985, c. C-44, as amended;

(g) “CCo” means XXXXXXXXXX;

(h) “CRA” means the Canada Revenue Agency;

(i) “DCo” means XXXXXXXXXX;

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

(k) “ECo” means XXXXXXXXXX;

(l) “excepted dividend” has the meaning assigned by section 187.1;

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

(n) “FCo” means XXXXXXXXXX;

(o) “Financial Institution” means XXXXXXXXXX, the third party financial institution from whom the Parent will borrow the Parent Daylight Loan;

(p) “GAAP” means generally accepted accounting principles in Canada, as defined by the International Financial Reporting Standards at the relevant time applied on a consistent basis;

(q) “GCo” means XXXXXXXXXX;

(r) “HCo” means XXXXXXXXXX;

(s) “ICo” means XXXXXXXXXX;

(t) “Income Pooling Arrangement” means the transactions described in Paragraphs 17 to 31;

(u) “JCo” means XXXXXXXXXX;

(v) “KCo” means XXXXXXXXXX;

(w) “Lossco” means any one of DCo, ECo, FCo, GCo, HCo, ICo, JCo and KCo;

(x) “Lossco Loans” means the promissory notes issued by the Losscos to New LP on the redemption of the Preferred Shares as described in Paragraph 28(e);

(y) “Losscos” means, collectively, DCo, ECo, FCo, GCo, HCo, ICo, JCo and KCo;

(z) “LP1” means XXXXXXXXXX;

(aa) “LP2” means XXXXXXXXXX, a limited partnership formed under the laws of the Province;

(bb) “New LP” means the limited partnership to be established pursuant to the laws of the Province as described in Paragraph 17;

(cc) “New LP Daylight Loan” means the loan made by Parent to New LP on a daylight-loan basis described in Paragraph 19.

(dd) “New LP Loans” means the loans made by the Losscos to New LP described in Paragraph 21;

(ee) “New LP Partners” means the partners of New LP, being Parent, ACo, BCo, and CCo;

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

(gg) “Non-Streamed Non-Capital Losses” means the Losscos’ non-capital loss carryforwards in respect of taxation years following the Acquisition of Control;

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

(ii) “Paragraph” refers to a numbered paragraph in this letter;

(jj) “Parent” means XXXXXXXXXX;

(kk) “Parent Affiliated Group” means Parent and its direct and indirect wholly-owned subsidiaries as listed in Appendix A;

(ll) “Parent Daylight Loan” means the loan made by the Financial Institution to Parent on a daylight-loan basis described in Paragraph 18;

(mm) “Partnership Agreement” means the agreement between the New LP Partners governing New LP;

(nn) “Preferred Shares” means the preferred shares issued by the Losscos as more fully described in Paragraph 15;

(oo) “Proposed Transactions” means the transactions described in Paragraphs 17 to 31;

(pp) “Province” means the Province of XXXXXXXXXX;

(qq) “Provincial BCA” means the Business Corporations Act XXXXXXXXXX;

(rr) “PS Dividend Loan” means a loan provided by DCo to a Lossco as described in Paragraph 24;

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

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

(uu) “Streamed Non-Capital Losses” means the Losscos’ non-capital loss carryforwards in respect of taxation years prior to the Acquisition of Control;

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

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

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

Facts

Profitco Entities

1. Parent is a corporation incorporated under the CBCA. Parent is a taxable Canadian corporation and a public corporation and its shares are listed on the XXXXXXXXXX Stock Exchange. Parent carries on XXXXXXXXXX business directly and indirectly through subsidiary entities and has a XXXXXXXXXX taxation year-end. Parent is not a specified financial institution.

Parent incurred a loss for tax purposes of approximately $XXXXXXXXXX for the year ending XXXXXXXXXX. Parent's consolidated gross revenues and consolidated net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and approximately $XXXXXXXXXX, respectively. Parent files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. Parent's business number is XXXXXXXXXX and its address is XXXXXXXXXX. Parent has permanent establishments in XXXXXXXXXX Canadian provinces. Parent's allocation of income among those XXXXXXXXXX provinces for its XXXXXXXXXX taxation year is estimated as follows:

XXXXXXXXXX

It is reasonable to expect that the estimated provincial allocation percentages shown above will be reflective of Parent's XXXXXXXXXX and subsequent taxation years.

2. ACo is a subsidiary wholly-owned corporation of Parent incorporated under the CBCA. ACo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. ACo carries on XXXXXXXXXX business. ACo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. ACo's gross revenues and net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively. ACo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. ACo's business number is XXXXXXXXXX and its address is XXXXXXXXXX. ACo has a provincial permanent establishment only in XXXXXXXXXX. It is expected this will continue to be the case for ACo's XXXXXXXXXX and subsequent taxation years.

3. BCo is a subsidiary wholly-owned corporation of Parent incorporated under the Provincial BCA. BCo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end.

4. LP1 is a limited partnership formed under the laws of the Province. LP1 is a Canadian partnership (as defined in subsection 248(1) the Act) the interests in which are held XXXXXXXXXX% by Parent as limited partner and XXXXXXXXXX% by BCo as general partner. LP1 has a XXXXXXXXXX fiscal period-end.

5. CCo is a subsidiary wholly-owned corporation of LP1 incorporated under the CBCA. CCo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. CCo holds a XXXXXXXXXX% partnership interest in LP2, which owns a XXXXXXXXXX% joint venture interest in, and operates, a XXXXXXXXXX facility. Parent owns the other XXXXXXXXXX% interest in LP2. CCo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. CCo's gross revenues and net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and approximately $XXXXXXXXXX, respectively. CCo files its information returns with the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office. CCo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

CCo has a provincial permanent establishment only in the Province. It is expected this will continue to be the case for CCo's XXXXXXXXXX and subsequent taxation years.

6. It is expected that each of Parent, ACo and CCo will generate sufficient annual taxable income over the next XXXXXXXXXX taxation years to fully offset its cumulative share of the interest expense on the New LP Loans (as described in Paragraph 21) allocated to it as a limited partner of New LP.

Lossco Entities

7. DCo is a subsidiary wholly-owned corporation of Parent incorporated under the Provincial BCA. DCo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. DCo carries on XXXXXXXXXX business directly and indirectly through subsidiary entities. DCo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. DCo's gross revenues and net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and approximately $XXXXXXXXXX, respectively. DCo has a non-capital loss carryforward balance of approximately $XXXXXXXXXX as of XXXXXXXXXX. Without giving effect to the Proposed Transactions, it is expected that DCo will generate taxable income in its XXXXXXXXXX and subsequent taxation years. DCo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. DCo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

DCo has permanent establishments in XXXXXXXXXX Canadian Provinces. DCo's allocation of income among those XXXXXXXXXX provinces for its XXXXXXXXXX taxation year is estimated as follows:

XXXXXXXXXX

It is reasonable to expect that the estimated provincial allocation percentages shown above will be approximately the same for DCo's XXXXXXXXXX and subsequent taxation years.

8. ECo is a subsidiary wholly-owned corporation of DCo incorporated under the Provincial BCA. ECo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. ECo carries on XXXXXXXXXX business. ECo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. ECo's gross revenues and net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and approximately $XXXXXXXXXX, respectively. ECo has a non-capital loss carryforward balance of approximately $XXXXXXXXXX as of XXXXXXXXXX. Without giving effect to the Proposed Transactions, it is expected that ECo will generate neither taxable income nor non-capital losses in its XXXXXXXXXX and subsequent taxation years. ECo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. ECo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

ECo has a provincial permanent establishment only in XXXXXXXXXX. It is expected this will continue to be the case for ECo's XXXXXXXXXX and subsequent taxation years.

9. FCo is a subsidiary wholly-owned corporation of DCo incorporated under the laws of the Province of XXXXXXXXXX. FCo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. FCo carries on XXXXXXXXXX business. FCo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. FCo's gross revenues and net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and approximately $XXXXXXXXXX, respectively. FCo has a non-capital loss carryforward balance of approximately $XXXXXXXXXX as of XXXXXXXXXX. Without giving effect to the Proposed Transactions, it is expected that FCo will generate taxable income in its XXXXXXXXXX and subsequent taxation years. FCo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. FCo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

FCo has a provincial permanent establishment only in XXXXXXXXXX. It is expected this will continue to be the case for FCo's XXXXXXXXXX and subsequent taxation years.

10. GCo is a subsidiary wholly-owned corporation of DCo incorporated under the Provincial BCA. GCo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. GCo carries on XXXXXXXXXX business. GCo's taxable income for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. GCo's gross revenues and net loss for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and approximately $XXXXXXXXXX, respectively. GCo has a non-capital loss carryforward balance of approximately $XXXXXXXXXX as of XXXXXXXXXX. Without giving effect to the Proposed Transactions, it is expected that GCo will generate taxable income in its XXXXXXXXXX and subsequent taxation years. GCo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. GCo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

GCo has a provincial permanent establishment only in XXXXXXXXXX. It is expected this will continue to be the case for GCo's XXXXXXXXXX and subsequent taxation years.

11. HCo is a subsidiary wholly-owned corporation of DCo incorporated under the laws of the Province of XXXXXXXXXX. HCo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. HCo carries on XXXXXXXXXX business. HCo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. HCo's gross revenues and net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and $XXXXXXXXXX, respectively. HCo has a non-capital loss carryforward balance of approximately $XXXXXXXXXX as of XXXXXXXXXX. Without giving effect to the Proposed Transactions, it is expected that HCo will generate taxable income in its XXXXXXXXXX and subsequent taxation years. HCo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. HCo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

HCo has a provincial permanent establishment only in XXXXXXXXXX. It is expected this will continue to be the case for HCo's XXXXXXXXXX and subsequent taxation years.

12. ICo is a subsidiary wholly-owned corporation of DCo incorporated under the Provincial BCA. ICo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. ICo carries on XXXXXXXXXX business. ICo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. ICo did not generate any revenues for the year ended XXXXXXXXXX and its net loss for financial reporting purposes amounted to approximately $XXXXXXXXXX. ICo has a non-capital loss carryforward balance of approximately $XXXXXXXXXX as of XXXXXXXXXX. Without giving effect to the Proposed Transactions, it is expected that ICo will generate non-capital losses in its XXXXXXXXXX and subsequent taxation years. ICo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.

ICo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

ICo has a provincial permanent establishment only in XXXXXXXXXX. It is expected this will continue to be the case for ICo's XXXXXXXXXX and subsequent taxation years.

13. JCo is a subsidiary wholly-owned corporation of DCo incorporated under the laws of the Province of XXXXXXXXXX. JCo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. JCo carries on XXXXXXXXXX business. JCo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. JCo's gross revenues and net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately $XXXXXXXXXX and approximately $XXXXXXXXXX, respectively. JCo has a non-capital loss carryforward balance of approximately $XXXXXXXXXX as of XXXXXXXXXX. Without giving effect to the Proposed Transactions, it is expected that JCo will generate taxable income in its XXXXXXXXXX and subsequent taxation years. JCo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. JCo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

JCo has a provincial permanent establishment only in XXXXXXXXXX. It is expected this will continue to be the case for JCo's XXXXXXXXXX and subsequent taxation years.

14. KCo is a subsidiary wholly-owned corporation of DCo incorporated under the CBCA. KCo is a taxable Canadian corporation and has a XXXXXXXXXX taxation year-end. KCo carries on XXXXXXXXXX business. KCo's loss for tax purposes for the year ending XXXXXXXXXX was approximately $XXXXXXXXXX. KCo's gross revenues and net income before tax for financial reporting purposes for the year ended XXXXXXXXXX were approximately XXXXXXXXXX and approximately XXXXXXXXXX, respectively. KCo has a non-capital loss carryforward balance of approximately $XXXXXXXXXX as of XXXXXXXXXX. Without giving effect to the Proposed Transactions, it is expected that KCo will generate taxable income in its XXXXXXXXXX and subsequent taxation years. KCo files its information returns with the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office. KCo's business number is XXXXXXXXXX and its address is XXXXXXXXXX.

KCo has a provincial permanent establishment only in XXXXXXXXXX. It is expected this will continue to be the case for KCo's XXXXXXXXXX and subsequent taxation years.

15. The authorized capital of each Lossco includes (or will include prior to the implementation of the Proposed Transactions) non-voting, non-par value preferred shares (the "Preferred Shares"). The Preferred Shares will be redeemable by the issuer at any time for a redemption price equal to the fair market value of the consideration for which the shares are issued, plus any accrued but unpaid dividends. The paid-up capital and the fair market value of the Preferred Shares will be equal to the subscription amount paid therefor. The holders of the Preferred Shares will be entitled to cumulative dividends calculated daily by reference to the redemption price of the Preferred Shares at an expected rate equal to approximately XXXXXXXXXX% (XXXXXXXXXX% higher than the interest rate on the New LP Loans). The dividends on the Preferred Shares will be payable XXXXXXXXXX on XXXXXXXXXX. No Preferred Shares will be issued and outstanding at the time the Proposed Transactions are initiated.

16. As at XXXXXXXXXX, the Losscos had balances of noncapital loss carryforwards as noted in Appendix B. Since the Streamed Non-capital Losses are in respect of taxation years prior to the Acquisition of Control, they are subject to the restrictions set out in subsection 111(5) of the Act. The restrictions set out in subsection 111(5) of the Act do not apply to the Non-Streamed Non-Capital Losses.

Proposed Transactions

17. The New LP Partners will form New LP under the laws of the Province. BCo will be the general partner of New LP and the remaining New LP Partners will be limited partners of New LP. New LP will be a Canadian partnership and its fiscal period-end will be XXXXXXXXXX. New LP's activities will be limited to those described in the Proposed Transactions, including acquiring the Preferred Shares and obtaining the New LP Loans as described below.

The projected percentage partnership ownership interests in New LP of each of the New LP Partners will be approximately as follows:

(a) BCo – XXXXXXXXXX%
(b) Parent – XXXXXXXXXX%
(c) ACo – XXXXXXXXXX%
(d) CCo – XXXXXXXXXX%

The New LP Partners will share in New LP's income or loss in proportion to their respective partnership ownership percentages.

18. Parent will borrow an estimated amount of $XXXXXXXXXX on a daylight loan basis from the Financial Institution. The amount of the Parent Daylight Loan will not exceed Parent's borrowing capacity. The loans will be real, wire transfers and there will be an appropriate paper trail for the loans.

19. Parent will make a non-interest bearing daylight loan to New LP of an estimated $XXXXXXXXXX (the "New LP Daylight Loan").

20. New LP will use the proceeds from the New LP Daylight Loan to subscribe for Preferred Shares of each Lossco in the amounts approximately as follows:

DCo – $XXXXXXXXXX;
ECo – $XXXXXXXXXX;
FCo – $XXXXXXXXXX;
GCo – $XXXXXXXXXX;
HCo – $XXXXXXXXXX;
ICo – $XXXXXXXXXX;
JCo – $XXXXXXXXXX;
KCo – $XXXXXXXXXX.

For greater certainty, when considering the application of section 112, neither New LP nor any of the New LP Partners will acquire or be considered to have acquired the Preferred Shares in the ordinary course of business carried on by the respective entity.

21. Each Lossco will use the proceeds received from the relevant Preferred Share subscription described in Paragraph 20 to make a loan to New LP (each a "New LP Loan" and collectively the "New LP Loans") in the amounts approximately as follows:

DCo – $XXXXXXXXXX;
ECo – $XXXXXXXXXX;
FCo – $XXXXXXXXXX;
GCo – $XXXXXXXXXX;
HCo – $XXXXXXXXXX;
ICo – $XXXXXXXXXX;
JCo – $XXXXXXXXXX;
KCo – $XXXXXXXXXX.

Each New LP Loan will bear interest at an annual rate equal to a commercial arm's length rate in the circumstances. It is expected that the annual interest rate will be approximately XXXXXXXXXX%. The interest on the New LP Loans will be paid XXXXXXXXXX on XXXXXXXXXX, or such earlier date as the New LP Loans are repaid.

Other than the interest expense incurred in respect of the New LP Loans, New LP does not expect to incur substantial expenses. As a result, for each fiscal period of New LP, the amount of dividends New LP receives on the Preferred Shares will exceed the total interest expense on the New LP Loans plus the amount (if any) of New LP's other expenses. Consequently, for each fiscal period of New LP in which the Income Pooling Arrangement is in place, New LP will have net income computed in accordance with subsection 96(1).

22. New LP will use the proceeds from the New LP Loans to repay the New LP Daylight Loan owing to the Parent.

23. Parent will use the proceeds from the repayment of the New LP Daylight Loan to repay the Parent Daylight Loan owing to the Financial Institution.

24. On each Preferred Share dividend payment date, each Lossco will, subject to any applicable corporate law solvency tests, declare and pay a dividend to New LP in accordance with terms of the Preferred Shares. If a Lossco does not have sufficient cash available to pay dividends on its Preferred Shares, DCo will provide to the Lossco, by way of an interest-free loan (the "PS Dividend Loan"), the amount required for the Lossco to pay the full amount of the dividends on the Preferred Shares.

25. On each interest payment date, New LP will use the proceeds from the Preferred Share dividends to pay the interest on the New LP Loans.

26. On receipt of the interest proceeds, each Lossco will repay any PS Dividend Loan outstanding to the extent possible. If any balance remains after this payment, DCo will, at its discretion, make a contribution of capital to the particular Lossco or Losscos, as the case may be, in an amount required repay any balance. The particular Lossco or Losscos will issue no shares with respect to the contribution of capital and no amount will be added to the stated capital or PUC of the Lossco's shares. The amount of the contribution of capital will be reported as contributed surplus for financial accounting purposes. The contribution of capital will not be reported as income for tax purposes and will not be treated as income of the particular Lossco or Losscos pursuant to GAAP. DCo will not claim, at any time, a capital loss in respect of these capital contributions to the particular Lossco or Losscos.

27. Any remaining amount of the Preferred Share dividend proceeds in excess of New LP's other expenses, if any, will be distributed to the New LP Partners no sooner than XXXXXXXXXX of the following year in proportion to the New LP Partners' ownership interests in New LP.

28. Once it is determined that the interest income to be received by the Losscos will be greater than the amount required to fully utilize the Non-Streamed Non-Capital Losses, the following transactions will occur to unwind the Income Pooling Arrangement.

(a) Each Lossco will, subject to any applicable corporate law solvency tests, declare and pay all accrued dividends to New LP in accordance with terms of the Preferred Shares. If a Lossco does not have sufficient cash available to pay dividends on its Preferred Shares, DCo will provide to the Lossco, by way of an interest-free loan, the amount required for the Lossco to pay the full amount of the dividends on the Preferred Shares.

(b) New LP will use the proceeds from the Preferred Share dividends to pay the accrued interest on the New LP Loans.

(c) On receipt of the interest proceeds, each Lossco having received an interest-free loan from DCo as described in Paragraph 28(a) will repay the loan to the extent possible. If a balance remains owing, DCo will at its discretion make a contribution of capital to the relevant subsidiary Lossco in an amount required for the Lossco to repay the remaining amount of the loan. The Lossco will issue no shares with respect to the contribution of capital and no amount will be added to the stated capital or PUC of the Lossco's shares. The amount of the contribution of capital will be reported as contributed surplus for financial accounting purposes. The contribution of capital will not be reported as income for tax purposes and will not be treated as income of the Lossco pursuant to GAAP.

(d) Any remaining amount of the Preferred Share dividend proceeds in excess of New LP's other expenses, if any, will be distributed to the New LP Partners no sooner than XXXXXXXXXX of the following year in proportion to the New LP Partners' ownership interests in New LP.

(e) Subject to any applicable corporate law solvency tests, the Losscos will redeem their issued and outstanding Preferred Shares held by New LP in exchange for promissory notes (the "Lossco Loans"), as follows:

DCo – $XXXXXXXXXX;
ECo – $XXXXXXXXXX;
FCo – $XXXXXXXXXX;
GCo – $XXXXXXXXXX;
HCo – $XXXXXXXXXX;
ICo – $XXXXXXXXXX;
JCo – $XXXXXXXXXX; and
KCo - $XXXXXXXXXX.

(f) The Lossco Loans and New LP Loans will be extinguished by offset at their principal amounts.

29. It is estimated that the Income Pooling Arrangement will remain in place until XXXXXXXXXX before being unwound as described in Paragraph 28.

Additional Information

30. At any time during the implementation of the proposed transactions described in this letter, the Preferred Shares will not be:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";

(b) the subject of a dividend rental arrangement;

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

(d) issued for consideration that is or includes:

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

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

Purpose of the Proposed Transactions

31. The purpose of the Proposed Transactions is to effect a tax consolidation of the New LP Partners and the Losscos by:

(a) having the Losscos earn interest income on the New LP Loans, thus permitting the Losscos to use their Non-Streamed Non-Capital Losses; and

(b) having the New LP Partners being allocated interest expense incurred by New LP on the New LP Loans, thereby allowing the New LP Partners to reduce their taxable income.

Rulings

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions,
(b) the proposed transactions are completed in the manner described above, and
(c) there are no other transactions which may be relevant to the rulings requested,

we rule as follows:

A. Provided that New LP has a legal obligation to pay interest on the New LP Loans and the Preferred Shares continue to be held by New LP for the purpose of gaining or producing income therefrom, New LP will be entitled, pursuant to paragraph 20(1)(c), to deduct in computing its income for a taxation year the lesser of (i) the interest paid or payable (depending on the method regularly followed by New LP in computing its income for the purposes of the Act) in respect of the New LP Loans for that taxation year, and (ii) a reasonable amount in respect thereof.

B. The dividends received by New LP on the Preferred Shares, as described in Paragraphs 24 and 28(a), will be taxable dividends and such dividends will, pursuant to paragraph 12(1)(j), be included in the computation of New LP's income as contemplated in subsection 96(1).

C. To the extent that New LP has net income in a particular year, computed in accordance with subsection 96(1) [reference is made to the comments in the last paragraph of Paragraph 21], then in that particular year, each New LP Partner will be required to report its share of that income in accordance with their respective ownership interests in New LP [see Paragraph 17] and in accordance with paragraph 96(1)(f). For greater certainty, in that case, none of the New LP Partners will have a share of any loss from New LP for that year and consequently subsection 96(2.1) would not apply to a New LP Partner for that particular year.

D. The dividends received by New LP in respect of the Preferred Shares in a particular year will be taxable dividends, and pursuant to subsection 112(1), an amount equal to the amount of those dividends will be deductible in computing the taxable income of the New LP Partners for the year in which the dividends are received and allocated by New LP to the New LP Partners in accordance with subsection 96(1). For greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), or 112(2.4).

E. In computing their taxable income for a taxation year, and subject to the limitations in section 111 of the Act, the Losscos will be entitled to deduct under paragraph 111(1)(a):

a) their Streamed Non-capital Losses to the extent permitted by subparagraph 111(5)(a) of the Act, and, for this purpose, the interest income of the Losscos that is derived from the New LP Loans will not be considered to be from the businesses carried on by the Losscos prior to the Acquisition of Control or from any other business substantially all the income of which was derived from the sale, leasing, rental or development, as the case may be, of similar properties or the rendering of similar services to those, if any, which had been sold, leased, rented, developed or rendered by the Losscos in the course of carrying on their businesses prior to the Acquisition of Control; and

b) provided that the Losscos deduct Streamed Non-capital Losses to which they are entitled in computing their income for that taxation year and the amount of taxable income is positive after taking into account such deductions, their Non-Streamed Non-capital Losses. In this regard, the claiming of Non-Streamed Non Capital Losses will not, in and by itself, preclude the claiming of Streamed Non-Capital Losses in the future to the extent the conditions in subparagraph 111(5)(a) are otherwise met.

F. The dividends received by New LP in respect of the Preferred Shares will not be subject to tax under Part IV.

G. No amount will be included in the income of a Lossco pursuant to section 9, paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital made by DCo to the particular Lossco, as described in Paragraphs 26 and 28(c).

H. The provisions of subsections 15(1), 56(2), and 246(1) will not apply as a result of entering into the proposed transactions described in Paragraphs 17 to 29, in and by themselves.

I. Subsection 245(2) will not be applied as a result of entering into the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings.

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 implemented on or before XXXXXXXXXX. These rulings 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.

Nothing in this letter 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 reasonableness or fair market value of any fees or expenditures referred to herein;
(c) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;
(d) the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions;
(e) the application or non-application of the general anti-avoidance provisions of any province; nor
(f) 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
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

APPENDIX A

Definition Name Abbreviation BN

ACo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
BCo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
CCo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
DCo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Eco XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
FCo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
GCo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
HCo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
ICo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
JCo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
KCo XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX

APPENDIX B

Tax Loss Continuity XXXXXXXXXX Total
Non Capital Losses XXXXXXXXXX XXXXXXXXXX
Expiry XXXXXXXXXX XXXXXXXXXX