2014 Ruling 2013-0505431R3 - XXXXXXXXXX

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

Principal Issues: 1- Is the transfer of a percentage of the interest in a royalty owned by a partnership (which is owned by Pubco and its wholly-owned subsidiary Subco), in line with policies relating to in-group consolidation transactions? 2 - Does the royalty qualify as CRP? 3 - Is the distribution of assets from Subco to Pubco considered to be good tax policy, i.e. no ACB grind on the redemption of the preferred shares? 4 - Will any of the proposed transactions for the first distribution of assets be described in any of subparagraphs 55(3)(a)(i) to (v)? 5 -Will any of the proposed transactions for the second distribution of assets be described in any of subparagraphs 55(3)(a)(i) to (v)? 6 - XXXXXXXXXX?

Position: 1 – Yes; 2 - This is an audit issue but we ruled favorably provided it meets the CRP definition; 3 - No. Representative changed Subco's capital under 86(1).4 - No. none of subparagraphs 55(3)(a)(i) to (v) will apply; 5 - No, none of subparagraphs 55(3)(a)(i) to (v) will apply; 6 - XXXXXXXXXX.

Reasons: 1 - As it is within a related group, the end result is a transfer of some of the CCDE pool from the partnership to Pubco. Under 98(2), Pubco acquires a CRP equal to the FMV of the interest in the royalty, and under subsection 66.2(5) Pubco incurs CDE equal to the cost of the interest in the royalty it acquires; 2 - This is an audit issue XXXXXXXXXX; 3 - No. Representative changed Subco's capital under 86(1). CRA normally requests that there be an ACB grind on a similar transaction by the conversion of some of the common shares into preferred shares. Consequently, we asked the representative to convert Subco's common shares and preferred shares into one common share and one preferred share. The FMV and redemption value of the preferred share corresponding to the FMV of the "Distributed XXXXXXXXXX Assets" as defined. 4 - No. None of subparagraphs 55(3)(a)(i) to (v) will apply. 5 - No. None of subparagraphs 55(3)(a)(i) to (v) will apply. These transactions will involve persons that are related to both dividend recipients (Subco and Pubco), or will involve the dividend recipient itself
6 - XXXXXXXXXX.

XXXXXXXXXX
2013-050543

XXXXXXXXXX, 2014

Dear XXXXXXXXXX :

Re : Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX and your other correspondence in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling request is:

(a) in an earlier income tax return of the taxpayer or a related person;

(b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed income tax return of the taxpayer or a related person;

(c) under objection by the taxpayer or a related person;

(d) before the courts; or

(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate involving the taxpayer or a related person.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meanings specified:

"Act" means the Income Tax Act, RSC 1985 c. 1 (5th Supplemental), as amended and all statutory references are, unless otherwise noted, references to provisions of the Act;

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

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

"arm's length" has the meaning assigned by subsection 251(1);

"Canadian resource property" has the meaning assigned by subsection 66(15);

"capital property" has the meaning assigned by section 54;

"CBCA" means the Canada Business Corporations Act, RSC 1985, c. C-44, as amended;

"CCDE" or "cumulative Canadian development expense" has the meaning assigned to that term by subsection 66.2(5);

"CDE" or "Canadian development expense" has the meaning assigned to that term by subsection 66.2(5);

"XXXXXXXXXX" means XXXXXXXXXX, a corporation governed by the CBCA, wholly-owned by Subco;

"XXXXXXXXXX Royalty" means the royalty described in paragraph 6(c);

"depreciable property" has the meaning assigned by subsection 13(21);

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

"Distributed XXXXXXXXXX Assets" means the assets described in paragraph 4;

"eligible capital property" has the meaning assigned by section 54;

"eligible dividend" has the meaning assigned by subsection 89(1);

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

"FMV" means fair market value, being the amount at which property would be transferred by a willing buyer to a willing seller, in an open and unrestricted market, between informed parties under no compulsion to act;

"XXXXXXXXXX" means XXXXXXXXXX, a general partnership, the partners of which are Subco as to XXXXXXXXXX% and XXXXXXXXXX, a third party, as to XXXXXXXXXX%;

"GPCo" means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX, wholly-owned by Pubco;

"XXXXXXXXXX" means XXXXXXXXXX, a corporation governed by the CBCA, wholly-owned by Partnership E;

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

"LP" means a limited partnership, the partners of which are Partnership E as to a XXXXXXXXXX% general partnership interest, XXXXXXXXXX as to a XXXXXXXXXX% general partnership interest, and each of XXXXXXXXXX and XXXXXXXXXX (both of which deal at arm's length with Partnership E and its direct and indirect partners) as to a XXXXXXXXXX% limited partnership interest;

"Newco 1" and "Newco 2" mean the corporations governed by the CBCA as described in the Proposed Transactions;

"Newco 1 Note" and "Newco 2 Note" mean the notes issued by Newco 1 and Newco 2, respectively, on the redemption of preferred shares in their capital as described in the Proposed Transactions;

"Pubco" means XXXXXXXXXX;

"Partnership A" is a general partnership, the partners of which are GPCo as to a XXXXXXXXXX% and Partnership D as to a XXXXXXXXXX%;

"Partnership B" means XXXXXXXXXX, a general partnership having as its partners Subco as to XXXXXXXXXX% and XXXXXXXXXX as to XXXXXXXXXX%;

"Partnership C" means XXXXXXXXXX, a general partnership the partners of which are Pubco as to XXXXXXXXXX% and XXXXXXXXXX as to XXXXXXXXXX%, and which holds the XXXXXXXXXX;

"Partnership D" means XXXXXXXXXX, a general partnership, the partners of which are Subco as to XXXXXXXXXX%, Pubco as to XXXXXXXXXX% and GPCo as to XXXXXXXXXX%;

"Partnership E" means XXXXXXXXXX, a general partnership the partners of which are Partnership C as to XXXXXXXXXX% and Partnership A as to XXXXXXXXXX%;

"Partnership H" means XXXXXXXXXX, a partnership the partners of which are Subco as to XXXXXXXXXX%, Pubco as to XXXXXXXXXX%, Partnership B as to XXXXXXXXXX% and XXXXXXXXXX ("XXXXXXXXXX") as to XXXXXXXXXX%;

"Proposed Transactions" means the proposed transactions described in paragraphs 11 through 22 below;

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

"Pubco" means XXXXXXXXXX;

"related person" means, in relation to a particular person, another person which is related to the particular person by virtue of subsection 251(2), as modified for the purpose of section 55 by paragraph 55(5)(e);

"Royalty Purchase Note" means the promissory note issued by Pubco on the purchase of part of Partnership D's interest in the Royalty as described in the Proposed Transactions;

"series of transactions or events" has the meaning assigned by subsection 248(10);

"Subco" means XXXXXXXXXX, a corporation governed by the CBCA, wholly-owned by Pubco;

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

"taxation year" has the meaning assigned by subsection 249(1);

"XXXXXXXXXX" means XXXXXXXXXX, a taxable Canadian corporation governed by
the CBCA, wholly-owned by Pubco;

"XXXXXXXXXX" means XXXXXXXXXX, a taxable Canadian corporation governed by the CBCA, wholly-owned by Partnership B;

"XXXXXXXXXX Note" means the note issued by Subco on the redemption of its preferred shares as described in the Proposed Transactions;

"XXXXXXXXXX" means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX, wholly-owned by Subco;

"Total Distributed XXXXXXXXXX Assets" means the Distributed XXXXXXXXXX Assets plus a XXXXXXXXXX% interest in Partnership H and the shares of XXXXXXXXXX;

"XXXXXXXXXX" means the XXXXXXXXXX; and

"unrelated person" has the meaning assigned by paragraph 55(3.01)(a).

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

FACTS

1. Pubco is a taxable Canadian corporation and a public corporation governed by the CBCA. Pubco is a resident of Canada. Pubco is a XXXXXXXXXX company which, directly and through affiliates (including Subco), XXXXXXXXXX. Pubco files its tax returns at the XXXXXXXXXX Taxation Centre and its income tax affairs are administered by the XXXXXXXXXX Tax Services Office. Pubco's Business Number is XXXXXXXXXX.
Pubco's issued share capital consists of Class A common shares and Class B subordinate voting shares, both of which are traded on the XXXXXXXXXX.

2. Subco is a taxable Canadian corporation governed by the CBCA and is resident in Canada. Subco is a XXXXXXXXXX company which, directly and through its affiliates, XXXXXXXXXX.

3. All of the issued shares in Subco's capital are owned by Pubco. The issued share capital of Subco consists of:

• XXXXXXXXXX common shares, with a PUC of approximately $XXXXXXXXXX;
• XXXXXXXXXX Series A first preferred shares, with a PUC of approximately $ XXXXXXXXXX;
• XXXXXXXXXX Series B first preferred shares with a PUC of approximately $ XXXXXXXXXX; and
• XXXXXXXXXX Series C preferred shares with a PUC of approximately $ XXXXXXXXXX.

The common shares are ordinary, voting, participating common shares. The Series A, B and C first preferred shares are non-voting shares (except in special circumstances), are redeemable and retractable for a specific redemption amount, are entitled to a priority over common shares on the dissolution of Subco for that amount and are entitled to dividends in the discretion of the directors.

4. Subco's directly-held assets include the following assets (referred to as the "Distributed XXXXXXXXXX Assets"):

(a) a XXXXXXXXXX% interest in Partnership D;

(b) a XXXXXXXXXX% interest in Partnership H;

(c) a XXXXXXXXXX% interest in XXXXXXXXXX; and

(d) shares in XXXXXXXXXX.

5. Subco also directly holds a XXXXXXXXXX located in XXXXXXXXXX. Subco directly owns a XXXXXXXXXX% interest in Partnership B.

6. Partnership D is a partnership between Subco (XXXXXXXXXX%), Pubco (XXXXXXXXXX%) and GPCo (XXXXXXXXXX%). Partnership D's principal assets are the XXXXXXXXXX Royalty and a XXXXXXXXXX% interest in Partnership A. Partnership A, indirectly, through Partnership E and LP, owns interests in XXXXXXXXXX.

(a) XXXXXXXXXX.

(b) The XXXXXXXXXX Royalty is a XXXXXXXXXX% interest in XXXXXXXXXX% of the net profits from the production from the XXXXXXXXXX owned by Partnership E and LP and from other cash flows generated in Partnership E. The net profits are computed by reference to XXXXXXXXXX% of the interest that Partnership E owns in its XXXXXXXXXX and by reference to XXXXXXXXXX% of the XXXXXXXXXX% interest in LP that Partnership E has. The royalty is paid by Partnership A out of the proceeds of XXXXXXXXXX.

(i) The terms of the XXXXXXXXXX Royalty are set out in a Royalty Agreement made XXXXXXXXXX. The XXXXXXXXXX Royalty is a "Canadian resource property" under paragraph (e) of the definition.

(ii) The original holder of the XXXXXXXXXX Royalty was XXXXXXXXXX. It assigned the XXXXXXXXXX Royalty to Pubco on XXXXXXXXXX when Pubco bought all of XXXXXXXXXX's assets. Subsequent to that, the XXXXXXXXXX Royalty was transferred by Pubco to Subco (in a tax-deferred transaction under section 85) and from Subco to Partnership D (in exchange for Subco's interest in Partnership D, again in a tax-deferred transaction, this time under subsection 97(2)).

(iii) The XXXXXXXXXX Royalty was originally granted to XXXXXXXXXX.

(c) Partnership A is a partnership between Partnership D (XXXXXXXXXX%) and GPCo (XXXXXXXXXX%). GPCo is a resident of Canada and a taxable Canadian corporation. Partnership A's principal asset is its XXXXXXXXXX% interest in Partnership E. Partnership A is the obligee under the XXXXXXXXXX Royalty. Partnership A and GPCo were acquired by Pubco, together with the XXXXXXXXXX Royalty, in the XXXXXXXXXX transactions described above.

(d) Partnership E is a partnership between Partnership A (XXXXXXXXXX%), and Partnership C (XXXXXXXXXX%). Partnership E owns directly (in the case of the XXXXXXXXXX) or indirectly (in the case of the XXXXXXXXXX by LP) an XXXXXXXXXX% to XXXXXXXXXX% interest in XXXXXXXXXX. The XXXXXXXXXX Royalty is granted in respect of XXXXXXXXXX.

(e) Partnership C is a partnership between Pubco (XXXXXXXXXX%) and its wholly-owned subsidiary, TCo (XXXXXXXXXX%). Partnership C became a XXXXXXXXXX% partner in Partnership E when it was formed in XXXXXXXXXX in consideration of Partnership C's contribution of certain XXXXXXXXXX related assets located in XXXXXXXXXX.

(f) LP is a limited partnership between Partnership E (XXXXXXXXXX%) as general partner, XXXXXXXXXX (XXXXXXXXXX%) as a general partner, and each of XXXXXXXXXX and XXXXXXXXXX (both of which deal at arm's length with Partnership E and its direct and indirect partner) as to a XXXXXXXXXX% percent limited partnership interest. LP owns and operates the XXXXXXXXXX.

(g) Partnership A, Partnership C, Partnership D, Partnership E and LP are tiered-partnerships and all have XXXXXXXXXX taxation year-ends.

7. Partnership B is a partnership between Subco (XXXXXXXXXX%) and its wholly-owned subsidiary, XXXXXXXXXX (XXXXXXXXXX%). Partnership B owns a XXXXXXXXXX% interest in Partnership H and XXXXXXXXXX% of XXXXXXXXXX companies (in XXXXXXXXXX) involved in the XXXXXXXXXX business. XXXXXXXXXX (the Canadian company), indirectly through XXXXXXXXXX subsidiaries, owns the group's interest in the XXXXXXXXXX in XXXXXXXXXX as well as other XXXXXXXXXX assets situated in XXXXXXXXXX. The XXXXXXXXXX affiliates are actively engaged in XXXXXXXXXX.

8. Partnership H is a partnership between Subco (XXXXXXXXXX%), Partnership B (XXXXXXXXXX%), Pubco (XXXXXXXXXX%) and XXXXXXXXXX (XXXXXXXXXX%) (which is XXXXXXXXXX% owned by Pubco with the balance being held by arm's length third parties). Partnership H owns and operates the XXXXXXXXXX in XXXXXXXXXX. Partnership H, Partnership B and XXXXXXXXXX are tiered-partnerships and all have XXXXXXXXXX taxation year-ends.

9. XXXXXXXXXX is a partnership between Subco (XXXXXXXXXX%) and XXXXXXXXXX (XXXXXXXXXX%), an arm's-length third party. XXXXXXXXXX owns the rights to the XXXXXXXXXX in XXXXXXXXXX. XXXXXXXXXX has a XXXXXXXXXX taxation year-end.

10. Pubco and Subco have XXXXXXXXXX taxation year-ends.

PROPOSED TRANSACTIONS

Preliminary transaction

11. Newco 1 and Newco 2 will be incorporated as wholly-owned subsidiaries of Pubco under the CBCA. Newco 1 and Newco 2 will each be a taxable Canadian corporation.

Reorganization of Capital of Subco

12. Before XXXXXXXXXX, Subco will enter into a reorganization of its capital whereby all of the issued and outstanding common shares and preferred shares of Subco will be exchanged by Pubco for one new common share (the "New Subco Common Share") and one new preferred share (the "New Subco Preferred Share"). The New Subco Preferred Share will be redeemable, subject to applicable law, at any time at the option of Subco at a redemption amount equal to the estimated FMV of the Total Distributed XXXXXXXXXX Assets. The relevant documentation relating to the share exchange will include a price adjustment clause which will provide that the redemption amount of the New Subco Preferred share is intended to be the FMV of the Total Distributed XXXXXXXXXX Assets and that, in the event that it is determined that the FMV is a different amount, the redemption amount of the New Subco Preferred share will be adjusted accordingly. The stated capital of the new shares will, in aggregate, be restricted to the PUC of the exchanged shares, and will be allocated between the New Subco Common Share and the New Subco Preferred Share in proportion to their FMVs.

Sale of Interest in XXXXXXXXXX Royalty to Pubco - XXXXXXXXXX

13. At XXXXXXXXXX on XXXXXXXXXX, Pubco will acquire an undivided percentage interest in the XXXXXXXXXX Royalty from Partnership D for a purchase price equal to the FMV of the undivided percentage interest. The purchase price will be paid through the issuance of a demand promissory note (the "Royalty Purchase Note").

(a) The undivided percentage interest acquired will be a percentage which has a FMV equal to the purchase price.

(b) There will be a price adjustment clause in the purchase and sale agreement that will adjust the undivided percentage interest transferred if it is determined that the FMV of the undivided percentage interest originally delivered was more or less than the agreed purchase price.

(c) At XXXXXXXXXX on XXXXXXXXXX, Partnership D will have a taxation year-end and, immediately before that time, the proceeds of disposition of the XXXXXXXXXX Royalty realized in this transaction will be allocated to its partners at that time in proportion to their partnership interests (Subco XXXXXXXXXX%, Pubco XXXXXXXXXX%).

Distribution from Subco - XXXXXXXXXX

14. At XXXXXXXXXX on XXXXXXXXXX, Subco will transfer the Distributed XXXXXXXXXX Assets to Newco 1. As consideration for the transfer, Newco 1 will issue XXXXXXXXXX preferred shares of Newco 1, having an aggregate FMV and redemption amount equal to the estimated FMV at the time of transfer of the Distributed XXXXXXXXXX Assets. The agreement of purchase and sale relating to the purchase by Newco 1 will include a price adjustment clause which will provide that the redemption amount of the preferred shares of Newco 1 is intended to be the FMV of the property transferred to Newco 1 and that, in the event that it is determined that the FMV of the transferred property is a different amount, the redemption amount of the preferred shares of Newco 1 will be adjusted accordingly.

Subco and Newco 1 will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer to Newco 1 of each eligible property. The elected amount in respect of each eligible property transferred will be its cost amount which is, in each case, less than its FMV.

The amount added to the stated capital of Newco 1, under subsection 26(3) of the CBCA, in respect of the issuance of the Newco 1 preferred shares will equal Newco 1's cost (pursuant to subsection 85(1)) of the Distributed XXXXXXXXXX Assets.

15. Newco 1 will then redeem all of the issued and outstanding preferred shares held by Subco for their redemption amount and, in consideration therefor, Newco 1 will issue the Newco 1 Note. The Newco 1 Note will be a demand, non-interest-bearing note with a Canadian dollar principal amount equal to the redemption amount of the preferred shares redeemed. The relevant documentation relating to the redemption of the Newco 1 shares will include contemporary notice to Subco that any arising deemed dividend under the Act is an eligible dividend and will include a price adjustment clause which will provide that the principal amount of the Newco 1 Note is to be adjusted in the same manner as the redemption amount of the redeemed preferred shares would have been adjusted had they remained outstanding.

16. Subco will then redeem the issued New Subco Preferred Share held by Pubco for its redemption amount and, in consideration therefor, will transfer to Pubco the Newco 1 Note and issue to Pubco the XXXXXXXXXX Note being a demand, non-interest-bearing note with a Canadian dollar principal amount equal to the difference between the redemption amount of the New Subco Preferred Share and the amount of the Newco 1 Note. The relevant documentation relating to the redemption of the preferred share will include contemporary notice to Pubco that any arising deemed dividend under the Act is an eligible dividend.

17. Newco 1 will then be wound-up into Pubco. On the winding-up, the Newco 1 Note will be cancelled and Pubco will receive all of the assets of Newco 1 (being the Distributed XXXXXXXXXX Assets). In due course, but not before XXXXXXXXXX months have elapsed (in order to qualify for certain exemptions from XXXXXXXXXX Sales Tax), Newco 1 will be dissolved. Pubco will elect, in prescribed form within the permitted time, to have subsection 80.01(4) apply to the settlement of the Newco 1 Note which occurs on the winding-up of Newco 1.

Transfer of Interest in XXXXXXXXXX Royalty back to Partnership D

18. At XXXXXXXXXX on XXXXXXXXXX, Pubco will transfer its undivided interest in the XXXXXXXXXX Royalty to Partnership D as a contribution to its capital. Pubco and Partnership D will jointly elect, under subsection 97(2), in prescribed form and within the permitted time, with respect to the transfer. The elected amount in relation to the transfer will be $XXXXXXXXXX.

Distribution from Partnership B - XXXXXXXXXX

19. At XXXXXXXXXX on XXXXXXXXXX, Partnership B will transfer its XXXXXXXXXX% interest in Partnership H and its shares of XXXXXXXXXX to Newco 2. As consideration for the transfer, Newco 2 will issue XXXXXXXXXX preferred shares of Newco 2, having an aggregate FMV and redemption amount equal to the estimated FMV at the time of the transfer of the property so transferred to Newco 2. The agreement of purchase and sale relating to the purchase by Newco 2 will include a price adjustment clause which will provide that the redemption amount of the preferred shares of Newco 2 is intended to be the FMV of the property transferred to Newco 2 and that, in the event that it is determined that the FMV of the transferred property is a different amount, the redemption amount of the preferred shares of Newco 2 will be adjusted accordingly.

Partnership B and Newco 2 will jointly elect pursuant to subsection 85(2), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer to Newco 2 of each eligible property. The elected amount in respect of each eligible property transferred will be its cost amount which, in each case, is less than its FMV.

The amount added to the stated capital of Newco 2, under subsection 26(3) of the CBCA, in respect of the issuance of the Newco 2 preferred shares will equal Newco 2's cost (pursuant to subsection 85(2)) of the property transferred to Newco 2 as described herein.

20. Newco 2 will then redeem all of the issued and outstanding preferred shares held by Partnership B for their redemption amount and, in consideration therefor, Newco 2 will issue the Newco 2 Note. The Newco 2 Note will be a demand, non-interest-bearing note with a Canadian dollar principal amount equal to the redemption amount of the preferred shares redeemed. The relevant documentation relating to the redemption of the Newco 2 shares will include contemporary notice to Partnership B that any arising deemed dividend under the Act is an eligible dividend and will include a price adjustment clause which will provide that the principal amount of the Newco 2 Note is to be adjusted in the same manner as the redemption amount of the redeemed preferred shares would have been adjusted had they remained outstanding.

21. Newco 2 will then be wound-up into Pubco. On the winding-up, the obligation to pay the Newco 2 Note will be assumed by Pubco and Pubco will receive all of the assets of Newco 2 (being a XXXXXXXXXX% interest in Partnership H and all of the shares of XXXXXXXXXX). In due course, but not before XXXXXXXXXX months have elapsed, Newco 2 will be dissolved.

22. After Partnership B's next year-end, Partnership B will distribute the Newco 2 Note to Subco and XXXXXXXXXX, reducing the ACB of their partnership interests by virtue of subparagraph 53(2)(c)(v) of the Act. XXXXXXXXXX will then distribute to Subco its portion of the Newco 2 Note. Finally, the Newco 2 Note owed to Subco will be set-off against the XXXXXXXXXX Note and both notes will be cancelled. The Royalty Purchase Note (owing by Pubco to Subco) will be repaid in the ordinary course of Pubco's internal intercompany liability management.

Additional Information

23. There will not be, at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement" in respect of any of the shares in the capital of Newco 1 or Newco 2 or of Subco.

24. None of the shares in the capital of Newco 1 or Newco 2 or of Subco will be part of a dividend rental arrangement for the purposes of subsection 112(2.3).

25. None of the shares in the capital of Newco 1 or Newco 2 or of Subco has been, or will be, issued or acquired as part of a transaction or event or a series of transactions or events of the type described in subsection 112(2.5).

26. Pubco, Subco and XXXXXXXXXX are not corporations, described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) nor are they "specified financial institutions" as defined in subsection 248(1).

27. Dispositions and acquisitions of Pubco shares by members of the public will occur during the same time frame as the Proposed Transactions in the ordinary course of public trading of those shares on the stock exchanges on which they are listed. Dispositions and acquisitions of Pubco shares may also occur by virtue of the exercise of employee stock options or through employee participation and other employee incentive plans. The Proposed Transactions do not, in any manner, facilitate any acquisition or disposition of Pubco's shares as described in this paragraph and are not undertaken with such trading in Pubco shares in mind but, rather, are purely internal transactions.

28. Subco will not dispose of its partnership interest in Partnership B as part of a series of transactions or events that includes the Proposed Transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

The Proposed Transactions are an internal reorganization the purpose of which is to achieve a rationalized and simplified legal organization under which ownership of the XXXXXXXXXX is consolidated into Pubco. The purposes of the proposed transactions are as follows:

1. The current legal organization is complex and has overlapping ownership and is in need of rationalization. The rationalization will simplify ongoing tax and financial compliance and reporting.

2. The reorganization will, by bringing principal revenue sources (XXXXXXXXXX assets) together in Pubco (the entity which incurs head office and financing costs), match operating income with related expenses.

3. The reorganization will help Pubco to effect an income tax consolidation within Canada, minimizing its Canadian income taxes while it has tax pools available.

4. The reorganization includes a step which moves some of the balance in Subco's CCDE pool from Subco to Pubco.

5. The reorganization will ensure future revenue from the XXXXXXXXXX, should it restart, is earned by Pubco, not Subco, consolidating that revenue with Pubco's XXXXXXXXXX tax pools associated with that XXXXXXXXXX.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the above transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the reorganization of capital, as described in paragraph 12 above, pursuant to which Pubco will exchange its XXXXXXXXXX common shares of Subco and XXXXXXXXXX Series A first preferred shares, XXXXXXXXXX Series B first preferred shares and XXXXXXXXXX Series C preferred shares in the capital stock of Subco in consideration for one New Subco Common Share and one New Subco Preferred Share provided that

(a) Pubco holds the Subco common shares and preferred shares as capital property; and

(b) Pubco and Subco do not file an election under subsection 85(1) in respect of the exchange;

such that

(c) pursuant to paragraph 86(1)(b), the cost to Pubco of the New Subco Common Share and of the New Subco Preferred Share, respectively, will be deemed to be the proportion of the total ACB to Pubco of such Subco common shares and preferred shares immediately before the exchange that

(i) the FMV, immediately after the exchange, of the New Subco Common Share, or of the New Subco Preferred Share, as the case may be, received by Pubco

is of

(ii) the FMV, immediately after the exchange, of all the shares of the capital stock of Subco acquired by Pubco on the exchange;

(d) pursuant to paragraph 86(1)(c), Pubco will be deemed to have disposed of Subco common shares and preferred shares for aggregate proceeds of disposition equal to the aggregate cost to Pubco of the New Subco Common Share and the New Subco Preferred Share received by Pubco as determined in (c) above, such that Pubco's proceeds of disposition of the Subco common shares and the Subco preferred shares will equal their respective costs; and

(e) pursuant to subsection 86(2.1), the aggregate PUC of the New Subco Common Share and of the New Subco Preferred Share will be equal to the PUC of the Subco common shares and the Subco preferred shares which were exchanged for the New Subco Common Share and the New Subco Preferred Share.

B. Provided that the XXXXXXXXXX Royalty constitutes "Canadian resource property", at the time of the disposition of the undivided interest in the XXXXXXXXXX Royalty by Partnership D to Pubco, as described in paragraph 13 above:

(a) Pursuant to subsection 98(2), Partnership D will be deemed at that time to have disposed of Canadian resource property for proceeds of disposition equal to the FMV of the undivided interest in the XXXXXXXXXX Royalty;

(b) Each of Pubco, Subco and GPCo will, pursuant to subsection 66.2(6) and element "F" of the definition of CCDE in subsection 66.2(5), reduce its CCDE account for its taxation year ending on XXXXXXXXXX, by an amount equal to the share of Partnership D's proceeds of disposition of the undivided interest in the XXXXXXXXXX Royalty that is allocated to Pubco, Subco and GPCo respectively by Partnership D;

(c) Pursuant to subparagraph 53(1)(e)(viii), each of Pubco, Subco and GPCo will, immediately after the end of Partnership D's fiscal period, increase the ACB of their interest in Partnership D by an amount equal to the share of Partnership D's proceeds of disposition of the undivided interest in the XXXXXXXXXX Royalty that is allocated to Pubco, Subco and GPCo respectively by Partnership D;

(d) pursuant to subsection 98(2), Pubco will be deemed at that time to have acquired a Canadian resource property at a cost equal to the fair market value of the undivided interest in the XXXXXXXXXX Royalty acquired by it;

(e) pursuant to paragraph (e) of the definition of CDE in subsection 66.2(5), Pubco will be regarded as incurring CDE at that time in an amount equal to the cost of the undivided interest in the XXXXXXXXXX Royalty acquired by it; and

(f) pursuant to element "A" of the definition of CCDE in subsection 66.2(5), Pubco will immediately after that time add to its CCDE account an amount equal to the cost of the undivided interest in the XXXXXXXXXX Royalty acquired by it; the addition to Pubco's CCDE account will therefore occur in its taxation year ending on XXXXXXXXXX.

C. Provided that the requisite elections are filed in the prescribed form and within the prescribed time, the provisions of subsection 85(1) will apply to:

(a) the transfer of the Distributed XXXXXXXXXX Assets by Subco to Newco1, as described in paragraph 14 above such that, subject to paragraphs 85(1)(c) and (c.1), the elected amounts in respect of each transfer will be deemed to be Subco's proceeds of disposition and Newco1's cost thereof pursuant to paragraph 85(1)(a); and

(b) for greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

D. Subsection 84(3) will apply to the redemption by Newco1 of the preferred shares in its capital held by Subco as described in paragraph 15 to deem Newco1 to have paid, and Subco to have received, a dividend on such share equal to the amount, if any, by which the aggregate amount paid upon the purchase exceeds the aggregate PUC in respect of such shares immediately before such redemption.

E. The taxable dividend described in Ruling D above:

(a) will be included in computing Subco's income, under subsection 82(1) and paragraph 12(1)(j),

(b) will be an eligible dividend,

(c) will be deductible by Subco, 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) or (2.4),

(d) will be excluded in determining the proceeds of disposition to Subco of the shares so redeemed pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54,

(e) will not be subject to tax under Part VI.1 or Part IV.1 of the Act by virtue of paragraph (b) of the definition "excepted dividend" in section 187.1 and paragraph (a) of the definition "excluded dividend" in subsection 191(1), and

(f) will, by virtue of subsection 112(3), reduce any loss that would otherwise be realized in respect of the disposition of those shares.

F. Subsection 84(3) will apply to the redemption by Subco of the New Subco Preferred Share held by Pubco, as described in paragraph 16 above, to deem Subco to have paid, and Pubco to have received, a dividend on such share equal to the amount, if any, by which the aggregate amount paid upon the purchase exceeds the aggregate PUC in respect of such share immediately before such redemption.

G. The taxable dividend described in Ruling F above:

(a) will be included in computing Pubco's income, under subsection 82(1) and paragraph 12(1)(j),

(b) will be an eligible dividend,

(c) will be deductible by Pubco, 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) or (2.4),

(d) will be excluded in determining the proceeds of disposition to Pubco of the shares so redeemed pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54,

(e) will not be subject to tax under Part VI.I or Part IV.I of the Act by virtue of paragraph (b) of the definition "excepted dividend" in section 187.1 and paragraph (a) of the definition "excluded dividend" in subsection 191(1), and

(f) will, by virtue of subsection 112(3), reduce any loss that would otherwise be realized in respect of the disposition of those shares.

H. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the deemed dividends referred to in Rulings D and F above, provided that there is not a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the Proposed Transactions. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition to, or increase in interest by, an unrelated person described in subparagraphs 55(3)(a)(i) to (v).

I. The provisions of subsection 88(1) will apply to the wind-up of Newco1 into Pubco as described in paragraph 17 above. In particular, the provisions of paragraph 88(1)(c) and (d) will apply in the following manner:

(a) Pubco will be treated as having disposed of the Newco1 common shares immediately before the wind-up for proceeds of disposition equal to the greater of the PUC of the Newco1 common shares and their ACB to Pubco; and

(b) the cost to Pubco of the Distributed XXXXXXXXXX Assets will be equal to their ACB to Newco1 immediately prior to the wind-up of Newco1 into Pubco.

J. Provided that the requisite elections are filed in the prescribed form and within the prescribed time period, the provisions of subsection 97(2) will apply to:

(a) the transfer of the undivided interest in the XXXXXXXXXX Royalty by Pubco to Partnership D, as described in paragraph 18 above such that, subject to paragraphs 85(1)(c) and (c.1), the elected amounts in respect of the above transfer will be deemed to be Pubco's proceeds of disposition and Partnership D's cost thereof pursuant to paragraph 85(1)(a); and

(b) for greater certainty, paragraph 85(1)(e.2) will not apply to the transfer referred to herein.

K. Provided that the requisite elections are filed in the prescribed form and within the prescribed time period, the provisions of subsection 85(2) will apply to:

(a) the transfer by Partnership B of its XXXXXXXXXX% interest in Partnership H and its shares of XXXXXXXXXX to Newco2, as described in paragraph 19 above such that, subject to paragraphs 85(1)(c) and (c.1), the elected amounts in respect of each transfer will be deemed to be Partnership B's proceeds of disposition and Newco2's cost thereof pursuant to paragraph 85(1)(a); and

(b) for greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

L. Subsection 84(3) will apply to the redemption by Newco2 of the preferred shares in its capital held by Partnership B, as described in paragraph 20 above, to deem Newco2 to have paid, and Partnership B to have received, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon the purchase exceeds the aggregate PUC in respect of such shares immediately before such redemption.

M. The taxable dividend described in Ruling L above:

(a) will be included in computing Partnership B's income, under paragraph 96(1)(a), subsection 82(1) and paragraph 12(1)(j), and will be an eligible dividend,

(b) will be deductible by the partners in Partnership B, pursuant to subsection 112(1), in computing their 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) or (2.4),

(c) will be excluded in determining the proceeds of disposition to Partnership B of the shares so redeemed pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54,

(d) will reduce Partnership B's partners' share of any loss arising from the disposition of those shares pursuant to subsection 112(3.1), and

(e) will not be subject to tax under Part VI.1 or Part IV.1 of the Act by virtue of paragraph (b) of the definition "excepted dividend" in section 187.1 and paragraph (a) of the definition "excluded dividend" in subsection 191(1).

N. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividend referred to in Ruling L above, provided that there is not a disposition of property or an increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) which is part of the series of transactions or events that includes the Proposed Transactions. For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in a disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v) of the Act. For greater certainty, a disposition of a partnership interest in Partnership B to an unrelated person that is undertaken as part of the series of transactions or events that includes the Proposed Transactions will result in the taxable dividend referred to in Ruling L being subject to the provisions of subsection 55(2).

O. The provisions of subsection 88(1) will apply to the wind-up of Newco 2 into Pubco as described in paragraph 21 above. In particular, the provisions of paragraph 88(1)(c) and (d) will apply in the following manner:

(a) Pubco will be treated as having disposed of the Newco 2 common shares immediately before the wind-up for proceeds of disposition equal to the greater of the PUC of the Newco 2 common shares and their ACB to Pubco; and

(b) the cost to Pubco of the XXXXXXXXXX% interest in Partnership H and its shares of XXXXXXXXXX will be equal to their ACB to Newco 2 immediately prior to the wind-up of Newco 2 into Pubco.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are completed before XXXXXXXXXX.

The above 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.

COMMENTS

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

(a) any other tax consequences relating to the Facts, Proposed Transactions and Additional Information 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; and

(b) the determination of the FMV or ACB of any property referred to herein, the PUC in respect of any share referred to herein, or the outstanding balance of various tax accounts for any of the corporate entities described herein.

Nothing in this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred or the redemption amount of the shares issued as consideration, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer and issuance of shares. Furthermore, none of the rulings given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CRA with respect to price adjustment clauses is stated in Income Tax Folio S4-F3-C1, "Price Adjustment Clauses", which replaces and cancels Interpretation Bulletin IT-169, "Price Adjustment Clauses".

Yours truly,

XXXXXXXXXX
Manager
Resources Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch