2016 Ruling 2015-0623731R3 - Subsections 55(2) and (2.1)

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: Issue 1: Whether paragraph 55(3)(a) exception to subsection 55(2) applies? Issue 2: Whether administrative position in respect of section 80 applies?

Position: Issue 1: Yes. Issue 2: No.

Reasons: Issue 1: Exception in paragraph 55(3)(a) applies. Issue 2: Set-off and cancellation of debts not occurring in context of a distribution as defined in subsection 55(1).

XXXXXXXXXX							2015-062373

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, which was a request for an advance income tax ruling by the Taxpayers. We also acknowledge the information provided in various emails and in our telephone conversations.

To the best of your knowledge and that of the 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; or

v. except as set out in Ruling 2015-060144, the subject of a ruling previously issued by the Directorate to any of the Taxpayers or a related person.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

“XXXXXXXXXX Employee Accruals” means the amounts deducted by Partnership in computing its income for its fiscal period ending XXXXXXXXXX that were unpaid as at XXXXXXXXXX and that are on account of any superannuation or pension benefit, retiring allowance, salary, wages or other remuneration (but not including reasonable vacation or holiday pay or a deferred amount under a salary deferral arrangement) in respect of employees or former employees of Partnership. For greater certainty, “XXXXXXXXXX Employee Accruals” do not include the XXXXXXXXXX Pension Contribution;

“XXXXXXXXXX Pension Contribution” means the contributions to the Defined Benefit Pension Plans that are unpaid as at XXXXXXXXXX and that will be paid within XXXXXXXXXX days after the end of Partnership’s fiscal period ending XXXXXXXXXX;

XXXXXXXXXX;

“Act 1” means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

“Act 2” means the XXXXXXXXXX;

“Act 3” means the XXXXXXXXXX;

“Act 4” means the XXXXXXXXXX;

“adjusted cost base” or “ACB” has the meaning assigned by section 54 and subsection 248(1);

“XXXXXXXXXX” means XXXXXXXXXX incorporated under Act 3 on XXXXXXXXXX and a wholly-owned subsidiary of Parent;

“CRA” means the Canada Revenue Agency;

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

“Capital” means the amount maintained in the capital account attributable to a share for purposes of Act 2;

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

“common share” has the meaning assigned by subsection 248(1);

“Completed Transactions” means the transactions described in paragraphs 29 to 39 below;

“Corp1” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC that was continued to Canada prior to the amalgamation described in paragraph 6 below;

“Corp2” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC that was continued to Canada prior to the amalgamation described in paragraph 28 below;

“Corp3” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC that was amalgamated with other related corporations in the amalgamation described in paragraph 16 below;

“Corp4” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC that was amalgamated with other related corporations in the amalgamation described in paragraph 16 below;

“Corp5” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC that was continued to XXXXXXXXXX prior to the amalgamation described in paragraph 16 below;

“Corp6” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC that was continued to Canada prior to the amalgamation described in paragraph 6 below;

“Corp7” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC that was continued to Canada prior to the amalgamation described in paragraph 6 below;

“CRA” means Canada Revenue Agency;

XXXXXXXXXX;

“Defined Benefit Pension Plans” means, collectively:

XXXXXXXXXX

“DSU Plans” means, collectively, the XXXXXXXXXX, each as amended;

“Elected Amount” means the amount that Sub2 and Sub1 will agree on in their subsection 85(1) election in respect of the transfer by Sub2 of its partnership interest in Partnership to Sub1 as described in paragraph 33 below;

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

“eligible dividend” has the meaning assigned by subsection 248(1) and subsection 89(1);

“Employee Unfunded Benefit Plans” means, collectively:

XXXXXXXXXX

“Exchanged Sub2 Shares” means all of the issued and outstanding Class A restricted voting shares, Class B non-voting shares, and common shares of Sub2 exchanged by Sub2 as described in paragraph 42(b) below;

“fair market value” or “FMV” means the highest price expressed in money or money’s worth obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length and under no compulsion to act;

“IFRS” means International Financial Reporting Standards;

“Group” means Parent and the corporations controlled by Parent;

XXXXXXXXXX

“New Sub1 Shares” means the common shares issued by Sub1 to Parent as described in paragraph 43 below;

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

“Parent” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC;

“Parent Preferred Shares” means the XXXXXXXXXX Preferred Shares and XXXXXXXXXX Preferred Shares of Parent;

“Partnership” means XXXXXXXXXX, a general partnership previously existing under the laws of the province of XXXXXXXXXX;

“Partnership Agreement” means the amended and restated partnership agreement relating to Partnership dated as at XXXXXXXXXX;

“Partnership Dissolution Ruling” means Advance income tax ruling #2015-060144, dated XXXXXXXXXX, 2015;

“Partnership Units” mean the general partnership units of Partnership;

“Pension Plans” means, collectively, XXXXXXXXXX;

XXXXXXXXXX

“Prepaid Expenses” means the expenses prepaid by Partnership, which include XXXXXXXXXX;

“Prime Rate” means the floating rate of interest established from time to time by a particular Canadian chartered bank (and reported to the Bank of Canada) as the reference rate of interest such chartered bank will use to determine rates of interest payable by its borrowers on Canadian dollar commercial loans made by such chartered bank to such borrowers in Canada and designated by such chartered bank as its "prime rate";

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

“Proposed Transactions” means the transactions described in paragraphs 40 to 45 below;

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

“Regulations” means the Income Tax Regulations, C.R.C. 1978, c. 945, as amended;

“RSU Plan” means the XXXXXXXXXX Restricted Share Unit Plan;

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

“Stated Capital” means the amount maintained in the stated capital account attributable to a share for purposes of Act 1;

“Stock Option Plans” means, collectively:

XXXXXXXXXX

“Sub1” means XXXXXXXXXX, a TCC governed by Act 1 that was formed by the amalgamation of Corp1, Corp6 and Corp7 as described in paragraph 6 below, and by amalgamation with Corp2 as described in paragraph 28 below;

“Sub1 Elected Amount” means the amount that Parent and Sub1 will agree on in their subsection 85(1) election in respect of the transfer by Parent of the Transferred Sub2 Shares to Sub1 as described in paragraph 43 below;

“Sub1 Note” has the meaning assigned in paragraph 33 below;

“Sub1-Parent Note” means the debt owing by Sub1 to Parent as described in paragraph 18 below;

“Sub1 Preferred Shares” means the preferred shares of Sub1 to be authorized as described in paragraph 29 below;

“Sub1 Redemption Amount” has the meaning assigned in paragraph 33 below;

“Sub1 Redemption Dividend” has the meaning assigned in Ruling C(a) below;

“Sub1 Redemption Note” has the meaning assigned in paragraph 41 below;

“Sub2” means XXXXXXXXXX, a public corporation as described in paragraph 8 below, and a TCC governed by Act 2;

“Sub2-Partnership Note” means the debt owing by Sub2 to Partnership as described in paragraph 27 below;

“Sub2 Redemption Dividend” has the meaning assigned in Ruling D(a) below;

“Sub2 Redemption Note” has the meaning assigned in paragraph 44 below;

“Sub2 XXXXXXXXXX Business” means Sub2’s business of XXXXXXXXXX;

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

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

“Transferred Sub2 Shares” has the meaning assigned by paragraph 43 below;

“undepreciated capital cost” or “UCC” has the meaning assigned by subsection 13(21); and

XXXXXXXXXX

FACTS

1. XXXXXXXXXX

2. XXXXXXXXXX

3. Substantially all of Group’s operations and sales are in Canada. Group has a XXXXXXXXXX workforce of approximately XXXXXXXXXX employees. Substantially all of the Group employees are situated in Canada.

4. Group’s business is divided into XXXXXXXXXX key segments:

XXXXXXXXXX

5. Parent is the parent company in the Group. Parent is a public corporation and its shares trade on the XXXXXXXXXX Stock Exchange.

6. Parent holds all of the issued and outstanding common shares of Sub1 (with an ACB of $XXXXXXXXXX). Sub1 was formed by the amalgamation of Corp1, Corp6 and Corp7 effective XXXXXXXXXX. Sub1’s authorized share capital consists of XXXXXXXXXX class of common shares. The shares of Sub1 are capital property to Parent.

7. Sub2 operated a XXXXXXXXXX in Canada in accordance with terms and conditions specified by the XXXXXXXXXX. Sub2 holds a XXXXXXXXXX. Sub2 provided XXXXXXXXXX to Partnership pursuant to the XXXXXXXXXX.

8. Parent holds all of the issued and outstanding shares of Sub2 (consisting of Class A restricted voting shares, Class B non-voting shares and common shares) with an aggregate ACB of approximately $XXXXXXXXXX, PUC of approximately $XXXXXXXXXX and FMV of in excess of $XXXXXXXXXX. Sub2 is currently a public corporation for the purposes of the Act XXXXXXXXXX. The shares of Sub2 are capital property to Parent.

9. XXXXXXXXXX

10. The taxation year of each of Parent, Sub1 and Sub2 is the calendar year. Their head office is located at XXXXXXXXXX, and they file their income tax returns at the XXXXXXXXXX Tax Centre and otherwise deal with the XXXXXXXXXX Tax Services Office.

11. Immediately prior to the transactions described in paragraph 33 below, Sub1 and Sub2 were the sole partners of Partnership.

12. Partnership operated the XXXXXXXXXX. Partnership had approximately XXXXXXXXXX employees and an annual payroll of approximately $XXXXXXXXXX. Partnership’s head office was located at XXXXXXXXXX, and it filed its Partnership Information Return at the XXXXXXXXXX Tax Centre and otherwise dealt with the XXXXXXXXXX Tax Services Office.

13. Partnership was a general partnership and a Canadian partnership for the purposes of the Act. Each partner’s interest in Partnership was expressed by reference to Partnership Units, the attributes of which carry identical entitlements. The Partnership Units were held as follows:

(a) Sub1 held XXXXXXXXXX Partnership Units (XXXXXXXXXX% interest) with an ACB of $XXXXXXXXXX; and

(b) Sub2 held XXXXXXXXXX Partnership Units (XXXXXXXXXX% interest) with an ACB of $XXXXXXXXXX.

14. Partnership was formed on XXXXXXXXXX, by Corp4 and Sub2. When Parent purchased Sub2 in XXXXXXXXXX, Sub2 had significant non-capital losses. Due to XXXXXXXXXX, it was not possible to amalgamate Sub2 and Corp4 in order to apply the non-capital losses of Sub2 against future income earned by Corp4 in carrying on the XXXXXXXXXX. Partnership was formed to allow a portion of the income earned from carrying on the XXXXXXXXXX to be allocated to Sub2 (so that the non-capital losses of Sub2 could be applied against such income). Advance income tax ruling # 2005-011948, dated XXXXXXXXXX, 2005, was obtained from the CRA in respect of the formation of Partnership in XXXXXXXXXX.

15. At the time of the formation of Partnership, Corp4 was a wholly owned subsidiary of Corp3, which was a wholly owned subsidiary of Parent. Each of Corp4 and Sub2 transferred substantial assets relating to the XXXXXXXXXX and the Sub2 XXXXXXXXXX to Partnership in consideration for partnership units of Partnership.

16. On XXXXXXXXXX, Parent, Corp3, Corp4 and Corp5 amalgamated to form Parent. As a result of the amalgamation, Parent became the owner of Corp4’s partnership interest in Partnership.

17. Partnership was governed by the Partnership Agreement. Under the Partnership Agreement, profits or losses and all income and losses of Partnership for income tax purposes were XXXXXXXXXX.

18. XXXXXXXXXX.

19. As noted in paragraph 6 above, Corp1 is a predecessor to Sub1 and Sub1 is consequently now the obligor under the Sub1-Parent Note. As of XXXXXXXXXX, Sub1 was indebted to Parent in the amount of $XXXXXXXXXX under the Sub1-Parent Note. The amount owing under the Sub1-Parent Note bears interest at XXXXXXXXXX% per annum.

20. In XXXXXXXXXX, each of Parent, Sub2 and Partnership received permission to change its fiscal period for purposes of the Act to XXXXXXXXXX (XXXXXXXXXX).

21. Reserved.

22. Reserved.

23. Reserved.

24. Reserved.

25. Reserved.

26. Reserved.

27. Prior to XXXXXXXXXX Sub2 was indebted to Partnership in the amount of approximately $XXXXXXXXXX (the “Sub2-Partnership Note”). The Sub2-Partnership Note is payable on demand and non-interest bearing. The Sub2-Partnership Note was issued by a predecessor corporation to Sub2 on the redemption of shares held by the Partnership. The Sub2-Partnership Note will be eliminated (by set-off against the Sub1 Note) as part of the Proposed Transactions.

28. On XXXXXXXXXX, Sub1 acquired all of the issued and outstanding shares of Corp2 pursuant to a share purchase agreement dated XXXXXXXXXX. The consideration for the shares of Corp2 was paid by delivery of cash to the shareholder of Corp2. Sub1 and Corp2 were amalgamated on XXXXXXXXXX.

COMPLETED TRANSACTIONS

29. Prior to XXXXXXXXXX, the articles of incorporation of Sub1 were amended to authorize the issuance of the Sub1 Preferred Shares with the following share attributes:

(a) non-voting;

(b) entitled to receive fixed, cumulative dividends at a rate per annum equal to the Prime Rate, accruing daily from the day following the date of issuance and payable annually;

(c) redeemable and retractable at any time on payment for each such share to be redeemed or retracted of an amount equal to the FMV of all of the consideration for which the Sub1 Preferred Shares are issued as at the time such Sub1 Preferred Shares are issued divided by the number of Sub1 Preferred Shares so issued, together with an amount equal to all accrued and unpaid cumulative dividends thereon up to the date of redemption or retraction; and

(d) subject to a price adjustment clause.

30. Reserved.

31. Reserved.

32. Reserved.

33. On XXXXXXXXXX, Sub2 transferred its interest in Partnership to Sub1 in consideration for XXXXXXXXXX Sub1 Preferred Shares and a non-interest bearing promissory note with a principal amount equal to the amount owing under the Sub2-Partnership Note (the “Sub1 Note”).

(a) Sub2 and Sub1 will jointly elect under subsection 85(1) in prescribed form and manner and within the time referred to in subsection 85(6) with respect to the disposition of Sub2’s interest in Partnership to Sub1. The Elected Amount will be an amount equal to the adjusted cost base of Sub2’s interest in Partnership at the time of transfer. The amount added to the Stated Capital of the Sub1 Preferred Shares issued on the transfer was equal to the Elected Amount less the principal amount of the Sub1 Note.

(b) The Sub1 Preferred Shares issued on the transfer have an aggregate redemption amount (and amount for which the holder may require them to be retracted) equal to (i) the FMV of Sub2’s interest in Partnership immediately before the transfer less the principal amount of the Sub1 Note plus (ii) accrued and unpaid dividends (the “Sub1 Redemption Amount”).

The Sub1 Preferred Shares acquired by Sub2 have an aggregate ACB and PUC of approximately $XXXXXXXXXX and FMV of approximately $XXXXXXXXXX.

34. On the transfer by Sub2 of its partnership interest in Partnership to Sub1:

(a) Sub2 ceased to be a partner of Partnership;

(b) Partnership ceased to exist;

(c) Sub1 became the sole owner of all of the property of Partnership (including the receivable from Sub2 under the Sub2-Partnership Note); and

(d) Sub1 became subject to all obligations of Partnership.

35. Reserved.

36. Reserved.

37. Reserved.

38. Reserved.

39. XXXXXXXXXX

PROPOSED TRANSACTIONS

Each of the following steps will occur on the same date and in the same order that they are set out below:

40. The Sub1 Note and the Sub2-Partnership Note will be settled by way of set-off and cancelled in full satisfaction of the obligations under each note.

41. Sub1 will redeem the Sub1 Preferred Shares held by Sub2. The redemption amount will be satisfied by the issuance of a non-interest bearing promissory note (the “Sub1 Redemption Note”). The redemption amount may include an amount in respect of accrued and unpaid dividends on the Sub1 Preferred Shares. Sub1 will designate a portion of the deemed dividend arising on the redemption to be an eligible dividend pursuant to subsection 89(14).

42. Sub2 and Parent will undertake a reorganization of Sub 2’s capital by:

(a) filing articles of amendment to:

i. authorize the Sub2 New Common Shares with the following share attributes:

1. voting;

2. participating (pari passu with all other issued and outstanding Class A restricted voting shares, Class B non-voting shares and common shares); and

3. entitlement to receive discretionary dividends (pari passu with all other issued and outstanding Class A restricted voting shares, Class B non-voting shares and common shares) after the payment of any dividend to which the holder of the Sub2 Preferred Shares may be entitled; and

ii. authorize the Sub2 Preferred Shares with the following share attributes:

1. non-voting and limited to a single issuance;

2. entitlement to receive fixed, cumulative dividends at a rate per annum equal to the Prime Rate, accruing daily from the day following the date of issuance and payable annually and in preference to payment of dividends on other classes of shares;

3. redeemable and retractable at any time on payment for each such share to be redeemed or retracted of an amount equal to the amount owing, at the time of issuance of the Sub2 Preferred Shares, by Sub1 under the Sub1 Redemption Note divided by the number of Sub2 Preferred Shares so issued, together with an amount equal to all accrued and unpaid cumulative dividends thereon up to the date of redemption or retraction; and

4. subject to a price adjustment clause; and

(b) Parent entering into an agreement with Sub2 to exchange all of the issued and outstanding shares of Sub2 (which will include all of the issued and outstanding Class A restricted voting shares, all of the issued and outstanding Class B non-voting shares and all of the issued and outstanding common shares) (the “Exchanged Sub2 Shares”) for Sub2 New Common Shares and Sub2 Preferred Shares. The Exchanged Sub2 Shares will be cancelled. The aggregate redemption amount of the Sub2 Preferred Shares will be equal to the amount owing by Sub1 under the Sub1 Redemption Note. The aggregate FMV of the Sub2 New Common Shares and the Sub2 Preferred Shares will be equal to the aggregate FMV of the Exchanged Sub2 Shares, which will be greater than the FMV of the Sub1 Redemption Note. No election will be made under subsection 85(1) with respect to this exchange.

42.1. The agreement described in paragraph 42(b) above will also provide that the aggregate Capital of the newly issued Sub2 New Common Shares and Sub2 Preferred Shares for purposes of Act 2 will be equal to the PUC of the Exchanged Sub2 Shares, immediately before the exchange, and that such Capital will be allocated to the newly issued Sub2 New Common Shares, as a class, and to the newly issued Sub2 Preferred Shares, as a class, proportionately based on each classes respective FMV.

43. Parent will transfer to Sub1 all of the issued and outstanding Sub2 Preferred Shares (the “Transferred Sub2 Shares”). Sub1 will issue common shares (the “New Sub1 Shares”) to Parent in consideration for the transfer of the Transferred Sub2 Shares. Parent and Sub1 will jointly elect under subsection 85(1) in prescribed form and manner and within the time referred to in subsection 85(6) with respect to the disposition of the Transferred Sub2 Shares to Sub1. The Sub1 Elected Amount will be an amount equal to Parent’s ACB of the Transferred Sub2 Shares at the time of transfer. The amount added to the Stated Capital of the New Sub1 Shares issued on the exchange will be equal to the Sub1 Elected Amount.

44. Sub2 will redeem the Transferred Sub2 Shares held by Sub1. The redemption amount will be satisfied by the issuance of a non-interest bearing promissory note (the “Sub2 Redemption Note”). Sub2 will designate a portion of the deemed dividend arising on the redemption to be an eligible dividend pursuant to subsection 89(14).

45. The Sub1 Redemption Note and the Sub2 Redemption Note will be settled by way of set-off and cancelled in full satisfaction of the obligations under the Sub1 Redemption Note and the Sub2 Redemption Note.

PURPOSE OF THE PROPOSED TRANSACTIONS

46. The purpose of the proposed transactions is to simplify the corporate structure of Group and the structure of the business carried on by Partnership (by, among other things, combining the XXXXXXXXXX business in Partnership with the XXXXXXXXXX business in Sub1). This simplification will reduce the complexity and cost of administration and compliance, both for Group and the CRA. Group’s simplification purpose is further evidenced by the following:

(a) in XXXXXXXXXX, Parent, Sub2 and Partnership applied for, and received, permission to change their fiscal periods for purposes of the Act to XXXXXXXXXX, effective XXXXXXXXXX, thereby aligning the tax and accounting year ends of the main Group companies.

(b) XXXXXXXXXX

(c) XXXXXXXXXX

ADDITIONAL INFORMATION

47. Each of the corporations described in this ruling request is a SFI because it is related to XXXXXXXXXX.

48. Sub2 did not acquire the Sub1 Preferred Shares in the ordinary course of the business carried on by it.

49. Sub1 will not acquire the Transferred Sub2 Shares in the ordinary course of the business carried on by it.

50. The Sub1 Preferred Shares are not, and will not be, at any time during a series of transactions or events that includes any of the Proposed Transactions:

(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 (as defined in subsection 248(1)), whether as that term is currently defined in the Act or as that term will be defined if the Legislative Proposals relating to the Income Tax Act and Regulations released on XXXXXXXXXX are enacted in their current form;

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

(d) issued for consideration that is or includes:

i. an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is, immediately before the issuance of the obligation, related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

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

(e) issued or acquired as part of a series of transactions or events of the type described in subsection 112(2.5).

51. The Transferred Sub2 Shares are not, and will not be, at any time during a series of transactions or events that includes any of the Proposed Transactions:

(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 (as defined in subsection 248(1));

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

(d) issued for consideration that is or includes:

i. an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is, immediately before the issuance of the obligation, related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

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

(e) issued or acquired as part of a series of transactions or events of the type described in subsection 112(2.5).

52. XXXXXXXXXX

RULINGS

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

A. Subsection 86(1) will apply, and subsection 86(2) will not apply, to the exchange of the Exchanged Sub2 Shares for Sub2 New Common Shares and Sub2 Preferred Shares described in paragraph 42(b) above.

B. Provided that, on the exchange of the Exchanged Sub2 Shares for the Sub2 New Common Shares and Sub2 Preferred Shares described in paragraphs 42(b) and 42.1 above, the aggregate amounts added to the Capital of the Sub2 New Common Shares and Sub2 Preferred Shares do not exceed the aggregate PUC of the Exchanged Sub2 Shares, no deemed dividend will arise under either of subsections 84(1) or (3).

C. On the redemption of the Sub1 Preferred Shares described in paragraph 41 above:

(a) the amount, if any, by which the amount paid to redeem or purchase the Sub1 Preferred Shares exceeds the PUC of the Sub1 Preferred Shares immediately before the redemption, will be deemed, pursuant to paragraph 84(3)(a), to be a dividend paid by Sub1 to Sub2 (the “Sub1 Redemption Dividend”);

(b) the Sub1 Redemption Dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of Sub2 for the year in which the dividend is deemed to have been received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(c) the Sub1 Redemption Dividend will, by virtue of paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded from the proceeds of disposition of the Sub1 Preferred Shares;

(d) Part IV.1 of the Act will not apply to the Sub1 Redemption Dividend because the dividend will be an excepted dividend pursuant to paragraph (b) of the definition of “excepted dividend” in section 187.1;

(e) Part VI.1 of the Act will not apply to the Sub1 Redemption Dividend because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of “excluded dividend” in subsection 191(1);

(f) no taxes in respect of Part IV will be payable in respect of the Sub1 Redemption Dividend, except to the extent of the amount, if any, payable under paragraph 186(1)(b);

(g) the Sub1 Redemption Dividend will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received.

D. On the redemption of the Transferred Sub2 Shares described in paragraph 44 above:

(a) the amount, if any, by which the amount paid to redeem or purchase the Transferred Sub2 Shares exceeds the PUC of the Transferred Sub2 Shares immediately before the redemption, will be deemed, pursuant to paragraph 84(3)(a), to be a dividend paid by Sub2 to Sub1 (the “Sub2 Redemption Dividend”);

(b) the Sub2 Redemption Dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of Sub1 for the year in which the dividend is deemed to have been received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(c) the Sub2 Redemption Dividend will, by virtue of paragraph (j) of the definition of “proceeds of disposition” in section 54, be excluded from the proceeds of disposition of the Transferred Sub2 Shares;

(d) Part IV.1 of the Act will not apply to the Sub2 Redemption Dividend because the dividend will be an excepted dividend pursuant to paragraph (b) of the definition of “excepted dividend” in section 187.1;

(e) Part VI.1 of the Act will not apply to the Sub2 Redemption Dividend because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of “excluded dividend” in subsection 191(1);

(f) no taxes in respect of Part IV will be payable in respect of the Sub2 Redemption Dividend, except to the extent of the amount, if any, determined under paragraph 186(1)(b);

(g) the Sub2 Redemption Dividend will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received.

E. Provided that the amount owing under the Sub1 Redemption Note is equal to the amount owing under the Sub2 Redemption Note, the provisions of subsection 80(1) will not apply to the settlements by way of set-off of the obligations evidenced by the Sub1 Redemption Note and the Sub2 Redemption Note described in paragraph 45 above.

F. Subsections 55(2) and (2.1) will not apply to the Sub1 Redemption Dividend or the Sub2 Redemption Dividend, by virtue of the exception in paragraph 55(3)(a), provided that, as part of the series of transactions or events as part of which these dividends are received, there is no event described in subparagraphs 55(3)(a)(i) to (v) which has not been described herein, and that the transactions and events described in paragraph 52 above were carried out in the manner described.

Our rulings are given subject to the limitations set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter. Our rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act or Regulations.

Our Comments

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) any tax consequences relating to the Facts or Proposed Transactions described herein, other than those specifically described in the rulings given above;

(c) the elections described in paragraphs 33 and 43 above;

(d) the transactions described in paragraph 52 above; or

(e) any proposed transaction described in the XXXXXXXXXX.

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, dated March 28, 2013.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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