2096 Ruling 9527343 - REORGANIZATION

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: none

Position:

Reasons:

		3-952734
XXXXXXXXXX	

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling is being considered by a Tax Services Office and/or a Taxation Centre in connection with an income tax return previously filed and none of the issues contained herein is under objection or appeal.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act").

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

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

"Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);

"capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);

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

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

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

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

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

"refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

"significant influence" has the meaning assigned by paragraph 3050.04 of the CICA Handbook;

"specified financial institution" ("SFI") has the meaning assigned by subsection 248(1);

"specified investment business" has the meaning assigned by subsection 125(7);

"specified person" has the meaning assigned by paragraph (h) of the definition of "taxable preferred share" as defined in subsection 248(1);

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

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

"taxable preferred share" has the meaning assigned by subsection 248(1); and

"undepreciated capital cost" ("UCC") has the meaning assigned by subsection 13(21).

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

FACTS

XXXXXXXXXX is a TCC and CCPC incorporated under the Canada Business Corporations Act (the "CBCA") on XXXXXXXXXX.

The authorized share capital of XXXXXXXXXX consists of the following:

An unlimited number of voting common shares.

An unlimited number of Class "A" preferred shares which are entitled to a non-cumulative XXXXXXXXXX% quarterly dividend on the amount paid up thereon; voting; redeemable for the amount paid up thereon plus declared and unpaid dividends; and, upon a liquidation of the company, entitled to receive in priority to all other classes of shares, 100% of the amount paid thereon plus declared and unpaid dividends.

An unlimited number of Class "B" preferred shares which are entitled to receive a non-cumulative XXXXXXXXXX% quarterly dividend on the amount paid up thereon; non-voting; redeemable and retractable for the amount paid up thereon plus declared and unpaid dividends; and, upon a liquidation of the company, entitled to receive, subject to the rights of the Class "A" preferred shares but in priority to all other classes of shares, 100% of the amount paid thereon plus declared and unpaid dividends.

An unlimited number of Class "C" preferred shares which are entitled to receive a non-cumulative XXXXXXXXXX% quarterly dividend on the amount paid up thereon; non-voting; redeemable for the amount paid up thereon plus declared and unpaid dividends; and, upon a liquidation of the company, entitled to receive, subject to the rights of the Class "A" preferred and Class "B" preferred shares but in priority to all other classes of shares, 100% of the amount paid thereon plus declared and unpaid dividends.

An unlimited number of Class "D" preferred shares which are entitled to receive a non-cumulative XXXXXXXXXX% quarterly dividend on the amount paid up thereon; non-voting; redeemable for the amount paid up thereon plus declared and unpaid dividends; and, upon a liquidation of the company, entitled to receive, subject to the rights of the Class "A" preferred, Class "B" preferred and Class "C" preferred shares but in priority to all other classes of shares, 100% of the amount paid thereon plus declared and unpaid dividends.

An unlimited number of Class "E" preferred shares which are entitled to receive a non-cumulative XXXXXXXXXX% quarterly dividend on the amount paid up thereon; non-voting, redeemable for the amount paid up thereon plus declared and unpaid dividends; and, upon a liquidation of the company, entitled to receive, subject to the rights of the Class "A" preferred, Class "B" preferred, Class "C" preferred and Class "D" preferred shares but in priority to all other classes of shares, 100% of the amount paid thereon plus declared and unpaid dividends.

an unlimited number of Class "F" preferred shares which are entitled to receive a non-cumulative XXXXXXXXXX% quarterly dividend on the amount paid up thereon; non-voting; redeemable for the amount paid up thereon plus declared and unpaid dividends; and, upon a liquidation of the company, entitled to receive, subject to the rights of the Class "A" preferred, Class "B" preferred, Class "C" preferred and Class "D" preferred shares but in priority to all other classes of shares, 100% of the amount paid thereon plus declared and unpaid dividends.

The issued and outstanding share capital of XXXXXXXXXX is held by their holders as capital property as follows:

Shareholder Class Number

XXXXXXXXXX

XXXXXXXXXX

The ACB and PUC of the shares is as follows:

Class ACB PUC

XXXXXXXXXX

The respective aggregate redemption value of the Class "B" and Class "C" shares is $XXXXXXXXXX and $XXXXXXXXXX None of the shares of XXXXXXXXXX owned by any of the shareholders referred to herein was acquired by such shareholders in contemplation of the proposed transactions described below.

XXXXXXXXXX are resident in Canada and are over the age of 18 years.

As of XXXXXXXXXX in its CDA and it had RDTOH of $XXXXXXXXXX does not have any unutilized losses for tax purposes.

XXXXXXXXXX is an investment company which mainly owns real estate and shares of other companies. The assets of XXXXXXXXXX consist of the following:

Cash and Near Cash Assets

Cash

Accounts Receivable

Prepaid Expenses

Advances to Related Companies
(on demand and non-interest-bearing)

Investment Assets

A XXXXXXXXXX% undivided co-ownership
interest in a building
located at XXXXXXXXXX

A XXXXXXXXXX% undivided
co-ownership interest
in land and a building
located at XXXXXXXXXX
A XXXXXXXXXX% undivided co-ownership
interest in land and a
building located at XXXXXXXXXX

A XXXXXXXXXX% undivided co-
ownership interest in land
and a building located at
XXXXXXXXXX

A XXXXXXXXXX% undivided co-ownership
interest in a building
located at XXXXXXXXXX

Furniture and Fixtures
(Class 8 )

Automobile
(Class 10 )

Investments in related
companies -

XXXXXXXXXX

A XXXXXXXXXX% interest in
XXXXXXXXXX

Goodwill

You have represented that all of the real estate owned by XXXXXXXXXX will be investment property for purposes of paragraph 55(3)(b) since they are all rental properties held as long-term investments. You have also represented that the loans to related companies will be considered cash or near cash property for purposes of paragraph 55(3)(b) since the loans are payable on demand with no specific terms of repayment.

The investment in XXXXXXXXXX represents, in your estimation, approximately XXXXXXXXXX% of the fair market value of XXXXXXXXXX owns 1/3 of the common voting shares of XXXXXXXXXX As it is your view that XXXXXXXXXX does not have significant influence over XXXXXXXXXX the shares of XXXXXXXXXX will be treated as investment property for purposes of paragraph 55(3)(b).

XXXXXXXXXX has no assets or liabilities and is the registered, though not beneficial, owner of XXXXXXXXXX This interest has an estimated value of $XXXXXXXXXX.

Immediately before the transfers of property described in paragraph 13 below and before the allocation of liabilities described in paragraph 8 below, the property of XXXXXXXXXX will be classified into three types of property for the purposes of paragraph 55(3)(b), as follows:

cash or near cash property, comprising all of the current assets of XXXXXXXXXX including, in particular, cash, accounts receivable, rights arising from the prepayment of certain expenses, advances to related companies and income taxes recoverable;

investment property, comprising all of the assets of XXXXXXXXXX other than any cash or near cash property, any income from which would for the purposes of the Act, be income from property or a specified investment business, including the shares in XXXXXXXXXX

(c) business property, comprising all of the assets of XXXXXXXXXX other than cash or near cash property, any income from which would, for purposes of the Act, be income from a business other than a specified investment business.

In determining the net fair market value of each type of property owned by XXXXXXXXXX immediately before the transfers of property described in paragraph 13 below, the liabilities of XXXXXXXXXX will be allocated to and be deducted in the calculation of the net fair market value of each type of property of XXXXXXXXXX as follows:

(a) Current liabilities (including the current portion of long-term debt) will be allocated to each cash or near cash property to the extent of the fair market value of such property.

(c) Liabilities, other than current liabilities, will be first allocated to the specific properties to which they relate, if any, and then to other properties of the same type, to the extent of the net fair market value of that particular type of property.

(d) Excess unallocated liabilities (including current liabilities remaining unallocated after step (a) above), if any, will then be allocated to the cash or near cash, investment and business property of XXXXXXXXXX on a pro rata basis, based on the relative net fair market value of each type of property resulting after the allocation of liabilities in accordance with the rules described in steps (a) and (b) above and prior to the allocation of each excess liability.

PROPOSED TRANSACTIONS

A new company will be incorporated under the CBCA (hereinafter referred to as "Newco"). Newco will be a CCPC and a TCC.

The authorized capital of Newco will include the following:

An unlimited number of voting Class "A" common shares.

An unlimited number of voting, Class "E" preferred shares which will be entitled to a monthly non-cumulative preferential dividend equal to XXXXXXXXXX% of the consideration for which such shares were issued and retractable and redeemable for an amount equal to the fair market value of the consideration for which such shares were issued.

An unlimited number of non-voting, Class "F" preferred shares which will be entitled to a monthly non-cumulative preferential dividend equal to XXXXXXXXXX% of the consideration for which such shares were issued and retractable and redeemable for an amount equal to the fair market value of the consideration for which such shares were issued.

Upon incorporation, XXXXXXXXXX will each subscribe for XXXXXXXXXX Class "A" common shares of Newco at a subscription price of $XXXXXXXXXX per share. The group that controls XXXXXXXXXX have always acted in concert to control XXXXXXXXXX and it is fully intended that the same group will act in concert to control Newco.

The articles of XXXXXXXXXX will be amended to convert all of the existing XXXXXXXXXX voting common shares into XXXXXXXXXX voting common shares and XXXXXXXXXX non-voting common shares. The purpose of these transactions is to avoid a potential "corporate incest" situation which may result on the transfer of property between XXXXXXXXXX and Newco.

Each shareholder of XXXXXXXXXX will transfer, at fair market value, to Newco, a number of its voting common shares, non-voting common shares, Class "B" preferred shares and Class "C" preferred shares of XXXXXXXXXX (collectively referred to as the "Shareholder Shares") such that the aggregate fair market value of the Shareholder Shares owned by Newco immediately after such transfer will be equal to that proportion (the "XXXXXXXXXX Proportion") of the aggregate fair market value of all of the issued and outstanding shares of XXXXXXXXXX that:

the fair market value of all investment assets net of any liabilities relating thereto, other than the fair market value of XXXXXXXXXX net of its mortgage

is of

the net fair market of all the investment assets of XXXXXXXXXX immediately before such transfer.

As consideration for the transfers described herein, Newco will issue to each of the shareholders, Class "F" shares of its capital stock having an aggregate fair market value and redemption value equal to the fair market value of the Shareholder Shares so transferred to Newco by that shareholder.

For greater certainty, the number of shares of XXXXXXXXXX to be transferred to Newco by each shareholder of XXXXXXXXXX will be that number which will result in the fair market value of the Class "F" shares of Newco being held by the shareholders to be in the same proportions as the fair market value of the shares held by the shareholders of XXXXXXXXXX immediately before this transaction. XXXXXXXXXX will transfer the same number of voting common shares of XXXXXXXXXX so as to ensure that there will not be a change of control of XXXXXXXXXX for purposes of the Act. Newco will own at least XXXXXXXXXX% of the votes and value of XXXXXXXXXX but will not, at any time, have voting control XXXXXXXXXX The common shares of XXXXXXXXXX referred to herein will not be taxable preferred shares.

Each of the shareholders and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), pursuant to subsection 85(1) in respect of the transfer of the Shareholder Shares by that shareholder as described in paragraph 11 above to Newco. The agreed amount in respect of the Shareholder Shares so transferred by each shareholder will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) to that shareholder.

The amount that will be added to the stated capital of the Class "F" shares of Newco as a result of the acquisition by Newco of the Shareholder Shares will not exceed the greater of the aggregate PUC of the Shareholder Shares or the aggregate ACB of those Shareholder Shares, as determined under paragraphs 84.1(2)(a) and (a.1), to the shareholders immediately before the disposition.

Immediately after the share transfers described in paragraph 11 above, XXXXXXXXXX will transfer, at fair market value, to Newco, cash or near cash property such that the aggregate net fair market value thereof (net of any liabilities of XXXXXXXXXX assumed by Newco as described herein) will be equal to the XXXXXXXXXX Proportion of the net fair market value of all of the cash or near cash property of XXXXXXXXXX immediately before the transfer, as determined under paragraphs 7 and 8 above. As consideration for the transfer of the cash or near cash property of XXXXXXXXXX Newco will assume certain current liabilities of XXXXXXXXXX related thereto including a portion of the current portion of the mortgage on the real estate and will issue to XXXXXXXXXX Class "E" shares of its capital stock having a fair market value and a redemption amount equal to the amount by which the aggregate fair market value of the cash or near cash property received by Newco exceeds the fair market value of the liabilities assumed by Newco.

The amount that will be added to the stated capital account of the Class "E" shares of Newco issued as a result of the acquisition by Newco of the cash or near cash property of XXXXXXXXXX (the "XXXXXXXXXX Cash") as described herein will be equal to the fair market value of the XXXXXXXXXX Cash so received by Newco less the amount of the liabilities assumed.

The transfer of the XXXXXXXXXX Cash is being effected prior to the transfer of the other assets so as to ensure that immediately subsequent to the aforementioned transfer, XXXXXXXXXX will own more than XXXXXXXXXX% of the voting shares of Newco. This has been done to ensure that XXXXXXXXXX land transfer tax) will not be exigible upon the transfer of the real estate.

Immediately following the transfer of the XXXXXXXXXX Cash to Newco, XXXXXXXXXX will transfer, at fair market value, to Newco

investment property, other than XXXXXXXXXX and

business property, if any,

such that the net fair market value of each such type of property to be transferred from XXXXXXXXXX to Newco (net of any liabilities of XXXXXXXXXX assumed by Newco as described herein) will be equal to the XXXXXXXXXX Proportion of the net fair market value of all of the investment property and business property of XXXXXXXXXX as the case may be, immediately before the transfer.

As consideration for the property so transferred, Newco will assume certain liabilities of XXXXXXXXXX and will issue to XXXXXXXXXX additional Class "E" shares of Newco having an aggregate redemption price and an aggregate fair market value equal to the amount by which the aggregate fair market value of the property transferred to Newco as described herein exceeds the amount of liabilities assumed by Newco in relation thereto. The liabilities assumed by Newco will be specifically allocated to particular properties. In no case will the liabilities allocated to an asset exceed the agreed amount, as described in paragraph 15 below, in respect of that asset.

XXXXXXXXXX and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), pursuant to subsection 85(1) in respect of the transfers of any eligible property of XXXXXXXXXX which is transferred to Newco as described in paragraph 14 above, the fair market value of which exceeds its cost amount. The agreed amount in respect of each transferred property will be equal to

(a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); and

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii).

The agreed amount in respect of each of the properties so transferred will be less than or equal to its fair market value at the time of the transfer.

The amount that will be added to the stated capital of the Class "E" shares of Newco which are to be issued as consideration for the property of XXXXXXXXXX which will be transferred to Newco as described in paragraph 14 above, will be equal to the amount by which the aggregate cost of the property to Newco (determined pursuant to subsection 85(1) where relevant) exceeds the liabilities assumed by Newco as consideration therefor.

Immediately after the registration of the transfer of the real estate described in paragraph 14 above at the appropriate registry office, Newco will redeem all of its Class "E" shares held by XXXXXXXXXX for an amount equal to their fair market value (the "Redemption Price") and, as payment of the Redemption Price, will issue to XXXXXXXXXX a non-interest-bearing promissory note (the "Newco Note") payable on demand having a principal amount and fair market value equal to the Redemption Price. XXXXXXXXXX will accept the Newco Note as full payment for the Redemption Price of the Class "E" shares so redeemed.

At the end of the day on which the Class "E" shares are redeemed by Newco, Newco will cause its first taxation year to end.

On the first business day following the redemption of the Class "E" shares of Newco as described in paragraph 16 above, XXXXXXXXXX will purchase for cancellation or redeem all of its common shares, Class "B" preferred shares and Class "C" preferred shares owned by Newco at their fair market value or redemption price, as the case may be. XXXXXXXXXX will pay the purchase price for such shares by returning the Newco Note described in paragraph 16 above to Newco and as a consequence thereof the Newco Note will be settled. Newco will accept the Newco Note as full payment for the purchase price of the common shares, Class "B" preferred shares and Class "C" preferred shares of XXXXXXXXXX so purchased or redeemed.

Immediately following the transfers of assets described in paragraphs 13 and 14 above, the redemption of the Newco Class "E" shares as described in paragraph 16 above and the purchase of the XXXXXXXXXX common shares, Class "B" preferred shares and Class "C" preferred shares as described in paragraph 18 above, the aggregate net fair market value of each type of property retained by XXXXXXXXXX determined in accordance with the guidelines described in paragraphs 7 and 8 above, will be equal to that proportion of the aggregate net fair market value of that type of property of XXXXXXXXXX immediately before the transfers described in paragraphs 13 and 14 above that:

the aggregate fair market value of all of the issued and outstanding shares of XXXXXXXXXX other than those held by Newco, immediately before the transfers of property described in paragraphs 13 and 14 above

is of

the aggregate fair market value of all of the issued and outstanding shares of XXXXXXXXXX immediately before such transfers.

ADDITIONAL INFORMATION

Except as described herein, no liabilities have been or will be incurred by, and no assets have been or will be acquired by or disposed of by XXXXXXXXXX, or a corporation controlled by it, in contemplation of and before the proposed transfers of properties described in paragraph 13 above.

Neither Newco nor XXXXXXXXXX is or, at the time of the proposed transactions, will be, an SFI.

None of the shares of XXXXXXXXXX or Newco have been or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2), that is given by an SFI or a specified person in relation to any such SFI for any of the purposes described in that subsection.

None of the shares of XXXXXXXXXX or Newco have been or will be issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5).

None of the parties is contemplating a disposition of any of the shares of XXXXXXXXXX or Newco other than as described herein.

None of the parties is contemplating an acquisition of control of XXXXXXXXXX or Newco other than the acquisition of control of Newco described herein.

It is not contemplated that any of the parties will sell or transfer any property as part of the series of transactions or events described herein, other than in the normal course of business, to a partnership or person who is not related to the vendor or transferor, except as described herein.

Federal income tax returns of XXXXXXXXXX are filed at the XXXXXXXXXX Taxation Services Office.

PURPOSE OF THE PROPOSED TRANSACTIONS

The shareholders of XXXXXXXXXX are concerned about the volatile real estate market and the risks related to XXXXXXXXXX in particular and would like to isolate as much as possible of the assets of XXXXXXXXXX (other than XXXXXXXXXX) in a separate company since it would be difficult to obtain the mortgagor's approval to transfer XXXXXXXXXX to another company.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts and proposed transactions and the purpose of the proposed transactions, we confirm the following:

Upon the redemption by Newco of its Class E shares held by XXXXXXXXXX, as described in paragraph 16 above, and the purchase for cancellation and redemption by XXXXXXXXXX of its common shares, Class B preferred shares and Class C preferred shares held by Newco, as described in paragraph 18 above, the amount by which the amount paid on the redemption or purchase for cancellation, as the case may be, exceeds the PUC of the particular shares redeemed or purchased for cancellation will be deemed to be a dividend paid by the particular payor and received by the particular recipient, by virtue of paragraph 84(3)(a) or 84(3)(b), as applicable. Each such dividend will be deductible by the particular recipient under subsection 112(1) in computing its taxable income for the taxation year in which it is deemed to have received such dividend and such deduction will not be precluded by any of subsections (2.1), (2.2) or (2.4) and the provisions of subsection 112(3) will apply to any loss which may otherwise arise to the recipient as a result of the redemption or purchase for cancellation.

The provisions of subsection 55(2) will not apply to the dividends described in ruling A above by virtue of the application of paragraph 55(3)(b) provided that, as part of the series of transactions or events that includes the proposed transactions described herein, there is no:

disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii); or

acquisition of property in the circumstances described in subparagraphs 55(3.1)(c) or (d),

which has not been described herein.

By virtue of subsection 186(2) and paragraph 186(4)(a), XXXXXXXXXX will be connected with Newco and Newco will be connected with XXXXXXXXXX Consequently:

(i) provided that Newco is not entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to pay the dividend referred to in ruling A above, XXXXXXXXXX will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(ii) Newco will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in its taxation year in which the taxable dividend referred to in ruling A above, is received by it in an amount equal to 1/4 of that proportion of 4 times the dividend refund to which XXXXXXXXXX will become entitled as a result of the payment of such taxable dividend, that the amount of the taxable dividend so received by Newco from XXXXXXXXXX is of the aggregate of all taxable dividends paid by XXXXXXXXXX in its taxation year in which the purchases for cancellation and redemptions described in paragraph 18 above take place.

The common shares of XXXXXXXXXX that are purchased for cancellation as described in ruling A above will not be considered to become taxable preferred shares as a result of the proposed transactions described above, in and by themselves.

The dividend described in ruling A above that is deemed to be received by Newco from XXXXXXXXXX on the respective redemption of the Class B and Class C preferred shares of XXXXXXXXXX held by Newco will be deemed to be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" contained in subsection 191(1), and an "excepted dividend" by virtue of paragraph (b) of the definition of "excepted dividend" contained in section 187.1 and, therefore, will not be subject to tax under Parts IV.1 and VI.1.

The dividend described in ruling A above that is deemed to be received by XXXXXXXXXX from Newco on the redemption of the Class E preferred shares held by Newco will be deemed to be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" contained in subsection 191(1), and an "excepted dividend" by virtue of paragraph (b) of the definition of "excepted dividend" contained in section 187.1 and, therefore, will not be subject to tax under Parts IV.1 and VI.1.

The cancellation of the Newco Note, as described in paragraph 18 above, will not give rise to a "forgiven amount" for purposes of section 80.

In respect of the transfers of assets described in paragraphs 11 and 14 above, provided the relevant parties jointly elect under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), a vendor's proceeds of disposition of, and a purchaser's cost of, a particular property transferred will, by virtue of paragraph 85(1)(a), be deemed to be equal to the amounts agreed upon in respect of that property, as described in paragraphs 12 and 15 above. For greater certainty, paragraph 85(1)(e.2) will not be applicable in respect of the transfers.

Provided that the liabilities to be assumed by Newco, as described in paragraphs 13 and 14 above, constitute borrowed money that had been used by XXXXXXXXXX for the purpose of earning income from its business or from property, or used to acquire property for the purpose of gaining or producing income, such that any interest paid by XXXXXXXXXX on such debt was deductible to it under paragraph 20(1)(c), an amount paid in the year or payable in respect of the year pursuant to a legal obligation to pay interest on such debt of XXXXXXXXXX so assumed by Newco will be deductible pursuant to the provisions of paragraph 20(1)(c) provided that the amount of such interest is reasonable in the circumstances and that Newco continues to use the borrowed money for the purpose described in subparagraph 20(1)(c)(i), or continues to use the property acquired from XXXXXXXXXX for the purpose described in subparagraph 20(1)(c)(ii).

The provisions of subsections 15(1), 56(2) and 246(1) will not be applied as a result of the proposed transactions described herein, in and by themselves.

The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada and are binding provided the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch