2096 Ruling 9601653 - DISTRESSED PREFERRED SHARES

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:

Financial Difficulty and issue of distress preferred shares where CMHC had insured debts, also complicated 4 Newco structure.

Position:

Ruling issued.

Reasons:

We have ruled in the past that even though debts are fully insured by CMHC the CMHC insurance does not represent a source of funding that a borrower can access to remedy a defaulted debt (E9001913).

XXXXXXXXXX							960165

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-noted taxpayers. You have advised that to the best of your knowledge and that of all the taxpayers involved, none of the issues raised in this letter are being considered by any Tax Services Office and/or Taxation Centre in connection with any tax return already filed, nor are any of these issues under objection or appeal.

Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act").

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

FACTS

1. XXXXXXXXXX is a corporation formed and carrying on business under the XXXXXXXXXX. It is a "taxable Canadian corporation" as defined in subsection 89(1) of the Act and a "specified financial institution" as defined in subsection 248(1) of the Act. XXXXXXXXXX Revenue Canada account number is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.

2. XXXXXXXXXX were incorporated under the XXXXXXXXXX and are "taxable Canadian corporations and "private corporations" as defined in subsection 89(1) of the Act. These corporations all have XXXXXXXXXX fiscal year ends, effective with XXXXXXXXXX and deal with the XXXXXXXXXX Tax Services Office. Their Revenue Canada account numbers are as follows:

XXXXXXXXXX

3. All of the outstanding common shares of XXXXXXXXXX are owned equally by XXXXXXXXXX (the "Shareholders") who are individual Canadian residents XXXXXXXXXX. The common shares of XXXXXXXXXX have nominal paid-up capital. XXXXXXXXXX is a wholly owned subsidiary of XXXXXXXXXX and XXXXXXXXXX is a wholly owned subsidiary of XXXXXXXXXX.

4. Because the financial affairs of XXXXXXXXXX are inextricably linked with each other through the pooling of cash flows, intercorporate loans & guarantees and incurring and reallocating of common costs, this group of companies, along with any other directly or indirectly owned subsidiaries, are herein collectively referred to as "XXXXXXXXXX" for the purposes of this letter, except where otherwise noted.

5. XXXXXXXXXX deals at arms length with the Shareholders, and XXXXXXXXXX within the meaning of section 251 of the Act.

6. XXXXXXXXXX at various locations in XXXXXXXXXX employs approximately XXXXXXXXXX full and part time employees,

XXXXXXXXXX

7. XXXXXXXXXX facilities XXXXXXXXXX are financed by XXXXXXXXXX through first mortgage loans with an interest rate of XXXXXXXXXX% and principal amounts outstanding as at XXXXXXXXXX as set out below. These mortgage loans ("XXXXXXXXXX Debt") are fully insured by Canada Mortgage and Housing Corporation ("CMHC"). The XXXXXXXXXX Debt includes $XXXXXXXXXX set aside in a term deposit as collateral to secure the XXXXXXXXXX operating line (see 8 below) and is reduced by $XXXXXXXXXX held in escrow by XXXXXXXXXX as a term deposit.

	XXXXXXXXXX			Debt Outstanding
	XXXXXXXXXX

XXXXXXXXXX

8. The approximate amount of other XXXXXXXXXX debts presently outstanding and their status are summarized as follows:

Debt Outstanding

XXXXXXXXXX

XXXXXXXXXX

Notes:

(1) These are mortgages and loans other than those owing to XXXXXXXXXX. Payments of principal and interest have sometimes been delayed. Several mortgage debts have matured and remain unpaid.

(2) XXXXXXXXXX in arrears, numerous creditors have commenced legal actions to obtain recovery.

(3) XXXXXXXXXX

(4) Fully collateralized line of credit, however, this line is fully drawn and no scheduled principal payments are required.

FINANCIAL DIFFICULTY

9. XXXXXXXXXX

invested heavily in renovating, refurbishing and expansion of its facilities.

XXXXXXXXXX

has for some time attempted to reduce its debt servicing costs by restructuring these debts.

10. As a result of XXXXXXXXXX increased debt servicing costs XXXXXXXXXX has been unable to pay various trade payables and other liabilities on a current basis for quite some time. As a result, numerous creditors had commenced legal proceedings, obtained summary judgments and become execution creditors.

XXXXXXXXXX

The registration of such writs, executions and encumbrances, as well as the existence of a number of material adverse changes to the operations and financial viability of XXXXXXXXXX constituted technical events of default under the XXXXXXXXXX Debt.

11. XXXXXXXXXX became extremely concerned with the increased financial pressure and demands being imposed on XXXXXXXXXX by these other secured and unsecured creditors. On

XXXXXXXXXX

12. XXXXXXXXXX

With this advance and disbursement of funds, XXXXXXXXXX other creditors were prepared to ease their financial demands, pending the outcome of the final debt restructuring plan of XXXXXXXXXX.

13. Throughout this period XXXXXXXXXX attempted to refinance their debt.

XXXXXXXXXX

and various other private lenders and financial institutions in attempts to refinance their indebtedness. All of these attempts to refinance were unsuccessful as XXXXXXXXXX debt level was too high.

XXXXXXXXXX

14. XXXXXXXXXX

15. XXXXXXXXXX

Additionally, the remuneration of the Shareholders, being $XXXXXXXXXX each for fiscal XXXXXXXXXX, is based on their extensive time commitment, experience and financial commitment to XXXXXXXXXX, within industry standards for similar positions and responsibilities within the industry. Furthermore, for fiscal XXXXXXXXXX, each shareholder agreed not to take out more than $XXXXXXXXXX in remuneration. Remuneration of the shareholders for fiscal XXXXXXXXXX and beyond will be addressed in the annual business plan in conjunction with discussions with XXXXXXXXXX. The remuneration paid to the Shareholders is made by way of dividends and/or salary and benefits.

16. XXXXXXXXXX inability to restructure its debts, raise new equity or significantly reduce other expenditures continues to result in certain creditors applying extreme pressure against XXXXXXXXXX. Garnishments and lien actions continue and certain mortgage payments on non-XXXXXXXXXX Facilities are deferred. Although XXXXXXXXXX does not wish any additional exposure to XXXXXXXXXX in order to prevent such creditors from petitioning XXXXXXXXXX into bankruptcy or taking some other similar action which would prevent XXXXXXXXXX from pursuing the best long term solution to XXXXXXXXXX financial problems, XXXXXXXXXX had to advance an additional $XXXXXXXXXX under the XXXXXXXXXX Debt and an additional $XXXXXXXXXX to meet the demands of various unsecured creditors, XXXXXXXXXX. These funds were disbursed in order to allow XXXXXXXXXX time to finalize XXXXXXXXXX long term financial solution.

17. With no access to funds, XXXXXXXXXX has been unable to negotiate significant compromises with creditors

XXXXXXXXXX

Some deferred or reduced payment arrangements have been agreed to, but due to cash constraints, XXXXXXXXXX has missed certain agreed payments which further aggravates the already tenuous relationships XXXXXXXXXX has with these creditors.

18. In addition to the emergency advances (described in 16 above), XXXXXXXXXX has been and continues to be required to provide bridge financing to meet payroll requirements on numerous occasions since

XXXXXXXXXX

Although XXXXXXXXXX continues to provide bridge financing while a long term solution to XXXXXXXXXX problems is being pursued, including the proposed issue of distressed preferred shares described herein, XXXXXXXXXX is unwilling to provide such financing on an ongoing basis in the absence of an acceptable long term solution.

19. Numerous discussions have taken place among XXXXXXXXXX agreeing that the issuance of distressed preferred shares is the only remaining solution available to enable XXXXXXXXXX to continue XXXXXXXXXX while at the same time, allowing XXXXXXXXXX to achieve long term financial stability and satisfy all its creditors.

20. Without the distressed preferred financing XXXXXXXXXX projects that it would continue to have a balance of overdue trade debts outstanding of approximately $XXXXXXXXXX in addition to current payables and its fully drawn XXXXXXXXXX operating line. Both senior management of XXXXXXXXXX believe that it is very unlikely that these creditors will wait five years or more for payment without taking actions which would further impair XXXXXXXXXX ability to operate effectively or continue as a going concern. Further, the number of garnishment actions consumes senior management's time, causes substantial legal fees and is of constant concern to the XXXXXXXXXX. Currently, senior management of XXXXXXXXXX spend a large amount of time dealing with XXXXXXXXXX financial problems, rather than running the business.

21. None of XXXXXXXXXX or any other lender are prepared to provide additional lines of credit, term facilities or other financial support to fund XXXXXXXXXX operations without a distressed preferred share financing. In the event that such a financing is not obtained, XXXXXXXXXX will seriously consider demanding repayment of the XXXXXXXXXX Debt as a consequence of the numerous events of default that have occurred under the loan agreements.

XXXXXXXXXX

If that occurs XXXXXXXXXX would not be able to honor any repayment demand made by XXXXXXXXXX would reasonably be expected to default on payments of principal and interest on the XXXXXXXXXX Debt and be forced into formal insolvency proceedings by its creditors.

PROPOSED TRANSACTIONS

22. XXXXXXXXXX will each incorporate a new corporation ("Newco") under the XXXXXXXXXX. Each Newco will be a taxable Canadian corporation within the meaning assigned by subsection 89(1) of the Act and will have the same fiscal year end as its respective owner.

23. The authorized capital of each Newco will consist of XXXXXXXXXX common shares ("Newco Common Shares") and a class of preferred shares to be designated as Class XXXXXXXXXX preferred shares ("Newco Preferred Shares") with the terms and conditions of the shares set out in 24 and 25 below. The articles of incorporation of each Newco will restrict each Newco from carrying on any business, incurring any liabilities or acquiring any assets except as contemplated herein.

24. The principal attributes of the Newco Common Shares to be issued by each Newco are that they will be entitled to carry one vote per share at all meetings of shareholders (other than for meetings of holders of Newco Preferred Shares) and will be entitled, subject to the rights and privileges of the Newco Preferred Shares, to share equally in such dividends as may be declared on liquidation or dissolution; provided that no dividends may be declared or paid on any Newco Common Shares while any Newco Preferred Shares are issued and outstanding.

25. The principal attributes of the Newco Preferred Shares to be issued by each Newco will be as follows:

(a) The Newco Preferred Shares will be issued for $XXXXXXXXXX per share and will rank ahead of the Newco Common Shares with respect to the payment of dividends and upon any distribution on a liquidation, dissolution or winding-up of Newco the holders of Newco Preferred Shares will be entitled to receive in priority to the holders of the Newco Common Shares an amount equal to the amount for which such share was issued plus any accrued and unpaid dividends (the "Redemption Amount");

(b) The holders of the Newco Preferred Shares will not generally be entitled to notice of, or to vote at, any meetings of the shareholders of Newco; however, such shareholders will be entitled to vote in all circumstances required by law, wherever any of the terms attaching to the Newco Preferred Shares are to be amended and after a "Retraction Event" has occurred (as defined in 26 below) unless such event is waived by XXXXXXXXXX in its sole discretion;

(c) Retractable by any holder at any time at the Redemption Amount;

(d) XXXXXXXXXX or any other holder may sell or transfer all or any portion of their Newco Preferred Shares to another taxable financial institution or institutions with or without credit support from XXXXXXXXXX to the other holders and with or without the consent of the issuing Newco or any of XXXXXXXXXX

(e) Cumulative dividends will be payable on the Newco Preferred Shares at an annual dividend rate of not more than XXXXXXXXXX%. Newco Preferred Shares dividends will be calculated and paid monthly commencing with the first month after issue;

(f) Preferential cumulative on the Newco Preferred Shares may be increased upon the occurrence of an "Adverse Yield Event" as defined in 33 below, by the amount of any "Rate Difference" as defined in 32 below;

(g) The Newco Preferred Shares will be redeemable in whole or in part at any time for cash or applicable part of the XXXXXXXXXX Debt at the option of the issuing Newco, at an amount for each Newco Preferred Share to be redeemed equal to the Redemption Amount. Notwithstanding, each Newco Preferred Share shall be redeemed without notice on or after the XXXXXXXXXX of issue of the Newco Preferred Shares.

26. A "Retraction Event" with respect to the Newco Preferred Shares shall include any of the following events:

(a) any Newco shall have failed to declare and pay in full the regular dividend payable on its Newco Preferred Shares as and when the same is payable in accordance with the terms and conditions of the shares;

(b) any Newco shall have failed to redeem all or any part of its Newco Preferred Shares at the time and in the manner required by the terms and conditions of the shares;

(c) any of XXXXXXXXXX shall have failed to make a contribution of capital or principal repayment on its respective Portion of the Total XXXXXXXXXX Debt (as defined in 28 below) as necessary to fund a dividend payment on, or redemption of, its respective Newco's Newco Preferred Shares;

(d) an order shall be made or an effective resolution shall be passed for the winding-up, liquidation or dissolution of any of XXXXXXXXXX or any Newco thereof;

(e) any of XXXXXXXXXX or any Newco thereof shall make a general assignment for the benefit of its creditors pursuant to a proposal under the XXXXXXXXXX or shall be declared bankrupt, or if a custodian, sequestrator, receiver or manager (or any combination thereof) or any other officer with similar powers shall be appointed of any Newco or any of XXXXXXXXXX or of the property of any Newco or any of XXXXXXXXXX or any part thereof that is, in the opinion of XXXXXXXXXX, or other holder of the Newco Preferred Shares, acting reasonably, a significant part thereof;

(f) An encumbrancer shall take possession of the property of, or any part thereof, of XXXXXXXXXX or any Newco thereof, that is, in the opinion of XXXXXXXXXX or other holder of Newco Preferred Shares, acting reasonably, a significant part thereof, or if a distress or execution or any similar process be levied or enforced there against, and remain unsatisfied for such period as would permit such property, or such part thereof, to be sold thereunder;

(g) There is an adverse change in the affairs, including without limitation a change in the financial condition, business, operations, assets or properties of XXXXXXXXXX or any Newco thereof, which, in the opinion of XXXXXXXXXX or other holder of Newco Preferred Shares acting reasonably, will materially affect the ability of any of XXXXXXXXXX to perform its obligations under the "Support Agreement" (as discussed in 32 below) or adversely impact upon the security position of XXXXXXXXXX or the holder;

(h) Any member of XXXXXXXXXX fails to comply with covenants contained in any agreements with respect to the Newco Preferred Shares or makes any misrepresentation in those agreements or any such agreement ceases to be in full force and effect, is declared null and void or its enforceability is contested or denied by any Newco or XXXXXXXXXX.

(i) Any Newco takes, or proposes to take, any action contrary to its articles;

(j) A change of control (within the meaning of the Act) of any of XXXXXXXXXX or any Newco thereof, occurs without the prior written consent of XXXXXXXXXX and all other holders of Newco Preferred Shares;

(k) Any of XXXXXXXXXX ceases to carry on all or a substantial part of its business or makes a bulk sale or transfer of all or a substantial part of its undertaking provided that such a cessation, sale, or transfer shall not be a Retraction Event in the event that such cessation, sale or transfer does not, in the opinion of XXXXXXXXXX or other holder, acting reasonably (i) materially adversely affect XXXXXXXXXX, or (ii) materially adversely affect any of XXXXXXXXXX or any Newco thereof, capacity or ability to perform any of their obligations contained in the agreements entered into to implement this transaction.

(l) XXXXXXXXXX or other holder of the Newco Preferred Shares, pursuant to applicable law or an order or direction of a regulatory authority having jurisdiction, is required to dispose of all or any portion of the Newco Preferred Shares, provided that XXXXXXXXXX or such other holder of the Newco Preferred Shares has first requested an exemption or similar relief from such requirement (if available) and the exemption or similar relief has been denied,

(m) XXXXXXXXXX provides XXXXXXXXXX or other holder of Newco Preferred Shares any representation or warranty which is false or misleading in any material adverse respect when made;

(n) A default under the Total XXXXXXXXXX Debt (as defined in 28 below) or any other security affecting any of XXXXXXXXXX that has priority over the Total XXXXXXXXXX Debt occurs or a default under any other security affecting any of XXXXXXXXXX that is subsequent in priority to the Total XXXXXXXXXX Debt occurs and any step is taken by the creditor to enforce its security;

(o) If, after the date on which a ruling is issued by Revenue Canada with respect to the Newco Preferred Shares, the Act or Regulations are changed or a similar event occurs in a manner which in the opinion of XXXXXXXXXX or other holder of Newco Preferred Shares, acting reasonably, significantly reduces the after tax return to XXXXXXXXXX or other holder of the Newco Preferred Shares or otherwise has a significant adverse impact on a holder of Newco Preferred Shares, or any notice is given that this ruling is no longer applicable; or

(p) Property tax on a XXXXXXXXXX Facility remains unpaid after the applicable due date.

27. Each of XXXXXXXXXX will subscribe for XXXXXXXXXX Newco Common Shares of its respective Newco for an aggregate subscription price of $XXXXXXXXXX. The Newco Common Shares will be pledged by each of XXXXXXXXXX to XXXXXXXXXX to secure XXXXXXXXXX present and future obligations to XXXXXXXXXX.

28. XXXXXXXXXX will provide additional advances to each of XXXXXXXXXX the aggregate amount of which will be $XXXXXXXXXX (the "Additional Debt"), which will be used to repay and consolidate their respective portion of the $XXXXXXXXXX emergency advance from XXXXXXXXXX retire past due balances of accounts payable (see paragraph 8) and pay their portion of the estimated $XXXXXXXXXX refinancing expenses of XXXXXXXXXX incurred in respect of this transaction. The Additional Debt together with the XXXXXXXXXX Debt of $XXXXXXXXXX before escrow (see paragraph 7), will result in the total amount owing to XXXXXXXXXX (excluding accrued interest to closing, if any, which XXXXXXXXXX shall pay separately) by XXXXXXXXXX being approximately $XXXXXXXXXX (the "Total XXXXXXXXXX Debt"). XXXXXXXXXX will also repay their respective portion of the $XXXXXXXXXX line of credit by having XXXXXXXXXX transfer to XXXXXXXXXX the $XXXXXXXXXX term deposit held as collateral for the line of credit, or an equivalent amount of cash. The "Portion of the Total XXXXXXXXXX Debt" of XXXXXXXXXX is approximately as follows:

					 Portion of the
					Total XXXXXXXXXX Debt

XXXXXXXXXX

XXXXXXXXXX

29. Each of XXXXXXXXXX Newco will borrow from XXXXXXXXXX on a demand basis an amount equal to the Portion of the Total XXXXXXXXXX Debt owing by their respective parent (as shown above). Each Newco will then use the proceeds of their demand loan to purchase from XXXXXXXXXX their respective parent's Portion of the Total XXXXXXXXXX Debt (as shown above) and the benefit of all security relating to their Portion of the Total XXXXXXXXXX Debt (with any consequential amendments to such security that may be required to give effect to the transactions contemplated herein). Each Newco will also immediately agree with XXXXXXXXXX that any security held by XXXXXXXXXX in respect of their portion of the Total XXXXXXXXXX Debt will be held by XXXXXXXXXX for the benefit of that Newco according to the terms of the loan agreement and security comprising the Total XXXXXXXXXX Debt.

30. Effective immediately after each Newco purchases its Portion of the Total XXXXXXXXXX Debt from XXXXXXXXXX, as described above, and until further written notice that may be unilaterally given by any Newco or other beneficial owner of any Portion of the Total XXXXXXXXXX Debt to XXXXXXXXXX no interest will accrue or be payable on the Total XXXXXXXXXX Debt. All other terms and conditions of the Total XXXXXXXXXX Debt will remain in force and effect.

31. Each Newco will issue a sufficient number of Newco Preferred Shares to XXXXXXXXXX for cash consideration equal to the purchase price of its Portion of the Total XXXXXXXXXX Debt approximately as follows:

XXXXXXXXXX

The full subscription price for the issue of the Newco Preferred Shares will be added to each respective Newco's stated capital account maintained for the Newco Preferred Shares. Each Newco will apply the proceeds from the issuance of the Newco Preferred Shares to repay their demand loan received from XXXXXXXXXX.

32. Each of XXXXXXXXXX will enter into an agreement (the "Support Agreement") whereby each will covenant and agree to pay to its own Newco on demand as a contribution of capital, such amount(s) as required to enable its respective Newco to pay dividends on the Newco Preferred Shares, to pay all such amounts as may be required by that Newco to pay the ongoing costs and expenses of the operation and administration of that Newco and to pay any income taxes payable by that Newco.

Further, each of XXXXXXXXXX will agree with XXXXXXXXXX (and any subsequent holder(s) of Newco Preferred Shares) that, in the event that there is an "Adverse Yield Event" (as defined in 33 below), each will agree to pay to a holder(s) of its own Newco's Newco Preferred Shares, such additional amount(s) (the "Rate Difference") as is necessary, so that after taking into account the full effect of the Adverse Yield Event and income taxes payable by a holder(s) on any such additional amount(s), such holder(s) of the Newco Preferred Shares would receive the same after tax income it would have received in the absence of an Adverse Yield Event on the assumption that each such holder(s) pays tax at the highest federal and provincial rate and has as its sole asset the Newco Preferred Shares and revenues, costs and expenses relating only to the Newco Preferred Shares. Amounts payable under this indemnity will be net of any amount(s) receivable by the holder(s) of Newco Preferred Shares as an increased dividend under the terms and conditions of such share (as described in 25(f). However, the obligation of XXXXXXXXXX or any Newco to a subsequent holder of Newco Preferred Shares shall not be any greater than it would have been if XXXXXXXXXX had continued to hold the Newco Preferred Shares.

33. "Adverse Yield Event" means:

(i) any new legislation or any change in any applicable existing or new legislation (and for these purposes "legislation" shall include any order-in-council, regulation, rule, guideline, treaty or directive (whether or not having the force of law)) of Canada or any province of Canada (other than any such change which results in a change in any rate of tax (including surtax) applicable to financial institutions or corporations generally), any announcement by any governmental authority, entity or agency (including any central bank or other fiscal or monetary authority or agency) of Canada or any province of Canada regarding the enactment of such new legislation or the making of any such change, any change in the interpretation or administration of any applicable legislation by any governmental authority, entity or agency (including any central bank or other fiscal or monetary authority or agency) of Canada or any province of Canada, or any notice from Revenue Canada that the income tax ruling in respect of these transactions has ceased to be applicable in accordance with its terms for any reason whatever;

(ii) any judgment or order of a court of competent jurisdiction in Canada or any province of Canada in any matter or case, whether or not an appeal has been instituted and notwithstanding the existence of any right of appeal;

(iii) any change in the status of any of XXXXXXXXXX or any Newco (including, without limitation, the loss of its status as a "taxable Canadian corporation as that term is defined in the Act) under any applicable legislation of Canada or a province of Canada;

(iv) or any assessment or reassessment of any person for any Canadian federal or provincial tax or both,

which, in the sole opinion of any holder of Newco Preferred Shares, has, or may reasonably be expected to have, one or more of the following effects:

(v) results in dividends, deemed dividends or distributions on the Newco Preferred Shares being subject to tax;

(vi) precludes such holder from deducting interest, costs or expenses incurred directly or indirectly as a result of the acquisition or holding of the Newco Preferred Shares;

(vii) otherwise decreases the holder's after-tax return or increases the holder's after-tax cost or imposes interest or penalty on amounts received by the holder;

(viii) imposes or modifies regulatory requirements with adverse effects on the holder's effective return;

(ix) makes it unlawful or impossible for the holder to continue to hold the Newco Preferred Shares; or

(x) results in any amount being imputed to the holder as a benefit in respect of the Newco Preferred Shares.

34. Each of XXXXXXXXXX will guarantee to XXXXXXXXXX and subsequent holders of its respective Newco's Newco Preferred Shares the performance by each Newco of its obligations to make dividend payments and redeem Newco Preferred Shares under the Support Agreement (in 32 above) and the Debt Put/Call Agreement described in 35 below. Each of XXXXXXXXXX will pledge its Newco Common Shares to XXXXXXXXXX (assignable to other holders of Newco Preferred Shares) as security for this guarantee and for XXXXXXXXXX other obligations to XXXXXXXXXX in respect of the Newco Preferred Shares described herein.

35. Each of XXXXXXXXXX each Newco thereof, and XXXXXXXXXX will enter into an agreement (the "Debt Put/Call Agreement") pursuant to which:

(a) any holder of Newco Preferred Shares will have the right at any time to purchase all or any part of that particular Newco's Portion of the Total XXXXXXXXXX Debt then outstanding,

and

(b) any Newco will have the right at any time to require XXXXXXXXXX or any subsequent holder of its Newco Preferred Shares to purchase all or any part of its Portion of the Total XXXXXXXXXX Debt then outstanding,

for a purchase price equal to the principal amount of the Portion of the Total XXXXXXXXXX Debt then outstanding and owing to the Newco, or part thereof, as the case may be.

Each Newco will redeem its Newco Preferred Shares with:

(i) the proceeds of sale of its Portion of the Total XXXXXXXXXX Debt with respect to the stated capital amount attributable to such shares at the time of redemption, and

(ii) contributions of capital from the holder of the common shares of the particular Newco pursuant to the Support Agreement (see 32 above) with respect to such additional funds as may be required to fund the balance of the Redemption Amount with respect to accrued and unpaid dividends on the Newco Preferred Shares at the time of redemption.

Each holder of Newco Preferred Shares will have the option of lending such funds as necessary to each of XXXXXXXXXX on a demand basis in order to permit XXXXXXXXXX as the case may be, to make any contributions of capital required pursuant to the Support Agreement to permit the applicable Newco to pay the Redemption Amount of its Newco Preferred Shares.

36. Each of XXXXXXXXXX will enter into an agreement with XXXXXXXXXX (the "Share Put Agreement") which will provide that at any time, XXXXXXXXXX will, at the option of any holder of Newco Preferred Shares, be required to purchase all or any part of its respective Newco's Newco Preferred Shares held by that holder then outstanding for a purchase price equal to the Redemption Amount of those particular shares and such additional amount as is necessary to put the holder in the same after tax position as it would be if it were to receive all such amounts as if (i) the Newco had redeemed or repurchased its Newco Preferred Shares, and (ii) any amount in excess of the paid-up capital thereof is received by the holder as a taxable dividend in respect of which the holder would be entitled to a deduction pursuant to subsection 112(1) of the Act. For this purpose, the assumptions referred to in 32 above with respect to the calculation of a "Rate Difference" shall be used and the Shareholders will give the same security in respect of this Share Put Agreement as has currently been given in respect of the Total XXXXXXXXXX Debt. Each holder will have the option of lending such funds as necessary to each of XXXXXXXXXX on a demand basis in order to permit XXXXXXXXXX to pay the purchase price of the Newco Preferred Shares.

37. Each Newco will agree that, for so long as its, or any other Newco's Newco Preferred Shares are outstanding, it will not, without the unanimous consent of all holders of Newco Preferred Shares or as contemplated by, or necessary or incidental to, the proposed transactions described herein,

(a) declare or pay any dividends or make any other distribution in respect of any shares (except on the Newco Preferred Shares),

(b) create or issue securities or purchase or redeem any of its shares other than the Newco Preferred Shares,

(c) make loans to its shareholders,

(d) create or incur, or suffer to exist any indebtedness, liability or obligation of Newco to any person,

(e) create any security over its assets,

(f) sell any of its assets,

(g) make any guarantees,

(h) amalgamate, merge or consolidate,

(i) amend or repeal any of its articles or bylaws,

(j) pass any resolution or special resolution to approve or authorize any fundamental changes to Newco,

(k) engage in any business, or

(l) pay any amounts to its directors or shareholders.

38. XXXXXXXXXX will acknowledge and consent to the transfer of the Portion of the Total XXXXXXXXXX Debt to each of XXXXXXXXXX particular Newco and will confirm that the relevant insurance policies will continue to apply to the Total XXXXXXXXXX Debt after the transfer of the Total XXXXXXXXXX Debt to the particular Newcos. XXXXXXXXXX will also consent to the transfer of the Total XXXXXXXXXX Debt from the Newcos to XXXXXXXXXX in the circumstances contemplated above and will confirm that the relevant insurance policies will continue to apply to the Total XXXXXXXXXX Debt after such transfer. XXXXXXXXXX will enter into an agreement with XXXXXXXXXX (the "XXXXXXXXXX Share Put Agreement") which will, provide that on or after the occurrence of a Retraction Event, or XXXXXXXXXX of the issue date, XXXXXXXXXX will, at the option of any holder of Newco Preferred Shares, purchase all or any part of the Newco Preferred Shares held by that holder then outstanding for a purchase price equal to the Redemption Amount of those shares and such additional amount as is necessary to put the holder in the same position as it would be if it was to receive all such amounts as a tax-free intercorporate dividend. For this purpose, the assumptions referred to in 32 above with respect to the calculation of a "Rate Difference" shall be used.

39. Notwithstanding the terms and conditions of the Newco Preferred Shares or any mandatory redemptions of the Newco Preferred Shares that may be required by XXXXXXXXXX an amount or amounts by which, in aggregate, are equal to or greater than the "Excess Cash Flow" arising in any fiscal period shall be applied to redeem the Newco Preferred Shares within XXXXXXXXXX

"Excess Cash Flow" in respect of a particular fiscal period shall be the change or increase in cash flow for such period of XXXXXXXXXX from all sources, as would be reported on the audited Consolidated Statement of Changes in Financial Position prepared in accordance with generally accepted accounting principles, but before outlays for:

(i) the payment of dividends other than dividends paid on any Newco's Newco Preferred Shares, dividends to XXXXXXXXXX from any of their directly or indirectly owned subsidiaries which may be required to enable such corporation or corporations to make a contribution of capital to its respective Newco as described in 40 below and dividends to the Shareholders not to exceed $XXXXXXXXXX each;

(ii) capital expenditures or any payment on capital account other than in respect of:

(a) the purchase or redemption of any Newco's Newco Preferred Shares, other than redemptions made in the period in respect of the prior period's Excess Cash Flow;

(b) repayments of indebtedness incurred in the normal and ordinary course of XXXXXXXXXX business and in existence at the date any Newco's Newco Preferred Shares are issued;

(c) repayments of additional debt incurred for the specific purpose of funding current operating requirements;

(d) expenditures or payments between any of XXXXXXXXXX and its directly and indirectly wholly-owned subsidiaries;

(e) reasonable capital expenditures or payments on capital account incurred in the normal and ordinary course of the existing business of XXXXXXXXXX and repayments of additional debt for the specific purpose of making such capital expenditures or payments on capital account; and

(f) repayments of additional debt incurred for the specific purpose of enabling any Newco to redeem its Newco Preferred Shares or to pay dividends on its Newco Preferred Shares;

(iii) repayments of loans to the shareholders of any of XXXXXXXXXX or redemptions of any of the shares of any of XXXXXXXXXX; and

(iv) loans to directors, officers and shareholders of XXXXXXXXXX or to other persons, firms or corporations except for any loan(s) between any of XXXXXXXXXX which may be required to enable such corporation or corporations to make a contribution of capital to its respective Newco as described in 40 below.

For purposes of this definition of Excess Cash Flow, additional debt shall not include a debt which arose as a result of the use of cash or funds for a purpose that is not envisaged herein.

40. If there is Excess Cash Flow at the end of any Fiscal Period, XXXXXXXXXX shall determine which particular Newco or Newcos of XXXXXXXXXX will be required to redeem their Newco Preferred Shares. If necessary, sufficient funds will be transferred to any one or more of XXXXXXXXXX based on XXXXXXXXXX determination and such corporation or corporations, as the case may be, shall make a contribution of capital to its respective Newco equal to that amount to allow such Newco to redeem its Newco Preferred Shares to the extent of the amount so determined by XXXXXXXXXX.

41. Each Newco will hold a contribution of capital it receives from its parent for the benefit of its parent until such time as that particular Newco requires the funds to pay dividends on its Newco Preferred Shares, including such additional funds as may be required to fund the balance of the Redemption Amount with respect to accrued and unpaid dividends on the Newco Preferred Shares at the time of redemption, pay the ongoing costs and expenses of the operation and administration of that Newco and to pay any income taxes payable by that Newco.

42. Not later than on or after
XXXXXXXXXX

of the issue of the Newco Preferred Shares, all the remaining Newco Preferred Shares then outstanding by any Newco will be redeemed. Each Newco will be wound-up with its respective of XXXXXXXXXX as soon as reasonably possible after the earlier of:

- the date on which the last Newco Preferred Share of that particular Newco is redeemed, cancelled or otherwise acquired by that Newco; and

- the fifth anniversary date of the issue of the Newco Preferred Shares by XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

43. The proposed transactions are necessary in order to allow XXXXXXXXXX to continue to carry on its current business and prevent a payment default under the Total XXXXXXXXXX Debt that is otherwise reasonably expected to occur.

RULINGS GIVEN

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

A. The Newco Preferred Shares of each Newco owned respectively by XXXXXXXXXX (the "Shares") to be issued to XXXXXXXXXX as described in 31 above, and where applicable, sold to a Third Party Purchaser will be:

(a) shares described in subparagraph (e)(iii) of the definition of "term preferred share" in subsection 248(1) of the Act for a period not exceeding five years from the date of their issuance, and,

(b) "exempt shares" pursuant to paragraph (c) of the definition thereof in subsection 112(2.6) of the Act for that same period

and, accordingly, subsections 112(2.1), (2.2), (2.3) and (2.4) of the Act will not apply to deny XXXXXXXXXX, or a Canadian resident corporate Third Party Purchaser, as the case may be, a deduction under subsection 112(1), or under subsection 138(6) where the Third Party Purchaser is a life insurer, for dividends received or deemed to have been received by it on such Shares during such period.

B. No amount will be included in computing the income of any Newco of XXXXXXXXXX under paragraph 12(1)(c) or (x), or subsection 12(3), 12(9), 16(1) or 246(1) or section 9 of the Act in respect of capital contributions made or required to be made by XXXXXXXXXX to its respective Newco, nor will such amounts constitute proceeds of disposition, as defined in section 54 of the Act, to that Newco from the disposition by it of any property.

C. Section 80 of the Act will not apply to XXXXXXXXXX by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX to its respective Newco on its Portion of the Total XXXXXXXXXX Debt or by virtue of the failure of any Newco to demand payment of its Portion of the Total XXXXXXXXXX Debt.

D. Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by each Newco in the course of borrowing money and issuing its Newco Preferred Shares will be deductible pursuant to paragraph 20(1)(e) of the Act to the extent such expenses are reasonable in the circumstances.

E. The cost amount, within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of any Newco Preferred Shares will, immediately after the time that the Newco Preferred Shares are issued, be equal to the amount paid by XXXXXXXXXX for those particular Newco Preferred Shares.

F. The cost amount, within the meaning of subsection 248(1) of the Act, and the specified cost, within the meaning of subsection 80.01(1) of the Act, to any Newco of its Portion of the Total XXXXXXXXXX Debt will, immediately after it is acquired from XXXXXXXXXX equal the purchase price paid therefore.

G. No amount will be included in computing the income of XXXXXXXXXX under subsection 56(2) of the Act in respect of any capital contributions made by XXXXXXXXXX to its respective Newco.

H. If the Total XXXXXXXXXX Debt, or a portion thereof, is reacquired by XXXXXXXXXX, the cost amount, within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of the Total XXXXXXXXXX Debt, or portion thereof, will be the purchase price paid therefore.

I. No amount will be included in the income of XXXXXXXXXX pursuant to subsections 15(1) and 246(1) of the Act solely by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX, as the case may be, to its respective Newco on its Portion of the Total XXXXXXXXXX Debt.

J. Provided the Total XXXXXXXXXX Debt arose from one or more loans made by XXXXXXXXXX in the course of its money lending business, all or any portion of the Total XXXXXXXXXX Debt reacquired by XXXXXXXXXX will be considered to have been acquired by XXXXXXXXXX in the ordinary course of its business of lending money for the purposes of paragraphs 20(1)(1) and 20(1)(p) of the Act.

K. Subsection 112(4) of the Act will not apply to any loss realized by XXXXXXXXXX on the Total XXXXXXXXXX Debt subsequent to it being reacquired by XXXXXXXXXX in respect of any dividends received by XXXXXXXXXX on the Newco Preferred Shares.

L. As a result of the Proposed Transactions, in and of themselves, subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2, issued on September 28, 1990 (as amended by special release dated September 30, 1992) and are binding on Revenue Canada provided the transactions are carried out by XXXXXXXXXX. These rulings are based on the Act in its present form and does not take into account the effect of any proposed amendments.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch