30 November 1995 Ruling 9626713 - FINANCIAL DIFFICULTY - LIMITED PARTNERSHIP

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:

1.Whether the proposed issuance of distressed preferred shares meets the requirements of the exception in subparagraph (e)(iii) of the definition of "term preferred share" in subsection 248(1). The debt being converted into share capital is a debt of a limited partnership the sole limited partner of which is wholly-owned by the general partner.

2.Can dividends be paid on distress preferred shares from the date of ruling, even though the shares are not issued until after the date of the ruling?

Position:

1.Favorable ruling given.

2.Yes, but only back to the date of the ruling. To the extent that interest becomes payable on the indebtedness for the period between the date of the ruling and the date the DPS are issued section 80 will apply.

Reasons:

1.Financial difficulty criteria met.

2.Given the time required to obtain a DPS ruling and implement the refinancing the Department is prepared to accommodate taxpayers that wish to have the 5 year period for after tax financing commence with the date the Ruling is issued.

XXXXXXXXXX							962671

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge receipt of your letters of XXXXXXXXXX and your facsimiles of XXXXXXXXXX.

You advise that to the best of your knowledge and that of the taxpayers listed above, none of the issues involved in the ruling request has been considered by a taxation services office or a taxation centre in connection with a tax return already filed, and none of the issues involved in the ruling request is the subject of any notice of objection or is under appeal.

Unless otherwise specified, all statutory references in this ruling application are references to the provisions of the Income Tax Act (the "Act").

Our understanding of the facts, proposed transactions and their purposes is set out below.

FACTS

Corporate Structure

1.XXXXXXXXXX was incorporated on XXXXXXXXXX under the XXXXXXXXXX Business Corporations Act (the "XXXXXXXXXX"). Its fiscal period ends on XXXXXXXXXX of each year. XXXXXXXXXX tax services office is in XXXXXXXXXX. Its federal business number is XXXXXXXXXX.

2.XXXXXXXXXX is wholly-owned by XXXXXXXXXX. None of XXXXXXXXXX is related to the other within the meaning of the Act.

3.XXXXXXXXXX was incorporated on XXXXXXXXXX under the XXXXXXXXXX Business Corporations Act. Its fiscal period ends on XXXXXXXXXX of each year. XXXXXXXXXX tax services office is in XXXXXXXXXX. Its federal business number is XXXXXXXXXX.

4.XXXXXXXXXX principal assets are share investments in four corporations, including XXXXXXXXXX, that have ownership interests in XXXXXXXXXX. The other three companies in which XXXXXXXXXX holds shares are: XXXXXXXXXX in which XXXXXXXXXX owns all of the voting common shares and none of the non-voting common shares to hold XXXXXXXXXX% of the total common share equity; XXXXXXXXXX in which XXXXXXXXXX owns all of the voting common shares and none of the non-voting common shares to hold XXXXXXXXXX% of the total common share equity; and XXXXXXXXXX which is wholly-owned.

5.XXXXXXXXXX acquired all of the issued shares of XXXXXXXXXX in XXXXXXXXXX. The aggregate adjusted cost base ("ACB") of these shares to XXXXXXXXXX is $XXXXXXXXXX.

6.XXXXXXXXXX was incorporated on XXXXXXXXXX under the XXXXXXXXXX. Its fiscal period ends on XXXXXXXXXX of each year. XXXXXXXXXX tax services office is in XXXXXXXXXX. Its federal business number is XXXXXXXXXX.

7.XXXXXXXXXX are each a "private corporation" and a "taxable Canadian corporation" within the meaning assigned to these expressions by subsection 89(1) and a "Canadian-controlled private corporation" within the meaning assigned to this expression by subsection 125(7).

8.XXXXXXXXXX are holding companies each of which has as its principal asset an interest in XXXXXXXXXX, a limited partnership formed on XXXXXXXXXX under the laws of the Province of XXXXXXXXXX. XXXXXXXXXX fiscal period ends on XXXXXXXXXX of each year.

9.XXXXXXXXXX are the only partners of XXXXXXXXXX. XXXXXXXXXX is the general partner of XXXXXXXXXX with a XXXXXXXXXX% interest. XXXXXXXXXX is the sole limited partner of XXXXXXXXXX with a XXXXXXXXXX% interest.

10.XXXXXXXXXX has a wholly-owned subsidiary, XXXXXXXXXX. XXXXXXXXXX was incorporated on XXXXXXXXXX as XXXXXXXXXX under the XXXXXXXXXX and acquired by XXXXXXXXXX effective XXXXXXXXXX Its fiscal period ends on XXXXXXXXXX of each year. XXXXXXXXXX tax services office is in XXXXXXXXXX. XXXXXXXXXX federal business number is XXXXXXXXXX.

The Business of XXXXXXXXXX

11.XXXXXXXXXX owns and operates a

XXXXXXXXXX.

12. XXXXXXXXXX.

13.XXXXXXXXXX sole activity is to

XXXXXXXXXX.

14. XXXXXXXXXX.

Financial Difficulty

15. XXXXXXXXXX.

16.As noted in 8 above, XXXXXXXXXX was formed on XXXXXXXXXX with XXXXXXXXXX as the sole limited partner and XXXXXXXXXX as the general partner. It was not until XXXXXXXXXX that XXXXXXXXXX acquired XXXXXXXXXX from XXXXXXXXXX.

17.On XXXXXXXXXX, a financing and acquisition transaction was completed and certain assets including land, XXXXXXXXXX were sold from XXXXXXXXXX to XXXXXXXXXX for total consideration of $XXXXXXXXXX of which $XXXXXXXXXX was cash and $XXXXXXXXXX was the assumption of liabilities related to the assets acquired.

18.Also on XXXXXXXXXX entered into a loan agreement with XXXXXXXXXX (referred to collectively herein as the "Lenders" and individually as a "Lender") and XXXXXXXXXX, as the agent for the Lenders under the agreement. Pursuant to the loan agreement, XXXXXXXXXX was provided with a $XXXXXXXXXX loan to finance the construction of XXXXXXXXXX ("Construction Loan") with each Lender's portion of the loan being $XXXXXXXXXX. XXXXXXXXXX, as the general partner, agreed to be jointly liable for all the covenants, agreements and obligations of XXXXXXXXXX as set out in the loan agreement. The assets described in paragraph 17 above were pledged to the Lenders as security for the Construction Loan. XXXXXXXXXX holds all security ("Original Security") for the Construction Loan as agent for the Lenders. The Lenders deal at arm's length with XXXXXXXXXX.

19.On XXXXXXXXXX entered into a contract ("XXXXXXXXXX Contract") with XXXXXXXXXX ("XXXXXXXXXX Contractor") to build XXXXXXXXXX with a completion date of XXXXXXXXXX. However, XXXXXXXXXX was not completed by that date.

20. XXXXXXXXXX.

21. XXXXXXXXXX.

22. XXXXXXXXXX.

23. XXXXXXXXXX.

24. XXXXXXXXXX.

25.XXXXXXXXXX also experienced ongoing operating problems. On

XXXXXXXXXX.

26. XXXXXXXXXX.

XXXXXXXXXX.

27.The Project's actual operating costs are currently running at an annual rate of $XXXXXXXXXX before interest payments and depreciation. This amount is $XXXXXXXXXX in excess of the original projected annual operating costs of XXXXXXXXXX, primarily due to the

XXXXXXXXXX.

28. XXXXXXXXXX.

29. XXXXXXXXXX.

30.The Construction Loan of $XXXXXXXXXX is currently outstanding. The Construction Loan was to have converted ("Conversion") to XXXXXXXXXX. In addition, the Construction Loan interest rate of XXXXXXXXXX% was to be reduced to XXXXXXXXXX% on Conversion. However, due to construction problems noted above, Conversion never occurred. As a result, XXXXXXXXXX has incurred approximately $XXXXXXXXXX of additional financing costs since XXXXXXXXXX which had not been anticipated.

31.Interest payments have not been made on the Construction Loan for the months of XXXXXXXXXX. Only partial payments of interest have been made since XXXXXXXXXX. On XXXXXXXXXX, the Lenders advised XXXXXXXXXX in writing that it is in material default pursuant to the terms of the Construction Loan, and specifically that it has defaulted in payment of interest due on the Construction Loan. XXXXXXXXXX has advised the Lenders it would not be able to make full interest payments for the foreseeable future.

32.Continued net income losses are projected. For the year ending XXXXXXXXXX net income losses are expected to total $XXXXXXXXXX, calculated after all interest charges on the outstanding Construction Loan.

33.Management of XXXXXXXXXX, met with the Lenders in XXXXXXXXXX to discuss XXXXXXXXXX financial condition and the options available to refinancing its indebtedness. As a result of this meeting and subsequent discussions, XXXXXXXXXX has reached agreement with the Lenders to refinance the principal balance and accrued but unpaid interest under the Construction Loan and other amounts owing by XXXXXXXXXX (referred to herein as the "Debt") through distress preferred shares as described under the heading "Proposed Transactions" below. It is presently contemplated that the Debt, which relates entirely to business carried on in Canada, will total approximately $XXXXXXXXXX comprising the $XXXXXXXXXX presently owing under the Construction Loan plus accrued but unpaid interest as well as approximately $XXXXXXXXXX relating to fees and expenses of the distress preferred share issuance. In this regard, XXXXXXXXXX have indicated to the Lenders that refinancing with distress preferred shares is the last option for refinancing that is available to them.

34.Cash flow projections for XXXXXXXXXX for the calendar years XXXXXXXXXX indicate continuing deficiencies if the Debt is not converted into distressed preferred shares as outlined in the proposed transactions described below. The following summarizes the projected cash flows ($XXXXXXXXXX) assuming firstly, that the Debt remains outstanding and secondly, that the Debt is converted into distressed preferred shares ("DPS") as outlined in the proposed transactions described below:

			   CASH FLOW	        CASH FLOW
				    Without DPS	    With DPS

XXXXXXXXXX

35.At the present time, no other refinancing alternatives are available to XXXXXXXXXX as a result of the difficulties faced by XXXXXXXXXX described herein. Cash flow from operations has declined to a point where XXXXXXXXXX is unable to meet its ongoing financial obligations as they come due. In the event that the issuance of distress preferred shares is not implemented, the Lenders will more urgently and strongly consider the option of accelerating the entire amount of the Construction Loan and enforcing their security. If that occurs, neither XXXXXXXXXX would be able to honour any repayment demand made by the Lenders. As a result, XXXXXXXXXX would reasonably be expected to default on payment.

Financial Position of Related Shareholders

36.As noted in 2 above, XXXXXXXXXX is a holding company the controlling shareholder of which is XXXXXXXXXX. Both XXXXXXXXXX have no superfluous or liquid assets which could be made available to XXXXXXXXXX to significantly alleviate its financial difficulty.

37.A XXXXXXXXXX Account ("XXXXXXXXXX") appears as a current asset on the XXXXXXXXXX balance sheet for each of XXXXXXXXXX, in the amount of XXXXXXXXXX. These funds are not available for investment in XXXXXXXXXX.

The XXXXXXXXXX assets owned by XXXXXXXXXX were acquired from XXXXXXXXXX. As part of the asset acquisitions, it was agreed that XXXXXXXXXX manage the XXXXXXXXXX and agreements were entered into with XXXXXXXXXX for this management. Pursuant to the management agreements, XXXXXXXXXX these amounts would be a performance incentive for XXXXXXXXXX Over time, the balance in these accounts would be paid to XXXXXXXXXX. The management agreements specify that the funds in the XXXXXXXXXX must be invested in short-term investments. No provisions exist in the management agreements whereby loans or other direct or indirect investment of these funds could be made to XXXXXXXXXX. Given the terms of the management agreements, XXXXXXXXXX has concluded that XXXXXXXXXX would not agree to advance or invest these funds in XXXXXXXXXX.

38.XXXXXXXXXX is a holding company whose sole asset is a XXXXXXXXXX% interest in XXXXXXXXXX. The XXXXXXXXXX realized a net loss of $XXXXXXXXXX for the period ended XXXXXXXXXX. The net loss is primarily attributable to interest expense of $XXXXXXXXXX. Accordingly, XXXXXXXXXX has no funds that could be made available to XXXXXXXXXX to alleviate their financial difficulty.

39.XXXXXXXXXX. XXXXXXXXXX has no significant assets or sources of funds which could be used to assist XXXXXXXXXX in resolving their financial difficulty.

PROPOSED TRANSACTIONS

40.As part of the transactions described below, XXXXXXXXXX will agree with XXXXXXXXXX that sufficient net cash flow from the Project will be paid to XXXXXXXXXX to be used by it as provided in paragraphs 50 and 53 below.

41.XXXXXXXXXX will incorporate a single purpose subsidiary ("Subco") under the Canada Business Corporations Act (the "CBCA"). Subco will be a taxable Canadian corporation within the meaning assigned by subsection 89(1) and its first fiscal year end will be XXXXXXXXXX to coincide with that of XXXXXXXXXX. The activities of Subco will be limited to acquiring, holding and realizing on the Debt and the Original Security, issuing the distress preferred shares as described below and activities ancillary thereto.

42.The authorized share capital of Subco will consist of a limited number of common shares all of which will be beneficially owned by XXXXXXXXXX and a limited number of non-voting preferred shares. The common shares of Subco will be issued to XXXXXXXXXX for nominal consideration.

43.The preferred shares of Subco will have, amongst others, the following attributes:

a)issuable for $XXXXXXXXXX each;

b)non-voting (except when an event of default has occurred and is continuing). An event of default includes a failure to pay dividends on a dividend payment date and a failure to make a payment to a holder of the preferred shares as a reduction of capital as and when required;

c)purchasable for cancellation for an amount equal to its initial stated capital plus accrued and unpaid dividends less any amounts previously paid out by way of a return of capital as contemplated in paragraphs 51 and 57 below;

d)preferential cumulative dividends at an annual dividend rate of XXXXXXXXXX% which will be calculated and paid monthly commencing with the first month after issue;

e)in the event of a liquidation, dissolution or winding-up of Subco the holders of preferred shares will be entitled to receive in priority to the holders of common shares an amount equal to the initial stated capital of the preferred shares plus accrued and unpaid dividends less any amounts previously returned to the shareholders as a return of capital (the "Purchase Amount").

44.Each Lender will advance funds to XXXXXXXXXX to allow XXXXXXXXXX to pay for the costs of the refinancing proposed herein that may reasonably be considered to relate to that Lender's portion of the Debt. As noted in paragraph 33 above, refinancing costs are estimated at $XXXXXXXXXX and such amount will be included in the Debt to be refinanced with the Subco preferred shares.

45.Subco will borrow from each Lender on a daylight loan basis (a "Daylight Loan") an amount equal to the portion of the Debt owed to that Lender as described in paragraph 33 above. Subco shall use such funds to purchase from each Lender the portion of the Debt owed to that Lender and a related portion of the Original Security. For this purpose, the Debt will not include interest after the date of the ruling. The Lenders and XXXXXXXXXX will agree that if the proposed transactions are completed, interest will not be owing for the period from the date of the ruling to the date on which the Shares are issued.

46.On the acquisition of the Debt, Subco will agree to waive interest payments on the Debt until the earlier of the fifth anniversary of the date of the ruling, (the "Expiry Date") and the date each Lender has exercised its Put Option under the XXXXXXXXXX Put Agreement referred to in paragraph 58 below.

47.Subco will guarantee the present and future obligations of XXXXXXXXXX to the Lenders under the XXXXXXXXXX Put Agreement referred to in paragraph 58 and will pledge the Debt and Original Security in support of the guarantee. The Subco guarantee (the "Limited Recourse Guarantee") will be limited in amount to the value of the Debt and limited in recourse to the Debt and the Original Security. Subco will enter into a general security agreement (the "Security Agreement") with XXXXXXXXXX, as agent for the Lenders, to secure Subco's obligations under the Limited Recourse Guarantee. Subco will enter into an agreement with the Lenders pursuant to which the Lenders will have the right to purchase the Debt and Original Security from Subco for an amount equal to the then outstanding amount of the Debt.

48.Each Lender will subscribe for preferred shares of Subco for an aggregate subscription price, payable by way of bank draft, equal to the amount of the Debt which such Lender sold to Subco, as described above (such preferred shares are collectively referred to herein as the "Shares"). The aggregate amount of the proceeds received by Subco from the issue of the Shares will be added to Subco's stated capital account maintained for the Shares. The Shares will be issued for $XXXXXXXXXX per share.

49.Subco will use the proceeds of the subscription referred to in paragraph 48 above, to repay the Daylight Loan owed to each Lender.

50.XXXXXXXXXX will enter into an agreement that will provide as long as the Shares are outstanding XXXXXXXXXX will make monthly cash distributions in advance to XXXXXXXXXX, in respect of XXXXXXXXXX earnings, equal to the estimated amount necessary for XXXXXXXXXX to make contributions of capital to Subco to meet Subco's required dividend payments on the Shares and pay any fees and expenses as noted in paragraph 51 below.

51.To the extent that the estimated amounts referred to in paragraph 50 above are funded by cash distributions from XXXXXXXXXX to XXXXXXXXXX will direct XXXXXXXXXX to pay such amounts directly to Subco as contributions of capital to provide Subco with sufficient funds to meet Subco's required dividend payments on the Shares, and any fees and expenses incurred by Subco in connection with the transactions described above. It will be agreed that such capital contributions will be regarded as funds held for the benefit of XXXXXXXXXX until such time as Subco requires the funds to make these payments.

52.Upon the issuance of the Shares to the Lenders, Subco will pay a special dividend to the Lenders equal to the dividend that would have been paid if the Shares had been issued on the date of this letter.

53.Notwithstanding the terms and conditions of the Shares, all Excess Cash Flow (as defined in paragraph 54 below) arising in each fiscal period shall be applied by XXXXXXXXXX to reduce the amount of the Debt owed to Subco. The application of Excess Cash Flow in such manner will occur in sufficient time to allow Subco to make corresponding reductions of capital of the Shares (in the manner contemplated in paragraph 57) on the dividend payment date which is closest to the 90th day from the end of Subco's fiscal period.

Excess Cash Flow

54.Excess Cash Flow in respect of a particular fiscal period (which for purposes hereof will be XXXXXXXXXX) shall be the changes in cash flow for the period of XXXXXXXXXX from all sources as would be reported on a Consolidated Statement of Changes in Financial Position prepared in accordance with generally accepted accounting principles, if only directly and indirectly wholly-owned subsidiaries of XXXXXXXXXX were so included, but before outlays for:

a)payment of dividends, other than dividends paid on the Shares or dividends paid by XXXXXXXXXX

b)repayment of shareholders' loans or purchase or redemption of any shares of XXXXXXXXXX

c)loans to any shareholders, directors and officers of XXXXXXXXXX or other persons, firms or corporations; or

d)capital expenditures or payments on capital account other than in respect of:

i. the purchase, or reduction of capital in respect of the Shares, other than purchases or capital reductions made in the year in respect of the prior period's Excess Cash Flow;

ii. repayments of indebtedness incurred in the normal and ordinary course of business and existing at the date of the issuance of the Shares;

iii. repayments of additional debt incurred after the date of the issuance of the Shares for the specific purpose of funding the current operating requirements of XXXXXXXXXX. Additional debt for this purpose shall not include debt used for the purpose of expanding the business of XXXXXXXXXX;

iv. reasonable capital expenditures or payments on capital account incurred in the normal and ordinary course of the existing business of XXXXXXXXXX (for example those capital expenditures referred to in paragraph 28 above) and repayments of additional debt incurred for the specific purpose of making such capital expenditures or payments on capital account;

v.repayments of additional debt incurred for the specific purpose of enabling Subco to purchase the Shares or to pay dividends on the Shares or to reduce the capital of the Shares; and

vi.costs incurred in connection with the issuance of the Shares.

For the purpose of this definition of Excess Cash Flow, additional debt shall not include any debt which arose as the result of the use of cash or funds for a purpose that is not contemplated as part of the proposed transaction.

In addition, Excess Cash Flow for a particular period shall be adjusted to eliminate any proceeds of insurance received in respect of damage or destruction to property to the extent that such proceeds are set aside to be used in the immediately following fiscal period to repair or replace such property. Such proceeds, to the extent not used to repair or replace property in the immediately following fiscal period will be included in Excess Cash Flow for that immediately following fiscal period.

For greater certainty, the Excess Cash Flow of XXXXXXXXXX includes XXXXXXXXXX% of the cash flow of XXXXXXXXXX.

55.The articles of Subco, as well as a unanimous shareholders agreement entered into between the shareholders of Subco, will provide that without the unanimous approval of the shareholders of Subco:

a)no transfer or encumbrance of common shares of Subco shall be effected:

b) no transfer or encumbrance of assets of Subco shall be effected; and

c)other than as contemplated herein, Subco will not carry on any activities; engage in any business transaction; incur any indebtedness; create any security over its assets; make any guarantee; amalgamate, merge or consolidate; declare or pay any dividends (other than on the Shares); or purchase or redeem any of its shares (other than the Shares).

56.Subject to the operation of any applicable law to which Subco is subject, Subco will be wound up without any undue delay after the earlier of:

a)the time at which all of Subco's Shares are repurchased, redeemed or cancelled; or

b)five years from the date of this letter.

57.Following the issue of the Shares, XXXXXXXXXX and the Lenders will take all steps as may be necessary under the XXXXXXXXXX to cause Subco to reduce the stated capital of the Shares to $XXXXXXXXXX in the aggregate without any distribution of any amount to the shareholders of Subco. The amount of the reduction in stated capital will be added to the contributed surplus account of Subco. The purpose of this reduction in stated capital is to assist Subco in meeting the solvency test under the XXXXXXXXXX for the payment of dividends on the Shares. On each dividend payment date on which a payment is received by Subco on the Debt, as contemplated by paragraph 53, and after the payment of dividends on that date, Subco will increase the stated capital of the Shares by an amount, equal to any repayment made by XXXXXXXXXX on the Debt. Immediately thereafter Subco will pay the amounts so received from XXXXXXXXXX pro-rata to the holders of the Shares by way of a reduction of capital of the Shares.

58.XXXXXXXXXX and each Lender will enter into an Agreement (the "XXXXXXXXXX Put Agreement") which will provide that XXXXXXXXXX will, upon the occurrence of certain events, at the option of a Lender, purchase each Share at a purchase price (the "Purchase Price") equal to the Purchase Amount (defined in paragraph 43(e) above) of such Share plus such additional amount as may be required to put the Lender in the same position as if all accrued and unpaid dividends on such Share at the time of such purchase had been received by the Lender as tax-free intercorporate dividends.

59.If XXXXXXXXXX does not pay the Purchase Price and Subco does not transfer the Debt and related Original Security to the Lenders, the Shares become voting. Subco can then be wound up by the Lenders with the Debt and related Original Security being distributed to the Lenders as a return of capital. Prior to the wind-up, the stated capital of the Shares would be increased in a similar manner to that referred to in paragraph 57 above.

60.XXXXXXXXXX will pledge the common shares of Subco to the Lenders as security for its obligations under the XXXXXXXXXX Put Agreement.

61.XXXXXXXXXX will act as agent for the Lenders under the Limited Recourse Guarantee and the Security Agreement and the exercise of the rights and remedies of the Lenders pursuant thereto.

PURPOSE OF PROPOSED TRANSACTIONS

62.The purpose of the proposed transactions is to convert XXXXXXXXXX Construction Loan into share capital and thereby increase XXXXXXXXXX cash flow so as to enable XXXXXXXXXX to continue to carry on business and to better their financial situation by reducing debt service requirements.

RULINGS REQUESTED

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

A.The Shares to be issued to the Lenders as described in paragraph 48 above 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 this letter 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(2.2), 112(2.3) and 112(2.4) of the Act will not apply to deny a Lender a deduction under subsection 138(6) of the Act for dividends received or deemed to have been received by it on such Shares during such period;

B.No amount will be included in the income of Subco pursuant to paragraph 12(1)(c) or 12(1)(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 Subco as described in paragraph 51 above, nor will such amounts constitute proceeds of disposition, as defined in section 54 of the Act, to Subco from the disposition by it of any property;

C.Section 80 of the Act will not apply in respect of XXXXXXXXXX by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX to Subco in respect of the Debt as described in paragraph 46 above or by virtue of the failure of Subco to demand payment of the Debt;

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

E.Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by XXXXXXXXXX and Subco in the course of restructuring the Debt will be deductible pursuant to subparagraph 20(1)(e)(ii.2) of the Act to the extent such expenses are reasonable in the circumstances;

F.The cost amount, within the meaning of subsection 248(1) of the Act, of the Shares to each Lender immediately after their issuance will be equal to the amount paid therefore by each Lender as described in paragraph 48 above;

G.The cost amount, within the meaning of subsection 248(1) of the Act, to Subco of the Debt will, immediately after the time it is acquired from the Lenders, as described in paragraph 45 above, equal the purchase price paid therefore as described in paragraph 45 above;

H.No amount will be included in computing the income of any of the Lenders under subsection 56(2) of the Act in respect of any capital contributions made by XXXXXXXXXX to Subco, as described in paragraph 51 above;

I.If all or any part of the relevant portion of the Debt is reacquired by a Lender pursuant to the agreement described in paragraph 47 above, the cost amount, within the meaning of subsection 248(1) of the Act, to the Lender of those respective debts immediately after they are acquired will be the purchase price paid therefor;

J.No amount will be included in the income of XXXXXXXXXX pursuant to subsection 15(1) or 246(1) of the Act or XXXXXXXXXX pursuant to subsection 246(1) of the Act solely by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX to Subco in respect of the Debt or by virtue of the failure of Subco to demand payment of the Debt as described in paragraph 46 above or as a result of the provision of the guarantee by Subco as described in paragraph 47 above.

K.Provided that the relevant portion of the Debt arose from one or more loans made by the applicable Lender in the course of its insurance or money lending business, all or any part of such portion of the Debt reacquired by such Lender as described in paragraphs 47 and 59 above will be considered to have been acquired in the ordinary course of its business of insurance or lending money for the purposes of paragraphs 20(1)(1) and 20(1)(p) of the Act;

L.Subsection 112(4) of the Act will not apply to any loss realized by the Lenders on the relevant portion of the Debt subsequently reacquired by the Lenders from Subco in respect of any dividends received by the Lenders on the Shares.

M.By virtue of paragraph 84(1)(c.3) of the Act, no dividend will be deemed to have been paid by Subco when it increases its stated capital as described in paragraph 57 above;

N.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