30 November 1995 Ruling 9631363 - DEDUCTIBILITY

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.

XXXXXXXXXX							963136
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling with respect to the above taxpayers. We also acknowledge our several telephone conversations.

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

Facts

1.XXXXXXXXXX is a "taxable Canadian corporation", a "private Corporation", and a "Canadian-controlled private corporation". The terms "taxable Canadian corporation" and "private corporation" have the meanings as defined in subsection 89(1) of the Income Tax Act Canada (the "Act"). The term "Canadian-controlled private corporation" has the meaning as defined in subsection 125(7) of the Act.

XXXXXXXXXX is a taxable Canadian corporation. XXXXXXXXXX is a restricted financial institution and a specified financial institution as such terms are defined in subsection 248(1) of the Act and deals at arm's length with XXXXXXXXXX files its income tax returns at the XXXXXXXXXX TSO.

2.On XXXXXXXXXX received advance income tax ruling 943301 (the "Initial Ruling") from Revenue Canada in connection with the issuance of distress preferred shares (the "Initial Ruling Shares") to certain lenders (the "Initial Ruling Lenders"). On XXXXXXXXXX received a supplementary ruling in connection with certain amendments to the Initial Ruling. On XXXXXXXXXX the majority of the transactions contemplated in the Initial Ruling were completed and XXXXXXXXXX new subsidiaries (the "Initial Ruling Subcos") of XXXXXXXXXX were incorporated as set out in the Initial Ruling. Due to certain complications the issuance of distress preferred shares to XXXXXXXXXX was not completed until XXXXXXXXXX As a result of the XXXXXXXXXX issuances XXXXXXXXXX acquired $XXXXXXXXXX of Initial Ruling Shares.

3.XXXXXXXXXX was formed as a result of an amalgamation on XXXXXXXXXX under the Business Corporation Act XXXXXXXXXX.

4.The authorized capital of XXXXXXXXXX consists of:

XXXXXXXXXX Class XXXXXXXXXX Preference shares without nominal or par value, entitled to a XXXXXXXXXX% non-cumulative dividend, voting, redeemable for the amount paid-up thereon.

XXXXXXXXXX Class XXXXXXXXXX Preference shares without nominal or par value, entitled to a XXXXXXXXXX% non-cumulative dividend, non-voting, redeemable at $XXXXXXXXXX per share.

XXXXXXXXXX Class XXXXXXXXXX Preference shares without nominal or par value, entitled to a XXXXXXXXXX% non-cumulative dividend, non-voting, redeemable and retractable for the amount paid-up thereon.

Unlimited number of Class XXXXXXXXXX Preference shares without nominal or par value, entitled to a XXXXXXXXXX% per month non-cumulative dividend, non-voting, redeemable and retractable for $XXXXXXXXXX per share.

Unlimited number of Class XXXXXXXXXX Preference shares without nominal or par value, entitled to a XXXXXXXXXX% per month non-cumulative dividend, voting, redeemable and retractable for the amount paid-up thereon.

Unlimited number of Class XXXXXXXXXX Preference shares without nominal or par value, entitled to a XXXXXXXXXX% cumulative dividend, non-voting, redeemable and retractable for the amount paid-up thereon.

Unlimited number of Class XXXXXXXXXX Preference shares entitled to dividends at the discretion of the board of directors, non-voting, redeemable for the amount paid-up thereon.

Unlimited number of Class XXXXXXXXXX Preference shares entitled to dividends at the discretion of the board of directors, non-voting, redeemable for the amount paid-up thereon.

Unlimited number of Class XXXXXXXXXX Preference shares entitled to dividends at the discretion of the board of directors, non-voting, redeemable for the amount paid-up thereon.

Unlimited number of Class XXXXXXXXXX Preference shares entitled to dividends at the discretion of the board of directors, non-voting, redeemable for the amount paid-up thereon.

XXXXXXXXXX Common shares

5.The shareholders of XXXXXXXXXX are as follows:

XXXXXXXXXX

6.The stated capital, paid-up capital ("PUC") and adjusted

cost base ("ACB") of the XXXXXXXXXX shares are as follows:

Stated Capital PUC ACB

XXXXXXXXXX

PUC and ACB have the meanings assigned by those terms in subsection 89(1) and section 54, respectively, of the Act.

7.Notwithstanding the issuance of the Initial Ruling Shares XXXXXXXXXX is still in financial difficulty. XXXXXXXXXX business continues to be severely impacted by the generally weak economic environment and the downturn in real estate markets in XXXXXXXXXX which have adversely affected the occupancy levels and commercial rents in XXXXXXXXXX

8.Pursuant to the issuance of the Initial Ruling Shares, XXXXXXXXXX long term financial position has been enhanced. Cashflow after the share issue was expected to improve by approximately $XXXXXXXXXX over the 5 year term of the Initial Ruling Shares. However, this improvement included a reversal of approximately $XXXXXXXXXX of cashflow deficiency with the remaining $XXXXXXXXXX of excess cashflow primarily generated in XXXXXXXXXX Although management has not significantly revised these estimates, they are based on assumptions over a five year term and include many uncontrollable factors that individually and in the aggregate may have a significant impact. These factors include the estimated interest rates, the vacancy rates, the achievable net effective rents, lease renewal rates, XXXXXXXXXX etc. The result is that the company's ability to meet cashflow requirements in XXXXXXXXXX is not assured and as a result both management and lenders are proceeding with caution, despite the issuance of the Initial Ruling Shares.

9.As an integral part of the restructuring the Initial Ruling Lenders and XXXXXXXXXX have imposed on

XXXXXXXXXX

10.XXXXXXXXXX in the amount of approximately $XXXXXXXXXX As a part of the restructuring, arrangements were made with these creditors for payment over a period of 2 to 5 years. Whereas previously XXXXXXXXXX was able to defer the payment of these amounts they are now required to make regular payments which creates an additional cashflow hardship. XXXXXXXXXX

11.XXXXXXXXXX investment in the Initial Ruling Shares of the Initial Ruling Subcos of XXXXXXXXXX represents approximately XXXXXXXXXX% of its total assets and the related annual dividends contribute approximately XXXXXXXXXX% to its total revenue. XXXXXXXXXX recognizes that this investment is significant and that the financial health of XXXXXXXXXX is important to XXXXXXXXXX financial results. XXXXXXXXXX recognize that the conditions imposed on XXXXXXXXXX by the Initial Ruling Lenders XXXXXXXXXX have placed a significant strain on XXXXXXXXXX and that XXXXXXXXXX ability to meet these commitments is not certain. The fact that these debts carry an interest rate of XXXXXXXXXX% is also a concern to XXXXXXXXXX In the event XXXXXXXXXX is unable to meet XXXXXXXXXX commitments on a timely basis, it is likely that the restructuring that resulted in the issuance of the Initial Ruling Shares would be unwound. In that case, it is doubtful that a revised restructuring would occur.

12.XXXXXXXXXX has attempted to convert the amount owing to XXXXXXXXXX into distress preferred shares, however, this has proven to be a difficult task (XXXXXXXXXX) which has frustrated XXXXXXXXXX

13.To the best of your knowledge and that of the parties to this ruling request, none of the issues involved in this ruling request are under objection or appeal nor are they being considered by any district taxation office or taxation centre in connection with any returns previously filed.

Proposed Transactions

14.XXXXXXXXXX will make aggregate payments of approximately $XXXXXXXXXX to XXXXXXXXXX in satisfaction of the XXXXXXXXXX due by XXXXXXXXXX It will be agreed that these payments will be made to settle an equal amount of XXXXXXXXXX and that XXXXXXXXXX will have no further liability to XXXXXXXXXX in respect of such XXXXXXXXXX As a result XXXXXXXXXX will have satisfied its current obligations imposed by the Initial Ruling Lenders with respect to the payment of XXXXXXXXXX to XXXXXXXXXX as set out in paragraph 10 above. The payment of XXXXXXXXXX by XXXXXXXXXX will be expensed in the financial statements of XXXXXXXXXX in the year in which they are paid and will be deducted for tax purposes on the same basis. The settlement of an equivalent amount of XXXXXXXXXX liabilities resulting from the payment of XXXXXXXXXX will result in an increase in the financial statement income of XXXXXXXXXX for the period of XXXXXXXXXX in which the settlement occurs and will result in the application of section 80 of the Act.

15.The rate on the monthly preferential dividends described in paragraph 39(d) of Initial Ruling will be increased in order to substantially compensate XXXXXXXXXX for the payment XXXXXXXXXX described in paragraph 14 above. It is estimated that these adjusted dividends, approximately XXXXXXXXXX% of which will be paid on closing, will increase by approximately XXXXXXXXXX%, the total dividends paid on the Initial Ruling shares over their five year term.

Purpose of Proposed Transactions

The purpose of the proposed transactions is to complete the corporate and financial reorganization of certain debt relating to business carried on in Canada so as to meet certain restructuring requirements imposed by the Initial Ruling Lenders and thereby enable XXXXXXXXXX to survive for the full five year term of the distress preferred shares, reduce its debt service costs, return to financial health and continue to carry on business.

Rulings Given

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

A.The adjustment of the dividend on the Initial Ruling Shares, as described in paragraph 15 above, will not cause the shares to be an issuance of new shares and the Initial Ruling will continue to be binding on the Department as indicated therein.

B.Provided that the additional dividends referred to in paragraph 15 above are validly declared and constitute dividends for purposes of the relevant corporate law, subsections 112(2.1), (2.2), (2.3) and (2.4) of the Act will not apply to deny the Initial Ruling Lenders or XXXXXXXXXX, as the case may be, a deduction under subsection 112(1) or 138(6) of the Act.

C.No amount will be included in the income of any of the Initial Ruling Lenders or XXXXXXXXXX under subsection 56(2) of the Act in respect of the payments to XXXXXXXXXX made by XXXXXXXXXX as described in paragraph 14 above.

D. Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

Except as expressly stated, our rulings do not imply acceptance, approval, or confirmation of any income tax implications of the facts and proposed transactions.

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

These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990 and are binding on Revenue Canada, Taxation provided that the proposed transactions described herein are completed by XXXXXXXXXX.

Yours truly,

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