30 November 1996 Ruling 9715673 - DISTRESS 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:

1.Whether the taxpayer qualifies to issue distress preferred shares.

2.Whether the use of two "newco" structure is acceptable.

3.Can the initial dividend on the DPS be paid from the first day of the month following the date of ruling rather than from the date of issuance?

Position:

1.Favourable ruling given. A favourable DPS ruling was previously given to a taxpayer within the same corporate group (E9640333).

2.Structure is acceptable.

3.Yes. To the extent that interest becomes payable on the indebtedness for the period between the first day of the month following the date of the ruling and the date the DPS are issued section 80 will apply.

Reasons:

1.Financial difficulty criteria met.

2.The two "newco" structure is being used due to concerns relating to solvency tests under corporate law. We have previously accepted the two "newco" structure (E9500033, E9615083 and E9626433).

3.We have given rulings allowing dividends be paid on DPS from the date of the ruling (E9626713, E9509643, E9433013, E9626433, E910378, and E30842).

XXXXXXXXXX							971567
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

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.

You advise that to the best of your knowledge and that of the taxpayers noted 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 formed by amalgamation on XXXXXXXXXX. Its fiscal period ends on XXXXXXXXXX of each year.

2. XXXXXXXXXX

3. XXXXXXXXXX

XXXXXXXXXX

4.XXXXXXXXXX is indirectly controlled by XXXXXXXXXX, an individual resident in Canada, through a series of corporations owned directly or indirectly by XXXXXXXXXX described as follows:

a)XXXXXXXXXX owns all the issued and outstanding shares of XXXXXXXXXX;

b)XXXXXXXXXX directly owns XXXXXXXXXX% of all the issued and outstanding shares of XXXXXXXXXX. Of the remaining XXXXXXXXXX% of the issued and outstanding shares of XXXXXXXXXX, XXXXXXXXXX% are owned by XXXXXXXXXX who deal at arm's length with XXXXXXXXXX.

XXXXXXXXXX

c)XXXXXXXXXX owns all the issued and outstanding shares of XXXXXXXXXX.

5. XXXXXXXXXX

6.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).

For the purpose of this ruling letter, the above related entities will collectively be referred to as the "XXXXXXXXXX Group".

7.The taxation services office ("TSO"), the taxation centre ("TC"), and the Revenue Canada account number ("RCT #") of the various members of the XXXXXXXXXX Group and XXXXXXXXXX are as follows:

CorporationTSO/TCRCT #

XXXXXXXXXX

8.XXXXXXXXXX is a taxable Canadian corporation and a public corporation, as those expressions are defined in subsection 89(1), whose shares are listed for trading on the XXXXXXXXXX. A total number of XXXXXXXXXX shares are issued and outstanding. The sole business of XXXXXXXXXX is XXXXXXXXXX.

9.The Lender carries on XXXXXXXXXX, a "restricted financial institution" and a "specified financial institution" within the meaning assigned to these expressions by subsection 248(1).

10.The Lender deals with XXXXXXXXXX, and each member of the XXXXXXXXXX Group and each of their shareholders at arm's length within the meaning assigned to this expression by subsection 251(1).

Description of Property

11. XXXXXXXXXX

12.The Property is subject to one mortgage securing a loan (the "Mortgage Loan") that was placed by XXXXXXXXXX on the Property on XXXXXXXXXX. The Mortgage Loan, owing to the Lender, was in the original amount of $XXXXXXXXXX and bears interest at the rate of XXXXXXXXXX%. The original term of the mortgage was for XXXXXXXXXX years, due XXXXXXXXXX. Scheduled repayment is by way of equal monthly payments of principal and interest of $XXXXXXXXXX, commencing XXXXXXXXXX, with a balance due on maturity of $XXXXXXXXXX.

The proceeds of the mortgage were used by XXXXXXXXXX to finance or refinance the original purchase of the Property.

13.XXXXXXXXXX agreed to sell and the Purchaser agreed to buy the Property for a purchase price of $XXXXXXXXXX. The purchase price was to be partly satisfied by the assumption by the Purchaser of the outstanding mortgage on the Property owing to the Lender. The completion of this transaction was subject to the satisfaction of, or compliance with, certain conditions precedent on the part of both parties at or before the closing date of XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

Financial Difficulty

14.The decline in the real estate rental market in the XXXXXXXXXX region has adversely affected XXXXXXXXXX. In particular, the large amount of vacant office and industrial space on the market has brought rents to extremely low levels and increased the requirements for larger incentives such as tenant inducements and free-rent periods. The resulting decline in revenues and increase in rental costs, coupled with higher than prevailing market rate of interest, has resulted in the Property being unable to generate sufficient cash flow to support the debt service on the Property.

15.The Mortgage Loan has been in default with respect to principal and interest payments since XXXXXXXXXX. On XXXXXXXXXX, XXXXXXXXXX completed a financing transaction which provided it with funds to, among other things, reduce the amount of arrears on the Mortgage Loan. A total amount of $XXXXXXXXXX was paid by XXXXXXXXXX on the principal amount. No payments on account of principal have been made on the Mortgage Loan since XXXXXXXXXX.

16.The Mortgage Loan owed to the Lender is, as of XXXXXXXXXX. As XXXXXXXXXX was unable to pay property taxes on the Property when due, the Lender has paid the property taxes relating to the Property, plus interest charges thereon, in the total amount of $XXXXXXXXXX, bringing the total amount owing to the Lender to $XXXXXXXXXX. Non-payment of property taxes constitutes a default under the terms of the mortgage with the Lender.

17.The Lender has agreed to allow the property manager to remit current monthly property taxes for the months of XXXXXXXXXX out of the net cash flow of the Property, representing amounts that otherwise would be remitted by XXXXXXXXXX to the Lender. Property taxes and related interest in the amount of approximately $XXXXXXXXXX remain in arrears as at XXXXXXXXXX.

18.XXXXXXXXXX does not possess any other financial resources with which to make the scheduled payments on the Mortgage Loan. XXXXXXXXXX other main assets consist of:

XXXXXXXXXX

XXXXXXXXXX

None of these assets produce positive cash flow to XXXXXXXXXX in order to assist it in supporting the Mortgage Loan.

19.XXXXXXXXXX main liabilities as of XXXXXXXXXX are:

(a)promissory notes payable of $XXXXXXXXXX, which are currently in default, as to principal repayment;

(b)mortgage loan payable to XXXXXXXXXX. Repayment was to commence XXXXXXXXXX after which time equal blended payments of principal and interest are required to be made semi-annually to XXXXXXXXXX. As of XXXXXXXXXX, the payments due on XXXXXXXXXX have not been made;

(c)mortgage loan payable to the Lender of $XXXXXXXXXX, which is currently in default;

(d)senior secured notes payable to XXXXXXXXXX;

(e)senior debt payable to XXXXXXXXXX. This loan was due on XXXXXXXXXX, however no payments have been made to date. In XXXXXXXXXX, the due date of this loan was restated to XXXXXXXXXX;

(f)senior subordinated shareholder debt outstanding of $XXXXXXXXXX;

(g)junior subordinated debt of $XXXXXXXXXX is made up of promissory notes payable to various parties including XXXXXXXXXX and suppliers. Some of these notes are currently in default;

(h)fully subordinated loan payable to XXXXXXXXXX; and

(i)$XXXXXXXXXX of accounts payable and accrued liabilities.

20.XXXXXXXXXX does not have any unencumbered assets of significant value that could be used to support the debt service on the Property or that could be used as security for significant additional financing.

21.As noted in paragraph 16 above, the total amount owing to the Lender is over $XXXXXXXXXX. However, the estimated market value of the Property is approximately $XXXXXXXXXX. Even if any or all of XXXXXXXXXX assets were sold, it is anticipated that the proceeds of disposition arising from such at this time would not provide sufficient funds to repay all the debts or other amounts owned by XXXXXXXXXX.

22.As of XXXXXXXXXX net shareholder's equity was in a deficit position of approximately $XXXXXXXXXX. Continued net income losses are projected.

23.There have been no dividends paid by XXXXXXXXXX on its shares since their issuance.

24.Cash flow projections for XXXXXXXXXX for the fiscal years XXXXXXXXXX indicate continuing deficiencies if the Mortgage Loan is not converted into share capital as outlined in the proposed transactions described below.

25.The operations of the Property do not provide a financial basis on which any prospective lender could seriously consider providing financing in the amount required to retire the Mortgage Loan.

26.Without the conversion of the Mortgage Loan into share capital as outlined in the proposed transactions described below, the Lender perceives that it will have to exercise its rights under the default provisions of the mortgage with XXXXXXXXXX to assume title and possession or to cause the forced sale of the Property.

Financial Position of Related Parties

27.No other member of the XXXXXXXXXX Group possesses the resources or ability to make payments on the Mortgage Loan on behalf of XXXXXXXXXX.

a)XXXXXXXXXX are holding corporations and do not have any assets other than its corporate subsidiaries.

b)XXXXXXXXXX principal assets consist of the XXXXXXXXXX shares of XXXXXXXXXX which have already been pledged as security on a $XXXXXXXXXX loan to XXXXXXXXXX and amounts due from other XXXXXXXXXX Group entities.

c)XXXXXXXXXX has no assets with which it can use to support XXXXXXXXXX. XXXXXXXXXX, which has been provided a favourable advance ruling which allows it to issue distress preferred shares in order to allow the operations of the XXXXXXXXXX to service its debt.

d)XXXXXXXXXX has no resources available to support XXXXXXXXXX and further is restricted from doing so by its existing borrowing arrangements and by its Limited Partnership Agreement.

e)XXXXXXXXXX has no assets other than management rights.

f)XXXXXXXXXX is holding the Property as bare trustee. It has no other assets.

g)XXXXXXXXXX has no assets other than a XXXXXXXXXX% interest in XXXXXXXXXX and it is otherwise inactive. It is intended that XXXXXXXXXX will be wound up.

28. XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

PROPOSED TRANSACTIONS

29.XXXXXXXXXX will cause a new corporation to be incorporated under the Canada Business Corporations Act ("Newco A"). The authorized share capital of Newco A will include an unlimited number of voting and participating common shares. XXXXXXXXXX will subscribe for a nominal amount of common shares of Newco A for a nominal cash consideration.

Newco A will be a single purpose corporation that will not engage in any business or activity except as provided for in the proposed transactions.

30.Newco A will cause a corporation to be incorporated under the Canada Business Corporations Act ("Lender Newco"). Lender Newco will be a taxable Canadian corporation within the meaning assigned by subsection 89(1). Newco A will subscribe for a nominal amount of common shares of Lender Newco for a nominal cash consideration.

Lender Newco will be a single purpose corporation that will not engage in any business or activity except as provided for in the proposed transactions.

31. The authorized share capital of Lender Newco will consist of an unlimited number of voting and participating common shares, and an unlimited number of Class XXXXXXXXXX Preferred Shares.

32.The Class XXXXXXXXXX Preferred Shares of Lender Newco will have the following attributes:

a)non-voting;

b) non-participating except for a preferential cumulative fixed dividend entitlement of XXXXXXXXXX% per annum; the initial dividend will accrue from XXXXXXXXXX notwithstanding that the Class XXXXXXXXXX Preferred Shares will be issued after that date;

c)redeemable at $XXXXXXXXXX per share plus accrued unpaid dividends, less any amounts previously returned to the shareholders as a return of capital;

d)redeemable at the option of the holder, at $XXXXXXXXXX per share plus accrued unpaid dividends, less any amounts previously returned to the shareholders as a return of capital, upon the occurrence of a Designated Event, as described in paragraph 42 below, or, in any event, on XXXXXXXXXX; and

e) in the event of a liquidation, dissolution or winding-up of Lender Newco, the holders of the Class XXXXXXXXXX Preferred Shares shall be entitled to receive in priority to the holders of common shares an amount equal to $XXXXXXXXXX per share plus accrued and unpaid dividends, less any amounts previously returned to the shareholders as a return of capital.

33.The articles of both Newco A and Lender Newco will provide that, without the unanimous approval of all the shareholders of such corporation, including, in the case of Lender Newco, the holders of the Class XXXXXXXXXX Preferred Shares;

a)no transfer or encumbrance of the common shares of Newco A or Lender Newco will be effective;

b)other than as contemplated herein, Newco A or Lender Newco, as the case may be, will not carry on any activities, engage in any business transactions, incur any indebtedness, create any security over its assets, make any guarantee, amalgamate, merge or consolidate, pay any dividends other than, in the case of Lender Newco on the Class XXXXXXXXXX Preferred Shares, or purchase or redeem any of its shares other than the Class XXXXXXXXXX Preferred Shares.

34.The Lender will pay, on account of XXXXXXXXXX, all remaining arrears of property taxes on the Property, currently in the amount of $XXXXXXXXXX, and the costs of issuance of the Class XXXXXXXXXX Preferred Shares. Such amounts will be capitalized and added to the principal amount of the Mortgage Loan. The Lender will also capitalize and add to the principal amount of the Mortgage Loan all accrued but unpaid interest to XXXXXXXXXX (including interest arrears of $XXXXXXXXXX) and property taxes and related interest of $XXXXXXXXXX paid by the Lender as described in paragraph 16 above. The Mortgage Loan, including all of these amounts, to be refinanced with the Class XXXXXXXXXX Preferred Shares of Lender Newco will be hereinafter referred to as the "Debt" (the principal amount of which is approximately $XXXXXXXXXX).

35.The Lender will advance an amount of cash to Lender Newco equal to the Debt (the "Advance"). The Advance will be for a term of one day, will be non-interest bearing and will be evidenced by a note. XXXXXXXXXX and Newco A will guarantee the obligations of Lender Newco to the Lender under the terms of the Advance.

36.Lender Newco will loan the full proceeds of the Advance received by it to Newco A (the "Newco Loan"). The Newco Loan will be repayable on demand or on XXXXXXXXXX, whichever is earlier, and will be interest-bearing. Lender Newco will waive all rights to receive any interest from Newco A with respect to the Newco Loan. XXXXXXXXXX will guarantee all of Newco A's obligations to Lender Newco under the terms of the Newco Loan.

37.Newco A will purchase the Debt from the Lender as well as all related security (the "Purchase"). The purchase price will be equal to the principal amount of the Debt as at the purchase date (the "Purchase Price") and will be paid in cash using the proceeds of the Newco Loan. Newco A will waive all rights to receive any interest from XXXXXXXXXX on the Debt from XXXXXXXXXX until the occurrence of a Designated Event as described in paragraph 42 below or, failing the occurrence of a Designated Event, on XXXXXXXXXX. Interest will begin to accrue again when the Debt is re-acquired by the Lender.

38.The Lender will subscribe for a number of Class XXXXXXXXXX Preferred Shares of Lender Newco (the "Shares). The stated capital and the subscription price, which will be paid in cash, of the Shares issued to the Lender will be equal to the Purchase Price.

39.The entire amount of the subscription proceeds received by the Lender Newco from the issuance of the Shares will be added to Lender Newco's stated capital account maintained by it with respect to such shares. If required by the Lender, the stated capital account for the Shares will be reduced to a nominal amount without any distribution of any amount to the shareholders of Lender Newco.

40.Lender Newco will repay the Advance in full to the Lender using the proceeds of the issuance of the Shares.

41.Newco A and the Lender will enter into an agreement which will provide that, after the occurrence of certain events (the "Designated Events"), the Lender will have the following options:

a) Newco A will be required, at the request of the Lender, to purchase all or some of the Shares from the Lender for a purchase price equal to the amount then outstanding under the corresponding portion of the Debt adjusted to compensate the Lender for any tax liabilities with respect to the Shares different from those outlined in the Rulings requested. At the Lender's option, the purchase price will be paid in the following manner:

(i) by the reassignment of the corresponding portion of the Debt by Newco A to the Lender; or

(ii) in cash.

To secure its obligations to purchase the Shares from the Lender and to pay the purchase price, Newco A will assign the Debt together with all related security to the Lender as collateral security. XXXXXXXXXX will guarantee all of Newco A's obligations to the Lender.

b)Newco A will be required, at the request of the Lender, to sell all or some of the Debt to the Lender for an amount to be paid in cash equal to the principal amount of the portion of the Debt, adjusted to compensate the Lender for any tax liabilities with respect to the Shares different from those outlined in the Rulings requested.

Concurrently, Newco A will be required to purchase all or some of the Shares held by the Lender utilizing the cash proceeds it receives from the Lender from the sale of the Debt.

To secure its obligation to purchase the Shares held by the Lender and to pay the purchase price, Newco A will assign to the Lender its right to receive the sale proceeds from the Lender. XXXXXXXXXX will guarantee all of Newco A's obligations to the Lender.

42."Designated Events" means any of the following events:

a) Lender Newco shall have failed to pay the regular dividend payable on the Shares as and when the same is payable in accordance with the terms and conditions of such Shares;

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

c) XXXXXXXXXX of Newco A shall have failed to make the required contribution of capital or principal repayment as described in paragraphs 43 and 45 below;

d) an order shall have been made or an effective resolution shall been passed for the winding-up, dissolution or liquidation of Newco A, Lender Newco, or XXXXXXXXXX;

e) XXXXXXXXXX, Newco A or Lender Newco shall have made a general assignment for the benefit of its creditors or a Proposal under the Bankruptcy and Insolvency Act, or shall be declared bankrupt, or if a custodian or sequestrator or receiver/manager (or both) or any other officer with similar power shall be appointed of XXXXXXXXXX, Newco A or Lender Newco, or if the property of XXXXXXXXXX, Newco A or Lender Newco, or any part thereof that is, in the opinion of the holder, a substantial part thereof, and

f) events which coincide in large part with the events of default under the agreement between XXXXXXXXXX and the Lender which governs the Mortgage Loan.

43.Dividends payable by Lender Newco on the Shares and any fees or expenses of Newco A or Lender Newco incurred to maintain their good standing under all applicable laws will be funded by capital contributions from time to time by XXXXXXXXXX to Newco A and, as applicable, by equivalent capital contributions by Newco A to Lender Newco.

44.The capital contributions referred to in paragraph 43 above will be regarded as funds to be held for the benefit of XXXXXXXXXX until such time as Newco A or Lender Newco require the funds to make the payments referred to paragraph 43 above. Neither of Newco A nor Lender Newco will add such contributions of capital to the stated capital of their common shares.

45.The redemption by Lender Newco of the Shares held by the holder thereof will be funded through the repayment by XXXXXXXXXX to Newco A of all or part of the Debt and by the parallel repayment of all or part of the Newco Loan by Newco A to Lender Newco.

46.Notwithstanding the terms and conditions of the Shares or any mandatory redemptions of the Shares that may be required by the holders thereof, all "Excess Cash Flow", as defined in paragraph 47 below, arising in each fiscal period shall be applied to redeem the Shares issued by Lender Newco within 120 days after the end of that fiscal period.

Excess Cash Flow

47.Excess Cash Flow in respect of a particular fiscal period shall be the change or increase in cash flow for such fiscal period of XXXXXXXXXX from all sources, as would be reported on a Consolidated Statement of Changes of 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) the payment of dividends other than dividends paid on the Shares or dividends paid by directly or indirectly wholly-owned subsidiaries of XXXXXXXXXX;

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

(i) the purchase or redemption of the Shares, other than purchases or redemptions made in the period in respect of the prior period's Excess Cash Flow;

(ii) repayments of indebtedness incurred in the normal and ordinary course of business and in existence at the date the Shares are issued;

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

(iv) expenditures or payments between any of XXXXXXXXXX, Newco A and Lender Newco;

(v) 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

(vi)repayments of additional debt incurred for the specific purpose of enabling Newco A to purchase the Shares or Lender Newco to redeem the Shares or to pay dividends thereon;

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

(d)loans to directors, officer and shareholders of XXXXXXXXXX or to other persons, firms or corporations.

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 and in the event that such debt is incurred, interest payable on such debt shall not be deducted in determining Excess Cash Flow.

48.Subject to the operation of any applicable law to which Newco A or Lender Newco is subject, each of Newco A and Lender Newco will be wound up without undue delay after the time that is the earlier of:

(a) the time at which all of the Shares are redeemed or cancelled; and

(b)XXXXXXXXXX.

49.The Lender will have the right at any time and from time to time, in it sole discretion, subject to any Unanimous Shareholders Agreement entered into by it, and any applicable security restrictions, to sell its Shares or any portion thereof, to third parties which are taxable Canadian corporations (the "Subsequent Acquirers") on such terms and conditions as the Lender may, in its sole discretion, determine.

50.The Lender will be granted an option, exercisable on the date that the Shares have been redeemed in full, to acquire from XXXXXXXXXX interest in the Property in return for assuming XXXXXXXXXX% of all debts than outstanding in the Property including, but not limited to the amount then outstanding under the Debt. The Lender will pay XXXXXXXXXX for the grant of this option. At the time of grant of the option, the fair market value of the Property will be less than the aggregate of the principal amount of the Debt.

PURPOSE OF PROPOSED TRANSACTIONS

51.The purpose of the proposed transactions is to convert XXXXXXXXXX long-term debt on the Property, into share capital, thereby increasing XXXXXXXXXX cash flow from the Property so as to allow it to continue its operations and to better its overall 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 of Lender Newco to be issued to the Lender as described in paragraph 38 above, and where applicable, sold to a Subsequent Acquirer as described in paragraph 49 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 commencing on the date of their issuance and ending no later than XXXXXXXXXX; and

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

and accordingly, subsections 112(2.1), (2.2), (2.3) and (2.4) of the Act will not apply to deny the Lender or a Canadian resident corporate Subsequent Acquirer, as the case may be, a deduction under subsection 112(1) or 138(6) 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 Newco A or Lender Newco 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 Newco A or by Newco A to Lender Newco as described in paragraph 43 above, nor will such amounts constitute "proceeds of disposition", as defined in section 54 of the Act, to Newco A or Lender Newco, as the case may be, from the disposition of any property.

C.No amount will be included in computing the income of the Lender under subsection 56(2) of the Act in respect of any capital contributions made by XXXXXXXXXX to Newco A or by Newco A to Lender Newco as described in paragraph 43 above.

D.No amount will be included in computing the income of XXXXXXXXXX or Newco A pursuant to subsection 15(1) or 246(1) of the Act, and section 80 of the Act will not apply to XXXXXXXXXX or Newco A, by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX to Newco A in respect of the Debt or by Newco A to Lender Newco in respect of the Newco Loan or as a result of the failure of Newco A to demand repayment of the Debt or the failure of Lender Newco to demand repayment of the Newco Loan.

E.Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by Newco A or Lender Newco in the course of borrowing money and by Lender Newco in the course of issuing the Shares will be deductible by Newco A or Lender Newco, as the case may be, pursuant to paragraph 20(1)(e) of the Act to the extent such expenses are reasonable in the circumstances.

F.Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by XXXXXXXXXX in the course of restructuring the Debt, other than expenses described in Ruling E above incurred in respect of Newco A or Lender Newco, will be deductible by XXXXXXXXXX pursuant to subparagraph 20(1)(e)(ii.2) of the Act to the extent such expenses are reasonable in the circumstances.

G.The cost amount, within the meaning of subsection 248(1) of the Act, to Lender Newco of the Newco Loan, immediately after the time that it is made to Newco A, will be equal to the amount advanced by Lender Newco to Newco A, as described in paragraph 36 above.

H.The cost amount, within the meaning of subsection 248(1) of the Act, to Newco A of the Debt, immediately after the time that it is acquired from the Lender, will be equal to the Purchase Price paid therefor by Newco A as described in paragraph 37 above.

I.The cost amount, within the meaning of subsection 248(1) of the Act, to the Lender of the Shares acquired by it, immediately after the time of their issue, will be equal to the Purchase Price paid therefor by the Lender as described in paragraph 38 above.

J.If the Debt is reacquired by the Lender as described in paragraph 41 above, the cost amount, within the meaning of subsection 248(1) of the Act, to the Lender of the reacquired Debt will be:

a)where the Debt is reacquired by the Lender as described in paragraph 41(a)(ii) or 41(b) above, the amount paid therefor by the Lender; and

b) in any other case, the fair market value of the consideration paid therefor.

K.Provided that the Debt arose from one or more loans or "lending assets", within the meaning of subsection 248(1) of the Act, made or acquired by the Lender in the course of its insurance or money lending business, the Debt reacquired by the Lender as described in paragraph 41 above will be considered to have been acquired by the Lender in the ordinary course of its business of lending money for the purposes of paragraphs 20(1)(l) and 20(1)(p) of the Act.

L.Subsection 112(4) of the Act will not apply, in respect of any dividends received by the Lender on the Shares, to any loss realized by the Lender on the Debt subsequent to it being reacquired by the Lender from Newco A in the circumstances described in paragraph 41 above.

M.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 70-6R3, issued on December 30, 1996 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