30 November 1996 Ruling 9716313 - ASSET ROLL-DOWN- SERIES OF TRANSACTIONS

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							3-971631
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above referenced taxpayers. In your letters dated XXXXXXXXXX you provided additional information in respect of the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:

(a)is in an earlier return of the taxpayers or a related person;

(b)is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(c)is under objection by the taxpayers or a related person; or

(d)is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

Definitions

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

"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;

"Brother1" refers to XXXXXXXXXX;

"Brother2" refers to XXXXXXXXXX;

"Canadian-controlled private corporation" has the meaning assigned to that term in subsection 125(7);

"capital property" has the meaning assigned to that term in section 54;

"cost amount" has the meaning assigned to that term in subsection 248(1);

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

"dividend rental arrangement" has the meaning assigned by subsection 248(1);

"eligible capital property" has the meaning assigned to that term in section 54;

"eligible property" has the meaning assigned to that term in subsection 85(1.1);

"Holdco" refers to XXXXXXXXXX, a company incorporated under the laws of XXXXXXXXXX;

"Investor" refers to XXXXXXXXXX;

"Investco" refers to XXXXXXXXXX, a company which was incorporated under the laws of XXXXXXXXXX;

"Investsubco" refers to XXXXXXXXXX a wholly-owned subsidiary of Investco which was incorporated under the laws of XXXXXXXXXX;

"Numberco" refers to XXXXXXXXXX, a company incorporated under the laws of XXXXXXXXXX;

"Opco" refers to XXXXXXXXXX, a company formed in XXXXXXXXXX under the Canada Business Corporations Act as a result of an amalgamation of XXXXXXXXXX, which were all controlled by Brother1 and Brother2. On XXXXXXXXXX, Opco was continued under the XXXXXXXXXX Business Corporations Act;

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

"restricted financial institution" has the meaning assigned under subsection 248(1);

"series of transactions or events" has the meaning assigned by subsection 248(10);

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

"Subco1" refers to XXXXXXXXXX, a company incorporated under the laws of XXXXXXXXXX;

"Subco2" refers to XXXXXXXXXX, a company incorporated under the laws of XXXXXXXXXX;

"Subco3" refers to XXXXXXXXXX, a company incorporated under the laws of XXXXXXXXXX;

"Subco4" refers to XXXXXXXXXX, a company incorporated under the laws of XXXXXXXXXX;

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

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

"Target Business" refers to XXXXXXXXXX; and

"Trust" refers to the XXXXXXXXXX.

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

Facts

Opco is a Canadian-controlled private corporation and a taxable Canadian corporation. Opco is not a specified financial institution. Opco currently owns and operates the Target Business. Opco also owns all of the issued shares of Subco1, Subco2 and Subco3.

The authorized share capital of Opco includes:

An unlimited number of Class XXXXXXXXXX non-participating, voting shares;

An unlimited number of Class XXXXXXXXXX participating, non-voting shares;

An unlimited number of Class XXXXXXXXXX preferred, non-voting shares, entitled to a cumulative variable rate dividend, redeemable and retractable at the issue price plus any unpaid dividends;

An unlimited number of Class XXXXXXXXXX participating voting shares; and

A limited number of Class XXXXXXXXXX preferred, non-voting, XXXXXXXXXX% fixed dividends, convertible prior to the fifth anniversary of the date of issuance at the option of the holder into Class XXXXXXXXXX common shares, redeemable after five years and retractable after ten years at $XXXXXXXXXX per share plus any accrued but unpaid dividends.

The issued share capital of Opco consists of XXXXXXXXXX shares which are owned by the following persons:

XXXXXXXXXX

Opco is controlled by Holdco.

The aggregate paid-up capital of the Class XXXXXXXXXX shares is $XXXXXXXXXX. The aggregate paid-up capital of the Class XXXXXXXXXX shares is $XXXXXXXXXX. The aggregate paid-up capital of the Class XXXXXXXXXX shares is $XXXXXXXXXX. The aggregate paid-up capital of the Class XXXXXXXXXX shares is $XXXXXXXXXX.

Holdco is a Canadian-controlled private corporation and a taxable Canadian corporation. Holdco is a holding company and its most significant asset is its shares in Opco. Brother1 owns all of the issued voting non-participating shares, all of the issued preferred shares and XXXXXXXXXX of the Class XXXXXXXXXX non-voting common shares of Holdco. The balance of the non-voting Class B common shares of Holdco are held by Investco (XXXXXXXXXX) and its wholly-owned subsidiary, Investsubco (XXXXXXXXXX).

Investco and Investsubco are Canadian-controlled private corporations and taxable Canadian corporations. Investco is a holding company and its most significant asset is its shares in Holdco. In addition to its investment in Holdco, Investsubco owns the real estate which is leased by Opco, Subco1, Subco2 and Subco3 for their XXXXXXXXXX operations. Brother1 owns all of the issued shares of Investco.

The Trust was established on XXXXXXXXXX and is an inter-vivos discretionary trust. All of the beneficiaries and trustees are Canadian residents. The beneficiaries are the spouse and children of Brother1. All of the trustees deal at arm’s length with Brother1. The assets of the Trust consist of investments in Opco and in certain related companies and some cash.

Numberco is a taxable Canadian corporation. Brother2, who is the brother of Brother1, owns all of the issued and outstanding shares of Numberco. Brother2 transferred his shares of Opco to Numberco in XXXXXXXXXX. This decision to transfer the shares of Opco was made completely independent of the proposed reorganization described below. The sole purpose of this transfer was to crystallize his capital gains exemption.

Investor purchased all the authorized Class XXXXXXXXXX shares of Opco from treasury on XXXXXXXXXX. All of the funds received from the issue of the Class XXXXXXXXXX shares were applied against Opco’s outstanding debt owing to an arm’s length financial institution. None of the funds raised by the share issuance were used to pay a dividend or redeem any issued shares of Opco.

Subco1 is a taxable Canadian corporation and a Canadian-controlled private corporation

XXXXXXXXXX

The authorized share capital of Subco1 consists of:

Class XXXXXXXXXX common voting shares;

Class XXXXXXXXXX non-participating, voting shares, redeemable at $XXXXXXXXXX per share; and

Class XXXXXXXXXX redeemable and retractable, non-voting preferred shares;

The issued share capital of Subco1 currently consists of XXXXXXXXXX Class XXXXXXXXXX shares all of which are owned by Opco.

Subco2 is a taxable Canadian corporation and a Canadian-controlled private corporation

XXXXXXXXXX

All of the issued and outstanding shares of Subco2 are owned by Opco.

Subco3 is a taxable Canadian corporation and a Canadian-controlled private corporation

XXXXXXXXXX

All of the issued and outstanding shares of Subco3 are owned by Opco.

The owners and management of Opco have a long-range, strategic corporate plan which they refer to as “subsidiary-based financing”. The basic objective of this strategy is to transfer operations at each particular geographical location into a separate subsidiary and finance each subsidiary independently, limiting the security provided and substantially reducing the overall corporate exposure to external debt financing. Opco, itself, is positioned as a secured creditor of each of its subsidiaries, and each subsidiary will have no, or very limited, exposure to another subsidiary’s obligations.

It is anticipated that such leveraging will enable Opco to accumulate substantial capital to finance further acquisitions and diversify into other industries free from exposure to the liabilities of the subsidiaries. New ventures and acquisitions will also be held in subsidiary corporations if they are to be highly leveraged or are otherwise high financial risk operations.

In XXXXXXXXXX, Opco’s debt outstanding to a single financial institution was XXXXXXXXXX. Its trade payables and other liabilities were XXXXXXXXXX on a consolidated basis. Due to the magnitude of the credit facility, Opco was forced to provide the financial institution with global asset coverage to secure this debt. The rapid and costly expansions in XXXXXXXXXX resulted in a very substantial increase in the level of debt in a very short timeframe. Opco was in a poor negotiation position, with substantial cash needs and an already significant debt level.

XXXXXXXXXX

As a result, the financial situation over the period XXXXXXXXXX was one of a critical debt to equity ratio, severe cash restrictions and covenants imposed by the main lender and tremendous pressure on Opco to fulfill these covenants. The company’s president was restricted to very nominal remuneration over this period and potential expansion opportunities were “shelved”. In the absence of any special action, Opco should have been able to significantly retire this debt over a five to seven-year period. When the debt was reduced to a manageable level, it would be replaced by subsidiary-based financing. However, it would necessitate applying all available cash flow towards debt reduction for this five to seven-year window. Many potential future opportunities would have been missed.

As outlined in advance income tax ruling XXXXXXXXXX which was issued on XXXXXXXXXX, Opco was attempting to attract an equity investor. In XXXXXXXXXX, Investor invested $XXXXXXXXXX into convertible preferred shares of Opco.

In addition, the decision was made, in the summer of XXXXXXXXXX, to sell the XXXXXXXXXX (“the Asset”) owned by Subco4. The sale of a business is a totally uncharacteristic event in the Opco Group of Companies. Opco is acquisition and growth-oriented and intent on expanding and acquiring new opportunities. The decision to sell was made for the following reasons:

-Obtain cash to reduce the bank debt of Opco.

-The Asset was not yet profitable and was requiring significant funding by the partners.

-
XXXXXXXXXX

-

XXXXXXXXXX

-

XXXXXXXXXX

-
XXXXXXXXXX

-XXXXXXXXXX, future competition was about to become immense and Opco anticipated this would significantly reduce the expected future profitability of the Asset.

-Opco was forced to utilize many of its key management people in the Asset in an attempt to make it profitable. The General Manager of the Asset had resigned. His temporary replacement had limited experience. This tied up a key Opco resource, its upper management, who were forced to focus on XXXXXXXXXX.

Subco4 received about $XXXXXXXXXX cash from the sale of the Asset. This money was transferred to Opco and these funds and the funds from the share issuance were applied entirely against Opco’s outstanding debt obligation to the financial institution. The debt was reduced to less than $XXXXXXXXXX. The proposed transfer of the Target Business does not form part of the same series of transactions which includes the sale of the Asset as described herein.

Opco is now poised to pursue subsidiary-based financing. It can negotiate its credit arrangements from a position of substantial strength.

Opco is very close to negotiating a stand alone credit facility in Subco1. This facility should be arranged prior to the end of Subco1's XXXXXXXXXX fiscal period. However, no funds will be drawn down on the facility until after the date of this letter. Opco is also engaged in protracted negotiations with various lenders to provide stand alone financing in Subco2 and Subco3. It is Opco’s intent that all of these subsidiary financings will have extremely favourable, non-restrictive and flexible credit and repayment terms with limited asset exposure. It is anticipated that there will be no recourse to Opco and no exposure of one subsidiary’s assets to another’s liabilities. Opco will be positioned as a secured creditor in these subsidiaries. The company is well along the path to fulfilling its key long-term objective.

Opco has a number of business and investment opportunities it is investigating. The acquisition of XXXXXXXXXX is being actively pursued. On XXXXXXXXXX, Opco acquired all of the issued common shares of XXXXXXXXXX.

The funds provided by the sale of XXXXXXXXXX and the convertible preferred share issuance have enabled Opco to pursue these strategic objectives currently rather than in five to seven years. While the funds from those sources have enabled Opco to “fast track” its corporate objectives, they were not necessary to the successful implementation thereof. This could have been achieved over a longer period through the cash flow from operations.

None of the transactions outlined herein, nor the transactions contemplated in the ruling, reduce the share value of Opco or the inherent capital gain on such shares.

Opco now intends to transfer the Target Business to a subsidiary, which is the subject of this ruling request, to enable it to pursue its subsidiary-based financing objective. The target date for such a transfer is XXXXXXXXXX. You have advised us that Opco did not previously transfer the Target Business to a separate subsidiary for the following reasons:

the Target Business was experiencing large start-up and current operating losses and it was believed that these losses should be incurred while the Target Business was an asset of Opco where the losses would be more readily useable;

the Target Business was losing money and it was considered unlikely that anyone would finance it on a stand alone basis;

the financial statements would present a much stronger picture if the Target Business was not transferred to a separate subsidiary until it was profitable, since they would not reflect losses and an accumulated deficit; and

during the start-up period, key Opco executives were devoting substantial time and effort to the Target Business and it was believed that their focus would be stronger if the Target Business was an asset of Opco.

You have also advised us that Opco would have transferred the Target Business to a separate operating subsidiary at this time even if the equity investment made by Investor had not occurred. In this regard, you have advised us that Opco has a practice of transferring XXXXXXXXXX to separate operating subsidiaries once their cash flow has "matured" and they are no longer generating operating losses. This practice is evidenced by the fact that XXXXXXXXXX have previously been transferred to Subco1, Subco2 and Subco3 as described in paragraphs 6, 7 and 8 above. The proposed transfer of the Target Business does not form part of the same series of transactions which includes the equity investment by Investor as described above.

Opco maintains the head office personnel and provides management services to Subco1, Subco2 and Subco3 and will provide the same to Newco as well as any of its other subsidiaries. Fees for such services will be billed at fair market value rates.

Proposed Transactions

A new corporation ("Newco") will be incorporated under XXXXXXXXXX law. The authorized share capital of Newco will be as follows:

a) Class XXXXXXXXXX voting common shares;

b) Class XXXXXXXXXX voting, non-participating shares, redeemable at $XXXXXXXXXX per share; and

c) Class XXXXXXXXXX non-voting, redeemable and retractable preferred shares.

Newco will be a taxable Canadian corporation and a Canadian-controlled private corporation. It will not be a specified financial institution or a restricted financial institution.

No shares of Newco will be issued at the time of incorporation or thereafter until the first issuance of shares as a result of the proposed transactions described in paragraph 12 below.

XXXXXXXXXX, Opco will transfer all of the properties, except trade accounts receivable, of the Target Business to Newco for a purchase price equal to the fair market value of the properties transferred. Newco will satisfy the purchase price as follows:

by the assumption of liabilities (in an amount not exceeding the aggregate of the agreed amounts referred to below) associated with the Target Business;

by issuing to Opco a promissory note (the "Newco Note1") payable on demand having a principal amount and fair market value equal to the aggregate of the elected amounts referred to below less the aggregate of $XXXXXXXXXX and the liabilities assumed as described in (a). The Newco Note1 will bear interest on issuance at XXXXXXXXXX%. Prepayments can be made without penalty. The Newco Note1 will be secured by a floating debenture on the assets of Newco;

by issuing to Opco redeemable and retractable Class XXXXXXXXXX preferred shares of its capital stock having an aggregate redemption amount and fair market value equal to the aggregate fair market value of the property transferred less the aggregate of the liabilities assumed as described in (a), the principal amount of the Newco Note1 described in (b) and $XXXXXXXXXX; and

by issuing to Opco XXXXXXXXXX voting Class XXXXXXXXXX common shares of its capital stock having an aggregate fair market value equal to the amount by which the fair market value of the property transferred by Opco exceeds the aggregate of the liabilities assumed as described in (a), the principal amount of the Newco Note1 described in (b) and the fair market value of the redeemable and retractable Class XXXXXXXXXX preferred shares described in (c).

Opco and Newco will elect jointly in prescribed form and within the time limits referred to in subsection 85(6) of the Act, to have the rules of subsection 85(1) of the Act apply to the transfers of any eligible property of Opco which is transferred to Newco as described herein. The amount agreed upon in such election in respect of each of the eligible properties so transferred will be expressed in dollars and shall be equal to:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the cost amount of the property to Opco and the fair market value thereof;

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the cost amount of the property to Opco, the cost of the property to Opco and the fair market value thereof; and

(c)in the case of eligible capital property, an amount equal to the least of 4/3 of the cost amount of the property to Opco, the cost of the property to Opco and the fair market value thereof.

For greater certainty, the agreed amount for any eligible property included in the subsection 85(1) election referred to herein will not be less than the amount of any liabilities assumed by Newco as consideration for the transfer of such property. In addition, the subsection 85(1) election referred to herein will not include any prepaid expenses.

The aggregate paid-up capital of the redeemable and retractable Class XXXXXXXXXX preferred shares to be issued by Newco will be $XXXXXXXXXX. The aggregate paid-up capital of the XXXXXXXXXX voting Class XXXXXXXXXX common shares will be $XXXXXXXXXX.

On the day following the transfer of the Target Business to Newco as described in paragraph 12 above, Newco will redeem its Class XXXXXXXXXX preferred shares by issuing to Opco a demand promissory note (the "Newco Note2") having a face amount and fair market value equal to the redemption amount of its preferred shares so redeemed. This Newco Note2 will not bear any interest until demand and upon demand will bear interest at the XXXXXXXXXX prime lending rate plus XXXXXXXXXX%. Prepayments can be made without penalty. The Newco Note2 will be secured by a floating debenture on the assets of Newco.

Brother1 will subscribe for and be issued XXXXXXXXXX voting Class XXXXXXXXXX shares of Subco1 at $XXXXXXXXXX per share. Subsequent to this issuance, Brother1 will own XXXXXXXXXX% of all the voting rights sufficient to elect the Board of Directors of Subco1. This will ensure that Subco1 is not a subsidiary of Opco for purposes of the relevant corporate law.

Subco1 will borrow up to $XXXXXXXXXX from an arm's length financial institution. The loan will not be convertible into shares and the interest rate will not be dependent, in whole or in part, on profits or cash flow of Subco1. Subco1 will use some or all of the loan proceeds to acquire Class XXXXXXXXXX preferred shares of Opco. The Class XXXXXXXXXX preferred shares of Opco will provide for a cumulative variable dividend rate that is XXXXXXXXXX higher than the interest rate payable by Subco1 in respect of the financing obtained to acquire the shares. The projected cash flow of Opco is expected to be sufficient to meet its obligations in respect of any dividend payments, including the dividends on the Class XXXXXXXXXX shares to be issued to Subco1.

The business assets of Subco1 will be pledged as security for the loan, but the Class XXXXXXXXXX shares of Opco will be excluded from such security.

Opco will use the funds from the issuance of its Class XXXXXXXXXX shares to repay existing bank debt on which interest is deductible pursuant to paragraph 20(1)(c) or subsection 20(3) of the Act. Any funds not used in this manner will be used to fund the acquisition of new business ventures, either directly or through subsidiary corporations, expansion of existing operations of the subsidiaries, increase working capital or fund operating expenses of Opco or its subsidiaries.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to complete another stage of Opco’s long-term strategic plan of achieving subsidiary-based financing with Opco obtaining secured creditor positioning in respect of the subsidiary's operations. The objective is to optimize the financing alternatives available to Opco while substantially reducing the risk of leverage financing and creditor-proofing Opco’s equity in each subsidiary.

Other Information

At some time prior to the transactions described in paragraph 19 below, Brother1 will subscribe for sufficient Class XXXXXXXXXX shares of Newco such that he will have XXXXXXXXXX% of all voting rights of that company necessary to elect the Board of Directors. This will ensure that Newco is not a subsidiary of Opco or Holdco for purposes of the relevant corporate law.

Over a period of years, Newco will borrow funds from external financial institutions with limited or no guarantees from Opco. These borrowed funds will be invested in preferred shares of either Opco, Holdco or a subsidiary thereof. The preferred shares Newco will acquire will be non-voting, redeemable and retractable at the issue price and will entitle the holder to cumulative dividends on the issue price at a variable rate higher than the interest payable by Newco on the funds borrowed to acquire the shares. Newco will pledge its business assets, other than the preferred shares, as security for the loan(s) from the financial institution(s).

Opco, Holdco or the particular subsidiaries thereof will use the funds from the issue of their preferred shares as described in paragraph 19 above to repay existing bank debt, fund new acquisitions or business ventures and pay operating costs.

None of the shares of Newco has been or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) of the Act as a "guarantee agreement";

(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5) of the Act; or

(c) the subject of a dividend rental arrangement.

There is no current intention for any of the issued shares of any corporation referred to in this letter to be disposed of by the current holder thereof.

Rulings

Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and that the proposed transactions are carried out as set forth herein, the following rulings are given:

A.Subject to the application of subsection 26(5) of the Income Tax Application Rules and to the application of paragraph 88(2.2)(b) of the Act, which applies for the purposes stated in the preamble to subsection 88(2.2) of the Act, the provisions of subsection 85(1) of the Act will apply to the transfer by Opco of each eligible property to Newco as described in paragraph 12 above such that the agreed amount in respect of each such transfer shall be deemed to be Opco's proceeds of disposition and Newco's cost thereof pursuant to paragraph 85(1)(a) of the Act. For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfers referred to herein.

B.The amount by which the amount paid by Newco on the redemption of its Class XXXXXXXXXX preferred shares held by Opco as described in paragraph 13 above exceeds the paid-up capital of the Class XXXXXXXXXX preferred shares redeemed will:

a)be deemed by paragraph 84(3)(a) of the Act to be a dividend paid by Newco;

b) be deemed by paragraph 84(3)(b) of the Act to be a dividend received by Opco; and

c) pursuant to the definition of “proceeds of disposition” in section 54 of the Act, not be included in determining the proceeds of disposition to Opco in respect of such preferred shares by virtue of paragraph (j) of that definition.

C.The dividend referred to in Ruling B above, to the extent that it is a taxable dividend, will:

a) be included in the income of Opco pursuant to paragraphs 12(1)(j) and 82(1)(a) of the Act;

b) not be included in the income of Opco pursuant to subsection 9(1) of the Act; and

c) be deductible by Opco in calculating its taxable income under subsection 112(1) of the Act, and, for greater certainty, such deduction will not be prohibited by either of subsections 112(2.2) or (2.4) of the Act.

D.Part VI.1 of the Act will not apply to the deemed dividend described in Ruling B above because the dividend will be an excluded dividend pursuant to paragraph (a) of the definition of that term in subsection 191(1) of the Act.

E.The Newco Note2 issued by Newco as consideration for the redemption of the Class XXXXXXXXXX preferred shares as described in paragraph 13 above will have a cost amount to Opco that is equal to the redemption amount of the Class XXXXXXXXXX preferred shares.

F.Pursuant to paragraph 20(1)(c) of the Act, Newco will be entitled to deduct, in computing its income for a taxation year for the purposes of the Act, any amount paid in the year or payable in respect of the year (depending upon the method regularly followed by Newco in computing its income for purposes of the Act) as interest on the Newco Note1, to the extent that the amount paid or payable is reasonable and is paid pursuant to a legal obligation to pay interest on the Newco Note1 which was issued by Newco to acquire the properties of the Target Business as described in paragraph 12 above and provided that the properties acquired continue to be used by Newco for the purpose of gaining or producing income from the property or from a business (other than property the income from which would be exempt or for property that is an interest in a life insurance policy).

G.Pursuant to paragraph 20(1)(c) of the Act, Subco1 will be entitled to deduct, in computing its income for a taxation year for the purposes of the Act, any amount paid in the year or payable in respect of the year (depending upon the method regularly followed by Subco1 in computing its income for purposes of the Act) as interest on the money borrowed to pay the subscription price of the Class XXXXXXXXXX shares of Opco to the extent that the amount paid or payable is reasonable in the circumstances and is paid pursuant to a legal obligation to pay interest on the money borrowed by Subco1 to pay the subscription price for the Class XXXXXXXXXX shares of Opco as described in paragraph 15 above and provided that Subco1 continues to hold the Class XXXXXXXXXX shares of Opco for the purpose of producing or gaining income from property (other than property the income from which would be exempt or for property that is an interest in a life insurance policy).

H.By virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the taxable dividend that Opco will be deemed to receive from Newco as referred to in Ruling B above, provided that there is not:

(a)a disposition of any property to a person with whom Opco is not related, or

(b)a significant increase in the interest in any corporation of any person with whom Opco is not related,

which occurs as part of a transaction or event or a series of transactions or events that includes the proposed transactions described in this letter. For greater certainty, the proposed transactions described in paragraphs 11 to 17 above, in and by themselves, will not be considered to result in any of the events described in (a) or (b) above.

I.Subsection 15(1) of the Act will not apply to the proposed transactions as described in paragraphs 11 to 17 above.

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

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Opinions

Provided that our understanding of the facts and proposed transactions described herein is correct, provided that there is no disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events which includes the taxable dividends referred to in Ruling B above and further provided that proposed paragraph 55(3)(a) and subsection 55(3.01) of the Act are enacted in substantially the same form as proposed in Bill C-69 which received first reading on December 2, 1996 and which subsequently died on the Order Paper, it is our opinion that, the exception in proposed paragraph 55(3)(a) will prevent the application of subsection 55(2) to the taxable dividend that Opco will be deemed to receive from Newco as referred to in Ruling B above. For greater certainty, the proposed transactions described in paragraphs 11 to 17 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of proposed subparagraphs 55(3)(a)(i) to (v).

Comments

1.Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or cost amount of any property referred to herein, or the paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

2.The taxable dividends that Opco will be deemed to receive from Newco which are referred to in Ruling B above will, by virtue of subsection 112(3) of the Act, reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received.

Yours truly,

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