1997 Ruling 9718053 - DPS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: financial difficulty

Position: ruling given

Reasons:

XXXXXXXXXX							971805
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX

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

To the best of your knowledge and that of XXXXXXXXXX, none of the issues in respect of which rulings are herein requested is currently under consideration by a district office or taxation centre in connection with a tax return or notice of objection already filed.

Except as otherwise noted, all statutory references in this ruling application are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th Supplement) C.1, as amended (the "Act").

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

Facts

1. XXXXXXXXXX is a public corporation and a taxable Canadian corporation formed on XXXXXXXXXX as a result of the amalgamation (herein, the "Amalgamation") under the XXXXXXXXXX. The name was changed to XXXXXXXXXX. XXXXXXXXXX underwent an initial public offering and became public XXXXXXXXXX. The terms "public corporation" and "taxable Canadian corporation" as used here and subsequently, have the meanings assigned by subsection 89(1). XXXXXXXXXX deals with the XXXXXXXXXX Tax Services office and filed a corporate tax return with XXXXXXXXXX Taxation Centre.

2. The authorized share capital of XXXXXXXXXX consists of:

- an unlimited number of Class XXXXXXXXXX voting common shares;

- XXXXXXXXXX convertible Class XXXXXXXXXX voting common shares, with a preferred cumulative annual dividend of $XXXXXXXXXX per share, payable semi-annually until XXXXXXXXXX inclusively, participating on a pari passu basis with Class XXXXXXXXXX common shares on all declared dividends on common shares during the year, after holders of Class XXXXXXXXXX common shares have received $XXXXXXXXXX per share.

- XXXXXXXXXX voting preferred shares, with a cumulative dividend of XXXXXXXXXX% payable quarterly in the amount of $XXXXXXXXXX per share, convertible into XXXXXXXXXX Class XXXXXXXXXX common shares for each preferred share converted, redeemable and retractable starting XXXXXXXXXX at a price of $XXXXXXXXXX per share.

- an unlimited number of non-voting first ranking and second ranking preferred shares, issuable in series.

3. The issued share capital of XXXXXXXXXX consists of XXXXXXXXXX, owned as follows:

		                    Number      Paid-Up Capital

Class XXXXXXXXXX common shares

XXXXXXXXXX

Class XXXXXXXXXX Common shares

XXXXXXXXXX

Convertible XXXXXXXXXX% preferred shares

XXXXXXXXXX

The expression "paid-up capital" as used here and subsequently has the meaning assigned by subsection 89(1).

4. XXXXXXXXXX is a private corporation and a taxable Canadian corporation formed on XXXXXXXXXX. XXXXXXXXXX is owned and controlled by the XXXXXXXXXX family.

5. XXXXXXXXXX is a private corporation and a taxable Canadian corporation. All of its voting shares are held by XXXXXXXXXX, who is unrelated to the XXXXXXXXXX family.

6. From XXXXXXXXXX to the present, XXXXXXXXXX has been active in the

XXXXXXXXXX

The main assets of XXXXXXXXXX consist of land in the process of being developed which for the most part is subject to mortgages, as well as a few rental properties. For the most part, the land in the process of being developed is held as "inventory" by XXXXXXXXXX having the meaning assigned by subsection 248(1). A list of these properties with their related mortgagees and mortgages as at XXXXXXXXXX were as follows:

A) Land held for Development

XXXXXXXXXX owns approximately XXXXXXXXXX square feet of land primarily located in the XXXXXXXXXX area.

Mortgages
(Including
Carrying Unpaid Interest
Values and Taxes)

XXXXXXXXXX

B) Rental Properties

XXXXXXXXXX

C) "Protected Properties"

XXXXXXXXXX

D) Other assets                   Carrying
		                                Value    Mortgage

XXXXXXXXXX

7. Many members of the XXXXXXXXXX family are active in the activities of XXXXXXXXXX and its subsidiaries.

XXXXXXXXXX

8. During the XXXXXXXXXX, XXXXXXXXXX was able to finance investments, land acquisition and growth through new borrowings and by becoming public XXXXXXXXXX. In the early XXXXXXXXXX, XXXXXXXXXX real estate market conditions worsened, making it difficult to obtain new borrowings. Due to the severe cash flow shortfall, XXXXXXXXXX was unable to pay its XXXXXXXXXX property taxes on its vacant land. XXXXXXXXXX has not paid the property tax installments due in XXXXXXXXXX.

In addition, XXXXXXXXXX was unable to pay its debts to various creditors and as such, was in default of its loans.

There have been no dividends paid by XXXXXXXXXX on its common and preferred shares since XXXXXXXXXX.

9. In XXXXXXXXXX, XXXXXXXXXX approached all its major lenders in order to negotiate the restructuring of XXXXXXXXXX assets and liabilities. After lengthy negotiations, XXXXXXXXXX filed a notice of intention to make a proposal to its creditors pursuant to subsection 50.4(1) of the Bankruptcy and Insolvency Act on XXXXXXXXXX (the "Proposal Date") and thereafter effectively made such a proposal which was accepted by a majority of the creditors who attended a creditors' meeting on XXXXXXXXXX. The proposal was also approved by the Bankruptcy Court on XXXXXXXXXX.

10. Based on the financial difficulties faced by XXXXXXXXXX as well as XXXXXXXXXX position of being in default on various loans, as outlined in paragraph 9 above, XXXXXXXXXX has met the requirement in subparagraph (e)(iii) of the definition of "Term Preferred Share" in subsection 248(1). In addition, XXXXXXXXXX filed an intention to make a proposal to its creditors under the Bankruptcy and Insolvency Act, as outlined in paragraph 9 above, and thus met the requirement in subparagraph (e)(i) of the definition of "Term Preferred Share" in subsection 248(1).

11. XXXXXXXXXX selected Option B of the proposal made to the Bankruptcy Court and each entered into ancillary agreements with XXXXXXXXXX which provided for the respective properties secured in favour of them to be transferred by XXXXXXXXXX to newly incorporated wholly-owned subsidiaries ("XXXXXXXXXX" respectively) so that the banks would maintain their security free and clear of any other creditors. Consequently, the properties secured in favour of the XXXXXXXXXX will be transferred by XXXXXXXXXX to XXXXXXXXXX as opposed to remaining in XXXXXXXXXX. In addition, the agreement between the XXXXXXXXXX allows for the XXXXXXXXXX Properties to then be transferred from XXXXXXXXXX to a partnership (the "Partnership") consisting of XXXXXXXXXX. The agreement further states that XXXXXXXXXX would cause the issuance of distress preferred shares to the XXXXXXXXXX in order to restructure the XXXXXXXXXX debt, the whole at the option of the XXXXXXXXXX.

12. In addition to making the proposal referred to in paragraph 9 above, XXXXXXXXXX entered into specific agreements with the following banks as to how to treat the excess cash in the subsidiary companies, when the debts and interest will have been totally repaid:

XXXXXXXXXX

XXXXXXXXXX

13. The restructuring of the XXXXXXXXXX Properties as outlined in paragraph 11 above, will allow XXXXXXXXXX to refinance its loans and advances from XXXXXXXXXX and any accrued but unpaid interest and any other amounts owing to the XXXXXXXXXX as at the date contemplated in paragraph 25 below (the "XXXXXXXXXX Loans") with distress preferred shares. As at XXXXXXXXXX Loans amount to approximately $XXXXXXXXXX.

With a view to facilitate an orderly development of the XXXXXXXXXX, advanced an additional sum of approximately

XXXXXXXXXX

14. Cash flows for the XXXXXXXXXX Properties for the calendar years XXXXXXXXXX indicate significant cash flow deficiencies if the XXXXXXXXXX Loans are not converted into share capital as outlined in the proposed transactions of the loan. A summary of these cash flow projections both before and after the implementation of the share issue is provided below.

PROJECTED CASH FLOW SUMMARY ($ XXXXXXXXXX)

XXXXXXXXXX

15. XXXXXXXXXX is a restricted financial institution and a specified financial institution within the meanings defined to these expressions by subsection 248(1). XXXXXXXXXX deals with the XXXXXXXXXX tax services office and files its corporation income tax return with the XXXXXXXXXX Taxation Centre.

16. XXXXXXXXXX deals with XXXXXXXXXX as well as its shareholders at arm's length within the meaning assigned to this expression by subsection 251(1).

Proposed Transactions

17. XXXXXXXXXX will incorporate XXXXXXXXXX. The authorized capital of XXXXXXXXXX will include an unlimited number of voting and participating common shares. XXXXXXXXXX will subscribe for a nominal amount of common shares of XXXXXXXXXX for nominal cash consideration.

18. XXXXXXXXXX will sell, at fair market value, the XXXXXXXXXX Properties to XXXXXXXXXX. As consideration for this sale, XXXXXXXXXX will assume the XXXXXXXXXX Loans. XXXXXXXXXX will continue to develop and sell the XXXXXXXXXX Properties.

19. XXXXXXXXXX will establish the Partnership by contributing $XXXXXXXXXX respectively. In return for these contributions, XXXXXXXXXX will receive a XXXXXXXXXX% interest in the profits and losses of the Partnership, respectively. This allocation reflects the operating efforts that XXXXXXXXXX will contribute to the Partnership in the development and resale of the XXXXXXXXXX Properties. XXXXXXXXXX will have the right to acquire XXXXXXXXXX interest in the Partnership at its fair market value at the time of winding up the Partnership and as consideration will issue such number of XXXXXXXXXX shares equal to the value of XXXXXXXXXX interest in the Partnership. XXXXXXXXXX will elect to have this transfer take place pursuant to section 85.

20. In the event that XXXXXXXXXX does not acquire XXXXXXXXXX interest in the Partnership as described in paragraph 19 above, the Partnership Agreement will allow for the following to take place on the winding-up of the Partnership:

i) XXXXXXXXXX will assume all the Partnership debts existing immediately before the Partnership ceases to exist;

ii) XXXXXXXXXX will be entitled to receive assets of the Partnership based on its capital accounts; and

iii) XXXXXXXXXX will have the right to the remaining assets of the Partnership.

21. XXXXXXXXXX will sell the XXXXXXXXXX Properties to the Partnership. XXXXXXXXXX. As consideration for the sale, the Partnership will assume the XXXXXXXXXX Loans. The purpose of this transfer is to reflect the business relationship between XXXXXXXXXX and avoid the complexities of XXXXXXXXXX transferring each lot to be developed on a piece-meal basis from XXXXXXXXXX to XXXXXXXXXX.

22. The Partnership will incorporate a new corporation ("Newco A") under the XXXXXXXXXX. The authorized capital of Newco A will include an unlimited number of voting and participating common shares. The Partnership will subscribe for a nominal amount of common shares of Newco A for 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.

23. Newco A will cause a new corporation to be incorporated under the Canada Business Corporations Act ("Newco B"). The authorized share capital of Newco B will include:

a) an unlimited number of voting and participating common shares; and

b) an unlimited number of Class XXXXXXXXXX preferred shares (the "DP shares"), the attributes of which will include the following;

i) all DP shares, as a class, shall have the right to XXXXXXXXXX% of the votes while the DP shares are outstanding regardless of the number of outstanding DP shares;

ii) non-participating, except for a preferential cumulative fixed dividend entitlement of XXXXXXXXXX% per annum;

iii) redeemable at $XXXXXXXXXX per share plus accrued and unpaid dividends;

iv) redeemable at the option of the holder at $XXXXXXXXXX per share plus accrued and unpaid dividends ("Retraction Amount"), upon the occurrence of a Designated Event as described in paragraph 31 below, or, in any event, on the fifth anniversary of their issuance; and

v) in the event of the liquidation, dissolution or winding-up of Newco B, the holders of Class XXXXXXXXXX preferred shares will be entitled to receive in priority to the holders of the common shares an amount equal to $XXXXXXXXXX per share plus accrued and unpaid dividends.

24. Newco A will subscribe for a nominal amount of common shares of Newco B for nominal cash consideration. Newco B will be a single-purpose corporation that will not engage in any business or activity except as provided for in the proposed transactions.

25. XXXXXXXXXX will advance, on a fully secured basis, an amount to Newco B equal to the amount of the XXXXXXXXXX Loans (the "Daylight Loan"). The Daylight Loan will be for a term of 1 day, non-interest bearing and evidenced by a note. The Partnership, XXXXXXXXXX and Newco A will guarantee all of Newco B's obligations to the XXXXXXXXXX under the terms of the Daylight Loan.

26. Newco B will loan, on a fully secured basis, the full proceeds of the Daylight Loan received by it to Newco A (the "Inter-Company Loan"). The Inter-Company Loan will be repayable on demand or in XXXXXXXXXX years, whichever is earlier, and will be interest bearing. Newco B will however, waive all rights to receive any interest from Newco A with respect to the Inter-Company Loan. The Partnership and XXXXXXXXXX will guarantee all of Newco A's obligations to Newco B under the terms of the InterCompany Loan.

27. Newco A will purchase the XXXXXXXXXX Loans from the XXXXXXXXXX as well as all related security (the "Purchase"). The purchase price will be equal to the principal amount of the XXXXXXXXXX Loans then outstanding and any accrued interest as at the day of the Purchase (the "Purchase Price") and will be paid in cash using the proceeds of the Inter-Company Loan. It will be agreed between Newco A and the Partnership that interest will accrue on the XXXXXXXXXX Loans for the first XXXXXXXXXX months but will not be payable by the Partnership on the XXXXXXXXXX Loans for as long as Newco A holds the XXXXXXXXXX Loans. Newco A will thereafter waive all rights to receive any interest from the Partnership with respect to the XXXXXXXXXX Loans until the occurrence of a Designated Event, as described in paragraph 31 below or, in any event, on the fifth anniversary of the Purchase. If, on the fifth anniversary of the Purchase, all dividends are paid on the DP shares to be issued by Newco B, as described in paragraph 32 below, the XXXXXXXXXX months of accrued interest on the XXXXXXXXXX Loans will be deemed to be cancelled immediately before Newco A transfers the XXXXXXXXXX Loans to XXXXXXXXXX. Interest will begin to accrue again when the XXXXXXXXXX Loans are reacquired by XXXXXXXXXX.

The purpose for the accrual of interest for XXXXXXXXXX months is to provide XXXXXXXXXX with access to the old security at an amount in excess of the amount of any indebtedness under the XXXXXXXXXX Loans in the event that XXXXXXXXXX requires the DP shares to be acquired for an amount in excess of the amount of the indebtedness under the related XXXXXXXXXX Loans, as set out in paragraph 30 below, as well as to compensate for any time delays in unwinding the proposals.

28. XXXXXXXXXX will subscribe for a number of DP shares on the basis of one share for each dollar of the face value of the XXXXXXXXXX Loans of Newco B. The subscription price of the DP shares issued to XXXXXXXXXX will be paid in cash and will be equal to the amount of the XXXXXXXXXX Loans.

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

29. Newco B will repay the Daylight Loan in full to XXXXXXXXXX using proceeds from the DP share subscription.

30. The Partnership, Newco A, Newco B and XXXXXXXXXX will enter into an agreement which will provide that after the occurrence of any one of the Designated Events, XXXXXXXXXX will have the following options:

a) Newco A will be required, at the request of XXXXXXXXXX, to purchase all or some of the DP shares from XXXXXXXXXX for a purchase price equal to the Retraction Amount of the DP shares then outstanding adjusted to compensate XXXXXXXXXX for any tax liabilities with respect to the DP shares, different from those outlined in the rulings given. At XXXXXXXXXX option, the purchase price will be paid in the following manner:

i) in cash; or

ii) by the reassignment of the XXXXXXXXXX Loans by Newco A to XXXXXXXXXX.

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

b) Newco A will be required to sell for cash, all or some of the XXXXXXXXXX Loans, to XXXXXXXXXX, for an amount equal to the principal amount of the portion of the XXXXXXXXXX Loans to be sold, adjusted to compensate XXXXXXXXXX for any tax liabilities with respect to the DP shares, different from those outlined in the rulings given.

Concurrently, Newco A will be required to purchase all or some of the DP shares held by XXXXXXXXXX for their Retraction Amount utilizing, inter alia, the cash proceeds it receives from XXXXXXXXXX from the sale of the XXXXXXXXXX Loans.

To secure its obligations to purchase the shares held by XXXXXXXXXX and to pay the purchase price, Newco A will assign to XXXXXXXXXX its right to receive the sale proceeds from XXXXXXXXXX. The Partnership will guarantee all of Newco A's obligations to XXXXXXXXXX; or

c) XXXXXXXXXX will retract the DP shares and cause the shares to be redeemed by Newco B in exchange for the transfer by Newco B to XXXXXXXXXX of the Inter-Company Loan and related security.

XXXXXXXXXX will thereafter demand repayment by Newco A of the InterCompany Loan by having Newco A assign the XXXXXXXXXX Loans and related security to XXXXXXXXXX.

31. "Designated Event" includes, inter alia, the following events:

a) Newco B shall have failed to pay the regular dividends payable on the DP shares as and when they are payable in accordance with the terms and conditions of the DP shares;

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

c) The Partnership or Newco A shall have failed to make a contribution of capital or principal repayment as described in paragraphs 32 and 33;

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

e) XXXXXXXXXX, the Partnership, XXXXXXXXXX, Newco A or Newco B 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 an sequestrator or a receiver/manager (or both) or any other officer with similar powers shall be appointed for XXXXXXXXXX, the Partnership, XXXXXXXXXX, Newco A or Newco B or for the property of XXXXXXXXXX, the Partnership, XXXXXXXXXX, Newco A or Newco B or any part thereof that is in the opinion of the holder of the DP shares, a substantial part thereof.

32. Dividends payable by Newco B on the DP shares and any fees and expenses of Newco A or Newco B incurred to maintain good standings under all applicable laws and agreements will be funded by capital contributions from time to time by the Partnership to Newco A and, as applicable, by equivalent capital contributions by Newco A to Newco B.

33. The capital contributions referred to in paragraph 32 above will be regarded as funds to be held for the benefit of the Partnership until such time as Newco A or Newco B require the funds to make the payments referred to in paragraph 32 above. Neither Newco A nor Newco B will add such contributions of capital to the stated capital of their shares.

34. The redemption by Newco B of the DP shares held by XXXXXXXXXX will be funded through a repayment by the Partnership to Newco A of all or part of the XXXXXXXXXX Loans and by the simultaneous repayment of all or part of the Inter-Company Loan by Newco A to Newco B.

35. Notwithstanding the terms and conditions of the DP shares or any mandatory redemption of the DP shares that may be required by XXXXXXXXXX, all of the "Excess Cash Flow", as defined in paragraph 36 below, arising in each fiscal period of the Partnership, shall be used to repay a portion of the loan outstanding to Newco A. Newco A will then use these proceeds to repay a portion of the loan outstanding to Newco B. Newco B will then use these proceeds to redeem the DP shares issued by Newco B within 120 days after the end of that fiscal period.

36. The "Excess Cash Flow" in respect of a particular fiscal period of the Partnership shall be the change or increase in cash flow for such fiscal period of the Partnership from all sources, as would be reported on a consolidated Statement of Changes of Financial Position prepared in accordance with generally accepted accounting principals, if only directly and indirectly wholly-owned companies of the Partnership were so included, but before outlays for:

a) the payment of dividends other than dividends on the DP shares;

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

i) the purchase or redemption of the DP shares, other than purchases or redemptions made in the period in respect of a prior year's Excess Cash flow;

ii) repayments of indebtedness incurred in the normal and ordinary course of business by the Partnership and in existence at the date the DP 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 the Partnership, other than for the purpose of acquiring the lands in XXXXXXXXXX;

iv) expenditures or repayments between any of the Partnership, Newco A and Newco B;

v) reasonable capital expenditures or payments on capital account incurred in the normal and ordinary course of the business of the Partnership 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 DP shares or Newco B to redeem the DP shares or to pay dividends thereon;

vii) costs incurred in connection with the issuance of the DP shares;

c) loans to directors, officers and shareholders of XXXXXXXXXX or other persons, firms or corporations, other than Newco A and Newco B;

d) distributions to the partners of the Partnership, other than those to enable the partners to pay income or capital tax liabilities including Part 1.3 tax in respect of the particular fiscal period.

For the purpose of the 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 the foregoing shall be adjusted, as appropriate, to prevent any unintended duplication of amounts.

37. For the purpose of the definition of Excess Cash Flow provided in paragraph 36 above:

a) Excess Cash Flow shall be reduced by negative Excess Cash Flow rising in the immediately preceding fiscal period;

b) Excess Cash Flow shall not include reasonable working capital reserves to fund reasonable capital expenditures, construction and operating costs or payments on capital account made or paid in the normal and ordinary course of business and will be held in reserve to pay any such expenses incurred in any subsequent fiscal period.

38. Subject to the operation of any applicable law to which Newco A or Newco B are subject, each of Newco A and Newco B will be wound-up without any undue delay at the earlier of:

a) the date upon which there are no longer any DP shares outstanding; and

b) the date that is five years after the date on which the DP shares are issued.

39. XXXXXXXXXX will have the right at any time and from time to time, in their sole discretion, subject to any applicable security restrictions, to sell the DP shares or any portion thereof, to third parties (the "Acquirers") on such terms and conditions as XXXXXXXXXX may in its sole discretion determine.

Purpose of Proposed Transactions

The purpose of the proposed transactions is to convert the XXXXXXXXXX debt into distress preferred share capital and thereby increase XXXXXXXXXX cash flow so as to allow it to continue its operations and to better its overall financial situation.

Rulings Given

A. The DP shares to be issued by Newco B to XXXXXXXXXX and, where applicable, sold by XXXXXXXXXX to an Acquirer, will be:

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

ii) "exempt shares" pursuant to the definition thereof in subsection 112(2.6) for that same period

and, accordingly, subsections 112(2.1), (2.2), (2.3) and (2.4) will not apply to deny the holder of such shares a deduction under subsection 112(1), or under subsection 138(6), for dividends received or deemed to have been received on the DP shares during such period.

B. No amount will be included in computing the income of Newco A or Newco B under paragraphs 12(1)(c) or 12(1)(x), or subsections 12(3), 12(9), 16(1) or 246(1), or section 9 in respect of capital contributions made or required to be made by the Partnership to Newco A or Newco B as described in paragraph 32 above, nor will any such amount constitute proceeds of disposition, as defined in section 54, to Newco A or Newco B from the disposition by either of any property.

C. No amount will be included in the income of the Partnership, Newco A, XXXXXXXXXX or an Acquirer pursuant to either of subsections 15(1) or 246(1), and section 80 will not apply to the Partnership or Newco A, solely by virtue of the fact that no interest will be paid or payable by the Partnership or Newco A in respect of the XXXXXXXXXX Loans or by Newco A to Newco B in respect of the Inter-Company Loan for the period ending on the earlier of the dates referred to in paragraphs 26 and 27 above, or as a result of the failure of Newco A to demand repayment of the XXXXXXXXXX Loans or the failure of Newco B to demand repayment of the Inter-Company Loan.

D. Subject to paragraph 20(1)(e.1), expenses incurred by the Partnership, Newco A or Newco B in the course of issuing the DP shares, will be deductible by the corporation or partnership incurring the expenses pursuant to and in accordance with paragraph 20(1)(e), to the extent such expenses are reasonable in the circumstances.

E. The cost amount, within the meaning of subsection 248(1), to:

i) Newco B of the Inter-Company Loan, immediately after the time that it is made to Newco A, will be the amount of the proceeds of the Daylight Loan, as described in paragraph 26 above;

ii) Newco A of the XXXXXXXXXX Loans, immediately after the time they are acquired from XXXXXXXXXX, will be equal to the amount of the Purchase Price paid therefore as described in paragraph 27 above;

iii) XXXXXXXXXX of the DP shares will, immediately after the time that the DP shares are issued, will be equal to the subscription price paid by XXXXXXXXXX for those DP shares as described in paragraph 28 above and in the event that an Acquirer acquires the DP shares from XXXXXXXXXX, the amount paid by the Acquirer for the DP shares

F. Upon the occurrence of a Designated Event as described in paragraph 31 above, the cost amount, within the meaning of subsection 248 of the Act, to:

i) Newco A of the DP shares will, immediately after the time that the DP shares are acquired from XXXXXXXXXX, be equal to the amount paid by the Partnership or Newco A for those DP shares as described in paragraph 30 above;

ii) XXXXXXXXXX or an Acquirer of the reacquired XXXXXXXXXX Loans will, immediately after the time that they are acquired from Newco A, be equal to the amount paid therefore as described in paragraph 30 above;

iii) XXXXXXXXXX or an Acquirer of the Inter-Company Loan, will, immediately after the time that it is reacquired from Newco B, be equal to the amount paid therefore as described in paragraph 30 above; and

iv) in any other case, the fair market value of the consideration paid therefore.

G. No amount will be included in computing the income of XXXXXXXXXX or an Acquirer, under subsection 56(2) in respect of capital contributions made or required to be made by the Partnership to Newco A or by Newco B, as described in paragraph 32 above.

H. Provided the XXXXXXXXXX Loans arose from one or more loans or "lending assets" within the meaning of subsection 248(1), made or acquired by XXXXXXXXXX in the course of its money-lending business, the XXXXXXXXXX Loans reacquired by XXXXXXXXXX or the Inter-Company Loan acquired by XXXXXXXXXX as described in paragraph 30 above, will be considered to have been acquired by XXXXXXXXXX in the ordinary course of its money lending business for purposes of paragraphs 20(1)(l) and 20(1)(p).

I. Provided that, in a particular taxation year, XXXXXXXXXX reports the DP shares as a substitute or alternative for the XXXXXXXXXX Loans, as described in paragraph 28 of the proposed transactions, not as part of its trading account in its annual report for the year to the relevant authority as contemplated in section 6209 of the Regulations, the DP shares will be "lending assets", as the term is defined in subsection 248(1), of XXXXXXXXXX for that year for purposes of paragraphs 20(1)(l) and 20(1)(p).

J. Subsection 112(4) will not apply, in respect of dividends received by XXXXXXXXXX or an Acquirer on the DP Shares, to any loss realized by XXXXXXXXXX on the XXXXXXXXXX Loans or Inter-Company Loan subsequent to them being reacquired by XXXXXXXXXX from Newco A or Newco B, respectively, in the circumstances described in paragraph 30 above.

K. Section 103 and subsection 246(1) will not apply to any allocations of income and losses by the Partnership to XXXXXXXXXX.

L. The sale by XXXXXXXXXX of the XXXXXXXXXX Properties to the Partnership, as described in paragraph 21 above, will be a disposition pursuant to the definition of "disposition" in section 54.

M. The provisions of subsection 98(5) of the Act will apply to the cessation of the Partnership as contemplated in paragraph 19 above provided that XXXXXXXXXX continues to carry on the business of the Partnership, using the Partnership property received by it as proceeds of disposition of its partnership interest.

N. To the extent that XXXXXXXXXX assumes the liabilities of the Partnership immediately before the acquisition of XXXXXXXXXX interest in the Partnership (as described in paragraph 19 above) XXXXXXXXXX will be considered to have made a contribution of capital to the Partnership immediately before the Partnership ceases to exist. For purposes of subparagraph 98(5)(a)(i) of the Act, the adjusted cost base of XXXXXXXXXX interest in the Partnership will be increased pursuant to subparagraph 53(1)(e)(iv) of the Act.

O. Subsection 245(2) will not apply, as a result of the proposed transactions in and of themselves, to redetermine the tax consequences confirmed in the advance income tax rulings given.

These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 ("IC-70-6R3") and are binding on Revenue Canada, Taxation provided that the proposed transactions described herein are completed by XXXXXXXXXX.

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

Opinion

Provided the draft regulations relating to securities held by Financial institutions released by the Department of Finance in June 1995 are enacted as proposed, the DP shares will be excluded from the mark to market property rules pursuant to subsection 142.2(1) and subsection 9002(2) of the Income Tax Regulations.

The foregoing opinion is given in accordance with the practice referred to in paragraph 21 of IC-70-6R3 and is not binding on Revenue Canada Taxation.

Yours truly,

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

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