30 November 1996 Ruling 9719043 - WITHHOLDING

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:

Changes to facts of Ruling #971581

Position:

Cancel 971581 and issue this ruling letter.

Reasons:

Considerable additional facts to be added to ensure full disclosure.

XXXXXXXXXX							971904
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: XXXXXXXXXX

This letter acknowledges your letter dated XXXXXXXXXX wherein you requested certain amendments to ruling 971581 dated XXXXXXXXXX, 1997 ("the Ruling") concerning the above mentioned taxpayer. As a result this letter cancels and replaces the Ruling.

To the best of your knowledge and that of XXXXXXXXXX none of the issues involved in the requested ruling is being considered by a tax services office or a taxation centre in connection with a tax return and none of the issues involved in the requested rulings in respect of that particular applicant is under appeal or objection.

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 was incorporated under the Business Corporations Act

XXXXXXXXXX

2. XXXXXXXXXX is a "taxable Canadian corporation" and a "private corporation" and is a resident of Canada. The terms taxable Canadian corporation and private corporation have the meanings assigned by those definitions in subsection 89(1).

3. XXXXXXXXXX

Proposed Transactions

4. XXXXXXXXXX has mailed a preliminary offering memorandum concerning an offering in the United States (the "Offering") of approximately XXXXXXXXXX (the "Notes"). In connection with the Offering of the Notes XXXXXXXXXX will XXXXXXXXXX issue warrants (the "Warrants") under a Warrant Agreement to be entered into between XXXXXXXXXX and a warrant agent. The Notes and Warrants will be issued to investors as Units (each unit will be comprised of one Note and a number of Warrants to be determined at pricing) and will not trade separately until the Separation Date (as defined in the Warrant Agreement which is to occur within XXXXXXXXXX days of the Offering) The Warrants will be warrants to acquire non-voting shares in the capital stock of XXXXXXXXXX (the "Warrant Shares") representing, in the aggregate, up to 10% (the final amount to be determined at pricing, although likely to be 5% or less) of all the Capital Stock of XXXXXXXXXX on a fully diluted basis. The Warrant Agreement will include standard anti-dilution adjustments. Each Warrant will be exercisable from any time on or after one year from the date of the Notes. The exercise price of XXXXXXXXXX per share will be paid by each initial purchaser as part of the purchase price of the Units. Therefore, no additional amounts will be paid on exercise of the Warrants.

If at any time during the period after the warrants are exercisable, XXXXXXXXXX proposes to effect a public equity offering of any capital stock, the Warrantholders will generally be entitled to include the Warrant Shares in such offering. The Warrants will also have certain other registration rights in connection with a public offering by XXXXXXXXXX of its securities. In the event that a Public Market (as defined in the Warrant Agreement) in the U.S. does not exist for the Warrant Shares within XXXXXXXXXX years after the issue date, XXXXXXXXXX will be required to either make an offer to purchase all outstanding Warrants and Warrant Shares for a purchase price equal to their fair market value at the time or take all necessary action to register all the warrant Shares with the U.S. Securities and Exchange Commission within 120 days from such date. Prior to a public offering by XXXXXXXXXX, upon a change of control, XXXXXXXXXX must make an offer to purchase all outstanding Warrants and Warrant Shares for a purchase price equal to their fair market value at the time.

Due to the fact that an investor will purchase a Unit comprised of a Note and Warrants, the investor will be required to allocate a certain portion of such Unit price to the Notes and the Warrants. The amounts of the gross proceeds from the Offering that will be allocated to the Warrants has not yet been determined and such amount will not be determined until pricing occurs. XXXXXXXXXX will make a determination of the value of the Warrants at that time, taking into account the nominal exercise price in respect thereof, and such allocation will, in the opinion of XXXXXXXXXX, be reasonable.

5. The Notes will be issued pursuant to a trust indenture (the "Indenture") to be entered into between XXXXXXXXXX and one or more trust companies.

6. Interest on the Notes will be payable semi-annually. The interest rate will be a fixed rate and paid semi-annually. The principal market for the Notes will be in the United States.

7. Except as described in paragraphs 11 and 12, below, the Notes will be unsecured obligations of XXXXXXXXXX ranking pari passu in right of payment with all other existing and future unsecured obligations of XXXXXXXXXX.

8. The Notes will not (except in the limited circumstances described in paragraph 10, below) be redeemable by XXXXXXXXXX prior to a date which is five years from the date of issuance of the Notes. Thereafter, the Notes will be subject to redemption at the option of XXXXXXXXXX, in whole or in part, at the stated redemption price (expressed as a percentage of the principal amount) plus accrued and unpaid interest to the date of redemption.

9. In the event that XXXXXXXXXX is required to withhold or deduct any amount for or on account of taxes from any payment made under the Notes, XXXXXXXXXX will pay such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by each holder (other than certain excepted holders) after such withholding or deduction will not be less than the amount the holder would have received if such taxes had not been withheld or deducted.

10. XXXXXXXXXX may, at its option, redeem the Notes, as a whole but not in part, at a redemption price equal to 100% of the principal amount of the Notes, together with accrued and unpaid interest to the redemption date, if XXXXXXXXXX has become or would become obligated to pay any Additional Amounts as a result of any change in the laws or regulations of Canada or any change regarding the application or interpretation of such laws or regulations, which is announced or becomes effective on or after the issue of the Notes. In addition, XXXXXXXXXX may have the option to redeem a portion of the Notes out of the net proceeds from a Strategic Equity Investment in XXXXXXXXXX. "Strategic Equity Investment" means an equity investment made by a Strategic Investor in XXXXXXXXXX in an aggregate amount of not less than $XXXXXXXXXX. Such option would be limited to 25% of the principal amount of the Notes after taking into account the allocation of a portion of the proceeds of the offering to the Warrants.

In addition, in the event that more than 95% of the outstanding principal of the Notes are tendered pursuant to a Change of Control Offer (as that term is defined in the "Description of The Notes" document), the remaining Notes are redeemable at the option of XXXXXXXXXX.

11. The Indenture will provide that upon the closing of the Offering, XXXXXXXXXX must purchase and pledge to a third party independent trustee (the "Trustee") for the benefit of the holders of the Notes U.S. Government debt obligations (the "Pledged Securities") in such amount as will be sufficient upon receipt of scheduled interest and principal payments of such securities to provide for payment in full of the fourth, fifth and sixth scheduled interest payments due on the Notes (the "Funded Interest Payments"), subject to the limitation that XXXXXXXXXX will not be required to use more than 25% of the gross proceeds from the Offering to purchase Pledged Securities. This limitation will take into account the amount allocated to the Warrants such that XXXXXXXXXX will not be required to purchase Pledged securities in an amount in excess of 25% of the gross proceeds of the Offering allocated to the Notes. As a result at no time will XXXXXXXXXX have the ability to freely redeem the Notes until a date that is five years from the date of issuance. The Company expects to use approximately XXXXXXXXXX, however, the precise amount of securities to be acquired will depend upon the interest rates on U.S. Government debt prevailing at the time of the closing of the Offering. The Pledged Securities will be pledged by XXXXXXXXXX to the Trustee for the benefit of the holders of Notes pursuant to a pledge agreement and will be held by the Trustee in a pledge account. Immediately prior to the date on which a Funded Interest Payment is due, XXXXXXXXXX may either deposit with the Trustee from funds otherwise available to XXXXXXXXXX cash sufficient to pay the interest payable on that date or may direct the Trustee to release from the pledge account proceeds sufficient to pay such interest. In the event that XXXXXXXXXX exercises the former option, XXXXXXXXXX may thereafter direct the Trustee to release to XXXXXXXXXX proceeds or Pledged Securities from the pledge account in like amount.

12. Interest earned on the Pledged Securities will be added to the pledge account. In the event that the funds or Pledged Securities held in the pledge account exceed the amount required to provide for payment in full of the outstanding Funded Interest Payments due on the Notes, the Trustee will be permitted to release to XXXXXXXXXX at XXXXXXXXXX request any such excess amount. The Notes will be secured by a first priority security interest in the Pledged Securities and in the pledge account and, accordingly, the Pledged Securities and the pledge account will also secure repayment of the principal amount of the Notes. Provided XXXXXXXXXX makes the Funded Interest Payments in a timely manner, the Pledged Securities will be released from the pledge account and thereafter the Notes will be unsecured.

13. The Indenture will also provide that, upon closing of the sale of the Notes, XXXXXXXXXX must purchase, for its own account, certain Eligible Securities (defined in the Indenture, to include U.S. Government debt obligations and short-term U.S. dollar denominated debt obligations of highly rated corporate issuers) in an amount equal to the first three scheduled interest payments (the "First Interest Payments") due on the Notes. XXXXXXXXXX to acquire Eligible Securities. XXXXXXXXXX will also be required to continue to hold Eligible Securities in such amount, subject to adjustment as described in paragraph 14, below, until the First Interest Payments have been made.

14. The Eligible Securities will be held and controlled by XXXXXXXXXX and will not be pledged to or for the benefit of the Noteholders or any other creditor. The Noteholders will only have recourse to the Eligible Securities as general unsecured creditors of XXXXXXXXXX and as such, only in the case of an Event of Default as defined in the Indenture. XXXXXXXXXX may liquidate Eligible Securities or utilize other cash resources to make the First Interest Payments and, in either case, the amount of Eligible Securities that XXXXXXXXXX is required to hold will be reduced accordingly. If XXXXXXXXXX uses other cash resources to fund one of the First Interest Payments, XXXXXXXXXX will be able to liquidate and use for general corporate purposes and without restriction that portion of the Eligible Securities in excess of the amount of outstanding First Interest Payments. Interest earned and gains realized on Eligible Securities may be utilized by XXXXXXXXXX for general corporate purposes and without restriction.

The company will not divide amounts necessary for interest payments between Pledged Securities and Eligible Securities (i.e., each interest payment will be funded by either Pledged Securities or Eligible Securities but not by both).

Purpose Of Proposed Transactions

15. XXXXXXXXXX

The only reason for the Pledged Securities and the Eligible Securities is to provide the Noteholders with assurance that XXXXXXXXXX will have sufficient resources to pay interest on the Notes. The cost to XXXXXXXXXX of any difference between the interest payable on the Notes and interest earned on the Pledged Securities and the Eligible Securities and any gain on the Eligible Securities is an additional cost of financing which XXXXXXXXXX must bear if it wishes to raise funds through the issuance of the notes in the U.S. high yield market.

Ruling Given

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

By virtue of the exemption contained in subparagraph 212(1)(b)(vii) of the Act, no tax under Part XIII of the Act will be exigible in respect of any amounts paid or credited on the Notes by XXXXXXXXXX, as on account or in lieu of payment of, or in satisfaction of interest.

This ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding on Revenue Canada, Taxation provided that the proposed transactions described herein are completed by XXXXXXXXXX. The ruling is based on the Act in its present form and does not take into consideration any proposed amendments to the Act. Due to the time constraints that you have placed upon us, except as expressly stated, we are not commenting on any income tax results that may arise from the Facts and Proposed Transactions described above.

Further, this letter is not to be construed as acceptance of the value to be allocated by XXXXXXXXXX to the Warrants, as described in paragraph 4 above.

Yours truly,

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