30 November 1997 Ruling 9727223 - XXXXXXXXXX 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 ISSUE(S):

Distress preferred shares

Position:

Standard rulings given plus opinion on exclusion from "mark-to-market property" definition by virtue of proposed Reg. 9000(2).

Reasons:

Sufficient evidence that taxpayer in financial difficulty.

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XXXXXXXXXX 				972722
		XXXXXXXXXX 

ATTENTION: XXXXXXXXXX

XXXXXXXXXX, 1998

RE:	Advance Income Tax Ruling Request
		XXXXXXXXXX ("Debtor")
		Business Number:  XXXXXXXXXX
		Issuance of Distress Preferred Shares

This is in reply to your letters of XXXXXXXXXX, and to your facsimile transmission of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the Debtor and the Lenders (as hereinafter defined), and further to several telephone conversations (XXXXXXXXXX).

In this letter the following terms have the meaning specified:

(a) "Act" means the Income Tax Act (Canada);

(b) "Lender A" means XXXXXXXXXX which is a chartered bank resident in Canada and governed by the Bank Act. It is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Its business number ("BN") is XXXXXXXXXX;

(c) "Lender B" means XXXXXXXXXX. It is an "insurance corporation" and a "taxable Canadian corporation". The term "insurance corporation" as used here and subsequently has the meaning assigned to that term in subsection 248(1) of the Act, and the term "taxable Canadian corporation" as used here and subsequently has the meaning assigned in subsection 89(1) of the Act. It is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Its BN is XXXXXXXXXX;

(d) "Lender C" meansXXXXXXXXXX. It is an insurance corporation, and a taxable Canadian corporation. It is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Its BN is XXXXXXXXXX;

(e) "Lender D" means XXXXXXXXXX which is a chartered bank resident in Canada and governed by the Bank Act. It is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre. Its BN is XXXXXXXXXX;

(f) "Lender E" means XXXXXXXXXX;

(g) "Lender F" means XXXXXXXXXX, an insurance corporation and a taxable Canadian corporation. XXXXXXXXXX.

(h) The "Lenders" mean all of the persons identified in (b) through (g) above;

(i) "XXXXXXXXXX" means XXXXXXXXXX and is more fully described in 4 below;

(j) "XXXXXXXXXX" means XXXXXXXXXX and is more fully described in 5 below;

(k) XXXXXXXXXX;

(l) XXXXXXXXXX;

(m) "XXXXXXXXXX" means XXXXXXXXXX, a private corporation and a taxable Canadian corporation incorporated on XXXXXXXXXX. All of its issued and outstanding shares are owned by the Debtor. The term "private corporation" as used here and subsequently has the meaning assigned in subsection 89(1) of the Act;

(n) XXXXXXXXXX., a private corporation and a taxable Canadian corporation incorporated on XXXXXXXXXX under the Canada Business Corporations Act (herein the "CBCA"). All of its issued and outstanding shares are owned by the Debtor;

(o) XXXXXXXXXX, a private corporation and a taxable Canadian corporation continued under the XXXXXXXXXX. All of its issued and outstanding shares are owned equally by the spouses of XXXXXXXXXX.

FACTS

1. The Debtor is a private corporation and a taxable Canadian corporation created by the amalgamation of XXXXXXXXXX corporations on XXXXXXXXXX. The Debtor's head office is located at XXXXXXXXXX and it files its returns with the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office.

2. The Lenders are all "restricted financial institutions" and "specified financial institutions", within the meanings assigned to such terms in subsection 248(1) of the Act.

3. The authorized share capital of the Debtor consists of an unlimited number of Class A, B, C, D, E, and F shares with the following characteristics:

XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

4. XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated on XXXXXXXXXX. All of its issued and outstanding shares are owned by XXXXXXXXXX.

5. XXXXXXXXXX is a private corporation and a taxable Canadian corporation incorporated on XXXXXXXXXX. All of its issued and outstanding shares are owned by XXXXXXXXXX.

6. The issued and outstanding shares of the Debtor are owned and held as follows:

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

7. XXXXXXXXXX are both individuals resident in Canada for income tax purposes. They are not related and deal at arm's length with each other. The term "related" as used herein has the meaning assigned by section 251 of the Act.

8. The Lenders deal at arm's length with each other as well as with each of the Debtor, XXXXXXXXXX.

9. The Debtor operates an

XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

10. Each of the Properties described in 9 above is subject to one or more mortgages securing loans due to the various Lenders (collectively the "Mortgage Loans") that were incurred either to acquire or refinance the Properties or to finance substantial renovations. In addition, Lender A has advanced various amounts to the Debtor to finance its real estate operations (the "Operating Lines"). The details of the Mortgage Loans and the Operating Lines (collectively, the "Loans"), totalling approximately $XXXXXXXXXX, which are owed to the Lenders and which the Debtor proposes to refinance with preferred shares are as follows and as described in 11 below:

		LENDER	    PROPERTY	INTEREST RATE		      PRINCIPAL
							         %			       AMOUNT
							XXXXXXXXXX 		                XXXXXXXXXX 

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

11. The principal amounts as of XXXXXXXXXX, and interest rates (XXXXXXXXXX ) on the Operating Lines with Lender A are as follows:

		PRINCIPAL AMOUNT	INTEREST RATE	 RATE EXPIRY DATE
								%

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

12.

XXXXXXXXXX

13. The Debtor's arrears with respect to the municipal property taxes due on two of the Properties currently total over $XXXXXXXXXX and constitute defaults under the relevant Mortgage Loans. Without the conversion of the Mortgage Loans into share capital as outlined in the proposed transactions described below, the Lenders perceive that within three to four months they will have to exercise their various rights under the default provisions of their respective Mortgage Loan agreements to assume title and possession of the Properties or to cause their forced sale. As confirmed in our telephone conversation of XXXXXXXXXX the Mortgage Loans are largely up to date with respect to principal and interest payments. The funds required to make these payments, however, have been obtained from one of the Lenders strictly as an interim accommodation during the course of the distress preferred share restructuring negotiations which are the subject of this ruling request. Without these interim advances which the Lender has only agreed to make on a very limited and short-term basis, all of the Mortgage Loans would be in default. All of the Operating Lines are in default.

14. Although the Debtor has reviewed many different debt restructuring options over the past two years, it has not been able to convince any alternative financing source to seriously consider providing additional or replacement financing given the current state of the real estate market and the reluctance in general of financial institutions to extend credit in the real estate industry at this time.

15. There have been no dividends paid by the Debtor on its common shares or preferred shares and no share redemptions in its past five fiscal periods. XXXXXXXXXX sole assets are their shares of the Debtor. Neither XXXXXXXXXX has any unencumbered assets of significant value that could alleviate the Debtor's financial difficulties or that could be used as security for significant additional financing. In addition, both XXXXXXXXXX are subject to personal guarantees with respect to some of the Mortgage Loans.

16. The Debtor's cash flow projections for the calendar years XXXXXXXXXX indicate continuing deficiencies if the Loans are not converted into share capital as outlined in the proposed transactions described below. Indicated below is a summary of the Debtor's projected cash flows, assuming the Loans remain outstanding and, in the alternative, assuming the Loans are converted into share capital.

	 						Cash Flow	Cash Flow
							Before Preferred	After Preferred
 							Share Issue	Share Issue

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

17. The Debtor has entered into negotiations with certain Lenders with respect to the possibility of reducing the interest rate on certain Mortgage Loans in exchange for a payment by the Debtor to the Lenders. In each case where this occurs the payment will be financed by the Lender in issue and added to the principal amounts owing to the Lender. However, the Lenders are not willing to continue to support the Properties without the conversion of the Loans into share capital as outlined in the proposed transactions below, and the interest rate reductions would only be agreed to in the context of the conversion of the Loans into share capital.

PROPOSED TRANSACTIONS

18. The Debtor will assume the two Mortgage Loans owing to Lender D with respect to XXXXXXXXXX. As consideration for the assumption of these liabilities, XXXXXXXXXX will owe the Debtor an amount equal to the principal amount of the Mortgage Loans on the day they are assumed by the Debtor. The debt owing by XXXXXXXXXX to the Debtor will carry the same terms and conditions as the two Mortgage Loans assumed by the Debtor, including those terms and conditions governing interest and capital payments.

Lender D will then consolidate and restate in one loan all of the Mortgage Loans owing to it by the Debtor (the Consolidated Loan), to be secured by first mortgages on XXXXXXXXXX as well as a second mortgage on XXXXXXXXXX will guarantee the Consolidated Loan on a limited recourse basis and as part of its guarantee will permit all of the cash flow generated by XXXXXXXXXX to be used to service the Consolidated Loan.

19. Subject to the requirements of all applicable legislation, each of XXXXXXXXXX will distribute all of their assets to the Debtor and the Debtor will assume all of their liabilities. Both XXXXXXXXXX will thereafter be wound up.

20. The Debtor will incorporate a new corporation (each referred to as a "Lender Newco") under the CBCA for each of the Lenders. Each Lender Newco will be a taxable Canadian corporation. Each 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.

21. The authorized share capital of each Lender Newco will include a limited number of voting and participating common shares. The common shares will become non-voting upon the occurrence of a “Designated Event” as defined in 27 below. The Debtor will subscribe for a nominal amount of common shares of each Lender Newco for a nominal cash consideration. The authorized share capital of each Lender Newco will also include a certain number of classes of preferred shares, which will have, inter alia, the following characteristics:

a) non-voting (except when an event of default has occurred and is continuing; an event of default includes a failure to pay dividends when required and a failure to make a payment in reduction of capital upon the preferred shares as and when required);

b) non-participating except for a preferential cumulative fixed or variable annual rate dividend entitlement, payable monthly, the rate of which will be negotiated between the Debtor and the Lender that will subscribe for the shares in that Lender Newco as described in 24 below;

c) redeemable at $XXXXXXXXXX per share plus accrued unpaid dividends less any amounts previously paid to the shareholder as a return or reduction of capital;

d) redeemable i) at $XXXXXXXXXXper share plus accrued unpaid dividends less any amounts previously paid to the shareholder as a return or reduction of capital, at the option of the shareholder, upon the occurrence of a "Designated Event", as defined in 27 below or, ii) in any event, on the fifth anniversary of their issuance; and

e) in the event of the liquidation, dissolution or wind-up of any Lender Newco, the holders of the preferred shares will be entitled to receive in priority to the holders of the common shares and any shares other than the preferred shares an amount equal to $XXXXXXXXXX per share plus accrued unpaid dividends less any amounts previously paid to the shareholder as a return or reduction of capital. In such event, each class of preferred shares will also be entitled to a nominal liquidation priority amount in the order of priority determined by the articles of each Lender Newco. The distribution of any other liquidation proceeds among the different classes of preferred shares will be at the discretion of the directors of the Lender Newco.

22. The Lenders will each advance an amount of cash to their respective Lender Newco (the "Advances") equal to an amount not exceeding the principal amount of their respective Loans, which may include any accrued interest thereon and any other amounts owing to the Lender. As confirmed in our telephone conversation of XXXXXXXXXX the amount of the Advance will not exceed the principal amount as at the date of the Advance. The Advances will be non-interest bearing and evidenced by a demand note. The Debtor will guarantee the obligations of each Lender Newco to the Lender under the terms of the Advances.

23. Each Lender Newco will purchase the Loans held by the Lender from which the Lender Newco received its Advance described in 22 above as well as related security (the "Purchase"). The purchase price will be equal to the principal amount of each Loan, as at the day of the Purchase (the "Purchase Price") and will be paid in cash using the proceeds of the Advances. It will be agreed between each Lender Newco and the Debtor that interest will accrue on the Loans for the first two months but will not be payable by the Debtor on any particular Loan for as long as the Lender Newco holds the Loan. Each Lender Newco will thereafter waive all rights to receive any interest from the Debtor with respect to the Loans until the occurrence of a Designated Event, as defined in 27 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 preferred shares to be issued by a particular Lender Newco, as described in 24 below, the two months of accrued interest on the appropriate Loan will be deemed to be cancelled immediately before the Lender Newco transfers the Loan to the appropriate Lender. Interest will begin to accrue again when the Loans are reacquired by the Lenders. The purpose for the accrual of interest for two months is to provide the Lenders with access to their original security at an amount in excess of the amount of any indebtedness under a Loan in the event that a Lender requires the preferred shares be acquired for an amount in excess of the amount of the indebtedness under the related Loans as set out in 27 below.

24. Each of the Lenders will subscribe for a number of preferred shares of the Lender Newco to which it made an Advance (the "Preferred Shares"). In certain cases the Lender Newco will have a separate class of Preferred Shares for each Mortgage Loan of the Lender and, in the case of Lender A, one class of Preferred Shares for the Operating Lines. The stated capital and the subscription price, which will be paid in cash, of each class of Preferred Shares issued to each Lender will be equal to the Purchase Price of each Lender's related Loans. The entire amount of the subscription proceeds received by each Lender Newco from the issuance of each class of Preferred Shares will be added to the Lender Newco's stated capital account maintained by it with respect to such class of shares. If required by the Lenders, the stated capital account of the common shares or any class of Preferred Shares will be reduced to a nominal amount without any distribution of any amount to the shareholders of the Lender Newco.

25. A unanimous shareholders' agreement entered into between the shareholders of each Lender Newco, will provide, inter alia, that without the unanimous approval of such shareholders:

a) no transfer or encumbrance of the common shares of the Lender Newco, other than to or for the benefit of a Lender, will be effective;

b) no additional shares of the Lender Newco will be issued;

c) no transfer or encumbrance of assets of the Lender Newco will be effective; and

d) other than as contemplated herein, the Lender Newco will not carry on any activities, engage in any business transaction, incur any indebtedness, create any security over its assets, make any guarantee, amalgamate, merge, consolidate, declare or pay dividends (other than on the Preferred Shares) or purchase or redeem any of its shares (other than the Preferred Shares).

26. Each Lender Newco will repay its Advance in full to the Lender subscribing for its Preferred Shares using the proceeds of the issuance of its Preferred Shares.

27. The Debtor, each Lender Newco and the appropriate Lender will enter into an agreement which will provide that, upon the occurrence of a Designated Event as defined herein and the fulfilment of certain other conditions, the Lender will have the following options:

a) The Debtor will be required at the request of the Lender to purchase all or some of the Preferred Shares from the Lender for a purchase price equal to the amount then outstanding under the corresponding portion of the Lender's Loans adjusted to compensate the Lender for any tax liabilities with respect to the Preferred Shares different from those outlined in the rulings given. The purchase price will be paid in cash and will be used by the Lender to acquire all or part of the Loans.

The Lender Newco will guarantee the Debtor's obligation to purchase the Preferred Shares from the Lender and to pay the purchase price for such shares. As collateral security for its guarantee, the Lender Newco will assign or hypothecate the Lender's Loans together with all related security to the Lender. The Debtor and the Lender Newco will each guarantee the other's obligations to the Lender.

b) The Lender Newco will be required to sell all or some of the Lender’s Loans to the Lender for an amount to be paid in cash equal to the principal amount of the portion of the Loan to be sold, adjusted to compensate the Lender for any tax liabilities with respect to the Preferred Shares different from those outlined in the rulings given.

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

To secure its obligation to purchase the Preferred Shares held by the Lender and to pay the purchase price of such shares, the Lender Newco will assign and hypothecate to the Lender its right to receive the sale proceeds from the Lender. The Debtor will guarantee all of the Lender Newco’s obligations to the Lender.

The "Designated Events" will include events which coincide with certain events of default under the various agreements between the Debtor and each Lender which govern the Loans as well as the following events:

1) the failure of a Lender Newco to pay the regular dividends payable on the Preferred Shares as and when they are payable;

2) the failure of a Lender Newco to repay or return the stated capital of all or any part of the Preferred Shares at the time and in the manner required;

3) the failure of the Debtor to make the required contributions of capital as described in 28 below;

4) the issuance of an order or an effective resolution for the wind-up, dissolution or liquidation of a Lender Newco or the Debtor;

5) the presentation by the Debtor or a Lender Newco of a general assignment for the benefit of creditors or a proposal under the Bankruptcy and Insolvency Act or the declaration of the bankruptcy of the Debtor or a Lender Newco or the appointment of a custodian or sequestrator or receiver/manager (or both) or any other officer with similar powers with respect to the Debtor or a Lender Newco or with respect to the property of the Debtor or a Lender Newco or any part thereof that is, in the opinion of the office holder, a material part thereof, unless such office holder is removed within 30 days of appointment;

6) any new legislation or any change in any applicable, existing or new legislation of Canada or any province of Canada, or any change in the interpretation thereof by a court of competent jurisdiction that shall become effective and make it unlawful or impossible for a Lender to continue to hold the Preferred Shares; and

7) the occurrence of any event or change in any applicable legislation, regulation, administrative policy or judicial interpretation resulting in tax consequences with respect to the Preferred Shares being otherwise than as provided for in the rulings given.

28. Dividends payable by the Lender Newcos on their Preferred Shares and any fees or expenses of the Lender Newcos incurred to maintain their good standing under all applicable laws will be funded by capital contributions from time to time by the Debtor to the Lender Newcos.

29. The capital contributions referred to in 28 above will be regarded as funds to be held for the benefit of the Debtor until such time as the Lender Newcos require the funds to make the payments referred to in 28 above. The Lender Newcos will not add such contributions of capital to the stated capital of their common shares.

30. Notwithstanding the terms and conditions of the Preferred Shares or any mandatory repayments of stated capital of the Preferred Shares that may be required by any Lender, all "Excess Cash Flow", as defined in 31 below, arising in each fiscal period shall be applied to repay or return the stated capital of the Preferred Shares issued by the Lender Newcos within 100 days after the end of that fiscal period. Any Excess Cash Flow will be attributed among the Lender Newcos to fund the required stated capital reductions in the manner to be agreed upon by the Lenders.

31. "Excess Cash Flow" in respect of a particular fiscal period shall be the change or increase in cash flow for such fiscal period of the Debtor from all sources, as would be reported on a consolidated Statement of Changes of Financial Position prepared in accordance with generally-accepted accounting principles, including the Lender Newcos and all directly and indirectly wholly-owned subsidiaries of the Debtor, but before outlays for:

a) the payment of dividends other than dividends paid on the Preferred Shares;

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

i) the purchase, redemption or repayment of stated capital of the Preferred Shares, other than purchases, redemptions, or repayments of stated capital made in the period in respect of a prior period’s Excess Cash Flow;

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

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

iv) expenditures or payments between any of the Debtor and the Lender Newcos, and between any of the Debtor's wholly-owned subsidiaries that own any of the Properties and the Lender Newcos;

v) reasonable capital expenditures or payments on capital account, including tenant inducements, incurred in the normal and ordinary course of the existing business of the Debtor, 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 the Lender Newcos to purchase, redeem or repay stated capital in respect of the Preferred Shares or to pay dividends thereon;

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

d) loans to directors, officers or shareholders of the Debtor or to other individuals, corporations or entities.

32. For purposes of the definition of Excess Cash Flow provided in 31 above:

a) additional debt as used in 31 b)iii), v) and vi) above 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;

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

c) Excess Cash Flow shall not include reasonable working capital reserves to fund reasonable capital expenditures, leasehold inducements, leasehold improvements, lease commissions or payments on capital account made or paid in the normal and ordinary course of business, at any time, which will be held in an escrow account and will be released upon certain conditions to be negotiated with the Lenders; and

d) Excess Cash Flow shall be adjusted as necessary in order to prevent duplication or repeated accounting of any amount.

33. On a monthly basis, an amount equal to any Excess Cash Flow attributed to a Lender Newco, if any, and any monthly principal repayments made by the Debtor to the Lender Newco with respect to a Loan will be added to the stated capital of the related Preferred Shares issued by the Lender Newco. The stated capital of the Preferred Shares will then be reduced by an equivalent amount upon the payment of such amount to the Lender.

34. Subject to the requirements of any applicable legislation, each Lender Newco will be wound-up without undue delay on the earlier of:

a) the date upon which there are no longer any Preferred Shares of that Lender Newco outstanding; and

b) the date that is five years after the date upon which the Lender Newco’s Preferred Shares are issued.

35. Each Lender will have the right at any time and from time to time, in its sole discretion, subject to any unanimous shareholders' agreement entered into by it and applicable security restrictions, to sell its Preferred Shares or any portion thereof, to third parties (the "Subsequent Acquirers") on such terms and conditions as each Lender may in its sole discretion determine.

PURPOSE OF THE PROPOSED TRANSACTIONS

36. The purpose of the proposed transactions is to convert a large part of the Debtor's long-term debt into share capital, thereby increasing the Debtor's cash flow so as to allow it to continue its operations and to better its overall financial situation.

OTHER INFORMATION

37. To the best of your knowledge and that of the Debtor and Lenders, none of the issues involved in this ruling request is currently under consideration by a tax services office or taxation centre in connection with a tax return already filed or is under objection, or under appeal, or the subject of any ruling previously issued by the Directorate with respect to the Debtor.

RULINGS

Provided all the relevant facts and the proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate, and provided the transactions are completed as proposed, we rule as follows:

A. The Preferred Shares of each Lender Newco to be issued to a Lender, as described in 24 above, and where applicable, sold to a Subsequent Acquirer as described in 35 above, will be

a) shares described in subparagraph (e)(iii) of the definition of "term preferred shares" in subsection 248(1) of the Act for a period not exceeding five years from the date of their issuance, and

b) "exempt shares" pursuant to paragraph (c) of the definition thereof in subsection 112(2.6) of the Act 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 a Lender or Subsequent Acquirer, as the case may be, a deduction under subsection 112(1) or 138(6) of the Act for dividends received or deemed to have been received by it on any Preferred Shares during such period.

B. No amount will be included in the income of any Lender Newco pursuant to paragraphs 12(1)(c) or 12(1)(x) or subsections 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 the Debtor to any Lender Newco as described in 28 above, nor will any such amounts constitute "proceeds of disposition" as defined in section 54 of the Act, to any Lender Newco from the disposition by it of any property.

C. No amount will be included in computing the income of any Lender or any Subsequent Acquirer under subsection 56(2) of the Act in respect of any capital contributions made by the Debtor to any Lender Newco as described in 28 above.

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

E. Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by the Debtor or a Lender Newco in the course of restructuring the Loans will be deductible by the corporation incurring the expenses pursuant to paragraph 20(1)(e) of the Act to the extent such expenses are reasonable in the circumstances.

F. The cost amount, within the meaning of subsection 248(1) of the Act, to any Lender Newco of the Loans will, immediately after the time that they are acquired from the Lenders, be equal to the Purchase Price paid therefor by the Lender Newco as described in 23 above.

G. The cost amount, within the meaning of subsection 248(1) of the Act, to each Lender of the Preferred Shares acquired by it will, immediately after the time of their issue, be equal to the subscription price paid therefor by the Lender as described in 24 above.

H. The cost amount, within the meaning of subsection 248(1) of the Act, to each Lender of a Loan acquired by the Lender, as described in 27 a) or b) above, will, immediately after the acquisition, be the amount paid therefor by the Lender.

I. Provided that the Loan arose from one or more loans or "lending assets", within the meaning of subsection 248(1) of the Act, made or acquired by the relevant Lender in the course of its insurance or money-lending business, any Loan reacquired by that Lender as described in 27 a) or b) above, will be considered to have been acquired by the Lender in the ordinary course of its business of insurance or lending money, as the case may be, for the purposes of paragraph 20(1)(l) and 20(1)(p) of the Act.

J. Provided that, in a particular year, a Lender (who is a bank), as holder of the Preferred Shares, meets the requirements outlined in paragraph 6209(a) of the Income Tax Regulations (the "Regulations") and such Preferred Shares are not "prescribed securities" to the Lender within the meaning assigned by paragraph 6209(b) of the Regulations, such Preferred Shares will be "lending assets" to the Lender within the meaning of subsection 248(1) of the Act.

K. Subsection 112(4) of the Act will not apply to any loss realized by any Lender on any Loan subsequent to it being reacquired by the Lender from any Lender Newco in the circumstances described in 27 a) or b) above in respect of any dividends received by any Lender on the Preferred Shares.

L. 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.

The above advance income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and are binding upon Revenue Canada provided the Preferred Shares are issued as described above on or before XXXXXXXXXX.

OPINION

Provided the draft regulations, released by the Department of Finance in July, 1995, and relating to securities held by financial institutions, are enacted as proposed, it is our view that a Preferred Share will be a prescribed property as described in subsection 9002(2) of the Regulations and excluded from the definition, in subsection 142.2(1) of the Act, of "mark-to-market property" by virtue of paragraph (e) of that definition.

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