30 November 1996 Ruling 9729283 - DISTRESS PREFERRED SHARES

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

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

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

Principal Issues:

Is XXXXXXXXXX in distress position ?

Position:

Yes

Reasons:

Company is in default on loans and cannot be helped by related companies, parent XXXXXXXXXX

XXXXXXXXXX							972928
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in response to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX.

This Ruling cancels and replaces Ruling 972075, issued XXXXXXXXXX, 1997.

Unless otherwise specified, all references to statute are to the Income Tax Act.

You advise that to the best of your knowledge and that of XXXXXXXXXX, none of the issues involved in the ruling request has been considered by a tax services office or a taxation centre in connection with a tax return already filed, and none of the issues involved in the ruling request is the subject of a notice of objection or is under appeal.

DEFINITIONS

In this RULING:

"Act" refers to the Income Tax Act, R.S.C. 1985, c.1. (5th supplement).

"Adjusted Cost Base" has the meaning ascribed thereto by section 54 of the Act.

"Adverse Yield Event" refers to an event where the tax or financial consequences of the DPS restructuring would be altered as a result of any Change in Law or Change in Facts.

XXXXXXXXXX has the meaning ascribed thereto at paragraph 104 below.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

"BIA" refers to the Bankruptcy and Insolvency Act, R.S.C. (1985), c. B-3, as amended.

"Capital Contribution Agreement" refers to the agreement to be entered into between Newco and XXXXXXXXXX and to which reference is made at paragraph 86 below.

XXXXXXXXXX

XXXXXXXXXX Loan" refers to the portion of the Original Loan made by XXXXXXXXXX.

"XXXXXXXXXX Loan Assignment Agreement" refers to the loan assignment agreement to be entered into between XXXXXXXXXX with regard to the assignment of XXXXXXXXXX Loan as described at paragraph 66 below.

"XXXXXXXXXX loan 2nd Assignment Agreement" refers to the loan assignment agreement to be entered into between XXXXXXXXXX, with regard to the assignment of XXXXXXXXXX Loan as described in paragraph 70 below.

XXXXXXXXXX

"CBCA" refers to the Canada Business Corporations Act, R.S.C. (1985) c. C-44.

"Change in Facts" refers to an event where a change in a factual situation, out of the control of the DPS Lenders, which would cause the advance tax rulings not to be binding upon Revenue Canada or XXXXXXXXXX.

"Change of Law" refers to an event whereby any legal or tax consequences of the DPS restructuring are altered as a result of such change in any relevant applicable legislation.

XXXXXXXXXX

"XXXXXXXXXX Loans" refers to the various advances made to XXXXXXXXXX.

"XXXXXXXXXX Trust Deed" refers to those deeds of trust, hypothec, mortgage and pledge, charging, inter alia, XXXXXXXXXX and the rentals generated thereby, in favour of the holders of the mortgage bonds issued thereunder by XXXXXXXXXX, i.e., XXXXXXXXXX, as collateral security for the repayment of XXXXXXXXXX Loans.

XXXXXXXXXX

"Daylight Loan" refers to the advance granted by the DPS Lenders to Newco described at paragraph 84 below.

"Deed of Grant of Priority" refers to that deed of grant of priority to be executed by XXXXXXXXXX in order to ensure that the hypothec granted in favour of the Lenders under the Share Pledge Agreement is a first ranking hypothec as described at paragraph 58 below.

"Deed of Mainlevee"refers to that deed of mainlevee providing for the complete discharge and total mainlevee by XXXXXXXXXX of all hypothecs and other charges affecting XXXXXXXXXX interest in XXXXXXXXXX, including in the Emphyteutic Lease, as described at paragraph 58 below.

XXXXXXXXXX

XXXXXXXXXX

"DPS" refers to the preferred shares to be issued by Newco described at paragraph 86 below.

"DPS Lenders" means XXXXXXXXXX, collectively, being the Lenders which will subscribe to DPS, as described at paragraph 91 below.

"DPS Redemption Amount" has the meaning ascribed to it at paragraph 101(d) below.

"Emphyteutic Lease" refers to that certain emphyteutic lease executed before

XXXXXXXXXX

"Escrow Agreement" refers to the escrow agreement under private signature executed, by and between XXXXXXXXXX, with regard to the holding in escrow of the Deed of Taking in Payment, as described at paragraph 40 below.

"Escrow Agent" means XXXXXXXXXX, acting as escrow agent under the Escrow Agreement.

"Event of Default" has the meaning ascribed thereto at paragraph 94 below.

"Excess Cash Flow" has the meaning ascribed thereto at paragraph 102 below.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

"Hypothecary Loan Agreement" refers that certain hypothecary loan agreement registered in XXXXXXXXXX, with regard to a loan made by the Lenders to XXXXXXXXXX, in respect of XXXXXXXXXX, in the original amount of $XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX, the original lessor under the Emphyteutic Lease, the name of which has successively changed to "XXXXXXXXXX"

"Lenders" means XXXXXXXXXX, as lenders under the Hypothecary Loan Agreement.

"Lenders' Trust Deed" refers to that deed of trust, hypothec, mortgage and pledge charging, inter alia, XXXXXXXXXX and the rentals generated thereby, in favour of the holders of the mortgage bonds issued thereunder, i.e., the Lenders, as collateral security for the repayment of the Original Loan.

"Loan Amendment Agreement" refers to that loan amendment agreement under private signature executed as of XXXXXXXXXX, amending the terms and conditions of the Hypothecary Loan Agreement.

"Loan Management Agreement" refers to that loan management agreement under private signature to be entered into by the DPS Lenders and Newco described at paragraph 85 below.

"Management Agreement" refers to that management agreement under private signature executed by XXXXXXXXXX, as mandatary for the Lenders and the Property Manager, providing for the management of XXXXXXXXXX during the term of the DPS, described at paragraph 47 below.

XXXXXXXXXX, as trustee under the Lenders' Trust Deed.

XXXXXXXXXX

"Newco" means a newly constituted corporation described at paragraph 82 below.

"Newco Loan Assignment Agreement" refers to that loan assignment agreement under private signature to be entered into by the DPS Lenders, XXXXXXXXXX and Newco described at paragraph 85 below.

XXXXXXXXXX

XXXXXXXXXX group of companies.

XXXXXXXXXX

XXXXXXXXXX

"Original Loan" refers to the loan made by the Lenders pursuant to the Hypothecary Loan Agreement, as amended by the Loan Amendment Agreement and disbursed by the Lenders

XXXXXXXXXX

"Paid up capital" has the meaning ascribed thereto by subsection 89(1) of the Act.

XXXXXXXXXX

XXXXXXXXXX

"Private corporation" has the meaning ascribed thereto by subsection 89(1) of the Act.

"Property Manager" means, the property manager under the Management Agreement.

"Purchase Agreement" refers to the purchase agreement under private signature to be executed by and between XXXXXXXXXX, Newco and the DPS Lenders and described at paragraph 90 below.

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

"Rentals Bank Account" refers to the bank account opened by XXXXXXXXXX, and in which all rentals generated by XXXXXXXXXX will be deposited.

XXXXXXXXXX

"Share Pledge Agreement" refers to that share pledge agreement to be executed between the Lenders and XXXXXXXXXX as described at paragraph 57 below.

"Share Subscription Agreement" has the meaning ascribed thereto at paragraph 91 below.

"Taxable Canadian Corporation" has the meaning ascribed thereto at subsection 89(1) of the Act.

"Term preferred shares" has the meaning ascribed thereto by subsection 248(1) of the Act.

XXXXXXXXXX

XXXXXXXXXX

"Unanimous Shareholders Agreement" refers to that unanimous shareholders' agreement, as such term is defined under the CBCA, under private signature to be entered into by the DPS Lenders and XXXXXXXXXX to govern the management and administration of the affairs of Newco as described at paragraph 98 below.

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

FACTS

1. XXXXXXXXXX

2. XXXXXXXXXX

3. XXXXXXXXXX

4. XXXXXXXXXX

5. XXXXXXXXXX

6. XXXXXXXXXX

7.XXXXXXXXXX is a private corporation and a taxable Canadian corporation that was incorporated on XXXXXXXXXX. XXXXXXXXXX is a subsidiary of XXXXXXXXXX. XXXXXXXXXX deals with the XXXXXXXXXX tax services office and files its corporate tax returns with the XXXXXXXXXX Taxation Centre.

8.XXXXXXXXXX has acquired the ownership of XXXXXXXXXX, as emphyteutic lessor from

XXXXXXXXXX

9.The authorized share capital of XXXXXXXXXX consists of an unlimited number of voting participating common shares without par value and an unlimited number of non-cumulative, non-voting, redeemable and retractable preferred shares without par value with a flexible non-cumulative dividend rate not to exceed XXXXXXXXXX% per annum.

10.The issued share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares and XXXXXXXXXX preferred shares owned as follows:

Class & Adjusted Paid-up
Shareholder Number Cost Base Capital

XXXXXXXXXX

11.The common shares of XXXXXXXXXX were issued upon incorporation in exchange for cash consideration of $XXXXXXXXXX per share. The preferred shares were issued on

XXXXXXXXXX

12.The authorized share capital of XXXXXXXXXX consists of an unlimited number of voting participating common shares without par value and an unlimited number of non-cumulative, non-voting, redeemable and retractable preferred shares without par value with a flexible non-cumulative dividend rate not to exceed XXXXXXXXXX% per annum.

13.The issued share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares issued upon incorporation for a cash subscription consideration of $XXXXXXXXXX per share. XXXXXXXXXX currently owns XXXXXXXXXX common shares of XXXXXXXXXX while XXXXXXXXXX owns the remaining common share of XXXXXXXXXX.

14.XXXXXXXXXX is a private corporation and a taxable Canadian corporation that was incorporated on XXXXXXXXXX under the CBCA. The issued share capital of XXXXXXXXXX consists of 1 common share issued to XXXXXXXXXX upon incorporation for cash consideration of $XXXXXXXXXX.

15.XXXXXXXXXX is a private corporation and a taxable Canadian corporation that was incorporated on XXXXXXXXXX under the CBCA. The issued share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares held by XXXXXXXXXX.

16. XXXXXXXXXX

17.The XXXXXXXXXX major property and asset management responsibilities include:

XXXXXXXXXX

18. XXXXXXXXXX

19. XXXXXXXXXX

XXXXXXXXXX

20. XXXXXXXXXX

21. XXXXXXXXXX

22. XXXXXXXXXX

23. XXXXXXXXXX

24. XXXXXXXXXX

25.XXXXXXXXXX is a single purpose corporation and exclusively holds its above-described interest in XXXXXXXXXX.

26.XXXXXXXXXX has entered into a management agreement with XXXXXXXXXX whereby the latter provides leasing, accounting and property management services to XXXXXXXXXX. XXXXXXXXXX has similar agreements with

XXXXXXXXXX

27.The interest of XXXXXXXXXX, as emphyteutic lessee, is affected by various hypothecs in favour of the Lenders and XXXXXXXXXX, as trustee for the Lenders in order to secure the repayment of the Original Loan and by various hypothecs of a more junior rank in favour of

XXXXXXXXXX

XXXXXXXXXX

28.The interest of XXXXXXXXXX, as owner and emphyteutic lessor, is affected by various hypothecs in favour of the Lenders, in order to secure the repayment of the Original Loan and by various hypothecs of a more junior rank in favour of

XXXXXXXXXX

29.Prior to the completion of the Proposed Transactions, the Lenders will also have been granted a first ranking hypothec on all the outstanding shares of the share capital of XXXXXXXXXX, as further security for the repayment of the Original Loan.

30. The Original Loan is now in default,

XXXXXXXXXX

31. XXXXXXXXXX

32. XXXXXXXXXX

33. XXXXXXXXXX

34. XXXXXXXXXX

35. XXXXXXXXXX

36. XXXXXXXXXX

37. XXXXXXXXXX

38. XXXXXXXXXX

39. XXXXXXXXXX

40. XXXXXXXXXX

41. XXXXXXXXXX

42. XXXXXXXXXX

43. XXXXXXXXXX

44. XXXXXXXXXX

45. XXXXXXXXXX

46. XXXXXXXXXX

47.The remuneration of the Property Manager and the operating costs of XXXXXXXXXX will have been reduced to the minimum pursuant to a management agreement to be entered into between XXXXXXXXXX, and the Property Manager prior to the completion of the Proposed Transactions.

48. XXXXXXXXXX

49. XXXXXXXXXX

50. XXXXXXXXXX

51. XXXXXXXXXX

52. XXXXXXXXXX

53.The Lenders will only continue to support XXXXXXXXXX if the DPS issue contemplated herein is effectively achieved. Without the conversion of the Original Loan into share capital, as outlined in the Proposed Transactions described below, the Lenders will complete the exercise of their various rights under the default provisions of the Hypothecary Loan Agreement, as amended, and the various security instruments securing the Original Loan.

54. XXXXXXXXXX

For the purposes of this paragraph:

a)"Base Amount" refers to the redemption price of the DPS then outstanding and the accrued and unpaid dividends thereon or, if no more DPS are then outstanding, the amount of principal of the Original Loan then outstanding and the accrued and unpaid interest, if any

b) "Consideration" refers to the greater of the following amounts, i.e., (i) the overall gross consideration of any kind payable at any time regarding the Sale, (ii) the fair market value, in the event of a deemed Sale, of the overall interest of XXXXXXXXXX as of the date of such Sale.

c)"Sale" refers to the transfer effected at any time or the undertaking to transfer made at any time by XXXXXXXXXX, at any time, of the interest of XXXXXXXXXX or any portion thereof, by whatever means, including without limitation by private sale, judicial sale, sale by the creditors, taking in payment, giving in payment, exchange, or other operation, for whatever purposes, directly or indirectly, to any person. The Change of Control of XXXXXXXXXX will be deemed as a Sale for the purposes hereof.

d)"Change of Control' refers to any transfer effected at any time or any undertaking to transfer at any time, directly or indirectly, of any number of shares of the share capital of XXXXXXXXXX, by whatever means, including by Sale, to any person.

55. XXXXXXXXXX

56. XXXXXXXXXX

57.As additional security for the repayment of the Original Loan, XXXXXXXXXX, the holder of all the outstanding shares of the share capital of XXXXXXXXXX will grant a first ranking hypothec in favour of the Lenders on its interest in such shares pursuant to a share pledge agreement, structured in such a way that XXXXXXXXXX can no longer dispose of its interest in XXXXXXXXXX, including in the Emphyteutic Lease, or hypothecate or otherwise charge same without the Lenders' prior written consent. The Share Pledge Agreement shall provide that the security granted thereunder is granted on a "non-recourse" basis, to the same extent as the Original Loan.

58. XXXXXXXXXX

XXXXXXXXXX

59.There have been no dividends paid by XXXXXXXXXX on its common and preferred shares since their issuance. XXXXXXXXXX has not received any interest, dividends, capital repayments or fees from the XXXXXXXXXX in at least the last XXXXXXXXXX years.

60. XXXXXXXXXX

61.The XXXXXXXXXX does not have any unencumbered assets that could significantly alleviate XXXXXXXXXX financial difficulties or that could be used as security for additional financing.

62.XXXXXXXXXX cash flow projections for the calendar years XXXXXXXXXX indicate continuous deficiencies if the Original Loan and any accrued but unpaid interest are not converted into share capital as outlined in the proposed transactions described below. The following summarises the projected cash flows ($XXXXXXXXXX) assuming firstly, that the Original Loan remains outstanding and secondly, that the Original Loan is converted into share capital as outlined in the proposed transactions described below:

XXXXXXXXXX

63.XXXXXXXXXX is a life insurance company governed by the Insurance Companies Act (Canada), S.C, (1991), ch, 47, and is a restricted financial institution and a specified financial institution within the meaning assigned to these expression by subsection 248(1) of the Act. XXXXXXXXXX deals with the XXXXXXXXXX taxation services office and files its corporate income tax returns with the XXXXXXXXXX Taxation Centre.

64.XXXXXXXXXX is a mutual life insurance company governed by the Insurance Companies Act (Canada), S.C. (1991), ch, 47, and is a restricted financial institution and a specified financial institution within the meaning assigned to these expression by subsection 248(1 ) of the Act. XXXXXXXXXX deals with the XXXXXXXXXX taxation services office and files its corporate income tax returns with the XXXXXXXXXX Taxation Centre.

65.XXXXXXXXXX as well as its shareholders and XXXXXXXXXX as well as its policyholders deal with XXXXXXXXXX and with each other at arm's length within the meaning assigned to this expression by subsection 251(1) of the Act.

PROPOSED TRANSACTIONS

66.XXXXXXXXXX will assign its interest in XXXXXXXXXX Loan in favour of XXXXXXXXXX, for a consideration representing the principal and all outstanding and accrued interest on XXXXXXXXXX Loan, the assignment proceeds being payable by monthly instalments of interest only, at the same rate as applicable on the Original Loan, i.e., XXXXXXXXXX, and the principal on XXXXXXXXXX.

67.The execution of the obligations of XXXXXXXXXX under XXXXXXXXXX Loan Assignment Agreement will be secured by a first ranking hypothec granted by XXXXXXXXXX in favour of XXXXXXXXXX on XXXXXXXXXX Loan, and such agreement shall provide that, notwithstanding the assignment of XXXXXXXXXX Loan to XXXXXXXXXX, no amendment to XXXXXXXXXX Loan can be made without XXXXXXXXXX prior written consent. The recourses of XXXXXXXXXX under XXXXXXXXXX loan Assignment Agreement against XXXXXXXXXX shall be limited to the interest of XXXXXXXXXX in XXXXXXXXXX Loan.

68.XXXXXXXXXX will in turn assign its interest in XXXXXXXXXX Loan to XXXXXXXXXX for a consideration of XXXXXXXXXX and the assumption of all of XXXXXXXXXX obligations resulting from XXXXXXXXXX Loan Assignment Agreement. XXXXXXXXXX will intervene to this XXXXXXXXXX Loan 2nd Assignment Agreement to consent to the assignment of XXXXXXXXXX Loan by XXXXXXXXXX to XXXXXXXXXX. XXXXXXXXXX will concurrently release XXXXXXXXXX from all of its obligations under XXXXXXXXXX Loan Assignment Agreement. XXXXXXXXXX will subsequently be terminated and its property will be delivered to the income and capital beneficiary, XXXXXXXXXX.

69.The XXXXXXXXXX Loan 2nd Assignment Agreement will contain provisions allowing XXXXXXXXXX to require XXXXXXXXXX to repurchase XXXXXXXXXX Loan, should there be an Event of Default, for an amount equal to the remaining balance of principal, interest and accessories thereon, subject to adjustments to be made in order to take into account dividends and capital payments received by XXXXXXXXXX and not remitted to XXXXXXXXXX.

70.XXXXXXXXXX Loan 2nd Assignment Agreement will provide that all sums received by XXXXXXXXXX in redemption of the DPS corresponding to XXXXXXXXXX Loan will be immediately applied in repayment of the assignment proceeds.

71.XXXXXXXXXX Loan 2nd Assignment Agreement will contain provisions allowing XXXXXXXXXX to require XXXXXXXXXX to repurchase XXXXXXXXXX Loan, should there be an Event of Default under the Purchase Agreement, for an amount equal to the remaining balance of principal, interest and accessories thereon.

72.XXXXXXXXXX Loan 2nd Assignment Agreement will further provide that should XXXXXXXXXX be in default thereunder, while no Event of Default has occurred, XXXXXXXXXX only recourse will be a personal recourse against XXXXXXXXXX, for the whole amount due to XXXXXXXXXX at that time, such recourse not being limited to any specific assets of XXXXXXXXXX.

73.XXXXXXXXXX Loan 2nd Assignment Agreement will finally provide that the assignment proceeds shall become due and exigible upon the winding-up of Newco or at the expiration of the term of the DPS, or as DPS issued in connection with XXXXXXXXXX Loan are being redeemed.

74.XXXXXXXXXX will claim a deduction in computing its income of an amount representing the interest paid or payable to XXXXXXXXXX pursuant to XXXXXXXXXX Loan 2nd Assignment Agreement up to the amount of the dividend payable on the DPS, XXXXXXXXXX.

75. XXXXXXXXXX

76. XXXXXXXXXX

XXXXXXXXXX

77. XXXXXXXXXX

78. XXXXXXXXXX

79. XXXXXXXXXX

80. XXXXXXXXXX

81. XXXXXXXXXX

82.XXXXXXXXXX will incorporate Newco as a subsidiary under the XXXXXXXXXX and will subscribe to XXXXXXXXXX of the common shares of the share capital of Newco. The subscription price for these common shares will be a nominal amount.

83.Newco will be a single-purpose corporation, the sole business of which will be to purchase, hold and realise upon the Original Loan and to issue the DPS.

84.The DPS Lenders will grant a Daylight Loan to Newco, i.e., an advance by way of a demand, non-interest-bearing note, the terms and conditions of which shall be governed by a daylight loan agreement which will provide that the proceeds of the Daylight Loan shall be utilised for the sole purpose of purchasing the Original Loan in accordance with a loan assignment agreement to be entered into by the DPS Lenders, XXXXXXXXXX and Newco. The Daylight Loan will be equal to the subscription price of the DPS representing the balance of principal then outstanding and the accrued and unpaid interest of the Original Loan.

85.Newco will use the Daylight Loan to repay with subrogation the Original Loan to the DPS Lenders. Such transfer will operate subrogation in favour of Newco to the rights of the DPS Lenders, as secured creditor of first rank. XXXXXXXXXX will thereby become indebted to Newco under the Hypothecary Loan Agreement secured by a first ranking hypothec on the interest of XXXXXXXXXX as well as on the rentals generated thereby and on the interest of XXXXXXXXXX in the shares of the share capital of XXXXXXXXXX, subject to the execution proceedings already initiated and pending. This later transaction will however not be reflected on title. The Newco Loan Assignment Agreement will provide that notwithstanding such assignment, the Original Loan and the security granted thereunder will remain registered in the name of the DPS Lenders. Furthermore, the Newco Loan Assignment Agreement will provide that notwithstanding such assignment, the Original Loan will be managed by the DPS Lenders on behalf of Newco, pursuant to a loan management agreement to be executed by the DPS Lenders and Newco. Under the Newco Loan Assignment Agreement, Newco will, inter alia, be prevented from selling, assigning, transferring, or otherwise disposing of or charging its interest in the Original Loan or the security granted thereunder, amend, vary, terminate or waive any term or provision of the Hypothecary Loan Agreement or of the security granted in connection thereto, call a default under or take any action or proceeding of any kind to enforce any right under the Hypothecary Loan Agreement or the security granted in connection thereto or compromise, surrender, forgive, give acquittance, forfeit, cancel, terminate or subordinate all or any portion of the Original Loan or the security granted in connection thereto, the whole except as provided in the Unanimous Shareholders Agreement. The Newco Loan Assignment Agreement and the Loan Management Agreement will further, inter alia, provide that

XXXXXXXXXX

86.Newco and XXXXXXXXXX will enter into the Capital Contribution Agreement under which XXXXXXXXXX will make capital contributions to Newco to finance Newco's operating expenses and the payment of the dividends payable on the DPS. These capital contributions by XXXXXXXXXX will be made out of the Rentals Bank Account, on behalf of XXXXXXXXXX. Such rental money will first be affected to the timely payment of the dividends payable under the DPS, and then to the payment of pre-approved tenant inducements and pre-approved capital expenditures, the whole under the close monitoring of XXXXXXXXXX. Those remittances will be effected by way of direct payments by XXXXXXXXXX either:

a)to the DPS Lenders, in payment of the dividends payable under the DPS;

b)to the Property Manager, to allow him to take proper care of XXXXXXXXXX, under the Management Agreement; or

c)to the various tenants entitled to receive the pre-approved tenant inducements.

All those payments will be made on behalf of XXXXXXXXXX, as capital contributions in favour of Newco, under the Capital Contribution Agreement or on behalf of Newco, as the case may be. The capital contributions referred to above will be regarded as funds to be held for the benefit of XXXXXXXXXX until such time as Newco require the funds to make the payments referred to in that same paragraph. XXXXXXXXXX will not add such capital contributions to the stated capital of the common shares of Newco it will hold.

87.On the acquisition of the Original Loan, Newco will agree that no interest will accrue or will be payable on the Original Loan until the earlier of the occurrence of an Event of Default or XXXXXXXXXX. The Capital Contribution Agreement will further provide that XXXXXXXXXX will make, within 120 days after the end of any particular fiscal period, capital contributions to Newco in an amount representing Excess Cash Flow to be used to redeem DPS.

88. XXXXXXXXXX

89.Newco will pledge its interest in the Original Loan, as amended, and the security granted thereunder to the DPS Lenders as a security for the execution of the various obligations resulting from the Purchase Agreement and the Newco Loan Assignment Agreement.

90.XXXXXXXXXX will grant a universal hypothec in favour of the Lenders as well as a specific hypothec upon their respective interest in XXXXXXXXXX and upon the rentals generated thereby, and XXXXXXXXXX will grant a specific hypothec on the shares of the share capital of XXXXXXXXXX, in order to further secure the execution of XXXXXXXXXX and Newco's obligations related to the DPS restructuring, including, inter alia, under the Purchase Agreement and the Newco Loan Assignment Agreement, the whole without novation, the security granted in relation to the Original Loan, as amended remaining in place. Such additional security will be given on a "non-recourse" basis, to the same extent as the Original Loan.

XXXXXXXXXX

91.The DPS Lenders will subscribe to DPS XXXXXXXXXX, for an aggregate subscription price equal to the amount of the balance of principal then outstanding and the accrued and unpaid interest XXXXXXXXXX, the whole as provided for in the Share Subscription Agreement. The entire amount of the subscription proceeds received by Newco from the issuance of the DPS will be added to the stated capital account maintained by Newco with respect to such class of shares. In order to enable Newco to meet solvency tests pertaining to declaration and payment of dividends as provided at section 42 of the CBCA, the stated capital account for the DPS will be reduced to a nominal amount without any distribution of any amount to the shareholders of Newco.

92.Newco will then use the subscription proceeds to reimburse the Daylight Loan to the DPS Lenders.

93.XXXXXXXXXX, Newco and the DPS Lenders will then enter into the Purchase Agreement under which the DPS Lenders can, upon the occurrence of an Event of Default, either (at their option) oblige XXXXXXXXXX to purchase the DPS for an amount equal to the redemption price of said DPS and the accrued and unpaid dividends on the DPS or repurchase the Original Loan from Newco for an amount equal to the outstanding balance of principal, interest and accessories on the Original Loan. In the latter case, the proceeds would then be used to repurchase all issued and outstanding DPS, the value of which should correspond to the balance of principal then outstanding and the accrued and unpaid interest of the Original Loan at that time.

94.The Events of Default under the Purchase Agreement will include all events of default provided in the Hypothecary Loan Agreement, as amended as well as in the various deeds and agreements evidencing the security granted thereunder and such other events of default usually found in similar transactions, such as failure to pay dividends on the DPS, liquidation or dissolution of Newco, XXXXXXXXXX, assignment in bankruptcy by Newco, XXXXXXXXXX, the filing by Newco, XXXXXXXXXX of a notice of intention to file a proposal or of a proposal under the BIA, any proceedings made by Newco, XXXXXXXXXX under the Companies Creditors Assignment Act (Canada) or the recourse in general by any one of them to any similar legislation, the occurrence of a Change of Law, the occurrence of a Change in Facts and the occurrence of an Adverse Yield Event.

95. XXXXXXXXXX

96.The DPS Lenders shall as well have the option to consider the termination of the Management Agreement as an Event of Default under the Purchase Agreement.

97.XXXXXXXXXX will pledge and deliver its common shares in the share capital of Newco to the DPS Lenders as security for the fulfilment of the obligation under the Purchase agreement. The DPS Lenders will be the registered holder of the common shares.

98.XXXXXXXXXX and the DPS Lenders will enter into a unanimous shareholders' agreement as such term is defined under the CBCA to govern the management and administration of the affairs of Newco. The directors and the officers of Newco will be appointed and chosen by XXXXXXXXXX with the express written consent of the Lenders.

99.The authorized share capital of Newco will consist of a limited number of common shares and a limited number of preferred shares of one class, issuable in series. Each such series of DPS will relate to a particular tranche of the Original Loan, and the number of shares authorized for each such series will be the total number of shares having an aggregate DPS Redemption Amount equal to the amount then outstanding under the Original Loan to which it relates, as the case may be.

100.The stated capital attributable to the issued common shares of Newco will be specified to be a nominal amount. The common shares will carry one vote per share at all meetings of shareholders (other than at class meetings for the holders of DPS) and will be entitled to share equally in such dividends as may be declared thereon. Subject to the privileges attaching to the DPS, the common shares will share equally in any distribution on the wind-up, liquidation or dissolution of Newco. It is not intended that any dividend will be declared or paid on the common shares while the DPS are issued and outstanding.

101.The attributes of each series of DPS will be as follows:

a)each series of DPS will rank pari passu with every other series of DPS, but ahead of the common shares of Newco, with respect to the payment of dividends and distributions on the winding-up, liquidation or dissolution of Newco;

b)holders of DPS will be entitled to receive dividends on such DPS determined as if dividends accrued daily, as of XXXXXXXXXX, irrespective of the date of their issuance, on the initial stated capital of each such DPS plus all accrued and unpaid dividends thereon at a rate equal to XXXXXXXXXX. Such dividends will be cumulative and payable monthly and in cash. In addition, all accrued and unpaid dividends on a particular class of DPS will be required to be paid immediately prior to the redemption of any of the DPS of such class;

c) holders of DPS will generally not be entitled to notice of, or to vote at, any meetings of shareholders, but will be entitled to vote in certain circumstances as required by law, and a class vote will be required to amend any of the terms attaching to such DPS;

d)DPS of each series will be redeemable, in whole or in part, at any time, in equal proportion of the DPS of any other series, at the option of Newco on not less than one day's notice to the holder thereof for an amount per share equal to the initial stated capital of each such Preferred Share;

e)a portion of each series of DPS will be required to be redeemed on a monthly basis in an amount representing the amount of capital contribution payments in excess of all dividends payable on the DPS paid by XXXXXXXXXX to Newco under the Original Loan as described at paragraph 86 above; furthermore, DPS will be redeemable, within 120 days after the end of any particular fiscal period, in an amount representing all Excess Cash Flow arising in such fiscal period;

f) DPS of each series will be redeemable, in whole or in part, upon the occurrence of any Event of Default at the option of the holder thereof for an amount per share equal to the DPS Redemption Amount. Notwithstanding, each such DPS shall be redeemed without notice not later than XXXXXXXXXX;

g)for so long as any DPS remains outstanding, Newco will not, except as required by the terms and conditions of or relating to such DPS or the Capital Contribution Agreement or except with the prior written approval of all holders of the DPS:

i)create, incur, assume or suffer to exist any indebtedness, liability or obligation of Newco to any person;

ii)create or issue any securities or redeem, purchase or retire any shares;

iii)pay or declare any dividends or make any other capital distribution in respect of any shares;

iv)amend or repeal any of its articles or by-laws; or

v)pass any resolution or special resolution to approve or authorise any fundamental changes to or affecting Newco.

Notwithstanding terms and conditions of the DPS or any mandatory redemptions of the DPS that may be required by DPS Lenders, all XXXXXXXXXX Excess Cash Flow, arising in each fiscal period, shall be applied to redeem the DPS within 120 days from the end of the fiscal period.

EXCESS CASH FLOW

102."Excess Cash Flow" in respect of a particular fiscal period shall mean the increases in cash flow of XXXXXXXXXX from all sources for such fiscal period, as would be reported on a Consolidated Statement of Changes in Financial Position prepared in accordance with generally accepted accounting principles ("GAAP") if only directly and indirectly wholly-owned subsidiaries of XXXXXXXXXX were so included, but before outlays for:

a)the payments of dividends other than dividends paid on the DPS;

b)capital expenditures or any payments on capital accounts, other than in respect of:

i) the purchase or redemption of any of the DPS, other than purchases or redemptions made in the fiscal period from a prior fiscal period Excess Cash Flow;

ii)repayments of indebtedness in existence at the date the DPS are issued by Newco and incurred in the normal and ordinary course of business to the extent that such debt is then due;

iii)repayments of additional debt incurred for the specific purpose to fund current operating requirement;

iv)repayments of additional debt incurred for the specific purpose to fund the redemption of DPS or to pay dividends thereon;

v)expenditures or payments between XXXXXXXXXX and Newco;

vi)reasonable capital expenditures, leasehold inducements, leasehold improvements, lease commissions or payment on capital account made or paid in the normal and ordinary course of business, including, without limiting the generality of the foregoing, any costs and expenses (other than those funded from insurance proceeds) paid to repair or replace damage or destruction to the XXXXXXXXXX or any part thereof to the existing standard;

vii)repayments of additional debt incurred for the specific purpose of making or paying such reasonable capital expenditures, leasehold inducements, leasehold improvements, lease commissions or payment on capital account made or paid in the normal and ordinary course of business;

viii)costs incurred, whether prior to or after the date of issuance of the DPS, in connection with the capital and financial reorganisation of XXXXXXXXXX herein described;

c)repayments of loans, redemption of any of the shares of XXXXXXXXXX, capital contributions or other distributions to shareholders of XXXXXXXXXX;

d)loans and payments to directors, officers and shareholders of XXXXXXXXXX and any other persons, firms or corporations, other than reasonable compensation for services rendered.

103.For the purposes of this definition of Excess Cash Flow

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

b)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;

c)all amounts referred to at paragraph 102 above shall be deducted in computing the Excess Cash Flow whether or not same is deductible in accordance with GAAP in computing changes in cash flow on the "Consolidated Statement of Changes in Financial Position";

d)the first fiscal period of Newco will be the period commencing on the Closing Date and ending on XXXXXXXXXX;

e)Excess Cash Flow shall be reduced by a negative Excess Cash Flow arising in the immediately preceding fiscal period: and

f)Excess Cash Flow shall not include reasonable working capital reserves to fund reasonable capital expenditures, leasehold inducements, leasehold improvements, lease commissions or payment on capital account made or paid in the normal and ordinary course of business, which amount shall not exceed XXXXXXXXXX, and will be held in reserve to pay any such expenses incurred in any subsequent fiscal period; and

g)Excess Cash Flow shall not include proceeds of insurance received in any particular fiscal period by XXXXXXXXXX in respect of damage or destruction to XXXXXXXXXX or any part thereof. Such proceeds shall, at the sole option of the DPS Lenders, be used either to redeem DPS or set aside to provide for or used to pay to repair or replace said damage or destruction. In the latter case, such proceeds of insurance shall be included in the Excess Cash Flow for the fiscal period immediately following the fiscal period during which said proceeds of insurance are set aside for or used to pay to repair or replace said damage or destruction.

Notwithstanding this definition of Excess Cash Flow, XXXXXXXXXX shall cause Newco to redeem, within 120 days from the end of the fiscal period, DPS having an aggregate redemption amount equal to XXXXXXXXXX Excess Cash Flow. XXXXXXXXXX in its sole discretion will determine how such redemptions will be allocated among its subsidiaries.

104.XXXXXXXXXX Excess Cash Flow in respect of a particular fiscal period shall be the cash flow for such period of XXXXXXXXXX on a consolidated basis from all sources, as would be reported on a consolidated statement of changes in financial position prepared in accordance with GAAP, if only directly and indirectly wholly-owned subsidiaries of XXXXXXXXXX (which for this purpose would include XXXXXXXXXX) are so included, but before outlays for:

a) the payments of dividends other than dividends paid on the DPS;

b)capital expenditures or any payments on capital accounts, other than in respect of;

i)the purchase or redemption of any of the DPS, other than purchases or redemptions made in the fiscal period from a prior fiscal period XXXXXXXXXX Excess Cash Flow;

ii)repayments of indebtedness in existence at the date the DPS are issued by Newco and incurred in the normal and ordinary course of business to the extent that such debt is then due;

iii)repayments of additional debt incurred for the specific purpose to fund current operating requirement;

iv)reasonable capital expenditures, leasehold inducements, leasehold improvements, lease commissions or payment on capital account made or paid in the normal and ordinary course of business,;

v)repayment of additional debt incurred for the specific purpose of making or paying such reasonable capital expenditures, leasehold inducements, leasehold improvements, lease commissions or payment on capital account made or paid in the normal and ordinary course of business;

vi)costs incurred, whether prior to or after the date of issuance of the DPS, in connection with the capital and financial reorganisation of XXXXXXXXXX herein described;

c) repayments of loans that XXXXXXXXXX and its wholly-owned subsidiaries has received from non-arm's length shareholders of XXXXXXXXXX, redemption of any of the shares of XXXXXXXXXX or its wholly owned subsidiaries;

d)loans and payments to directors, officers and shareholders of XXXXXXXXXX or its wholly owned subsidiaries and any other persons, firms or corporations, other than reasonable compensation for services rendered.

For the purposes of this definition of Excess Cash Flow, the foregoing shall be adjusted as necessary in order to prevent duplication or repeated accounting of any amount.

WINDING UP OF NEWCO

105.Subject to the operation of any applicable law to which Newco is subject, Newco will be wound-up without any undue delay the earlier of:

a)the time at which all of the DPS are repurchased, redeemed or cancelled; or

b)XXXXXXXXXX.

106.Should the operation of any applicable legislation delay or preclude the redemption, repurchased or cancellation of the DPS or the winding-up of Newco, such redemption, repurchase or cancellation of the DPS or winding-up of Newco will occur without any undue delay after the termination of any such legal impediment.

PURPOSE OF THE PROPOSED TRANSACTIONS

107.The purpose of the Proposed Transactions is to reduce the financing costs and cash-flow requirements of XXXXXXXXXX by exchanging the Original Loan for DPS entitling their holder to a cumulative fixed dividend at a lower rate than the interest rate on the Original Loan while maintaining the after-tax rate of return on the funds provided by the Lenders to XXXXXXXXXX pursuant to the Original Loan and maintaining all securities and hypothecs guarantying the repayment of the Original Loan.

108.The net cash flow improvement of XXXXXXXXXX will allow it to continue the carrying on of its business operations with respect to the XXXXXXXXXX, better its overall financial situation by reducing its debt requirements and effectively remedy its default position under the Original Loan. The Proposed Transactions will also promote the long-term commercial viability of XXXXXXXXXX.

RULINGS GIVEN

Provided all relevant facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate, we confirm the following:

A.The DPS of Newco to be issued to the DPS Lenders as described at paragraph 100 above will be:

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

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

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

B.No amount will be included in computing the income of Newco under paragraphs 12(1)(c) or (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 XXXXXXXXXX to Newco, nor will such amounts constitute proceeds of disposition, as defined in section 54 of the Act, to Newco from the disposition by it of any property.

C.Subsection 80(2) of the Act will not apply in respect of XXXXXXXXXX by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX to Newco on the Original Loan;

D.Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by XXXXXXXXXX or Newco in the course of the restructuring of the Original Loan and issuing the DPS 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.

E.The "cost amount", within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of XXXXXXXXXX Loan will, immediately after the time XXXXXXXXXX Loan is acquired, be equal to the amount paid by XXXXXXXXXX for XXXXXXXXXX Loan as described at paragraph 66 above.

F.The "cost amount", within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of XXXXXXXXXX Loan will, immediately after the time XXXXXXXXXX Loan is acquired, be equal to the amount paid by XXXXXXXXXX for XXXXXXXXXX Loan as described at paragraph 70 above.

G.The "cost amount" within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of the portion of the Original Loan held by XXXXXXXXXX will, immediately after the time said portion of the Original Loan is acquired, be equal to the amount paid by XXXXXXXXXX to XXXXXXXXXX for such portion of the Original Loan as described at paragraph 75 above.

H.The "cost amount", within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of the portion of the Original Loan held by XXXXXXXXXX will, immediately after the time said portion of the Original Loan is acquired, be equal to the amount paid by XXXXXXXXXX to XXXXXXXXXX for such portion of the Original Loan as described at paragraph 77 above.

I.The "cost amount", within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of the portion of the Original Loan held by XXXXXXXXXX will, immediately after the said portion of the Original Loan is acquired, be equal to the amount paid by XXXXXXXXXX to XXXXXXXXXX for such portion of the Original Loan as described at paragraph 78 above.

J.The "cost amount", within the meaning of subsection 248(1) of the Act, to the DPS Lenders of the DPS will, immediately after the time the DPS are issued, be equal to the amount paid by such DPS Lenders for the DPS as described at paragraph 91 above.

K.The "cost amount" within the meaning of subsection 248(1) of the Act, to Newco of the Original Loan will, immediately after it is acquired from the DPS Lenders, equal the purchase price therefor as described at paragraph 85 above.

L.No amount will be included in computing the income of the DPS Lenders under subsection 56(2) of the Act in respect of any capital contributions made by XXXXXXXXXX to Newco under the Capital Contribution Agreement.

M.If the Original Loan is reacquired by the DPS Lenders, the "cost amount", within the meaning of subsection 248(1) of the Act, to the DPS Lenders of the Original Loan will equal the purchase price therefor as described at paragraph 93 above.

N.If a portion of the Original Loan is subsequently reacquired by XXXXXXXXXX from XXXXXXXXXX, the "cost amount", within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of such portion of the Original Loan will, immediately after it is acquired from XXXXXXXXXX, equal the purchase price therefor as described at paragraph 77 above.

O.If a portion of the Original Loan is subsequently reacquired by XXXXXXXXXX from XXXXXXXXXX, the "cost amount", within the meaning of subsection 248(1) of the Act, to XXXXXXXXXX of such portion of the Original Loan will, immediately after it is acquired from XXXXXXXXXX, equal the purchase price therefor as described at paragraph 76 above.

P.No amount will be included in the income of XXXXXXXXXX pursuant to subsections 15(1) or 246(1) of the Act solely by virtue of the fact that interest will not be paid or payable by XXXXXXXXXX to Newco on the Original Loan.

Q.Provided the Original Loan arose from one or more loans made by the DPS Lenders in the course of their money lending business, the Original Loan reacquired from Newco by the DPS Lenders as described at paragraph 93 above will be considered to have been acquired by the DPS Lenders in the ordinary course of their insurance business for the purposes of paragraph 20(1)(1) and 20(1)(p) of the Act.

R.Subsection 112(4) of the Act will not apply, in respect of any dividends received by the DPS Lenders on the DPS, to any loss realised by the DPS Lenders on the Original Loan subsequent to being reacquired by the DPS Lenders.

S.The portion of the interest paid or payable by XXXXXXXXXX on the XXXXXXXXXX Loan equal to or less than the rate of dividend paid or payable on the DPS by Newco will be deducible by XXXXXXXXXX pursuant to subsection 9(1) or paragraph 20(1)(c) of the Act in its taxation year in which said portion of the interest is paid or payable.

T.The portion of the interest paid or payable by XXXXXXXXXX on XXXXXXXXXX share of the Original Loan equal to or less than the rate of dividend paid or payable on the DPS by Newco will be deductible by XXXXXXXXXX pursuant to subsection 9(1) or paragraph 20(1)(c) of the Act in its taxation year in which said portion of the interest is paid or payable.

U.As a result of the Proposed Transactions described, in and of themselves, subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings given.

This ruling is given subject to the general limitations and qualifications set forth in Information circular 70-6R3 issued by Revenue Canada on December 30, 1996, and is binding on the Department provided the DPS are issued as described above on or before XXXXXXXXXX. This ruling is based on the Act in its present form and does not take into account the effects of any proposed amendments thereto.

Yours truly,

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