1998 Ruling 9733833 - 55(3)(A) RULING

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: 55(3)(A) Ruling which contains several issues

Position: (See Statement of Principal Issues attached with Ruling)

Reasons: (See Statement of Principal Issues attached with Ruling)

XXXXXXXXXX
XXXXXXXXXX 973383
XXXXXXXXXX

Attention: XXXXXXXXXX
XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, as amended by your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information that you provided in our various telephone conversations (XXXXXXXXXX).

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

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

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

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

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

(v) is the subject of a ruling previously issued by the Directorate.

Definitions

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

(a) Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act");

(b) "adjusted cost base" has the meaning assigned by section 54;

(c) “arm’s length” has the meaning assigned by section 251;

(d) "agreed amount" has the meaning assigned by subsection 85(1);

(e) "BCA" means the Business Corporations Act (XXXXXXXXXX), and, where applicable, its predecessor statutes;

(f) "capital property" has the meaning assigned by section 54;

(g) “CBCA” means the Canada Business Corporations Act, R.S.C. 1985, c.C-44, as amended;

(h) “cost amount” has the meaning assigned by subsection 248(1);

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

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

(k) “eligible property” has the meaning assigned by subsection 85(1.1);

(l) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(m) "PUC" means paid-up capital as that expression is defined in subsection 89(1);

(n) "proceeds of disposition" has the meaning assigned by section 54;

(o) "public corporation" has the meaning assigned by subsection 89(1);

(p) “Regulations” means Income Tax Regulations;

(q) "related" has the meaning assigned by section 251;

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

(s) “series of transactions or events" includes the transactions or events referred to in subsection 248(10);

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

(u) "specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1);

(v) “stated capital” has the meaning assigned by the provisions of CBCA or BCA, as the case may be;

(w) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

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

(z) "term preferred share" has the meaning assigned by subsection 248(1).

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

Facts

1. XXXXXXXXXX (“Subco1”) is a taxable Canadian corporation and a public corporation which was formed as a result of an amalgamation of former Subco1 and XXXXXXXXXX (“A Co.”), under the BCA on XXXXXXXXXX. Its fiscal year end is XXXXXXXXXX.

A Co. was formerly XXXXXXXXXX which was formerly XXXXXXXXXX. A Co. carried on the business of XXXXXXXXXX. Prior to the amalgamation, all of the issued common shares of both corporations were owned by an indirect subsidiary wholly-owned corporation of XXXXXXXXXX (“Pubco”), a taxable Canadian corporation and a public corporation.

The capital stock of Subco1 consists of:

(a) common shares;

(b) XXXXXXXXXX preferred shares;

(c) XXXXXXXXXX preferred shares;

(d) XXXXXXXXXX preferred shares.

(e) XXXXXXXXXX preferred shares.

There are currently XXXXXXXXXX preferred shares of Subco1 outstanding. These preferred shares are non-voting unless Subco1 defaults in making XXXXXXXXXX quarterly dividend payments. These preferred shares are trading on the XXXXXXXXXX Stock Exchange.

In XXXXXXXXXX preferred shares were issued privately by Subco1 to an arm’s length party. The XXXXXXXXXX preferred shares of Subco1 are non-voting unless Subco1 defaults in making XXXXXXXXXX quarterly dividend payments. The XXXXXXXXXX preferred shares of Subco1 were issued for financing purposes and their issue was not part of the series of transactions or events which includes the proposed transactions described herein.

The common shares of Subco1 are held by XXXXXXXXXX (“B Co.”), a taxable Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX (“C Co.”). C Co. is an indirect subsidiary wholly-owned corporation of Pubco.

The common shares of Subco1 were previously held by XXXXXXXXXX (“Subco2”), a corporation which is related to C Co. In XXXXXXXXXX, Subco2 transferred the common shares of Subco1 to XXXXXXXXXX (“D Co.”), which was then a subsidiary wholly-owned corporation of C Co. pursuant to subsection 85(1) and received preferred shares of D Co. as consideration.

As a result of D Co. receiving an unsolicited offer to purchase XXXXXXXXXX (“E Co.”), a subsidiary wholly-owned corporation of D Co., C Co. incorporated B Co. in XXXXXXXXXX and transferred the shares of D Co. to B Co. pursuant to subsection 85(1) and received common shares of B Co. as consideration. Subco2 then transferred the preferred shares of D Co. to B Co. pursuant to subsection 85(1) and received preferred shares of B Co. as consideration, and thereafter D Co. was wound up. The property of D Co., including the shares of E Co. and Subco1, was distributed to B Co. pursuant to subsection 88(1). The excess adjusted cost base of the shares of D Co. to B Co. that was calculated under paragraph 88(1)(d)(i) in respect of the wind-up of D Co., was designated and allocated by B Co. to the non-depreciable property of D Co., including the shares of E Co. so distributed to B Co.

The shares of D Co. were previously acquired by Pubco in XXXXXXXXXX.

The shares of E Co. were sold to an unrelated third party for fair market value cash consideration.

Subco1 is a specified financial institution pursuant to paragraph (g) of the definition of “specified financial institution”, because one of its related corporations, XXXXXXXXXX (“F Co.”), a subsidiary wholly-owned corporation of Pubco, is a captive insurance corporation.

Subco1 currently carries on business as a XXXXXXXXXX (“Business A”).

XXXXXXXXXX

Subco1 also provides XXXXXXXXXX (“Business B ”).

XXXXXXXXXX

The assets of Business B currently consist of:

(f) merchandise rentals, including an estimated XXXXXXXXXX (the “Equipment”), comprising approximately XXXXXXXXXX% of the depreciable property of Business B;

(g) depreciable property used for servicing the XXXXXXXXXX business, including computer hardware and software, vehicles, furniture and fixtures, telephones, tools and service work equipment; and

(h) customer lists and profiles, dealer lists and specified sales records, assignable contracts and agreements, business and financial records, practice manuals, accounts receivable, prepaid expenses, inventory (including product warranties and service records), intellectual property (including licenses, patents and trademarks), employees and goodwill.

2. Subco2, formerly XXXXXXXXXX, is a taxable Canadian corporation and is governed by the BCA. Its fiscal year end is XXXXXXXXXX.

The capital stock of Subco2 consists of:

(a) common shares; and

(b) XXXXXXXXXX preferred shares.

The common shares of Subco2 are currently owned by XXXXXXXXXX (“G Co.”), an indirect subsidiary wholly-owned corporation of Pubco.

There are currently $XXXXXXXXXX preferred shares outstanding which are held by an arm’s length party. These preferred shares of Subco2 are not voting unless Subco2 defaults in making dividend payments for a cumulative period of XXXXXXXXXX months. The XXXXXXXXXX preferred shares of Subco2 were issued for financing purposes and their issue was not part of the series of transactions or events which includes the proposed transactions described herein.

Subco2 is a specified financial institution pursuant to paragraph (g) of the definition of “specified financial institution”, as Subco2 is related to F Co.

Subco2 carries on a variety of businesses, XXXXXXXXXX. Subco2’s businesses include:

(c) a XXXXXXXXXX% limited partnership interest in the XXXXXXXXXX (“LP #1”). The remaining XXXXXXXXXX% partnership interest is owned as general partner byXXXXXXXXXX (“H Co.”), a related corporation to both Subco2 and Subco1. LP #1’s business activities include XXXXXXXXXX;

(d) a XXXXXXXXXX% limited partnership interest in the XXXXXXXXXX (“LP #2”). The remaining XXXXXXXXXX% partnership interest is owned as general partner by XXXXXXXXXX (“I Co.”), a related corporation to both Subco2 and Subco1. LP #2’s business activities involve XXXXXXXXXX;

(e) a XXXXXXXXXX% limited partnership interest in XXXXXXXXXX (“LP #3”). The remaining XXXXXXXXXX% partnership interest is owned as general partner by XXXXXXXXXX (“J Co.”), a related corporation to both Subco2 and Subco1. LP #3’s business activities include XXXXXXXXXX;

(f) a XXXXXXXXXX% limited partnership interest in XXXXXXXXXX (“LP #4”). The remaining XXXXXXXXXX% partnership interest is owned as general partner by XXXXXXXXXX (“K Co.”), a related corporation to both Subco2 and Subco1. LP #4’s business activities include XXXXXXXXXX.

You have advised that Subco2 may acquire a XXXXXXXXXX% limited partnership interest in XXXXXXXXXX (“Partnership A”) and the remaining XXXXXXXXXX% partnership interest will be owned as general partner by XXXXXXXXXX (“L Co.”), a related corporation to both Subco2 and Subco1. Partnership A is intended to be a XXXXXXXXXX. Partnership A may or may not be formed.

XXXXXXXXXX

With respect to the acquisitions of the shares of Target Corporations, Subco2 paid cash for such acquisitions and owns all the shares of the Target Corporations directly. With respect to the acquisitions of the assets of the Target businesses, Subco2 acquired the assets of the Target businesses through XXXXXXXXXX (“LP #5”) in which Subco2 holds a XXXXXXXXXX% limited partnership interest while the remaining XXXXXXXXXX% partnership interest is held by XXXXXXXXXX (“M Co.”) as general partner. All of the shares of M Co. are held by XXXXXXXXXX (“N Co.”) which is a subsidiary wholly-owned corporation of Pubco. M Co. is governed by the CBCA and is related to both Subco2 and Subco1. The acquisition of the shares of the Target Corporations and the assets of the Target businesses were not made in contemplation of, and are not related in any way to the proposed transactions described below.

Subco2 and N Co. each made an initial cash capital contribution to LP #5 according to its respective partnership interest in LP #5. Since then Subco2 made loans (the “LP #5 loans”) to LP #5 to fund the acquisitions of the assets of the Target businesses. The LP #5 loans are currently outstanding.

On or about XXXXXXXXXX, Subco2 plans to have the Target Corporations and M Co. amalgamated to form XXXXXXXXXX (“Newco”) under the CBCA. In contemplation of this amalgamation, on XXXXXXXXXX, N Co. transferred its shares of M Co. to Subco2 for cash at fair market value, which is a nominal amount. On the amalgamation, Subco2, being the sole shareholder of the Target Corporations and of M Co., will receive common shares of Newco. All of the shares of Newco will be owned by Subco2.

In contemplation of the dissolution of LP #5, on XXXXXXXXXX, Subco2 and M Co. each made an additional cash capital contribution to LP #5 according to its partnership interest in LP #5. Such cash proceeds have been used by LP #5 to pay down part of the LP #5 loans described herein. Also, on or about XXXXXXXXXX, Subco2 and M Co. each will make a final cash capital contribution to LP #5, according to its respective partnership interest in LP #5. Such cash proceeds will also be used by LP #5 to pay down the LP #5 loans.

On or about XXXXXXXXXX, Subco2 will, pursuant to subsection 85(1) of the Act, transfer to Newco its XXXXXXXXXX% limited partnership interest in LP #5 for consideration consisting of Newco common shares. As a consequence of such transfer, LP #5 will cease to exist by virtue of the acquisition by Newco of all of the interests in LP #5. All of the assets and liabilities of LP #5 will become the assets and liabilities of Newco.

XXXXXXXXXX

3. Pubco is a taxable Canadian corporation and a public corporation, and is governed by the CBCA. The capital stock of Pubco consists of:

(a) common shares;

(b) XXXXXXXXXX Preferred Shares XXXXXXXXXX;

(c) XXXXXXXXXX Preferred Shares XXXXXXXXXX;

(d) XXXXXXXXXX Preferred Shares XXXXXXXXXX;

(e) XXXXXXXXXX Preferred Shares XXXXXXXXXX; and

(f) XXXXXXXXXX Preferred Shares XXXXXXXXXX.

The common shares of Pubco are widely held such that no person, or related group of persons, owns a sufficient number of shares which represent control of Pubco for the purposes of the Act. The common shares of Pubco are listed on the XXXXXXXXXX stock exchanges.

The XXXXXXXXXX Preferred Shares XXXXXXXXXX 7 of Pubco are listed on the XXXXXXXXXX stock exchanges. These preferred shares do not have voting rights except for two situations:

(g) when a poll is taken at a meeting of such XXXXXXXXXX preferred shares, then each holder is entitled to one vote; and

(h) should Pubco default in making XXXXXXXXXX quarterly dividend payments.

4.

XXXXXXXXXX

(a) XXXXXXXXXX

(b) XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Although the assets of Business A and Business B which are included in Class 8 of Schedule II to the Regulations have been regulated differently, such assets were not included in separate classes for purposes of filing Subco1’s corporate income tax returns prior to XXXXXXXXXX Business A and Business B represent separate businesses and, as such, the Class 8 assets relating to each such business should be included in a separate prescribed class.

Around XXXXXXXXXX, Subco1 amended the T2S(8) Schedules for the taxation year ended XXXXXXXXXX for both A Co. and former Subco1 to separate the Equipment from the Class 8 property of Business A and to include it in a separate Class 8. For the XXXXXXXXXX and subsequent taxation years, Subco1 has filed its T2S(8) on the basis that Business A and Business B are separate businesses.

Proposed Transactions

5. The Articles of Incorporation of Subco2 will be amended in such manner that, in addition to any other shares that may be authorized for issue, its share capital will include XXXXXXXXXX preferred shares XXXXXXXXXX with the following share attributes:

(a) non-voting unless Subco2 defaults in making XXXXXXXXXX cumulative dividend payments;

(b) dividend rate is based on the five year Canada bond rate, at date of issue, times XXXXXXXXXX % plus XXXXXXXXXX basis points. The dividend is cumulative and is to be paid quarterly;

(c) redeemable at any time for cash, together with accrued and unpaid dividends up to but excluding the date fixed for redemption. It is mandatory that the share will be redeemed no later than XXXXXXXXXX; and

(d) subject to a price adjustment clause.

6. The Articles of Incorporation of XXXXXXXXXX (“Subco3”) will be amended in such manner that, in addition to any other shares that may be authorized for issue, its share capital will include a new class of non-voting, redeemable and retractable preferred shares. Dividends will be paid on these shares at the discretion of the Board of Directors. You have advised that currently, Subco3 only has a class of common shares outstanding, all of which are owned by Pubco.

7. On or about XXXXXXXXXX, Subco1 will transfer all the property of Business B, other than the software, to Subco2. As consideration therefor, Subco2 will:

(a) pay cash and or assume debts of Subco1 related to Business B, but not exceeding the aggregate of the agreed amounts in the joint election under subsection 85(1) described below; and

(b) issue XXXXXXXXXX preferred shares of Subco2 having an aggregate fair market value and redemption amount equal to the fair market value at that time of the property so transferred to Subco2 as described herein less the amount of the non-share consideration received by Subco1 as described in (a) herein.

You have advised that Subco2 will utilize its existing line of credit to make the cash payment described in (a) herein.

Subco1 will provide to XXXXXXXXXX an independent opinion that the dividend rate on the XXXXXXXXXX preferred shares of Subco2 will represent a market rate at the time of issue.

Subco1 and Subco2 will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to Subco2 of any eligible property of Subco1 that has a fair market value in excess of its cost amount. Specifically, the agreed amount in each joint election will not be less than the least of :

(c) in the case of eligible capital property, the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii),

(d) in the case of depreciable property of a prescribed class, the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii), and

(e) in the case of property described in paragraph 85(1)(c.1), the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii).

In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

Pursuant to the provisions of the BCA, the amount to be added to the stated capital of Subco2 in respect of the issuance of the Subco2 XXXXXXXXXX preferred shares will equal the amount by which the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to Subco2 as described herein exceeds the amount of the non-share consideration as described herein.

8. Immediately following the completion of the transactions described in paragraph 7 above, Subco2 will transfer the Equipment and related leases, as well as the merchandise and finance receivables to Subco3.

As consideration for the transfer of property described herein, Subco3 will:

(a) pay cash, not exceeding the aggregate of the agreed amounts in the joint election under subsection 85(1) described below; and

(b) issue non-voting, redeemable and retractable preferred shares of Subco3 having an aggregate fair market value and redemption and retraction amount equal to the fair market value at that time of the property so transferred to Subco3 as described herein less the amount of cash received by Subco2 as described in (a) herein.

Subco3 and Subco2 will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to Subco3 of any eligible property of Subco2 that has a fair market value in excess of its cost amount. Specifically, the agreed amount in each joint election will not be less than the least of :

(c) in the case of depreciable property of a prescribed class, the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii), and

(d) in the case of property described in paragraph 85(1)(c.1), the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii).

In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

Pursuant to the provisions of the CBCA, the amount to be added to the stated capital of Subco3 in respect of the issuance of the Subco3 preferred shares will equal the amount by which the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to Subco3 exceeds the amount of cash received by Subco2 as described herein.

You have advised that Subco3 is acting as an intermediary by facilitating the acquisition and financing of assets of the Pubco related group of corporations. By aggregating the assets, such as the Equipment and the merchandise and finance receivables of Subco2, of the Pubco related group of corporations into Subco3, Subco3 will be better able to access the capital financial markets in order to securitize these assets.

9. Contemporaneously with the transfers described in paragraph 8 herein, Subco2 will transfer to Newco at fair market value all the property of Business B, other than the Equipment, merchandise and finance receivables. As consideration for the transfer of property described herein, Newco will pay cash to Subco2.

10. On or about XXXXXXXXXX:

(a) Subco3 will sell the merchandise and finance receivables of Business B to a trust (“Trust”) at fair market value. The trustee and the beneficiaries of the Trust will be unrelated persons to Subco3, Subco2 and Subco1 within the meaning of paragraph 55(3.01)(a). The beneficiaries of the Trust will be one or more charities.

As consideration for the transfer of the property as described herein, the Trust will pay cash to Subco3. The Trust will finance the purchase on the capital financial markets by issuing commercial paper backed by the merchandise and finance receivables of Business B.

(b) Subco3 will then effect what is sometimes referred to as a “sale/sale/leaseback securitization” with the Trust. The securitization transactions will include:

(i) Subco3 will sell the Equipment including the underlying operating leases with third parties (“underlying operating leases”) to the Trust at fair market value.

As consideration for the transfer of property described herein, the Trust will issue a demand promissory note with a principal amount and fair market value equal to the fair market value of the property so transferred to the Trust (the “Trust Promissory Note”).

(ii) Immediately thereafter, Subco3 will enter into a master lease agreement (the “master lease”) which will provide that if Subco3 ever reacquires the Equipment, Subco3 will immediately lease the Equipment back to the Trust, in accordance with the terms of the master lease which, inter alia, include:

(I) the Trust will bear the loss of any bad debts from the underlying operating leases; and

(II) the term of the master lease will be longer than the underlying operating leases but less than the expected useful life of the Equipment.

The fair market value of the master lease will be equal to the fair market value of the aggregate underlying operating leases and, therefore, the fair market value of the Equipment with the master lease will have a fair market value equal to that of the Equipment with the underlying operating leases.

As consideration for the master lease described herein, once the master lease becomes effective, the Trust will prepay rent to Subco3 under the master lease, financed on the capital financial markets by issuing commercial paper backed by the underlying operating leases.
(iii) Immediately thereafter, the Trust will sell the Equipment without the underlying operating leases back to Subco3 at fair market value and the master lease will be effective immediately.

As consideration for the transfer of the Equipment to Subco3, Subco3 will issue a demand promissory note with a principal amount and fair market value equal to the fair market value of the Equipment (with the master lease ) so transferred to Subco3 (the “Subco3 Promissory Note”).

(iv) The Trust will pay the principal amount of the Trust Promissory Note by transferring to Subco3 the Subco3 Promissory Note which will be accepted by Subco3 in full payment of the Trust’s obligation. Subco3 will pay the principal amount of the Subco3 Promissory Note by transferring to the Trust the Trust Promissory Note which will be accepted by the Trust in full payment of Subco3’s obligation. The Trust Promissory Note and the Subco3 Promissory Note will be marked paid in full and cancelled. At the time of their cancellation, the principal amount and fair market value of the Trust Promissory Note will be equal to the principal amount and fair market value of the Subco3 Promissory Note.

11. Immediately following the completion of the transactions described in paragraph 10, Subco3 will use the cash proceeds received from the Trust to redeem the Subco3 preferred shares held by Subco2 for an amount equal to their fair market value (being the aggregate of the redemption amounts of the Subco3 preferred shares so redeemed) and will pay cash as consideration for such redemption.

Subco2 will use these cash proceeds received from Subco3 to repay part of Subco2’s line of credit as described in paragraph 7 above.

12. On or before XXXXXXXXXX, Subco2 will redeem from Subco1 some of the Subco2 XXXXXXXXXX preferred shares for an amount equal to their fair market value, being the aggregate of the redemption amounts of the Subco2 XXXXXXXXXX preferred shares so redeemed and will use funds that have been generated from its business operations to pay for such redemption.

Additional Information

13. There will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a “guarantee agreement”, as defined in subsection 112(2.2) of the Act, in respect of any of the Subco3 preferred shares or Subco2 XXXXXXXXXX preferred shares.

14. None of the Subco3 preferred shares nor Subco2 XXXXXXXXXX preferred shares has been or will be part of a dividend rental arrangement for purposes of subsection 112(2.3) of the Act.

15. None of the Subco3 preferred shares nor Subco2 XXXXXXXXXX preferred shares referred to herein has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act.

16. None of Subco1, Subco2 nor Subco3 is, or will be, at any time before the completion of the proposed transactions described herein, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

17. There is not a present intention to dispose, as part of the series of transactions which includes the redemption of the Subco3 preferred shares or the Subco2 XXXXXXXXXX preferred shares as described in paragraphs 11 and 12 above, respectively, of any property or to increase any interest in any corporation described in any of subparagraphs 55(3)(a)(i) to (v) to a person or partnership who is not related to Subco1 or Subco2 immediately prior to such event.

18. With respect to the XXXXXXXXXX preferred shares of Subco2 that will be held by Subco1 and that will still be outstanding after XXXXXXXXXX, Subco2 will redeem all of them on or before XXXXXXXXXX, for an amount equal to their fair market value, being the aggregate of the redemption amounts of the Subco2 XXXXXXXXXX preferred shares so redeemed and will use funds that have been generated from its business operations to pay for such redemption.

Purpose of the Proposed Transactions

19.

XXXXXXXXXX

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. By virtue of paragraph 1100(2.2)(e) of the Regulations, and provided that the conditions in either of paragraphs 1100(2.2)(f) or (g) of the Regulations is satisfied in respect of a property of a class in Schedule II of the Regulations acquired by Subco2 from Subco1 or acquired by Subco3 from Subco2, as described in paragraphs 7 and 8 above, respectively, pursuant to the provisions of paragraph 1100(2.2)(h) of the Regulations no amount will be included under paragraph 1100(2)(a) of the Regulations in respect of such property.

B. Subsection 84(3) will apply on the redemption:

(a) as described in paragraph 11, of the Subco3 preferred shares held by Subco2, to deem Subco3 to have paid and Subco2 to have received;

(b) as described in paragraph 12, of the Subco2 XXXXXXXXXX preferred shares held by Subco1, to deem Subco2 to have paid and Subco1 to have received:

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend

(c) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(d) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(e) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed pursuant to paragraph (j) of the definition of “proceeds of disposition” in section 54;

(f) will reduce any loss arising from the redemption of those shares pursuant to subsection 112(3) of the Act; and

(g) will not be subject to tax under Part IV.1 and Part VI.1 of the Act by virtue of paragraph (b) of the definition of “excepted dividend” in section 187.1 of the Act and paragraph (a) of the definition of “excluded dividend” in subsection 191(1) of the Act, as each of Subco1 and Subco2 will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer corporation immediately before the redemption of such shares.

C. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v), then by virtue of paragraph 55(3)(a) of the Act, the provisions of subsection 55(2) of the Act will not apply to the taxable dividends referred to in Ruling B. For greater certainty, the proposed transactions described in paragraphs 5 to 12 herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) of the Act.

D. The provisions of paragraph 85(1)(e.2) and subsections 15(1), 56(2), 69(1), 69(4) and 246(1) of the Act will not apply to any of the proposed transactions described in paragraphs 5 to 12, in and of themselves.

E. As a result of the proposed transactions described in paragraphs 5 to 12, in and of themselves, subsection 245(2) of the Act will not be applied to redetermine the tax consequences as described in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada, Customs, Excise and Taxation on December 30, 1996 and are binding provided that the proposed transactions are completed by XXXXXXXXXX.

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

Comments

1. It is our view that the Equipment to be acquired by Subco3 from the Trust as described in subparagraph 10(b)(iii) herein will be subject to subsection 1100(2) of the Regulations. Subsection 1100(2.2) of the Regulations will not apply to such acquisition as the Equipment will be acquired by Subco3 from the Trust with whom Subco3 will be dealing at arm’s length and, therefore, Subco3 will not meet the requirements of paragraph 1100(2.2)(e) of the Regulations.

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

(a) the determination of the fair market value, adjusted cost base or V-day value of any particular asset or share or the paid-up capital of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty, our rulings should not be construed as confirming that

(i) should any shares of Newco be acquired by a person or partnership which is an unrelated person of any of Subco1, Subco2 or Subco3 that such acquisition will not be part of the series of transactions which includes the redemption of the Subco3 preferred shares or the Subco2 XXXXXXXXXX preferred shares as described in paragraphs 11 and 12 above, respectively,

(ii) any tax consequences relating to the prepayment made to Subco3 under the master lease as described in paragraph 10 herein. Such prepayment may constitute an advance under paragraph (c) of the definition of “capital” in subsection 181.2(3) of the Act and therefore such prepayment amount may be included in determining the taxable capital of Subco3 employed in Canada for the purposes of computing Subco3’s Part I.3 tax liability for the particular taxation year.

3. You have informed us, in paragraph 5 above, that the XXXXXXXXXX preferred shares XXXXXXXXXX will be subject to a price adjustment clause.

Nothing in this letter should be interpreted as confirming that,

(a) for purposes of the Act, any adjustment made pursuant to any such price adjustment clause in respect of a transaction subsequent to the time of such transaction will be effective, retroactively, to the time of such transaction, or

(b) for the purposes of the Act, any amount paid pursuant to any such price adjustment clause, in respect of a transaction subsequent to the time of such transaction will be an additional payment of the redemption or purchase price of any shares redeemed or repurchased.

The operation of a price adjustment clause is not a proposed transaction and, consequently, advance rulings are not given by the Department in respect thereof. The Department's general position with respect to price adjustment clauses in agreements is set out in Interpretation Bulletin IT-169 dated August 6, 1974.

Yours truly,

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

18

		.../cont’d

		.../cont’d