1998 Ruling 9800383 - 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.

ISSUES:

Whether debtor in financial difficulty & can replace lender's debt with DPS.

Position:

Yes.

Reasons:

Facts substantiate financial difficulty.

XXXXXXXXXX
XXXXXXXXXX 980038

XXXXXXXXXX, 1998

RE: Advance Income Tax. Ruling Request

XXXXXXXXXX ("Debtor")

This is in reply to your advance income tax ruling request of XXXXXXXXXX, on behalf of the Debtor, and further to your letters of XXXXXXXXXX.

In this letter the following terms have the meaning specified:

(a) "Banco 1" means the XXXXXXXXXX

(b) "Insuranceco" means XXXXXXXXXX

(c) "Trustco" means XXXXXXXXXX and is more fully described in 9 below;

(d) XXXXXXXXXX, all of whom are the shareholders of the Debtor, the share structure of which is more fully described in 7 below;

(e) “Holdco" means XXXXXXXXXX and is more fully described in 11 below;

(f) "Co-Owner" means XXXXXXXXXX

(g) "East Property" means XXXXXXXXXX, and is more fully described in 9 below:

(h) "Related Borrowers" include XXXXXXXXXX and is more fully described in 11 and 13 b) below;

(i) "Banco 2" means the XXXXXXXXXX

(j) "Family" means the XXXXXXXXXX family some of whom are identified in (d) above;

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

FACTS

1. On XXXXXXXXXX, an advance income tax ruling was requested on behalf of the Debtor relating to a proposed refinancing of its indebtedness to Banco 1 and Insuranceco by way of distress preferred shares ("DPS")

2. On XXXXXXXXXX, the Department issued an advance income tax ruling respecting the issue of DPS by the Debtor with respect to debts with Banco 1 and Insuranceco (the "First Ruling"). The relevant facts contained in the ruling were, inter alia, that the Debtor's tine of credit with the LENDER at that time was $XXXXXXXXXX and that the credit agreement governing this tine of credit had expired; that a new credit agreement was negotiated dated as of XXXXXXXXXX (the "Restructuring Agreement" - for more details see 13 below); that this agreement provided, among other things, that the LENDER would agree to convert part of its debt into DPS and scheduled repayments over a five-year period of $XXXXXXXXXX of which was to be repaid in XXXXXXXXXX.

3. On XXXXXXXXXX submitted a request for an advance income ruling related to the refinancing of the LENDER's loans DPS. The facts contained in that letter are reproduced below and have been updated in your letters of XXXXXXXXXX.

4. On XXXXXXXXXX, your wrote a letter further to a request from the Department for further evidence of the Debtor's continued financial difficulty and enclosed a letter of XXXXXXXXXX, from the LENDER. In your letter you referred to the Debtor's liability on two guarantees, one to Banco 1 in the approximate amount of $XXXXXXXXXX , and one to Banco 2 in the approximate amount of $XXXXXXXXXX. As confirmed in your letter of XXXXXXXXXX, the liability on the guarantee to Banco 1 is anticipated to be $XXXXXXXXXX upon eventual sale of the related security while the liability on the guarantee to Banco 2 has been satisfied by payment by the Debtor of $XXXXXXXXXX

The LENDER in its letter of XXXXXXXXXX confirmed that in its opinion if the portion of indebtedness identified in the Restructuring Agreement were not converted to DPS, the Debtor would have insufficient cash to perform all of its obligations including its obligations under the Restructuring Agreement and, in the event of such default, the LENDER would be forced to consider pursuing its various options, one of which would be to accelerate the Debtor's outstanding indebtedness and enforce its security. With your letter of XXXXXXXXXX, you forwarded a letter of XXXXXXXXXX, from the LENDER confirming that the sentiments expressed and the statements made in their letter of XXXXXXXXXX, continue to represent and reflect the LENDER's views on this matter at the present time.

5. The LENDER's head office is located at XXXXXXXXXX. It deals with the XXXXXXXXXX Tax Services Office. It is a "specified financial institution" within the meaning assigned to that term in subsection 248(1) of the Income Tax Act (the "Act") and is also a "taxable Canadian corporation" within the meaning assigned to that term in subsection 89(1) of the Act. The LENDER deals with the Debtor and Trustco (see 9 below) and with the shareholders of each such corporation "at arm's length" as that expression is used in the Act.

6. The Debtor was created by amalgamation on XXXXXXXXXX and its office is located at XXXXXXXXXX. t deals with the XXXXXXXXXX Tax Services Office. It is a "private corporation" and a "taxable Canadian corporation" within the mean~ngs assigned to these expressions by subsection 89(1) of the Act, and a "Canadian-controlled private corporation" within the meaning assigned to this expression by subsection 125(7) of the Act. It's fiscal year end is October 31.

7. The issued and outstanding shares of the Debtor and the holders are:

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

8. The Debtor is

XXXXXXXXXX

These single purpose corporations are also the principal obligors or borrowers under the debt that relates to the assets. These corporations act as agent and trustee for beneficial owners and do not engage in any business or transactions other than the legal ownership of these properties (which term includes related personal property).

9. The Debtor owns XXXXXXXXXX% of the shares of Trustco. Trustco is a single purpose corporation acting as agent and trustee on behalf of the Debtor. Trustco's tax account number is XXXXXXXXXX and deals with the XXXXXXXXXX Tax Services Office. Trustco holds legal title to XXXXXXXXXX Trustco is the principal obligor and the registered mortgagor or borrower of the debt obligations related to that property. The Debtor, by reason of an agency agreement with Trustco, is the beneficial owner of this property and considers itself to be the obligor under the related debt obligations. The Debtor reports both its ownership in XXXXXXXXXX as an asset and the related mortgage as a long-term liability in its annual financial statements. The Debtor also includes the income and expenses from this property in its annual financial statements and income tax returns. Trustco files nil tax returns each year and is described in its 1995 corporate income tax returns as an "inactive trustee". It is acknowledged that the trust relationship between the Debtor and Trustco was not disclosed to the LENDER at the time the acquisition loan was advanced to Trustco or when the security therefor was executed, delivered and registered.

10. The business affairs of the Debtor are managed by XXXXXXXXXX located at the address cited in 6 above.

11. The Debtor confirms that it is indebted to the creditors described below. The debts described in paragraphs a), b) and c) below were the subject of the "First Ruling" in which they were refinanced with DPS

a) Insuranceco: XXXXXXXXXX mortgage due XXXXXXXXXX This mortgage relates to property held by Holdco, a single-purpose corporation owned by the Debtor and the Co-Owner. Holdco owns a project which includes XXXXXXXXXX. Under the terms of the mortgage agreement, the Debtor was liable for its proportionate share of this mortgage, approximately $XXXXXXXXXX. The balance relates to the Co-Owner's proportionate share

b) Banco 1: $XXXXXXXXXX mortgage with Holdco, bearing interest at prime plus one-half of one percent secured on the leasehold interest in the XXXXXXXXXX Holdco Project. This loan was due XXXXXXXXXX. Under the terms of the mortgage agreement the Debtor was liable for its proportionate share of this mortgage, approximately $XXXXXXXXXX . The balance relates to the Co-Owner's proportionate share.

c) Banco 1: $XXXXXXXXXX bearing interest at prime plus one-half of one percent. This mortgage relates to property held by XXXXXXXXXX are wholly-owned single-purpose subsidiaries of the Debtor. Under the terms of the mortgage agreement, the Debtor was liable for the full amount of this mortgage.

d) LENDER: $XXXXXXXXXX advanced to the Debtor and Trustco under the terms of a credit agreement dated XXXXXXXXXX, which credit agreement expired XXXXXXXXXX at which time all credit facilities under it became due and payable. All facilities were restructured under the Restructuring Agreement. At the time of this ruling request, the indebtedness to the LENDER is comprised of the following amounts, of which only ii) and iii) are to be refinanced by DPS as described in the Proposed Transactions below

(i) Operating Line of Credit - $XXXXXXXXXX authorized. Interest on this facility is calculated at prime plus 1.5%, payable monthly. A restructuring fee was paid to the LENDER of $XXXXXXXXXX from this line.

(ii) XXXXXXXXXX Term Facility - $XXXXXXXXXX , with interest at prime plus 1%, calculated and payable monthly.

(iii) Debtor Term Facility No. 1 - $XXXXXXXXXX , with interest at prime plus 1%, calculated and payable monthly.

In addition to the loans and advances made by the LENDER under the terms of the XXXXXXXXXX credit agreement, the LENDER advanced funds to the Related Borrowers in which the Debtor held shares. The Debtor guaranteed the debts of the Related Borrowers and was subsequently approached by the LENDER regarding payment of deficiencies under the guarantees when it had been determined by the LENDER that the Related Borrowers could not repay their liabilities in full. Under the terms of the Restructuring Agreement, the Debtor's guarantees with respect to the Related Borrowers, which exceeded $XXXXXXXXX, were capped at a maximum of $10 million. This $XXXXXXXXXX guarantee amount was added to the Debtor's indebtedness to the LENDER.

e) Banco 1: $XXXXXXXXXX. The loan relates to the Holdco. The Debtor is liable for its proportionate share. As confirmed in your letter of XXXXXXXXXX, the Debtor also guaranteed loans from Banco 1 on a project. The Debtor is attempting to sell the project and it is anticipated that there will be a $XXXXXXXXXX deficiency on the sale.

f) Banco 2: $XXXXXXXXXX. This is the balance of a loan made by Banco 2 with respect to industrial land owned by the Debtor. This is the balance remaining due after the sale of the land.

12. As described in 11 d)(ii) and (iii) above, the Debtor had an operating line of credit with the LENDER in the amount of $XXXXXXXXXX which was payable on demand and was overdrawn in the amount of $XXXXXXXXXX. The XXXXXXXXXX credit agreement between the LENDER and the Debtor that governed the terms of that line of credit expired on XXXXXXXXXX The Debtor's indebtedness was increased by $XXXXXXXXXX as a result of the calling of the Related Borrowers guarantee referred to in 11 d) above and the total indebtedness of $XXXXXXXXXX was refinanced under the terms of the Restructuring Agreement dated XXXXXXXXXX (see 13 below for more concerning this agreement). On XXXXXXXXXX, the Debtor sold an asset and repaid $XXXXXXXXXX of the indebtedness. In XXXXXXXXXX a further $XXXXXXXXXX approximately was repaid (see 13 c) below) which leaves approximately $XXXXXXXXXX to be refinanced. The LENDER agreed to the restructuring on condition that arrangements be made with Banco 1 and Insuranceco to refinance their respective indebtedness with DPS. The First Ruling provided for the refinancing of the indebtedness of both Banco 1 and Insuranceco described in 11 a), b) and c) above.

13. The principal terms of the Restructuring Agreement are as follows:

a) The LENDER agreed to restructure the credit facilities into those outlined in paragraph 11 d) above;

b) The Debtor and LENDER agreed to settle and compromise the LENDER's claim against the Debtor under its guarantees of the Related Borrowers for $XXXXXXXXXX The LENDER and Debtor agreed that the Debtor's $XXXXXXXXXX guarantee payment would increase the Debtor's total direct indebtedness to the LENDER and would be applied against the indebtedness of some of the Related Borrowers (who are consequently now indebted to the Debtor);

c) A new repayment schedule for all credit facilities was established which requires the Debtor and Trustco to dispose of certain assets in a timely fashion. On XXXXXXXXXX , the LENDER received a payment of approximately $XXXXXXXXXX representing the net proceeds of the sale of one of the properties of the Debtor. This amount was applied to reduce the overall debt of the Debtor (see 12 above)

d) The due date for repayment of the operating facility was extended to XXXXXXXXXX, and thereafter is made subject to annual approval provided that earlier demand had not been made. Repayment of the other facilities was extended to the last day of XXXXXXXXXX (assuming no earlier default or acceleration);

e) The LENDER agreed to refinance, with DPS, the term facilities upon satisfaction of the conditions precedent set out therein.

In the absence of the new Restructuring Agreement with the LENDER, the Debtor would have been unable to repay the line of credit.

14. The Debtor was in default of payment of principal at the end of XXXXXXXXXX. The Restructuring Agreement requires the Debtor to repay $XXXXXXXXXX for the XXXXXXXXXX calendar year. As of XXXXXXXXXX, approximately $XXXXXXXXXX had been repaid. The LENDER is required to consider pursuing its various options, one of which is to accelerate the indebtedness and enforce its security held for the indebtedness. This would result in a bankruptcy of the Debtor. As confirmed in your letter of XXXXXXXXXX, the Debtor has made no further repayments to date of its indebtedness to the LENDER other than those referred to herein.

15. The assets of the Debtor consist mainly of XXXXXXXXXX. At that time, the Debtor had several projects it had recently acquired and was in the process of developing.

XXXXXXXXXX

16. The Debtor is unable to raise additional financing from any other sources. Substantially all of its assets are encumbered by mortgages or pledged as security and are thus unavailable for use as security for additional financing. The Debtor advises that its shareholders are also not in a position to contribute further funds of any significance.

17. The Debtor's cash flow projections for the five-year period commencing XXXXXXXXXX indicates that with asset sales but without LENDER DPS, the Debtor's shortfall on the LENDER's required repayment schedule will be $XXXXXXXXXX while with asset sales and LENDER DPS, the net cash flow over the 5 year period will be $XXXXXXXXXX. The Debtor is committed to disposing of assets in an orderly fashion to retire the DPS; however, that process will take several years and reduced debt service over those years will provide the Debtor with time to realize on their assets in an orderly fashion, rather than forcing them to dispose of assets on unfavourable terms (see 29 below)

PROPOSED TRANSACTIONS

18. The Debtor will incorporate a single corporation ("Finco") under the Business Corporations Act (XXXXXXXXXX). All of the issued and outstanding common shares of Finco will be beneficially owned by the Debtor and Trustco with the shares being owned proportionately to the debt converted. Finco will be a single-purpose corporation, the solepurpose of which will be to purchase, hold and realize upon the LENDER debts referred to in paragraphs 11 d)(ii) and (iii) above and to issue the preferred shares referred to in 26 below.

19. The articles of incorporation of Finco will restrict it from carrying on any business, incurring any liabilities or acquiring any assets except as contemplated herein.

20. The authorized shafe capital of Finco will consist of the common shares referred to in 18 above and a single class of preferred shares ("Preferred Shares") with the following terms and conditions:

- issuable for $1 each (the "Redemption Price");

- non-voting except after a "Retraction Event" described in 21 below;

- redeemable at any time at the Redemption Price;

- preferential cumulative monthly dividends will be payable on the outstanding Preferred Shares calculated at a floating dividend rate which will be computed at (i) 50% of the LENDER's prime rate (being the rate determined from time to time by the LENDER as its reference rate of interest then in effect to determine the rate of interest that it charges on its Canadian dollar commercial bank loans in Canada) plus (ii) 1%;

- freely assignable by the LENDER;

- retractable at an amount per share equal to the Redemption Price plus accrued and unpaid dividends at any time after a Retraction Event and, in any event, 10 days before the fifth anniversary of their issuance;

- in the event of a liquidation, dissolution or winding-up, the holders of the Preferred Shares will be entitled to receive in priority to the holders of the common shares an amount per share equal to the Redemption Price plus accrued and unpaid dividends;

- mandatory redemption of shares from "Excess Cash Flow" (described in 32 below) and asset sales.

21. "Retraction Event" for a particular Preferred Share will parallel an "Event of Default" as defined in the Restructuring Agreement and will include the occurrence of any one or more of the following events or circumstances:

a) Finco, for any reason, fails to declare and pay in full all dividends that have accrued on the Preferred Shares up to and including any date scheduled for the payment of dividends within three (3) business days of such date;

b) Finco, for any reason, fails to redeem any Preferred Share as required by the rights, privileges, restrictions and conditions attaching to the Preferred Shares within three (3) business days of the required redemption date, provided that the three (3) business days grace period shall not apply to the redemptions due on the fifth anniversary of the issuance of the Preferred Shares;

c) Finco, for any reason, defaults in the performance of or compliance with any other term of the rights, privileges, restrictions and conditions attaching to the Preferred Shares and such default continues for ten (10) business' days after written notice of such default has been given to Finco by persons holding, in the aggregate, at least 51% of the issued and outstanding Preferred Shares;

d) any one or more of the Conversion Agreement (as described in 28 and 29 below), the Put Agreement (see 30 below) or the Support Agreement (see 27 below) ceases to be in full force and effect or is declared null and void or if the enforceability thereof is contested or denied by any of the XXXXXXXXXX (collectively, the "Debtor Group Members" and each individually a "Debtor Group Member")

e) the Debtor or Trustco, for any reason, fails to make a contribution of surplus or other monies to fund its obligations under the Support Agreement, or if the Debtor, Trustco or Finco, for any reason, defaults in the performance of or compliance with any other term of the Support Agreement;

f) an order is made or an effective resolution is passed for the winding-up or liquidation of any Debtor Group Member;

g) any Debtor Group Member makes a general assignment for the benefit of its creditors or files a proposal under the Bankruptcy and Insolvency Act (Canada), or files a plan under the Companies' Creditors Arrangement Act (Canada), or is declared bankrupt or commits an act of bankruptcy, or if a custodian, sequestrator, receiver or a receiver and manager or any other person with similar powers is appointed of any Debtor Group Member or of the property of any Debtor Group Member or any part thereof that is material to the operations of any Debtor Group Member on a consolidated basis;

h) an encumbrancer takes possession of the property of any Debtor Group Member or any part thereof that is material to the operations of any Debtor Group Member on a consolidated basis, or if a distress or execution or any similar process is levied or enforced against such property and remains unsatisfied for such period as would permit such property or such part thereof to be sold thereunder;

i) there exists or occurs any state of facts or any change in the Act and the regulations thereunder which, in the opinion of the LENDER, adversely affects the advance income tax ruling obtained from Revenue Canada by the LENDER and Finco (the "Ruling"), the tax status of the Preferred Shares or the after-tax return to the LENDER;

j) any Debtor Group Member shall have breached any of its obligations under the Restructuring Agreement, the Conversion Agreement, the Put Agreement or any transaction documents relating to the issue of the Preferred Shares;

k) the Debtor and Trustco cease to beneficially own the common shares of Finco;

l) the Debtor or Trustco cease to carry on business in any material respect;

m) Banco 1 or Insuranceco commence any enforcement proceedings in respect of its security from any Debtor Group Member;

n) the Debtor, Trustco or Finco fails to comply with or otherwise breaches any term or provision of the Ruling; or

o) an Event of Default shall have occurred under the Restructuring Agreement,

22 Finco will be wound-up as soon as reasonably possible after the earlier of:

- the date on which the last of the Preferred Shares is redeemed, caQcelled or otherwise acquired by Finco; and

- five years from the date of issue of the Preferred Shares.

23. Finco will borrow approximately $XXXXXXXXXX from the LENDER on a daylight loan basis and will use the proceeds of this loan to purchase the LENDER debts referred to in 11 d)(ii) and (iii) above (the "Purchased Debt") from the LENDER. Finco will enter into an agreement with the LENDER under which it will agree with the LENDER that the Purchased Debt will continue to be administered on Finco's behalf by the LENDER.

24. Effective on the date of purchase, the Debtor will agree with Finco that no interest will be payable on the Purchased Debt so long as it is held by Finco. However, if the Purchased Debt is subsequently assigned (including reacquisition by the LENDER), interest will again become payable at that time in accordance with the original terms of the loan.

25. After Finco acquires the Purchased Debt from the LENDER as described in 23 above, the Debtor will remain indebted to the LENDER for its revolving line of credit as described in 11 d)(i) above.

26. Finco will issue the Preferred Shares to the LENDER for an aggregate cash consideration of approximately $XXXXXXXXXX The entire amount of the subscription proceeds received by Finco from the issuance of its Preferred Shares will be added to its stated capital account maintained by it in respect to its Preferred Shares. Finco will apply the proceeds from the issuance of the Preferred Shares to repay the daylight loan received by it and referred to in 23 above.

27. The Debtor, Finco and the LENDER will enter into a Support Agreement under which the Debtor will agree to provide, from time to time, Finco with funds sufficient to pay dividends on the Preferred Shares, pay all operating expenses and pay all fees and expen5es required to keep Finco in good standing under the laws of Canada. Such funds will be advanced as contributions to surplus of Finco. The Support Agreement provides that such funds will be regarded as trust funds to be held by Finco for the benefit of the Debtor until such time as the funds are used to pay dividends or operating expenses.

28. The Conversion Agreement (which is the master agreement among the Debtor, Finco and the LENDER governing this Preferred Share refinancing) further provides that Finco may not, except as contemplated herein, declare or pay any dividends, purchase or redeem any shares, make loans to shareholders, incur any debts, create any security over any of its assets, sell any assets, make any guarantees, amalgamate, merge or consolidate, issue any shares, engage in any business or pay any amounts to its officers, directors or shareholders,

29. The Restructuring Agreement also requires the Debtor to sell certain of its assets in an orderly fashion and to apply the proceeds of sale tp retire the LENDER debt. Those terms of the Restructuring Agreement will remain in effect when Finco acquires the Purchased Debt, with the result that the Debtor will be required to remit the net proceeds of sale (after costs of disposition) to Finco. The terms of the Conversion Agreement require Finco to apply these sale proceeds to redeem the Preferred Shares which the LENDER will hold. In addition to these mandatory redemptions, the Preferred Shares will be redeemed periodically, as described in 32 below, by Finco out of Excess Cash Flow,

30. Under the terms of the Put Agreement, upon the occurrence of a Retraction Event (see 21 above) and in any event on and after the tenth day prior to the fifth anniversary of the issuance of the Preferred Shares, the LENDER shall have the right to cause the Debtor to purchase the Preferred Shares issued by Finco for an amount equal to the Redemption Amount plus accrued and unpaid dividends plus a tax indemnity amount (to ensure that the net after-tax proceeds realized by the LENDER are sufficient to repay the Purchased Debt in full). The Debtor will give the same security in respect of this put as it has currently given in respect of its debts.

31. Upon the occurrence of a Retraction Event, and in any event on and after the tenth day prior to the fifth anniversary of the issuance of the Preferred Shares, and in certain other circumstances, the LENDER shall have the right to retract the Preferred Shares. Finco will have the right after the LENDER has exercised its retraction rights to require the LENDER to purchase the Purchased Debt for an amount equal to its then outstanding principal amount in which event the proceeds will be used to redeem the Preferred Shares. In such event, the purchase price for the Purchased Debt will be paid by certified check or bank draft, and Finco will satisfy the redemption price by endorsing such check or bank draft in favour of the LENDER.

32. Notwithstanding the terms and conditions of the Finco Preferred Shares or any mandatory redemption of the Finco Preferred Shares that may be required by the LENDER, an amount or amounts which, in the aggregate, are equal to or greater than the "Excess Cash Flow" arising in any fiscal period shall be applied to redeem the Finco Preferred Shares within 90 days after the end of that fiscal period.

“Excess Cash Flow" as at the end of a particular fiscal period for each of the Debtor and Trustco means the positive changes in cash flow from all sources for such fiscal period as would be reported on the consolidated Statement of Changes in Financial Position prepared in accordance with generally-accepted accounting principles ("GAAP"), if only directly and indirectly wholly-owned subsidiaries were so included but before outlays for:

a) the payment of dividends other than (i) dividends on any Preferred Shares, or (ii) dividends paid to the Debtor and Trustco from any of its directly or indirectly owned subsidiaries which may be required to enable the Debtor or Irustco to make a contribution of capital to Finco as described in the Support Agreement;

b) capital contributions or any payment on capital account, other than:

i) the purchase or redemption of any of the Preferred Shares other than purchases or redemptions made in the fiscal period in respect of the Excess Cash Flow of the prior fiscal period;

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

iii) repayments of additional debt incurred for the specific purpose of funding current operating requirements;

iv) expenditures or payments between the Debtor and Trustco and Finco;

v) reasonable capital expenditures or payments on capital account incurred in the normal and ordinary course of the existing business 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 Finco to pay dividends on the LENDER's Preferred Shares.

c) repayments of loans from shareholders of the Debtor or Trustco or persons related to shareholders, other than amounts in lieu of remuneration; and

d) loans to directors, officers and shareholders of the Debtor or Trustco or to other persons, firms or corporations, all adjusted as necessary in order to prevent duplication or repeated counting of amounts.

For the purpose of this definition of Excess Cash Flow:

i) additional debt" as used in 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;

ii) fiscal period means the semi-annual periods XXXXXXXXXX and the first fiscal period, as confirmed in our telephone conversation (XXXXXXXXX). XXXXXXXXXX, will be the period commencing on the date the Preferred Shares are issued and ending on XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

33. The purpose of the proposed transactions is to refinance the long-term debt of the Debtor with DPS and increase cash flow by reducing debt service requirements and thereby to allow a continuation of operations. The Debtor is committed to disposing of assets in an orderly fashion to retire the DPS; however, that process will take several years and reduced debt service over those years will provide the Debtor with time to realize on their assets in an orderly fashion, rather than forcing them to dispose of assets on unfavourable terms. In the absence of this financing, there is a substantial likelihood that the Debtor will continue to be unable to meet regular payments of debt and that secured creditors will enforce their respective security for non -payment of interest and principal.

OTHER INFORMATION

34. To the best of your knowledge none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with a tax return already filed or is under objection or appeal or the subject of any ruling, other than the First Ruling, previously issued by the Directorate with respect to the Debtor or Trustco.

RULINGS

Provided all the relevant facts and the proposed transactions and their purpose 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 issued to the LENDER as described in 26 above and, where applicable, sold to a third party purchaser will be

(a) shares described in subparagraph (e)(iii) of the definition "term preferred share" 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, for the same period

and, accordingly, subsections 112(2.1), (2.3), (2.4) or 138(6) of the Act will not apply to deny the LENDER, or a Canadian resident corporate third party purchaser, as the case may be, a deduction under subsection 112(1) or 138(6) of the Act for an amount equal to each dividend received or deemed by the Act to have been received by it on such shares during such period.

B. No amount will be included in computing the income of Finco under paragraph 12(1)(c) or (x), subsection 12(3), 12(9), 16(1) or 246(1) or section 9 of the Act in respect of contributions to surplus made by the Debtor in accordance with 27 above; nor will any such amount be included in the LENDER's income pursuant to subsection 56(2) or 246(1) of the Act; nor will any such amount constitute proceeds of disposition, as defined in section 54 of the Act, to Finco from the disposition by it of any property.

C. Subject to 20(1)(e.1) of the Act, expenses incurred by Finco in the course of borrowing money and issuing the Preferred Shares, referred to in 23 and 26 above, will be deductible by it pursuant to paragraph 20(1)(e) of the Act to the extent such expenses are reasonable in the circumstances,

D. No amount will be included in the income of the Debtor or the LENDER pursuant to subsection 15(1) or 246(1) of the Act, and section 80 will not apply to the Debtor, by virtue of the failure of Finco to charge interest on the Purchased Debt in accordance with Finco's agreement described in 24 above that interest will not be payable, or by virtue of the failure of Finco to demand payment of the Purchased Debt.

E. The cost amount, within the meaning of subsection 248(1) of the Act, to the LENDER of the Preferred Shares immediately after the time of their issue, will be equal to the price paid therefor by the LENDER as described in 26 above.

F. The cost amount, within the meaning of subsection 248(1) of the Act, to Finco of the Purchased Debt, immediately after the time that it is acquired from the LENDER, will be equal to the amount paid therefor by Finco as described in 23 above,

G. The cost amount, within the meaning of subsection 248(1) of the Act, to the LENDER of that portion of the Purchased Debt immediately after it is reacquired as described in 31 above, will be the amount paid therefor by the LENDER.

H. Provided the Purchased Debt arose from one or more loans or "lending assets", within the meaning of subsection 248(1) of the Act, made or acquired by the LENDER in the course of its money-lending business, all or any part of the Purchased Debt reacquired by the LENDER in circumstances described in 31 above will be considered to have been acquired by the LENDER in the ordinary course of its business of lending money for the purposes of paragraphs 20(1)(l) and 20(1)(p) of the Act,

I. Subsection 112(4) of the Act will not apply to any loss realized by the LENDER on the Purchased Debt subsequent to its reacquisition by the LENDER from Finco in circumstances described in 31 above in respect of any dividends received by the LENDER on the Preferred Shares.

J. Provided that, in a particular year, the LENDER, as bolder 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" within the meaning of subsection 248(1) of the Act,

K. 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.

These 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 on the Department provided the Preferred Shares are issued as described above on or before XXXXXXXXXX.

Yours truly,

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