2013 Ruling 2011-0395091R3 - MFC to MFT Conversion

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.

Principal Issues: Whether section 132.2 would apply to the conversion of an MFC that used to be a TCC to an MFT

Position: Yes

Reasons: See details

XXXXXXXXXX 2011-039509

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request in respect of XXXXXXXXXX ("Taxpayer") ? XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of Taxpayer. We also acknowledge the revisions made to your request on XXXXXXXXXX and our telephone conversations and correspondences concerning your request.

To the best of your knowledge and that of Taxpayer, none of the issues involved in the ruling request is:

(i) in an earlier return of Taxpayer or a related person,

(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of Taxpayer or a related person,

(iii) under objection by Taxpayer or a related person,

(iv) before the courts, or

(v) the subject of a ruling previously considered by the Directorate in respect of Taxpayer or a related person except in the ruling document XXXXXXXXXX.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

In this document, unless otherwise indicated, all statutory references are to the Income Tax Act, (R.S.C. 1985, 5th Supplement, c.1. as amended, the "Act") or to the Income Tax Regulations promulgated under the Act (the "Regulations") and all monetary amounts are expressed in Canadian dollars.

Definitions

In this letter unless otherwise expressly stated:

a) "ACB" means adjusted cost base, which has the meaning assigned by section 54;

b) "Assessable distribution" has the meaning assigned by subsection 218.3(1);

c) "block of units" has the meaning assigned by subsection 4803(1) of the Regulations;

d) "Canadian partnership" has the meaning assigned by subsection 102(1);

e) "XXXXXXXXXX" means a trust established on XXXXXXXXXX, under the laws of XXXXXXXXXX;

f) "Debentureholders" means the holders of Debentures;

g) "Debenture" has the meaning assigned by paragraph 3 below;

h) "Direct Subtrusts" means XXXXXXXXXX, collectively;

i) "Entity" has the meaning assigned by subsection 122.1(1);

j) "XXXXXXXXXX" means a trust established on XXXXXXXXXX, under the laws of XXXXXXXXXX;

k) "GPco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

l) "MLP" means XXXXXXXXXX, a limited partnership established on XXXXXXXXXX, under the laws of XXXXXXXXXX;

m) "Mortgage Bondholders" means the holders of Mortgage Bonds;

n) "Mortgage Bonds" has the meaning assigned by paragraph 4 below;

o) "Mutual fund corporation" has the meaning assigned by subsection 131(8);

p) "Mutual fund trust" has the meaning assigned by subsection 132(6);

q) "Non-capital loss" has the meaning assigned by subsection 111(8);

r) "Non-Resident Investors" has the meaning assigned by paragraph 24(c) below;

s) "OT" means XXXXXXXXXX, a trust established on XXXXXXXXXX, under the laws of XXXXXXXXXX;

t) "Personal trust" has the meaning assigned by subsection 248(1);

u) "Proposed Amendments" means any amendments currently proposed to the Act but not yet in force;

v) "Proposed Transactions" means the proposed transactions in paragraphs 18 to 54 below;

w) "Public corporation" has the meaning assigned by subsection 89(1);

x) "Qualified for distribution to the public" has the meaning assigned by subsection 4803(2) of the Regulations;

y) "Qualified REIT property" has the meaning assigned by subsection 122.1(1);

z) "Real estate investment trust" has the meaning assigned by subsection 122.1(1);

aa) "REIT" means XXXXXXXXXX, a trust established on XXXXXXXXXX, under the laws of XXXXXXXXXX;

bb) "REIT #1" has the meaning assigned by paragraph 23 below;

cc) "REIT #2" has the meaning assigned by paragraph 34 below;

dd) "REIT #2 Property" has the meaning assigned by paragraph 41(a) below;

ee) "REIT #2 Transfer Time" has the meaning assigned by paragraph 41(b) below;

ff) "REIT #3" has the meaning assigned by paragraph 44 below;

gg) "REIT #3 Property" has the meaning assigned by paragraph 52(a) below;

hh) "REIT #3 Transfer Time" has the meaning assigned by paragraph 52(b) below;

ii) "SIFT trust" has the meaning assigned by subsection 122.1(1);

jj) "Subject entity" has the meaning assigned by subsection 122.1(1);

kk) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1);

ll) "Taxpayer" means XXXXXXXXXX;

mm) "Taxpayer Property" has the meaning assigned by paragraph 28(a) below;

nn) "Taxpayer Transfer Time" has the meaning assigned by paragraph 28(b) below;

oo) "TCP gains distribution" has the meaning assigned by subsection 132(5.1);

pp) "XXXXXXXXXX" means a trust established on XXXXXXXXXX, under the laws of XXXXXXXXXX;

qq) "Transfer time" has the meaning assigned by the definition of "qualifying exchange" in subsection 132.2(2);

rr) "Trust A" has the meaning assigned by paragraph 19 below;

ss) "UCC" means undepreciated capital cost, which has the meaning assigned by subsection 13(21); and

tt) "Unit trust" has the meaning assigned by subsection 108(2).

Facts

1. Taxpayer is a taxable Canadian corporation incorporated under the laws of XXXXXXXXXX, and having its head office at XXXXXXXXXX. Its taxation year end is XXXXXXXXXX. It deals with the XXXXXXXXXX Tax Services Office and files its tax return with the XXXXXXXXXX Tax Centre.

2. Taxpayer is a public corporation which qualifies as a mutual fund corporation. Taxpayer's common shares are listed on the XXXXXXXXXX, and it has no other class of shares outstanding. The shareholders of Taxpayer are generally persons who deal with each other at arm's length.

3. Taxpayer has issued to the public the following currently outstanding Debenture as of XXXXXXXXXX:

a) XXXXXXXXXX convertible at $XXXXXXXXXX, maturing on XXXXXXXXXX, principal amount of $XXXXXXXXXX.

4. Taxpayer has issued to the public the following currently outstanding Mortgage Bonds:

a) XXXXXXXXXX% Mortgage Bonds XXXXXXXXXX, principal amount of $XXXXXXXXXX; and

b) XXXXXXXXXX% Mortgage Bonds XXXXXXXXXX, principal amount of $XXXXXXXXXX.

5. XXXXXXXXXX.

6. Taxpayer holds real estate directly, investments in various subsidiary partnerships and corporations, as well as all the beneficial interests in each of the Direct Subtrusts (including REIT). XXXXXXXXXX.

7. Each of the Direct Subtrusts is a resident of Canada, is not a personal trust, and is an inter vivos trust the interest of each beneficiary under which is described by reference to units of the trust. The units of REIT are redeemable at the demand of the holder, and the units of the other Direct Subtrusts are not redeemable at the demand of the holder.

8. Taxpayer is the sole beneficiary of each of the Direct Subtrusts.

9. The Direct Subtrusts hold Canadian real estate directly, as well as through subsidiary partnerships, nominee corporations, and trusts.

10. REIT is the sole beneficiary of OT.

11. OT is a resident of Canada, is not a personal trust, is an inter vivos trust the interest of each beneficiary under which is described by reference to units of the trust, and the units of OT are redeemable at the demand of the holder.

12. OT is the sole limited partner of MLP, the general partner of which is GPco.

13. MLP holds Canadian real estate directly, as well as through nominee corporations and subsidiary partnerships, and acquired its real estate with borrowed funds.

14. OT has non-capital losses as a result of being allocated losses by MLP.

15. After the Proposed Transactions have been completed, the fair market value of the shares of Taxpayer shall be nominal.

Purpose of the Proposed Transactions

16. The purposes of the transactions described in paragraphs 19 to 54 are:

a) to convert Taxpayer, on a tax deferred basis, into a mutual fund trust, thereby achieving greater operational efficiencies for Taxpayer, and providing it with greater access to capital available to real estate investment trusts; and

b) to simplify the organizational structure of Taxpayer, to reduce administrative expenses, and to ease compliance with the SIFT trust and real estate investment trust rules post conversion.

17. The purpose of the transactions described in paragraph 18 is to capitalize the non-capital losses of OT into capital cost of MLP's depreciable property.

Proposed Transactions

All steps will occur in such manner that, once the first step is taken, all other steps must also be completed.

18. GPco will late file elections under section 21 and subsection 220(3.2) of the Act, and paragraph 600(a) of the Regulations, for paragraphs 20(1)(c), (d), (e), and (e.1) (as applicable), in respect of the depreciable property held by MLP, to not apply to amounts that but for this election would have been deductible in computing income in respect of borrowed money used to acquire the depreciable property, and these amounts will be added to the capital cost to MLP of such depreciable property.

19. A new Canadian resident trust that is a unit trust, Trust A, will be formed under the laws of XXXXXXXXXX. Taxpayer will contribute a nominal amount of cash to Trust A in exchange for one unit of Trust A, and Taxpayer initially shall be the sole beneficiary of Trust A. The sole asset of Trust A initially shall be a nominal amount of cash. The trustees of Trust A shall be the same persons as those of the Direct Subtrusts. A majority of the trustees shall be residents of Canada, and the central management and control of Trust A shall be exercised in Canada.

20. The terms of the Direct Subtrusts will be amended to match the terms of Trust A in all material respects, and to allow for the transfer of the Direct Subtrusts' property to Trust A for no consideration other than the assumption of the Direct Subtrusts' liabilities. The amendments will not affect the beneficial entitlement and rights of the sole beneficiary, nor will they give rise to any change in beneficial ownership of the property held by the Direct Subtrusts.

21. The Direct Subtrusts will simultaneously transfer their assets to Trust A for no consideration other than the assumption of their liabilities, and as a result of such transfers the Direct Subtrusts will cease to exist.

22. Trust A will not file the election referred to in subparagraph (f)(v) of the definition of "disposition" in subsection 248(1) of the Act.

23. A new Canadian-resident trust that will be a unit trust, REIT #1, will be formed by Taxpayer under the laws of XXXXXXXXXX for a nominal amount. Taxpayer will contribute a nominal amount of cash in exchange for units of REIT #1. The number of REIT #1 units acquired by Taxpayer will be equal to the number of outstanding common shares of Taxpayer at that time. A majority of the trustees shall be residents of Canada, and the central management and control of REIT #1 shall be exercised in Canada.

24. The terms of REIT #1 will be such that:

a) it complies with paragraph 108(2)(a), specifically:

i. the interest of each beneficiary shall be described by reference to units of REIT #1; and

ii. all of the issued units of REIT #1 shall have conditions attached thereto that include conditions requiring REIT #1 to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units, or fractions or parts thereof, that are fully paid.

b) it complies with paragraph 132(6)(b), such that the only undertaking of REIT #1 can be:

i. the investing of its funds in property (other than real property or an interest in real property or an immovable or a real right in an immovable);

ii. the acquiring, holding, maintaining, improving, leasing or managing of any real property (or interest in real property) or of any immovable (or real right in immovables) that is capital property of REIT #1; or

iii. any combination of the activities described in (i) and (ii).

c) there shall be a restriction on ownership of units by non-resident persons or by partnerships which are not Canadian Partnerships ("Non-Resident Investors"), and REIT #1 may redeem units held by Non-Resident Investors if the aggregate holdings by Non-Resident Investors exceed XXXXXXXXXX%, so that at all times subsection 132(7) will not apply to REIT #1.

25. Taxpayer will make a distribution to its shareholders as follows:

a) this distribution shall be as a return of capital, consisting of one REIT #1 unit per common share of Taxpayer held such that REIT #1 will satisfy the conditions of paragraph 132(6)(c) to be a mutual fund trust, plus a nominal amount of cash;

b) this shall be a lawful distribution in a province to the public of units of REIT #1 and a prospectus, registration statement or similar document will not be required under the laws of the province to be filed in respect of the distribution;

c) by virtue of the provisions of subsections 4803(3) and (4) of the Regulations, REIT #1 will have at least 60 beneficiaries holding units with a fair market value of at least $500 each, and each holding not less than one block of units; and

d) the number of common shares owned by each shareholder of Taxpayer will not be reduced as a result of this distribution.

26. In respect of each non-resident shareholder, Taxpayer will withhold and remit to the Receiver General of Canada on the nominal value distribution as required under Part XIII.2 the cash otherwise payable to each non-resident shareholder.

27. The terms and conditions of the Debenture will be modified to allow Debentureholders to choose, when exercising their conversion right, to convert the Debenture to either units of REIT #1 or Taxpayer common shares. Subparagraph 248(25)(b)(iii) will not apply in respect of any Debentureholder in relation to REIT #1. Taxpayer and the Debentureholders will specify in writing that they do not intend to affect a novation of the Debenture by such modifications.

28. Taxpayer and REIT #1 shall undertake a tax deferred transaction under section 132.2, and in particular:

a) Taxpayer shall transfer all or substantially all of its properties (the "Taxpayer Property") to REIT #1, in exchange for

i. REIT #1's assumption of any liabilities of Taxpayer, including

A. REIT #1's covenant (the "Obligation") to be responsible (vis-à-vis Taxpayer) for the Debenture as further described in paragraph 31 below, and

B. REIT #1's direct assumption of the Mortgage Bonds as further described in paragraph 32 below;

ii. Units of REIT #1 with an aggregate fair market value equal to the fair market value of the Taxpayer Property less the aggregate amount of any assumed liabilities and debts in i.;

b) all or substantially all of the shares issued by Taxpayer and outstanding immediately before the time of the transfer referred to in (a) above ("Taxpayer Transfer Time") will be within 60 days after the Taxpayer Transfer Time disposed of by Taxpayer's shareholders to Taxpayer, in exchange for units of REIT #1 with an equivalent fair market value on a pro-rata basis; and

c) Taxpayer and REIT #1 shall jointly elect for section 132.2 to apply, by filing a prescribed form on or before the election's due date.

29. REIT #1 shall elect under subsection 132(6.1) before the 91st day after the end of its first taxation year to have been a mutual fund trust from the beginning of that year.

30. REIT #1 will subscribe for one common share of Taxpayer for a nominal amount.

31. In respect of the Debenture:

a) Taxpayer shall remain responsible for interest payments on the Debenture to the Debentureholders, pursuant to the terms of the Debenture;

b) Unless otherwise directed, REIT #1 will make interest payments to Taxpayer in respect of the Obligation;

c) The interest paid by REIT #1 to Taxpayer shall be slightly higher than the interest paid by Taxpayer to the Debentureholders; and

d) REIT #1 will guarantee the obligations of Taxpayer under the Debenture for no consideration.

32. In respect of the Mortgage Bonds, REIT #1 shall directly assume the liabilities as part of the consideration for the transfer of Taxpayer Property referred to in paragraph 28, and REIT #1 shall be responsible for payments on the Mortgage Bonds directly to the Mortgage Bondholders.

33. The outstanding REIT #1 units will be consolidated, such that the total number of REIT #1 units outstanding immediately after the consolidation will be equal to the total number of common shares of Taxpayer outstanding immediately before the Proposed Transactions. All of the REIT #1 units will be consolidated on the same basis. There will be no change in the total capital of REIT #1 or in the rights of unitholders or their percentage interests in REIT #1 as a result of this consolidation.

34. A new Canadian resident trust that will be a unit trust, REIT #2, will be formed by REIT #1 under the laws of XXXXXXXXXX. REIT #1 will contribute a nominal amount of cash in exchange for units of REIT #2. The number of REIT #2 units issued to REIT #1 will be equal to the number of issued and outstanding REIT #1 units at that time (which will also be equal to the original number of common shares of Taxpayer). A majority of the trustees shall be residents of Canada, and the central management and control of REIT #2 shall be exercised in Canada.

35. The terms of REIT #2 will be such that:

a) It complies with paragraph 108(2)(a), specifically

i. the interest of each beneficiary shall be described by reference to units of REIT #2; and

ii. all of the issued units of REIT #2 shall have conditions attached thereto that include conditions requiring REIT #2 to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units, or fractions or parts thereof, that are fully paid;

b) It complies with paragraph 132(6)(b), such that the only undertaking of REIT #2 can be:

i. the investing of its funds in property (other than real property or an interest in real property or an immovable or a real right in an immovable);

ii. the acquiring, holding, maintaining, improving, leasing or managing of any real property (or interest in real property) or of any immovable (or real right in immovables) that is capital property of REIT #2; or

iii. any combination of the activities described in (i) and (ii).

36. Trust A will transfer all of its property to REIT #2 for no consideration other than the assumption of Trust A's debts for which the property so transferred can reasonably be considered to be security. Any of Trust A's debts for which the property so transferred cannot reasonably be considered to be security shall be repaid before this proposed transaction. As a result of such transfers, Trust A will cease to exist.

37. REIT #2 will file the election referred to in subparagraph (f)(v) of the definition of "disposition" in subsection 248(1) of the Act.

38. Trust A will not file the election in subparagraph 107.4(3)(a)(i).

39. REIT #1 shall make a pro rata distribution to its unitholders:

a) this distribution shall be as a return of capital, consisting of a sufficient number of REIT #2 units such that REIT #2 will satisfy the conditions of paragraph 132(6)(c) to be a mutual fund trust;

b) this shall be a lawful distribution in a province to the public of units of REIT #2 and a prospectus, registration statement or similar document will not be required under the laws of the province to be filed in respect of the distribution;

c) by virtue of the provisions of subsections 4803(3) and (4) of the Regulations, REIT #2 will have at least 150 beneficiaries holding units with a fair market value of at least $500 each, and each holding not less than one block of units; and

d) to the extent that any capital gain is realized by REIT #1 on this distribution of REIT #2 units, REIT #1 shall:

i. not claim a deduction as per paragraph 104(6)(b) in computing its income resulting from this distribution; and

ii. not make a designation under subsection 104(21) in respect of any net taxable capital gains realized as a result of this distribution.

40. REIT #2 shall elect under subsection 132(6.1) before the 91st day after the end of its first taxation year to have been a mutual fund trust from the beginning of that year.

41. REIT #2 and REIT #1 shall undertake a tax deferred transaction under section 132.2, and in particular:

a) REIT #2 shall transfer all or substantially all of its property ("REIT #2 Property") to REIT #1, in exchange for

i. the assumption of any liabilities of REIT #2; and

ii. units of REIT #1 with an aggregate fair market value equal to the fair market value of the REIT #2 Property less the aggregate amount of any assumed liabilities;

b) All or substantially all of the units issued by REIT #2 and outstanding immediately before the time of the transfer referred to in a) above ("REIT #2 Transfer Time") will be within 60 days after the REIT #2 Transfer Time disposed of by REIT #2's unitholders to REIT #2 (other than 1 unit held by REIT #1), in exchange for units of REIT #1 with an equivalent fair market value on a pro-rata basis; and

c) REIT #2 and REIT #1 shall jointly elect for section 132.2 to apply, by filing a prescribed form on or before the election's due date.

42. The units of itself that REIT #1 shall receive, as described in paragraph 41, will be cancelled for no consideration.

43. The outstanding REIT #1 units will be consolidated such that the total number of units outstanding immediately after the consolidation will be equal to the original number of shares of Taxpayer outstanding immediately before the Proposed Transactions. All of the REIT #1 units will be consolidated on the same basis. There will be no change in the total capital of REIT #1 or in the rights of unitholders or their percentage interests as a result of the consolidation.

44. A new Canadian-resident trust that will be a unit trust, REIT #3, will be formed by REIT #1 under the laws of XXXXXXXXXX. REIT #1 will contribute a nominal amount of cash in exchange for units of REIT #3. The number of REIT #3 units to be issued to REIT #1 will be equal to the number of issued and outstanding REIT #1 units at that time (which will also be equal to the original number of common shares of Taxpayer). A majority of the trustees shall be residents of Canada, and the central management and control of REIT #3 shall be exercised in Canada.

45. The terms of REIT #3 will be such that:

a) It complies with paragraph 108(2)(a), specifically:

i. the interest of each beneficiary shall be described by reference to units of REIT #3; and

ii. all of the issued units of REIT #3 shall have conditions attached thereto that include conditions requiring REIT #3 to accept, at the demand of the holder thereof and at prices determined and payable in accordance with the conditions, the surrender of the units, or fractions or parts thereof, that are fully paid.

b) It complies with paragraph 132(6)(b), such that the only undertaking of REIT #3 can be:

i. the investing of its funds in property (other than real property or an interest in real property or an immovable or a real right in an immovable);

ii. the acquiring, holding, maintaining, improving, leasing or managing of any real property (or interest in real property) or of any immovable (or real right in immovables) that is capital property of REIT #3; or

iii. any combination of the activities described in (i) and (ii).

46. The terms of OT will be amended to match the terms of REIT #3 in all material respects, and to allow for the transfer of OT's property to REIT #3 for no consideration other than the assumption of the OT's liabilities. The amendments will not affect the beneficial entitlement and rights of the sole beneficiary, nor will they give rise to any change in beneficial ownership of the property held by the OT.

47. OT will transfer all of its property to REIT #3 for no consideration other than the assumption of OT's debts for which the property so transferred can reasonably be considered to be security. Any of OT's debts for which the property so transferred cannot reasonably be considered to be security shall be repaid before this proposed transaction. As a result of such transfers, OT will cease to exist.

48. REIT #3 will file the election referred to in subparagraph (f)(v) of the definition of "disposition" in subsection 248(1) of the Act.

49. OT will not file the election in subparagraph 107.4(3)(a)(i).

50. REIT #1 shall make a pro rata distribution to its unitholders:

a) this distribution shall be as a return of capital, consisting of a sufficient number of REIT #3 units such that REIT #3 will satisfy the conditions of paragraph 132(6)(c) to be a mutual fund trust;

b) this shall be a lawful distribution in a province to the public of units of REIT #3 and a prospectus, registration statement or similar document will not be required under the laws of the province to be filed in respect of the distribution;

c) by virtue of the provisions of subsections 4803(3) and (4) of the Regulations, REIT #3 will have at least 150 beneficiaries holding units with a fair market value of at least $500 each, and each holding not less than one block of units; and

d) to the extent that any capital gain is realized by REIT #1 on this distribution of REIT #3 units, REIT #1 shall:

i. not claim a deduction as per paragraph 104(6)(b) in computing its income resulting from this distribution; and

ii. not make a designation under subsection 104(21) in respect of any net taxable capital gains realized as a result of this distribution.

51. REIT #3 shall elect under subsection 132(6.1) before the 91st day after the end of its first taxation year to have been a mutual fund trust from the beginning of that year.

52. REIT #3 and REIT #1 shall undertake a tax deferred transaction under section 132.2, and in particular:

a) REIT #3 shall transfer all or substantially all of its property ("REIT #3 Property") to REIT #1, in exchange for

i. the assumption of any liabilities of REIT #3; and

ii. units of REIT #1 with an aggregate fair market value equal to the fair market value of the REIT #3 Property less the aggregate amount of any assumed liabilities in i.;

b) all or substantially all of the units issued by REIT #3 and outstanding immediately before the time of the transfer referred to in (a) above ("REIT #3 Transfer Time") will be within 60 days after the REIT #3 Transfer Time disposed of by REIT #3's unitholders to REIT #3 (other than 1 unit held by REIT #1), in exchange for units of REIT #1 with an equivalent fair market value on a pro-rata basis; and

c) REIT #3 and REIT #1 shall jointly elect for section 132.2 to apply, by filing a prescribed form on or before the election's due date.

53. The units of itself that REIT #1 shall receive, as described in paragraph 52, will be cancelled for no consideration.

54. The outstanding REIT #1 units will be consolidated such that the total number of units outstanding immediately after the consolidation will be equal to the original number of shares of Taxpayer outstanding immediately before the Proposed Transactions. All of the REIT #1 units will be consolidated on the same basis. There will be no change in the total capital of REIT #1 or in the rights of unitholders or their percentage interests as a result of the consolidation.

Additional Information

55. Taxpayer will remain in existence at least until the last Debenture matures, at which time Taxpayer is expected to be dissolved.

56. The amendments to the Debenture as described in paragraph 27 above, shall not, under the terms of the Debenture, result in the creation of a new obligation, and will simply be a modification of the existing obligation as per the amendment provisions of the Debenture. The amendments to the Debenture will not result in a novation, a substitution or a discharge, rescission or extinguishment of all or any portion of the Debenture under the laws of the Province of XXXXXXXXXX.

57. The amendments to the Direct Subtrusts referred to in paragraph 20 above, and to OT referred to in paragraph 46 above, shall not, under XXXXXXXXXX law, result in the creation of new trusts but will simply be a modification of the existing trusts.

58. Immediately after the Proposed Transactions are complete, Taxpayer shall have no property other than rights in respect of the obligations of REIT #1 in connection with the Debenture as referred to in paragraph 31 above, and no employees. The sole liability of Taxpayer shall be to the Debentureholders under the Debenture.

59. The Obligation of REIT #1 in respect of the Debenture referred to in 28(a)(i)(A) above shall be solely as between Taxpayer and REIT #1, and shall not affect the rights of the Debentureholders in any way.

60. Once the necessary filings and elections in respect of the Proposed Transactions have been made, REIT #2 and REIT #3 shall be dissolved.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all relevant facts, Proposed Transactions and the purpose of the Proposed Transactions, the Proposed Transactions are completed in the manner described above and there are no other transactions that may be relevant to the rulings given, our rulings are as follows:

A. None of the proposed transactions described in paragraphs 18 to 27 above, will, in and of themselves, adversely affect the qualification of Taxpayer as a mutual fund corporation within the meaning of subsection 131(8) and for purposes of the Act.

B. The Direct Subtrusts will not, solely by virtue of the amendments referred to in paragraph 20 above, be considered to have disposed of their property or resettled any new trusts.

C. The amendments referred to in paragraph 20 above will not, in and of themselves, result in a disposition by the existing holder of units of the Direct Subtrusts.

D. The OT will not, solely by virtue of the amendments referred to in paragraph 46 above, be considered to have disposed of its property or resettled a new trust.

E. The amendments referred to in paragraph 46 above will not, in and of themselves, result in a disposition by the existing holder of units of OT.

F. The transfer of properties from the Direct Subtrusts to Trust A, described in paragraph 21 above, will not be considered a "disposition" by virtue of paragraph (f) of the definition of that term in subsection 248(1) of the Act. Trust A will be deemed, after the transfer in paragraph 21, to be the same trust as, and a continuation of, each of the Direct Subtrusts by virtue of subsection 248(25.1) and therefore the ACB of Taxpayer's interest in Trust A after the transfer shall be equal to the aggregate ACB of Taxpayer's interests in the Direct Subtrusts before the transfer.

G. The amendments to the terms and conditions of the Debentures as described in paragraph 27 above, such that a Debentureholder may choose, when exercising their conversion rights, to convert the Debentures to either units of REIT #1 or Taxpayer shares, shall not, in and by themselves, result in the disposition of such Debentures.

H. Provided REIT #1 is a mutual fund trust within the meaning assigned by subsection 132(6) of the Act and where it becomes a mutual fund trust at any particular time before the 91st day after the end of its first taxation year, and it so elects in its return of income for that year, REIT #1 shall be deemed to have been a mutual fund trust from the beginning of its first taxation year as provided for in subsection 132(6.1) of the Act.

I. Provided that at the moment of the transfer described in paragraph 28 above, Taxpayer is a mutual fund corporation within the meaning assigned by subsection 131(8) of the Act and REIT #1 is a mutual fund trust within the meaning assigned by subsection 132(6) of the Act and provided that joint elections are filed in prescribed form and within the time set out in paragraph (c) of the definition of qualifying exchange in subsection 132.2(2) of the Act, the transactions between Taxpayer and REIT #1, referred to in paragraph 28, will be a qualifying exchange under section 132.2 of the Act.

J. The guarantee granted by REIT #1 to the Debentureholders in respect of the Debentures, referred to in paragraph 31 above, will not, in and of itself cause REIT #1 to not be a mutual fund trust.

K. Provided that REIT #1 has a legal obligation to pay interest on the Obligation and that the Taxpayer Property (or other property acquired by REIT #1 under the Proposed Transactions to which the Obligation may be traced) is held by REIT #1 for the purpose of gaining or producing income, in computing its income for a taxation year, REIT #1 will be entitled to deduct, pursuant to paragraph 20(1)(c) of the Act, the lesser of (i) the interest on the Obligation, as described in subparagraph 31(b) above, paid in the year or payable in respect of the year (depending on the method regularly followed by REIT #1 in computing its income for the purposes of the Act) and (ii) a reasonable amount thereof.

L. Provided that Taxpayer has a legal obligation to pay interest on the Debentures and that the Obligation continues to be held by Taxpayer for the purpose of gaining or producing income, in computing its income for a taxation year, Taxpayer will be entitled to deduct, pursuant to paragraph 20(1)(c) of the Act, the lesser of (i) the interest on the Debentures, as described in subparagraph 31(a) above, paid in the year or payable in respect of the year (depending on the method regularly followed by Taxpayer in computing its income for the purposes of the Act) and (ii) a reasonable amount thereof.

M. Provided that REIT #1 has a legal obligation to pay interest on the Mortgage Bonds and that the Taxpayer Property (or other property acquired by REIT #1 under the Proposed Transactions to which the Mortgage Bonds may be traced) is held by REIT #1 for the purpose of gaining or producing income, in computing its income for a taxation year, REIT #1 will be entitled to deduct, pursuant to paragraph 20(1)(c) of the Act, the lesser of (i) the interest on the Mortgage Bonds, as described in paragraph 32 above, paid in the year or payable in respect of the year (depending on the method regularly followed by REIT #1 in computing its income for the purposes of the Act) and (ii) a reasonable amount thereof.

N. The consolidations of units of REIT #1, referred to in paragraphs 33, 43 and 54, shall not, in and by themselves, result in any gain, income, or loss in the hands of any unitholder.

O. Provided that at the time of the transfer of Trust A's properties to REIT #2, referred to in paragraph 36 above, REIT #1 holds all of the units of both REIT #2 and Trust A, the transfer will be a "qualifying disposition" within the meaning of subsection 107.4(1) of the Act, such that the rules in subsection 107.4(3) of the Act will apply to REIT #2 and Trust A in respect of the transfer.

P. Provided REIT #2 is a mutual fund trust within the meaning assigned by subsection 132(6) of the Act and where it becomes a mutual fund trust at any particular time before the 91st day after the end of its first taxation year, and it so elects in its return of income for that year, REIT #2 shall be deemed to have been a mutual fund trust from the beginning of its first taxation year as provided for in subsection 132(6.1) of the Act.

Q. Provided that at the moment of the transfer described in paragraph 41 above, REIT #2 and REIT #1 are each a mutual fund trust within the meaning assigned by subsection 132(6) of the Act and provided that joint elections are filed in prescribed form and within the time set out in paragraph (c) of the definition of qualifying exchange in subsection 132.2(2) of the Act, the transactions between REIT #2 and REIT #1, referred to in paragraph 41, will be a qualifying exchange under section 132.2 of the Act.

R. Provided that at the time of the transfer of OT's properties to REIT #3, referred to in paragraph 47 above, REIT #1 holds all of the units of both OT and REIT #3, the transfer will be a "qualifying disposition" within the meaning of subsection 107.4(1) of the Act, such that the rules in subsection 107.4(3) of the Act will apply to REIT #3 and OT in respect of the transfer.

S. Provided REIT #3 is a mutual fund trust within the meaning assigned by subsection 132(6) of the Act and where it becomes a mutual fund trust at any particular time before the 91st day after the end of its first taxation year, and it so elects in its return of income for that year, REIT #3 shall be deemed to have been a mutual fund trust from the beginning of its first taxation year as provided for in subsection 132(6.1) of the Act.

T. Provided that at the moment of the transfer described in paragraph 52 above, REIT #3 and REIT #1 are each a mutual fund trust within the meaning assigned by subsection 132(6) of the Act and provided that joint elections are filed in prescribed form and within the time set out in paragraph (c) of the definition of qualifying exchange in subsection 132.2(2) of the Act, the transactions between REIT #3 and REIT #1 hereof, referred to in paragraph 52, will constitute a qualifying exchange such that the rules in subsection 132.2(1) of the Act will apply to such transactions.

U. Provided that immediately after the Proposed Transactions REIT # 1 shall own all of the assets that Taxpayer previously owned, directly or indirectly, immediately before the Proposed Transactions, the provisions of subsections 15(1), 56(2), 56(4), 69(1), 69(4), 105(1) and 246(1) will not apply as a result of the Proposed Transactions, in and by themselves.

V. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency ("CRA") provided that proposed transactions are completed within six months of the date of this letter.

Opinions/Caveats

It is our opinion that:

1. Where all the other requirements of subsections 96(3), 21(1) and 21(3) of the Act are satisfied, an election made by GPco under subsections 21(1) and (3) of the Act in respect of the depreciable property held by MLP would be considered a valid election provided that GPco had authority to act for the MLP and the election was made or executed on behalf of GPco and each other person who was a member of MLP during the fiscal period. In such a case, each other person who was a member of the MLP during the fiscal period would be deemed to have also made a valid election by virtue of paragraphs 96(3)(b) and (c) of the Act. We express no opinion as to whether or not the late-filed elections under section 21 of the Act (referred to in paragraph 18 above) will be accepted under subsection 220(3.2) of the Act.

2. Provided that the proposed amendments to section 132.2 of the Act, as contained in Bill C-48 currently before Parliament, are enacted in substantially the same form as proposed, it is our opinion that, by virtue of subparagraph 132.2(3)(g)(iii), the following will be deemed not to be an assessable distribution for purposes of section 218.3:

a. The exchange of REIT #1 units in respect of the disposition by Taxpayer's shareholders to Taxpayer of shares of Taxpayer, referred to in subparagraph 28(b) above;

b. The exchange of REIT #1 units in respect of the disposition by the holders of REIT #2 units to REIT #2 of units of REIT #2, referred to in subparagraph 41(b) above; and

c. The exchange of REIT #1 units in respect of the disposition by the holders of REIT #3 units to REIT #3 of units of REIT #3, referred to in subparagraph 52(b) above.

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular,

• we express no opinion with respect to whether Trust A, the Direct Subtrusts, OT, REIT #1, REIT #2 or REIT #3 is a mutual fund trust within the meaning of subsection 132(6) at any particular time;
• we express no opinion with respect to whether Trust A, REIT #1, REIT #2 or REIT #3 is a unit trust at any particular time;
• we express no opinion with respect to whether Taxpayer is a mutual fund corporation within the meaning of subsection 131(8) at any particular time;
• we have made no determination of the fair market value of any property referred to herein;
• we have made no determination of the amount of any capital gain referred to herein; and
• we express no views as to any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings and opinions provided above.

In accordance with paragraph 22 of Information Circular 70-6R5, the preceding comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the CRA.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch