2012 Ruling 2011-0426051R3 - Debt Restructuring

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: 1. Will ATR-66 apply to the transfers and settlements of Loan 1 and Loan 2 such that the transferor's losses will be denied, the ACBs of the loans to the transferee will be increased by the transferor's denied losses, and there will be no forgiven amounts on the amalgamation of the transferee and the debtor? 2. Will the settlements of Loan 3 and the accrued and unpaid interest regarding Loan 3 result in forgiven amounts and will the debtor be entitled to a 61.3(1) deduction? 3. Will the creditor's loss on the settlement of Loan 3 including the accrued and unpaid interest thereon be deemed to be nil pursuant to 40(3.4)?

Position: 1. Yes; 2. Yes; 3. No

Reasons: 1. Requirements of the law are met. 2. The interest payable is deemed to be an obligation having a principal amount and there will be forgiven amounts to the extent the consideration given in settlement of Loan 3 and the accrued and unpaid interest regarding Loan 3 is less than their principal amounts. 3. The proposed transactions do not meet the requirements of subsection 40(3.3).

XXXXXXXXXX
2011-042605
XXXXXXXXXX

XXXXXXXXXX , 2012

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the additional information provided to us in your emails, the last of which was dated XXXXXXXXXX .

This letter is based solely on the facts, Proposed Transactions and additional information described below. Any documentation submitted in respect of your request does not form part of the facts, Proposed Transactions and additional information, and any references thereto are provided solely for the convenience of the reader.

To the best of your knowledge, and that of the above-noted taxpayers, none of the issues involved in this advance income tax ruling are:

(i) in an earlier tax return of the above-noted taxpayers or of a related person;

(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of the above-noted taxpayers or of a related person;

(iii) under objection by the above-noted taxpayers or by a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or,

(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate in connection with the above-noted taxpayers or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act") or the Income Tax Regulations (the "Regulations"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:

Definitions

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

(a) "ACB" has the meaning assigned to "adjusted cost base" by section 54 of the Act;

(b) "Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(c) "Canadian Group" means the Canadian entities that are part of the Group;

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

(e) "Canco 1" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the CBCA;

(f) "Canco 2" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the CBCA;

(g) "capital property" has the meaning assigned by section 54 of the Act;

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

(i) "CEC" has the meaning assigned to "cumulative eligible capital" by subsection 14(5) of the Act;

(j) "commercial obligation" has the meaning assigned by subsection 80(1) of the Act;

(k) "CRA" means the Canada Revenue Agency;

(l) "dollar" or "$" means Canadian dollars;

(m) "€" means Euros;

(n) "Extinguished Interest" means the accrued and unpaid interest in respect of Loan 3 as further described in 43 below;

(o) "Extinguished Principal" means the principal amount of Loan 3 as further described in 43 below;

(p) "Facilities Agreement", as described in 12 below, means the credit facility agreement XXXXXXXXXX , in particular, Foreign Parent, XXXXXXXXXX and Holdco as borrowers, and a consortium of foreign banks as lenders;

(q) "FMV" means fair market value;

(r) "Foreign Holdco" means XXXXXXXXXX , a XXXXXXXXXX limited liability company;

(s) "Foreign Parent" means XXXXXXXXXX , a publicly-traded XXXXXXXXXX corporation;

(t) "forgiven amount" has the meaning assigned by subsection 80(1) of the Act;

(u) "Former Holdco" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the CBCA that was formally dissolved on XXXXXXXXXX ;

(v) "Former Subco 1" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the CBCA that was formally dissolved on XXXXXXXXXX ;

(w) "Former Subco 2" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the CBCA that was formally dissolved on XXXXXXXXXX ;

(x) "Former Subco 3" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the CBCA that was formally dissolved on XXXXXXXXXX ;

(y) "GP" means XXXXXXXXXX , a Canadian partnership created under the laws of the Province of XXXXXXXXXX ;

(z) "Group" is the worldwide group of corporations ultimately owned or controlled by Foreign Parent;

(aa) "Holdco" means XXXXXXXXXX , a taxable Canadian corporation incorporated XXXXXXXXXX ;

(bb) "Loan 1" is an interest-bearing loan with a principal amount of approximately $XXXXXXXXXX owing by Opco to GP, as more fully described in 22 below;

(cc) "Loan 2" is an interest-bearing loan with a principal amount of approximately $XXXXXXXXXX owing by Opco to Holdco, as more fully described in 27 below;

(dd) "Loan 3" is an interest-bearing loan with a principal amount of approximately $XXXXXXXXXX owing by Canco 2 to Holdco, as more fully described in 23 below;

(ee) "Opco" means XXXXXXXXXX , a taxable Canadian corporation incorporated under the CBCA;

(ff) "Opco Preferred Shares" means the class of Opco shares described in 44 below;

(gg) "PUC" has the meaning assigned to "paid-up capital" by subsection 89(1) of the Act;

(hh) "private corporation" has the meaning assigned by subsection 89(1) of the Act;

(ii) "Proposed Transactions" means the transactions described in 38 to 47 below;

(jj) "Restructuring Framework Agreement" means the agreement described in 31 below;

(kk) "Subco" means a new corporation to be incorporated by Opco under the CBCA, as more fully described in 38 below;

(ll) "Subco Preferred Shares" means the class of Subco shares described in 38 below;

(mm) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act; and

(nn) "UCC" has the meaning assigned to "undepreciated capital cost" by subsection 13(21) of the Act.

Facts

Current Corporate Structure

1. Foreign Parent is the ultimate parent corporation of the Group and its shares are listed on the XXXXXXXXXX . The Group is one of the world's leading XXXXXXXXXX .

The Group has approximately XXXXXXXXXX employees and operates XXXXXXXXXX locations in XXXXXXXXXX .

2. Foreign Parent owns XXXXXXXXXX % of Foreign Holdco.

3. Foreign Holdco is a XXXXXXXXXX limited liability company which owns XXXXXXXXXX % of Holdco.

4. The share capital of Holdco is made of XXXXXXXXXX class of common shares. The PUC of the issued common shares of Holdco is $XXXXXXXXXX .

5. Holdco owns all the shares of Opco and Canco 2. Holdco also holds Loan 2 and Loan 3.

6. The taxation year of Holdco, Opco, and Canco 2 ends on XXXXXXXXXX of each year.

7. Opco is the only CanadianXXXXXXXXXX operating entity in the Group. It specializes in the XXXXXXXXXX . Opco's head office is located in XXXXXXXXXX . Opco currently employs XXXXXXXXXX employees in its head office and in XXXXXXXXXX in XXXXXXXXXX . The FMV of Opco's assets is currently estimated at approximately $XXXXXXXXXX .

8. Opco owns all the common shares of Canco 1, which also has a XXXXXXXXXX year end, and a XXXXXXXXXX % partnership interest in GP.

9. Canco 2 owns XXXXXXXXXX class A preferred shares of Canco 1 and a XXXXXXXXXX % partnership interest in GP as capital property.

10. GP holds Loan 1.

11. Opco owes an amount of $XXXXXXXXXX to Canco 1.

XXXXXXXXXX Acquisition of Control, Refinancing and Subsequent Reorganization

12. On XXXXXXXXXX , certain entities of the Group (including Holdco as borrower) entered into the Facilities Agreement with a consortium of external lenders consisting of a €XXXXXXXXXX credit facility agreement (or the equivalent in Canadian dollars).

13. On XXXXXXXXXX , Holdco purchased all of the issued and outstanding shares of Former Holdco for a purchase price of approximately $XXXXXXXXXX . At the time of the purchase, Former Holdco was the sole shareholder of Opco, which in turn wholly-owned Former Subco 1, and Former Subco 3, and owned XXXXXXXXXX % plus 1 share of Former Subco 2. The purchase, therefore, resulted in an acquisition of control for Former Holdco as well as for Opco, Former Subco1, Former Subco 2, and Former Subco 3.

14. On the same day, Holdco borrowed approximately $XXXXXXXXXX under the Facilities Agreement to, inter alia, make a loan to Former Subco 2 of approximately $XXXXXXXXXX and a loan to Opco of approximately $XXXXXXXXXX . Out of the $XXXXXXXXXX loan from Holdco, Opco made in turn a $XXXXXXXXXX loan to Former Subco 3. Former Subco 2, Opco and Former Subco 3 each used the proceeds of the loans to repay debts to external lenders that existed at the time of the acquisition of control described in 13 above.

15. In XXXXXXXXXX , Opco created Canco 1 as a wholly-owned subsidiary.

16. On XXXXXXXXXX , Former Subco 1 was wound-up into Opco in accordance with subsection 88(1) of the Act. Prior to its wind-up, Former Subco 1 owed Canco 1 $XXXXXXXXXX , and following the wind-up, Opco owed Canco 1 $XXXXXXXXXX .

17. On XXXXXXXXXX , Former Subco 3 was wound-up into Opco in accordance with subsection 88(1) of the Act.

XXXXXXXXXX Transactions

18. On XXXXXXXXXX , Opco acquired the remaining shares of Former Subco 2 for approximately $XXXXXXXXXX , XXXXXXXXXX unrelated Canadian corporations.

19. On XXXXXXXXXX , Holdco transferred to Opco the $XXXXXXXXXX loan receivable from Former Subco 2 in exchange for a promissory note of the same amount from Opco. As a result of adding this to the $XXXXXXXXXX already borrowed on XXXXXXXXXX , Opco's indebtedness towards Holdco amounted to approximately $XXXXXXXXXX .

20. XXXXXXXXXX , Holdco created Canco 2 and subscribed for XXXXXXXXXX common shares for $XXXXXXXXXX .

21. Immediately thereafter, Holdco and Opco formed GP by entering into a general partnership agreement. Holdco contributed to GP the loan receivable from Opco, which had been reduced to $XXXXXXXXXX , in exchange for XXXXXXXXXX partnership units (representing a XXXXXXXXXX % interest). Opco subscribed for XXXXXXXXXX partnership units (representing a XXXXXXXXXX % partnership interest) in exchange for $XXXXXXXXXX .

22. As a matter of law, the contribution of the $XXXXXXXXXX loan by Holdco to GP resulted in a new loan (i.e., a "novation by substitution of creditor" occurred). This new loan constitutes Loan 1; this loan is still in place today, although the principal amount has been reduced to approximately $XXXXXXXXXX . Based on the current estimate of the FMV of the assets of Opco, it is estimated that the FMV of Loan 1 is approximately $XXXXXXXXXX .

23. On XXXXXXXXXX , Holdco transferred its XXXXXXXXXX partnership units in GP to Canco 2 in exchange for an interest bearing promissory note of $XXXXXXXXXX . This promissory note constitutes Loan 3; this loan is still in place today, although the principal amount has been reduced to approximately $XXXXXXXXXX . Based on the current estimate of the FMV of the assets of Opco, it is estimated that the FMV of Loan 3 is approximately $XXXXXXXXXX .

24. On XXXXXXXXXX , Former Holdco was wound up into Holdco in accordance with subsection 88(1) of the Act. A designation under paragraph 88(1)(d) of the Act was filled in order to "bump" the ACB of the Opco shares from approximately $XXXXXXXXXX to $XXXXXXXXXX .

25. XXXXXXXXXX , Canco 2 subscribed for XXXXXXXXXX class A preferred shares of Canco 1 for a total consideration of $XXXXXXXXXX .

26. XXXXXXXXXX , Former Subco 2 was wound-up into Opco in accordance with subsection 88(1) of the Act.

Loan by Holdco to Opco

27. Since XXXXXXXXXX , Holdco borrowed approximately $XXXXXXXXXX under a revolving credit facility (which forms part of the Facilities Agreement). Holdco then on-lent these funds directly to Opco. This loan is referred to as Loan 2. Based on the current estimate of the FMV of the assets of Opco, the current FMV of Loan 2 is approximately $XXXXXXXXXX .

Current Financial Difficulties of the Group

28. The outstanding principal amount under the term facility forming part of the Facilities Agreement is approximately €XXXXXXXXXX which was owing by non-Canadian entities of the Group and approximately $XXXXXXXXXX which is owing by Holdco. In addition, Holdco currently owes approximately $XXXXXXXXXX under a revolving credit facility which also forms part of the Facilities Agreement.

29. Since XXXXXXXXXX , the Group has faced a significant deterioration in business conditions XXXXXXXXXX . This resulted in a situation where the Group was not in a position to meet all the covenants under the Facilities Agreement.

30. In XXXXXXXXXX , Foreign Parent entered into negotiations with its creditors to develop a restructuring plan. XXXXXXXXXX .

31. On XXXXXXXXXX , Foreign Parent entered into an agreement (the "Restructuring Framework Agreement") with the major creditors of the Group. The key terms of the Restructuring Framework Agreement can be summarized as follows:

XXXXXXXXXX

32. The Restructuring Framework Agreement also provided for a €XXXXXXXXXX super-senior secured facility to be made available by certain lenders to certain entities of the Group. From that amount, Opco borrowed $XXXXXXXXXX on which it is currently paying interest. A portion of that amount has since been reduced. The €XXXXXXXXXX super-senior secured facility is not subject to the standstill agreement nor will it be compromised as part as the restructuring plan.

33. The implementation of the Restructuring Framework Agreement is expected to close in the first half of XXXXXXXXXX .

Tax attributes of the Canadian Group

34. Subject to the final preparation of the tax returns for XXXXXXXXXX , it is currently estimated that as of XXXXXXXXXX , the Canadian Group had the following tax attributes:

Entity Non-capital Net UCC CEC SRED
Losses Capital (of all expenditure
Losses classes) pool

Holdco XXXXX XXXXX XXXXX XXXXX XXXXXX
Opco XXXXX XXXXX XXXXX XXXXX XXXXXX
Canco 2 XXXXX XXXXX XXXXX XXXXX XXXXXX
Canco 1 XXXXX XXXXX XXXXX XXXXX XXXXX

35. Holdco owns the following investments as capital property:

ACB FMV

XXXX common shares of Opco XXXX XXXX

Loan 3 XXXX plus Approximately XXXX accrued and unpaid interest

Loan 2 XXXX plus Approximately XXXX accrued and unpaid interest

XXXX common shares of Canco 2 XXXXXXXXXX XXXXXXXXXX

36. Canco 2's only material assets are a XXXXXXXXXX % partnership interest in GP with an ACB of $XXXXXXXXXX and an estimated FMV of $XXXXXXXXXX , and XXXXXXXXXX class A preferred shares of Canco 1 with an aggregate ACB and estimated FMV of approximately $XXXXXXXXXX . Canco 2 may also, from time to time, own small amounts of cash on hand and may incur/acquire short-term indebtednesses with other members of the Group in the normal course of business. Having regard to the fact that Canco 2 is indebted towards Holdco for $XXXXXXXXXX but has assets with a value of approximately $XXXXXXXXXX , Canco 2 is currently insolvent.

37. GP holds the Loan 1. The outstanding principal amount of Loan 1 is approximately $XXXXXXXXXX and the ACB of such loan to GP is equal to its principal amount plus the amount of accrued and unpaid interest included in GP's income and added to its ACB pursuant to subsection 52(1) of the Act. The FMV of the Loan 1 is approximately $XXXXXXXXXX . Loan 1 is a capital property to GP.

Proposed Transactions

Incorporation of Subco

38. Opco will incorporate a wholly-owned subsidiary ("Subco") under the CBCA. The authorized share capital of Subco will include a class of redeemable and retractable non-voting preferred shares entitled to a non-cumulative preferential dividend at a reasonable rate and whose redemption price will be subject to a standard price adjustment clause (the "Subco Preferred Shares").

39. Upon incorporation of Subco, Opco will subscribe for common shares for a nominal amount.

Transfer of Loan 1 and Loan 2

40. GP will transfer Loan 1 (including accrued and unpaid interest) to Subco in exchange for a number of Subco Preferred Shares having an ACB, PUC and redemption value equal to the FMV of Loan 1, which is currently estimated at approximately $XXXXXXXXXX . The members of GP and Subco will jointly elect, in prescribed form and within the time determined under subsection 85(6) of the Act, for the provisions of subsection 85(2) of the Act to apply to the transfer.

41. Holdco will transfer Loan 2 (including all accrued and unpaid interest) to Subco in exchange for a number of Subco Preferred Shares having an ACB, PUC and redemption value equal to the FMV of Loan 2, which is currently estimated at approximately $XXXXXXXXXX . Holdco and Subco will jointly elect, in prescribed form and within the time determined under subsection 85(6) of the Act, for the provisions of subsection 85(1) of the Act to apply to the transfer.

Dissolution of GP

42. Opco will sell its XXXXXXXXXX % partnership interest in GP to Canco 2 for a price equal to the FMV of the partnership interest, which is currently estimated at approximately $XXXXXXXXXX , payable in XXXXXXXXXX . Consequently, GP will cease to exist, having only one partner, which will cause the assets of GP, consisting of the Subco Preferred Shares described in 40 above, to be distributed to Canco 2.

Complete Settlement of Loan 3

43. Canco 2 will transfer the Subco Preferred Shares received from GP, as described in 42 above, to Holdco in final settlement of Loan 3 including all accrued and unpaid interest in respect thereof. The repayment will first be applied against the accrued and unpaid interest in respect of Loan 3 (the "Extinguished Interest") and the balance will be applied against the principal amount of Loan 3 (the "Extinguished Principal"). Loan 3 is a commercial obligation and the provisions of section 80 will apply to Canco 2 in respect of the forgiven amounts, if any, that arise on the extinguishments of the Extinguished Interest and the Extinguished Principal. Neither Holdco, nor a person affiliated with Holdco, will acquire a substituted property that is identical to Loan 3 (within the meaning of subsection 248(12) of the Act) during the period that begins 30 days before and ends 30 days after the final settlement of Loan 3.

Transfer of Subco Preferred Shares

44. Opco will obtain articles of amendment to modify its share capital to authorize the issuance of an unlimited number of preferred shares (the "Opco Preferred Shares"). The Opco Preferred Shares will be redeemable and retractable non-voting preferred shares entitled to a non-cumulative preferential dividend at a reasonable rate and whose redemption price is subject to a standard price adjustment clause.

45. Holdco will transfer the Subco Preferred Shares it acquired in 41 and 43 above to Opco in exchange for Opco Preferred Shares having a redemption value equal to the FMV of the Subco Preferred Shares so transferred, subject to a price adjustment clause. Holdco and Opco will jointly elect, in prescribed form and within the time determined under subsection 85(6) of the Act, for the provisions of subsection 85(1) of the Act to apply to the transfer.

Liquidation and Dissolution of Subco

46. The stated capital of the Subco Preferred Shares will be reduced to $XXXXXXXXXX in the aggregate, without any distribution by Subco. The amount of the said reduction will be added to the contributed surplus.

47. Subco will be wound-up into Opco under subsection 88(1) of the Act. Consequently, Loan 1, Loan 2, and all accrued and unpaid interest thereon will be extinguished by reason of the merger of creditor and debtor. An election will be filed under subsection 80.01(4) of the Act to deem Loan 1, Loan 2, and all accrued and unpaid interest thereon to have been settled for an amount equal to their cost amount to Subco calculated in accordance with subparagraphs 80.01(4)(c)(i) and (ii) of the Act.

Additional Information

48. As a result of the settlement of Loan 3 including all accrued and unpaid interest in respect thereof, as described in 43 above, it is anticipated that Canco 2 will have forgiven amounts. It is expected that the forgiven amounts will be equal to:

a. the amount, if any, by which the amount of Extinguished Interest exceeds the FMV of the Subco Preferred Shares transferred by Canco 2 to Holdco in satisfaction of the Extinguished Interest; and

b. the amount, if any, by which the lesser of the amount for which Loan 3 was issued and the principal amount outstanding under Loan 3, excluding the amount, if any, of accrued and unpaid interest (i.e., the Extinguished Principal), exceeds the FMV of the Subco Preferred Shares transferred by Canco 2 to Holdco in satisfaction of the Extinguished Principal.

Canco 2 will designate a nominal amount of approximately $XXXXXXXXXX under subsection 80(7) of the Act to reduce its CEC pool, and a nominal amount of approximately $XXXXXXXXXX under subsection 80(11) of the Act to reduce its ACB of the XXXXXXXXXX Class A preferred shares it holds in Canco 1. Canco 2 will have no other tax attributes described in subsections 80(5) to (11) of the Act.

49. As a result of Holdco's disposition of Loan 3 including all accrued and unpaid interest in respect thereof, as described in 43 above, Holdco will realize a capital loss equal to the amount, if any, by which the ACB of Loan 3 to Holdco exceeds the FMV of the Subco Preferred Shares transferred by Canco 2 to Holdco in settlement of Loan 3 including all accrued and unpaid interest in respect thereof.

50. The implementation of the Restructuring Framework Agreement described in 31 above will accomplish a significant de-leveraging of the Group. As a result, Holdco's debt owing will be significantly reduced and thus significantly reduce debt service obligations going forward. The debt reduction will improve the Group's ability to access the capital markets in the future and to attract and retain employees, customers and suppliers.

51. It is currently anticipated that the forgiveness of Holdco's debts resulting from the implementation of the Restructuring Framework Agreement, as described in 31 a. above, will result in Holdco having a forgiven amount of approximately $XXXXXXXXXX (subject to the final calculation of accrued and unpaid interest which will be forgiven). It is anticipated that a portion of the forgiven amount will be applied against the capital loss realized by Holdco on the settlement of Loan 3, as described in 43 above, pursuant to subsection 80(4) or 80(12) of the Act, as the case may be.

52. XXXXXXXXXX .

53. XXXXXXXXXX.

Purpose of the Proposed Transactions

54. Since the Restructuring Framework Agreement described in 31 above will result in a change of shareholders at the level of Foreign Parent, it is possible, depending on the identity of the shareholders post-restructuring, that there will be an acquisition of control of the Group by a person or a group of persons for Canadian tax purposes. XXXXXXXXXX . Should an acquisition of control occur, it will become impossible to unwind the present internal financing structure of the Canadian Group without adverse tax consequences. It is therefore desirable that the Proposed Transactions be implemented before the occurrence of an acquisition of control.

55. In addition, currently, the balance sheet of Opco shows liabilities far exceeding the value of its assets. This prevents Opco from contracting new obligations and imperils its relations with its trade creditors. The Proposed Transactions will result in the elimination of Loan 1 and Loan 2 thus significantly improving Opco's balance sheet.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions and purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:

A. Paragraphs 40(2)(e.1) and 53(1)(f.11) of the Act will apply to the disposition, as described in 40 above, of Loan 1 by GP to Subco such that (i) the capital loss realized by GP will be deemed to be nil, and (ii) the ACB to Subco of Loan 1 will be increased by an amount equal to the amount of the loss so denied.

B. Paragraphs 40(2)(e.1) and 53(1)(f.1) of the Act will apply to the disposition, as described in 41 above, of Loan 2 by Holdco to Subco such that (i) the capital loss realized by Holdco will be deemed to be nil, and (ii) the ACB to Subco of Loan 2 will be increased by an amount equal to the amount of the loss so denied.

C. Provided the election referred to in subsection 80.01(4) of the Act is filed in a timely manner, the settlement, as described in 47 above, of Loan 1, Loan 2, and all accrued and unpaid interest thereon as a result of the wind-up of Subco into Opco will not give rise to a "forgiven amount", within the definition of that term in subsection 80(1) of the Act, for Opco.

D. Paragraph 80(2)(b) of the Act will apply to deem Canco 2 to have issued a debt obligation having a principal amount equal to the amount of the accrued and unpaid interest in respect of Loan 3 that was deductible in computing Canco 2's income for a taxation year (i.e., the Extinguished Interest).

E. To the extent that the FMV of the Subco Preferred Shares that are transferred to Holdco in final settlement, as described in 43 above, of the accrued and unpaid interest in respect of Loan 3 (i.e., the Extinguished Interest) is less than the principal amount of the debt obligation Canco 2 is deemed to have issued as described in Ruling D above, a "forgiven amount", within the definition of that term in subsection 80(1) of the Act, will arise as a result of this transfer.

F. To the extent that the FMV of the Subco Preferred Shares that are transferred to Holdco in final settlement, as described in 43 above, of the principal amount of Loan 3 (i.e., the Extinguished Principal) is less than the lesser of the amount for which Loan 3 was issued and the principal amount of Loan 3, a "forgiven amount", within the definition of that term in subsection 80(1) of the Act, will arise as a result of this transfer.

G. Provided the "forgiven amount" described in Ruling E and/or Ruling F above results in Canco 2 having an income inclusion under paragraph 12(1)(z.3) of the Act as computed under subsection 80(13) of the Act, subsection 61.3(3) of the Act will not be applicable as a result of the Proposed Transactions, in and by themselves, to deny the application of subsection 61.3(1) of the Act.

H. Neither paragraph 40(2)(e.1) nor subsection 40(3.4) of the Act will be applicable as a result of the Proposed Transactions, in and by themselves, to deem Holdco's capital loss, if any, resulting from its disposition, as described in 43 above, of Loan 3 including all accrued and unpaid interest in respect thereof, to be nil.

I. Subsection 245(2) of the Act will not be applicable as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the Proposed Transactions are commenced by XXXXXXXXXX .

The above rulings are based on the law as it presently reads 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

Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the GST implications of any of the Proposed Transactions;
(b) the reasonableness of any amount;
(c) the FMV or ACB of any property or the PUC of any shares referred to herein;
(d) the amount of any non-capital loss or any other amount of any corporation referred to herein; or
(e) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.

Yours truly,

XXXXXXXXXX
For Director
Financial Industries Division
Income Tax Rulings Directorate