2011 Ruling 2010-0367251R3 - Loss Consolidation

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: Standard Loss Consolidation. Shift of current year losses to affiliated corporation through interest expense on inter-corporate debt.

Position: Favourable Ruling Issued

Reasons: Legislative and administrative requirements met. Prior ruling issued to same taxpayer with respect to similar transactions.

XXXXXXXXXX
								2010-036725
XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
Draft Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information provided in correspondence and telephone conversations (XXXXXXXXXX) concerning your request. The information contained in documents submitted with your request forms part of this ruling only to the extent it is expressly referred to or described herein.

To the best of your knowledge and that of the above-referenced taxpayers, none of the issues involved in this ruling is:

(i) dealt with in an earlier return of any of the above-referenced taxpayers, or a related person,

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

(iii) under objection or appeal by any of the above-referenced taxpayers, or 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 issued by the Income Tax Rulings Directorate.

Further, the above referenced taxpayers have advised that the Subject Transactions and the Proposed Transactions described herein will not result in the taxpayers or any related person herein being unable to pay its outstanding tax liabilities.

Unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (the "Act"), and the Income Tax Regulations thereunder are referred to as the "Regulations".

DEFINITIONS

In this letter, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified and where the circumstances so require, words importing the singular include the plural and vice versa, and words importing any gender or the neuter include all genders and the neuter:

"adjusted cost base" (also referred to as "ACB") has the meaning assigned by section 54;

"affiliated persons" has the meaning assigned by subsection 251.1(1);

"Agreeing Province" means a province that has entered into an agreement with the Government of Canada under which the Government of Canada will collect taxes payable under the income tax statute of that province and will make payments to that Province in respect of the taxes so collected;

"arm's length" has the meaning assigned by subsection 251(1);

"BCA" means the Business Corporations Act, XXXXXXXXXX , as amended;

"Canadian-controlled private corporation" (also referred to as "CCPC") has the meaning assigned by subsection 125(7);

"Canadian tax results" has the meaning assigned by subsection 261(1);

"CRA" means the Canada Revenue Agency;

"Daylight Loan" has the meaning assigned in Paragraph 21;

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

"fair market value" (also referred to as "FMV") means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

"financial intermediary corporation" has the meaning assigned by subsection 191(1);

"fiscal period" has the meaning assigned by section 249.1;

"General Anti-avoidance Provision of an Agreeing Province" means:

XXXXXXXXXX

"GPCo 1" means XXXXXXXXXX ;

"GPCo 2" means XXXXXXXXXX ;

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

"investment corporation" has the meaning assigned by subsection 130(3);

"LossCo" means XXXXXXXXXX ;

"LossCo Demand Note" has the meaning assigned in Paragraph 24;

"LossCo's Non-Capital Loss Deductions" has the meaning assigned by Paragraph 63;

"LossCo Sub" means XXXXXXXXXX ;

"LossCo Sub Demand Note" has the meaning assigned in Paragraph 34;

"LossCo Sub Preferred Shares" has the meaning assigned in Paragraph 18;

"LP1" means XXXXXXXXXX ;

"LP2" means XXXXXXXXXX ;

"mortgage investment corporation" has the meaning assigned by subsection 130.1(6);

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

"XXXXXXXXXX" has the meaning assigned in Paragraph 8;

"NewCo" means XXXXXXXXXX , a newly-incorporated corporation described in Paragraph 19;

"NewCo Class I Common Shares" has the meaning assigned in Paragraph 19;

"NewCo Class II Common Shares" has the meaning assigned in Paragraph 19;

"NewCo Demand Note" has the meaning assigned in Paragraph 22;

"NewCo II" means XXXXXXXXXX , a newly incorporated corporation described in Paragraph 36;

"NewCo II Common Shares" has the meaning assigned in Paragraph 36;

"NewCo III" means XXXXXXXXXX , a newly incorporated corporation described in Paragraph 37;

"NewCo III Class I Common Shares" has the meaning assigned in Paragraph 37;

"NewCo III Class II Common Shares" has the meaning assigned in Paragraph 37;

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

"OpCo" means XXXXXXXXXX ;

"OpCo's Non-Capital Loss Deductions" has the meaning assigned by Paragraph 63;

"paid-up capital" has the meaning assigned by subsection 89(1);

"Paragraph" means a numbered paragraph in this letter;

"ParentCo" means XXXXXXXXXX ;

"permanent establishment" has the meaning assigned by Part IV of the Regulations;

"principal amount" has the meaning assigned by subsection 248(1);

"Proposed Transactions" means the proposed transactions described in Paragraphs 38 to 61;

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

"related persons" has the meaning assigned by subsection 251(2);

"safe income determination time" has the meaning assigned by subsection 55(1);

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

"Subject Transactions" means the subject transactions described in Paragraphs 19 to 37.1;

"XXXXXXXXXX" has the meaning assigned in Paragraph 8;

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

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

"taxable income" has the meaning assigned by subsection 248(1);

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

"US$ Daylight Loan" has the meaning assigned in Paragraph 43;

"US$ LossCo Demand Note" has the meaning assigned in Paragraph 46;

"US$ LossCo Sub Demand Note" has the meaning assigned in Paragraph 56;

"US$ LossCo Sub Preferred Shares" has the meaning assigned in Paragraph 45;

"US$ NewCo III Demand Note" has the meaning assigned in Paragraph 44;

"X" means XXXXXXXXXX .

FACTS

1. X is an individual who is a resident of Canada for the purposes of the Act.

2. ParentCo is a taxable Canadian corporation and a CCPC. ParentCo was incorporated under the BCA. X controls ParentCo and is its sole shareholder.

3. GPCo1 is a taxable Canadian corporation and a CCPC. GPCo1 was incorporated under the BCA. X controls GPCo1 and is its sole shareholder.

4. GPCo2 is a taxable Canadian corporation and a CCPC. GPCo2 was incorporated under the BCA. X controls GPCo2 and is its sole shareholder.

5. OpCo is a taxable Canadian corporation and a public corporation whose common shares are listed for trading on the XXXXXXXXXX . The authorized and issued share capital of OpCo consists of approximately XXXXXXXXXX common shares. As at XXXXXXXXXX , OpCo had a market capitalization of approximately $XXXXXXXXXX . As at XXXXXXXXXX , OpCo had consolidated revenues of approximately $XXXXXXXXXX .

6. OpCo is a XXXXXXXXXX . OpCo's most recent taxation year ended on XXXXXXXXXX . Opco files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office. OpCo has permanent establishments in XXXXXXXXXX provinces XXXXXXXXXX in Canada.

	Provincial Allocation
XXXXXXXXXX 		XXXXXXXXXX 

7. LossCo is a taxable Canadian corporation and a public corporation. LossCo's taxation year-end is XXXXXXXXXX . LossCo files its Canadian federal income tax returns with the XXXXXXXXXX Tax Centre and its Canadian federal income tax affairs are administered by the XXXXXXXXXX Tax Services Office. LossCo has a permanent establishment in XXXXXXXXXX .

8. The authorized and issued share capital of LossCo consists of a class of XXXXXXXXXX , a class of XXXXXXXXXX and a class of XXXXXXXXXX .

9. As at XXXXXXXXXX , LossCo had a market capitalization of approximately $XXXXXXXXXX . LossCo had consolidated revenues of approximately $XXXXXXXXXX in its XXXXXXXXXX fiscal period. LossCo principally XXXXXXXXXX .

10. LossCo Sub is a taxable Canadian corporation. LossCo owns (directly and indirectly) all of the issued and outstanding shares of LossCo Sub. LossCo Sub owns investments in XXXXXXXXXX .

11. GPCo 1 is the general partner of LP1, a limited partnership. ParentCo is a limited partner of LP1. The other limited partners of LP1 are taxable Canadian corporations controlled by ParentCo.

12. GPCo 2 is the general partner of LP2, a limited partnership. LP1 is the sole limited partner of LP2.

13. LP1, LP2, ParentCo and a number of taxable Canadian corporations controlled by ParentCo together hold approximately XXXXXXXXXX common shares of OpCo, representing approximately XXXXXXXXXX % of the issued and outstanding common shares of OpCo. LP1 and LP2 directly hold a total of approximately XXXXXXXXXX % of the common shares of OpCo.

14. X holds all the shares of and controls each of GPCo 1, GPCo 2 and ParentCo. X controls OpCo because GPCo 1 and GPCo 2 have the exclusive authority to manage the operation and affairs of LP1 and LP2, respectively.

15. X controls a number of taxable Canadian corporations that collectively hold approximately XXXXXXXXXX % of the issued and outstanding XXXXXXXXXX. X also controls a taxable Canadian corporation that holds all the issued and outstanding XXXXXXXXXX. X therefore controls LossCo.

16. As at XXXXXXXXXX , the balance of LossCo's non-capital losses as filed was approximately $XXXXXXXXXX . The non-capital losses were incurred and expire as follows:

Approximate Amount of	Year Incurred		Year of Expiry
	Loss
XXXXXXXXXX 			XXXXXXXXXX 			XXXXXXXXXX 

17. OpCo and LossCo are affiliated persons and related persons since they are both controlled by X.

18. The authorized capital of LossCo Sub includes XXXXXXXXXX preferred shares of LossCo Sub (the "LossCo Sub Preferred Shares"). The LossCo Sub Preferred Shares are non-voting, redeemable, subject to applicable law, at any time at the option of LossCo Sub for an amount equal to the amount for which they were issued plus any accrued and unpaid dividends, and carry a cumulative dividend entitlement at a rate equal to XXXXXXXXXX % per year.

LossCo holds a certain number of LossCo Sub Preferred Shares which it received as consideration for a previous transfer of assets to LossCo Sub. The paid-up capital and redemption amount of each LossCo Sub Preferred Share that LossCo holds is $XXXXXXXXXX .

SUBJECT TRANSACTIONS

19. LossCo incorporated NewCo under the BCA on XXXXXXXXXX . The authorized share capital of NewCo consists of an unlimited number of two classes of common shares (the "NewCo Class I Common Shares" and the "NewCo Class II Common Shares"). NewCo is a taxable Canadian corporation. NewCo has not and will not carry on any business and its activities are limited to investing in LossCo Sub Preferred Shares as described in Paragraph 23. NewCo issued XXXXXXXXXX NewCo Class I Common Shares to LossCo for $XXXXXXXXXX upon incorporation. NewCo will have a taxation year-end date of XXXXXXXXXX . LossCo holds the NewCo Class I Common Shares as capital property.

20. [Reserved].

21. On XXXXXXXXXX , LossCo borrowed $XXXXXXXXXX from a financial institution on a daylight loan basis (the "Daylight Loan") on arm's length commercial terms customary for this type of loan.

22. On XXXXXXXXXX , LossCo used the entire amount of the proceeds from the Daylight Loan to make an interest bearing loan to NewCo. Such loan was evidenced by an interest bearing demand note issued by NewCo to LossCo (the "NewCo Demand Note").

23. On XXXXXXXXXX , NewCo used the entire amount of the proceeds borrowed from LossCo to subscribe for LossCo Sub Preferred Shares. The LossCo Sub Preferred Shares had an aggregate redemption amount and paid-up capital equal to the amount of the subscription. The paid-up capital and redemption amount of each LossCo Sub Preferred Share that NewCo held was $XXXXXXXXXX .

24. On XXXXXXXXXX , LossCo Sub used the entire amount of the proceeds received from NewCo on the subscription for LossCo Sub Preferred Shares to make a non-interest bearing loan to LossCo. Such loan was evidenced by a non-interest bearing demand note issued by LossCo to LossCo Sub (the "LossCo Demand Note").

25. LossCo used the entire amount of the proceeds borrowed from LossCo Sub to repay the Daylight Loan to the financial institution.

26. LossCo had the financial capacity to borrow $XXXXXXXXXX based on LossCo's net asset value and its sources of cash flow existing at that time.

27. The NewCo Demand Note bore interest at a rate that was reasonable based on the circumstances, which rate was not in excess of the rate that would be required by a third party lender. The interest rate charged on the NewCo Demand Note was XXXXXXXXXX % per annum.

28. On XXXXXXXXXX , LossCo Sub requested that the CRA approve a change in taxation year end to XXXXXXXXXX , effective XXXXXXXXXX . The request was approved by the CRA on XXXXXXXXXX .

29. The wind-up of the Canadian dollar loss consolidation, described in Paragraphs 30 to 35, occurred in the following order on XXXXXXXXXX .

30. LossCo Sub paid all accrued and unpaid dividends on the LossCo Sub Preferred Shares, being $XXXXXXXXXX . Of this amount, $XXXXXXXXXX was paid to NewCo for its share of the dividends and $XXXXXXXXXX was paid to LossCo for its share of the dividends.

31. NewCo paid all accrued and unpaid interest on the NewCo Demand Note, being $XXXXXXXXXX to LossCo. NewCo also paid a dividend of $XXXXXXXXXX on its Class I Common Shares to LossCo.

32. LossCo used the funds received from the transactions in Paragraphs 30 and 31, being $XXXXXXXXXX , to repay intercorporate advances owing to LossCo Sub and to make a non-interest bearing loan to LossCo Sub.

33. LossCo Sub demanded repayment of the LossCo Demand Note. LossCo repaid the LossCo Demand Note by assigning the NewCo Demand Note to LossCo Sub in full satisfaction of the amount due under the LossCo Demand Note. The LossCo Demand Note was cancelled.

34. LossCo Sub redeemed its LossCo Sub Preferred Shares held by NewCo in exchange for a non-interest bearing demand note issued by LossCo Sub (the "LossCo Sub Demand Note") having a principal amount and FMV equal to the aggregate redemption amount of the LossCo Sub Preferred Shares, owned by NewCo, so redeemed.

35. LossCo Sub and NewCo set off the principal amount due under the NewCo Demand Note against the principal amount due under the LossCo Sub Demand Note. The NewCo Demand Note and the LossCo Sub Demand Note were cancelled.

36. LossCo incorporated NewCo II under the BCA on XXXXXXXXXX . The authorized share capital of NewCo II consists of an unlimited number of common shares (the "NewCo II Common Shares").

NewCo II is a taxable Canadian corporation. NewCo II has not and will not carry on any business and its activities will be limited to making cash contributions to LossCo Sub as described in Paragraphs 51 and 54. NewCo II issued 1,000 NewCo II Common Shares to LossCo for US$XXXXXXXXXX upon incorporation. NewCo II intends to have a taxation year-end date on or before XXXXXXXXXX .

37. LossCo incorporated NewCo III under the BCA on XXXXXXXXXX . The authorized share capital of NewCo III consists of an unlimited number of two classes of common shares (the "NewCo III Class I Common Shares" and the "NewCo III Class II Common Shares").

NewCo III is a taxable Canadian corporation. NewCo III has not and will not carry on any business and its activities will be limited to investing in US$ LossCo Sub Preferred Shares as described in Paragraph 45. NewCo III issued XXXXXXXXXX NewCo III Class I Common Shares to LossCo for US$XXXXXXXXXX upon incorporation. LossCo holds the NewCo III Class I Common Shares as capital property. NewCo III will have a taxation year-end date of XXXXXXXXXX .

37.1 On XXXXXXXXXX , NewCo II and NewCo III each filed a functional currency election, in prescribed form, pursuant to subsection 261(3), to adopt US$ effective for their XXXXXXXXXX and XXXXXXXXXX taxation year, respectively.

PROPOSED TRANSACTIONS

Subsection 261(3) elections

38. LossCo and LossCo Sub will each elect, pursuant to subsection 261(3), to adopt US$ for their XXXXXXXXXX taxation years. The elections will be filed in prescribed form on or before XXXXXXXXXX .

Opco's share subscription in NewCo

39. On or before XXXXXXXXXX , OpCo will subscribe for XXXXXXXXXX NewCo Class II Common Shares in consideration for a cash contribution equal to the FMV, determined at the time of the share subscription, of the XXXXXXXXXX NewCo Class I Common Shares held by LossCo.

40. On or before XXXXXXXXXX , NewCo will use all of the proceeds from the share subscription described in Paragraph 39 to purchase for cancellation the NewCo Class I Common Shares held by LossCo. The amount paid by NewCo to purchase the NewCo Class I Common Shares from LossCo will be greater than $XXXXXXXXXX

41. On or before XXXXXXXXXX , NewCo will commence winding-up into OpCo in accordance with the provisions of the BCA.

The US dollar loss consolidation

42. The transactions described in Paragraphs 43 to 49 will be denominated in US$ and will take place in XXXXXXXXXX .

43. LossCo will borrow the US$ equivalent of approximately $XXXXXXXXXX from a financial institution on a daylight loan basis (the "US$ Daylight Loan") on arm's length commercial terms customary for this type of loan.

44. LossCo will use the entire amount of the proceeds from the US$ Daylight Loan to make an interest bearing loan to Newco III. Such loan will be evidenced by an interest bearing demand note issued by NewCo III to LossCo (the "US$ NewCo III Demand Note").

45. NewCo III will use the entire amount of the proceeds borrowed from LossCo to subscribe for a new class of US$ denominated preferred shares of LossCo Sub, created by legal resolution, (the "US$ LossCo Sub Preferred Shares"). The US$ LossCo Sub Preferred Shares will have a redemption amount and paid-up capital equal to the amount of the subscription. The US$ LossCo Sub Preferred Shares will be non-voting, redeemable, subject to applicable law, at any time at the option of LossCo Sub for an amount equal to the amount for which they were issued plus any accrued and unpaid dividends, and will carry a cumulative dividend entitlement at a rate equal to XXXXXXXXXX % per year.

46. LossCo Sub will use the entire amount of the proceeds received from NewCo III on the subscription for the US$ LossCo Sub Preferred Shares to make a non-interest bearing loan to LossCo. Such loan will be evidenced by a non-interest bearing demand note issued by LossCo to LossCo Sub (the "US$ LossCo Demand Note").

47. LossCo will use the entire amount of the proceeds borrowed from LossCo Sub to repay the US$ Daylight Loan to the financial institution.

48. LossCo will have the financial capacity to borrow the US$ equivalent of $XXXXXXXXXX to finance additional investments based on LossCo's current net asset value and its existing sources of cash flow.

49. The US$ NewCo III Demand Note will bear interest at a rate that will be reasonable based on the circumstances, which rate will not be in excess of the rate that would be required by a third party lender. The interest rate to be charged on the US$ NewCo III Demand Note will not exceed XXXXXXXXXX % per annum.

50. On or before XXXXXXXXXX , LossCo Sub will pay all accrued and unpaid dividends on the US$ LossCo Sub Preferred Shares to Newco III. It is expected LossCo Sub will have sufficient funds from its own operations to pay the amount of such dividends. In the event that LossCo Sub requires additional funds to fully pay the amount of such dividends, LossCo Sub will receive a capital contribution from NewCo II, in the manner described in Paragraph 51, to the extent of the shortfall so that the capital contribution, along with the cash from LossCo Sub's own operations, will be sufficient to satisfy the dividend payments on the US$ LossCo Sub Preferred Shares.

51. It is expected that cash from LossCo Sub's own operations will be sufficient to satisfy any dividend payments on the US$ LossCo Sub Preferred Shares. In the event of a shortfall, LossCo will subscribe for NewCo II Common Shares in consideration for a cash contribution equal to the amount of the shortfall required by LossCo Sub to fund dividend payments by LossCo Sub on the US$ LossCo Sub Preferred Shares. With the proceeds from the issuance of shares to LossCo, NewCo II will make a cash capital contribution to LossCo Sub in the amount of the shortfall to fund the payment of dividends on the US$ LossCo Sub Preferred Shares. No shares will be issued by LossCo Sub with respect to the contribution of capital by NewCo II and no amount will be added to the stated capital account maintained in respect of any class of shares of LossCo Sub and, for greater certainty, to the paid-up capital of any class of shares of LossCo Sub. The amount of this contribution of capital, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital by NewCo II, if any, will not be income of LossCo Sub pursuant to generally accepted accounting principles.

52. On or before XXXXXXXXXX , NewCo III will pay all accrued and unpaid interest on the US$ NewCo III Demand Note to LossCo. Newco III will also pay a dividend to LossCo on its NewCo III Class I Common Shares. The amount of the dividend will be equal to the difference between the dividends received by Newco III on the US$ LossCo Sub Preferred Shares, as described in Paragraph 50, and the interest paid by NewCo III to LossCo on the US$ NewCo III Demand Note as described in this Paragraph.

53. LossCo Sub will repay to LossCo the funds it received from LossCo as described in Paragraph 32, being the US$ equivalent of $XXXXXXXXXX .

54. LossCo will use the aggregate funds it receives in Paragraphs 52 and 53, less the amount, if any, that LossCo used to subscribe for NewCo II shares in circumstances described in Paragraph 50, to subscribe for NewCo II Common Shares. With the proceeds from the issuance of shares to LossCo, NewCo II will make a cash capital contribution to LossCo Sub. No shares will be issued by LossCo Sub with respect to the contribution of capital and no amount will be added to the stated capital account maintained in respect of any class of shares of LossCo Sub and, for greater certainty, to the paid-up capital of any class of shares of LossCo Sub. The amount of this contribution of capital, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital by NewCo II, if any, will not be income of LossCo Sub pursuant to generally accepted accounting principles.

55. On or before XXXXXXXXXX , LossCo Sub will demand repayment of the US$ LossCo Demand Note. LossCo will repay the US$ LossCo Demand Note by assigning the US$ NewCo III Demand Note to LossCo Sub in full satisfaction of the principal amount due under the US$ LossCo Demand Note. The US$ LossCo Demand Note will be cancelled.

56. On or before XXXXXXXXXX , LossCo Sub will redeem its US$ LossCo Sub Preferred Shares held by NewCo III in exchange for an interest bearing demand note issued by LossCo Sub (the "US$ LossCo Sub Demand Note") having a principal amount and FMV equal to the aggregate redemption amount of the US$ LossCo Sub Preferred Shares, owned by NewCo III, so redeemed. The US$ LossCo Sub Demand Note will bear interest at a rate that will be reasonable based on the circumstances, which rate will not be in excess of the rate that would be required by a third party lender.

57. On or before XXXXXXXXXX , LossCo Sub and NewCo III will set off the principal amount due under the US$ NewCo III Demand Note against the principal amount due under the US$ LossCo Sub Demand Note. The US$ NewCo III Demand Note and the US$ LossCo Sub Demand Note will be cancelled.

OpCo's share subscription in NewCo III

58. Between XXXXXXXXXX and XXXXXXXXXX , OpCo will subscribe for XXXXXXXXXX NewCo III Class II Common Shares, denominated in Canadian dollars, in consideration for a cash contribution equal to the FMV, determined at the time of subscription, of the XXXXXXXXXX NewCo III Class I Common shares held by LossCo.

59. Between XXXXXXXXXX and XXXXXXXXXX , NewCo III will use the proceeds from the share subscription in Paragraph 58 to purchase for cancellation the NewCo III Class I Common Shares held by LossCo. The Canadian dollar amount paid by NewCo III to purchase the NewCo III Class I Common Shares from LossCo will be greater than the paid-up capital of those shares.

60. Between XXXXXXXXXX and XXXXXXXXXX , and after the subscription of the NewCo III Class II Common Shares by OpCo, NewCo III will commence winding-up into OpCo in accordance with the provisions of the BCA.

61. On or before XXXXXXXXXX , NewCo II will be wound-up into LossCo.

ADDITIONAL INFORMATION

62. The management of LossCo is not aware of any potential audit adjustments that would cause the non-capital loss balance of LossCo for the XXXXXXXXXX taxation year to increase from the current balance, nor will it request that any adjustments be made to increase the non-capital loss balance for the XXXXXXXXXX taxation year.

62.1 NewCo will claim an amount of interest deduction under paragraph 20(1)(c) for its XXXXXXXXXX taxation year equal to the amount by which the amount of interest paid or payable on the NewCo Demand Note for the XXXXXXXXXX taxation year exceeds the amount of the XXXXXXXXXX non-capital loss that LossCo deducted in computing its income for the XXXXXXXXXX taxation year.

62.2 The amount of interest paid or payable on the NewCo III Demand Note will not exceed the US dollar equivalent of $XXXXXXXXXX .

63. The aggregate amount of OpCo's XXXXXXXXXX non-capital loss (arising from the Subject Transactions and the Proposed Transactions upon the windings-up of NewCo and NewCo III) that OpCo deducts in computing its income for any of its taxation years that end 10 taxation years after the end of LossCo's XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ) ("OpCo's Non-Capital Loss Deductions") will not be less than the aggregate amount ("LossCo's Non-Capital Loss Deductions") of:

(a) The amount of the non-capital loss (other than LossCo's XXXXXXXXXX non-capital loss) that LossCo deducts in computing its income for the XXXXXXXXXX taxation year, and

(b) The lesser of:

(i) The amount of the non-capital loss that LossCo deducts in computing its income for the XXXXXXXXXX taxation year, converted to Canadian currency using the same exchange rate used in Paragraph 63(b)(ii); and

(ii) The non-capital loss of NewCo III for its taxation year ended XXXXXXXXXX , converted to Canadian currency in accordance with subsection 261(12) and paragraph 261(7)(a).

63.1 OpCo will not deduct any portion of its XXXXXXXXXX non-capital loss, (other than the aggregate amount determined under Paragraph 63(a) and (b) above, which is subject to the 10 taxation year rule as described in Paragraph 63), arising from the Subject Transactions and the Proposed Transactions upon the windings up of NewCo and NewCo III, in computing its income for any of its taxation years that end more than 20 taxation years after the end of LossCo's XXXXXXXXXX taxation year (or such other period as may be prescribed from time to time under paragraph 111(1)(a), or any successor provision, for a non-capital loss incurred by a taxpayer in a taxation year ending on XXXXXXXXXX ).

64. None of the main purposes of the Subject Transactions described in Paragraphs 36, 37 and 37.1 and the Proposed Transactions is to change, or to enable the changing of, the currency in which the Canadian tax results of any property for a taxation year would otherwise be determined.

65. None of the LossCo Sub Preferred Shares, the NewCo Class I Common Shares, the US$ LossCo Sub Preferred Shares, and the NewCo III Class I Common Shares, are or will be, at any time during the implementation of the Subject Transactions and the Proposed Transactions described herein:

(a) the subject of any undertaking that is a guarantee agreement;

(b) the subject of a dividend rental arrangement;

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i) other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

66. LossCo, LossCo Sub, NewCo, NewCo II and NewCo III are specified financial institutions. LossCo, LossCo Sub, NewCo, NewCo II, and NewCo III are not financial intermediary corporations.

67. LossCo, NewCo, NewCo II, NewCo III, LossCo Sub, ParentCo, GPCo 1, GPCo 2 and OpCo are affiliated persons and related persons and will continue to be affiliated and related to each other at all relevant times.

68. The NewCo Class I Common Shares and the Newco III Class I Common Shares are not term preferred shares.

69. The LossCo Sub Preferred Shares and the US$ LossCo Sub Preferred Shares are term preferred shares. Neither LossCo nor NewCo acquired the LossCo Sub Preferred Shares in the ordinary course of its business. NewCo III will not acquire the US$ LossCo Sub Preferred Shares in the ordinary course of its business.

70. LossCo, LossCo Sub, NewCo II, and NewCo III are not investment corporations, mortgage investment corporations or mutual fund corporations.

71. On XXXXXXXXXX , LossCo Sub paid dividends that had accrued up to that date, being $XXXXXXXXXX , to LossCo.

72. The elections under subsection 261(3) are, or will be, validly made, as described in Paragraphs 37.1 and 38.

PURPOSES OF THE SUBJECT TRANSACTIONS AND THE PROPOSED TRANSACTIONS

73. The purpose of the Subject Transactions and the Proposed Transactions is to consolidate profits and losses within a group of taxable Canadian corporations that are affiliated and related persons by enabling LossCo to earn sufficient interest income to utilize a portion of its expected XXXXXXXXXX losses and to enable NewCo and NewCo III to obtain an interest expense deduction to generate a non-capital loss in their XXXXXXXXXX taxation years.

74. The purpose of the repayment by LossCo Sub to LossCo of the US$ equivalent of $XXXXXXXXXX as described in Paragraph 53 is to eliminate the non-interest bearing loan made by LossCo to LossCo Sub as described in Paragraph 32.

75. The purpose of the subscription of the NewCo II Common Shares by LossCo followed by a capital contribution by NewCo II to LossCo Sub as described in Paragraph 54 is to restore the liquidity position of LossCo Sub and to enable LossCo Sub to carry out its various investment and management activities.

76. The purpose of the change in LossCo Sub's taxation year end to XXXXXXXXXX as described in Paragraph 28 was to ensure that all of the relevant corporations have a subsection 261(3) election in place for the same fiscal period.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, transactions, and purposes of the Subject Transactions and the Proposed Transactions and provided further that the Proposed Transactions are carried out as described above, we rule as follows:

A. Subsection 55(2) will apply to

(a) the taxable dividend that NewCo received from LossCo Sub on the LossCo Sub Preferred Shares as described in Paragraph 30;

(b) the taxable dividend that LossCo received from LossCo Sub on the LossCo Sub Preferred Shares as described in Paragraph 30;

(c) the taxable dividend that LossCo received from NewCo on the NewCo Class I Common Shares as described in Paragraph 31;

(d) the taxable dividend that NewCo III will receive from LossCo Sub on the US$ LossCo Sub Preferred Shares as described in Paragraph 50; and

(e) the taxable dividend that LossCo will receive from NewCo III on the NewCo III Class I Common Shares as described in Paragraph 52,

unless none of the purposes of the dividend, determined with respect to each dividend described in (a) to (e) above, was to effect a significant reduction in the portion of the capital gain that, but for the particular dividend, would have been realized on a disposition at FMV of the LossCo Sub Preferred Shares, the US$ LossCo Sub Preferred Shares, the NewCo Class I Common Shares, or the NewCo III Class I Common Shares, as the case may be, immediately before the particular dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by any corporation after 1971 and before the relevant safe-income determination time.

B. Subsection 55(2) will apply to the taxable dividends that LossCo is otherwise deemed to have received, pursuant to subsection 84(3), as a consequence of

(a) the purchase for cancellation of the NewCo Class I Common Shares described in Paragraph 40; and

(b) the purchase for cancellation of the NewCo III Class I Common Shares described in Paragraph 59,

unless the amount of the reduction to the accrued capital gain on the NewCo Class I Common Shares or the NewCo III Class I Common Shares, as the case may be, as a consequence of the particular dividend is wholly attributable to income earned or realized by NewCo or NewCo III, as the case may be, determined as of the relevant safe income determination time.

C. Without considering the winding-up of NewCo into OpCo as described in Paragraph 41, the winding-up of NewCo III into OpCo as described in Paragraph 60, and the winding-up of NewCo II into LossCo as described in Paragraph 61, the Subject Transactions and the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

D. Without considering the application of subsection 55(2), each taxable dividend referred to in Ruling A(a) to (e)

(a) will be included in the recipient corporation's income pursuant to subsection 82(1) and paragraph 12(1)(j);

(b) will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient corporation for the year in which the dividend is received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4);

(c) will not be subject to tax under Part IV except to the extent, if any, that paragraph 186(1)(b) applies to impose such tax; and

(d) will not be subject to tax under Part IV.1.

E. Without considering the application of subsection 55(2), as a result of the purchase for cancellation of the XXXXXXXXXX NewCo Class I Common Shares described in Paragraph 40 and the purchase for cancellation of the XXXXXXXXXX NewCo III Class I Common Shares described in Paragraph 59, by virtue of subsection 84(3):

(a) NewCo will be deemed to have paid, and LossCo will be deemed to have received, a dividend equal to the amount by which the amount paid by NewCo on the purchase for cancellation exceeds the paid-up capital of the NewCo Class I Common Shares immediately before the purchase for cancellation;

(b) NewCo III will be deemed to have paid, and LossCo will be deemed to have received, a dividend equal to the amount by which the amount paid by NewCo III on the purchase for cancellation exceeds the paid-up capital of the NewCo III Class I Common Shares immediately before the purchase for cancellation; and

(c) each deemed dividend as described in (a) and (b) above:

(i) will be included in LossCo's income pursuant to subsection 82(1) and paragraph 12(1)(j);

(ii) will be a taxable dividend that will be deductible pursuant to subsection 112(1) in computing the taxable income of LossCo for the taxation year in which the dividend is deemed to have been received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4);

(iii) will be excluded in determining the proceeds of disposition to LossCo of the shares so purchased for cancellation pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(iv) will, by virtue of subsection 112(3), reduce any loss to LossCo resulting from the purchase for cancellation of the shares on which the dividend is deemed to be received;

(v) will not be subject to tax under Part IV except to the extent, if any, that paragraph 186(1)(b) applies to impose such tax; and

(vi) will not be subject to tax under Part IV.1.

F. Part VI.1 will not apply to

(a) the taxable dividend that LossCo Sub paid to each of LossCo and NewCo on the LossCo Sub Preferred Shares as described in Paragraph 30;

(b) the taxable dividend that NewCo paid to LossCo on the NewCo Class I Common Shares as described in Paragraph 31;

(c) the taxable dividend that LossCo Sub will pay to NewCo III on the US$ LossCo Sub Preferred Shares as described in Paragraph 50;

(d) the taxable dividend that NewCo III will pay to LossCo on the NewCo III Class I Common Shares as described in Paragraph 52;

(e) the taxable dividend that NewCo will be deemed to have paid to LossCo on the purchase for cancellation of the NewCo Class I Common Shares as described in Paragraph 40; and

(f) the taxable dividend that NewCo III will be deemed to have paid to LossCo on the purchase for cancellation of the NewCo III Class I Common Shares as described in Paragraph 59.

G. Provided that NewCo had a legal obligation to pay interest on the NewCo Demand Note, NewCo will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year (depending on the method regularly followed by NewCo in computing its income for the purposes of the Act), the lesser of

(a) the interest paid or payable on the NewCo Demand Note in respect of that taxation year, taking into account Paragraph 62.1; and

(b) a reasonable amount in respect thereof.

H. Provided NewCo III has a legal obligation to pay interest on the US$ NewCo III Demand Note, and NewCo III continues to hold the US$ LossCo Sub Preferred Shares it acquires, in the manner described in Paragraph 45, for the purpose of gaining or producing income from property, NewCo III will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year (depending on the method regularly followed by NewCo III in computing its income for the purposes of the Act), the lesser of

(a) the interest paid or payable on the US$ NewCo III Demand Note in respect of that taxation year; and

(b) a reasonable amount in respect thereof.

I. Pursuant to paragraph 256(7)(a), control of NewCo and NewCo III, as the case may be, will be deemed not to have been acquired, for the purposes of the provisions enumerated in subsection 256(7), solely because of the Proposed Transactions described in Paragraphs 39 and 40 with respect to NewCo and Paragraphs 58 and 59 with respect to NewCo III.

J. A "forgiven amount" within the meaning of subsection 80(1) and 80.01(1) will not arise on

(a) the settlement of the LossCo Demand Note, the NewCo Demand Note and the LossCo Sub Demand Note as described in Paragraphs 33 and 35; and

(b) the settlement of the US$ LossCo Demand Note, the US$ NewCo III Demand Note and the US$ LossCo Sub Demand Note as described in Paragraphs 55 and 57.

K. After the winding-up of NewCo into OpCo as described in Paragraph 41 and the winding up of NewCo III into OpCo as described in Paragraph 60 are completed, the provisions of subsection 88(1.1) will apply to permit OpCo to deduct the non-capital losses of NewCo and NewCo III, as the case may be, in computing its taxable income for any taxation year of OpCo to commence after the commencement of the winding-up of NewCo and NewCo III, as the case may be, to the extent that the requirements in paragraphs 88(1.1)(a) and (b) are satisfied and subject to the limitations in paragraph 88(1.1)(e) and section 111.

L. Subsections 15(1), 56(2), and 246(1) will not apply to the Subject Transactions and the Proposed Transactions, in and by themselves.

M. Subsection 261(18) will not apply to the Subject Transactions described in Paragraphs 36, 37 and 37.1 and the Proposed Transactions, in and by themselves.

N. Subject to the comment below, subsection 245(2) will not apply to the Subject Transactions and the Proposed Transactions, in and by themselves, to redetermine the consequences confirmed in the rulings given above.

O. The General Anti-avoidance Provision of an Agreeing Province will not be applied, as a result of the Subject Transactions and the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above, in respect of a taxation year for which such Province was an Agreeing Province.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions are completed on or before 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 and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

COMMENTS

A. It is our view that the winding-up of NewCo into OpCo as described in Paragraph 41, the winding-up of NewCo III into OpCo as described in Paragraph 60, or the winding-up of NewCo II into LossCo described in Paragraph 61 could cause subsection 55(2) to apply to the taxable dividends referred to in Rulings A and B. However, we understand that the Department of Finance has issued a letter dated April 21, 2005 (the "comfort letter"), indicating that it was prepared to recommend to the Minister of Finance that situations described in the comfort letter (i.e. essentially where a wholly-owned subsidiary is amalgamated with, or wound-up into, its parent) should not result in a significant increase in the interest of the subsidiary solely as a result of the application of paragraphs 55(3.01)(b) and (c). If such legislation is ever enacted and is effective for the period in which these Subject Transactions and Proposed Transactions take place, it is possible that subsection 55(2) may not apply to the dividends described in Rulings A and B.

B. It is our view that if

(a) OpCo's Non-Capital Loss Deductions are less than LossCo's Non-Capital Loss Deductions as described in Paragraph 63;

(b) the interest expense deducted by NewCo under paragraph 20(1)(c) in its XXXXXXXXXX taxation year exceeds the amount described in Paragraph 62.1; and/or

(c) OpCo deducts a portion of its XXXXXXXXXX non-capital loss in a taxation year more than 20 years after the end of LossCo's XXXXXXXXXX taxation year as described in Paragraph 63.1,

there could be an inappropriate "refreshing" of LossCo's non-capital losses as a consequence of the Subject Transactions and/or the Proposed Transactions, with the result that subsection 245(2) could apply to redetermine the consequences confirmed in Rulings G, H and K above.

C. Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the ACB or FMV of any property referred to herein;

(b) the amount of any non-capital loss or any other amount of any corporation referred to herein;

(c) whether the elections under subsection 261(3), as described in Paragraphs 37.1 and 38 are or will be validly made;

(d) the provincial income tax implications relating to the allocation of income and expenses under the Subject Transactions and the Proposed Transactions;

(e) the application of subsection 55(2) to the dividends received by LossCo on the LossCo Sub Preferred Shares as described in Paragraph 70;

(f) subject to Ruling O, the application or non-application of a general anti-avoidance provisions of any province; or

(g) any other tax consequence relating to the facts, Subject Transactions, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Subject Transactions and the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Yours sincerely,

XXXXXXXXXX
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch