2010 Ruling 2009-0350711R3 - Debt restructuring and forgiveness

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 paragraphs 40(2)(e.1) and 53(1)(f.11) apply to the disposition of a Loan issued by Opco to LP to a related Newco such that (i) the capital loss realized by the LP will be deemed to be nil, and (ii) the ACB to Newco of the Vanilla Loan 2 will be increased by an amount equal to the amount of the loss so denied? 2. Will subsection 39(2) apply where a debt is exchanged for a different debt or modifications are made to a debt?

Position: 1. and 2. Yes.

Reasons: 1. The transactions respect the law. 2. In the first case, the original debt is paid and in the second one, the modifications are important, consequently, a new debt results.

XXXXXXXXXX 								2009-035071

XXXXXXXXXX , 2010

Dear XXXXXXXXXX :

Re : Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX , in respect of your request for an advance income tax ruling on behalf of the above noted-taxpayers. We also acknowledge the information provided to us in your electronic correspondence and during various telephone conversations (XXXXXXXXXX ) in connection with your ruling request. .

This letter is based solely on the facts and proposed transactions described below. Any documentation submitted in respect of your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.
Unless otherwise indicated, all references in this ruling to monetary amounts are in Canadian dollars.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request is:
(a) dealt with in an earlier return of any of the taxpayers or a related person,
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the taxpayers or a related person,
(c) under objection by any of the taxpayers or a related person,
(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired, or
(e) the subject of a ruling previously issued to any of the parties or a related person by the Income Tax Rulings Directorate of the Canada Revenue Agency

Our understanding of the facts, proposed transactions, other representations and the purpose of the proposed transactions are as follows:

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified hereunder:

(a) "ABL Credit Facility" means a senior secured credit facility denominated in XXXXXXXXXX between Opco, as borrower, and certain First Lien Lenders, as lenders. The obligations under the ABL Credit Facility will be secured with a first priority security interest in substantially all of the assets of Opco and will be guaranteed by New Forco. The ABL Credit Facility will consist of a term loan in a principal amount equal to XXXXXXXXXX $ XXXXXXXXXX and a revolving credit facility in a principal amount of up to XXXXXXXXXX $ XXXXXXXXXX (which will be available in cash or through letters of credit).

(b) "Acquisition of Control Taxation Year" means the taxation year ending immediately before the acquisition of control of Opco and ULC1 pursuant to paragraph 249(4)(a);

(c) "Act" means the Income Tax Act, R.S.C. 1985, c. l (5th Supp.), as amended, and unless otherwise stated, every reference herein to a section, paragraph or subparagraph is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";

(d) "adjusted cost base" or "ACB" has the meaning assigned by section 54;

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

(f) "Canco" means XXXXXXXXXX , a public corporation and a TCC;

(g) "Canco Promissory Note" has the meaning assigned by Paragraph 38;

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

(i) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as now in effect and as it may be amended from time to time prior to the Effective Date;

(j) "C$" or "$" means Canadian dollars;

(k) "commercial obligation" has the meaning assigned by subsection 80(1);

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

(m) "cumulative eligible capital" or "CEC" has the meaning assigned by subsection 14(5);

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

(o) "Effective Date" means the date on which the consensual restructuring becomes legally effective;

(p) "Effective Time" means the effective time referred to in the share purchase agreement describe in Paragraph 37 which, is the time that is immediately after the restructuring of the First Lien Debt and the Second Lien Term Loan described in Paragraph 33 to 36;

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

(r) "First Lien Credit Agreement" means the first lien credit agreement dated as of XXXXXXXXXX , as amended, supplemented or modified from time to time by and among Opco, Forco, Former Forco, XXXXXXXXXX ., as administrative agent and collateral agent, and the lender parties from time to time party thereto. All amounts owing under the First Lien Credit Agreement and the Hedge Obligations are secured by perfected first-ranking priority security interests in and charges over substantially all of the assets of Opco and are unconditionally guaranteed by Forco;

(s) "First Lien Debt" means all obligations (including accrued and unpaid interest) owing by Opco to the First Lien Lenders under the First Lien Credit Agreement and to Hedge Bank under the Hedge Agreement;

(t) "First Lien Lenders" means the holders of claims under the First Lien Credit Agreement;

(u) "First Lien Term Loan" means a term loan due to the First Lien Lenders by Opco denominated in XXXXXXXXXX in the principal amount of XXXXXXXXXX $XXXXXXXXXX , payable in full at maturity in XXXXXXXXXX ;

(v) "FMV" means fair market value;

(w) "Forco" means XXXXXXXXXX . Forco's head office is located at XXXXXXXXXX . Forco owns all of the issued and outstanding voting shares of ULC1, XXXXXXXXXX common shares of Opco and indirectly owns XXXXXXXXXX % of the shares of Latco;

(x) "Foreign LP" means XXXXXXXXXX ;

(y) "Forgiven amount" has the meaning assigned by subsection 80(1);

(z) "Former Forco" means XXXXXXXXXX

(aa) "Former Vendor" means XXXXXXXXXX a Canadian partnership and a limited partnership;

(bb) "FX" means foreign currency exchange;

(cc) "GAAR" means the general anti-avoidance rule found in section 245;

(dd) "Hedge Agreement" means the XXXXXXXXXX , together with the schedules and exhibits attached thereto and transactions entered into thereunder and confirmations incorporated therein;

(ee) "Hedge Bank" means XXXXXXXXXX ., as a Hedge Bank as defined in the First Lien Credit Agreement;

(ff) "Hedge Obligations" means the obligations owing to Hedge Bank pursuant to the Hedge Agreement;

(gg) "Latco" means XXXXXXXXXX Latco's offices are located at XXXXXXXXXX ;

(hh) "LP" means XXXXXXXXXX . a Canadian partnership and a limited partnership governed by the laws of XXXXXXXXXX . ULC1 holds XXXXXXXXXX % of the issued and outstanding units of LP as general partner and the remaining units are held by ULC2 as limited partner. LP's offices are located at XXXXXXXXXX . LP has elected to be treated as a corporation for U.S. tax purposes;

(ii) "Newco" means a new corporation to be incorporated by Opco under the CBCA, as more fully described in Paragraph 26;

(jj) "New Forco" means a new XXXXXXXXXX corporation incorporated under the laws of XXXXXXXXXX ;

(kk) "Opco" means XXXXXXXXXX a private corporation and a TCC incorporated under the CBCA. Opco's offices are located at XXXXXXXXXX . Opco is served by the XXXXXXXXXX TSO and the XXXXXXXXXX Taxation Centre;

(ll) "Opco Revolver" means a revolving credit facility that is part of the First Lien Credit Agreement in a maximum amount of XXXXXXXXXX $XXXXXXXXXX , payable in full at maturity in XXXXXXXXXX . Under the terms of the Opco Revolver, Opco can borrow in Canadian or U.S. dollars. The outstanding principal amount of the Opco Revolver is XXXXXXXXXX $XXXXXXXXXX plus XXXXXXXXXX $XXXXXXXXXX in accrued interest as of XXXXXXXXXX ;

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

(nn) "Paragraph" means a numbered paragraph in this advance income tax ruling;

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

(pp) "proposed transactions" means the proposed transactions described herein;

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

(rr) "Second Lien Credit Agreement" means the second lien credit agreement dated as of XXXXXXXXXX , as amended, supplemented or modified from time to time, by and among, Opco, Forco, Former Forco, XXXXXXXXXX ., as collateral agent, and XXXXXXXXXX ., as lender. All amounts owing under the Second Lien Credit Agreement are secured by perfected second priority interests in and charges over substantially all the assets of Opco and are unconditionally guaranteed by Forco;

(ss) "Second Lien Lender" means the holder of claims under the Second Lien Term Loan, namely, XXXXXXXXXX .;

(tt) "Second Lien Term Loan" means a term loan made to Opco by the Second Lien Lender in the principal amount of XXXXXXXXXX $XXXXXXXXXX , secured by a perfected second priority interest in substantially all the assets of Opco and guaranteed by Forco, payable in full at maturity in XXXXXXXXXX ;

(uu) "Take Back Term Debt" means the new interest-bearing debt denominated in XXXXXXXXXX to be issued by Opco to the First Lien Lenders in satisfaction of a portion of the principal amount outstanding under the First Lien Debt equal to XXXXXXXXXX $XXXXXXXXXX . The Take Back Term Debt will be secured with a second priority security interest in substantially all the assets of Opco and will be guaranteed by New Forco. The maturity of the Take Back Term Debt will be on the XXXXXXXXXX anniversary of the Effective Date;

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

(ww) "TSO" means a CRA tax services office;

(xx) "ULC1" means XXXXXXXXXX , a private corporation and a TCC. ULC1's offices are located at XXXXXXXXXX . ULC1 has been treated as a disregarded entity for U.S. tax purposes;

(yy) "ULC2" means XXXXXXXXXX , a private corporation and a TCC. ULC2's offices are located at XXXXXXXXXX . ULC2 has been treated as a disregarded entity for U.S. tax purposes;

(zz) "ULC2 Promissory Note" means an amount of XXXXXXXXXX $XXXXXXXXXX owing by ULC2 to ULC1 bearing interest at a rate equivalent to the rate of interest payable under the Second Lien Term Loan plus XXXXXXXXXX % per annum, payable in full at maturity in XXXXXXXXXX;

(aaa) "undepreciated capital cost" ("UCC") has the meaning assigned by subsection 13(21);

(bbb) "US$" or "U.S. dollars" means American dollars;

(ccc) "Vanilla Loan 1" means a XXXXXXXXXX $XXXXXXXXXX subordinated interest-bearing promissory note issued by ULC1 to Forco, bearing interest at a rate equivalent to the rate of interest payable under the Second Lien Term Loan, payable in full at maturity in XXXXXXXXXX . Pursuant to the terms of the loan, the payment of the interest is deferred until the end of the second taxation year of ULC1 following the year in which the interest was incurred, at which point it shall be paid in cash. The interest so deferred does not bear interest; and

(ddd) "Vanilla Loan 2" means a XXXXXXXXXX $XXXXXXXXXX subordinated interest-bearing promissory note issued by Opco to LP bearing interest at a rate equivalent to the rate of interest payable under the Second Lien Term Loan plus XXXXXXXXXX % per annum, payable in full at maturity in XXXXXXXXXX . Pursuant to the terms of the loan, the payment of the interest is deferred until the end of the second taxation year of Opco following the year in which the interest was incurred, at which point it shall be paid in cash. The interest so deferred does not bear interest.

The facts, proposed transactions and the purposes of the proposed transactions are set out as follows:

FACTS

1. Forco is a privately held company domiciled in XXXXXXXXXX . Forco is a management holding company which forms, with its subsidiaries and affiliates, a group XXXXXXXXXX . Forco's taxation year-end is XXXXXXXXXX . Forco's consolidated sales for its financial year ended on XXXXXXXXXX totaled XXXXXXXXXX $XXXXXXXXXX with a consolidated net loss amounting to XXXXXXXXXX $XXXXXXXXXX .

2. XXXXXXXXXX

3. Forco's authorized share capital consists of voting common shares with a par value of XXXXXXXXXX $XXXXXXXXXX each.

4. Forco owns equity investments in wholly-owned and jointly-owned entities. The table below describes such equity investments as well as Forco's ACB and their estimated FMV at the time of the proposed transactions:

Entity ACB FMV

Wholly-owned

Opco XXXXXXXXXX XXXXXXXXXX
ULC1 XXXXXXXXXX XXXXXXXXXX

Jointly-owned (80%)

Foreign LP XXXXXXXXXX XXXXXXXXXX

5. Forco also owns the Vanilla Loan 1. The cost to Forco of the Vanilla Loan 1 is XXXXXXXXXX $XXXXXXXXXX and the FMV of the Vanilla Loan 1 is XXXXXXXXXX .

6. Latco is a private corporation domiciled in XXXXXXXXXX . All the shares of Latco are held by Foreign LP. Forco has an XXXXXXXXXX % interest in Foreign LP. The other XXXXXXXXXX % interest is held by XXXXXXXXXX , an arm's length corporation.

7. ULC1 is a wholly-owned subsidiary of Forco and a TCC. The authorized share capital of ULC1 consists of an unlimited number of common shares. ULC's taxation year-end is XXXXXXXXXX .

8. ULC1 owns equity investments in wholly-owned and jointly-owned entities. The table below describes such equity investments as well as ULC1's ACB and their estimated FMV at the time of the proposed transactions. These equity investments are capital properties of ULC1.

Entity ACB FMV

Wholly-owned

ULC2			  XXXXXXXXXX        XXXXXXXXXX 

Jointly-owned

Opco 			  XXXXXXXXXX        XXXXXXXXXX
(XXXXXXXXXX%)
LP                  XXXXXXXXXX        XXXXXXXXXX
(XXXXXXXXXX%)

9. ULC1 also owns the ULC2 Promissory Note and the ACB of such note is equal to its principal amount plus the amount of interest included in ULC1's income and added to the ACB of the ULC2 Promissory Note under subsection 52(1). The estimated FMV of the ULC2 Promissory Note is XXXXXXXXXX . The ULC2 Promissory Note is a capital property to ULC1.

10. ULC2 is a wholly-owned subsidiary of ULC1 and a TCC. ULC2 is an investment corporation which owns XXXXXXXXXX % of the issued and outstanding units of LP. The ACB of ULC2's partnership interest in LP is XXXXXXXXXX $XXXXXXXXXX and its estimated FMV is XXXXXXXXXX.

11. Opco is a private corporation governed by the CBCA and is a TCC. Opco is an XXXXXXXXXX corporation which forms, with Latco a XXXXXXXXXX group. Opco's taxation year-end is XXXXXXXXXX .

12. As of XXXXXXXXXX , the tax attributes of Opco, ULC1, ULC2 and LP were as follows:

Entity
Non-capital losses
Net Capital losses
CEC
UCC
Opco XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
ULC1
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
ULC2
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
LP
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

In addition, it is currently estimated that Opco will have an operating loss of approximately XXXXXXXXXX $XXXXXXXXXX for the XXXXXXXXXX taxation year.

13. The unconsolidated enterprise value of Opco is currently estimated at XXXXXXXXXX $XXXXXXXXXX . Based on this amount, it is currently estimated that the FMV of the depreciable property of Opco is XXXXXXXXXX $XXXXXXXXXX and the FMV of the eligible capital property of Opco is estimated at XXXXXXXXXX $XXXXXXXXXX .

14. Opco's authorized share capital consists of an unlimited number of voting common shares without par value. XXXXXXXXXX common shares are issued and outstanding. Forco owns XXXXXXXXXX common shares of Opco and ULC1 owns XXXXXXXXXX common shares of Opco. The ACB and PUC of each share of Opco owned by Forco and ULC1 is XXXXXXXXXX $XXXXXXXXXX .

15. LP owns the Vanilla Loan 2 and the ACB of such loan to LP is equal to its principal amount plus the amount of accrued and unpaid interest included in LP's income and added to its ACB pursuant to subsection 52(1). The FMV of the Vanilla Loan 2 is XXXXXXXXXX . The Vanilla Loan 2 is a capital property to LP.

XXXXXXXXXX Acquisition

16. On XXXXXXXXXX , Former Vendor and a group of private equity investors entered into an asset purchase agreement providing for the acquisition of substantially all the assets of Former Vendor for approximately XXXXXXXXXX $XXXXXXXXXX upon the satisfaction or waiver of certain conditions.

17. The following transactions took place on XXXXXXXXXX :

(i) Former Forco granted Vanilla Loan 1 to ULC1 and transferred XXXXXXXXXX $XXXXXXXXXX to ULC1 in consideration of a XXXXXXXXXX $XXXXXXXXXX non-interest bearing demand note;
(ii) ULC1 transferred XXXXXXXXXX $XXXXXXXXXX to Opco in exchange for XXXXXXXXXX common shares of Opco;
(iii) ULC1 made the ULC2 Promissory Note to ULC2;
(iv) ULC1 and ULC2 contributed XXXXXXXXXX $XXXXXXXXXX and XXXXXXXXXX $XXXXXXXXXX respectively to LP in consideration for LP units;
(v) LP granted the Vanilla Loan 2 to Opco;
(vi) Opco entered into the borrowing under the First Lien Term Loan and the Second Lien Term Loan;
(vii) Opco acquired substantially all the assets of the XXXXXXXXXX business formerly carried on by Former Vendor for approximately XXXXXXXXXX $XXXXXXXXXX . Opco funded the purchase price of the assets and the expenses relating to the acquisition using the proceeds of the First Lien Term Loan, the proceeds of the Second Lien Term Loan, the proceeds of the Vanilla Loan 2 and the XXXXXXXXXX $XXXXXXXXXX subscription price received from ULC1; and
(viii) Former Forco acquired Former Vendor's indirect XXXXXXXXXX % interest in Latco in exchange for shares representing approximately XXXXXXXXXX % of the issued and outstanding shares of Former Forco.

18. The exchange rate on XXXXXXXXXX , on the date of the borrowing under the First Lien Term Loan, was XXXXXXXXXX . Therefore, based on current exchange rates, Opco has a latent foreign exchange loss on the First Lien Term Loan.

19. On or about XXXXXXXXXX , Former Forco transferred all of its assets and liabilities to Forco in exchange for Forco shares. Former Forco was liquidated shortly after this transfer and the shares of Forco were distributed to its shareholders (which include the current shareholders of Forco). Forco then exchanged its XXXXXXXXXX $XXXXXXXXXX non-interest bearing demand note from ULC1 for XXXXXXXXXX common shares of ULC1.

20. The shareholders of Forco are as follows:

(i) XXXXXXXXXX , a limited liability company incorporated under the laws of XXXXXXXXXX which is owned by the private equity investors: XXXXXXXXXX %;
(ii) Former Vendor: XXXXXXXXXX %;
(iii) XXXXXXXXXX , and
(iv) Private shareholders: XXXXXXXXXX %.

The rights of the shareholders of Forco are governed by shareholders' agreements and related agreements, which contain standard tag-along and drag-along provisions.

Background of the proposed transactions & financial difficulty of Opco

21. Since XXXXXXXXXX , Opco has faced a significant deterioration in business conditions. XXXXXXXXXX

22. Subsequent to XXXXXXXXXX , Opco failed to make its interest payment due on
XXXXXXXXXX . As a result, Opco became in default under its First and Second Lien Credit Agreements.

23. Opco executed forbearance agreements with its First Lien and Second Lien Lender to address defaults under its credit agreements. In connection with the forbearance agreements, some of the provisions of the First Lien and Second Lien Credit Agreements have been amended for the term of the forbearance.

24. Opco, Forco, ULC1, ULC2, LP, the First Lien Lenders, the Hedge Bank, the Second Lien Lender, Former Vendor and holders of XXXXXXXXXX % of the common shares of Forco have executed a Restructuring and Lock-Up Agreement dated as of XXXXXXXXXX which will provide, among other things, for a consensual out-of-court restructuring of Opco, Forco and the other entities in the group in a manner that is consistent with the proposed transactions described below. XXXXXXXXXX .

PROPOSED TRANSACTIONS

Waiver of interest under Vanilla Loan 1

25. On XXXXXXXXXX , the accrued and unpaid interest on the Vanilla Loan 1 in respect of the XXXXXXXXXX taxation year of ULC1 was forgiven by Forco.
The transactions described in Paragraphs 26 to 42 will take place on the Effective Date.

Elimination of the Vanilla Loan 2

26. Opco will incorporate Newco. Upon incorporation, Opco will subscribe for common shares of Newco for a nominal consideration.

27. LP will transfer the Vanilla Loan 2 (including all accrued interest thereon) to Newco in exchange for a new promissory note in an amount equal to the FMV of the Vanilla Loan 2, which is currently estimated at XXXXXXXXXX $XXXXXXXXXX .

28. Newco will be wound-up into Opco and subsequently dissolved. An election will be filed under subsection 80.01(4) to deem the Vanilla Loan 2 to have been settled for an amount equal to its cost amount to Newco calculated in accordance with subparagraphs 80.01(4)(c)(i) and (ii).

Liquidation of LP

29. LP will be liquidated into ULC1 and ULC2. The property of the partnership will be distributed among its members based on their respective partnership interest.

Transfer of shares of Opco by ULC1 to Forco

30. The shares of Opco owned by ULC1 will be sold to Forco for (XXXXXXXXXX $XXXXXXXXXX ), which represents their FMV.
Wind-up of ULC2 into ULC1 and forgiveness of accrued interest

31. ULC2 will be wound-up into ULC1. An election will be filed under subsection 80.01(4) to deem the ULC2 Promissory Note to have been settled for an amount equal to the cost amount to ULC1 calculated in accordance with paragraphs 80.01(4)(c)(i) and (ii).

32. The remaining accrued and unpaid interest on the Vanilla Loan 1 will be forgiven by Forco.
The steps in Paragraphs 33 to 36 will occur simultaneously immediately before the Effective Time.

Settlement of the amounts owing under the First Lien Credit Agreement and Second Lien Term Loan and Acquisition of Forco Shares

33. The First Lien Lenders will assign to New Forco a portion of the principal amount owing under the First Lien Debt and all related security and guarantee rights in exchange for New Forco shares equivalent to XXXXXXXXXX % of the equity of New Forco that will be outstanding following the acquisition of New Forco shares by the First Lien Lenders as described in this Paragraph 33 and by the Second Lien Lender as described in paragraph 35. The principal amount of the First Lien Debt transferred will be equal, in the aggregate, to XXXXXXXXXX % of the difference (XXXXXXXXXX ) between (a) the consolidated enterprise value of Opco and Latco and (b) the aggregate of the amount of the Take Back Term Debt, the amount of the ABL Credit Facility, the amount of the Canco Promissory Note to be issued to Canco and other external post-restructuring long term liabilities outstanding immediately after the proposed transactions, which difference is expected to be approximately the equivalent in XXXXXXXXXX $ of XXXXXXXXXX $XXXXXXXXXX . The principal amount of First Lien Debt assigned by each particular First Lien Lender will be equal to the total FMV of the shares of New Forco issued to the particular First Lien Lender, as described in subparagraph (a) and (b) below. The assignment agreement will provide that the price paid by New Forco will be equal to the FMV of the principal amount of the First Lien Debt (and all related security and guarantee rights) that is assigned to New Forco. In determining the principal amount of the First Lien Debt that will be assigned by, and the FMV of the New Forco shares that will be issued in consideration for the assignment of a portion of the First Lien Debt to, each particular First Lien Lender:

(a) shares representing XXXXXXXXXX % of the outstanding New Forco equity, at that time, will be issued to the First Lien Lenders on a pro rata basis based on the total amount of the First Lien Debt owing to each First Lien Lender; and

(b) shares representing XXXXXXXXXX % of the outstanding New Forco equity, at that time, will be issued to the First Lien Lenders on a pro rata basis based on the total amount of the commitments held by each First Lien Lender who participates in the new ABL Credit Facility.

34. The First Lien Lenders will exchange XXXXXXXXXX $XXXXXXXXXX of the principal amount outstanding under the First Lien Debt for the Take Back Term Debt.

35. In settlement and extinguishment of the Second Lien Debt (and all related security and guarantee rights), the Second Lien Lender will receive shares of New Forco representing XXXXXXXXXX % of the New Forco equity outstanding at that time. In consideration of the issuance of shares of New Forco to the Second Lien Lender, Opco will issue non-interest bearing debt to New Forco for the value of the New Forco shares issued to the Second Lien Lender. The principal amount of the debt will be subject to a price adjustment clause.

36. The First Lien Lenders will forgive all remaining amounts outstanding under the First Lien Credit Agreement, including all accrued and unpaid interest, but excluding, for greater certainty, the portion of the principal amount of the First Lien Debt that is assigned to New Forco and the portion of the principal amount of the First Lien Debt that is exchanged for the Take Back Term Debt.

Acquisition of Forco common shares

37. At the Effective Time, New Forco will acquire XXXXXXXXXX % of the existing common shares of Forco for a nominal consideration (i.e. total purchase price of XXXXXXXXXX $XXXXXXXXXX ), being their estimated FMV, pursuant to a share purchase agreement with the existing shareholders of Forco, thereby triggering an acquisition of control of Forco and its direct and indirect subsidiaries. Opco and ULC1 will each elect in their return of income for their respective Acquisition of Control Taxation Year not to have subsection 256(9) apply.

Other transactions

38. In connection with its release and settlement of claims and contractual concessions, Opco will issue to Canco an unsecured promissory note denominated in XXXXXXXXXX $ payable XXXXXXXXXX and bearing interest at a rate equal to the interest rate payable under the Take-Back Debt (the "Canco Promissory Note"). The principal amount of the Canco Promissory Note will be equal to the FMV of XXXXXXXXXX % of the equity of New Forco on a fully diluted basis, which is currently estimated at XXXXXXXXXX $ XXXXXXXXXX . The principal amount of the Canco Promissory Note will be subject to a price adjustment clause. Provided that the proposed addition of section 56.4 is enacted in substantially the same form as was described in section 71 of former Bill C-10, which received second reading in the Senate on December 4, 2007 in the 2nd Session of the 39th Parliament, Canco and Opco intend to make an election under paragraph 56.4(3)(b) such that the amount of the Canco Promissory Note will be required by the description of E of the definition of CEC to be included in computing Canco's CEC.

39. Canco will endorse the Canco Promissory Note to New Forco in payment of the subscription price for XXXXXXXXXX % of the shares of New Forco on a fully diluted basis.

40. All existing share options, warrants, restricted share units and other equity interests relating to Forco which are not otherwise converted into shares of Forco on or prior to the Effective Time and transferred to New Forco pursuant to Paragraph 37 above, and all stock option, long term incentive and similar plans and agreements relating thereto, will be terminated and/or cancelled for no consideration.

41. Forco's existing shareholders agreements and related agreements will be terminated upon the transfer of the Forco shares by the shareholders of Forco to New Forco.

42. The terms of the First Lien Debt that is assigned to Forco in Paragraph 33 above will be modified to, in particular, set the interest rate at XXXXXXXXXX %, and provide that the amount owing is denominated in Canadian currency, and extend the maturity date to XXXXXXXXXX . The terms of the Vanilla Loan 1 will also be modified to set its interest rate at XXXXXXXXXX %. The terms of the Canco Promissory Note will also be modified to set its interest rate at XXXXXXXXXX %.

43. New Forco will issue to current Opco management, subject to vesting conditions, options or restricted stock units to acquire New Forco equity representing XXXXXXXXXX % of the New Forco equity, plus at the discretion of the New Forco Board from time to time, discretionary options or restricted stock units up to an additional XXXXXXXXXX % of the New Forco equity outstanding on the Effective Date.

PURPOSE OF THE PROPOSED TRANSACTIONS

44. The proposed transactions will accomplish a significant de-leveraging of Opco's balance sheet. Opco's debt owing to First Lien Lenders and to the Second Lien Lender will be reduced from approximately XXXXXXXXXX $XXXXXXXXXX to XXXXXXXXXX $XXXXXXXXXX and the debt owing to other external creditors will be significantly reduced, thus reducing debt service obligations going forward. The debt reduction would improve Opco's ability to access the capital markets in the future and to attract and retain employees, customers and suppliers. The successful implementation of the proposed transactions described herein is expected to be a significant positive step in assisting Opco to execute its business plan.

RULINGS GIVEN

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 that the proposed transactions are completed in the manner described above, we rule as follows:

A. The forgiveness of the accrued and unpaid interest on the Vanilla Loan 1 as described in Paragraphs 25 and 32 above will not result in any withholding tax under paragraph 212(1)(b).

B. Provided that the accrued and unpaid interest on the Vanilla Loan 1 up to and until the time of the forgiveness as described in Paragraph 25 and 32 above constitutes a commercial obligation, section 80 will apply to the forgiven amount resulting from that forgiveness.

C. Subsection 78(1) will not apply to require ULC1 to include in its income any of the accrued and unpaid interest on the Vanilla Loan 1 that is forgiven.

D. Paragraphs 40(2)(e.1) and 53(1)(f.11) will apply to the disposition of the Vanilla Loan 2 by LP to Newco such that (i) the capital loss realized by LP will be deemed to be nil, and (ii) the ACB to Newco of the Vanilla Loan 2 will be increased by an amount equal to the amount of the loss so denied.

E. Provided the election referred to in subsection 80.01(4) is filed in a timely manner, the extinction of the Vanilla Loan 2 and all accrued interest thereon as a result of the wind-up of Newco will not give rise to a forgiven amount for Opco for the purposes of section 80.

F. The aggregate cost of the First Lien Debt to New Forco will be equal to the aggregate FMV of the shares of New Forco issued to the First Lien Lenders.

G. The specified cost (as defined in subsection 80.01(1)) to New Forco of the aggregate principal amount of First Lien Debt assigned to New Forco in Paragraph 33 above will be equal to the principal amount of such debt. As a result, the assignment to New Forco of a portion of the principal amount outstanding under the First Lien Debt as described in Paragraph 33 above will not give rise to a forgiven amount for the purposes of section 80.

H. Paragraph 80(2)(h) will apply to the exchange of a portion of the First Lien Debt for the Take Back Term Debt as described in Paragraph 34 above and it will not result in a forgiven amount for the purposes of section 80.

I. The assignment to New Forco of a portion of the principal amount outstanding under the First Lien Debt as described in Paragraph 33 above will not, in and of itself, result in a foreign exchange gain or loss to Opco under subsection 39(2).

J. To the extent that the value of the U.S. dollar relative to the Canadian dollar has increased between the time the First Lien Term Loan was issued by Opco and the time of the acquisition of the shares of Forco by New Forco described in Paragraph 37, Opco will be deemed to realize in the Acquisition of Control Taxation Year a capital loss pursuant to subsections 111(4) and (12) in respect of the portion of the principal amount of the First Lien Term Loan that is assigned to New Forco as described in Paragraph 33.

K. Subsections 111(5.1) and 111(5.2) will apply immediately before the Effective Time, and therefore, the maximum amounts that Opco would be able to designate under subsections 80(5) and 80(7) in respect of the settlement of the amount outstanding under the First Lien Credit Agreement and in respect of the settlement of the Second Lien Term Loan (described in Paragraphs 35 and 36 above) would be equal respectively to the FMV of its depreciable properties and to 3/4 of the FMV of its eligible capital properties.

L. Provided Opco designates amounts under subsections 80(5) and 80(7) to the maximum extent permitted in respect of the settlement of the amount outstanding under the First Lien Credit Agreement and in respect of the settlement of the Second Lien Term Loan (described in Paragraphs 35 and 36 above), Opco will be deemed to have a capital gain for the year from the disposition of capital property equal to the amount determine under paragraph 80(12)(a).
M. The amendments of the terms of the Vanilla Loan 1, the amendments of the terms of the First Lien Credit Agreement and the amendment of the terms of the Canco Promissory Note described in Paragraph 42 above will not give rise to a forgiven amount for the purposes of section 80.

N. Subsection 245(2) 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.
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 described in Paragraphs 26 to 42 above are completed 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 into law, could have an effect on the rulings provided herein.

COMMENTS

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

(a) the amount of any non-capital loss, net capital loss, undepreciated capital cost of depreciable property, adjusted cost base of any property or any other amount of any corporation referred to herein;

(b) the FMV of any property referred to herein;

(c) the application or non-application of the general anti-avoidance provisions of any province; and

(d) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch