2010 Ruling 2009-0349701R3 - Article XXIX-A (US Treaty)

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: (i) Whether the Limitation on Benefits provisions in the Canada-US Income Tax Convention (the "Convention") applies to the situation? (ii) Whether the return of capital by Canco to USHoldco be considered as stripping the surplus of CanSubco for Canadian tax purposes? (iii) Whether subsections 15(2) and 17(1) apply? (iv) Whether the net capital loss can be used to reduce a forgiven amount?

Position: (i) No. (ii) No. (iii) No. (iv) Yes.

Reasons: (i) It is reasonable to accept that the capital gains realized by USSubco on the disposition of the shares of CanSubco in the course of the winding-up of USSubco would qualify for the active trade or business test described in Article XXIX-A(3) of the Convention. (ii) The distribution from Canco represents a real return of capital formerly contributed to Canco by USHoldco. (iii) Note 1 and Note 2 will be outstanding for less than a year and the back-to-back provisions of section 17 would not apply. (iv) the net capital loss meets the requirements specified in the term "relevant loss balance" in subsection 80(1) and is thus forms part of the relevant loss balance for the purposes of the debt forgiveness provisions.

XXXXXXXXXX
						2009-034970
						XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX , 2010

Dear Sirs or Madams:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the additional information you provided in your revised ruling requests of XXXXXXXXXX .

To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayers or a related person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Unless otherwise stated, all references to a statute are references to the provisions of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) as amended to the date hereof (the "Act"), and every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.

Definitions

In this letter the following terms have the meanings specified:

(a) "ACB" means "adjusted cost base" as that expression is defined in section 54;

(b) "Amalco" means a corporation to be formed under the XXXXXXXXXX as a result of the amalgamation of Canco and CanSubco as described in paragraph 35 below;

(c) "Acquisitionco" means XXXXXXXXXX ;

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

(e) "Bankruptcy Code" means Chapter 11 of title 11 of the United States Code, as amended to the date hereof;

(f) "Canco" means XXXXXXXXXX ;

(g) "CanSubco" means XXXXXXXXXX ;

(h) "capital gain" has the meaning assigned by section 39;

(i) "capital loss" has the meaning assigned by section 39;

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

(k) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

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

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

(n) "disposition" has the meaning assigned by subsection 248(1);

(o) "equity percentage" has the meaning assigned by subsection 95(4);

(p) "Exchange" means the XXXXXXXXXX Stock Exchange;

(q) "foreign affiliate" has the meaning assigned by subsection 95(1);

(r) "forgiven amount" has the meaning assigned by subsection 80(1);

(s) "IRC" means the U.S. Internal Revenue Code of 1986, as amended to the date hereof;

(t) "Liquidating Trust" means the trust created as part of the proceedings governed by the United States Bankruptcy Court for the purpose of collecting, holding, administering, distributing and liquidating the assets of US Parentco for the benefit of creditors in accordance with those proceedings;

(u) "Note 1" means the non-interest-bearing demand promissory note issued by Targetco to Old CanSubco on XXXXXXXXXX with a principal amount of $XXXXXXXXXX , denominated in Canadian currency;

(v) "Note 2" means the non-interest-bearing demand promissory note issued by Targetco to Old CanSubco on XXXXXXXXXX with a principal amount of $XXXXXXXXXX , denominated in Canadian currency;

(w) "Note 3" means the non-interest-bearing demand promissory note issued by Canco to CanSubco on XXXXXXXXXX with a principal amount of $XXXXXXXXXX , denominated in Canadian currency;

(x) "Note 4" means the non-interest-bearing demand promissory note issued by Canco to CanSubco on XXXXXXXXXX with a principal amount of $XXXXXXXXXX , denominated in Canadian currency;

(y) XXXXXXXXXX

(z) "Old CanSubco" means XXXXXXXXXX , a predecessor corporation of CanSubco;

(aa) XXXXXXXXXX

(bb) "Proposed Transactions" means the transactions described in paragraphs 31 to 37 below;

(cc) "PUC" means "paid-up capital" as that expression is defined in subsection 89(1);

(dd) "relevant loss balance" has the meaning assigned by subsection 80(1);

(ee) "SEC" means the U.S. Securities and Exchange Commission;

(ff) "stated capital" means "paid-up share capital" as that expression is defined for purposes of the XXXXXXXXXX ;

(gg) "Targetco" means XXXXXXXXXX , a predecessor corporation of USSubco;

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

(ii) "taxable capital gain" has the meaning assigned by section 38;

(jj) "Trade Name1" means XXXXXXXXXX ;

(kk) "Trade Name2" means XXXXXXXXXX ;

(ll) "Treaty" means The Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital signed on September 26, 1980, as Amended by Protocols Signed on June 14, 1982, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007 and unless otherwise stated, every reference herein to an Article is a reference to the corresponding provision of the Treaty;

(mm) "treaty-exempt property" has the meaning assigned by subsection 116(6.1);

(nn) "treaty-protected property" has the meaning assigned by subsection 248(1);

(oo) "USHoldco" means XXXXXXXXXX ;

(pp) "USParentco" means XXXXXXXXXX ;

(qq) "USParentco Group" means USParentco and all its direct and indirect subsidiaries;

(rr) "USSubco" means XXXXXXXXXX , a corporation formed as a result of the merger of Acquisitionco and Targetco as described in paragraph 23 below;

(ss) "Wco" means XXXXXXXXXX ;

(tt) "Xco" means XXXXXXXXXX ;

(uu) "Yco" means XXXXXXXXXX ; and

(vv) "Zco" means XXXXXXXXXX .

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

General

1. USParentco is a corporation that was incorporated under the laws of the State of XXXXXXXXXX . USParentco is a non-resident of Canada for purposes of the Act and is a resident of the U.S. for purposes of the Treaty. The authorized share capital of USParentco consists of XXXXXXXXXX common shares (with a par value of US$XXXXXXXXXX per share) and XXXXXXXXXX preferred shares (with a par value of US$XXXXXXXXXX per share). There are no issued and outstanding preferred shares in the capital stock of USParentco and, as of XXXXXXXXXX, there were XXXXXXXXXX issued and outstanding common shares in the capital of USParentco. Prior to XXXXXXXXXX , the common shares in the capital stock of USParentco were listed, and primarily and regularly traded, on the Exchange. USParentco has a XXXXXXXXXX year-end for purposes of the IRC.

2. USParentco is the parent of a number of wholly-owned direct and indirect subsidiaries including USHoldco, Canco, USSubco and CanSubco. Historically, the USParentco group was a specialty retailer of XXXXXXXXXX and had the following XXXXXXXXXX reportable segments:

(a) the U.S. domestic segment, comprised of the operations of USParentco, which was engaged in the business of selling XXXXXXXXXX and related services in stores located in the U.S. and via the internet; and

(b) the international segment, comprised primarily of the operations of CanSubco, which was engaged in the business of selling XXXXXXXXXX in Canada and via the internet, primarily under Trade Name2.

3. USParentco's required regulatory filing with the SEC for the quarterly period ending XXXXXXXXXX contains the following information with respect to the USParentco group's XXXXXXXXXX reportable segments:

(a) Domestic - this segment operated XXXXXXXXXX superstores and XXXXXXXXXX outlet stores in XXXXXXXXXX U.S.XXXXXXXXXX markets, had assets of US$XXXXXXXXXX , and, XXXXXXXXXX this segment had net sales of US$XXXXXXXXXX gross profit of US$XXXXXXXXXX and selling, general and administrative expenses of US$XXXXXXXXXX ; and

(b) International - this segment conducted business through XXXXXXXXXX retail stores and dealer outlets, which consisted of XXXXXXXXXX company-owned stores and XXXXXXXXXX dealer outlets, had assets of US$ XXXXXXXXXX , and, XXXXXXXXXX this segment had net sales of US$XXXXXXXXXX gross profit of US$XXXXXXXXXX and selling, general and administrative expenses of
US$XXXXXXXXXX .

4. USHoldco is a corporation that was incorporated under the laws of the State of XXXXXXXXXX on XXXXXXXXXX . USHoldco is a non-resident of Canada for purposes of the Act and is a resident of the U.S. for purposes of the Treaty. The authorized share capital stock of USHoldco consists of XXXXXXXXXX common shares (with a par value of US$XXXXXXXXXX per share). There are XXXXXXXXXX issued and outstanding common shares in the capital stock of USHoldco, all of which are owned by USParentco. USHoldco has a XXXXXXXXXX year-end for purposes of the IRC.

5. Canco is an unlimited liability company that was incorporated under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX . Canco is a resident of Canada for purposes of the Act and the Treaty and is a taxable Canadian corporation. The authorized share capital of Canco consists of XXXXXXXXXX common shares with XXXXXXXXXX par value. All of the XXXXXXXXXX issued and outstanding common shares in the capital stock of Canco are owned by USHoldco. USHoldco holds the issued and outstanding common shares in the capital stock of Canco as capital property and such shares have an aggregate ACB to USHoldco, and stated capital and PUC, of $XXXXXXXXXX . Canco has a XXXXXXXXXX year-end for purposes of the Act. Pursuant to a "check-the-box" election filed by USParentco under the IRC, Canco is treated as disregarded for U.S. federal income tax purposes.

6. Canco's mailing address is XXXXXXXXXX . Canco's business number is XXXXXXXXXX and it files its tax returns with the XXXXXXXXXX Taxation Centre.

7. USSubco is the surviving corporation from a merger of Acquisitionco and Targetco under the laws of the State of XXXXXXXXXX on XXXXXXXXXX when Acquisitionco merged with and into Targetco as described in paragraph 23 below. USSubco is a non-resident of Canada for purposes of the Act and is a resident of the U.S. for purposes of the Treaty. The authorized share capital of USSubco consists of XXXXXXXXXX common shares (with a par value of US$XXXXXXXXXX per share) and XXXXXXXXXX preferred shares (with a par value of US$XXXXXXXXXX per share), issuable in series. USSubco is authorized to issue XXXXXXXXXX Series A preferred shares and XXXXXXXXXX Series B preferred shares, which have the following attributes:

(a) Series A preferred shares entitle the holder to XXXXXXXXXX votes per share, to non-cumulative dividends, when, as and if declared, at a rate of XXXXXXXXXX % of US$XXXXXXXXXX every XXXXXXXXXX weeks, are redeemable and retractable for US$XXXXXXXXXX per share, plus any declared and unpaid dividends and have priority over the common shares in the event of a liquidation or dissolution of USSubco; and

(b) Series B preferred shares are non-voting, entitle the holder to non-cumulative dividends, when, as and if declared, at a rate of XXXXXXXXXX % of US$XXXXXXXXXX every XXXXXXXXXX weeks, are redeemable and retractable for US$XXXXXXXXXX per share, plus any declared and unpaid dividends and have priority over the common shares and the Series A preferred shares in the event of a liquidation or dissolution of USSubco.

There are XXXXXXXXXX issued and outstanding common shares in the capital stock of USSubco, all of which are owned by USHoldco. USHoldco holds the issued and outstanding common shares in the capital stock of USSubco as capital property and such shares have an aggregate ACB to USHoldco of $XXXXXXXXXX , as converted into Canadian dollars using historic exchange rates. There are XXXXXXXXXX issued and outstanding Series A preferred shares, and XXXXXXXXXX issued and outstanding Series B preferred shares, in the capital stock of USSubco, all of which are owned by Canco. Canco holds the issued and outstanding Series A and Series B preferred shares in the capital stock of USSubco as capital property, the Series A preferred shares have an aggregate ACB to Canco of $XXXXXXXXXX and the Series B preferred shares have an aggregate ACB to Canco of $XXXXXXXXXX . USSubco has a XXXXXXXXXX year-end for purposes of the IRC.

8. USSubco' business number is XXXXXXXXXX . As described in paragraph 21 below, USSubco sold its Canadian branch operations in XXXXXXXXXX and the last Canadian income tax return filed, and required to be filed, by USSubco was in respect of its XXXXXXXXXX taxation year. Since the sale of its Canadian branch operations, USSubco has not had a permanent establishment in Canada for purposes of the Act or the Treaty.

9. CanSubco is the successor corporation from the vertical short-form amalgamation of Old CanSubco and Xco (whose shares Old CanSubco acquired on XXXXXXXXXX ) under the XXXXXXXXXX on XXXXXXXXXX . Old CanSubco was incorporated in XXXXXXXXXX on XXXXXXXXXX . On XXXXXXXXXX , Old CanSubco continued from XXXXXXXXXX to XXXXXXXXXX and on XXXXXXXXXX , Old CanSubco continued from XXXXXXXXXX to XXXXXXXXXX . CanSubco is a resident of XXXXXXXXXX for purposes of the Act and the Treaty and is a taxable Canadian corporation. There are XXXXXXXXXX issued and outstanding common shares in the capital stock of CanSubco, all of which are owned by USSubco. USSubco holds the issued and outstanding common shares in the capital stock of CanSubco as capital property and such shares have a nominal ACB and PUC. CanSubco has a XXXXXXXXXX year-end for purposes of the Act.

10. CanSubco's mailing address is XXXXXXXXXX . CanSubco's business number is XXXXXXXXXX and its deals with the XXXXXXXXXX Tax Services Office and files its tax returns with the XXXXXXXXXX Taxation Centre.

11. Targetco was a corporation incorporated under the laws of the State of XXXXXXXXXX and was dealing at arm's length with USParentco and its subsidiaries prior to the acquisition of its shares by Acquisitionco as described in paragraph 19 below.

12. USParentco indirectly acquired Targetco pursuant to a tender offer in XXXXXXXXXX . At the time of the acquisition, the common shares in the capital stock of Targetco were traded on the Exchange. In addition, at the time of the acquisition, Old CanSubco was a wholly-owned subsidiary of Targetco and Old CanSubco held a number of common shares in the capital stock of Targetco. Details relating to Old CanSubco's upstream shareholdings in Targetco and the XXXXXXXXXX acquisition of Targetco by USParentco are described in more detail in paragraphs 13 to 25 below.

Upstream Shareholdings

13. CanSubco began to acquire common shares in the capital stock of Targetco on the open market in XXXXXXXXXX . On XXXXXXXXXX , CanSubco acquired additional common shares in the capital stock of Targetco on the open market such that it owned XXXXXXXXXX common shares. On XXXXXXXXXX , Targetco had approximately XXXXXXXXXX common shares issued, of which XXXXXXXXXX were outstanding and the balance was held in treasury by Targetco. Consequently, as a result of the common share acquisition by CanSubco on XXXXXXXXXX , its equity percentage in Targetco exceeded XXXXXXXXXX % as computed without reference to the treasury shares. At no time prior to XXXXXXXXXX did the equity percentage of CanSubco, and each person related to CanSubco, in Targetco exceed XXXXXXXXXX %. Targetco thereby became a foreign affiliate of CanSubco on XXXXXXXXXX , and remained a foreign affiliate of CanSubco until XXXXXXXXXX when such shares, together with common shares acquired by CanSubco after XXXXXXXXXX , were disposed of by CanSubco as further described in paragraph 20 below.

14. On XXXXXXXXXX , the common shares in the capital stock of Targetco last traded at a price of US$XXXXXXXXXX per share. In the XXXXXXXXXX days prior to, and including XXXXXXXXXX , the common shares in the capital stock of Targetco had traded for between US$XXXXXXXXXX and US$XXXXXXXXXX per share. An average of the trading values for this period indicates that Targetco's market capitalization value on XXXXXXXXXX was approximately US$XXXXXXXXXX (approximately $XXXXXXXXXX ). As the net assets of Targetco in its financial statements on XXXXXXXXXX , excluding its investment in CanSubco, was US$XXXXXXXXXX that were comprised mainly of cash, short-term investments and accounts receivable (third party and intercompany), net of liabilities such as accounts payable, accruals and other non-current liabilities, the vast majority of Targetco's value of approximately US$XXXXXXXXXX (i.e. approximately US$XXXXXXXXXX ) was attributable to its investment in CanSubco.
USParentco's Acquisition of Targetco

15. USParentco incorporated Acquisitionco under the laws of the State of XXXXXXXXXX on XXXXXXXXXX to effect the acquisition of Targetco. Acquisitionco was a non-resident of Canada for purpose of the Act. The authorized share capital of Acquisitionco consisted of XXXXXXXXXX common shares (with a par value of US$XXXXXXXXXX per share) and XXXXXXXXXX preferred shares (with a par value of US$XXXXXXXXXX per share), issuable in series. The XXXXXXXXXX series of preferred shares in the capital stock of Acquisitionco, being Series A and Series B preferred shares, had the same attributes as the Series A preferred shares and the Series B preferred shares in the capital stock of USSubco described in paragraph 7 above. On XXXXXXXXXX , USParentco subscribed for XXXXXXXXXX common shares in the capital stock of Acquisitionco for US$XXXXXXXXXX .

16. On XXXXXXXXXX , USParentco, Acquisitionco and Targetco entered into an acquisition agreement and an agreement and plan of merger pursuant to which Acquisitionco agreed to make a tender offer to acquire all of the issued and outstanding common shares in the capital stock of Targetco for US$XXXXXXXXXX per share and to subsequently merge with and into Targetco. Prior to this time, USParentco and its subsidiaries, on the one hand, and Targetco and its subsidiaries, on the other hand, dealt with each other at arm's length.

17. USHoldco and Canco were also incorporated in connection with the acquisition of Targetco. The incorporator of Canco received one common share in the capital stock of Canco on incorporation, which was subsequently transferred to USHoldco on XXXXXXXXXX for no consideration. USParentco subscribed for XXXXXXXXXX common shares in the capital stock of USHoldco for US$XXXXXXXXXX upon USHoldco's incorporation. On XXXXXXXXXX , USParentco contributed the XXXXXXXXXX common shares in the capital stock of Acquisitionco to USHoldco.

18. In order to provide Acquisitionco with sufficient cash to effect the acquisition of the Targetco common shares:

(a) USParentco, using its surplus cash from operations, made a cash contribution on XXXXXXXXXX of US$XXXXXXXXXX to USHoldco and another cash contribution of US$XXXXXXXXXX on XXXXXXXXXX ;

(b) USHoldco used a portion of the funds received from USParentco in (a) above to subscribe for XXXXXXXXXX common shares in the capital stock of Canco for $XXXXXXXXXX (being the Canadian dollar equivalent of US$XXXXXXXXXX );

(c) USHoldco used the balance of the funds received from USParentco in (a) above to subscribe for XXXXXXXXXX common shares in the capital stock of Acquisitionco for US$XXXXXXXXXX ; and

(d) Canco used the funds received from USHoldco in (b) above to subscribe for XXXXXXXXXX Series A preferred shares from treasury in the capital stock of Acquisitionco for $XXXXXXXXXX (being the Canadian dollar equivalent of US$XXXXXXXXXX ).

19. On XXXXXXXXXX , Acquisitionco acquired XXXXXXXXXX common shares in the capital stock of Targetco tendered by the public for cash proceeds of US$XXXXXXXXXX per share, representing approximately XXXXXXXXXX % of the outstanding common shares (not otherwise owned by CanSubco). At this time, Targetco became a foreign affiliate and a controlled foreign affiliate of Canco.

20. In order to eliminate the upstream shareholdings, on XXXXXXXXXX , CanSubco disposed of the XXXXXXXXXX issued and outstanding common shares in the capital stock of Targetco that it held to Targetco in exchange for fair market value consideration consisting of Note 1 with a principal amount of $XXXXXXXXXX . CanSubco has not owned any shares in the capital stock of Targetco (subsequently after the amalgamation described in paragraph 23 below, of USSubco) since this time.

21. On XXXXXXXXXX , Targetco transferred the assets of its Canadian branch to CanSubco for a purchase price equal to the fair market value of such assets, being $XXXXXXXXXX . CanSubco satisfied the purchase price by issuing XXXXXXXXXX common shares to Targetco and assuming liabilities in the amount of $XXXXXXXXXX . Targetco and CanSubco filed a section 85 election in respect of such transfer and the agreed amount in this election was $XXXXXXXXXX . Targetco obtained a section 116 certificate in respect of the foregoing asset transfer. CanSubco then assumed additional liabilities of Targetco's Canadian branch in the amount of $XXXXXXXXXX in exchange for the issuance of Note 2 by Targetco to CanSubco.

22. On XXXXXXXXXX , CanSubco transferred Note 1 and Note 2 to Canco in exchange for the issuance of Note 3 and Note 4, respectively, by Canco to CanSubco, with the same principal amounts as those in Note 1 and Note 2, respectively.

23. On XXXXXXXXXX , Acquisitionco and Targetco merged under the laws of XXXXXXXXXX with Targetco as the surviving company (hereinafter called "USSubco") in such a manner that, on and by virtue of the merger:

(a) the certificate of incorporation of Acquisitionco was effectively adopted as the certificate of incorporation of USSubco;

(b) Acquisitionco was merged with and into Targetco;

(c) each issued and outstanding share in the capital stock of Acquisitionco was converted into one share in the capital stock of USSubco;

(d) each issued and outstanding common share in the capital stock of Targetco owned by Acquisitionco and each common share held in treasury by Targetco was cancelled for no consideration; and

(e) each issued and outstanding common share in the capital stock of Targetco, other than those described in (d) above, were converted into a right to receive US$XXXXXXXXXX per share and such shares were cancelled.

24. On XXXXXXXXXX , Canco subscribed for XXXXXXXXXX Series B preferred shares in the capital stock of USSubco in exchange for the contribution by Canco to USSubco of Note 1 and Note 2. As a result of this contribution, the obligations of USSubco under Note 1 and Note 2 were paid in full and cancelled.

25. Until XXXXXXXXXX , CanSubco operated the Trade Name1 stores in Canada under a licensing agreement with Wco for the use of the Trade Name1 brand and trademarks. However, after the USParentco acquisition, USSubco and Wco came to an agreement in XXXXXXXXXX that CanSubco would no longer use the Trade Name1 brand or trademark in Canada. All CanSubco's corporate and dealer retail XXXXXXXXXX stores formerly known as Trade Name1 were rebranded and operated under Trade Name2.

Bankruptcy Proceedings

26. On XXXXXXXXXX :

(a) USParentco and each of its wholly-owned U.S. and XXXXXXXXXX subsidiaries voluntarily commenced bankruptcy proceedings under the Bankruptcy Code in the United States Bankruptcy Court, Eastern District of XXXXXXXXXX ;

(b) the common shares in the capital stock of USParentco were delisted from the Exchange; and

(c) CanSubco and Canco commenced a voluntary proceeding under the Companies' Creditors Arrangement Act (Canada) in the Province of XXXXXXXXXX .

27. After XXXXXXXXXX , USParentco and its U.S. and XXXXXXXXXX subsidiaries continued to operate as debtors in possession subject to the supervision of the courts and in accordance with the Bankruptcy Code. Under the Bankruptcy Code, USParentco and its U.S. and XXXXXXXXXX subsidiaries are required to comply with certain statutory reporting requirements, including the filing of monthly operating reports. USParentco and its U.S and XXXXXXXXXX subsidiaries were authorized to operate their business in the ordinary course, with transactions out of the ordinary course of business requiring court approval.

28. USParentco sought to close unprofitable stores in the U.S. and in furtherance of this objective, on XXXXXXXXXX , USParentco entered into a store closing agency agreement with third parties. Pursuant to this agreement, liquidation sales atXXXXXXXXXX stores in the U.S. began onXXXXXXXXXX and were concluded by XXXXXXXXXX . On XXXXXXXXXX , USParentco and its U.S. and XXXXXXXXXX subsidiaries entered into an agency agreement with third parties regarding the liquidation of their businesses. Pursuant to this agreement, the going-out-of business sales at USParentco's XXXXXXXXXX remaining stores in the U.S. were completed by XXXXXXXXXX . Since XXXXXXXXXX , USParentco and its U.S. and XXXXXXXXXX subsidiaries have effected sales of other types of assets, including real property, intellectual property and other miscellaneous assets, and these corporations continue to carry on various activities in the course of the businesses being wound-down.

29. Since XXXXXXXXXX , notwithstanding the delisting, USParentco's common shares continued to be traded over the counter and quotes for its common shares are made in the "pink sheets", an electronic quotation system.

30. On XXXXXXXXXX , CanSubco completed the sale of all its assets related to operations, (including the assumption of certain liabilities) to Yco, a corporation governed by the laws of Canada, and a subsidiary of Zco. Following this sale, CanSubco's primary assets are cash of approximately $XXXXXXXXXX , Note 3 and Note 4, before liabilities and CanSubco continues to carry on various activities in the course of its business being wound-down.
Proposed Transactions

31. USHoldco will transfer all of the issued and outstanding common shares in the capital stock of USSubco to Canco for a purchase price equal to the fair market value of such shares, which is expected to be nominal. Canco will satisfy the purchase price by issuing to USHoldco one common share in the capital stock of Canco having a fair market value equal to the purchase price.

32. CanSubco will, pursuant to the provisions of the XXXXXXXXXX , apply for and obtain a certificate of continuance to continue CanSubco as a company limited by shares under the XXXXXXXXXX . After the issuance of the foregoing certificate of continuance, by virtue of the provisions of the XXXXXXXXXX , CanSubco will be governed in all respects by the provisions of the XXXXXXXXXX , CanSubco will have all of the ancillary and other powers given to a company incorporated under the XXXXXXXXXX and any provision of the XXXXXXXXXX that applies only to companies incorporated or registered after a certain date will apply to CanSubco as if CanSubco had been incorporated or registered on the date of continuance. In addition, by virtue of the provisions of the XXXXXXXXXX , from and after the continuance, among other things:

(a) the share capital of CanSubco will be the existing share capital;

(b) the property of CanSubco will continue to be the property of CanSubco;

(c) CanSubco will continue to be liable for its obligations;

(d) none of CanSubco's rights or properties, and none of CanSubco's contracts or obligations, will be prejudicially affected nor will CanSubco be deemed to have been liquidated or dissolved;

(e) the directors and officers of CanSubco will continue to be the directors and officers of CanSubco; and

(f) all rights of the shareholders or members of CanSubco acquired, accrued, accruing or incurred on or before the continuance will continue in full force and effect without any change, except that CanSubco, as an unlimited liability company, will not have any limit on the liability of its shareholders or members.

33. USSubco will commence winding-up under the applicable Delaware law. In connection with the winding-up of USSubco, USSubco will distribute all of its property to Canco, including all of the issued and outstanding common shares in the capital stock of CanSubco, and all of the liabilities and obligations of USSubco will be assumed by Canco. In due course, USSubco will file certificate of dissolution and upon the effectiveness of the certificate of dissolution, the corporate existence of USSubco will cease and its shares will be cancelled. Canco will file a notice under subsection 116(5.02) in respect of the acquisition of the issued and outstanding common shares in the capital stock of CanSubco.

34. Liquidating Trust will be created by an act of the United States Bankruptcy Court and will become the direct or indirect holder of the shares of USHoldco. USHoldco's interest and shareholdings in Canco will remain unchanged.

35. Canco and CanSubco (referred to in this paragraph as "predecessor corporations") will effect a vertical short-form amalgamation under the provisions of the XXXXXXXXXX to form Amalco, an unlimited liability company, in such a manner that, on and by virtue of the amalgamation:

(a) the memorandum and articles of Canco will become the memorandum an articles of Amalco;

(b) all the shares in the capital stock of CanSubco that are owned or held by Canco immediately prior to the amalgamation will be cancelled for no consideration;

(c) none of the shares of Canco (other than any such shares owned by a predecessor corporation) will be cancelled on the amalgamation;

(d) all of the property (except any amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Amalco;

(e) all of the liabilities (except any amounts payable by any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco; and

(f) the obligations of Canco to CanSubco under Note 3 and Note 4 will be extinguished, resulting in a forgiven amount.
For greater certainty, as a result of the amalgamation of Canco and CanSubco, all of the shareholders of Canco immediately before the amalgamation will, pursuant to subsection 87(1.1), be considered to have received shares in the capital stock of Amalco for the purposes of paragraph 87(1)(c).

36. The Liquidating Trust will file a "check the box" election under the IRC so that Amalco will be treated as disregarded for U.S. federal income tax purposes. This election will be filed within the time provided in the IRC.

37. Once Amalco has settled all of the claims of Canadian creditors, and received the required approval of the relevant Canadian courts, Amalco will distribute its remaining cash to USHoldco as one or more returns of capital in respect of the common shares held by USHoldco. Following the foregoing transactions, in due course, Amalco will be liquidated and dissolved. As a result, any remaining unused portion of the capital loss referred to in paragraph 41 below will, at that time, disappear.

Additional Information

38. The Proposed Transactions will occur in the order presented, unless otherwise indicated.

39. The gain accrued on the common shares in the capital stock of CanSubco as of XXXXXXXXXX will exceed the gain to be realized by USSubco on the disposition of these shares upon its winding-up, as described in paragraph 33 above.

40. At the time of the winding-up of USSubco, as described in paragraph 33 above, the value of the common shares in the capital stock of CanSubco will not be derived principally from real property situated in Canada.

41. Canco will realize a capital loss on the disposition of the issued and outstanding shares of USSubco when such shares are cancelled on the dissolution of USSubco referred to in paragraph 33 above.

42. Prior to the event described in paragraph 34 above, the ACB of Note 3 and Note 4 to CanSubco is equal to the principal amount of each respective note.

43. Each of Canco and CanSubco will file tax returns on the basis that there has been an acquisition of control by the Liquidating Trust as a result of the event described in paragraph 34 above. As a result, the ACB of Note 3 and Note 4 owned by CanSubco immediately before the time of the acquisition of control is required to be reduced at and after that time by the excess immediately before that time of Note 3's and Note 4's ACB over its fair market value.

44. The capital loss referred to in paragraph 41 above is expected to exceed the forgiven amount resulting from the settlement of Note 3 and Note 4 upon the amalgamation of Canco and CanSubco referred to in paragraph 35 above. Such forgiven amount will, pursuant to subsection 80(4), be applied to reduce the capital loss referred to in paragraph 41.

45. The aggregate quantum of the returns of capital by Amalco, as described in paragraph 37 above, will not exceed the stated capital and PUC of the common shares in the capital stock of Amalco.
Purpose of the Proposed Transactions

46. Following the sale of all assets of CanSubco on XXXXXXXXXX , and the settlement of all remaining claims of Canadian creditors, any remaining assets of CanSubco (and subsequently Amalco) must be distributed to USHoldco in order to permit U.S. members of the USParentco Group to use these remaining proceeds to settle U.S. creditor obligations, pursuant to court orders to that effect. The purpose of the Proposed Transactions is, therefore, to ensure that the USParentco Group is able to return all remaining cash in Canada to the U.S. in the most efficient manner.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The continuance of CanSubco from XXXXXXXXXX to XXXXXXXXXX , as described in paragraph 32 above, will not, in and of itself, result in a disposition of the assets or settlement of the liabilities of CanSubco, or the disposition of any shares in the capital stock of CanSubco by USSubco, for purposes of the Act.

B. The capital gain realized by USSubco on the disposition of all of the issued and outstanding common shares in the capital stock of CanSubco upon its winding-up, as described in paragraph 33 above, will be exempt from Canadian taxation by virtue of paragraph 81(1)(a) and Article XIII of the Treaty because the shares are treaty-protected property.

C. Provided that Canco files the notice provided in subsection 116(5.02) in respect of the acquisition of the common shares in the capital stock of CanSubco from USSubco on its winding-up as described in paragraph 33 above, such shares will constitute treaty-exempt property such that USSubco will not be required to comply with the requirements of subsection 116(1) or (3) in respect of the disposition of such shares and Canco will not be subject to any liability under subsection 116(5) in respect of the acquisition of such shares.

D. Pursuant to the provisions of paragraph 95(2)(f.1), no amount of the capital gain realized by USSubco from the disposition of the common shares in the capital stock of CanSubco on the winding-up of USSubco as described in paragraph 33 above will be included in computing the taxable capital gain of USSubco for purposes of subdivision i of Division B of Part I of the Act. Accordingly, Canco will not be required to include any amount in respect of such taxable capital gain in its income pursuant to subsection 91(1).

E. In connection with the amalgamation of Canco and CanSubco, as described in paragraph 35 above:

(a) the provisions of section 87 will apply in respect of Canco and CanSubco;

(b) the provisions of subsection 87(4), other than paragraphs 87(4)(c), (d) and (e), will apply to USHoldco;

(c) subsection 80.01(3) will apply such that Note 3 and Note 4 will be deemed to have been settled immediately before the time that is immediately before the amalgamation by a payment made by Canco and received by CanSubco of an amount equal to the cost amount of Note 3 and Note 4 to CanSubco at that time as computed in accordance with subsection 80.01(3). The subsection 80.01(3) deemed settlement of Note 3 and Note 4 will result in a forgiven amount; and

(d) the provisions of section 80 will apply such that the relevant loss balance for Note 3 and Note 4, at the time of the subsection 80.01(3) deemed settlement referred to in Ruling E(c) above, will include the capital loss referred to in paragraph 41 above.

F. USHoldco will not be required to comply with the provisions of section 116 in respect of the disposition of the common shares in the capital stock of Canco upon the amalgamation of Canco and CanSubco, as described in paragraph 35 above.

G. With respect to the returns of capital on the common shares in the capital stock of Amalco, as described in paragraph 37 above:

(a) subject to the application of subsection 40(3), such returns of capital will not, in and of themselves, result in a disposition by USHoldco of the common shares in the capital stock of Amalco;

(b) provided that the aggregate quantum of the returns of capital do not exceed the PUC of the common shares in the capital stock of Amalco, subsection 84(4) will not apply to deem Amalco to have paid, and USHoldco to have received, a dividend;

(c) the amounts received by USHoldco on such returns of capital will be deducted in computing the ACB of USHoldco's common shares in the capital stock of Amalco pursuant to subparagraph 53(2)(a)(ii) to the extent that the amounts received are not deemed by subsection 84(4) to be a dividend;

(d) subsection 15(1) will not apply to include any amounts distributed to USHoldco as such returns of capital in computing the income of USHoldco for the year and paragraph 214(3)(a) will not apply to deem Amalco to have paid a dividend to USHoldco; and

(e) such returns of capital will not be subject to Part XIII withholding tax.

H. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings A to G above.

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

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Caveat

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed the following:

(i) the classification of any entity described in this ruling letter or

(ii) the ACB, cost amount, PUC or fair market value of any property described herein.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch