2010 Ruling 2009-0347041R3 - 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: Is the proposed loss consolidation acceptable?

Position: Yes

Reasons: Consistent with similar previous rulings and tax policy.

XXXXXXXXXX 							2009-034704

XXXXXXXXXX , 2010

Dear XXXXXXXXXX:

Re:
Advance Income Tax Ruling

XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling with respect to the above-noted taxpayers (the "Taxpayers") regarding the implementation of a loss consolidation transaction which, in very general terms, involves an internal reorganization and an adjustment of a previous loss consolidation structure between affiliated persons. We also acknowledge the additional information provided to us in your emails dated XXXXXXXXXX , as well as in our telephone discussions on XXXXXXXXXX .
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.

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

(i) in an earlier tax return of the Taxpayers or of a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of the Taxpayers or of a related person;
(iii) under objection by the Taxpayers or by a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling, other than the Initial Ruling, previously issued to the Taxpayers or a related person by the Income Tax Rulings Directorate.

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

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

Definitions

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

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

(b) "affiliated person" has the meaning assigned by subsection 69(11) of the Act;

(c) "Amalco" means XXXXXXXXXX , an amalgamated corporation governed by the XXXXXXXXXX . Amalco is a holding company that is a TCC and that holds XXXXXXXXXX common shares XXXXXXXXXX of Opco;

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

(e) "Daylight Loan" means the loan described in 28 below;

(f) "Debenture" means the convertible debenture described in 5 below;

(g) "XXXXXXXXXX " means XXXXXXXXXX , an affiliate of X, which holds the X Loan;

(h) "XXXXXXXXXX Shares" mean the XXXXXXXXXX (or XXXXXXXXXX ) shares described in 20 below;

(i) XXXXXXXXXX

(j) "Holdings" means XXXXXXXXXX . a corporation incorporated under the XXXXXXXXXX . On XXXXXXXXXX , Holdings was amalgamated with Parent as stated in 1 below to form Amalco;

(k) "Initial Ruling" means the ruling referred to in 5 below;

(l) "Lossco" means a subsidiary wholly-owned corporation to be formed by Amalco. Lossco will be incorporated under the XXXXXXXXXX as part of the Proposed Transactions. Lossco will be a TCC;

(m) "Lossco (XXXXXXXXXX )" means XXXXXXXXXX , a corporation incorporated under the XXXXXXXXXX . See 12 below for more details on the purpose of this corporation;

(n) "Lossco Loan" means the loan described in 29 below;

(o) "Newco (XXXXXXXXXX )" means XXXXXXXXXX , a corporation incorporated under the XXXXXXXXXX . See 12 below for more details on the purpose of this corporation;

(p) "New Daylight Loan" means the loan described in 34(b) below;

(q) "New Debenture Loan" means the loan described in 21(c) below;

(r) "Newparentco" means XXXXXXXXXX , a corporation to be incorporated under the XXXXXXXXXX as part of the Proposed Transactions. Newparentco's mailing address will be XXXXXXXXXX

(s) "Newparentco Loan" means the loan described in 31 below;

(t) "Newsubco" means a subsidiary wholly-owned corporation to be formed by Newparentco. Newsubco will be incorporated under the XXXXXXXXXX as part of the Proposed Transactions. Newsubco will be a TCC. Newsubco's mailing address will be XXXXXXXXXX ;

(u) "Newsubco Preferred Shares" mean the shares described in 22 below;

(v) "New X Loan" means the loan described in 21(h) below;

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

(x) XXXXXXXXXX

(y) "Opco" means XXXXXXXXXX , a corporation incorporated under the XXXXXXXXXX . Opco is a XXXXXXXXXX corporation that is a TCC;

(z) XXXXXXXXXX

(aa) "Parent" means XXXXXXXXXX , a corporation incorporated by X under the XXXXXXXXXX on XXXXXXXXXX . On XXXXXXXXXX , Parent was amalgamated with Holdings as stated in 1 below to form Amalco;

(bb) "XXXXXXXXXX Notes" mean the promissory notes issued by Amalco in respect of interest on the Debenture as described in 6 below;

(cc) "Proposed Transactions" mean the transactions described in 14 to 39 below;

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

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

(ff) "XXXXXXXXXX Shares" mean the XXXXXXXXXX (or XXXXXXXXXX ) shares described in 20 below;

(gg) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act;

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

(ii) "X" means the XXXXXXXXXX ;

(jj) "X Loan" means the long term debt described in 5 below; and

(kk) "YCo" means XXXXXXXXXX , a corporation incorporated under the XXXXXXXXXX and wholly-owned by XXXXXXXXXX , who is XXXXXXXXXX of Opco and Amalco.

Facts

1. Parent was incorporated for the purpose of purchasing all the shares of Holdings. On XXXXXXXXXX , Parent acquired, from arm's length parties, all the XXXXXXXXXX common shares of Holdings for consideration of approximately $XXXXXXXXXX . The acquisition was financed by the proceeds of the issuance of common shares for approximately $XXXXXXXXXX and the X Loan.

Amalco was formed on XXXXXXXXXX , pursuant to the amalgamation of Holdings and Parent. Amalco's mailing address is XXXXXXXXXX . It files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

2. Amalco has XXXXXXXXXX common shares issued and outstanding. X owns XXXXXXXXXX common shares (XXXXXXXXXX %) and a group of employees of Amalco and its affiliates, together, owns XXXXXXXXXX common shares (XXXXXXXXXX %). Each common share has one vote per share.

XXXXXXXXXX agreements have been entered into between Amalco and XXXXXXXXXX with respect to the common shares of Amalco held by XXXXXXXXXX .

3. Amalco also has XXXXXXXXXX issued and outstanding XXXXXXXXXX shares XXXXXXXXXX
XXXXXXXXXX

4. There is an agreement XXXXXXXXXX

5. Amalco's indebtedness consists primarily of long-term debt of approximately $XXXXXXXXXX (the "X Loan") and a convertible debenture with a face value of $XXXXXXXXXX (the "Debenture"). The X Loan is the same debt that was issued to finance the XXXXXXXXXX acquisition, as referred to in 1 above. The Debenture was issued on XXXXXXXXXX , as part of a loss consolidation arrangement for which ruling XXXXXXXXXX was obtained on XXXXXXXXXX , (the "Initial Ruling").

The Debenture held by X matures in XXXXXXXXXX , bears interest at a rate of XXXXXXXXXX % per annum, and is convertible into common shares of Amalco at a rate of one common share for every $XXXXXXXXXX of principal outstanding.

As at XXXXXXXXXX , the amount of the Debenture presented in Amalco's financial statements as equity was $XXXXXXXXXX and the other $XXXXXXXXXX was presented as debt.

The X Loan bears interest at the average annual rate for bankers' acceptances plus a factor depending on the debt-to-capital ratio of Amalco. The X Loan is presented as a liability for accounting purposes, net of approximately $XXXXXXXXXX of deferred debt financing costs as at XXXXXXXXXX

6. From time to time, Amalco issued promissory notes ("XXXXXXXXXX Notes") in respect of interest on the Debenture. Pursuant to section 78 of the Act, elections have been filed in respect of the Debenture interest deducted in XXXXXXXXXX . The elections deemed the interest to have been paid to X and subsequently borrowed therefrom. As at XXXXXXXXXX , the amount of the XXXXXXXXXX Notes was $XXXXXXXXXX , and this amount was reflected as debt in Amalco's financial statements. It is estimated that the amount as at XXXXXXXXXX , will be approximately $XXXXXXXXXX .

7. Amalco adopted a stock option plan which authorises the granting of service and performance options to certain employees and directors of Amalco and its affiliates. The holders of certain options are entitled to XXXXXXXXXX based on the XXXXXXXXXX (Similar XXXXXXXXXX have been declared but not yet paid on the common shares held by the employees and X.) There is a total of XXXXXXXXXX service and performance options outstanding in addition to another XXXXXXXXXX share options for a total of XXXXXXXXXX options.

8. Opco's mailing address is XXXXXXXXXX . It files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

Opco has XXXXXXXXXX common shares issued and outstanding. Amalco owns XXXXXXXXXX common shares (XXXXXXXXXX %), XXXXXXXXXX owns XXXXXXXXXX common shares XXXXXXXXXX and XXXXXXXXXX own XXXXXXXXXX common shares XXXXXXXXXX of Opco.

9. As of XXXXXXXXXX , Opco issued XXXXXXXXXX shares to YCo at an issue price of $XXXXXXXXXX per share.

XXXXXXXXXX

10. There is an agreement XXXXXXXXXX

11. As at XXXXXXXXXX , Opco had retained earnings of approximately $XXXXXXXXXX . As of XXXXXXXXXX , Opco had retained earnings of approximately $XXXXXXXXXX .

Since the acquisition referred to in 1 above, and up to the date of the Proposed Transactions, it is estimated that the undistributed retained earnings of Opco will have increased by approximately $XXXXXXXXXX .
At the commencement of the XXXXXXXXXX taxation year, Opco's non-capital loss carryforwards will be approximately $XXXXXXXXXX all of which will be the result of unwinding the loss consolidation pursuant to the Initial Ruling as described in 15 below. It is anticipated that Opco will utilise all of its non-capital loss carryforwards in its XXXXXXXXXX taxation year.

12. XXXXXXXXXX
Under the existing loss consolidation structure Amalco currently holds all of the common shares of Newco (XXXXXXXXXX ) and Lossco (XXXXXXXXXX ), both of which were set up solely for the purposes of the loss consolidation. Broadly described, originally the funds from a daylight loan were used by Amalco to make an interest bearing loan to Lossco (XXXXXXXXXX ), which then invested these funds in preferred shares of Newco (XXXXXXXXXX ). Newco (XXXXXXXXXX ) in turn lent the funds back to Amalco on an interest-free basis, so that Amalco could repay the debt. Amalco then made regular capital contributions to Newco (XXXXXXXXXX ) which in turn used the funds to pay dividends to Lossco (XXXXXXXXXX ). Lossco (XXXXXXXXXX ) would use these funds to pay the interest to Amalco. The interest deduction in Lossco (XXXXXXXXXX ) would create a loss that could eventually be used whenever the structure was unwound, as described in 15 below. Specifically, Amalco would contribute the shares of Lossco (XXXXXXXXXX ) to Opco which would liquidate Lossco (XXXXXXXXXX ).

If the loss consolidation pursuant to the Initial Ruling had not been implemented, it is estimated that by the end of its XXXXXXXXXX taxation year, Amalco would have had non-capital loss carryforwards of approximately $XXXXXXXXXX as a result of the interest payable on the Debenture and X Loan. This represents $ XXXXXXXXXX in losses from XXXXXXXXXX , $XXXXXXXXXX from XXXXXXXXXX , $XXXXXXXXXX from XXXXXXXXXX and $XXXXXXXXXX from XXXXXXXXXX .

13. Opco has a permanent establishment XXXXXXXXXX

Proposed Transactions

14. The Proposed Transactions described in 15 to 27 below have been completed.

15. In XXXXXXXXXX , Amalco unwound the current loss consolidation structure. Specifically, after all accrued interest and dividends had been paid by Newco (XXXXXXXXXX ) and Lossco (XXXXXXXXXX ), Amalco borrowed money on a daylight basis in order to repay the interest-free loan from Newco (XXXXXXXXXX ). Newco (XXXXXXXXXX ) used these funds to redeem the preferred shares held by Lossco (XXXXXXXXXX ), which then repaid the interest-bearing loan from Amalco. Amalco in turn repaid the daylight loan and contributed the shares of Lossco (XXXXXXXXXX ) to Opco. Amalco and Opco then proceeded, respectively, to liquidate Newco (XXXXXXXXXX ) and Lossco (XXXXXXXXXX ).

16. X incorporated Newparentco. The taxation year-end of Newparentco is XXXXXXXXXX . The activities of Newparentco will essentially be limited to the activities described in the Proposed Transactions, including the holding of X's investments in Amalco.
The authorized share capital of Newparentco consists of an unlimited number of common shares and XXXXXXXXXX shares.
The common shares of Newparentco are voting (XXXXXXXXXX ) and without par value. The holders of common shares are entitled to dividends at the discretion of the directors, and are entitled to receive the remaining property of the corporation upon its winding-up or dissolution.

The XXXXXXXXXX shares are voting (XXXXXXXXXX votes per share) XXXXXXXXXX

17. Newparentco issued 1 common share of its capital stock to X and XXXXXXXXXX shares to YCo at an issue price of $XXXXXXXXXX per share.

18. X and YCo entered into an agreement pertaining to the XXXXXXXXXX shares of Newparentco, which is similar in terms of terms and purpose as the agreements referred to in 4 and 10 above.

19. Newparentco entered into XXXXXXXXXX agreements in respect of the common shares of Amalco with XXXXXXXXXX referred to in 2 above on similar terms and conditions. Concurrently, the XXXXXXXXXX agreements described in 2 above were cancelled. Newparentco entered into similar XXXXXXXXXX agreements in respect of the options in Amalco held by XXXXXXXXXX . It should be noted that Amalco will have no liability in respect of these new XXXXXXXXXX agreements.

20. Amalco created two new categories of preferred shares: XXXXXXXXXX (or XXXXXXXXXX shares ("XXXXXXXXXX Shares")) and XXXXXXXXXX (or XXXXXXXXXX shares ("XXXXXXXXXX Shares")).

The main characteristics of the XXXXXXXXXX Shares are as follows:

(i) non-voting unless required by law;
(ii) entitlement to dividends equal on an annual basis to the aggregate of (i) the interest paid on the New X Loan and (ii) XXXXXXXXXX of the dividends paid on the Newsubco Preferred Shares;
(iii) entitlement, in the event of liquidation, to receive an amount equal to the sum of $XXXXXXXXXX per share plus any accrued but unpaid dividends;
(iv) priority over the other shares of Amalco in respect of dividend entitlement and liquidation entitlement; and
(v) redeemable, in whole or in part, at the option of Amalco for an amount equal to the sum of $XXXXXXXXXX per share plus accrued but unpaid dividends, if any.

The main characteristics of the XXXXXXXXXX Shares are as follows:

(i) non-voting unless required by law;
(ii) entitlement to a non-cumulative discretionary dividend as and when declared by the board of directors out of the earnings of Amalco properly applicable to the payment of the dividend;
(iii) entitlement, in the event of liquidation, to receive an amount equal to the sum of $XXXXXXXXXX per share plus accrued but unpaid dividends, if any;
(iv) priority over the other shares of Amalco ranking junior to the XXXXXXXXXX Shares in respect of dividend entitlement and liquidation entitlement; and
(v) redeemable, in whole or in part, at the option of Amalco for an amount equal to the sum of $XXXXXXXXXX per share plus accrued but unpaid dividends, if any.

21. On or about XXXXXXXXXX , the following steps were taken:

(a) Amalco settled prior periods' accrued dividends payable by issuing a stock dividend for approximately $XXXXXXXXXX in XXXXXXXXXX Shares to all shareholders. ($XXXXXXXXXX of these XXXXXXXXXX Shares will be issued to X.) The PUC of the XXXXXXXXXX Shares is XXXXXXXXXX per share.

(b) Pursuant to the terms of the Debenture, X converted the Debenture into XXXXXXXXXX common shares of Amalco.

(c) X made an unsecured loan of $XXXXXXXXXX to Newparentco (the "New Debenture Loan"). The New Debenture Loan matures XXXXXXXXXX years after its issuance and bears interest at XXXXXXXXXX %.

(d) X subscribed to XXXXXXXXXX common shares of Newparentco for $XXXXXXXXXX in cash.

(e) Newparentco subscribed to approximately XXXXXXXXXX Shares of Amalco for approximately $XXXXXXXXXX in cash. The cash used was from the share subscription in (d) above.

(f) Amalco paid approximately $XXXXXXXXXX to X to settle the XXXXXXXXXX Notes in full.

(g) Newparentco purchased from X its XXXXXXXXXX common shares of Amalco for approximately $XXXXXXXXXX in cash. Newparentco used the $XXXXXXXXXX from the New Debenture Loan for this purpose and financed the balance with cash from the share subscription in (d) above. Newparentco also purchased the $XXXXXXXXXX in XXXXXXXXXX Shares issued to X in (a) above for $XXXXXXXXXX in cash. The cash used was from the share subscription in (d) above.

(h) The XXXXXXXXXX made a loan for $XXXXXXXXXX to Newparentco (the "New X Loan") on similar terms and conditions as the existing X Loan. The interest will be paid on a XXXXXXXXXX basis.

(i) Newparentco subscribed for XXXXXXXXXX Shares of Amalco for $XXXXXXXXXX in cash. The cash used was from the New X Loan.

(j) Amalco used the proceeds of the XXXXXXXXXX Share subscription in (i) above to repay the X Loan.

22. In XXXXXXXXXX , Newparentco incorporated Newsubco. The taxation year-end of Newsubco is XXXXXXXXXX . The activities of Newsubco will essentially be limited to the activities described in the Proposed Transactions, including the investing of the proceeds received upon the issuance of its preferred shares to Lossco, as described in 30 below. Such proceeds will be loaned on a non-interest bearing basis to Newparentco as described in 31 below.

The authorized share capital of Newsubco consists of an unlimited number of common shares, XXXXXXXXXX shares and preferred shares (the "Newsubco Preferred Shares").

The common shares of Newsubco are voting (XXXXXXXXXX ) and without par value. The holders of common shares are entitled to dividends at the discretion of the directors, and are entitled to receive the remaining property of the corporation upon its winding-up or dissolution.
The XXXXXXXXXX shares are voting (XXXXXXXXXX votes per share) XXXXXXXXXX

The Newsubco Preferred Shares are non-voting and without par value. The Newsubco Preferred Shares are redeemable and retractable for a redemption price equal to the FMV of the consideration for which the shares were issued, plus any accrued but unpaid dividends. The holders of Newsubco Preferred Shares are entitled to cumulative dividends, calculated daily by reference to the redemption/retraction price of the Newsubco Preferred Shares at a rate equal to the interest rate on the Lossco Loan (as defined in 29 below) plus XXXXXXXXXX %. The dividends on the Newsubco Preferred Shares will be payable annually.

23. Newsubco issued XXXXXXXXXX common shares of its capital stock to Newparentco and XXXXXXXXXX shares to YCo, in each case for nominal consideration.

24. X and YCo entered into an agreement pertaining to the XXXXXXXXXX shares of Newsubco, which is similar in terms of terms and purpose as the agreements referred to in 4 and 10 above.

25. Amalco incorporated Lossco. The taxation year-end of Lossco is XXXXXXXXXX . The activities of Lossco will be essentially limited to the activities described in the Proposed Transactions, including the investing of the proceeds received upon the making of the Lossco Loan (as described in 29 below). Such Lossco Loan proceeds will be invested in the Newsubco Preferred Shares, as described in 30 below.
The authorized share capital of Lossco will consist of an unlimited number of common shares and XXXXXXXXXX shares.
The common shares of Lossco are voting (XXXXXXXXXX ) and without par value. The holders of common shares are entitled to dividends at the discretion of the directors, and are entitled to receive the remaining property of the corporation upon its winding-up or dissolution. The XXXXXXXXXX shares are voting (XXXXXXXXXX votes per share) XXXXXXXXXX

26. Lossco issued XXXXXXXXXX common shares of its capital stock to Amalco and XXXXXXXXXX shares to YCo, in each case for nominal consideration.

27. X and YCo entered into an agreement pertaining to the XXXXXXXXXX shares of Newsubco, which is similar in terms of terms and purpose as the agreements referred to in Paragraphs 4 and 10.

28. In XXXXXXXXXX , Newparentco will borrow an amount of $XXXXXXXXXX on a "daylight loan" basis from X (the "Daylight Loan"). The interest rate on the Daylight Loan will be a commercial arm's length rate. In the circumstances, and based on its existing assets and resources, Newparentco has a borrowing capacity of at least $XXXXXXXXXX .

29. Newparentco will use the proceeds of the Daylight Loan to make a loan of $XXXXXXXXXX to Lossco (the "Lossco Loan"). Simple interest will accrue on the Lossco Loan and will be calculated at a rate of XXXXXXXXXX %. The Lossco Loan will be payable on demand. The interest on the Lossco Loan will be paid periodically.

30. Lossco will use the proceeds of the Lossco Loan to subscribe for Newsubco Preferred Shares having an aggregate redemption/retraction price equal to the amount contributed ($XXXXXXXXXX ). The PUC and the fair market value of the Newsubco Preferred Shares will be $XXXXXXXXXX . Lossco will be entitled to cumulative dividends on the Newsubco Preferred Shares, calculated daily by reference to the redemption/retraction price of the Newsubco Preferred Shares at a rate of XXXXXXXXXX %.
The amount of dividends on the Newsubco Preferred Shares held by Lossco will be sufficient to permit Lossco to realize a profit on its investment activity, after the deduction of all its expenses (not only its interest expenses).

31. Newsubco will use the proceeds ($XXXXXXXXXX ) received from the Newsubco Preferred Shares subscription to make a demand, interest-free loan to Newparentco in an amount equal to $XXXXXXXXXX (the "Newparentco Loan"). The Newparentco Loan will be payable on demand.

32. Newparentco will use the proceeds ($XXXXXXXXXX ) received from the Newparentco Loan to repay the Daylight Loan of $XXXXXXXXXX .

33. Whenever interest is due and payable on the New X Loan, Amalco will declare a dividend on the XXXXXXXXXX Shares. This dividend will be funded by a dividend by Opco.

34. In XXXXXXXXXX , the following transactions will occur in order to unwind the loss consolidation arrangement:

(a) Newparentco will borrow an amount equal to the amount of any accrued and unpaid dividends on the Newsubco Preferred Shares held by Lossco on a "daylight loan" basis from X. Newparentco will use these funds to make a contribution of capital to Newsubco. No shares will be issued by Newsubco and no amount will be added to its PUC in respect of the contribution. The amount of this contribution of capital, if any, will be recorded as contributed surplus for accounting purposes. The contribution of capital, if any, will not be income of Newsubco pursuant to generally accepted accounting principles.

(b) Newparentco will borrow $XXXXXXXXXX on a "daylight loan" basis from X (the "New Daylight Loan"). Newparentco will use these funds to repay the Newparentco Loan to Newsubco.

(c) Newsubco will use the funds received through steps (a) and (b) above (i) to pay dividends to Lossco equal to the amount of the dividends payable on the Newsubco Preferred Shares and (ii) to redeem the issued and outstanding Newsubco Preferred Shares held by Lossco.

(d) Lossco will use the proceeds received in step (c) above to repay the Lossco Loan and any unpaid interest thereon and, with any remainder, to pay a dividend on the common shares held by Amalco.

(e) Amalco will pay any remaining dividend entitlement on the XXXXXXXXXX Shares.

(f) Newparentco will use the funds received (i) from Lossco on the repayment of the principal and interest of the Lossco Loan and (ii) from Amalco on the dividend referred to in step (e) above in order to repay the New Daylight Loan as well as the amount borrowed in step (a) above and to pay the remaining interest payable under the New X Loan.

35. Immediately after the transaction described in 34 above, Amalco will transfer to Opco all of its common shares of Lossco in exchange for one common share of Opco.

Opco will add to its account of issued and paid-up share capital in respect of the common share issued to Amalco an amount equal to the ACB to Amalco of the common shares of Lossco. The ACB to Amalco of the common shares of Lossco should be nominal. Amalco and Opco will file a joint election, in prescribed form and within the time limits referred to in subsection 85(6), to have subsection 85(1) apply to the transfer of the common shares of Lossco to Opco. The amount agreed in the election will be equal to the ACB to Amalco of the common shares of Lossco.

The ACB of the common shares of Lossco will be less than their fair market value at the time of the disposition. The fair market value of the common shares of Lossco will be determined by taking into consideration the funds available in Lossco (i.e. some funds will have accumulated in Lossco given the spread between the yield on the Newsubco Preferred Shares versus the interest paid on the Lossco Loan), the estimated time of utilization of the non-capital losses of Lossco and other factors.

36. YCo will sell all of its XXXXXXXXXX shares of Lossco to Opco for cash consideration equal to the PUC of the XXXXXXXXXX shares (a nominal amount as noted in 26 above).

37. Shortly after the transactions described in 35 and 36 above, Opco will cause Lossco to be wound-up. The assets of Lossco will be distributed to Opco and its liabilities, if any, will be assumed by Opco. Lossco will be dissolved within a short period of time.

38. After the wind-up of Lossco, the above transactions, other than those described in 15 to 24 above, will be repeated annually until the New Debenture Loan and the New X Loan have been repaid.

39. At the end of the cycle, after the repayment of the New Debenture Loan and the New X Loan, Newparentco will acquire all of the issued XXXXXXXXXX shares of Newsubco for a cash consideration equal to the PUC of the issued XXXXXXXXXX shares and will cause Newsubco to be wound-up.

Purpose of the Proposed Transactions

40. The purpose of the Proposed Transactions is threefold:

(a) First, in XXXXXXXXXX , Opco intends to submit an application to XXXXXXXXXX . Since XXXXXXXXXX will be considering the balance sheet and financial strength of each company in the upstream ownership chain, it is desirable to implement the Proposed Transactions to improve the balance sheet strength of Amalco. XXXXXXXXXX , a rating agency, which evaluates the claims paying strength of Opco has also expressed concerns about the balance sheet of Amalco.

(b) Second, the Proposed Transactions replace the current loss consolidation structure and increase the amount of the loss consolidation to reflect the undistributed retained earnings that have accumulated in Opco and Amalco since the acquisition of Opco on XXXXXXXXXX .
The Proposed Transactions allow for the consolidation of the non-capital losses of Newparentco that would have been created by the interest expense, if it was not for the loss consolidation transaction described above, with the taxable income of Opco. The loss consolidation will be achieved by a series of transactions, including the creation of non-capital losses in Lossco, and the subsequent utilization of the non-capital losses created in Lossco by Opco. XXXXXXXXXX In a typical loss transfer arrangement, Newparentco would have lent to Opco at a stated rate of interest and Opco would in turn have used the borrowed funds to invest in the Newsubco Preferred Shares.

(c) Third, the Proposed Transactions simplify the administration with respect to the employee equity holdings by eliminating the requirement for XXXXXXXXXX (see 7 above).

Additional Information

41. Newsubco will not be used for any other purposes than those described in the Proposed Transactions. Newparentco will not elect, at any time, to claim a capital loss in respect of its investment in Newsubco. Also, as Newsubco will not have any debt, it should never be insolvent.

42. In the Proposed Transactions, there is no refreshing of losses. The losses will be used within the 20-year period and would never be carried back.

43. If the income of Opco up until XXXXXXXXXX is significantly higher than estimated, resulting in retained earnings that are significantly higher than stated in 11 above, Opco may increase the amount of the New Debenture Loan in 21(c), the Daylight Loan in 28, and the New Daylight Loan in 34(b) by a corresponding amount. The amount of the Lossco Loan, the subscription to the Newsubco Preferred Shares and the Newparentco Loan would also change correspondingly.

44. Each of the corporations involved in the Proposed Transactions is a XXXXXXXXXX .

45. The issued Newsubco Preferred Shares will not, at any time during the implementation of the Proposed Transactions, be:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";

(b) the subject of a dividend rental arrangement as that term is defined in subsection 248(1);

(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).

Rulings

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 further that the Proposed Transactions were and are, as applicable, completed in the manner described above, we rule as follows:

A. To the extent interest paid or payable by Newparentco on the New Debenture Loan and the New X Loan is paid pursuant to a legal obligation and that the common shares and XXXXXXXXXX shares of Amalco continue to be held by Newparentco for the purpose of gaining or producing income, pursuant to paragraph 20(1)(c) of the Act, Newparentco will be entitled to deduct in computing its income for a taxation year, the lesser of (i) the interest paid or payable (depending on the method regularly followed by Newparentco in computing its income for the purposes of the Act) in respect of the taxation year on the loans, or (ii) a reasonable amount in respect thereof.

B. To the extent interest paid or payable by Lossco on the Lossco Loan is paid pursuant to a legal obligation and that the Newsubco Preferred Shares continue to be held by Lossco for the purpose of gaining or producing income, pursuant to paragraph 20(1)(c) of the Act, Lossco will be entitled, to deduct in computing its income for a taxation year, the lesser of (i) the interest paid or payable (depending on the method regularly followed by Lossco in computing its income for the purposes of the Act) in respect of the taxation year on the Lossco Loan, or (ii) a reasonable amount in respect thereof.

C. No amount will be included in the income of Newsubco pursuant to section 9, or paragraphs 12(1)(c) or 12(1)(x) of the Act, in respect of the contributions of capital made by Newparentco as described in 34(a) above.

D. The dividends (or deemed dividends, if any) received by Newparentco from Amalco on the XXXXXXXXXX Shares as described in 33 and 34(e) above, and the dividends received by Lossco on the Newsubco Preferred Shares as described in 34(c) above, will be taxable dividends that will be deductible pursuant to subsection 112(1) of the Act in computing the taxable income of, respectively, Newparentco and Lossco for the taxation year in which the dividends are received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), or 112(2.4) of the Act.

E. After the winding-up of Lossco into Opco is completed, as described in 37 above, the provisions of subsection 88(1.1) of the Act will apply to permit Opco to deduct the non-capital losses of Lossco in computing its taxable income for any taxation year commencing after the commencement of the winding-up, to the extent that the requirements in paragraphs 88(1.1)(a) and (b) of the Act are satisfied and subject to the limitations in paragraph 88(1.1)(e) and section 111 of the Act.

F. The provisions of subsections 15(1), 56(2), and 246(1) of the Act, in and by themselves, will not apply to the Proposed Transactions.

G. Subsection 245(2) of the Act will not be applicable as a result of the Proposed Transactions to redetermine the tax consequences confirmed in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the Proposed Transactions, excluding 34 to 39 above, are completed by XXXXXXXXXX .

The above rulings are based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comments

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

(a) the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

(b) the unique share structure of Amalco, Opco, Newparentco, Newsubco and Lossco that is in place XXXXXXXXXX ;

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

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

(e) the application or non-application of the general anti-avoidance provisions of any province; nor

(f) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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