2015 Ruling 2015-0601441R3 - XXXXXXXXXX Partnership - winding up

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 subsection 98(5) will apply? ii. Whether “proprietor” can claim interest under paragraph 20(1)(c)? iii. Whether proprietor is entitled to a reserve under paragraph 20(1)(m) and (n) for proportionate interest? iv. Whether QTI reserves affected by dissolution of partnership?

Position: i. Yes ii. Yes. iii. Yes. iv. Yes v. No.

Reasons: i. Conforms to legislation. ii. Conforms to policy in Folio S3-F6-C1. iii. Conforms to previous position in 2003-0033545. iv. Exception in 34.2(14) applies.

XXXXXXXXXX						2015-060144

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”), as amended by your letter dated XXXXXXXXXX. We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Taxpayers, none of the issues involved in the ruling request is:

i. in an earlier return of any of the Taxpayers or a related person;

ii. being considered by a tax services office or a tax centre in connection with a tax return already filed by any of the Taxpayers or a related person;

iii. under objection by any of the Taxpayers or a related person;

iv. before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

v. the subject of a ruling previously issued by the Directorate to any of the Taxpayers or a related person.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars.

DEFINITIONS:

“XXXXXXXXXX Employee Accruals” means the amounts deducted by Partnership in computing its income for its fiscal period ending XXXXXXXXXX that are unpaid as at XXXXXXXXXX and that are on account of any superannuation or pension benefit, retiring allowance, salary, wages or other remuneration (but not including reasonable vacation or holiday pay or a deferred amount under a salary deferral arrangement) in respect of employees or former employees of Partnership. For greater certainty, “XXXXXXXXXX Employee Accruals” does not include the XXXXXXXXXX Pension Contribution;

“XXXXXXXXXX Pension Contribution” means the contributions to the Defined Benefit Pension Plans that are unpaid as at XXXXXXXXXX and that will be paid within XXXXXXXXXX days after the end of Partnership’s fiscal period ending XXXXXXXXXX;

“adjusted cost base” or “ACB” has the meaning assigned by section 54 and subsection 248(1);

XXXXXXXXXX

XXXXXXXXXX

“Canadian partnership” has the meaning assigned by subsection 102(1);

XXXXXXXXXX

“common share” has the meaning assigned by subsection 248(1);

“Corp1” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC; it was continued to Canada prior to the amalgamation described in paragraph 6 below;

“Corp2” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC; it was continued to Canada prior to the amalgamation described in paragraph 38 below;

“Corp3” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC; it amalgamated with other related corporations in the amalgamation described in paragraph 16 below;

“Corp4” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC; it amalgamated with other related corporations in the amalgamation described in paragraph 16 below;

“Corp5” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC; it was continued to XXXXXXXXXX prior to the amalgamation described in paragraph 16 below;

“Corp6” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC; it was continued to Canada prior to the amalgamation described in paragraph 6 below;

“Corp7” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC; it was continued to Canada prior to the amalgamation described in paragraph 6 below;

“CRA” means Canada Revenue Agency;

XXXXXXXXXX

“Deferred Purchase Price Component” has the meaning assigned in paragraph 30 below;

“Defined Benefit Pension Plans” means, collectively:

XXXXXXXXXX

“depreciable property” has the meaning assigned by subsection 13(21);

“DSU” means a right granted by Parent to an eligible executive to receive, on a deferred payment basis, the cash equivalent of a common share of Parent on the terms contained in the DSU Plan;

“DSU Plans” means, collectively, the XXXXXXXXXX, each as amended;

“Elected Amount” means the amount that Sub2 and Sub1 will agree on in their subsection 85(1) election in respect of the transfer by Sub2 of its partnership interest in Partnership to Sub1 as described in paragraph 43 below;

“eligible alignment income” has the meaning assigned by subsection 34.2(1);

“eligible capital property” has the meaning assigned by section 54;

“Employee Unfunded Benefit Plans” means, collectively:

XXXXXXXXXX

“fair market value” or “FMV” means the highest price available in an open and unrestricted market between informed prudent parties acting at arm’s length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

XXXXXXXXXX

“IFRS” means International Financial Reporting Standards;

“Group” means the XXXXXXXXXX;

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

“Parent” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC;

“Parent-Partnership Note” means the debt owing by Parent to Partnership as described in paragraph 35 below;

“Parent Preferred Shares” means the XXXXXXXXXX Preferred Shares and XXXXXXXXXX Preferred Shares of Parent;

“Partnership” means XXXXXXXXXX, a general partnership existing under the laws of the province of XXXXXXXXXX. XXXXXXXXXX.

“Partnership Agreement” means the amended and restated partnership agreement relating to Partnership dated as at XXXXXXXXXX;

“Partnership-Parent Note” means the debt owing by Partnership to Parent as described in paragraph 36 below;

“Partnership Units” mean the general partnership units of Partnership;

“Pension Plans” means, collectively, XXXXXXXXXX;

XXXXXXXXXX

“Prepaid Expenses” means the expenses prepaid by Partnership, which include XXXXXXXXXX;

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

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

“qualifying transitional income” or “QTI” has the meaning assigned by subsection 34.2(1);

“Regulations” means the Income Tax Regulations, C.R.C. 1978, c. 945, as amended;

“RSU” means a right granted to a participant to receive, on the basis set out in the RSU Plan, a share of Parent or the cash equivalent or a combination thereof;

“RSU Plan” means the XXXXXXXXXX Restricted Share Unit Plan, as amended;

“SARs” means the share appreciation rights described in paragraph 27 below;

“single-tier alignment” has the meaning assigned by subsection 34.2(1);

“Stock Option Plans” means, collectively:

XXXXXXXXXX

“Sub1” means XXXXXXXXXX, a corporation governed by the laws of Canada and a TCC;

“Sub1 Note” has the meaning assigned in paragraph 43 below;

“Sub1-Parent Note” means the debt owing by Sub1 to Parent as described in paragraph 19 below;

“Sub1-Partnership Note” means the debt owing by Sub1 to Partnership as described in paragraph 34 below;

“Sub1 Preferred Shares” means the First Preferred Shares of Sub1 to be authorized as described in paragraph 39 below;

“Sub1 Redemption Amount” has the meaning assigned in paragraph 43 below;

“Sub2” means XXXXXXXXXX, a corporation governed by the laws of XXXXXXXXXX and a TCC;

“Sub2-Partnership Note” means the debt owing by Sub2 to Partnership as described in paragraph 37 below;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1) and is herein referred to as a “TCC”;

“taxation year” has the meaning assigned by subsection 249(1);

XXXXXXXXXX

XXXXXXXXXX

FACTS:

1. XXXXXXXXXX

2. XXXXXXXXXX

3. Substantially all of Group’s operations and sales are in Canada. Group has a XXXXXXXXXX workforce of approximately XXXXXXXXXX employees. Substantially all of the Group employees are situated in Canada.

4. Group’s business is divided into XXXXXXXXXX key segments:

XXXXXXXXXX

5. Parent is the parent company in the Group. Parent is a “public corporation” for the purposes of the Act. Parent is publicly traded on the XXXXXXXXXX Stock Exchange.

6. Parent holds all of the issued and outstanding common shares of Sub1 (with ACB of $XXXXXXXXXX). Sub1 was formed by the amalgamation of Corp1, Corp6 and Corp7 effective XXXXXXXXXX. Sub1’s authorized share capital consists of XXXXXXXXXX class of common shares. The shares of Sub1 are capital property to Parent.

7. Sub2 operates a XXXXXXXXXX in Canada in accordance with terms and conditions specified by the XXXXXXXXXX. Sub2 holds a XXXXXXXXXX. Sub2 provides XXXXXXXXXX to Partnership pursuant to the XXXXXXXXXX.

8. Parent holds all of the issued and outstanding shares of Sub2 (consisting of Class A restricted voting shares, Class B non-voting shares and common shares). Sub2 is currently a public corporation for the purposes of the Act XXXXXXXXXX. The shares of Sub2 are capital property to Parent.

9. XXXXXXXXXX

10. The taxation years of each of Parent, Sub1 and Sub2 is the calendar year. Their head office is located at XXXXXXXXXX, and they file their income tax returns at the XXXXXXXXXX Tax Centre and otherwise deal with the XXXXXXXXXX Tax Services Office.

11. Sub1 and Sub2 are currently the sole partners of Partnership.

12. Partnership operates the XXXXXXXXXX. Partnership has approximately XXXXXXXXXX employees and an annual payroll of approximately $XXXXXXXXXX. Partnership’s head office is located at XXXXXXXXXX, and files its Partnership Information Return at the XXXXXXXXXX Tax Centre and otherwise deals with the XXXXXXXXXX Tax Services Office.

13. Partnership is a general partnership and a Canadian partnership for the purposes of the Act. Each partner’s interest in Partnership is expressed by reference to Partnership Units, the attributes of which carry identical entitlements. The Partnership Units are held as follows:

(a) Sub1 holds XXXXXXXXXX Partnership Units (XXXXXXXXXX% interest) with ACB of $XXXXXXXXXX; and

(b) Sub2 holds XXXXXXXXXX Partnership Units (XXXXXXXXXX% interest) with ACB of $XXXXXXXXXX.

14. Partnership was formed on XXXXXXXXXX, by Corp4 and Sub2. When Parent purchased Sub2 in XXXXXXXXXX, Sub2 had significant non-capital losses. Due to XXXXXXXXXX, it was not possible to amalgamate Sub2 and Corp4 in order to apply the non-capital losses of Sub2 against future income earned by Corp4 in carrying on the XXXXXXXXXX (from a tax point of view such non-capital losses would have been available under the constraints imposed by subsection 111(5) had an amalgamation been possible). As a result, Partnership was formed to allow a portion of the income earned from carrying on the XXXXXXXXXX to be allocated to Sub2 (so that the non-capital losses of Sub2 could be applied against such income). Ruling # 2005-011948, dated XXXXXXXXXX, 2005, was obtained in respect of the formation of Partnership in XXXXXXXXXX.

15. At the time of the formation of Partnership, Corp4 was a wholly owned subsidiary of Corp3, which was a wholly owned subsidiary of Parent. Each of Corp4 and Sub2 transferred substantial assets relating to the XXXXXXXXXX to Partnership in consideration for partnership units of Partnership.

16. On XXXXXXXXXX, Parent, Corp3, Corp4 and Corp5 amalgamated to form Parent. As a result of the amalgamation, Parent became the owner of Corp4’s partnership interest in Partnership.

17. Partnership is governed by the Partnership Agreement. Under the Partnership Agreement, Partnership Profit or Partnership Loss and all income and loss of Partnership for income tax purposes is XXXXXXXXXX (as all such terms are defined in the Partnership Agreement).

18. At the time of formation of Partnership in XXXXXXXXXX, the fiscal period of the partnership for tax purposes was established as ending on XXXXXXXXXX. After the implementation of the proposals in the XXXXXXXXXX, Parent and Sub2 (the partners at the relevant time), XXXXXXXXXX which each had a XXXXXXXXXX taxation year end, made a “single-tier fiscal period alignment” to align the fiscal period of Partnership to XXXXXXXXXX. As a consequence of the alignment election, each of Parent and Sub2 had “eligible alignment income” which was included in QTI and was eligible to claim a transitional reserve in accordance with subsection 34.2(11) and the related rules. Subsection 34.2(14) preserved Parent’s eligibility to continue to claim the reserve after Parent’s transfer of its interest in Partnership to Corp1 (a corporation related to Parent).

19. XXXXXXXXXX

20. As noted in paragraph 6 above, Corp1 is a predecessor to Sub1 and Sub1 is consequently now the obligor under the Sub1-Parent Note. As of XXXXXXXXXX, Sub1 was indebted to Parent in the amount of $XXXXXXXXXX under the Sub1-Parent Note. The amount owing under the Sub1-Parent Note bears interest at XXXXXXXXXX% per annum.

21. In XXXXXXXXXX, each of Parent, Sub2 and Partnership received permission to change its fiscal period for purposes of the Act to XXXXXXXXXX.

22. As of XXXXXXXXXX, Partnership had total assets of approximately $XXXXXXXXXX (XXXXXXXXXX), which include:

(a) cash and equivalents of $XXXXXXXXXX;

(b) amounts due from related parties of $XXXXXXXXXX;

(c) accounts receivable of $XXXXXXXXXX;

(d) depreciable capital property with aggregate UCC of $XXXXXXXXXX and net book value of $XXXXXXXXXX;

(e) assets under construction of $XXXXXXXXXX;

(f) cumulative eligible capital balance of $XXXXXXXXXX; and

(g) other assets of $XXXXXXXXXX (including Prepaid Expenses).

23. As of XXXXXXXXXX, Partnership had total booked liabilities of approximately $XXXXXXXXXX (XXXXXXXXXX), which include:

(a) amounts due to related parties of $XXXXXXXXXX;

(b) unearned revenue of $XXXXXXXXXX;

(c) accounts payable and accrued liabilities of $XXXXXXXXXX;

(d) other liabilities of $XXXXXXXXXX mainly relating to liabilities associated with pension and compensation plans; and

(e) asset retirement obligation of $XXXXXXXXXX relating to the future estimated costs associated with the decommissioning of assets and restoring locations to their original standards.

24. As of XXXXXXXXXX, Partnership had Prepaid Expenses of approximately $XXXXXXXXXX.

25. Partnership is the plan sponsor and a participating employer in connection with each of the Pension Plans. The amounts booked as liabilities for accounting purposes include amounts in respect of the Pension Plans. IFRS requires that Partnership disclose on its balance sheet as a liability the present value of its obligations at the end of any fiscal period in respect of defined benefit pension plans of which it is the sponsor, minus the FMV of the plan assets at that time. Any change to this liability from year to year is recorded as an expense that reduces or increases the income of Partnership for any fiscal period for financial statement purposes. Any such expense is reversed in the calculation of Partnership’s income from its business for purposes of subsection 96(1). When Partnership makes a contribution to any of the Pension Plans in a taxation year (or, optionally, within XXXXXXXXXX days after the end of the taxation year), a deduction is claimed under paragraph 20(1)(q) as permitted by subsection 147.2(1).

26. Partnership is the plan sponsor and a participating employer in connection with each of the Employee Unfunded Benefit Plans.

27. The Stock Option Plans grant options to acquire common shares of Parent. Share appreciation rights (“SARs”) attach to options. The SARs feature allows the option holder to elect to receive in cash an amount equal to the intrinsic value of the option, instead of exercising the option and acquiring shares. Where a common share of Parent is issued in connection with the exercise of an option by an employee of Partnership, Partnership reimburses Parent for the cost of the option (the intrinsic value) by adjusting the intercompany amount owing by Partnership to Parent. Partnership has elected to forgo the deduction in respect of SARs payments made to employees dealing at arm’s length with Partnership. Partnership deducts an amount in respect of SARs payments made to persons not dealing at arm’s length with Partnership.

28. RSUs are granted to eligible employees and officers for their employment services. RSUs are settled through cash payments. An RSU liability is measured at fair value. The accounting treatment for RSU obligations is similar to that described above with respect to the obligations of Partnership in respect of the Pension Plans. For tax purposes, a deduction is claimed when the cash settlement amounts are paid.

29. DSUs enable the Board of Directors and certain key executives to elect to receive certain types of remuneration in deferred share units. DSUs are only exercisable upon death or retirement of the participant. DSUs are settled through cash payments. A DSU liability is measured at fair value. The accounting treatment for DSU obligations is similar to that described above with respect to the obligations of Partnership in respect of the Pension Plans. For tax purposes, a deduction is claimed when the cash settlement amounts are paid.

30. Partnership’s business generates XXXXXXXXXX. It is Partnership’s practice to sell substantially all of such accounts receivable to Parent. Parent then sells those receivables in “securitization” transactions with an arm’s length financial institution. The purchase price for each receivable sold by Parent in the arm’s length securitization transaction is payable through delivery of cash for a significant portion of the unpaid balance of such receivable with the balance of the amount payable on a deferred basis (the “Deferred Purchase Price Component”) as the receivable is collected from the customer. The terms of the sale of the receivables by Partnership to Parent mirror the terms of Parent’s arm’s length sale to the financial institution. Partnership continues to collect the customer receivables on behalf of the financial institution.

31. The aggregate of the cash amount of the purchase price received by Partnership and the FMV of the Deferred Purchase Price Component from the sale of the accounts receivable to Parent is included in the computation of Partnership’s income at the time of the sale. Any subsequent gain or loss on the Deferred Purchase Price Component is also treated on income account and is recognized when amounts are received from Parent.

32. Partnership claims a reserve under paragraph 20(1)(l) in respect of accounts receivable from customers that have not been sold to Parent. Once all collection efforts have been made and such receivables have been written off, a bad debt deduction is claimed by Partnership under paragraph 20(1)(p).

33. Partnership’s business also generates amounts included in income pursuant to paragraph 12(1)(a) that are amounts received in a fiscal period of Partnership on account of services not rendered or goods not delivered before the end of the fiscal period. Partnership claims a reserve pursuant to paragraph 20(1)(m) in respect of goods or services that it is reasonably anticipated will have to be delivered or rendered after the end of the relevant fiscal period.

34. As of XXXXXXXXXX, Sub1 was indebted to Partnership in the amount of $XXXXXXXXXX (the “Sub1-Partnership Note”). The Sub1-Partnership Note is non-interest bearing and payable on demand.

35. As of XXXXXXXXXX, Parent was indebted to Partnership in the amount of approximately $XXXXXXXXXX (the “Parent-Partnership Note”). The Parent-Partnership Note is non-interest bearing and payable on demand.

36. As of XXXXXXXXXX, Partnership was indebted to Parent in the amount of approximately $XXXXXXXXXX (the “Partnership-Parent Note”). This indebtedness represents a borrowing by Partnership from Parent to finance Partnership’s purchase of spectrum in XXXXXXXXXX. The Partnership-Parent Note is payable on demand and bears interest at XXXXXXXXXX%.

37. As of XXXXXXXXXX, Sub2 was indebted to Partnership in the amount of approximately $XXXXXXXXXX (the “Sub2-Partnership Note”). The Sub2-Partnership Note is payable on demand and non-interest bearing.

38. On XXXXXXXXXX, Sub1 acquired all of the issued and outstanding shares of Corp2 pursuant to a share purchase agreement dated XXXXXXXXXX. The consideration for the shares of Corp2 was paid by delivery of cash to the shareholder of Corp2. Sub1 and Corp2 were amalgamated on XXXXXXXXXX.

PROPOSED TRANSACTIONS:

39. Prior to XXXXXXXXXX, the articles of incorporation of Sub1 will be amended to authorize the Sub1 Preferred Shares with the following share attributes:

(a) non-voting;

(b) entitlement to receive fixed, cumulative dividends at a rate per annum equal to the Prime rate, accruing daily from the day following the date of issuance and payable annually;

(c) redeemable and retractable at any time on payment for each such share to be redeemed or retracted of an amount equal to the FMV of all of the consideration for which the Sub1 Preferred Shares are issued as at the time such Sub1 Preferred Shares are issued divided by the number of Sub1 Preferred Shares so issued, together with an amount equal to all accrued and unpaid cumulative dividends thereon up to the date of redemption or retraction; and

(d) subject to a price adjustment clause.

40. On XXXXXXXXXX, Sub1 will repay the Sub1-Partnership Note by assuming Partnership’s accounts payable in an aggregate amount equal to the amount owing by Sub1 under the Sub1-Partnership Note.

41. On XXXXXXXXXX, Sub1 will assume all indebtedness of Partnership, including the Partnership-Parent Note and Partnership’s obligation to pay the XXXXXXXXXX Employee Accruals (but, for greater certainty, not including obligations that Partnership may have to Sub2 solely in Sub2’s capacity as a partner of Partnership), as a contribution of capital to Partnership. In return, Sub1 will receive additional Partnership Units, which depending on the amount of indebtedness assumed, will result in Sub1 increasing its proportionate interest in the Partnership by XXXXXXXXXX percent.

42. On XXXXXXXXXX, Partnership will pay to Sub1 a reasonable amount for undertaking to assume Partnership’s obligations described in paragraph 33 above (by assigning an equivalent amount of the Parent-Partnership Note as payment). A joint election will be made in respect of such payment in accordance with subsections 20(24) and 20(25).

43. On XXXXXXXXXX, Sub2 will transfer its interest in Partnership to Sub1 in consideration for XXXXXXXXXX Sub1 Preferred Shares and a non-interest bearing promissory note with a principal amount equal to the amount owing under the Sub2-Partnership Note (the “Sub1 Note”).

(a) Sub2 and Sub1 will jointly elect under subsection 85(1) in prescribed form and manner and within the time referred to in subsection 85(6) with respect to the disposition of Sub2’s interest in Partnership to Sub1. The Elected Amount will be an amount equal to the adjusted cost base of Sub2’s interest in Partnership at the time of transfer. The amount added to the stated capital of the Sub1 Preferred Shares issued on the transfer will be equal to the Elected Amount less the principal amount of the Sub1 Note.

(b) The Sub1 Preferred Shares issued on the transfer will have an aggregate redemption amount (and amount for which the holder may require them to be retracted) equal to (i) the difference between the FMV of Sub2’s interest in Partnership immediately before the transfer and the principal amount of the Sub1 Note plus (ii) accrued and unpaid dividends (the “Sub1 Redemption Amount”).

44. As a consequence of the transfer by Sub2 of its partnership interest in Partnership to Sub1:

(a) Sub2 will cease to be a partner of Partnership;

(b) Partnership will cease to exist as a matter of law (because there will no longer be XXXXXXXXXX partners carrying on the business);

(c) Sub1 will become the sole owner of all of the property of Partnership, including, for greater certainty, Partnership’s rights under the XXXXXXXXXX with Sub2; and

(d) Sub1 will become subject to all obligations of Partnership not previously assumed as described in paragraph 41, including, for greater certainty, (i) Partnership’s obligations, XXXXXXXXXX, to Sub2 under the XXXXXXXXXX and (ii) the obligation, as successor to Partnership’s business and successor employer to the Partnership workforce, to perform the obligations under the Pension Plans and the Employee Unfunded Benefit Plans that would otherwise have been performed by Partnership. In computing Sub1’s income from its business carried on by it as a successor to Partnership, Sub1 will deduct such amounts as are paid by it in respect of the Employee Unfunded Benefit Plans.

For greater certainty, there will not be any time interval between the time of the cessation of Partnership and the time that all property of Partnership is distributed to Sub1 as the person entitled by law to receive such property.

45. The total income for Partnership’s XXXXXXXXXX taxation year ending in XXXXXXXXXX will be computed based on a proportionate amount of the income from Partnership’s business for the XXXXXXXXXX, which will carried on by Sub1 after the Partnership ceases to exist. Partnership will also include in income (pursuant to paragraph 12(1)(d) or 12(1)(e)) all amounts in respect of which Partnership will have claimed a reserve pursuant to any of paragraphs 20(1)(l), 20(1)(m) or 20(1)(n) for its fiscal period ending XXXXXXXXXX. Partnership’s income for its final fiscal period will be allocated to Sub1 and Sub2 in proportion to their respective interests, which will be approximately XXXXXXXXXX% and XXXXXXXXXX% respectively. The actual percentage will depend on the amount of the Partnership’s indebtedness assumed by Sub1, as described in paragraph 41 above.

46. Immediately after the particular time at which Partnership has ceased to exist, Sub1 will carry on alone the business that was the business of Partnership for the purpose of earning income and will continue to use, in the course of the business, all of the property that was, immediately before the particular time, property of Partnership and that is received by Sub1 upon the cessation of Partnership. Such business will at no time within XXXXXXXXXX months of Partnership ceasing to exist be carried on by Sub2. Sub2 will continue to XXXXXXXXXX which allowed it to provide XXXXXXXXXX services to Partnership and, following Partnership ceasing to exist, to Sub1.

47. The assets of Partnership that Sub1 will acquire as a result of Partnership ceasing to exist will include the receivable from Sub2 under the Sub2-Partnership Note and such portion of the receivable from Parent under the Parent-Partnership Note as remains owing to Partnership after the assignment of a portion of the Parent-Partnership Note to Sub1 (in paragraph 42 above).

48. Sub1 may make designations under paragraph 98(5)(c) in respect of certain property transferred to it in connection with the cessation of Partnership.

49. XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to simplify the corporate structure of Group and the structure of the business carried on by Partnership (XXXXXXXXXX). This simplification will reduce the complexity and cost of administration and compliance, both for Group and the CRA. Group’s simplification purpose is further evidenced by the following:

(a) In XXXXXXXXXX, Parent, Sub2 and Partnership applied for, and received, permission to change their fiscal periods for purposes of the Act to XXXXXXXXXX, thereby aligning the tax and accounting year ends of the main Group companies.

(b) XXXXXXXXXX

(c) XXXXXXXXXX

(d) XXXXXXXXXX

RULINGS PROVIDED

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions,

(b) the proposed transactions are completed in the manner described above, and

(c) there are no other transactions which may be relevant to the rulings requested,

we rule that:

A. The implementation of the Proposed Transactions will not, in and of themselves, result in Sub1 being denied a deduction to which it might otherwise be entitled under paragraph 20(1)(c) in respect of interest paid or payable on the Sub1-Parent Note in a particular taxation year.

B. Interest paid or payable by Sub1 in respect of any debt obligation of Partnership, including the Partnership-Parent Note, assumed by Sub1 as a consequence of the dissolution of Partnership will be deductible by Sub1 under paragraph 20(1)(c) to the same extent that such interest would have been deductible by Partnership if Partnership did not dissolve provided that Sub1 uses the property acquired from Partnership for the purpose of earning income from a business or property (other than income which is exempt or property that is a life insurance property).

C. Provided that Sub1 continues to carry on the business of Partnership subsequent to the completion of the proposed transactions, the provisions of subsection 98(5) will apply in respect of the dissolution of Partnership.

D. Subject to paragraph 20(24)(a), Sub1 may claim a reserve under paragraph 20(1)(m) in respect of its proportionate share of Partnership’s final fiscal period income inclusion under paragraph 12(1)(e) which relates to Partnership’s preceding year reserve under paragraph 20(1)(m). For greater certainty, Sub1’s proportionate share is set out in paragraph 45 above.

E. Sub1 may claim a reserve under paragraph 20(1)(n) in respect of its proportionate share of Partnership’s final fiscal period income inclusion under paragraph 12(1)(e) which relates to Partnership’s preceding year reserve under paragraph 20(1)(n). For greater certainty, Sub1’s proportionate share is set out in paragraph 45 above.

F. Provided the amounts described in paragraph 33 have been included in computing Partnership’s income from its business pursuant to paragraph 12(1)(a) for a fiscal period ending before the time of the dissolution of the Partnership, and Partnership and Sub1 jointly elect under subsection 20(24) in the form and within the time referred to in subsection 20(25), the payment made by partnership as described in paragraph 42 by assigning an equivalent amount of the Parent-Partnership Note as consideration for the assumption by Sub1 of Partnership’s obligations described in Paragraph 33, if any,

(a) may be deducted in computing the income of Partnership for its fiscal period ending at XXXXXXXXXX on XXXXXXXXXX, pursuant to paragraph 20(24)(a); and

(b) will be deemed to be an amount described in paragraph 12(1)(a) of Sub1 for its fiscal period in which the payment is received, pursuant to paragraph 20(24)(b), provided the amount of such payment is reasonable.

G. Parent shall be deemed, for the purposes of paragraph 34.2(13)(a) to be a member of Partnership continuously until the end of Parent’s taxation year ending on XXXXXXXXXX. Parent may, in computing its income for its taxation year ending on XXXXXXXXXX, claim a reserve as provided in subsection 34.2(11). For greater certainty, neither subsection 34.2(13) nor subsection 34.2(18) shall apply to deny Parent’s claim under subsection 34.2(11) in computing its income for its taxation year ending on XXXXXXXXXX.

H. Sub2 may, in computing its income for its taxation year ending on XXXXXXXXXX, claim a reserve as provided in subsection 34.2(11). For greater certainty, neither subsection 34.2(13) nor subsection 34.2(18) shall apply to deny Sub2’s claim under subsection 34.2(11) in computing its income for its taxation year ending on XXXXXXXXXX.

I. Each property which, immediately before the dissolution of Partnership is depreciable property of a prescribed class or separate prescribed class of Partnership and which is acquired by Sub1 on the dissolution of Partnership, will be depreciable property of the same prescribed class or separate prescribed class, as the case may be, of Sub1.

J. A former employee of Partnership will be deemed to be a former employee of Sub1 for the purpose of subsection 147.2(8) and Partnership will be considered a “predecessor employer” for such purpose, pursuant to subsection 8500(1.2) of the Regulations and the definition of “predecessor employer” in subsection 8500(1) of the Regulations. There may be deducted in computing the income of Sub1 the total of all amounts each of which is a contribution made by Sub1 after XXXXXXXXXX to a Defined Benefit Pension Plan within the time prescribed in subsection 147.2(1).

K. The XXXXXXXXXX Pension Contribution will be deductible in computing Sub1’s income for its fiscal period ending XXXXXXXXXX provided that the XXXXXXXXXX Pension Contribution is paid by Sub1 within XXXXXXXXXX days of the end of Sub1’s fiscal period ending on XXXXXXXXXX.

L. The XXXXXXXXXX Employee Accruals will be deductible in computing Partnership’s income for its fiscal period ending XXXXXXXXXX. For greater certainty, subsection 78(4) will not apply to prohibit Partnership from deducting the amount of the XXXXXXXXXX Employee Accruals provided that the relevant amounts are paid by Sub1 within XXXXXXXXXX days of the end of Partnership’s fiscal period ending on XXXXXXXXXX.

M. The fact that the obligations of Partnership under the Employee Unfunded Benefit Plans will become obligations of Sub1 as a consequence of Sub1 becoming the successor to Partnership’s business and successor employer to Partnership’s employees will not, in and of itself, result in a disposition of an employee’s rights under such Employee Unfunded Benefit Plans and a corresponding income inclusion for the employee.

N. Except to the extent that the prepaid expenses were deducted in computing the income of Partnership in a prior taxation year, subject to paragraph 18(1)(a) or section 67, Sub1 will be entitled to deduct in computing its income for any particular year the prepaid expenses described in paragraph 24 above pursuant to subsections 9(1) and 18(9).

O. Any recovery or loss by Sub1 in respect of the Deferred Purchase Price Component subsequent to the distribution by Partnership to Sub1 of the rights in respect of that Deferred Purchase Price Component will be considered to be on income account.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA provided that the Proposed Transactions are commenced or entered into on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this 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 reasonableness or fair market value of any fees or expenditures referred to herein;

(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; or

(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
Partnerships and Corporate Financing Section
International Division
Income Tax Rulings Directorate