2007 Ruling 2007-0226931R3 - Corporate Reorganization - Affiliated Group

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: The deductibility of interest within an affiliated group. Borrowing to return capital.

Position: Granted.

Reasons: The law.

XXXXXXXXXX 								2007-022693

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, and your other correspondence, in which you requested an advance income tax ruling on behalf of the taxpayers described in this letter. You have advised that to the best of your knowledge, and that of the responsible officers of each of the taxpayers, none of the issues involved in this Ruling is:

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

(ii) being considered by a tax services office (TSO) or taxation centre (TC) in connection with a previously filed tax return of 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 expired; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You have also advised that to the best of your knowledge, and that of the responsible officers of each of the taxpayers, that the proposed transactions will not result in any of the taxpayers or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

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

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

(c) "agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

(d) "BCA" means the Canada Business Corporations Act;

(e) "BN" means the business number issued to the particular entity by CRA;

(f) "Canco" means XXXXXXXXXX ;

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

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

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

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

(k) "eligible property" has the meaning assigned by subsection 85(1.1);

(l) "fair market value" ("FMV") means the highest price available in an open and unrestricted market between informed prudent parties acting at arms length (within the meaning assigned by subsection 251(1)) under no compulsion to act and contracting for a taxable purchase and sale;

(m) "Foreign Pubco" means XXXXXXXXXX;

(n) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

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

(p) "NRco C" means XXXXXXXXXX;

(q) "NRco D" means XXXXXXXXXX;

(r) "Opco A" means XXXXXXXXXX;

(s) "Opco B" means XXXXXXXXXX;

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

(u) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;

(v) "predecessor corporation" has the meaning assigned by subsection 87(1);

(w) "prescribed debt obligation" has the meaning assigned by subsection 7000(1) of the Regulations;

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

(y) "proceeds of disposition" has the meaning assigned by section 54;

(z) "Proposed Transactions" means the transactions described in Paragraphs 16 to 27;

(aa) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

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

(cc) "stated capital" has the meaning assigned by the BCA or any other relevant corporate statute;

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

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

(ff) "taxation year" has the meaning assigned by subsection 249(1).

FACTS

The following is a description of the relevant facts immediately prior to the commencement of the Proposed Transactions.

1. Foreign Pubco is a widely-held foreign public corporation, the securities of which are traded on the XXXXXXXXXX Stock Exchange. Foreign Pubco was incorporated under the laws of XXXXXXXXXX and is a non-resident of Canada for the purposes of the Act. XXXXXXXXXX Foreign Pubco owns directly or indirectly, controlling interests in several corporate entities, certain of which are described in more detail below, and which are collectively referred to as the "Foreign Pubco Group".

2. Foreign Pubco owns, directly or indirectly, all of the issued and outstanding shares of NRco C, a corporation formed under the laws of XXXXXXXXXX, and all of the issued and outstanding shares of NRco D, a corporation formed under the laws of XXXXXXXXXX. NRco C is a non-resident of Canada for the purposes of the Act and a resident of XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention. NRco C currently employs more than XXXXXXXXXX individuals in XXXXXXXXXX. NRco D is a non-resident of Canada for the purposes of the Act and a resident of XXXXXXXXXX for the purposes of the Canada-XXXXXXXXXX Income Tax Convention (the "XXXXXXXXXX Treaty"). NRco D currently employs XXXXXXXXXX individuals in XXXXXXXXXX, but the XXXXXXXXXX consolidated group of which it is a member currently employs approximately XXXXXXXXXX individuals in XXXXXXXXXX (including the XXXXXXXXXX employees of NRco D). NRco D does not have a permanent establishment in Canada for the purposes of the XXXXXXXXXX Treaty.

3. Canco is an unlimited liability corporation that was formed under the laws of XXXXXXXXXX . Canco is a taxable Canadian corporation and a private corporation and is the Canadian holding corporation for the Foreign Pubco Group. Canco deals with the XXXXXXXXXX TSO and files its federal returns at the XXXXXXXXXX TC.

4. The issued and outstanding shares of Canco consist of XXXXXXXXXX common shares and XXXXXXXXXX preferred shares (the "Canco Preferred Shares"). NRco D owns all the issued and outstanding shares of Canco. NRco D acquired the common shares of Canco on or before XXXXXXXXXX. The Canco Preferred Shares were issued to NRco D by Canco between XXXXXXXXXX and XXXXXXXXXX, as consideration for common shares of Foreign Pubco that were transferred by NRco D to Canco or for cash. The common shares of Canco and the Canco Preferred Shares are considered to be capital property to NRco D. The aggregate PUC and ACB of the Canco Preferred Shares is approximately $XXXXXXXXXX.

5. Opco A is a taxable Canadian corporation that was formed under the laws of XXXXXXXXXX. Opco A carries on the business of providing XXXXXXXXXX services within Canada XXXXXXXXXX. Opco A deals with the XXXXXXXXXX TSO and files its federal returns at the XXXXXXXXXX TC.

6. Canco owns all of the issued and outstanding shares of Opco A, being 1 common share (the "Opco A Common Share") and XXXXXXXXXX exchangeable shares (the "Exchangeable Shares"). The Exchangeable Shares of Opco A were acquired by Canco as consideration for Canco's transfer of common shares of Foreign Pubco to various third parties as described below.

The Exchangeable Shares of Opco A were originally issued to the previous common shareholders of Opco A (which at the time such shares were issued Opco A was named "XXXXXXXXXX") on XXXXXXXXXX. Specifically, Foreign Pubco and Opco A undertook a negotiated, arm's-length transaction, pursuant to which (i) Foreign Pubco caused Canco to subscribe for a preferred share in Opco A, (ii) the previous shareholders of Opco A exchanged their common shares of Opco A for Exchangeable Shares issued by Opco A under a capital reorganization governed by section 86, and (iii) the preferred share held by Canco was then exchanged for one common share of Opco A.

Each of the Exchangeable Shares, in accordance with the terms thereof, is exchangeable for XXXXXXXXXX common shares of Foreign Pubco. On each occurrence of a holder of Exchangeable Shares indicating an intention to exchange such shares for common shares of Foreign Pubco, Canco would acquire such Exchangeable Shares from such holder and, as consideration therefor, deliver the required amount of common shares of Foreign Pubco to such holder.

As described in Paragraph 4, Canco would acquire the common shares of Foreign Pubco from NRco D by issuing Canco Preferred Shares to NRco D as consideration for the common shares of Foreign Pubco it received from NRco D, or by using the cash subscription proceeds Canco received from NRco D from issuing Canco Preferred Shares to acquire common shares of Foreign Pubco from NRco D. NRco D acquired the common shares of Foreign Pubco by paying cash, or by issuing its own shares and debt to Foreign Pubco as consideration for the common shares of Foreign Pubco it acquired.

The Opco A Common Share and the Exchangeable Shares are considered to be capital property to Canco. The aggregate ACB of the Exchangeable Shares to Canco is approximately $XXXXXXXXXX and the aggregate PUC of the Exchangeable Shares is approximately $XXXXXXXXXX. The aggregate FMV of the Exchangeable Shares is substantially less than their aggregate ACB. The FMV, ACB and PUC of the Opco A Common Share is nominal.

7. Opco B is a taxable Canadian corporation that was formed under the BCA. Opco B carries on the business in Canada of providing XXXXXXXXXX services within Canada to XXXXXXXXXX . Opco B files its federal returns at the XXXXXXXXXX TC. Canco owns the only issued and outstanding common share of Opco B (the "Opco B Common Share"). The Opco B Common Share is considered to be capital property to Canco. The FMV of the Opco B Common Share is currently higher than its ACB and PUC (which are nominal).

8. Opco A owns all of the issued and outstanding preferred shares of Opco B, being XXXXXXXXXX preferred shares (the "Opco B Preferred Shares"). The Opco B Preferred Shares are non-voting and retractable by the holder for a specified redemption price that reflects the FMV and PUC of such shares. The Opco B Preferred Shares were issued to Opco A on the amalgamation of Opco B's two predecessor corporations, XXXXXXXXXX, as described in Paragraph 9, in exchange for the common shares of XXXXXXXXXX. that were owned by Opco A immediately before the amalgamation. The Opco B Preferred Shares are considered to be capital property to Opco A. The aggregate ACB of the Opco B Preferred Shares is higher than the aggregate FMV of such shares.

9. Opco B currently owes approximately $XXXXXXXXXX (the "Acquisition Debt") to Canco. The Acquisition Debt arose as a result of an interest-bearing loan of approximately $XXXXXXXXXX that was made by Canco to one of Opco B's predecessor corporations (i.e. XXXXXXXXXX), which had used the loan proceeds to acquire all of the issued and outstanding common shares of another taxable Canadian corporation, XXXXXXXXXX. (other than those common shares of XXXXXXXXXX. that were already owned by Opco A) from an arm's-length person resident in Canada. Immediately after the XXXXXXXXXX. share acquisition, XXXXXXXXXX. were amalgamated to form Opco B and the Acquisition Debt became a debt of Opco B.

10. Opco B also owes approximately US$XXXXXXXXXX (the "Operations Debt") to Canco. The Operations Debt was advanced to Opco B in two separate tranches, on an interest-bearing basis, to fund Opco B's business operations.

11. Canco funded its advances under both the Acquisition Debt and the Operations Debt by borrowing identical amounts from NRco D at rates of interest, which are XXXXXXXXXX basis points lower than the rates applicable under such Acquisition Debt and Operations Debt.

12. Opco B also owes approximately $XXXXXXXXXX to Opco A pursuant to an interest-bearing debenture (the "Debenture"). The Debenture arose when XXXXXXXXXX. had borrowed funds from Opco A to use in its business prior to the amalgamation described in Paragraph 9. As a result of such amalgamation, the Debenture became an obligation of Opco B. Opco B continues to use the borrowed funds from the Debenture in its business. The Debenture, when initially issued to Opco A, provided for its conversion into common shares of XXXXXXXXXX. In connection with XXXXXXXXXX's acquisition of XXXXXXXXXX's common shares, as described in Paragraph 9, there was an amendment to the terms of the Debenture to remove the conversion feature. Opco A's ACB in the Debenture is equal to its principal amount. Effective as of XXXXXXXXXX, the interest rate on the Debenture was reduced to XXXXXXXXXX% per annum. The interest rate on the Debenture was reduced because Opco A had become profitable and Opco B did not need the benefit of higher interest deductions, so the loss consolidation with Opco A was no longer necessary. A nominal rate of interest has been maintained so that the Debenture would not become a prescribed debt obligation.

13. Opco A and Opco B are currently profitable and are expected to continue being profitable. Canco has no activities other than those described above. The taxation year of Opco A ends on XXXXXXXXXX.The taxation year of Opco B ends on XXXXXXXXXX and the taxation year of Canco ends on XXXXXXXXXX.

14. Foreign Pubco has a captive insurance company within the Foreign Pubco Group such that each of Canco, Opco A and Opco B is a specified financial institution. However, this captive insurance company does not control Canco, Opco A or Opco B. Each of Foreign Pubco, NRco C, NRco D, Canco, Opco A and Opco B is an affiliated person in relation to each other.

15. The capital structure of Canco and its subsidiaries were reorganized and the businesses of Opco A and Opco B were combined as described below.

PROPOSED TRANSACTIONS

16. On XXXXXXXXXX, Canco incorporated a new wholly-owned subsidiary corporation ("Newco") under the provisions of the BCA. Newco is a taxable Canadian corporation and its authorized share capital includes common shares ("Newco Common Shares"). On incorporation, Canco subscribed for one Newco Common Share for $XXXXXXXXXX.

17. On XXXXXXXXXX, Opco A was continued as a federal corporation under the BCA.

18. On XXXXXXXXXX, the terms and conditions of the Canco Preferred Shares were amended pursuant to a shareholder's resolution that provided that the redemption price of Canco Preferred Shares will be reduced by any amount paid by Canco on a reduction of PUC in respect of such shares. Under the relevant corporate law, such amendment did not result in any of the Canco Preferred Shares being considered to have been redeemed, acquired or cancelled by Canco nor did such change result in those shares being considered to have been disposed of by NRco D.

19. Pursuant to the adoption by Opco A of Articles of Amendment, all the Exchangeable Shares were converted on XXXXXXXXXX, into Opco A Common Shares. The aggregate FMV of the Opco A Common Shares received by Canco on the conversion was equal to the aggregate FMV of the Exchangeable Shares. The aggregate PUC of the Opco A Common Shares after this conversion was approximately $XXXXXXXXXX and their aggregate ACB was approximately $XXXXXXXXXX.

20. On XXXXXXXXXX, Canco transferred its 1 Opco B Common Share to Opco A. As consideration therefor, Opco A issued to Canco a number of Opco A Common Shares having an aggregate FMV equal to the FMV of the 1 Opco B Common Share so transferred. Canco and Opco A will jointly elect, in prescribed form and within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to this share transfer. The agreed amount in respect of such transfer will be the ACB to Canco of the 1 Opco B Common Share and for greater certainty, such agreed amount will not exceed the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

The addition to the stated capital of the Opco A Common Shares issued by Opco A as consideration for the 1 Opco B Common Share was equal to the ACB of the 1 Opco B Common Share transferred to Opco A by Canco. For greater certainty, the addition to stated capital did not exceed the maximum amount that could be added to the PUC of such Opco A Common Shares, having regard to subsection 85(2.1).

21. On XXXXXXXXXX, Canco transferred all of its Opco A Common Shares to Newco in consideration for one Newco Common Share and three promissory notes issued by Newco, such consideration having an aggregate FMV equal to the aggregate FMV of the Opco A Common Shares. The promissory notes issued by Newco (collectively referred to as the "Amalco Notes") had an aggregate principal amount that was not greater than the lesser of: (i) the aggregate FMV of the Opco A Common Shares; or (ii) the aggregate ACB of the Opco A Common Shares, and each of the notes bear interest at a reasonable rate. The aggregate principal amount and FMV of the Amalco Notes was approximately $XXXXXXXXXX.

Canco and Newco will jointly elect, in prescribed form and within the time prescribed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfers of the Opco A Common Shares. The agreed amount in respect of each such transfer is expected to be equal to the FMV of such share at the time of such transfer, which for greater certainty will not exceed the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), nor will the aggregate of such agreed amounts be less than the principal amount and FMV of the Amalco Note.

Canco realized a capital loss on the disposition of its Opco A Common Shares which is deemed to be nil by virtue of paragraph 40(3.4)(a). Canco agrees that it will not claim a deduction for this capital loss before the time permitted by paragraph 40(3.4)(b).

The aggregate addition to the stated capital of the 1 Newco Common Share so issued did not exceed the maximum amount that could be added to the PUC of such Newco Common Share, having regard to subsection 85(2.1).

22. On XXXXXXXXXX, Newco, Opco A and Opco B amalgamated pursuant to a short-form vertical amalgamation under the BCA to form a new corporate entity ("Amalco") such that:

(a) all of the property of each predecessor corporation immediately before the amalgamation became property of Amalco by virtue of the amalgamation (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation),

(b) all of the liabilities of each predecessor corporation immediately before the amalgamation became liabilities of Amalco by virtue of the amalgamation (except amounts payable to any predecessor corporation), and

(c) the Opco A Common Shares, the Opco B Common Share and the Opco B Preferred Shares were cancelled on the amalgamation; and the common shares of Newco owned by Canco immediately prior to the amalgamation remained outstanding as Amalco common shares (the "Amalco Common Shares").

Immediately following the amalgamation, Canco held all the Amalco Common Shares as well as the existing Acquisition Debt and Operations Debt, plus the Amalco Notes. For greater certainty, the obligation of Opco B to Opco A under the Debenture was extinguished on the amalgamation.

Following the amalgamation, Amalco continued to hold and use the assets formerly held by Opco A and Opco B, respectively, for purposes of gaining or producing income from its business. Each of the Acquisition Debt, the Operations Debt and the Amalco Note that was outstanding immediately before the amalgamation became a debt of Amalco on the amalgamation and the amount payable by Amalco on the maturity of each such debt will be the same as the amount that would have been payable by such predecessor corporation on the maturity of such debt.

23. On XXXXXXXXXX, NRco D borrowed approximately $XXXXXXXXXX from NRco C, which was evidenced by a promissory note (the "NRco D Loan") in that amount. The NRco D Loan bears interest at about XXXXXXXXXX percent less than the New Canco Notes (defined in Paragraph 24), based on differences in the terms on the notes. For greater certainty, the principal amount of the NRco D Loan will be equal to the aggregate principal amount of the Amalco Notes.

24. On XXXXXXXXXX, NRco D made three interest-bearing loans to Canco in the aggregate amount of $XXXXXXXXXX, evidenced by Canco issuing three promissory notes (the "New Canco Notes"), each bearing interest at a reasonable rate that is less than the interest rates on the Amalco Notes. The proceeds from the New Canco Notes constituted borrowed money in reference to Canco, which were solely used for the payment to NRco D on the reduction of the paid-up capital of the Canco Preferred Shares described in Paragraph 26.

25. Amalco declared and paid a cash dividend (from its available cash on hand) to Canco. The amount of the taxable dividend paid by Amalco was approximately $ XXXXXXXXXX.

26. Canco reduced the PUC of the Canco Preferred Shares by an amount equal to the aggregate of the principal amount of the New Canco Notes described in Paragraph 24 and the taxable dividend paid by Amalco to Canco described in Paragraph 25. Canco used the cash proceeds it received from issuing the New Canco Notes and from the taxable dividend it received from Amalco to make a cash payment to NRco D on the PUC reduction. The amount of the PUC reduction was approximately $ XXXXXXXXXX. For greater certainty, the payment on the PUC reduction did not exceed the aggregate PUC or aggregate ACB of the Canco Preferred Shares to NRco D.

27. NRco D used a portion of the proceeds it received on the PUC reduction described in Paragraph 26 to repay the principal amount of the NRco D Loan and may use the balance of such proceeds to pay a dividend to its shareholder.

ADDITIONAL INFORMATION

28. The Proposed Transactions occurred in the order presented unless otherwise indicated with the exception of filing the applicable election forms described in Paragraphs 20 and 21, which will be filed on or before the applicable due date.

29. Immediately following the completion of the Proposed Transactions, the amount of any debts owing by Canco to specified non-residents for the purpose of subsection 18(4) did not exceed two times the PUC of the Canco Preferred Shares.

30. None of the Amalco Common Shares were, are or will be, at any time throughout the series of transactions that includes the Proposed Transactions described herein:

(a) the subject of a dividend rental arrangement;

(b) the subject of a guarantee agreement

(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).

31. Other than as described herein, no significant transactions have been completed prior to the date of this letter nor are there any other transactions currently being contemplated that would form part of the series of transactions or events that includes the Proposed Transactions.

PURPOSE OF PROPOSED TRANSACTIONS

32. The overall purpose of the Proposed Transactions was to consolidate the Canadian business operations carried on by Opco A and Opco B, and to restructure the capital of the relevant corporate entities, in a tax-efficient manner.

33. The purpose of the share conversion described in Paragraph 19 was to consolidate the tax attributes of the Exchangeable Shares with the tax attributes of the Opco A Common Shares, which also simplified the implementation of the Proposed Transactions since Opco A would only have one class of shares issued and outstanding, being Opco A Common Shares, after the conversion. In addition, since Canco owned all of the issued and outstanding Exchangeable Shares, there was no longer any need for a class of shares to be exchangeable into common shares of Foreign Pubco.

34. The purpose of the incorporation of Newco described in Paragraph 16; transfer of the Opco B Common Share to Opco A described in Paragraph 20; the transfer of the Opco A Common Shares to Newco described in Paragraph 21; and the amalgamation of Newco, Opco A and Opco B described in Paragraph 22, was to permit Amalco to bear the additional amount of indebtedness reflected in the Amalco Notes. The reason these steps were undertaken, instead of simply amalgamating Opco A and Opco B, was to simplify the recapitalization of the business operations with the additional debt represented by the Amalco Notes as described in Paragraph 21. For example, if Opco A and Opco B simply amalgamated after the transfer of Opco A's shares to Newco, there would be no additional debt borne by Amalco at this time on the Amalco Notes and a second amalgamation of Amalco with Newco would be required. The aggregate principal amount of the Amalco Notes is intended to match the additional amount of indebtedness to be borne by Canco under the New Canco Notes once the Proposed Transactions described in Paragraphs 23 to 27 were completed.

35. The purpose of implementing the Proposed Transactions described in Paragraphs 23 to 27 was to ensure that the indebtedness of Canco reflected by the New Canco Notes constituted "borrowed money" within the meaning of subparagraph 20(1)(c)(i). The aggregate principal amount of the New Canco Notes corresponds to part of the amount by which Canco's PUC was ultimately reduced by the Proposed Transactions described in Paragraph 26, and the proceeds of this indebtedness were used by Canco for this purpose.

36. The purpose for the three Amalco Notes described in Paragraph 21 and three Canco Notes described in Paragraph 24 is that Foreign Pubco wanted the three notes (in each case) to have different maturity dates and interest rates, because of commercial considerations, and not for tax considerations in any country.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. The amendment to reduce the redemption amount of the Canco Preferred Shares by any amounts paid by Canco on a reduction of PUC in respect of such shares, as described in Paragraph 18, will not, in and by itself, result in a disposition of the Canco Preferred Shares.

B. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply in respect of the conversion of the Exchangeable Shares into Opco A Common Shares as described in Paragraph 19.

C. Subject to the application of subsection 69(11), provided the appropriate joint election is filed in the prescribed form and manner within the time limits specified in subsection 85(6), the provisions of subsection 85(1) will apply to:

(i) the transfer of the Opco B Common Share to Opco A by Canco as described in Paragraph 20; and

(ii) the transfer of the Opco A Common Share to Newco by Canco as described in Paragraph 21,

such that the agreed amount in respect of each such transfer will be deemed to be Canco's proceeds of disposition and the particular transferee's cost thereof. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of the above transfers of property.

D. On the amalgamation of Newco, Opco A and Opco B to form Amalco, as described in Paragraph 22, the provisions of:

(a) subsection 87(1) will, by virtue of subsection 87(1.1), apply; and

(b) provided the Newco Common Shares were capital property to Canco immediately before the amalgamation, the provisions of subsection 87(4) other than paragraphs (c), (d) and (e) thereof will apply, such that:

(i) Canco will be deemed by paragraph 87(4)(a) to have disposed of its Newco Common Shares for proceeds of disposition equal to the ACB to Canco of such shares immediately before the amalgamation and Canco will be deemed by paragraph 87(4)(b) to have acquired its shares of Amalco at an aggregate cost equal to those proceeds of disposition;

(c) the cancellation of any of the shares of any predecessor corporation by virtue of the amalgamation will not give rise to a gain or loss;

(d) subsection 87(7) will apply to a debt or other obligation of any predecessor corporation that was outstanding immediately before the amalgamation and became a debt or other obligation of Amalco on the amalgamation including, in particular, the Acquisition Debt, the Operations Debt and the Amalco Notes, where the amount payable by Amalco on the maturity of such the debt or other obligation, as the case may be, is the same as the amount that would have been payable by such predecessor corporation on the maturity of such the debt or other obligation, as the case may be; and

(e) pursuant to the provisions of subsection 80.01(3), the settlement and cancellation of the Debenture upon the amalgamation of Newco, Opco A and Opco B, will result in it being deemed to have been settled immediately before the time that is immediately before the amalgamation by a payment, made by Opco B and received by Opco A, of an amount equal to the amount that would have been Opco A's cost amount of the Debenture at that time as computed in accordance with paragraphs 80.01(3)(a) and (b).

E. In respect of the amalgamation of Newco, Opco A and Opco B to form Amalco, as described in Paragraph 22:

(a) provided that Amalco continues to have a legal obligation to pay interest on the Operations Debt and provided Amalco continues to use the borrowed money from the Operations Debt in its business operations, Amalco will be entitled to deduct, in a taxation year, pursuant to paragraph 20(1)(c), the interest paid or payable (depending on the method regularly followed by Amalco in computing its income for purposes of the Act) to Canco on the Operations Debt in respect of the taxation year, to the extent the interest is reasonable;

(b) provided that Amalco has a legal obligation to pay interest on the Acquisition Debt and the property acquired as a result of the amalgamation of Newco, Opco A and Opco B, continues to be used by Amalco for the purposes of gaining or producing income therefrom (other than exempt income), Amalco will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year, the interest paid or payable (depending on the method regularly followed by Amalco in computing its income for purposes of the Act) to Canco, to the extent that the interest is reasonable; and

(c) provided that Amalco has a legal obligation to pay interest on the Amalco Notes, and provided that the property acquired as a result of the amalgamation of Newco, Opco A and Opco B continues to be used by Amalco for the purposes of gaining or producing income therefrom (other than exempt income), Amalco will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year, the interest paid or payable (depending on the method regularly followed by Amalco in computing its income for purposes of the Act) to Canco, to the extent that the interest is reasonable.

F. Provided that Canco has a legal obligation to pay interest on the New Canco Notes described in Paragraph 24, and provided that Canco used the proceeds from the New Canco Notes solely to make the payment to NRCo D on the reduction of the paid-up capital of the Canco Preferred Shares described in Paragraph 26, Canco will, pursuant to paragraph 20(1)(c), be entitled to deduct, in computing its income for a taxation year, the interest paid or payable (depending on the method regularly followed by Canco in computing its income for purposes of the Act) to NRCo D, to the extent that the interest is reasonable.

G. Provided that XXXXXXXXXX, and provided that NRco D will continue to be a resident of XXXXXXXXXX for the purposes of the XXXXXXXXXX Treaty, the beneficial owner of the interest paid or credited to it by Canco under the New Canco Notes, NRco D will be subject to non-resident withholding tax under Part XIII on such interest at the rate of 10% specified in XXXXXXXXXX Treaty.

H. The taxable dividend received by Canco from Amalco, as described in Paragraph 25, will be a taxable dividend that will, pursuant to subsection 112(1), be deductible in computing the taxable income of Canco for the year in which the dividend is received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

I. Subject to the application of subsection 40(3), the payment on the reduction of PUC on the Canco Preferred Shares described in Paragraph 26 did not, in and by itself result in:

(i) a disposition of the Canco Preferred Shares owned by NRco D; or

(ii) Canco being deemed by paragraph 84(4)(a) to have paid, or NRco D being deemed by paragraph 84(4)(b) to have received, a dividend; and

the amount received by NRco D in respect of such PUC reduction will reduce the ACB of NRco D's Canco Preferred Shares pursuant to subparagraph 53(2)(a)(ii).

J. Subsection 18(6) will not apply in respect of any of the debts described herein and owing by Amalco (or its predecessor corporations) to Canco, to deem any such amount to be a debt incurred by Amalco (or its predecessor corporations) to NRco D.

K. The provisions of subsection 69(11) will not apply to the transfer of the 1 Opco B Common Share to Opco A as described in Paragraph 20.

L. The provisions of 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 given above.

The above rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

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

(b) the residence status of NRco D for the purposes of the Act and the XXXXXXXXXX Treaty; or

(c) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the ruling given above.

Yours truly,

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