2003 Ruling 2002-0174053 - Internal Reorganization

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Where in an in-house loss utilization scheme, within an affiliated group, whether a disposition, by a taxpayer of its depreciable properties to an unrelated person, would be exempt under subparagraph 55(3)(a)(i)(B) of the Income Tax Act?

Position:

Provided that the proceeds of disposition of the depreciable properties are not less than the aggregate fair market value of the depreciable properties at the time of the sale, such disposition would be exempt under subparagraph 55(3)(a)(i)(B).

Reasons:

As stated above.

XXXXXXXXXX 2002-017405

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. In your subsequent facsimiles, XXXXXXXXXX provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

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

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one of the taxpayers or a related person;

(iii) under objection by one of the taxpayers or a related person;

(iv) before the courts or, if a judgement 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 Income Tax Rulings Directorate.

Definitions

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

(a) Unless otherwise indicated, all statutory references are to the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all references to monetary amounts are in Canadian dollars;

(b) "ACB" means "adjusted cost base" as that expression is defined in subsection 248(1);

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

(d) "agreed amount" means the amount that the taxpayer and the corporation have jointly elected in prescribed form in respect of an eligible property;

(e) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c.C-44, as amended;

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

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

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

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

(j) "dividend refund" has the meaning assigned by subsection 129(1);

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

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

(m) "FMV" represents fair market value which 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;

(n) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

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

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

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

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

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

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

(u) "recaptured depreciation" means the excess amount that is determined under subsection 13(1);

(v) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

(w) "Regulations" refers to the Income Tax Regulations;

(x) "related persons" has the meaning assigned by subsection 251(2);

(y) "restricted financial institution" has the meaning assigned by subsection 248(1);

(z) "series of transactions" has the meaning assigned by subsection 248(10);

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

(bb) "stated capital" has the meaning assigned by the provisions of CBCA;

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

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

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

(ff) "undepreciated capital cost" ("U.C.C.") has the meaning assigned by subsection 13(21).

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

Facts

1. XXXXXXXXXX ("Canco1") is a XXXXXXXXXX It is a private corporation, a TCC, a restricted financial institution and a specified financial institution. Canco1's tax affairs are administrated by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

Canco1 is a subsidiary wholly-owned corporation of XXXXXXXXXX . ("Foreignco1") which in turn is a subsidiary of XXXXXXXXXX ("Parentco").

Foreignco1 and Canco1 are controlled by Parentco.

Canco1 is a XXXXXXXXXX operating in Canada. XXXXXXXXXX

Canco1's assets include:

(a) XXXXXXXXXX and

(b) XXXXXXXXXX.

The XXXXXXXXXX are depreciable property described in XXXXXXXXXX.

The U.C.C. of Canco1's XXXXXXXXXX Property is nil. The capital cost of the XXXXXXXXXX to Canco1 exceeds $XXXXXXXXXX.

The XXXXXXXXXX and the XXXXXXXXXX Lease are eligible property.

2. The XXXXXXXXXX Lease is the only equipment lease that Canco1 currently is a party to. The lessee ("Lessee"), under the XXXXXXXXXX Lease, is XXXXXXXXXX and is not related to Canco1.

The XXXXXXXXXX Lease was originated by one of Canco1's former subsidiary wholly-owned corporations, XXXXXXXXXX ("Lessor") in XXXXXXXXXX. The terms of the XXXXXXXXXX Lease include the following:

(a) the leased properties are the XXXXXXXXXX;

(b) the lease term ends in XXXXXXXXXX;

(c) the Lessee has an option to purchase ("Purchase Option") the XXXXXXXXXX at an option price ("Option Price") of $XXXXXXXXXX. The Purchase Option is to be exercised on XXXXXXXXXX, and

(d) the XXXXXXXXXX Lease is to be construed in accordance with the laws applicable in the Province of XXXXXXXXXX.

The Lessor acquired most of the XXXXXXXXXX in used condition from the Lessee and the balance from a manufacturer.

For federal income tax purposes, the Lessor treated the XXXXXXXXXX Lease as a lease.

The Lessor borrowed funds ("XXXXXXXXXX Loan") from an unrelated lender ("Lender") in XXXXXXXXXX to finance the acquisition of the XXXXXXXXXX. The terms of the XXXXXXXXXX Loan require, inter alia, that the Lessor

(i) maintain title to the XXXXXXXXXX; and

(ii) provide the XXXXXXXXXX and the rent under the XXXXXXXXXX Lease as collateral security to the XXXXXXXXXX Loan.

On or about XXXXXXXXXX , the Lender, the Lessor and Canco1 entered into a novation agreement, pursuant to which, inter alia, Canco1 became the principal debtor of the XXXXXXXXXX Loan and the Lessor became the guarantor that guaranteed Canco1's XXXXXXXXXX Loan.

The Lender subsequently merged with another corporation to form XXXXXXXXXX ("AmalcoLender").

On or about XXXXXXXXXX,

(I) the Lessor amalgamated with a subsidiary corporation to form a new corporation ("Amalco"). By virtue of the merger, inter alia, the Lessor's XXXXXXXXXX and XXXXXXXXXX Lease became property of Amalco, and

(II) following the merger described in (I) above, Amalco was wound up into Canco1. All property of Amalco, which included the XXXXXXXXXX and the XXXXXXXXXX Lease, was distributed to Canco1 and all liabilities of Amalco were assumed by Canco1 on the wind-up of Amalco.

Since its acquisition of the XXXXXXXXXX and the XXXXXXXXXX Lease, Canco1 has included rental payments under the XXXXXXXXXX Lease as rental income for federal income tax purposes.

3. Prior to XXXXXXXXXX, the Lessee notified Canco1 (the "Notice") that it had elected to exercise its Purchase Option under the XXXXXXXXXX Lease.

On XXXXXXXXXX

(a) Canco1 and the Lessee amended the XXXXXXXXXX Lease by entering into an agreement ("Lease Amending Agreement"), which included the following terms:

(i) Canco1 acknowledged that the Lessee had given proper notice under the XXXXXXXXXX Lease;

(ii) the Option Price under the XXXXXXXXXX Lease was changed to $XXXXXXXXXX, and

(iii) the closing date of the sale of the XXXXXXXXXX to the Lessee was changed to XXXXXXXXXX or such later agreed date.

(b) Canco1 and the Lessee entered into a purchase and sale agreement ("Purchase and Sale Agreement ") which provided, inter alia, that Canco1 would sell the XXXXXXXXXX to the Lessee for $XXXXXXXXXX on XXXXXXXXXX or such later agreed date.

4. Foreignco1 is a XXXXXXXXXX corporation, which is chartered under the laws of XXXXXXXXXX pursuant to the XXXXXXXXXX, which is part of the XXXXXXXXXX.

5. Parentco is a XXXXXXXXXX public corporation. Its shares are widely held by the public. Parentco is governed by the laws of the State of XXXXXXXXXX.

Neither Parentco nor Foreignco1 is a resident of Canada for the purposes of the Act. Neither maintains a permanent establishment in Canada or files tax returns in Canada.

6. XXXXXXXXXX ("Lossco") is a private corporation, a specified financial institution and a TCC. It was incorporated in XXXXXXXXXX and is governed by the CBCA. Lossco's tax affairs are administrated by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre. Lossco's fiscal and taxation years end on XXXXXXXXXX.

Lossco operates in Canada and provides loans to commercial clients primarily to finance equipment such as XXXXXXXXXX. Lossco's assets have an aggregate value of just under $XXXXXXXXXX. However, Lossco has no Class XXXXXXXXXX Property.

The issued and outstanding capital of Lossco consists of common shares ("Lossco Common Shares"), which are all owned by XXXXXXXXXX ("Canco2").

Lossco has never carried on the business of equipment leasing.

Lossco has had a series of relatively small operating losses. Its largest loss was in XXXXXXXXXX when it lost $XXXXXXXXXX. Lossco had, for accounting purposes, a deficit of $XXXXXXXXXX and a shareholder's deficiency of $XXXXXXXXXX as at XXXXXXXXXX and a shareholder's deficiency of $XXXXXXXXXX as at XXXXXXXXXX. Lossco has not paid any dividends to its shareholder since its XXXXXXXXXX taxation year.

Currently Lossco has approximately $XXXXXXXXXX of non-capital losses.

Lossco does not currently have any balance in its RDTOH and will have no RDTOH at the end of its taxation year in which the purposed transactions described below are completed.

7. Canco2 is a private corporation, a TCC and is governed by the CBCA. The tax affairs of Canco2 are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

Canco2 is a subsidiary wholly-owned corporation of XXXXXXXXXX . ("Foreignco2") which in turn is a subsidiary wholly-owned corporation of XXXXXXXXXX . ("Foreignco3"). Foreignco3 is a subsidiary of Parentco.

Canco2 is a holding company whose assets include

(a) shares of its subsidiary corporations;

(b) loans receivable from its subsidiary corporations;

(c) incidental assets such as cash and prepaid expenses.

The Lossco Common Shares, held by Canco2, constitute capital property to Canco2.

8. Foreignco2 is a XXXXXXXXXX corporation and is governed by the laws of the State of XXXXXXXXXX. Foreignco2 is not a resident of Canada for the purposes of the Act. It does not maintain a permanent establishment in Canada and it does not file tax returns in Canada.

Prior to XXXXXXXXXX, Foreignco2 was a XXXXXXXXXX public corporation, which controlled Lossco through its subsidiary wholly-owned corporation, Canco2.

On XXXXXXXXXX, Parentco acquired all of the issued and outstanding shares of Foreignco2. As consideration for the acquisition, Parentco issued XXXXXXXXXX of its shares to the former shareholders of Foreignco2. Consequently, Parentco acquired control of Canco2 and Lossco on XXXXXXXXXX.

Prior to the acquisition of control of Lossco by Parentco, Lossco incurred approximately $XXXXXXXXXX of non-capital losses, which form part of Lossco's total non-capital losses of $XXXXXXXXXX as described in paragraph 6 above.

From XXXXXXXXXX to XXXXXXXXXX, Parentco and its subsidiaries in the United States underwent certain internal reorganizations such that in XXXXXXXXXX Foreignco3 owned all of the issued and outstanding shares of Foreignco2.

9. Canco1 and Lossco are related and affiliated persons.

Proposed Transactions

10. Pursuant to the provisions of the CBCA, the articles of incorporation of Lossco will be amended to create an additional class of an unlimited number of preferred shares (the "Lossco Preferred Shares"), each of which will include the following attributes:

(a) voting;

(b) redeemable and retractable, subject to applicable law, at any time for an amount, in U.S. dollars, equal to the aggregate FMV of the consideration for which the Lossco Preferred Shares are issued, divided by the number of such shares issued (the "Lossco Redemption Amount");

(c) entitled to a non-cumulative dividend at a rate not less than XXXXXXXXXX% per annum of the Lossco Redemption Amount, and

(d) a preference on dissolution over the Lossco Common Shares for the return of the redemption amount plus unpaid dividends.

11. Canco2 will provide approximately $XXXXXXXXXX to Lossco by way of capital contribution. Lossco will issue no new shares to Canco2 in respect of such capital contribution.

12. Following the capital contribution made by Canco2 to Lossco described in paragraph 11 above,

(a) Canco1 and the Lessee will enter into a sale cancellation agreement ("Sale Cancellation Agreement") which will, inter alia, provide the following:

(i) the Purchase and Sale Agreement described in paragraph 3(b) above will be cancelled ab initio, and

(ii) Canco1 will acknowledge and agree that the Notice given by the Lessee described in paragraph 3 above, is proper and valid under the XXXXXXXXXX Lease, and that Canco1 shall remain liable for the performance of its obligations under the XXXXXXXXXX Lease, including those relating to the Lessee's Purchase Option.

(b) Canco1 and the Lessee will amend the Lease Amending Agreement described in paragraph 3(a) above to, inter alia, confirm that, notwithstanding that the Lessee has duly given notice of its election to exercise the Purchase Option, should the Lessee not pay the revised Option Price of $XXXXXXXXXX on the closing date, Canco1 will have no recourse against the Lessee solely for that reason.

Following the completion of the transactions described in (a) and (b) above, Canco1, Lossco, the Lessee and AmalcoLender will carry out the transactions described in paragraphs 13 to 20 below.

13. Canco1 will sell to Lossco, and Lossco will purchase from Canco1, the XXXXXXXXXX for an amount equal to their FMV, being $XXXXXXXXXX and Canco1 will assign to Lossco, and Lossco will accept, the XXXXXXXXXX Lease as amended, for consideration equal to its FMV, being $XXXXXXXXXX.

Immediately prior to the sale of the XXXXXXXXXX and the assignment of the XXXXXXXXXX Lease, by Canco1 to Lossco, there will not be any agreement in existence between Canco1 and the Lessee for the purchase and sale of the XXXXXXXXXX.

The agreement, between Canco1 and Lossco, governing the sale of the XXXXXXXXXX and assignment of the XXXXXXXXXX Lease will include a price adjustment clause which will indicate that where the Canada Customs and Revenue Agency ("CCRA") disagrees with the purchase price of $XXXXXXXXXX for the XXXXXXXXXX and $XXXXXXXXXX for the assignment of the XXXXXXXXXX Lease, Canco1 and Lossco may agree to change the price to agree with the CCRA's estimate of FMV for the XXXXXXXXXX and the XXXXXXXXXX Lease.

As sole consideration for the transfer of the XXXXXXXXXX and the assignment of the XXXXXXXXXX Lease, Lossco will issue to Canco1 Lossco Preferred Shares having an aggregate redemption and retraction amount and FMV equal to the FMV at that time of the XXXXXXXXXX and the XXXXXXXXXX Lease, being the sum of $XXXXXXXXXX and $XXXXXXXXXX.

Canco1 and Lossco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer of the XXXXXXXXXX and the assignment of the XXXXXXXXXX Lease, by Canco1 to Lossco, an agreed amount as follows:

(i) $XXXXXXXXXX in the case of the XXXXXXXXXX Lease; and

(ii) an amount not less than the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of the XXXXXXXXXX.

In each case, the agreed amount will not exceed the FMV of the respective property.

14. Pursuant to the provisions of the CBCA, the addition to the stated capital of the Lossco Preferred Shares in respect of the issuance of the Lossco Preferred Shares, will equal the aggregate of the FMV of the property transferred to Lossco as described in paragraph 13 above.

15. Following the completion of the transactions described in paragraph 13 above, Lossco will sell the XXXXXXXXXX to the Lessee for $XXXXXXXXXX ("Purchase Price"), which amount will not be less than the aggregate FMV of the XXXXXXXXXX at that time.

Concurrent with the sale by Lossco of the XXXXXXXXXX to the Lessee, Lossco and the Lessee will execute a lease cancellation agreement to cancel the XXXXXXXXXX Lease.

Lossco will not allocate any portion of the Purchase Price to the lease cancellation and therefore Lossco will receive no consideration in respect of that cancellation.

16. Following the sale described in paragraph 15 above, Lossco will sell and assign, to Canco1, its sale price receivable of $XXXXXXXXXX owing to it from the Lessee ("Sale Price Receivable") for $XXXXXXXXXX, its FMV.

The Lessee and AmalcoLender will acknowledge and consent to the sale and assignment of the Sale Price Receivable.

17. The Lessee will direct AmalcoLender to pay the Purchase Price to Canco1.

18. AmalcoLender will set off the payment of the Purchase Price against an equivalent amount of the XXXXXXXXXX Loan owing by Canco1 to AmalcoLender.

19. Canco1 will pay cash of $XXXXXXXXXX to Lossco in respect of its purchase of the Sale Price Receivable.

20. Following receipt, by Lossco, of the $XXXXXXXXXX from Canco1, Lossco will immediately redeem all of its Preferred Shares for an amount equal to their FMV, being the sum of $XXXXXXXXXX and $XXXXXXXXXX, and will pay cash of that amount to Canco1 as sole consideration for such redemption.

Additional Information

21. The Lossco Preferred Shares, issued by Lossco to Canco1 as consideration for Canco1's XXXXXXXXXX and XXXXXXXXXX Lease described in paragraph 13 above, will not be acquired by Canco1 in the ordinary course of its business.

22. There will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2) of the Act, in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

23. Lossco will not have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

24. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act.

25. None of the corporations described above is or will be, at any time before the completion of the proposed transactions described above, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

26. None of the proposed transactions described above will have an impact on Canco1, Canco2 or Lossco's ability to pay any of its outstanding tax liabilities.

Purpose of the Proposed Transactions

27. The overall purpose of the proposed transactions is to allow Lossco to utilize its non-capital losses as well as to complete the Lessee's purchase of the XXXXXXXXXX pursuant to its Purchase Option under the XXXXXXXXXX Lease.

28. The purpose of the capital contribution made by Canco2 to Lossco described in paragraph 11 above, is to assist Lossco in meeting the solvency test and the liquidity test under the CBCA for the redemption of its Preferred Shares described in paragraph 20 above.

Rulings

Provided that the preceding statements constitute 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 follows:

A. The provisions of subsection 85(1) will apply to the transfer by Canco1 of its XXXXXXXXXX, and the assignment by Canco1 of its XXXXXXXXXX Lease, to Lossco as described in paragraph 13 above, such that the agreed amount in respect of each transfer of eligible property will be deemed to be Canco1's proceeds of disposition and Lossco's cost thereof pursuant to paragraph 85(1)(a). In respect of depreciable property, to the extent that Canco1's capital cost exceeds Canco1's proceeds of disposition of the property, Lossco's capital cost of each such property will be determined in accordance with subsection 85(5).

For greater certainty,

(a) paragraph 85(1)(e.2) will not apply to the transfer, and

(b) subsection 85(2.1) will apply to reduce the PUC of the Lossco Preferred Shares issued, as described in paragraph 14 above, by Lossco.

B. Subsection 84(3) will apply on the redemption of the Lossco Preferred Shares described in paragraph 20 above, to deem Lossco to have paid and Canco1 to have received, a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and such dividend

(a) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of Canco1;

(b) will be deductible by Canco1 in computing its taxable income pursuant to subsection 112(1) and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(c) will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act;

(d) by virtue of subsection 112(3) of the Act, will reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received; and

(e) will not be subject to tax under Part IV.1 and Part VI.1 of the Act on the basis that such dividend will be an excepted dividend by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and an excluded dividend by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as Canco1 will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in Lossco at the time of the redemption of such shares.

C. By virtue of subsection 186(2) and paragraph 186(4)(a) of the Act, Canco1 will be connected with Lossco. Provided that Lossco is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in ruling B above, Canco1 will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

D. By virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividend referred to in ruling B above, provided that

(a) the proceeds of disposition of the XXXXXXXXXX, being $XXXXXXXXXX, are not less than the aggregate FMV of the XXXXXXXXXX at the time of the sale described in paragraph 15 above; and

(b) there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the taxable dividend referred to in ruling B above.

For greater certainty, the proposed transactions described in paragraphs 10 to 20 above, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

E. By virtue of paragraph 53(1)(c), provided that the capital contribution ("Contribution") made by Canco2 to Lossco as described in paragraph 11 above results in an increase in the FMV of the Lossco Common Shares owned by Canco2, in computing the ACB to Canco2 of its Lossco Common Shares at any time after the Contribution, there shall be added to the cost to Canco2 of those shares such part of the amount of the Contribution as cannot reasonably be regarded as a benefit conferred by Canco2 on a person (other than Lossco) who was related to Canco2.

For greater certainty, the Contribution to Lossco will not be included in computing the income, for the purpose of section 9, of Lossco.

F. To the extent that the non-capital losses of Lossco described in paragraph 6 above include non-capital losses that were incurred by Lossco

(a) for a taxation year that ended prior to the acquisition of control, by Parentco, of Lossco ("pre-acquisition non-capital losses") described in paragraph 8 above, subsection 111(5) will apply to such pre-acquisition non-capital losses. Pre-acquisition non-capital losses cannot be utilized, by Lossco, to reduce any recaptured depreciation realized from the disposition of the XXXXXXXXXX to the Lessee described in paragraph 15 above; and

(b) for a taxation year that ended following the acquisition of control, by Parentco, of Lossco described in paragraph 8 above, subsection 111(5) will not apply to such non-capital losses.

G. The provisions of subsections 15(1), 56(2), 56(4), 69(4), and 246(1) will not apply to any of the proposed transactions described in paragraphs 10 to 20 above, in and by themselves.

H. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions described in paragraphs 10 to 20 above, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the CCRA on May 17, 2002 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the Act in its present form and do 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 should be construed as implying that CCRA has agreed to or reviewed:

(a) the determination of the FMV or the cost amount of any particular asset, in particular, the XXXXXXXXXX, or the PUC of any shares referred to herein; and

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

Price adjustment clause

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares.

In addition, any such adjustment could affect the rulings given above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause. The general position of the CCRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch