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: uniquely structured DPS
Position: Favourable ruling on
Reasons: Complies with ITA
XXXXXXXXXX 2003-018373
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request.
We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling:
(i) is in an earlier return of a taxpayer identified in this document or of a related person,
(ii) is being considered by any Tax Services Office or Taxation Centre of the Agency in connection with a tax return already filed,
(iii) is under objection by a taxpayer identified in this document or by a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) is the subject of a ruling previously considered by this Directorate.
In this letter, the following terms have the meanings specified:
(a) "XXXXXXXXXX Warrants" means XXXXXXXXXX warrants of New Debtor entitling the holders thereof to subscribe for XXXXXXXXXX Shares or XXXXXXXXXX, of New Debtor at an exercise price per share XXXXXXXXXX;
(b) "XXXXXXXXXX Warrants" means XXXXXXXXXX warrants of New Debtor entitling the holders thereof to subscribe for XXXXXXXXXX Shares or XXXXXXXXXX, of New Debtor at an exercise price per share XXXXXXXXXX;
(c) "Accretion Amount" means, at any particular time, the product obtained by the multiplication of XXXXXXXXXX by XXXXXXXXXX as of the end of the immediately preceeding semi-annual period;
(d) "Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended to the date hereof;
(e) "Adjusted Cost Base" ("ACB") has the meaning assigned by section 54 of the Act;
(f) "Administrative Agent" means XXXXXXXXXX;
(g) "XXXXXXXXXX Unsecured Creditors" means with respect to Debtor only, the Noteholders and holders of Tax Claims, if any, as described in paragraph 28(a) below;
(h) "XXXXXXXXXX Committee" means the informal ad hoc committee of Noteholders formed to pursue discussions with Debtor regarding its proposed recapitalization as described herein;
(i) "Amalco" means the Taxable Canadian corporation resulting from the amalgamation of Subco, Debtor's Sub #1, Debtor's Sub #1's Sub A, Debtor's Sub #1's Sub B, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4 as described in paragraph 78 below;
(j) "Amalco2" means the Taxable Canadian corporation resulting from the amalgamation of Subco2 and Debtor's SubSub as described in paragraph 80 below;
(k) "Amalgamation" means the amalgamation of Subco, Debtor's Sub #1, Debtor's Sub #1's Sub A, Debtor's Sub #1's Sub B, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4 as described in paragraphs 78 and 79 below;
(l) "Amalgamation2" means the amalgamation of Subco2 and Debtor's SubSub as described in paragraph 80 below;
(m) "Average Common Share Price" means as at relevant date the weighted average trading price per share of the XXXXXXXXXX Shares and XXXXXXXXXX during the XXXXXXXXXX dates ending XXXXXXXXXX trading days prior such relevant date;
(n) "Canadian-Controlled Private Corporation" has the meaning assigned by subsection 125(7) of the Act;
(o) XXXXXXXXXX;
(p) "CBCA" means the Canada Business Corporations Act;
(q) "CCAA" means the Companies Creditors Arrangement Act (Canada);
(r) "CCRA" means the Canada Customs and Revenue Agency;
(s) "XXXXXXXXXX Shares" means the XXXXXXXXXX Shares in the capital of New Debtor;
(t) "XXXXXXXXXX Shares" means the XXXXXXXXXX Shares in the capital of New Debtor;
(u) "Commercial Obligation" has the meaning assigned by subsection 80(1) of the Act;
(v) "Convertible Notes" means a series of subordinated convertible XXXXXXXXXX% notes XXXXXXXXXX issued by New Debtor having the same terms and conditions as the XXXXXXXXXX Preferred Shares (XXXXXXXXXX) and a term to maturity equal to the remaining term to Maturity of the XXXXXXXXXX Preferred Shares;
(w) "Day 1" means the first day of the two day period during which the Proposed Transactions will occur;
(x) "Day 2" means the second day of the two day period during which the Proposed Transactions will occur;
(y) "Day 1 Transaction" means the transactions which form part of the Proposed Transactions that will be realized on Day 1;
(z) "Day 2 Transaction" means the transactions which form part of the Proposed Transactions that will be realized on Day 2;
(aa) "Debtor" means XXXXXXXXXX;
(bb) "Debtor's Sub #1" means XXXXXXXXXX;
(cc) "Debtor's Sub #1's Sub A" means XXXXXXXXXX;
(dd) "Debtor's Sub #1's Sub B" means XXXXXXXXXX;
(ee) "Debtor's Sub #2" means XXXXXXXXXX;
(ff) "Debtor's Sub #3" means XXXXXXXXXX;
(gg) "Debtor's Sub #4" means XXXXXXXXXX;
(hh) "Debtor's SubSub" (or "Debtor's Sub #1's Sub C") means XXXXXXXXXX;
(ii) "Distress Preferred Shares" ("DPS") means, the XXXXXXXXXX Preferred Shares XXXXXXXXXX;
(jj) "EBITDA" means operating income (loss) plus, to the extent deducted in calculating operating income (loss), non-cash restructuring charges impairment of intangible assets, depreciation and amortization calculated in accordance with Canadian GAAP;
(kk) "Effective Date" means the date on which the Plan becomes effective in accordance with the CCAA;
(ll) "Excess Cash Flow" means, for any given fiscal period:
(a) consolidated EBITDA of New Debtor for such fiscal period, minus:
(b) the sum of:
(i) scheduled payments of principal made pursuant to XXXXXXXXXX Debt XXXXXXXXXX for such fiscal period,
(ii) payments of principal made pursuant to XXXXXXXXXX Facility XXXXXXXXXX,
(iii) the principal portion of scheduled payments under capital lease obligations made by New Debtor, Amalco and the subsidiaries which are guarantors for such fiscal period,
(iv) cash interest paid by New Debtor, Amalco and the subsidiaries which are guarantors for such fiscal period,
(v) cash taxes applicable to such fiscal period and paid or payable by New Debtor, Amalco and the subsidiaries which are guarantors prior to the date of determination, and
(vi) capital expenditures incurred (XXXXXXXXXX) by New Debtor during such fiscal period;
(mm) "Existing Credit Agreement" means the credit agreement dated XXXXXXXXXX, as amended and restated as of XXXXXXXXXX, among Debtor's Sub #3 and Debtor's Sub #4, as borrowers, Debtor, as guarantor, the Administrative Agent and the Lenders;
(nn) "Existing Stock Option Plan" means the stock option plan of Debtor established for senior executives and key employees on XXXXXXXXXX;
(oo) "Existing Stock Purchase Plan" means the employee stock purchase plan of Debtor adopted by the Board on XXXXXXXXXX, providing for the grant to employees of shares of Debtor and its subsidiaries of options to purchase XXXXXXXXXX Shares of Debtor XXXXXXXXXX;
(pp) "XXXXXXXXXX Preferred Shares" means the XXXXXXXXXX Preferred Shares in the capital of New Debtor to be issued to the Secured Creditors in consideration for an equivalent amount of the Secured Debt;
(qq) "Forgiven Amount" has the meaning assigned by subsection 80(1) of the Act;
(rr) "FMV" means fair market value;
(ss) "XXXXXXXXXX Agreement" means the agreement entered into on XXXXXXXXXX between any of Debtor, Debtor's Sub #3 and Debtor's Sub #4, the Administrative Agent and the Lenders, pursuant to which the Lenders confirmed their intention not to exercise any enforcement rights or remedies under the Existing Credit Agreement or under the security instruments granted under the Existing Credit Agreement until the XXXXXXXXXX Deadline;
(tt) "XXXXXXXXXX Deadline" means XXXXXXXXXX, the date until which the Lenders agreed to forebear the exercise of any enforcement right under the Existing Credit Agreement or the security instruments granted under the Existing Credit Agreement;
(uu) XXXXXXXXXX;
(vv) XXXXXXXXXX;
(ww) "XXXXXXXXXX Redemption Price" means, for purposes hereof: (i) the XXXXXXXXXX Redemption Price shall initially be the issue price per share thereof; and XXXXXXXXXX;
XXXXXXXXXX
(xx) XXXXXXXXXX;
(yy) XXXXXXXXXX;
(zz) "Guarantors" means New Debtor and all of its subsidiaries, XXXXXXXXXX, that will act as guarantors of the XXXXXXXXXX;
(aaa) "Hedge Counterparties" means XXXXXXXXXX;
(bbb) "Hedging Agreements" means the secured hedging agreements pertaining to the XXXXXXXXXX Secured Loans and XXXXXXXXXX Notes XXXXXXXXXX entered into pursuant to master agreements respectively dated XXXXXXXXXX;
(ccc) "Industry Canada" means the Minister of Industry Canada;
(ddd) "Interco Receivables" or "Interco Notes" means all notes receivable by Debtor from each of Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, as described in paragraph 29 below;
(eee) "In-the-Money" means that as of any particular trading day, if the XXXXXXXXXX Shares XXXXXXXXXX are listed and posted for trading on the XXXXXXXXXX , the Average Common Share Price as of such trading day is equal to or in excess of the then current Redemption Price;
(fff) "Lenders" means the group of lenders party, from time to time, to the Existing Credit Agreement;
(ggg) "Lock-Up Agreements" means the agreements entered into between (i) Debtor and certain Secured Creditors and (ii) Debtor and certain Unsecured Creditors, respectively, under which the Secured and Unsecured Creditors, as applicable, which executed the agreement agreed, subject to the terms and conditions set forth therein, to vote for the approval of the Plan by the courts and not to transfer or otherwise dispose of their debt to an assignee unless the latter agrees in writing to be bound by the terms of the applicable Lock-Up Agreement;
(hhh) "Material Assets Sale" means any sale, transfer or other disposition of assets generating net proceeds (subject to customary exceptions) in excess of $XXXXXXXXXX;
(iii) "Maturity" means XXXXXXXXXX;
(jjj) "New Board" means the Board of Directors of New Debtor as described in paragraph 72 below;
(kkk) "New Debtor" means the new corporation to be incorporated under the CBCA, as described in paragraph 71 below;
(lll) "New Instruments" means XXXXXXXXXX Debt, XXXXXXXXXX to be allocated to the Secured Creditors as described in paragraph 87 below;
(mmm) XXXXXXXXXX;
(nnn) "Noteholders" means the holders of the Unsecured Notes as described in paragraph 28(a) below;
(ooo) "Old Equity" means the existing issued and outstanding shares of Debtor;
(ppp) XXXXXXXXXX;
(qqq) "Plan" means the plan of arrangement filed pursuant to the CCAA and the CBCA, as amended from time to time in accordance with its terms as described in paragraph 39 below;
(rrr) "Principal" means XXXXXXXXXX;
(sss) "Public Corporation" has the meaning assigned by subsection 89(1) of the Act;
(ttt) "Redemption Price" has the meaning assigned by Appendix A hereto;
(uuu) "S&P" means Standard & Poor's;
(vvv) "XXXXXXXXXX Steering Committee" means the informal steering committee established by certain Secured Creditors composed of representatives of the Administrative Agent and of certain Secured Creditors established to pursue discussions with Debtor;
(www) XXXXXXXXXX Preferred Shares" means the XXXXXXXXXX preferred shares issued by New Debtor to the Secured Creditors and the XXXXXXXXXX Unsecured Creditors;
(xxx) "Secured Creditors" means the Lenders and the Hedge Counterparties;
(yyy) "Secured Debt" means the sum of the Senior Secured Loans and the amount owed under the Hedging Agreements inclusive of any accrued and unpaid interest;
(zzz) "Senior Secured Loans" means the loans granted under the Existing Credit Agreement, as described in paragraph 28(b) below;
(aaaa) "Special Committee" means a special committee of the Board of Directors of Debtor composed of independent directors formed by Debtor on XXXXXXXXXX with the view of evaluating various strategic options to reduce Debtor's financing costs and improve its liquidity and operating performance;
(bbbb) XXXXXXXXXX;
(cccc) XXXXXXXXXX;
(dddd) XXXXXXXXXX;
(eeee) XXXXXXXXXX;
(ffff) XXXXXXXXXX;
(gggg) XXXXXXXXXX
(hhhh) "Subco" means XXXXXXXXXX;
(iiii) "Subco2" means XXXXXXXXXX;
(jjjj) "Subsidiary Wholly-Owned Corporation" has the meaning assigned by subsection 248(1) of the Act;
(kkkk) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1) of the Act;
(llll) "Taxes" shall mean any and all federal and provincial taxes, assessments, reassessments and other governmental charges, duties, impositions and liabilities (including, without limitation, any Claims by Her Majesty the Queen, Her Majesty the Queen in right of Canada, Her Majesty the Queen in right of any province or territory of Canada, CCRA and any similar revenue or taxing authority of any province or territory of Canada) including without limitation taxes based upon or measured by reference to gross receipts, income, profits, sales, capital, use and occupation and recapture taxes, together with all interest, penalties, fines and additions with respect to such amounts;
(mmmm)"Tax Claims" means any and all Claims against Debtor for Taxes by any federal, provincial, territorial, municipal, local or foreign authority, agency or government (including, without limitation, any and all Claims for Taxes by Her Majesty the Queen, Her Majesty the Queen in right of Canada, Her Majesty the Queen in right of any province or territory of Canada, CCRA and any similar revenue or taxing authority of any province or territory of Canada) in respect of any taxation year or period ending on or before the Effective Date including, without limitation, any Taxes arising out of or attributable to any transaction to be completed in accordance with the Plan and, in the case where a current taxation year does not end on the Effective Date, any Taxes due in respect of or attributable to that portion of the period commencing at the beginning of such current taxation year up to and including the Effective Date;
(nnnn) XXXXXXXXXX;
(oooo) "Term Preferred Share" has the meaning assigned in subsection 248(1) of the Act;
(pppp) "XXXXXXXXXX Facility" means the new XXXXXXXXXX credit facility XXXXXXXXXX;
(qqqq) "XXXXXXXXXX Debt" means the new XXXXXXXXXX loan of $XXXXXXXXXX to be established XXXXXXXXXX;
(rrrr) XXXXXXXXXX;
(ssss) XXXXXXXXXX;
(tttt) "UCC" means undepreciated capital cost as the term is defined for the purpose of the Act;
(uuuu) "Unsecured Creditors" means the holders of the Unsecured Notes so described in paragraph 28(b) below and such other Unsecured Creditors, if any, designated by Debtor under the Plan, including the Crown's claims;
(vvvv) "Unsecured Notes" means collectively, the Unsecured Notes due XXXXXXXXXX;
(wwww) XXXXXXXXXX;
(xxxx) XXXXXXXXXX;
(yyyy) XXXXXXXXXX;
(zzzz) XXXXXXXXXX;
(aaaaa)XXXXXXXXXX;
(bbbbb) XXXXXXXXXX.
Our understanding of the facts and proposed transactions is as follows:
FACTS
Debtor
1. Debtor was incorporated under the XXXXXXXXXX on XXXXXXXXXX. Debtor is a taxable Canadian corporation and a public corporation. Debtor has been a public corporation since XXXXXXXXXX and its XXXXXXXXXX shares are listed on the XXXXXXXXXX.
2. Debtor's authorized share capital is comprised of XXXXXXXXXX.
3. XXXXXXXXXX.
4. Debtor conducts its business of XXXXXXXXXX through four (4) direct and indirect subsidiaries which are: Debtor's SubSub, Debtor's Sub #2, Debtor's Sub #3 and Debtor's Sub #4. The business activities of Debtor and its subsidiaries are exclusively conducted in Canada.
5. XXXXXXXXXX.
6. Debtor's adjusted cost base ("ACB") of its shares in each of Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4 is, as at XXXXXXXXXX, as follows:
Debtor's Sub #1:
$XXXXXXXXXX
Debtor's Sub #2:
$XXXXXXXXXX
Debtor's Sub #3:
$XXXXXXXXXX
Debtor's Sub #4:
$XXXXXXXXXX
Total
$XXXXXXXXXX
The shares of Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4 are capital properties of Debtor.
7. In addition to the Interco Notes and the shares of its four wholly-owned subsidiaries, Debtor holds the following assets as of XXXXXXXXXX:
Depreciable Property
XXXXXXXXXX .
Cash and Equivalent
$XXXXXXXXXX
Short term investments
XXXXXXXXXX.
XXXXXXXXXX.
Sales Tax Receivables
$XXXXXXXXXX.
Receivables - other
$XXXXXXXXXX.
Prepaid
$XXXXXXXXXX.
Deposit - Suppliers
$XXXXXXXXXX.
Deferred Charges
$XXXXXXXXXX.
8. XXXXXXXXXX:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Debtor's Sub #1 - XXXXXXXXXX
9. Debtor's Sub #1 was incorporated under XXXXXXXXXX on XXXXXXXXXX. Debtor's Sub # 1 is a taxable Canadian corporation. XXXXXXXXXX
10. XXXXXXXXXX.
11. The business activities of Debtor's Sub # 1 and its subsidiary wholly-owned corporations are exclusively conducted in Canada.
12. Debtor's Sub #1's adjusted cost base ("ACB") of its shares in Debtor's Sub #1's Sub A, Debtor's Sub #1's Sub B and Debtor's SubSub are, as at XXXXXXXXXX, as follow:
Debtor's Sub #1's Sub A:
$XXXXXXXXXX
Debtor's Sub #1's Sub B:
$XXXXXXXXXX
Debtor's SubSub:
$XXXXXXXXXX
Total
$XXXXXXXXXX
13. The shares of Debtor's Sub #1's Sub A, Debtor's Sub #1's Sub B, and Debtor's SubSub are capital property to Debtor's Sub #1.
Debtor's Sub #1's Sub A - XXXXXXXXXX
14. Debtor's Sub #1's Sub A was incorporated under XXXXXXXXXX on XXXXXXXXXX. Debtor's Sub #1's Sub A is a taxable Canadian corporation. XXXXXXXXXX.
15. XXXXXXXXXX.
Debtor's Sub #1's Sub B - XXXXXXXXXX.
16. Debtor's Sub #1's Sub B was incorporated under XXXXXXXXXX on XXXXXXXXXX. Debtor's Sub #1's Sub B is a taxable Canadian corporation. XXXXXXXXXX.
17. XXXXXXXXXX.
Debtor's Sub #1's Sub C - (Debtor's SubSub) - XXXXXXXXXX
18. Debtor's SubSub was incorporated under XXXXXXXXXX on XXXXXXXXXX . Debtor's SubSub is a taxable Canadian corporation. XXXXXXXXXX
19. XXXXXXXXXX.
20. XXXXXXXXXX.
21. XXXXXXXXXX.
Debtor's Sub #2 - XXXXXXXXXX.
22. Debtor's Sub #2 was incorporated under XXXXXXXXXX on XXXXXXXXXX . Debtor's Sub #2 is a taxable Canadian corporation. XXXXXXXXXX.
23. XXXXXXXXXX.
Debtor's Sub #3 - XXXXXXXXXX.
24. Debtor's Sub # 3 was incorporated under XXXXXXXXXX on XXXXXXXXXX . Debtor's Sub # 3 is a taxable Canadian corporation. XXXXXXXXXX.
25. XXXXXXXXXX.
Debtor's Sub #4 - XXXXXXXXXX.
26. Debtor's Sub #4 was incorporated under XXXXXXXXXX on XXXXXXXXXX . Debtor's Sub #4 is a taxable Canadian corporation. XXXXXXXXXX.
27. XXXXXXXXXX.
Debtor's Outstanding Debts
28. Debtor's outstanding debt obligations as at XXXXXXXXXX is comprised of the following:
(a) Unsecured Notes:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Based on information received from the XXXXXXXXXX Committee, a substantial number of XXXXXXXXXX
(b) Secured Notes:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
InterCorporate Indebtedness
InterCo Notes
29. As mentioned in paragraph 28 above, proceeds from the Unsecured Notes were used by Debtor to fund the business operations of its subsidiaries. The subsidiaries issued notes payable (such notes payable by the subsidiaries, Collectively, the "Interco Notes") in consideration for the loans. The Interco Notes are capital property to Debtor and are Commercial Obligations of Debtor. XXXXXXXXXX:
BORROWER
LOAN BALANCE RECEIVABLE
XXXXXXXXXX
Debtor's Sub #2
$ XXXXXXXXXX
Debtor's Sub #3
$ XXXXXXXXXX
Debtor's Sub #4
$XXXXXXXXXX
Aggregate of Interco Notes
$XXXXXXXXXX
XXXXXXXXXX
Debtor's SubSub Loans
30. The following loans have been made by the following companies to Debtor's SubSub. XXXXXXXXXX.
As of XXXXXXXXXX, the amounts of the loans, all of which bear interest, are as follows:
LENDER
LOAN BALANCE RECEIVABLE
XXXXXXXXXX
Debtor
$XXXXXXXXXX
Debtor's Sub #1
$ XXXXXXXXXX
Debtor's Sub #2
$ XXXXXXXXXX
Debtor's Sub #3
$ XXXXXXXXXX
Debtor's Sub #4
$XXXXXXXXXX
Aggregate Debtor's SubSub Loan balance
$XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
31. XXXXXXXXXX
32. XXXXXXXXXX
33. XXXXXXXXXX
34. XXXXXXXXXX
35. XXXXXXXXXX
36. XXXXXXXXXX
37. XXXXXXXXXX
38. XXXXXXXXXX
Financial difficulty of the Debtor
39. On XXXXXXXXXX, an application pursuant to the CCAA was made to XXXXXXXXXX by Debtor, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, Debtor's Sub #1's Sub B, and Debtor's SubSub and an initial order was granted by the court pending the filing of the Plan. The initial order imposed a general stay of proceedings against Debtor, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, Debtor's Sub #1's Sub B, and Debtor's SubSub for a period of 30 days from the date thereof, provided for the appointment of a monitor and directed that the Plan be filed with the court on or before XXXXXXXXXX.
At the creditor's meeting on XXXXXXXXXX, XXXXXXXXXX% of the Secured Creditors and XXXXXXXXXX% of the XXXXXXXXXX Unsecured Creditors approved the Plan, representing XXXXXXXXXX % and XXXXXXXXXX%, respectively, of the total value of the Secured Claims and the XXXXXXXXXX Unsecured Claims entitled to vote at such meeting.
On XXXXXXXXXX , the Debtor received a sanction order from XXXXXXXXXX approving the Plan.
40. XXXXXXXXXX.
41. To finance these activities, Debtor raised over $XXXXXXXXXX in debt and equity capital between XXXXXXXXXX.
42. XXXXXXXXXX.
43. Due to XXXXXXXXXX, Debtor's strategic business plan required additional funding. XXXXXXXXXX.
44. XXXXXXXXXX .
45. Given this context, Debtor's operations cannot support its current financial structure. XXXXXXXXXX.
46. Debtor also strove to obtain further funding from XXXXXXXXXX stakeholder in the shares of Debtor. After numerous discussions XXXXXXXXXX shareholders XXXXXXXXXX refused to invest additional funds in Debtor. XXXXXXXXXX.
47. The approximate tax attributes of Debtor and its subsidiaries as at XXXXXXXXXX are as follows:
Corporation
Balance of Non-capital losses
UCC of depreciable properties
FMV of Depreciable properties
Debtor
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Debtor's Sub #1
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Debtor's Sub #1's Sub A
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Debtor's Sub #3
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Debtor's Sub #2
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Debtor's Sub #1's Sub B
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Debtor's Sub #4
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
Debtor's SubSub
XXXXXXXXX
XXXXXXXXX
XXXXXXXXX
48. On XXXXXXXXXX, Debtor announced that it had retained the services of XXXXXXXXXX ("Valuator"), as financial advisor, and formed the Special Committee. The mandate of the Special Committee is to review and evaluate the alternatives of Debtor with a view to reducing its financing costs and improving its liquidity.
49. In its valuation, Valuator estimated the total enterprise value of Debtor and its subsidiaries on a consolidated basis to be in the range of $XXXXXXXXXX and $XXXXXXXXXX. The Proposed Transactions described below were based on a total enterprise value of $XXXXXXXXXX. When the proposed transactions described herein are realized, only XXXXXXXXXX% of the XXXXXXXXXX Shares will be attributable to the existing holders of outstanding Old Equity, who will also receive a portion of the warrants. XXXXXXXXXX.
50. A variety of possible strategic financial investors which had been identified as possible participants in a recapitalization of Debtor were contacted. However, these attempts have been unsuccessful in producing additional sources of funding for the Debtor.
51. Concurrently with its attempts to find strategic financial investors, the Special Committee determined that it was in Debtor's best interest to enter into discussions with the Secured Creditors. As is customary in similar circumstances and in light of the practical difficulty in conducting negotiations between Debtor and a large and varied group of Secured Creditors, the Secured Creditors proceeded, for convenience purposes only, to form the XXXXXXXXXX Steering Committee. Similarly, the XXXXXXXXXX Committee was established by the Noteholders to pursue discussions with the Special Committee regarding the recapitalization of Debtor.
52. Debtor engaged in discussions with Secured Creditors and the Unsecured Creditors. They are unwilling to provide further financing to the Debtor except under the terms of the Plan.
53. Debtor approached other financial institutions regarding additional sources of funding. However, these attempts have been unsuccessful in producing additional sources of funding for the Debtor.
54.
XXXXXXXXXX.
55. On XXXXXXXXXX, Debtor, Debtor's Sub #3 and Debtor's Sub #4 entered into the XXXXXXXXXX Agreement pursuant to which the Lenders confirmed that they did not intend to exercise any rights or remedies under the enforcement provisions of the Existing Credit Agreement or the security instruments granted under the Existing Credit Agreement resulting from certain possible future defaults of Debtor and agreed to forebear from the exercise of any such rights or remedies in respect of these possible defaults during the period from XXXXXXXXXX until XXXXXXXXXX.
56. The XXXXXXXXXX Agreement provided that upon a written request by, Debtor's Sub #3, Debtor's Sub #4 and Debtor to the Agent, the XXXXXXXXXX Deadline would be extended to XXXXXXXXXX provided that at such time Debtor's Sub #3, Debtor's Sub #4 and Debtor, were in compliance with all of their obligations under the Forbearance Agreement and no default or event of default, as defined in the Existing Credit Agreement, had occurred.
57. On XXXXXXXXXX, S&P rating services announced that it lowered its long-term corporate rating on Debtor to XXXXXXXXXX. Simultaneously, Debtor's unsecured debt rating was lowered to XXXXXXXXXX. According to S&P, the ratings reflected the uncertainty with regard to Debtor's future as a going concern along with other concerns about Debtor's deteriorating liquidity outlook
58. On XXXXXXXXXX, Debtor did not pay interest on its XXXXXXXXXX.
59. Under the conditions of the XXXXXXXXXX, failure to pay interest when due constitutes an event of default if not remedied within XXXXXXXXXX. Furthermore, since the amount of interest due on XXXXXXXXXX was not paid on or before XXXXXXXXXX, Debtor is in default on all of the XXXXXXXXXX. Furthermore, pursuant to XXXXXXXXXX, Debtor, Debtor's Sub #3 and Debtor's Sub #4 were also in default, under the XXXXXXXXXX, as of XXXXXXXXXX, since the XXXXXXXXXX does not recognize any grace period.
60. Debtor did not pay principal due on XXXXXXXXXX on certain loans under the XXXXXXXXXX. This failure to pay caused an additional default under XXXXXXXXXX. Several other events of default have occurred XXXXXXXXXX , including:
(i) failure to pay principal due of XXXXXXXXXX; and
(ii) failure to pay interest due on XXXXXXXXXX; and
as a result of these events of default, but for the stay imposed by the initial court order in the CCAA proceedings, as described in paragraph 39 above, the senior lenders would have the right to deliver formal notices of default, accelerate the repayment of the XXXXXXXXXX.
61. Pursuant to the terms of the Lock-up Agreement with the Secured Creditors which modified, inter alia, the terms of the XXXXXXXXXX Agreement, Debtor's Sub #3, Debtor's Sub #4 and Debtor obtained the extension of the XXXXXXXXXX Deadline to XXXXXXXXXX. No extension to the XXXXXXXXXX Agreement has been obtained with the result that it has expired.
62. On XXXXXXXXXX, S&P downgraded the long-term corporate credit rating on Debtor from XXXXXXXXXX. These rating actions were in response to Debtor's announcement on XXXXXXXXXX, that it missed a scheduled interest payment on XXXXXXXXXX.
63. Debtor, Debtor's Sub #3 and Debtor's Sub #4 and the XXXXXXXXXX Steering Committee on behalf of the Secured Creditors and the XXXXXXXXXX Committee on behalf of the Unsecured Creditors entered into arm's length negotiations in order to arrive at a plan of arrangement which has received the required approval of its creditors.
64. The Debtor, XXXXXXXXXX Steering Committee on behalf of the Secured Creditors and the XXXXXXXXXX Committee on behalf of the Unsecured Creditors have tentatively agreed to the terms set out in the Plan. Valuator has been retained by Debtor to act as financial advisor and has retained XXXXXXXXXX to act as legal counsel in connection with negotiations leading up to the Plan. Each of the XXXXXXXXXX Steering Committee and the XXXXXXXXXX Committee was represented by counsel independent of Debtor and has been assisted by independent financial advisors to negotiate the best recovery under the Plan having regard to the terms and conditions of their claims and taking into account Debtor's difficult financial position.
65. The current financial position of the Debtor precludes any opportunity for third party intervention in the form of a debt infusion or equity investment.
66. The Debtor has a debt burden in excess of $XXXXXXXXXX on an asset base that has an estimated current market value significantly below that amount. Under these circumstances, there is no economic basis for refinancing and no return for potential equity participants.
67. Cash Flow Projections for the Debtor - XXXXXXXXXX - are contained in Appendix C.
68. Cash Flow Projections for the Debtor - XXXXXXXXXX - are contained in Appendix C.
PROPOSED TRANSACTIONS
The Plan
69. The claims of the XXXXXXXXXX Unsecured Creditors of Debtor and of the Secured Creditors are addressed in the Plan filed pursuant to the CCAA XXXXXXXXXX.
70. The Secured Creditors form a class of creditors and the XXXXXXXXXX Unsecured Creditors form a separate class of creditors of Debtor. Under the Plan, the following transactions will be completed or approved within a period of two days once various closing conditions have been satisfied and will be effective on Day 1 or Day 2, as the case may be (Day 2 being also referred to as the "Effective Date").
Day 1 Transactions
The Day 1 transactions will be completed or approved sequentially in the order provided in paragraphs 71 and 75 to 77 below.
New Debtor
71. On or before Day 1, a new corporation ("New Debtor") will be incorporated by the law firm, XXXXXXXXXX, under XXXXXXXXXX. The authorized share capital of New Debtor will be comprised of:
(a) an unlimited number of XXXXXXXXXX Common Shares;
(b) XXXXXXXXXX;
(c) an unlimited number of XXXXXXXXXX Preferred Shares XXXXXXXXXX;
(d) XXXXXXXXXX
XXXXXXXXXX
72. XXXXXXXXXX.
Subco and Subco2
73. Before Day 1, "Subco" and "Subco2" were incorporated under the CBCA, each as subsidiary wholly-owned corporations of Debtor. The authorized share capital of Subco consists of XXXXXXXXXX. The authorized share capital of Subco2 consists of XXXXXXXXXX.
74. Subco and Subco2 will each be a taxable Canadian corporation and have the same taxation year-end as the Debtor.
Transfer of IntraCorporate Receivables
75. Debtor will transfer to Subco the Interco Receivables issued by each of Debtor's Sub #2, Debtor's Sub #3 and Debtor's Sub #4 having an aggregate face value of approximately $XXXXXXXXXX and an aggregate FMV of approximately $XXXXXXXXXX in consideration for the issuance by Subco of XXXXXXXXXX common shares in the capital of Subco (the "Subco Transaction").
Debtor and Subco will file a joint election under subsection 85(1) of the Act in prescribed form and within the time permitted in subsection 85(6) of the Act. The agreed amount in respect of each of the Interco Notes shall be equal to the fair market value of such Interco Note [XXXXXXXXXX]. As a result, Debtor will obtain an adjusted cost base in its shares of Subco equal to approximately $XXXXXXXXXX.
76. Debtor, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub # 3, and Debtor's Sub #4 will transfer to Subco2 the Debtor's SubSub Loans having an aggregate face value of $XXXXXXXXXX and having XXXXXXXXXX FMV. Each of Debtor, Debtor's Sub # 1, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4 will receive from Subco2 as sole consideration for the transfer of the Debtor's SubSub Loans, XXXXXXXXXX Preferred Shares of distinct classes in the capital of Subco2 in favour of each of these transferor corporations.
Subco2 and each of Debtor, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub # 3, and Debtor's Sub #4 will file a joint election under subsection 85(1) in prescribed form and within the time permitted in subsection 85(6). The agreed amount in respect of each of the Debtor's SubSub Loans shall be equal to the fair market value of such Debtor's SubSub Loan [XXXXXXXXXX ]. As a result, each of Debtor, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub # 3, and Debtor's Sub #4 will obtain an ACB in its shares of Subco2 equal to the following:
? Debtor $XXXXXXXXXX
? Debtor's Sub #1 $XXXXXXXXXX
? Debtor's Sub #2 $XXXXXXXXXX
? Debtor's Sub #3 $XXXXXXXXXX
? Debtor's Sub #4 $XXXXXXXXXX
Transfer of Debtor's Assets
77. Debtor will transfer to Debtor's Sub #3 all of its depreciable assets having an aggregate FMV of approximately $XXXXXXXXXX and an aggregate UCC of approximately $XXXXXXXXXX and all other assets, other than its investments in any of its subsidiary wholly-owned corporations. Debtor will receive from Debtor's Sub #3, as sole consideration for the transfer of its depreciable assets, shares of Debtor's Sub #3. Debtor and Debtor's Sub #3 will file a joint election in respect of eligible property under subsection 85(1) of the Act in prescribed form and within the time permitted in subsection 85(6) of the Act. The agreed amount in respect of each depreciable property will be equal to the least of the UCC of each such property, the cost of each such property to Debtor, and the fair market value of each such property. With respect to any other capital property transferred to Debtor's Sub #3, the agreed amount will be the lowest of the FMV of such property and the cost amount of such property to the Debtor.
Day 2 Transactions
On Day 2, the following transactions will be completed or approved sequentially in the order provided as described in paragraphs 78 to 99 below:
Amalgamation
78. Debtor will cause the Amalgamation of Subco, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, Debtor's Sub #1's Sub A, and Debtor's Sub #1's Sub B to occur (the "Amalgamation") to form one corporate entity ("Amalco"), XXXXXXXXXX. The Amalgamation will be one described in subsection 87(1) of the Act.
The certificate of arrangement of Amalco will provide that the Amalgamation shall occur on Day 2 without providing for a specific time. The authorized share capital of Amalco will consist of an unlimited number of voting, participating common shares.
79. On the amalgamation of Subco, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, Debtor's Sub #1's Sub A, and Debtor's Sub #1's Sub B:
(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Subco, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, Debtor's Sub #1's Sub A, and Debtor's Sub #1's Sub B immediately before the merger will become property of Amalco by virtue of the merger;
(b) all of the liabilities (except amounts payable to any predecessor corporation) of Subco, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, Debtor's Sub #1's Sub A, and Debtor's Sub #1's Sub B immediately before the merger will become liabilities of Amalco by virtue of the merger; and
(c) Debtor will receive, as sole consideration for all of its shares of Subco, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, and all of the shares of Debtor's Sub #1's Sub A and Debtor's Sub #1's Sub B held by Debtor's Sub #1, common shares of Amalco.
The property acquired by Amalco as a result of the amalgamation of Subco, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, Debtor's Sub #4, Debtor's Sub #1's Sub A, and Debtor's Sub #1's Sub B will continue to be used for the purpose of gaining or producing income.
Amalgamation2
80. As part of the Plan, Subco2 and Debtor's SubSub will be amalgamated (the "Amalgamation2") to form one corporate entity ("Amalco2"), XXXXXXXXXX. The Amalgamation will be one described in subsection 87(1) of the Act.
The articles of arrangement of Amalco2 will provide for XXXXXXXXXX.
On the amalgamation of Subco2 and Debtor's SubSub:
(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Subco2 and Debtor's SubSub immediately before the merger will become property of Amalco2 by virtue of the merger;
(b) all of the liabilities (except amounts payable to any predecessor corporation) of Subco2 and Debtor's SubSub immediately before the merger will become liabilities of Amalco2 by virtue of the merger; and
(c) (i) Debtor, being the sole direct shareholder of Subco2 immediately before the merger, will receive, as sole consideration for all of its shares of Subco2 common shares of Amalco2.
(ii) Amalco, being the sole direct shareholder of Debtor's SubSub immediately before the merger, will receive, as sole consideration for all of its shares of Debtor's SubSub, XXXXXXXXXX shares and XXXXXXXXXX of Amalco2.
The property acquired by Amalco2 as a result of the amalgamation of Subco2 and Debtor's SubSub will continue to be used for the purpose of gaining or producing income.
The certificate of amalgamation will provide that the Amalgamation2 shall occur on Day 2 without providing for a specific time.
Debtor's Resolution
81. The Articles of Debtor will be amended by way of articles of reorganization XXXXXXXXXX, in order to:
(a) amend the rights, privileges, conditions and restrictions of the Old Equity to provide for a redemption right, exercisable at the option of Debtor, pursuant to which each such share will be redeemable in consideration for the delivery of XXXXXXXXXX Shares, XXXXXXXXXX of New Debtor as described below; and
(b) create a class of non-redeemable common shares ("Non-redeemable Common Shares") that will be "common shares" within the meaning assigned by subsection 248(1) of the Act.
Debtor/New Debtor
82. New Debtor will subscribe for XXXXXXXXXX Non-redeemable Common Shares of Debtor having an estimated fair market value of $XXXXXXXXXX. The consideration for New Debtor's subscription for the XXXXXXXXXX Non-redeemable Common Shares of Debtor will be comprised of:
(a) a nominal cash consideration;
(b) the undertaking by New Debtor to deliver XXXXXXXXXX Common Shares, XXXXXXXXXX of New Debtor to the holders of Debtor's Old Equity upon the redemption by Debtor of the Old Equity as described in paragraph 83 below; and
(c) the undertaking by New Debtor to deliver XXXXXXXXXX Preferred Shares, XXXXXXXXXX Common Shares, XXXXXXXXXX (based on their entitlements described in paragraphs 93 and 94 below) to the XXXXXXXXXX Unsecured Creditors upon the settlement of their claims (described in paragraph 28(a) above by Debtor.
It is assumed that the estimated aggregate FMV of Debtor, Amalco and Amalco 2 is $XXXXXXXXXX. The estimated values attributed to the XXXXXXXXXX Shares, XXXXXXXXXX being issued by New Debtor was computed as follows:
XXXXXXXXXX.
*The estimated FMV of each XXXXXXXXXX Preferred Share, XXXXXXXXXX Common Share XXXXXXXXXX of New Debtor is $XXXXXXXXXX.
The value of the undertaking of New Debtor given in connection with the subscription for XXXXXXXXXX common shares of Debtor is approximately $XXXXXXXXXX
83. Debtor will redeem all the Old Equity (other than the Non-redeemable Common Shares of Debtor issued to New Debtor) in consideration of a promise to provide holders of Old Equity with a number of XXXXXXXXXX Shares XXXXXXXXXX of New Debtor (XXXXXXXXXX), which New Debtor will issue to the holders of Old Equity in satisfaction of the undertaking described XXXXXXXXXX 82(b) above and as described in paragraph 95 below.
Upon the redemption by Debtor of its Old Equity, New Debtor will become the sole shareholder of Debtor.
84. The Existing Stock Option Plan and any other rights to acquire shares of Debtor, such as warrants, will be cancelled, without payment of any consideration (including for greater certainty pursuant to any shareholders agreement or articles).
85. A new stock option plan (the "New Stock Option Plan") will be implemented by New Debtor. The purpose of the New Stock Option Plan is to provide an opportunity, through options, for the officers and key employees of New Debtor and its subsidiaries to purchase XXXXXXXXXX Shares XXXXXXXXXX upon exercise of options granted pursuant to the New Stock Option Plan and thereby participate in the future growth and development of New Debtor.
Amalco/Future Debts
86. As a condition of the implementation of the Plan, Amalco will enter into an agreement (XXXXXXXXXX) for the creation of a new XXXXXXXXXX credit facility in an amount of XXXXXXXXXX.
87. XXXXXXXXXX.
88. XXXXXXXXXX.
The Secured Creditors will receive in exchange for and in satisfaction of a portion of the Secured Debt XXXXXXXXXX to be apportioned among the Secured Creditors pro rata on the basis of the principal amounts of Secured Debt owing to them on the Effective Date.
XXXXXXXXXX
The XXXXXXXXXX Debt agreement will set out the terms and conditions of the XXXXXXXXXX Debt.
The more important terms and conditions of the XXXXXXXXXX Debt agreement in relation to the ruling request are as follows:
(a) Interest
XXXXXXXXXX.
(b) Maturity date
XXXXXXXXXX
XXXXXXXX
XXXXXXXXXX
(c) Repayment
Mandatory
Excess cash flow to be used for mandatory prepayments to be applied against amortization schedule in order of maturity (XXXXXXXXXX) annually and thereafter pro rata against all maturities.
Aggregate Cap
Subject to maximum amortisation and prepayments of 25% (XXXXXXXXXX) in the aggregate during the first five years (XXXXXXXXXX).
(d) Additional terms
The mandatory repayment of the XXXXXXXXXX Debt will be limited to 25% of the total of the principal amount within the first five years subject to the occurrence of XXXXXXXXXX.
XXXXXXXXXX
89.
XXXXXXXXXX
(i) in cash; or
XXXXXXXXXX
90. The Secured Creditors will receive the XXXXXXXXXX Debt and XXXXXXXXXX directly from Amalco in satisfaction of the corresponding portion of their Secured Claims.
XXXXXXXXXX
New Debtor / XXXXXXXXXX Preferred Shares
91. New Debtor will issue $XXXXXXXXXX in XXXXXXXXXX Preferred Shares (XXXXXXXXXX) to the Secured Creditors pro rata on the basis of the amounts owing to them on the Effective Date XXXXXXXXXX in consideration for an equivalent principal amount of the Secured Debt, which will be transferred to New Debtor. The XXXXXXXXXX Preferred Shares will be issued at $XXXXXXXXXX per share.
XXXXXXXXXX
92. As a consequence of the issuance of XXXXXXXXXX Preferred Shares in exchange for Secured Debt held by the Secured Creditors as described above, New Debtor will acquire the balance of the Secured Creditors claims remaining after conversion into XXXXXXXXXX Debt XXXXXXXXXX and as a result New Debtor will become a creditor of Amalco. This indebtedness will be converted into common shares of Amalco at the Effective Date.
New Debtor / Second Preferred Shares
93. New Debtor will issue XXXXXXXXXX Preferred Shares (XXXXXXXXXX) in an amount (XXXXXXXXXX") equal to XXXXXXXXXX:
XXXXXXXXXX
to the Secured Creditors (XXXXXXXXXX) and to the XXXXXXXXXX Unsecured Creditors (XXXXXXXXXX) and to be apportioned among the Secured Creditors pro rata on the basis of the amounts owing to them on the Effective Date XXXXXXXXXX.
The XXXXXXXXXX Preferred Shares will be issued at $XXXXXXXXXX per share XXXXXXXXXX.
Settlement of Claims of Affected Unsecured Creditors
94. Claims (XXXXXXXXXX) of any XXXXXXXXXX Unsecured Creditors will be satisfied by way of delivery to be apportioned among them pro rata on the basis of the respective accreted values or principal amount, as the case may be, of the XXXXXXXXXX Unsecured Creditors' claims, of a total consideration of approximately $XXXXXXXXXX comprising XXXXXXXXXX Preferred Shares (XXXXXXXXXX). The XXXXXXXXXX Unsecured Creditors will receive this consideration from Debtor. Debtor will issue XXXXXXXXXX Common Shares to New Debtor in consideration for New Debtor's delivery of the consideration to Debtor, which will then deliver this consideration directly to the XXXXXXXXXX Unsecured Creditors. This should result in a forgiven amount of Debtor of approximately $XXXXXXXXXX to be applied against the tax attributes of Debtor in accordance with section 80 of the Act.
New Debtor / Old Equity
95. New Debtor will issue, on behalf of Debtor, the XXXXXXXXXX Common SharesXXXXXXXXXX to the holders of the Old Equity in satisfaction of its undertaking under paragraph 82 above, as consideration for the redemption of the Old Equity pursuant to paragraph 83 above. At no time will Debtor hold, in any manner whatsoever, the shares of New Debtor. New Debtor will rather issue those shares directly to the holders of the Old Equity on behalf of Debtor. The holders of the Old Equity will receive, in aggregate, XXXXXXXXXX Common Shares XXXXXXXXXX of New Debtor.
96. XXXXXXXXXX.
Share Capital of New Debtor After the Plan
97. Immediately following the completion of the transactions described above the issued and outstanding share capital of New Debtor will be held as follows (XXXXXXXXXX):
(a) XXXXXXXXXX% by the Secured Creditors in the form of XXXXXXXXXX Preferred Shares XXXXXXXXXX;
(b) XXXXXXXXXX%, by the XXXXXXXXXX Unsecured Creditors in the form of XXXXXXXXXX Common Shares, XXXXXXXXXX and XXXXXXXXXX Preferred Shares; and
(c) XXXXXXXXXX%, by the holders of the Old Equity in the form of XXXXXXXXXX Common Shares.
(d) XXXXXXXXXX:
Excess Cash Flow re New Debtor
98. The Plan will provide for an Excess Cash Flow Provision that may be summarized as follows: the aggregate of XXXXXXXXXX.
Such amounts are to be applied in the order of priority set forth below:
(i) repayment of the XXXXXXXXXX Debt, up to 25% of the principal amount thereof, except as to XXXXXXXXXX as described in paragraph 88 hereof;
(ii) payment of interest on XXXXXXXXXX;
(iii) payment of dividends on the XXXXXXXXXX Preferred Shares;
(iv) until the fifth anniversary of the Effective Date, on a pro rata basis, repayment XXXXXXXXXX;
XXXXXXXXXX
XXXXXXXXXX, redemption of XXXXXXXXXX Preferred Shares.
Other
99. Any remaining commitments or obligations to the Secured Creditors XXXXXXXXXX shall be terminated and cancelled upon the Effective Date (XXXXXXXXXX).
100. It is contemplated that Debtor would be liquidated into New Debtor following the Effective Date XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
101. Debtor and its subsidiaries (the "Debtor Group") are restructuring operations and refinancing their debt in part with Distress Preferred Shares and in part with new long term debt to increase cash flow by reducing debt service requirements and thereby to allow the restructured Debtor Group to continue operating as a going concern. In the absence of this refinancing, Debtor will be unable to meet regular payments on its outstanding debt and the Secured Creditors will enforce their security for non-payment of interest and principal. The Secured Creditors enforcement of their security will seriously jeopardize Debtor's ability to continue the operation of its business activities.
RULINGS
Provided that the above description of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose thereof, and provided further that the proposed transactions are completed in the manner described above, our rulings are as set forth below:
A. The XXXXXXXXXX Preferred Shares XXXXXXXXXX of New Debtor (as described in paragraphs 91 and 93 above, respectively) (the "Shares") to be issued to the Secured Creditors and the XXXXXXXXXX Unsecured Creditors, and where applicable, sold to a subsequent corporate purchaser will be:
(i) Shares described in subparagraph (e)(iii) of the definition of "term preferred share" in subsection 248(1) for a period not exceeding five years from the date of their issuance, and
(ii) "exempt shares" pursuant to paragraph (c) of the definition thereof in subsection 112(2.6) of the Act for that same period, and
and accordingly:
(iii) subsections 112(2.1), (2.2), (2.3), and (2.4) will not apply to deny the Secured Creditors and the XXXXXXXXXX Unsecured Creditors or where applicable, a subsequent Canadian resident corporate purchaser, as the case may be, a deduction under subsection 112(1) for dividends received or deemed to have been received by them on such Shares during such period, and
(iv) the provisions of Part IV.1 and Part VI.1 will not apply to dividends (including deemed dividends) received on the Shares during such period.
B. Paragraph 40(2)(e.1) will apply on the disposition by Debtor to Subco of the Interco Notes issued by each of Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4 as described in paragraph 75 above, with the result that the amount of the capital loss realized by Debtor on the disposition of each Interco Note will be deemed to be nil.
C. Paragraph 53(1)(f.1) will apply with respect to the dispositions noted in Ruling B above, such that Subco's ACB in respect of the Interco Notes will include the amount of the capital loss that would otherwise have been realized by Debtor.
D. Paragraph 40(2)(e.1) will apply on the dispositions by Debtor, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3 and Debtor's Sub #4 to Subco2 of the Debtor's SubSub Loans as described in paragraph 76 above, with the result that the amount of the capital loss realized by each of Debtor, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4 on the disposition of each of the Debtor's SubSub Loans will be deemed to be nil.
E. Paragraph 53(1)(f.1) will apply with respect to the dispositions noted in Ruling D above, such that Subco 2's ACB in respect of the Debtor's SubSub Loans will include the amount of the capital loss that would otherwise have been realized by each of Debtor, Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4.
F. Provided that no election pursuant to subsection 256(9) is filed with respect to the acquisition of control of Debtor as described in paragraph 83 above, and no time is specified in the certificates of amalgamation obtained in respect of the amalgamations described in paragraphs 78 and 80 above, and all three of the transactions described in paragraphs 78, 80 and 83 above are executed on the same day and in the same sequence as described therein, the Amalgamation, Amalgamation2, and the acquisition of control of Debtor by New Debtor will result in a single taxation year-end (the "Change of Control Taxation Year") for each of Debtor's Sub #1, Debtor's Sub #1's Sub A, Debtor Sub#1's Sub B, Debtor's SubSub, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4, Subco and Subco2, which will be the last moment in time on Day 1.
G. Subsection 80.01(3) will apply on the Amalgamation such that the Interco Notes will be deemed to have been settled at the moment immediately before the last moment of Day 1 by a payment made by each of the debtors having issued the Interco Notes (as described in paragraph 29 above), of an amount equal to the cost amount of the Interco Notes to Subco at the time of the Amalgamation as determined pursuant to subsection 80.01(3) and paragraph 53(1)(f.1), with the result that there will be no Forgiven Amount in respect of the Interco Notes by reason of the Amalgamation.
H. Subsection 80.01(3) will apply on the Amalgamation2 such that the SubSub Loan will be deemed to have been settled at the moment immediately before the last moment of Day 1 by a payment made by each of the debtors having issued the Debtor's SubSub Loans (as described in paragraph 30 above), of an amount equal to the cost amount of the Debtor's SubSub Loans to Subco2 at the time of the Amalamation2 as determined pursuant to subsection 80.01(3) and paragraph 53(1)(f.1), with the result that there will be no Forgiven Amount in respect of the Debtor's SubSub Loans by reason of Amalgamation2.
I. The provisions of subsections 111(4) to 111(5.4) will apply in respect of the acquisition of control that will occur pursuant to the transaction described in paragraph 83 above at and after the last moment of Day 1. Paragraph 111(4)(d) will apply to create a capital loss in the taxation year of the Debtor ending at the last moment in time on Day 1 to the extent that Debtor's ACB in the shares of Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3, and Debtor's Sub #4 (as described in paragraph 6 above) exceed the FMV thereof at such time. Any such capital loss will form part of Debtor's capital losses for the purposes of subsection 80(4).
J. Since the principal amount of the portion of the Secured Debt that is exchanged for the XXXXXXXXXX Debt and the XXXXXXXXXX is equal to the principal amount of such XXXXXXXXXX Debt and XXXXXXXXXX, the application of paragraph 80(2)(h) to these transactions will not result in a Forgiven Amount.
K. The settlement of the Unsecured Notes (as described in paragraph 94 above) will result in a Forgiven Amount of Debtor in respect of the Unsecured Notes that will be applied as described in section 80 in the taxation year following the Change of Control Taxation Year of Debtor. More specifically, Debtor will be required to reduce all non-capital losses and net capital losses for each taxation year ending prior to the settlement of the XXXXXXXXXX Notes which includes the Change of Control Taxation Year. The net capital losses for the Change of Control Taxation Year include the capital losses deemed to be realized on the Debtor's share investments in all of its subsidiaries including Debtor's Sub #1, Debtor's Sub #2, Debtor's Sub #3 and Debtor's Sub #4 as a result of the application of the provisions of subsection 111(4) to 111(5.4) in accordance with Ruling I above.
L. Paragraph 20(1)(c) will apply in respect of interest paid or payable by Amalco on the XXXXXXXXXX Debt XXXXXXXXXX, and subsection 20(3) will apply to the XXXXXXXXXX Debt XXXXXXXXXX, provided that the paragraph 20(1)(c) applied in respect of interest paid or payable on the Secured Debt.
M. Subject to paragraph 20(1)(e.1), expenses that are incurred by New Debtor in the course of issuing the XXXXXXXXXX Preferred Shares XXXXXXXXXX and incurring indebtedness will, to the extent such expenses are reasonable in the circumstances, be deductible by New Debtor pursuant to paragraph 20(1)(e).
N. A Secured Creditor which is a non-resident of Canada will not be considered not to deal at arm's length with New Debtor or Amalco solely by reason of the rights and the New Instruments acquired by the Secured Creditors pursuant to the Plan.
The rights and New Instruments acquired under the Plan by a Secured Creditor will not, in and of themselves, cause the Secured Creditor to not be dealing at arm's length with New Debtor or Amalco
O. Paragraph 212(1)(b)(vii) will apply to interest paid or credited by Amalco to Secured Creditors (who are non-resident in Canada and who deal with Amalco at arm's length) on the XXXXXXXXXX Debt and the XXXXXXXXXX.
P. The acquisition and ownership of the New Instruments by the Secured Creditors will not, in and of themselves, cause subsection 18(4) to apply to interest paid or payable by Amalco on the XXXXXXXXXX Debt and the XXXXXXXXXX.
Q. Subsection 245(2) of the Act will not apply to redetermine the tax consequences described in the rulings above.
CAVEAT
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 (the "Circular") issued by the CCRA on May 17, 2002, and are binding provided the Proposed Transactions described in paragraphs 69 to 99 above are completed on or before XXXXXXXXXX.
These 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.
Nothing in this letter should be construed as implying that the CCRA has agreed to or accepted:
(i) whether or not any persons referred to in this ruling deal at arm's length, except to the extent of the rulings given in O and P above;
(ii) the fair market value of any expenditures referred to in this letter;
(iii) whether any property of a person referred to in this ruling is held on income account or on capital account;
(iv) the income tax consequences of any of the proposed elections under subsection 85(1) of the Act described above;
(v) the GST implications of any of the proposed transactions;
(vi) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
XXXXXXXXXX
50
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