2003 Ruling 2003-0041833 - Loss Utilization in a Related 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.

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: Loss utilization in a related group of companies.

Position: The loss utilization is acceptable.

Reasons: The loss utilization involves a reorganization of related companies such that various loss companies become partners in a partnership thus enabling them to set off gains and losses within the group of companies.

XXXXXXXXXX 2003-004183

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge receipt of your facsimiles and emails as well as the information provided in various telephone conversations.

Throughout this letter, certain individuals and corporations will be referred to as follows:

	Business Number
XXXXXXXXXX 		Aco
XXXXXXXXXX 		Bco
XXXXXXXXXX 		JJP Holdco
XXXXXXXXXX 		Cco
XXXXXXXXXX 		Dco
XXXXXXXXXX 		F1co
XXXXXXXXXX 		F2co
XXXXXXXXXX 		N1co
XXXXXXXXXX 		N2co
XXXXXXXXXX 		Sco
XXXXXXXXXX 		Vco
XXXXXXXXXX 		Wco
XXXXXXXXXX 		JJLP
XXXXXXXXXX 		GPco
XXXXXXXXXX .		Kco
XXXXXXXXXX .		Newco
XXXXXXXXXX 		KFund
XXXXXXXXXX .		JJL Holdco
XXXXXXXXXX 		T

Aco files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. Aco is resident in Canada for the purposes of the Act.

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

(i) involved in an earlier return of any 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 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

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

Aco has confirmed that the proposed transactions described herein will not affect the ability of any taxpayer identified in this ruling to pay its outstanding tax liabilities.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;

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

(d) "BCA(X)" means the XXXXXXXXXX Business Corporations Act and, where applicable, its predecessor statutes;

(e) "BCA(Y)" means the Business Corporations Act (XXXXXXXXXX) and, where applicable, its predecessor statutes;

(f) "CCRA" means the Canada Customs and Revenue Agency;

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

(h) "FMV" means fair market value;

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

(j) "net capital loss" has the meaning assigned by subsection 111(8);

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

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

(m) "Paragraph" means a numbered paragraph in this advance income tax ruling;

(n) "principal amount" has the meaning assigned by subsection 248(1);

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

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

(q) "proposed transactions" means the transactions described in Paragraphs 25 to 42 below;

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

(s) "Stock Exchange" means the XXXXXXXXXX Stock Exchange;

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

(u) "taxable dividend" has the meaning assigned by subsection 89(1).

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

FACTS

1. Aco is a taxable Canadian corporation and a public corporation governed by the BCA(Y). Aco is indirectly controlled by T, an individual resident in Canada. Aco's XXXXXXXXXX shares are listed on the Stock Exchange.

2. Bco is a taxable Canadian corporation and a private corporation governed by the BCA(Y). Bco is indirectly controlled by T.

3. JJP Holdco is a taxable Canadian corporation governed by the BCA(Y). All of the shares of JJP Holdco are held by Aco and its subsidiaries, and Bco.

4. Cco is a taxable Canadian corporation governed by the BCA(X). All of the shares of Cco are held by Aco and its subsidiaries.

5. Dco is a taxable Canadian corporation governed by the BCA(Y). Dco is a direct, wholly owned subsidiary of Cco.

6. F1co is a taxable Canadian corporation governed by the BCA(Y). F1co holds XXXXXXXXXX B Units in JJLP (the "F1co Units"). The issued share capital of F1co consists of various classes of XXXXXXXXXX shares. All of the shares (other than XXXXXXXXXX shares) of F1co are owned by Cco, and all of the XXXXXXXXXX shares of F1co, XXXXXXXXXX are owned by Bco. As a result, F1co is indirectly controlled by T. Various executives of Aco hold options to acquire shares of F1co.

7. F2co is a taxable Canadian corporation governed by the BCA(Y). F2co holds XXXXXXXXXX Units in JJLP (the "F2co Units"). The issued share capital of F2co consists of various classes of XXXXXXXXXX shares. All of the shares (other than XXXXXXXXXX shares) of F2co are owned by Cco, and all of the XXXXXXXXXX shares of F2co, XXXXXXXXXX are owned by Bco. As a result, F2co is indirectly controlled by T. T also holds options to acquire shares of F2co.

8. N1co is a taxable Canadian corporation governed by the BCA(Y). N1co holds XXXXXXXXXX Units in JJLP (the "N1co Units"). N1co is a direct, wholly owned subsidiary of Dco. Various executives of Aco hold options to acquire shares of N1co.

9. N2co is a taxable Canadian corporation governed by the BCA(Y). N2co holds XXXXXXXXXX Units in JJLP (the "N2co Units"). N2co is a direct, wholly owned subsidiary of Dco. Various non-executive directors of Aco hold options to acquire shares of N2co.

10. JJLP is a limited partnership formed under the laws of the Province of XXXXXXXXXX pursuant to a limited partnership agreement effective as of XXXXXXXXXX, and amended and restated with effect from XXXXXXXXXX (as amended, the "JJLP Partnership Agreement"). The general partner of JJLP is GPco, a corporation governed by the BCA(X) and a direct, wholly owned subsidiary of JJP Holdco. The interests of the limited partners in JJLP are described by reference to Units, consisting of XXXXXXXXXX Units. Following the distribution to the XXXXXXXXXX unitholders described in Paragraph 15 below, no XXXXXXXXXX Units has any further preference or priority in relation to other XXXXXXXXXX Units. The holders of the XXXXXXXXXX Units were entitled to a preferential distribution of capital from JJLP in the aggregate amount of $XXXXXXXXXX (the "XXXXXXXXXX Preference") upon receipt by JJLP of proceeds from the disposition of XXXXXXXXXX Preference Shares in the capital of Kco (the "Kco Preferred Shares"), having an aggregate redemption amount of $XXXXXXXXXX. The XXXXXXXXXX Units of JJLP are held by various taxable Canadian corporations, the majority of which are controlled by T, including JJP Holdco, N1co and N2co. All of the outstanding XXXXXXXXXX Units are held by F1co. The outstanding XXXXXXXXXX Units are held by JJP Holdco and F2co.

11. The fiscal period of JJLP is XXXXXXXXXX. Pursuant to the terms of the JJLP Partnership Agreement, the net income and net loss and all taxable gains and losses of the partnership for each fiscal period are allocated among the limited partners of record at the end of the fiscal year in proportion to their percentage ownership of JJLP.

12. Newco is a taxable Canadian corporation that was incorporated as a wholly owned subsidiary of Aco on XXXXXXXXXX. The share capital of Newco consists of an unlimited number of common shares (the "Newco Common Shares"). Aco subscribed $XXXXXXXXXX for 1 Newco Common Share at the time of Newco's incorporation.

13. On XXXXXXXXXX, JJLP disposed of XXXXXXXXXX units of KFund, which are listed on the Stock Exchange, to XXXXXXXXXX acting at arm's length with JJLP in a secondary offering (the "Secondary Offering") pursuant to a (final) short-form prospectus dated XXXXXXXXXX for total proceeds of $XXXXXXXXXX (or $XXXXXXXXXX per unit) less a XXXXXXXXXX% commission paid to the XXXXXXXXXX for net proceeds of $XXXXXXXXXX (or $XXXXXXXXXX per unit). Following the Secondary Offering, JJLP continued to own XXXXXXXXXX units of KFund.

14. Prior to the completion of the Secondary Offering, Kco was controlled by Bco XXXXXXXXXX. On XXXXXXXXXX, contemporaneously with the completion of the Secondary Offering, Kco redeemed the Kco Preferred Shares from JJLP. XXXXXXXXXX , the redemption proceeds were satisfied by the delivery to JJLP of a XXXXXXXXXX note in the principal amount of $XXXXXXXXXX (the "XXXXXXXXXX Note") issued by XXXXXXXXXX and held by Kco. Subsection 55(2) will apply to the dividend deemed to be received pursuant to subsection 84(3) on the redemption of the Kco Preferred Shares. Bco transferred the XXXXXXXXXX shares of Kco to an unrelated party at FMV.

15. On XXXXXXXXXX, JJLP distributed the XXXXXXXXXX Note to JJP Holdco and F2co in accordance with their proportionate ownership of the outstanding XXXXXXXXXX Units of JJLP in satisfaction of the XXXXXXXXXX Preference payable to them as the holders of all of the outstanding XXXXXXXXXX Units of JJLP.

16. On XXXXXXXXXX, JJLP used the $XXXXXXXXXX cash proceeds received by it from the sale of the KFund units under the Secondary Offering to make a non-interest-bearing demand loan to JJL Holdco, a wholly owned subsidiary of JJLP. The loan is evidenced by a promissory note dated XXXXXXXXXX.

17. JJL Holdco used the cash received from JJLP pursuant to the loan described in Paragraph 16 above to make non-interest-bearing demand loans to the limited partners of JJLP (other than the XXXXXXXXXX limited partners referred to in Paragraph 18 below) in proportion to their percentage ownership of JJLP. The loans from JJL Holdco to the JJLP limited partners are evidenced by promissory notes dated XXXXXXXXXX.

18. On XXXXXXXXXX, JJLP transferred the remaining XXXXXXXXXX KFund units held by it to XXXXXXXXXX of its limited partners, and to an individual that is a shareholder of a XXXXXXXXXX limited partner and an officer of Aco, in proportion to the percentage interest of such limited partner in JJLP for total proceeds of $XXXXXXXXXX (or $XXXXXXXXXX per unit). None of the transferees was affiliated with JJLP at any relevant time.

19. It is anticipated that a portion of the options referred to in Paragraphs 6, 7, 8 and 9 will be exercised in the near future by their holders, and that their holders will elect to receive a cash surrender payment in lieu of stock, as contemplated in the options.

20. Sco is a taxable Canadian corporation governed by the BCA(Y). Sco is controlled by T. Aco has no direct or indirect interest in Sco.

21. Vco is a taxable Canadian corporation governed by the BCA(Y). Vco is a direct, wholly owned subsidiary of Sco.

22. Wco is a taxable Canadian corporation governed by the BCA(Y). Wco is a direct, wholly owned subsidiary of Vco.

23. Sco holds XXXXXXXXXX Units of JJLP (the "Sco Units").

24. Each of Aco, Cco and Wco has realized capital or non-capital losses available in its current taxation year.

PROPOSED TRANSACTIONS

25. F1co will purchase for cancellation the XXXXXXXXXX shares held by Bco for their FMV of $XXXXXXXXXX in accordance with their terms. Cco, the sole remaining shareholder of F1co, will then pass a special resolution reducing the aggregate stated capital of the outstanding F1co shares to $XXXXXXXXXX. No distribution will be made in connection with this stated capital reduction.

26. F2co will purchase for cancellation the XXXXXXXXXX shares held by Bco for their FMV of $XXXXXXXXXX in accordance with their terms. Cco, the sole remaining shareholder of F2co, will then pass a special resolution reducing the aggregate stated capital of the outstanding F2co shares to $XXXXXXXXXX. No distribution will be made in connection with this stated capital reduction.

27. F1co will be wound up into Cco. On the winding-up of F1co, the F1co Units will be transferred to Cco.

28. F2co will be wound up into Cco. On the winding-up of F2co, the F2co Units will be transferred to Cco.

29. Cco, the sole shareholder of Dco, will pass a special resolution reducing the aggregate stated capital of the outstanding shares of Dco to $XXXXXXXXXX. No distribution will be made in connection with this stated capital reduction.

30. Dco will be wound up into Cco. On the winding-up of Dco, the shares in the capital of N1co and N2co held by Dco will be transferred to Cco.

31. Cco, the sole shareholder of each of N1co and N2co, will pass a special resolution in respect of each corporation reducing the aggregate stated capital of the outstanding shares of each corporation to $XXXXXXXXXX. No distribution will be made in connection with either such stated capital reduction.

32. N1co will be wound up into Cco. On the winding-up of N1co, the N1co Units will be transferred to Cco.

33. N2co will be wound up into Cco. On the winding-up of N2co, the N2co Units will be transferred to Cco.

34. In connection with the winding-up of each of F1co, F2co, N1co and N2co, holders of options in respect of shares of the particular corporation being wound up will exchange such options for options in respect of common shares of Cco on terms consistent with the requirements of subsection 7(1.4).

35. The articles of incorporation of Newco will be amended to create a new class of non-voting, redeemable, retractable preference shares bearing a non-cumulative, fixed dividend (the "Newco Preferred Shares").

The Newco Preferred Shares will not be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is a guarantee agreement;

(b) the subject of a dividend rental arrangement; or

(c) shares that are issued or acquired as part of a transaction or event or a series of transactions or events of the type described in subsection 112(2.5).

36. JJP Holdco will transfer XXXXXXXXXX Units and XXXXXXXXXX Units in JJLP (the "JJP Holdco Units"), being its entire direct interest in JJLP, to Newco. As consideration for the transfer, Newco will issue Newco Preferred Shares to JJP Holdco having an aggregate redemption and retraction amount equal to the aggregate fair market value of the JJP Holdco Units. The transfer agreement will contain a price adjustment clause which will apply in circumstances where it is determined that the fair market value of the Newco Preferred Shares is not equal to the fair market value of the JJP Holdco Units.

JJP Holdco and Newco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the JJP Holdco Units. The agreed amount specified in the election will be equal to the ACB of the JJP Holdco Units to JJP Holdco at the time of the transfer. For greater certainty, the ACB of the transferred units will not exceed the FMV of the units and will not be less than zero. The amount added to the stated capital of the Newco Preferred Shares in respect of the issuance of such shares will be equal to the elected amount.

37. Newco will redeem the Newco Preferred Shares held by JJP Holdco and will issue to JJP Holdco, as consideration therefor, a non-interest-bearing demand note (the "Newco Cancellation Note") having a principal amount equal to the redemption amount of the Newco Preferred Shares.

38. Newco will be wound up into Aco. The JJP Holdco Units will be transferred to Aco on the wind-up. The Newco Cancellation Note will be assumed by Aco.

39. Aco will repay a portion of the Newco Cancellation Note at least equal to the ACB of the shares in the capital of JJP Holdco that were issued in connection with the acquisition of the interest in JJLP by JJP Holdco. JJP Holdco will then use these funds to effect a return of capital on those shares to their holder, which will have the effect of reducing their ACB to nil. In order to facilitate this transaction, these shares will be reclassified into a separate class of shares immediately prior to this reduction of capital. Such funds in the hands of JJP Holdco's shareholder will then be paid to Aco by way of dividend. The transactions in this Paragraph may not occur until after Paragraphs 40 through 42, but will be completed as expeditiously as possible.

40. Sco will transfer the Sco Units, or a portion thereof, to Vco in exchange for additional common shares in the capital of Vco.

Sco and Vco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the Sco Units. The agreed amount specified in the election will be equal to the ACB of the Sco Units to Sco at the time of the transfer. For greater certainty, the ACB of the transferred units will not exceed the FMV of the units and will not be less than zero. The amount added to the stated capital of the Vco common shares in respect of the additional Vco common shares so issued will be equal to the elected amount.

41. Vco will transfer the Sco Units it acquires from Sco, as described in Paragraph 40 above, to Wco in exchange for additional common shares in the capital of Wco.

Vco and Wco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the Sco Units. The agreed amount specified in the election will be equal to the ACB of the Sco Units to Vco at the time of the transfer. For greater certainty, the ACB of the transferred units will not exceed the FMV of the units and will not be less than zero. The amount added to the stated capital of the Wco common shares in respect of the additional Wco common shares so issued will be equal to the elected amount.

42. At the end of the fiscal period of JJLP (XXXXXXXXXX), JJLP's income, loss, capital gains and capital losses for the XXXXXXXXXX taxation year (which will include amounts arising in connection with the transactions described in Paragraphs 13, 14 and 18 above) will be allocated to its partners in accordance with their respective interests in JJLP at that time.

PURPOSE OF THE PROPOSED TRANSACTIONS

43. The purpose of the proposed transactions is to permit the set-off of gains and losses within affiliated groups of companies in a manner consistent with the CCRA's published administrative practices. It would be possible to achieve the same result through a different series of transactions that would not involve the possible application of subsection 55(2). For example, JJP Holdco could be wound up into Aco. However, such alternative transactions are less convenient for the taxpayers for non-tax reasons, principally relating to the fact that a number of the corporations involved have other significant assets that it would be preferable not to have to deal with. The proposed transactions avoid such non-tax disadvantages and also eliminates a number of corporations that exist principally for historical reasons and thereby simplifies the Aco corporate group.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided 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:

(a) the transfer of the JJP Holdco Units held by JJP Holdco to Newco, as described in Paragraph 36 above;

(b) the transfer of the Sco Units held by Sco to Vco, as described in Paragraph 40 above; and

(c) the transfer of the Sco Units held by Vco to Wco, as described in Paragraph 41 above;

such that the agreed amount in respect of each transfer will be deemed to be the transferor's proceeds of disposition of the property and the transferee's cost thereof, and the transferor's cost of the shares received as consideration for the disposition.

B. The proposed transactions, in and by themselves, will not result in the application of subsection 69(11) to JJP Holdco, Sco or Vco in connection with the disposition of units of JJLP, as described in Paragraphs 36, 40 and 41 above.

C. As a result of the redemption of the Newco Preferred Shares, described in Paragraph 37 above:

(a) by virtue of paragraphs 84(3)(a) and (b), Newco will be deemed to have paid, and JJP Holdco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the Newco Preferred Shares exceeds the PUC thereof, immediately before such redemption;

(b) the taxable dividend deemed to be received by JJP Holdco, referred to in Ruling C(a) above, will be included in JJP Holdco's income pursuant to paragraph 12(1)(j), and will be deductible by Newco in computing its taxable income for the taxation year in which such dividend is deemed to have been received pursuant to subsection 112(1). For greater certainty, such deduction will not be denied by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4);

(c) the dividend deemed to be received by JJP Holdco, referred to in Ruling C(a) above, will be excluded from the proceeds of disposition to JJP Holdco of the Newco Preferred Shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from the disposition of these shares will be reduced by the amount of such dividend pursuant to subsection 112(3);

(d) JJP Holdco will not be subject to Part IV.1 tax under section 187.2 in respect of the dividend received from Newco, referred to in Ruling C(a) above; and

(e) Newco will not be subject to Part VI.1 tax under section 191.1 in respect of the dividend paid to JJP Holdco, referred to in Ruling C(a) above.

D. Provided that 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 proposed transactions, then, by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Ruling C(a) above. For greater certainty, the facts and proposed transactions described herein, 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. The provisions of subsection 88(1) will apply to the wind-up of F1co into Cco, as described in Paragraph 27 above, such that:

(a) pursuant to paragraph 88(1)(a.2), the F1co Units distributed to Cco on the winding-up will be deemed not to have been disposed of by F1co;

(b) pursuant to paragraph 88(1)(b), the shares of F1co owned by Cco immediately before the winding-up will be deemed to have been disposed of by Cco on the winding-up for proceeds of disposition equal to the greater of the amounts determined in subparagraphs 88(1)(b)(i) and (ii); and

(c) pursuant to subparagraph 88(1)(c)(i) and paragraphs 88(1)(e.2) and 87(2)(e.1), the cost to Cco of the F1co Units distributed to Cco on the winding-up will be deemed to be equal to the cost of the F1co Units to F1co, and in respect of the F1co Units, Cco will be deemed to be the same corporation as and a continuation of F1co.

F. The provisions of subsection 88(1) will apply to the wind-up of F2co into Cco, as described in Paragraph 28 above, such that:

(a) pursuant to paragraph 88(1)(a.2), the F2co Units distributed to Cco on the winding-up will be deemed not to have been disposed of by F2co;

(b) pursuant to paragraph 88(1)(b), the shares of F2co owned by Cco immediately before the winding-up will be deemed to have been disposed of by Cco on the winding-up for proceeds of disposition equal to the greater of the amounts determined in subparagraphs 88(1)(b)(i) and (ii); and

(c) pursuant to subparagraph 88(1)(c)(i) and paragraphs 88(1)(e.2) and 87(2)(e.1), the cost to Cco of the F2co Units distributed to Cco on the winding-up will be deemed to be equal to the cost of the F2co Units to F2co, and in respect of the F2co Units, Cco will be deemed to be the same corporation as and a continuation of F2co.

G. The provisions of subsection 88(1) will apply to the wind-up of Dco into Cco, as described in Paragraph 30 above, such that:

(a) pursuant to paragraph 88(1)(b), the shares of Dco owned by Cco immediately before the winding-up will be deemed to have been disposed of by Cco on the winding-up for proceeds of disposition equal to the greater of the amounts determined in subparagraphs 88(1)(b)(i) and (ii); and

(b) pursuant to subparagraph 88(1)(c)(ii), the cost to Cco of the shares in the capital of N1co and N2co distributed to Cco on the winding-up will be deemed to be equal to their ACB to Dco immediately before the winding-up.

H. The provisions of subsection 88(1) will apply to the wind-up of N1co into Cco, as described in Paragraph 32 above, such that:

(a) pursuant to paragraph 88(1)(a.2), the N1co Units distributed to Cco on the winding-up will be deemed not to have been disposed of by N1co;

(b) pursuant to paragraph 88(1)(b), the shares of N1co owned by Cco immediately before the winding-up will be deemed to have been disposed of by Cco on the winding-up for proceeds of disposition equal to the greater of the amounts determined in subparagraphs 88(1)(b)(i) and (ii); and

(c) pursuant to subparagraph 88(1)(c)(i) and paragraphs 88(1)(e.2) and 87(2)(e.1), the cost to Cco of the N1co Units distributed to Cco on the winding-up will be deemed to be equal to the cost of the N1co Units to N1co, and in respect of the N1co Units, Cco will be deemed to be the same corporation as and a continuation of N1co.

I. The provisions of subsection 88(1) will apply to the wind-up of N2co into Cco, as described in Paragraph 33 above, such that:

(a) pursuant to paragraph 88(1)(a.2), the N2co Units distributed to Cco on the winding-up will be deemed not to have been disposed of by N2co;

(b) pursuant to paragraph 88(1)(b), the shares of N2co owned by Cco immediately before the winding-up will be deemed to have been disposed of by Cco on the winding-up for proceeds of disposition equal to the greater of the amounts determined in subparagraphs 88(1)(b)(i) and (ii); and

(c) pursuant to subparagraph 88(1)(c)(i) and paragraphs 88(1)(e.2) and 87(2)(e.1), the cost to Cco of the N2co Units distributed to Cco on the winding-up will be deemed to be equal to the cost of the N2co Units to N2co, and in respect of the N2co Units, Cco will be deemed to be the same corporation as and a continuation of N2co.

J. The provisions of subsection 88(1) will apply to the wind-up of Newco into Aco, as described in Paragraph 38 above, such that:

(a) pursuant to paragraph 88(1)(a.2), the JJP Holdco Units distributed to Aco on the winding-up will be deemed not to have been disposed of by Newco;

(b) pursuant to paragraph 88(1)(b), the shares of Newco owned by Aco immediately before the winding-up will be deemed to have been disposed of by Aco on the winding-up for proceeds of disposition equal to the greater of the amounts determined in subparagraphs 88(1)(b)(i) and (ii); and

(c) pursuant to subparagraph 88(1)(c)(i) and paragraphs 88(1)(e.2) and 87(2)(e.1), the cost to Aco of the JJP Holdco Units distributed to Aco on the winding-up will be deemed to be equal to the cost of the JJP Holdco Units to Newco, and in respect of the JJP Holdco Units, Aco will be deemed to be the same corporation as and a continuation of Newco.

K. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions, in and by themselves.

L. Subsection 245(2) will not apply to the proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

The above rulings are based on the law as it presently reads 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

1. Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to, reviewed or has made any determination in respect of:

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

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

(c) the provincial income tax implications relating to the allocation of income and expenses under the proposed transaction; and

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

2. You have informed us in Paragraph 36 above that the redemption price of the Newco Preferred Shares is subject to a price adjustment clause. Nothing in this letter should be construed as confirmation, express or implied, that any adjustment to the FMV of the JJP Holdco Units transferred or to the redemption amount of the Newco Preferred Shares issued as consideration will be effective retroactively to the time of the transfer and issuance of such shares. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. 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

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