2001 Ruling 2000-0053013 - Loss Consolidation

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 Department.

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

Principal Issues:

1. Whether the loss consolidation arrangement is permissible under our current administrative policy?

2. Whether an additional cost amount can be created in a loss consolidation arrangement within an affiliated group ?

3. Where the loss from the disposition of a share of a corporation by a corporate taxpayer is denied under paragraph 40(3.6)(a), whether such loss can be added back to the ACB of the taxpayer's remaining shares in the corporation under paragraph 40(3.6)(b) when such loss is resulted from the deemed dividend on the cancellation of the share which is deductible by the dividend recipient corporate taxpayer under subsection 112(1) ?

4. Where shares of a corporation have a high ACB (to the holder of the shares) and a low PUC and the corporation purchases the shares for cancellation by issuing an interest bearing note to the holder, whether the interest paid or payable by the corporation on the note is deductible by the corporation?

Position:

1. Provided that the loss consolidation arrangement is within an affiliated group, the answer is yes.

2. No.

3. No.

4. No.

Reasons:

1. As stated above.

2. The purpose of a loss consolidation within an affiliated group is to allow the affiliated group to utilize its member's losses and not to facilitate the creation of additional cost amount to any of its member's property.

3. The stop-loss rule in subsection 112(3) would apply to such loss.

4. The note is not issued for the purpose of gaining or producing income and it will not constitute a replacement of or substitute for the share capital of the corporation, as the principal amount of the note is in excess of the PUC of the shares being cancelled by the corporation.

XXXXXXXXXX 2000-005301-3

XXXXXXXXXX , 2001

Dear Sirs:

Re: 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 letters of XXXXXXXXXX you 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 contained herein:

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

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

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a ruling previously issued by the Directorate.

Definitions

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

(a) Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act");

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

(c) "affiliated group of persons" has the meaning assigned by subsection 251.1(3);

(d) "agreed amount" has the meaning assigned by subsection 85(1);

(e) "BCA1" means the XXXXXXXXXX and, where applicable, its predecessor statutes;

(f) "BCA2" means the XXXXXXXXXX, and, where applicable, its predecessor statutes;

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

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

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

(j) "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;

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

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

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

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

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

(p) "related" has the meaning assigned by section 251;

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

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

(s) "stated capital" has the meaning assigned by the provisions of BCA1 or BCA2, as the case may be;

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

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

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

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

Facts

1. XXXXXXXXXX ("Pubco") is a public corporation, a taxable Canadian corporation and a holding corporation whose subsidiary wholly-owned corporations are XXXXXXXXXX. Pubco was incorporated under the BCA1 on XXXXXXXXXX under the name of XXXXXXXXXX and its shares are listed for trading on the XXXXXXXXXX Stock Exchange.

As at XXXXXXXXXX, the issued and outstanding capital of Pubco consisted approximately of XXXXXXXXXX common shares and no single shareholder nor any related group owned more than XXXXXXXXXX% of the issued and outstanding Pubco common shares.

The assets of Pubco include:

(a) all the issued and outstanding shares of the following corporations:

(i) XXXXXXXXXX ("Subco1");

(ii) XXXXXXXXXX ("Subco2");

(iii) XXXXXXXXXX ("Subco3");

(iv) XXXXXXXXXX ("Subco4"); and

(b) the following promissory notes:

(i) the Subco2 Promissory Note with a principal amount of $XXXXXXXXXX described in paragraph 5(e) below;

(ii) the Subco3 Promissory Note with a principal amount of $XXXXXXXXXX described in paragraph 4(a) below; and

(iii) the Subco4 Promissory Note with a principal amount of $XXXXXXXXXX as described in paragraph 5(b) below.

As Pubco controls Subco1, Subco2, Subco3 and Subco4, they are related and affiliated to one another. None of Subco1, Subco2, Subco3 or Subco4 is a private corporation.

Pubco holds the shares of Subco1, Subco2, Subco3 and Subco4 as capital property.

Pubco's year-end is XXXXXXXXXX of each year. As at XXXXXXXXXX, the balance of non-capital losses of Pubco amounted to $XXXXXXXXXX which were incurred in the following years:

XXXXXXXXXX.

During the period XXXXXXXXXX, no person or group of persons has acquired control, or is deemed by subsection 256(7) to have acquired control, of Pubco.

Pubco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at XXXXXXXXXX Taxation Centre.

2. Subco1 is a taxable Canadian corporation that is governed by the BCA1. Subco1 was formed on XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX ("Amalco1"), XXXXXXXXXX ("Aco") and XXXXXXXXXX ("Bco"), each of which was then a subsidiary wholly-owned corporation of Pubco. Relevant details relating to the predecessors of Subco1 are as follows:

(a) Amalco1 was formed on or about XXXXXXXXXX by the amalgamation of XXXXXXXXXX ("Cco") and XXXXXXXXXX ("Dco"). Immediately prior to this amalgamation, control of Cco was acquired by Pubco from unrelated parties. Control of Dco was acquired by Pubco on or about XXXXXXXXXX.

(b) Pubco acquired all of the issued and outstanding shares of Aco from unrelated persons on XXXXXXXXXX.

(c) Pubco acquired all of the issued and outstanding shares of Bco from unrelated persons on XXXXXXXXXX.

XXXXXXXXXX

The authorized share capital of Subco1 consists of:

(a) an unlimited number of common shares, without par value, each share entitled to one vote; and

(b) an unlimited number of preference shares, without par value, non-voting, without preference or priority in the payment of dividends, redeemable for the amount of their stated capital.

As at XXXXXXXXXX, the issued and outstanding capital of Subco1 consisted of XXXXXXXXXX common shares all of which were owned by Pubco.

Subco1's year-end is XXXXXXXXXX of each year. As at XXXXXXXXXX, the balance of non-capital losses of Subco1 amounted to $XXXXXXXXXX which were incurred in the following years:

XXXXXXXXXX.

Subco1's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at XXXXXXXXXX Taxation Centre.

3. Subco2 is a taxable Canadian corporation and a subsidiary wholly-owned corporation of Pubco. Subco2 was incorporated on XXXXXXXXXX and is governed by XXXXXXXXXX BCA2. Pubco acquired control of Subco2 in XXXXXXXXXX.

XXXXXXXXXX Its year-end is XXXXXXXXXX of each year.

Subco2's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at XXXXXXXXXX Taxation Centre.

On XXXXXXXXXX, Pubco transferred at FMV all of the issued and outstanding shares of XXXXXXXXXX ("Eco") to Subco2. As consideration for such transfer, Subco2 issued XXXXXXXXXX of its common shares and paid non-share consideration of $XXXXXXXXXX for an aggregate FMV of $XXXXXXXXXX. Pubco and Subco2 jointly elected pursuant to subsection 85(1) of the Act with respect to the transfer of the Eco shares to Subco2. The agreed amount in the joint election was $XXXXXXXXXX. Immediately thereafter, Eco was wound up into Subco2 pursuant to subsection 88(1). Eco is a corporation that was formed on or about XXXXXXXXXX as a result of the amalgamation of XXXXXXXXXX and two related corporations. Pubco had acquired control of each of the predecessors immediately before the amalgamation.

4. Subco3 is a taxable Canadian corporation and a subsidiary wholly-owned corporation of Pubco. Subco3 was incorporated on XXXXXXXXXX and is governed by the BCA1. Pubco acquired control of Subco3 on XXXXXXXXXX. On XXXXXXXXXX, Pubco transferred pursuant to subsection 85(1) all of its Subco3 Class B shares and Subco3 common shares to Subco3 for consideration consisting of

(a) a demand promissory note ("Subco3 Promissory Note") with a principal amount of $XXXXXXXXXX bearing an interest rate of XXXXXXXXXX% per annum, and

(b) XXXXXXXXXX Subco3 New Common Shares.

XXXXXXXXXX

Subco3's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at XXXXXXXXXX Taxation Centre.

5. Subco4 is a taxable Canadian corporation and a subsidiary wholly-owned corporation of Pubco. Subco4 was incorporated on XXXXXXXXXX and is governed by the BCA1. Pubco acquired from unrelated vendors all of the issued and outstanding shares of Subco4 and its related corporation, XXXXXXXXXX ("Fco"), on XXXXXXXXXX.

On XXXXXXXXXX, the following transactions occurred:

(a) Pubco transferred pursuant to subsection 85(1) all of its Fco shares, being XXXXXXXXXX Fco common shares, to Subco4 for consideration consisting of XXXXXXXXXX Subco4 common shares having an aggregate FMV of $XXXXXXXXXX.

(b) Pubco then transferred, pursuant to subsection 85(1), all of its Subco4 common shares to Subco4 for consideration consisting of

(i) a demand promissory note ("Subco4 Promissory Note") with a principal amount of $XXXXXXXXXX bearing an interest rate of XXXXXXXXXX% per annum., and

(ii) XXXXXXXXXX Subco4 New Common Shares.

(c) Fco was then wound up into Subco4 under subsection 88(1).

(d) Immediately after the winding up of Fco as described in (c) above, Subco4 transferred, pursuant to subsection 85(1), its assets located in the Province of XXXXXXXXXX to Subco2 for consideration consisting of XXXXXXXXXX Subco2 Class D Preferred Shares having an aggregate redemption value and FMV of $XXXXXXXXXX ("Subco2 Preferred Shares Redemption Amount"), an amount equal to the FMV of the assets so transferred to Subco2.

(e) Following the transfer as described in (d) above, Subco2 redeemed all of its Preferred Shares held by Subco4 at an amount equal to the Subco2 Preferred Shares Redemption Amount and FMV of $XXXXXXXXXX. As consideration for such share redemption, Subco2 issued to Subco4 a demand promissory note ("Subco2 Promissory Note") with a principal amount and FMV of $XXXXXXXXXX bearing an interest rate at XXXXXXXXXX% per annum.

(f) Following the receipt of the Subco2 Promissory Note by Subco4, Subco4 declared and paid a dividend in kind of an amount equal to the principal amount of the Subco2 Promissory Note to Pubco by assigning the Subco2 Promissory Note to Pubco.

XXXXXXXXXX

Subco4's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at XXXXXXXXXX Taxation Centre.

Proposed Transactions

6. Subco1 will file articles of amendment with the appropriate Corporate Registry to create an additional class of common shares ("Subco1 Class B Common Shares") and three new classes of preferred shares ("Subco1 Preferred Shares I", "Subco1 Preferred Shares II" and "Subco1 Preferred Shares III") which will have the following share attributes:

(a) the holders of the Subco1 Class B Common Shares will be entitled to the same rights as the holders of the existing common shares; however, the Subco1 Class B Common Shares will be entitled to XXXXXXXXXX votes per share; and

(b) the Subco1 Preferred Shares I, the Subco1 Preferred Shares II and the Subco1 Preferred Shares III:

(i) will be non-voting;

(ii) will be redeemable and retractable at any time for an amount equal to the amount for which they were issued and any unpaid dividends which have accumulated prior to their redemption or retraction ("Redemption Amount"); and

(iii) will be entitled equally to an annual cumulative dividend of XXXXXXXXXX% on the amount for which they were issued and will have preference over the common shares and the Subco1 Class B Common Shares for the payment of dividends. However, Subco1 will be permitted to declare dividends on any particular class of preferred shares without paying dividends on the other classes of preferred shares.

7. Pubco will transfer at FMV its XXXXXXXXXX Subco1 common shares to Subco1. As sole consideration for such transfer, Subco1 will issue to Pubco

(a) XXXXXXXXXX Subco1 Class B Common Shares; and

(b) XXXXXXXXXX Subco1 Preferred Shares I having an aggregate redemption and retraction amount equal to $XXXXXXXXXX.

The aggregate FMV of the Subco1 shares described in (a) and (b) above will be equal to the aggregate FMV of the XXXXXXXXXX Subco1 common shares so transferred to Subco1.

Pubco and Subco1 will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to Subco1 of the XXXXXXXXXX Subco1 common shares. The agreed amount in the joint election will be equal to $XXXXXXXXXX , being the ACB to Pubco of the XXXXXXXXXX Subco1 common shares at the time of the transfer which amount will not exceed their FMV.

Pursuant to paragraphs 85(1)(g) and (h) of the Act,

(i) the cost to Pubco of the XXXXXXXXXX Subco1 Preferred Shares I receivable by Pubco as consideration for the transfer shall be deemed to be the lesser of the FMV of the XXXXXXXXXX Subco1 Preferred Shares I immediately after the transfer and the proceeds of disposition as determined pursuant to subsection 85(1) of the Act of the XXXXXXXXXX Subco1 common shares so transferred to Subco1, being $XXXXXXXXXX, and

(ii) the cost to Pubco of the XXXXXXXXXX Subco1 Class B Common Shares receivable by Pubco as consideration for the transfer shall be deemed to be the amount by which the proceeds of disposition of the XXXXXXXXXX Subco1 common shares so transferred to Subco1 exceeds the cost to Pubco of the XXXXXXXXXX Subco1 Preferred Shares I as described in (i) above, being nil.

For the purpose of the BCA1, the aggregate amount to be added to the stated capital of the Subco1 Preferred Shares I and the Subco1 Class B Common Shares will be equal to the aggregate PUC of the XXXXXXXXXX Subco1 common shares owned by Pubco immediately before the transfer as described above and such aggregate stated capital will be allocated to the Subco1 Preferred Shares I and the Subco1 Class B Common Shares in proportion to their respective FMV.

8. Pubco will transfer at FMV its XXXXXXXXXX Subco1 Preferred Shares I to Subco2. As consideration for such transfer, Subco2 will issue to Pubco a demand promissory note with a principal amount and FMV equal to the aggregate redemption and retraction amount of the XXXXXXXXXX Subco1 Preferred Shares I, being $XXXXXXXXXX, and bearing a commercial interest rate at XXXXXXXXXX% per annum ("Subco2 Note").

Subco2 will make the interest payments on the Subco2 Note to Pubco annually.

Subco1 will have sufficient cash flow to pay and will pay the dividends on the Subco1 Preferred Shares I held by Subco2 annually.

It is not expected that the interest expense to be deducted by Subco2 in any particular year in respect of the Subco2 Note described above will result in a non-capital loss to Subco2 for the particular year.

9. Subco1 will borrow an amount of $XXXXXXXXXX on a "daylight loan" basis ("Daylight Loan") from an arm's length institutional lender. Subco1 will use the Daylight Loan proceeds to make a demand loan of $XXXXXXXXXX to Subco3 and $XXXXXXXXXX to Subco4. As evidence for such indebtedness, each of Subco3 and Subco4 will issue to Subco1 a demand promissory note with a principal amount and FMV equal to $XXXXXXXXXX ("Subco3 Note") and $XXXXXXXXXX ("Subco4 Note"), respectively, and bearing a commercial interest rate at XXXXXXXXXX% per annum.

Subco3 and Subco4 will use the loan proceeds from Subco1 to subscribe for Subco1 Preferred Shares II and Subco1 Preferred Shares III, respectively, having an aggregate redemption and retraction amount and FMV equal to $XXXXXXXXXX, in the case of the Subco1 Preferred Shares II, and $XXXXXXXXXX, in the case of the Subco1 Preferred Shares III.

Pursuant to the applicable provisions of the BCA1, the amount to be added to the stated capital of Subco1 will be equal to $XXXXXXXXXX in respect of the Subco1 Preferred Shares II and $XXXXXXXXXX in respect of the Subco1 Preferred Shares III.

Subco1 will use these share subscription proceeds to repay the Daylight Loan.

Subco3 and Subco4 will make the interest payments on the Subco3 Note and Subco4 Note, respectively, to Subco1 annually.

Subco1 will use the interest payments received from Subco3 and Subco4 described above plus its internal funds to pay the annual XXXXXXXXXX% dividends on its Preferred Shares II and Preferred Shares III held by Subco3 and Subco4, respectively.

It is not expected that the interest expense to be deducted by Subco3 and Subco4, as the case may be, in respect of the Subco3 Note and Subco4 Note in a particular year will result in a non-capital loss to Subco3 or Subco4, as the case may be, for the particular year.

10. Once sufficient income has been earned by Pubco to fully utilize its non-capital losses:

(a) Subco1 will pay the balance of any accrued and unpaid dividends on the Subco1 Preferred Shares I held by Subco2.

(b) Subco2 will pay the balance of any accrued and unpaid interest owing on the Subco2 Note.

(c) Pubco will purchase from Subco2 at FMV all of the XXXXXXXXXX Subco1 Preferred Shares I held by Subco2. It is expected that the FMV of the XXXXXXXXXX Subco1 Preferred Shares I held by Subco2 will be equal to their aggregate redemption and retraction amounts of $XXXXXXXXXX. As consideration for such purchase, Pubco will issue to Subco2 a demand promissory note ("Pubco Note") with a principal amount and FMV equal to the FMV of the XXXXXXXXXX Subco1 Preferred Shares I so purchased (which amount is expected to be $XXXXXXXXXX), bearing a commercial interest rate.

(d) Subco2 will pay the principal amount of the Subco2 Note by transferring to Pubco the Pubco Note which will be accepted by Pubco in full payment of Subco2's obligation. Pubco will pay the principal amount of the Pubco Note by transferring to Subco2 the Subco2 Note which will be accepted by Subco2 in full payment of Pubco's obligation. The Subco2 Note and the Pubco Note will both thereupon be marked paid in full and cancelled.

(e) Pubco will transfer to Subco1 its XXXXXXXXXX Subco1 Preferred Shares I in exchange for XXXXXXXXXX Subco1 Class B Common Shares ("Share Exchange") having an aggregate FMV equal to the FMV of the XXXXXXXXXX Subco1 Preferred Shares I immediately before the Share Exchange. Pursuant to the applicable provisions of the BCA1, the addition to the stated capital of Subco1 in respect of the issuance of the XXXXXXXXXX Subco1 Class B Common Shares will not exceed the aggregate PUC of the XXXXXXXXXX Subco1 Preferred Shares I owned by Pubco immediately before the Share Exchange. No election will be filed pursuant to subsection 85(1) of the Act with respect to the Share Exchange.

It is expected that Pubco will fully utilize its non-capital losses described in paragraph 1 above in its XXXXXXXXXX taxation year.

11. Once sufficient income has been earned by Subco1 to fully utilize its non-capital losses:

(a) Subco1 will pay the balance of any accrued and unpaid dividends on the Subco1 Preferred Shares II and the Subco1 Preferred Shares III held by Subco3 and Subco4.

(b) Subco3 and Subco4 will pay the balance of any accrued and unpaid interest owing on the Subco3 Note and the Subco4 Note, as the case may be.

(c) Subco1 will redeem at FMV all of its Subco1 Preferred Shares II and Subco1 Preferred Shares III held by Subco3 and Subco4. It is expected that the FMV of these preferred shares will be equal to their aggregate redemption amounts of $XXXXXXXXXX and $XXXXXXXXXX, respectively. As consideration for such share redemptions, Subco1 will issue to each of Subco3 and Subco4 a demand promissory note (the "Subco1 Note1" and Subco1 Note2", respectively), with a principal amount and FMV equal to the FMV of the preferred shares so redeemed and bearing a commercial interest rate. Each of Subco3 and Subco4 will accept the Subco1 Note1 and Subco1 Note2, respectively, as full and absolute payment of the redemption amount of the Subco1 Preferred Shares II and Subco1 Preferred Shares III, as the case may be, with the risk of the note being dishonoured.

(d) Subco1 will pay the principal amount of the Subco1 Note1 and Subco1 Note2 by transferring to each of Subco3 and Subco4 the Subco3 Note and the Subco4 Note, as the case may be, which note will be accepted by each of Subco3 and Subco4 in full payment of Subco1's obligation. Each of Subco3 and Subco4 will pay the principal amount of the Subco3 Note and the Subco4 Note, as the case may be, by transferring to Subco1 the Subco1 Note1 and the Subco1 Note2, as the case may be, which will be accepted by Subco1 in full payment of Subco3's and Subco4's obligation. The Subco1 Note1, the Subco1 Note2, the Subco3 Note and the Subco4 Note will all thereupon be marked paid in full and cancelled.

It is expected that Subco1 will fully utilize its non-capital losses described in paragraph 2 above in its XXXXXXXXXX taxation year.

Additional Information

12. None of the corporations referred to herein is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

13. 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 Subco1 Preferred Shares I, Subco1 Preferred Shares II or Subco1 Preferred Shares III.

14. Subco1 will not have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the Subco1 Preferred Shares I, Subco1 Preferred Shares II, or Subco1 Preferred Shares III.

15. None of the Subco1 Preferred Shares I, Subco1 Preferred Shares II or Subco1 Preferred Shares III referred to herein 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.

16. 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.

17. Each of Pubco, Subco1, Subco2, Subco3 and Subco4 will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note(s) issued by it as part of the proposed transactions.

18. None of the proposed transactions described above will have a significant impact on any outstanding tax liabilities of Pubco, Subco1, Subco2, Subco3 or Subco4.

19. None of the purposes of paying the dividends as described in the proposed transactions will be to effect a significant reduction in the portion of the gain that, but for the dividends, would have been realized on a disposition at FMV of any share of capital stock described above immediately before the dividends.

20. Except as outlined herein, Pubco has no specific intention of disposing any of the Subco1 shares, Subco2 shares, Subco3 shares and Subco4 shares directly or indirectly to any unrelated person following the proposed transactions as part of a series of transactions which includes the proposed transactions.

Purpose of the Proposed Transactions

21. The purpose of the proposed transactions is to consolidate profit and losses within an affiliated group enabling each of Pubco and Subco1 to earn sufficient interest income to eliminate its non-capital losses.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The provisions of subsection 85(1) will apply to the transfer by Pubco of its XXXXXXXXXX Subco1 common shares to Subco1 as described in paragraph 7 above, in respect of which a joint election under subsection 85(1) is made such that the agreed amount in respect of the transfer will be deemed to be the proceeds of disposition to Pubco and the cost thereof to Subco1 pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer referred to herein.

B. Provided that each of Subco2, Subco3 and Subco4 has a legal obligation to pay interest on the Subco2 Note, the Subco3 Note and the Subco4 Note, as the case may be, and provided that the Subco1 Preferred Shares I, the Subco1 Preferred Shares II and the Subco1 Preferred Shares III continue to be held by Subco2, Subco3 and Subco4, as the case may be, for the purpose of producing income (other than income which is exempt), each of Subco2, Subco3 and Subco4 will, to the extent that such amount does not exceed a reasonable amount, be entitled to deduct, in computing its income for a taxation year, an amount paid in the year or payable in respect of the year (depending on the method regularly followed by such corporation in computing its income for purposes of the Act) as interest on the Subco2 Note, the Subco3 Note or the Subco4 Note, as the case may be, pursuant to paragraph 20(1)(c) of the Act.

C. The taxable dividend received by each of Subco2, Subco3 and Subco4, as described in paragraphs 8 and 9 above, will,

(a) be deductible by each of the recipients pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(b) will not be subject to tax under Parts IV.1 and VI.1 of the Act by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act because each of the recipients will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer corporation immediately before the payment of the taxable dividend as described in paragraphs 8 and 9 above.

D. Provided that at the time of the disposition by Subco2 of its Subco1 Preferred Shares I to Pubco as described in subparagraph 10(c) above the FMV of such Subco1 Preferred Shares I is equal to their redemption amount of $XXXXXXXXXX, the repayment of the Subco2 Note and the Pubco Note as described in subparagraph 10(d) above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act.

E. Provided that at the time of the redemption by Subco1 of its Subco1 Preferred Shares II owned by Subco3 and Subco1 Preferred Shares III owned by Subco4 as described in paragraph 11(c) above the FMV of such Subco1 Preferred Shares II and Subco1 Preferred Shares III is equal to their aggregate redemption amount of $XXXXXXXXXX and $XXXXXXXXXX, respectively, the repayment of the Subco1 Note1, the Subco1 Note2, the Subco3 Note and the Subco4 Note as described in subparagraph 11(d) above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) of the Act.

F. Provided that, immediately before the Share Exchange as described in subparagraph 10(e) above, Pubco

(a) holds the XXXXXXXXXX Subco1 Preferred Shares I as capital property;

(b) does not receive any consideration other than the Subco1 Class B Common Shares; and

(c) does not file an election under subsection 85(1) with respect to the shares received by it on the Share Exchange;

and further provided that section 86 of the Act will not apply to the Share Exchange, then, the provisions of subsection 51(1) of the Act will apply to the Share Exchange with the result that:

(i) Pubco will be deemed not to have disposed of its Subco1 Preferred Shares I; and

(ii) the cost to Pubco of the Subco1 Class B Common Shares received will be equal to the ACB to Pubco of its Subco1 Preferred Shares I immediately before the Share Exchange.

For greater certainty, subsection 51(2) of the Act will not apply to the Share Exchange.

G. As a result of the proposed transactions described in paragraphs 6 through 11 above, in and of themselves, subsection 245(2) of the Act will not be applied 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 70-6R4 issued by Canada Customs and Revenue Agency ("CCRA") on January 29, 2001 and are binding provided that the proposed transactions, other than those described in paragraphs 10 and 11, 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

1. Nothing in this ruling should be construed as implying that CCRA has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or the PUC of any shares referred to herein; or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above, in particular, those completed transactions as described in paragraphs 2 through 5 above.

2. To the extent that the non-capital losses of Subco1 as described in paragraph 2 above include non-capital losses that were incurred by a predecessor of Subco1 for a taxation year of such predecessor that ended prior to the acquisition of control of such predecessor by Pubco ("pre-acquisition non-capital losses"), subsections 111(5) and 87(2.1) of the Act will apply to such pre-acquisition non-capital losses of Subco1. In such case, such pre-acquisition non-capital losses of Subco1 cannot be utilized to reduce any interest income that will be earned by Subco1 as described herein.

3. In the event that the interest expense that is deductible by any of Subco2, Subco3 or Subco4 in a particular taxation year in respect of the Subco2 Note, the Subco3 Note or the Subco4 Note, as the case may be, results in a non-capital loss to Subco2, Subco3 or Subco4, as the case may be, for the particular taxation year, such non-capital loss will not be a non-capital loss of the particular corporation from carrying on business such that paragraph 111(5)(b) will preclude the carry-back of any such non-capital losses to a taxation year of Subco2, Subco3 or Subco4 which ends before the acquisition of control of such corporation by Pubco.

Yours truly,

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