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 financial difficulty criteria met.
2. Where a limited partnership is eliminated for the purposes of refinancing a debt of the limited partnership with DPS, will GAAR apply to deny the lenders a subsection 112(1) or 136(1) deduction in respect of the dividends on the DPS?
3. The revised proposal is to retain the limited partnership with the taxpayer as the general partner having a XXXXXXXXXX % interest and its newly created wholly-owned subsidiary as the sole limited partner having a XXXXXXXXXX % interest. Is this proposed structure acceptable?
4. Whether the proposed splitting of the term loan into two tranches before the issuance of the DPS is acceptable.
5. Can dividends be paid on the DPS from XXXXXXXXXX even though the shares will not be issued until after that date?
Position:
1. Favourable ruling given.
2. No, based on the circumstances of this particular situation.
3. It is acceptable in this case.
4. Yes.
5. Yes.
Reasons:
1. Facts substantiate financial difficulty.
2. The proposal considered in the original ruling (E9723533) was for the existing limited partners to transfer their interests to the general partner in exchange for preferred shares of the general partner except for one individual limited partner who was to sell his interest for cash consideration. The GAAR Committee concluded that the transfer of the Class A and B partnership interests by the limited partners to the corporate general partner to be followed by the formation of a wholly-owned subsidiary of the general partner to issue DPS were all avoidance transactions. However, based on the facts of this particular situation where the benefits of the DPS financing would accrue primarily to the general partner and the Class B limited partners which were all corporations, the GAAR Committee agreed with the recommendation that GAAR not be applied on the basis that the tax benefits did not result in a misuse of the DPS legislation.
3. The reasons given to continue the partnership are considered reasonable. Also, we have ruled favourably with regard to the refinancing of limited partnership debts with DPS in situations where the partners were in the same corporate group.
4. The existing term loan satisfies the requirements for DPS refinancing and the proposed restructuring will proceed only if the issuance of the DPS is approved.
5. Given the time required to obtain a DPS ruling and implement the refinancing, the Department is prepared to accommodate taxpayers that wish to have the 5 year period for after tax financing commence with the date the ruling is issued. In this case, the date of the original ruling letter was XXXXXXXXXX, 1998. However, due to the length of time it has taken to complete negotiations with the lenders, we will accept a revised effective date of XXXXXXXXXX.
XXXXXXXXXX 990696
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX requesting on behalf of the above-noted taxpayer certain amendments to ruling 972353 dated XXXXXXXXXX, 1998 (the "Ruling"). We also acknowledge receipt of your letters of XXXXXXXXXX. Given the extent of the changes, this letter constitutes a revision and a restatement of the Ruling and cancels and replaces the Ruling.
You advise that to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request has been considered by a taxation services office or a taxation centre in connection with a tax return already filed, and none of the issues involved in the ruling request is the subject of any notice of objection or is under appeal.
In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:
a) "A Co" means XXXXXXXXXX,
b) "B Co" means XXXXXXXXXX,
c) "C Co" means XXXXXXXXXX,
d) "D Co" means XXXXXXXXXX,
e) "E Co" means XXXXXXXXXX,
f) "F Co" means XXXXXXXXXX,
g) "G Co" means XXXXXXXXXX,
h) "H Co" means XXXXXXXXXX,
i) "I Co" means XXXXXXXXXX,
j) "J Co" means XXXXXXXXXX,
k) "K Co" means XXXXXXXXXX,
l) "L Co" means XXXXXXXXXX,
m) "M Co" means XXXXXXXXXX,
n) "N Co" means XXXXXXXXXX,
o) "O Co" means XXXXXXXXXX,
p) "P Co" means XXXXXXXXXX,
q) "Q Co" means XXXXXXXXXX,
r) "R Co" means XXXXXXXXXX,
s) "S Co" means XXXXXXXXXX,
t) "T Co" means XXXXXXXXXX,
u) "U Co" means XXXXXXXXXX,
v) "V Co" means XXXXXXXXXX,
w) "W Co" means XXXXXXXXXX,
x) "X Co" means XXXXXXXXXX,
y) "Y Co" means XXXXXXXXXX,
z) "Partnership A" means XXXXXXXXXX,
aa) "Partnership B" means XXXXXXXXXX,
bb) "Individual #1" means XXXXXXXXXX,
cc) "Individual #2" means XXXXXXXXXX,
dd) "taxable Canadian corporation" has the meaning assigned to that expression by subsection 89(1),
ee) "Agent" means D Co as agent for the Original Lenders (as hereinafter defined), and
ff) "Closing Date" means the date on which the Debt Restructuring Agreement is executed and delivered and the distress preferred share financing completed.
Our understanding of the facts, proposed transactions and their purposes is set out below.
FACTS
CORPORATE STRUCTURE
1. A Co was incorporated on XXXXXXXXXX under the Canada Business Corporations Act (the "CBCA"). Its fiscal period ends on XXXXXXXXXX of each year. A Co's head office is in XXXXXXXXXX and its tax services office is in XXXXXXXXXX. Its federal business number is XXXXXXXXXX.
2. A Co is a taxable Canadian corporation, a private corporation within the meaning assigned to this expression by subsection 89(1), and a Canadian controlled-private corporation within the meaning assigned to this expression by subsection 125(7).
3. The authorized capital of A Co consists of an unlimited number of common shares of which one share has been issued to B Co for consideration of $XXXXXXXXXX. The adjusted cost base ("ACB") and paid-up capital ("PUC") of this share is $XXXXXXXXXX. ACB and PUC have the meanings assigned to those terms in section 54 and subsection 89(1).
4. B Co was incorporated on XXXXXXXXXX under the XXXXXXXXXX Business Corporations Act. Its fiscal period ends on XXXXXXXXXX of each year. B Co's head office is in XXXXXXXXXX and its tax services office is in XXXXXXXXXX. Its federal business number is XXXXXXXXXX.
5. B Co is owned as to XXXXXXXXXX% by C Co, XXXXXXXXXX% by D Co, XXXXXXXXXX% by E Co, and XXXXXXXXXX% by F Co. None of C Co, D Co, E Co or F Co is related to the other within the meaning of the Act.
6. B Co's principal assets are share investments in four corporations, including A Co, that have ownership interests in XXXXXXXXXX projects. The other three companies in which B Co holds shares are: G Co in which B Co owns all of the voting common shares and none of the non-voting common shares to hold XXXXXXXXXX% of the total common share equity; H Co in which B Co owns all of the voting common shares and none of the non-voting common shares to hold XXXXXXXXXX% of the total common share equity; and I Co which is wholly-owned.
7. A Co is a holding company which has as its principal asset a XXXXXXXXXX% interest in Partnership A, a limited partnership formed on XXXXXXXXXX under the laws of the XXXXXXXXXX. Partnership A's fiscal period ends on XXXXXXXXXX of each year.
8. Partnership A was authorized to issue up to XXXXXXXXXX partnership interests comprised of XXXXXXXXXX Class A partnership interests, XXXXXXXXXX Class B partnership interests, and XXXXXXXXXX general partnership interests. The limited partnership agreement provides that the partnership interests are to be treated equally (i.e., distributions are to be allocated XXXXXXXXXX% to the general partner, XXXXXXXXXX% to the Class B interest holders and XXXXXXXXXX% to the Class A interest holders) except as to priority of distributions to the Class B interest holders. Class B interest holders and the general partnership interest holders are entitled to receive priority distributions from Partnership A until such time that the Class B partnership interest holders receive $XXXXXXXXXX plus a pre-established return on this same amount. In a year in which priority distributions are made, the income or loss of Partnership A is allocated to the partners in proportion to the cash distributions received by each partner (i.e., XXXXXXXXXX% to the general partner, XXXXXXXXXX% to the Class B interest holders and XXXXXXXXXX% to the Class A interest holders).
9. On XXXXXXXXXX, Partnership A issued the XXXXXXXXXX general partnership interests to A Co for $XXXXXXXXXX.
10. On XXXXXXXXXX, Partnership A issued a total of XXXXXXXXXX Class A partnership interests for total consideration of $XXXXXXXXXX to three parties: Individual #1 as to XXXXXXXXXX Class A partnership interests, Individual #2 as to XXXXXXXXXX Class A partnership interests, and J Co as to XXXXXXXXXX Class A partnership interests.
11. On XXXXXXXXXX, Partnership A entered into an agreement with A Co, D Co, K Co, L Co, Individual #1 and Individual #2 for the future issuance of Class B partnership interests. The Class B partnership interests were agreed to be issued on the date the project converted from the construction phase to the operational phase ("Conversion") for a subscription price of $XXXXXXXXXX million. On XXXXXXXXXX, L Co assigned its rights and obligations under such agreement to its affiliate Y Co. Conversion occurred with effect on XXXXXXXXXX as more fully described in 40 below.
12. Subsequent to XXXXXXXXXX and prior to Conversion, Individual #1 and Individual #2 sold promissory notes, originally issued as noted in 24 below, to M Co. These promissory notes were agreed to be part of the XXXXXXXXXX noted in 11 above. This transaction made M Co the ultimate holder of what would have been Individual #1 and Individual #2's Class B partnership interests when issued. The holders of the XXXXXXXXXX issued Class B partnership interests were D Co (XXXXXXXXXX units), K Co (XXXXXXXXXX units), Y Co (XXXXXXXXXX units) and M Co (XXXXXXXXXX units). Hereinafter A Co, Individual #1, Individual #2, J Co, D Co, K Co, Y Co and M Co will collectively be referred to as the "Partners". None of the Partners is related to the other within the meaning of the Act.
13. During the fiscal year XXXXXXXXXX, Partnership A redeemed XXXXXXXXXX units of Class B partnership interests from M Co for an aggregate amount of $XXXXXXXXXX. On XXXXXXXXXX, Partnership A redeemed XXXXXXXXXX units of Class A partnership interests from Individual #1 and XXXXXXXXXX units of Class A partnership interests from Individual #2 for consideration of $XXXXXXXXXX each.
14. Individual #1 is resident in XXXXXXXXXX. Individual #2 is resident in XXXXXXXXXX.
15. J Co is a taxable Canadian corporation resident in the XXXXXXXXXX.
16. D Co is a Canadian insurance company and a taxable Canadian corporation.
17. L Co and Y Co are wholly owned subsidiaries of XXXXXXXXXX and are taxable Canadian corporations.
18. K Co is a Canadian XXXXXXXXXX and is a taxable Canadian corporation.
19. M Co is a XXXXXXXXXX and a taxable Canadian corporation.
THE BUSINESS OF PARTNERSHIP A
20. Partnership A owns a XXXXXXXXXX. The Facility and the associated contracts and permits are hereinafter referred to as the "Project".
21. Operations, management and maintenance services to Partnership A are currently provided by N Co. N Co employs all of the manpower at the Facility including the Facility's XXXXXXXXXX manager and is responsible for the operations of the Facility under an operating, management and maintenance agreement with Partnership A. N Co is not related to the Partners within the meaning of the Act.
22. Approximately XXXXXXXXXX operational staff are employed at the Facility by N Co. XXXXXXXXXX.
FINANCIAL DIFFICULTY
23. Development of the Project was started in XXXXXXXXXX by O Co, a corporation controlled by Individual #1 and Individual #2. O Co entered into a contract (the "Construction Contract") with M Co (the "Construction Contractor") pursuant to which M Co was to provide engineering and construction services to the Project.
24. On XXXXXXXXXX, a financing and acquisition transaction was completed and certain assets including the land and all significant contracts related to the Project were sold from O Co to Partnership A for $XXXXXXXXXX consideration consisting of $XXXXXXXXXX cash and the issuance of interest bearing notes of $XXXXXXXXXX to each of Individual #1 and Individual #2. The Class A units referred to in 10 above were issued at this time.
25. On XXXXXXXXXX, D Co, K Co, L Co, U Co, V Co, W Co, and X Co (collectively the "Original Lenders" and individually an "Original Lender") provided to Partnership A a $XXXXXXXXXX construction loan to finance the construction of the Facility (the "Construction Loan"). The assets described in 24 above were pledged to the Original Lenders as security for the Construction Loan. The Agent for the Original Lenders under the Construction Loan held all security (the "Original Security") for the Construction Loan. The Original Lenders deal at arm's length with A Co and Partnership A.
26. On XXXXXXXXXX, O Co novated the Construction Contract between itself and M Co in favour of Partnership A. Construction of the Facility began in XXXXXXXXXX. The Construction Contract provided for a completion date of the Facility of XXXXXXXXXX.
27. On XXXXXXXXXX (the "Project Manager") was contracted to be the construction and operations manager for the Project. The Project Manager's remuneration and compensation was to be based entirely on the profitability of Partnership A.
28. XXXXXXXXXX.
29. XXXXXXXXXX.
30. XXXXXXXXXX.
31. XXXXXXXXXX.
32. XXXXXXXXXX.
33. XXXXXXXXXX .
34. XXXXXXXXXX .
35. The Project's actual operating costs were running at an annual rate of $XXXXXXXXXX, before interest payments and depreciation. This amount is $XXXXXXXXXX in excess of the original projected annual operating costs of the Facility, due to several factors, including but not limited to the following:
a) $XXXXXXXXXX of excess XXXXXXXXXX costs (as outlined in 28 to 31 above);
b) XXXXXXXXXX costs of approximately $XXXXXXXXXX per annum in excess of the original forecast;
c) utility cost overruns of $XXXXXXXXXX per annum;
d) fuel oil cost overruns of $XXXXXXXXXX per annum;
e) unforeseen municipal property taxes of approximately $XXXXXXXXXX;
f) management cost overruns of $XXXXXXXXXX; and
g) annual labour cost overruns of $XXXXXXXXXX.
The Project's operating costs before interest payments and depreciation were $XXXXXXXXXX for the year ended XXXXXXXXXX and $XXXXXXXXXX for the year ended XXXXXXXXXX.
36. During XXXXXXXXXX, the Facility was completed by M Co, the Construction Contractor, two months after the contractual completion date. However, poor construction management and inappropriate cost controls by the Project Manager and S Co failed to prevent cost overruns on the Project. Accordingly, the contract with the Project Manager was terminated in XXXXXXXXXX. Furthermore, for those reasons outlined in 34 above, S Co was terminated as the operations manager of the Facility in XXXXXXXXXX and replaced with N Co (see 21 above).
37. Because of delays in the completion of construction of the Facility, revenue for the operating period ended XXXXXXXXXX was $XXXXXXXXXX, approximately $XXXXXXXXXX less than originally forecasted. Revenue for the year ended XXXXXXXXXX was $XXXXXXXXXX and net losses for that year totalled $XXXXXXXXXX. For the year ended XXXXXXXXXX, revenue was $XXXXXXXXXX and net losses totalled $XXXXXXXXXX.
38. The actual total cost of the XXXXXXXXXX assets in the Project to XXXXXXXXXX, including deferred debt issuance costs, totalled $XXXXXXXXXX. Prepaid expenses and other short term assets totalling $XXXXXXXXXX brought total assets in the limited partnership to $XXXXXXXXXX, or approximately $XXXXXXXXXX in excess of the original estimated capital budget of $XXXXXXXXXX. The majority of the excess costs incurred to XXXXXXXXXX were subsequently funded through:
a) the issuance by Partnership A on XXXXXXXXXX (when construction holdbacks were paid) of a subordinated note (the "Subdebt Agreement") to D Co and Y Co (the "Subdebt Lenders") to evidence a term loan for $XXXXXXXXXX with an interest rate of XXXXXXXXXX% (the "Subdebt"). The Subdebt is to mature on XXXXXXXXXX and monthly interest and principal payments are required;
b) the issuance of $XXXXXXXXXX working capital notes (the "Operating Loan") established with D Co and Y Co (the "Operating Lenders") in XXXXXXXXXX;
c) capital leases totalling $XXXXXXXXXX; and
d) trade and other creditors for $XXXXXXXXXX.
39. The Subdebt is secured by a second charge on Partnership A's assets (the "Subdebt Security"). The Operating Loan is secured by a first charge on Partnership A's accounts receivable and a charge on Partnership A's assets (the "Operating Security"). The additional financing charges arising from funding of the excess costs were not anticipated by the Project and have further contributed to Partnership A's financial difficulty.
40. Conversion, referred to in 11 above, occurred on XXXXXXXXXX. At that time the Construction Loan was converted to (i) a XXXXXXXXXX-year term loan of $XXXXXXXXXX with a fixed interest rate of XXXXXXXXXX% per annum (the "Term Loan") secured by the Original Security; and (ii) $XXXXXXXXXX of Class B partnership units. A Co, as the general partner, agreed to be jointly liable for all the covenants, agreements and obligations of Partnership A as set out in the Term Loan Agreement. The lenders of the Term Loan ("Term Lenders") and their respective portion of the Term Loan were as follows:
a) D Co $XXXXXXXXXX
b) K Co $XXXXXXXXXX
c) Y Co $XXXXXXXXXX
d) U Co $XXXXXXXXXX
e) V Co $XXXXXXXXXX
f) W Co $XXXXXXXXXX
g) X Co $XXXXXXXXXX
As part of the Conversion, the two interest bearing notes of $XXXXXXXXXX each acquired by M Co, as described in 12 above, were converted into $XXXXXXXXXX of Class B partnership units.
41. A Co, on behalf of Partnership A, has met with the Term Lenders, the Subdebt Lenders and the Operating Lenders on numerous occasions in an attempt to resolve Partnership A's mounting financial difficulties. The measures taken to finance the budget overruns as outlined in 38 above are short term in nature and do not alleviate the Project's long term financial difficulties.
42. Because of financial difficulties encountered, required principal and interest payments have not been made on the Term Loan, the Subdebt or the Operating Loan for the months of XXXXXXXXXX. During XXXXXXXXXX, the Term Lenders, the Subdebt Lenders and the Operating Loan Lenders advised Partnership A in writing that it was in default pursuant to the terms of the respective loan agreements, and specifically that it had defaulted in payment of principal and interest due on the loans. Partnership A has advised the Term Lenders, the Subdebt Lenders and the Operating Loan Lenders that it would not be able to make full interest payments for the foreseeable future. On XXXXXXXXXX, partial payment for arrears interest on the Term Loan and Operating Loan were made in the amounts of $XXXXXXXXXX and $XXXXXXXXXX respectively. From XXXXXXXXXX, Partnership A made payments on the Operating Loan totalling $XXXXXXXXXX (reducing principal by $XXXXXXXXXX), interest payments on the Term Loan totalling $XXXXXXXXXX and a payment of $XXXXXXXXXX on account of interest on the Term Loan (see 56(b) below). No principal or interest payments were made on the Subdebt during this period. On XXXXXXXXXX, an interest payment of $XXXXXXXXXX was made on the Term Loan and a payment of $XXXXXXXXXX was made on the Operating Loan which had the effect of paying off the Operating Loan in full.
43. Continued net income losses are projected. For the year ending XXXXXXXXXX (assuming no change to the existing capital structure) net losses are expected to total $XXXXXXXXXX, calculated after all interest charges on the Term Loan, the Subdebt, and the Operating Loan.
44. In XXXXXXXXXX, management of A Co, on behalf of Partnership A, met with the Term Lenders, the Subdebt Lenders and the Operating Lenders to discuss Partnership A's financial condition and the options available for refinancing its indebtedness. In this regard, A Co and Partnership A have indicated to the lenders that refinancing with distress preferred shares as described below is the last option available to them other than to surrender the XXXXXXXXXX to its lenders or make a petition in Bankruptcy. As a result of this meeting and subsequent discussions, Partnership A has reached agreement with the lenders to enter into an agreement to restructure the Term Loan and the Subdebt, both of which relate entirely to business carried on in Canada, prior to any refinancing through the issue of distress preferred shares (see "Debt Restructuring Agreement" in 56 below). In addition, as part of the financial restructuring, Partnership A has reached agreement with the Term Lenders and the Subdebt Lenders that the Operating Loan will be repaid prior to issuing the distress preferred shares. As noted in 42 above, the Operating Loan was repaid in full on XXXXXXXXXX.
45. Cash flow projections for Partnership A prepared for the next five years indicate continuing deficiencies without the proposed refinancing as described below. The projections with the refinancing indicate cash flow savings throughout the five year forecast period which can be used to pay down Partnership A's indebtedness.
46. At the present time, no other refinancing alternatives are available to Partnership A as a result of the difficulties faced by Partnership A described herein. Cash flow from operations has declined to a point where Partnership A is unable to meet its ongoing financial obligations as they come due. If the proposed refinancing does not occur, the Term Lenders and the Subdebt Lenders will more urgently and strongly consider the option of accelerating the entire amount of the Term Loan and the Subdebt and enforcing their security.
47. B Co is a holding company the controlling shareholder of which is C Co. Both B Co and C Co have no superfluous or liquid assets which could be made available to Partnership A to significantly alleviate its financial difficulty.
48. G Co and H Co are not in a position to provide any financial assistance to Partnership A. A XXXXXXXXXX appears as a current asset on the XXXXXXXXXX balance sheet for each of G Co and H Co in the amount of $XXXXXXXXXX for G Co and $XXXXXXXXXX for H Co. These funds are not available for investment in A Co or Partnership A.
The XXXXXXXXXX assets owned by G Co and H Co were acquired from XXXXXXXXXX As part of the asset acquisitions, it was agreed that XXXXXXXXXX manage the XXXXXXXXXX facilities and agreements were entered into with XXXXXXXXXX for this management. Pursuant to the management agreements, specified amounts were to be held back from the asset purchase price to XXXXXXXXXX for deposit into the XXXXXXXXXX. It was agreed that these amounts would be used for operations of the XXXXXXXXXX facilities and it was understood that these amounts would be a performance incentive for XXXXXXXXXX. If the projects were managed efficiently by XXXXXXXXXX, there would be no need to call on the XXXXXXXXXX. Over time, the balance in these accounts would be paid to XXXXXXXXXX. The management agreements specify that the funds in the XXXXXXXXXX must be invested in short-term investments. No provisions exist in the management agreements whereby loans or other direct or indirect investment of these funds could be made to A Co or Partnership A. Given the terms of the management agreements, B Co has concluded that XXXXXXXXXX would not agree to advance or invest these funds in A Co or Partnership A.
49. I Co is a holding company which directly and indirectly owns XXXXXXXXXX% of Partnership B, which realized a net income loss of $XXXXXXXXXX for the period ended XXXXXXXXXX. The net income loss of Partnership B is primarily attributable to interest expense of approximately $XXXXXXXXXX. I Co has no funds that could be made available to A Co or Partnership A to alleviate their financial difficulty. Partnership B's construction loan was refinanced with distress preferred shares on XXXXXXXXXX to assist I Co in alleviating its own financial difficulty. For the period ended XXXXXXXXXX, Partnership B realized a net income of $XXXXXXXXXX.
50. A Co has an ACB of nil at XXXXXXXXXX in respect of its investment in Partnership A. Losses of approximately $XXXXXXXXXX to XXXXXXXXXX have been allocated by Partnership A to A Co.
PROPOSED TRANSACTIONS
51. The authorized share capital of A Co will be amended to change the number of common shares which A Co is currently authorized to issue from an unlimited number to XXXXXXXXXX and to subdivide the one issued common share of A Co into XXXXXXXXXX issued common shares. A Co's authorized share capital will also be amended to create a class of XXXXXXXXXX non-voting Class A shares and a class of XXXXXXXXXX non-voting Class B preferred shares. The Class A shares and the Class B preferred shares will be entitled to dividends as declared by directors where cash flow permits. The holders of Class B preferred shares and common shares will be entitled to receive dividends in priority to the holders of Class A shares until the holders of the Class B preferred shares have received $XXXXXXXXXX plus a pre-established return on this same amount. This dividend provision will mirror the Partnership A Class B partnership unit priorities distribution agreement (see 8 above). The share conditions attached to the Class A shares, the Class B preferred shares and the common shares of A Co will reflect the priority dividends described above.
52. J Co will transfer its Partnership A Class A partnership interests in exchange for XXXXXXXXXX Class A preferred shares of A Co. As a result, A Co will hold all of the Class A partnership interests of Partnership A.
53. A Co will incorporate a wholly-owned subsidiary ("Partnerco") under the CBCA which will be a taxable Canadian corporation. The authorized share capital of Partnerco will consist of a limited number of common shares. A Co will transfer one Class A partnership interest of Partnership A acquired by it as a result of the transactions described in 52 above to Partnerco in exchange for Partnerco issuing one common share to A Co. You advise that the provisions of section 85 of the Act will be utilized to effect this transfer without tax to A Co.
54. All of the holders of Class B Partnership A partnership interests will transfer their interests to A Co in exchange for Class B preferred shares of A Co. As a result, D Co, Y Co, and K Co will hold XXXXXXXXXX Class B preferred shares, respectively.
The Class B preferred shares will be non-voting. B Co, the sole holder of the common shares of A Co will agree to vote its shares to elect one nominee of each of D Co, K Co and Y Co to the board of directors of A Co so that they will have XXXXXXXXXX nominees on the board out of a total of XXXXXXXXXX directors. B Co will agree to instruct its nominees on the board not to vote in favour of any resolution unless at least XXXXXXXXXX of the XXXXXXXXXX nominees of the Class B shareholders will vote in favour of such resolution. However, a director is under no legal obligation to follow such instructions and is obliged as a matter of corporate law to act honestly and in good faith with a view to the best interests of A Co.
55. In respect of the transfers of the partnership interests as described in 52 and 54 above, you advise that one or more limited partners may jointly elect with A Co, pursuant to subsection 85(1), in prescribed form and within the term referred to in subsection 85(6).
As a result of these transactions, A Co will own XXXXXXXXXX% of the interests in Partnership A and Partnerco will own XXXXXXXXXX% of the interest in Partnership A. The XXXXXXXXXX business will continue to be conducted by Partnership A.
56. As noted in 44 above, a Debt Restructuring Agreement will be entered into and will take effect on or before the issuance of the distress preferred shares. It will provide that the Term Loan Agreement will be amended (hereinafter referred to as the "Restated Term Loan Agreement") to divide the Term Loan into the Tranche A Loan and the Tranche B Loan as described below:
a) The Tranche A Loan will represent $XXXXXXXXXX of the principal amount of the Term Loan. The interest on the Tranche A Loan will be XXXXXXXXXX % per annum. The Restated Term Loan Agreement will provide for equal monthly blended payments of principal and interest to fully amortize the Tranche A Loan prior to its maturity date of XXXXXXXXXX.
b) As a condition precedent, a repayment of $XXXXXXXXXX on account of accrued and unpaid interest on the Term Loan was made on XXXXXXXXXX prior to the entering into of the Debt Restructuring Agreement. The Tranche B Loan will therefore represent the remaining $XXXXXXXXXX of the principal amount of the Term Loan as of XXXXXXXXXX plus $XXXXXXXXXX of accrued but unpaid interest on the Term Loan as of XXXXXXXXXX for a total amount of $XXXXXXXXXX. The interest rate on the Tranche B Loan will be XXXXXXXXXX% from XXXXXXXXXX until the Closing Date and XXXXXXXXXX% thereafter. Interest will be paid semi-annually. Principal will be paid annually to the extent there are funds available at the appropriate level of the "waterfall" referred to in 57 below. The Tranche B Loan will mature on XXXXXXXXXX.
c) The Term Lenders will be issued Tranche A Secured Senior Term Notes and Tranche B Secured Senior Term Notes on a pro-rata basis in replacement for the Secured Senior Term Notes issued to evidence the Term Loan to the Term Lenders.
d) To the extent that the Tranche B Loan is repaid in full prior to its maturity date and there are sufficient funds available at the appropriate level of the "waterfall" referred to in 57 below, the Tranche B Lenders will be paid a fee (the "Restructuring Fee") in an amount equal to the amount which is required to bring the internal rate of return on the Tranche B Loan to the Tranche B Lenders to XXXXXXXXXX % per annum for the period from and including XXXXXXXXXX to the date on which the last instalment of the Restructuring Fee is paid. Such fee will be payable semi-annually to the extent of available funds.
A Term Lender having a rateable portion of the Tranche A Loan is herein referred to as a "Tranche A Lender". A Term Lender having a rateable portion of the Tranche B Loan is herein referred to as a "Tranche B Lender". The portion of the Tranche A Loan and the Tranche B Loan owing to each Term Lender will be as follows:
Tranche A
D Co $XXXXXXXXXX
K Co XXXXXXXXXX
Y Co XXXXXXXXXX
U Co XXXXXXXXXX
V Co XXXXXXXXXX
W Co XXXXXXXXXX
X Co XXXXXXXXXX
Total $XXXXXXXXXX
Tranche B
D Co $XXXXXXXXXX
K Co XXXXXXXXXX
Y Co XXXXXXXXXX
U Co XXXXXXXXXX
V Co XXXXXXXXXX
W Co XXXXXXXXXX
X Co XXXXXXXXXX
Total $XXXXXXXXXX
Total of Tranche A and Tranche B Loans $XXXXXXXXXX.
57. Pursuant to the Debt Restructuring Agreement, the Restated Term Loan Agreement will provide that all Project Revenues, as defined in the Restated Term Loan Agreement, will be deposited into Partnership A's bank account and applied in the following order of priority (referred to herein as the "waterfall"):
a) as and when due, to the payment of Project Expenses, as defined in the Restated Term Loan Agreement;
b) as and when due, to pay the Manager the Management Bonus, as defined in the Operating Management and Maintenance Agreement between N Co and Partnership A;
c) as provided in the Restated Term Loan Agreement, to fund the Major Maintenance Account which has been set to provide for major maintenance to the XXXXXXXXXX;
d) as and when due, to the payment of all amounts other than interest and principal payable to the Agent or to any of the Tranche A Lenders in accordance with the terms of the Restated Term Loan Agreement or any other Document, as defined in the Restated Term Loan Agreement.
e) as and when due, to the payment of all principal and interest to the Tranche A Lenders;
f) as and when due, to the payment of all amounts other than interest and principal payable to any of the Tranche B Lenders in accordance with the terms of the Restated Term Loan Agreement or any other Document, as defined in the Restated Term Loan Agreement.
g) as and when due, to the payment of interest to the Tranche B Lenders;
h) as and when due, to pay any interest to the Subdebt Lenders on amounts drawn on the Reserve Loan (as described in 59 below);
i) to the payment of all principal drawn on the Reserve Loan to the Subdebt Lenders;
j) annually, to pay all amounts available as repayment of principal to the Tranche B Lenders;
k) if applicable, to pay annually all amount available as payment of the Restructuring Fee to the Tranche B Lenders;
l) to the payment of principal to the Subdebt Lenders in respect of the Subdebt then outstanding; and
m) provided the entire Restructuring Fee has been paid in full to the Tranche B Lenders and all amounts outstanding under the Subdebt Agreement have been repaid and the Subdebt Agreement has been terminated, to make distributions to A Co and Partnerco all in accordance with the provisions of section XXXXXXXXXX of the Restated Term Loan Agreement.
Partnership A will not make any payment or apply any funds in accordance with the priority of payments set forth above unless it is able, in its opinion, acting reasonably, to make all payments for the items above the subject payment in the priority of payments set forth above as they fall due out of available funds maintained by Partnership A therefor or out of funds that it expects to receive before such payments are due.
58. In addition, the Restated Term Loan Agreement will:
a) provide for specific amounts to be deposited to the Major Maintenance Account;
b) provide that if there are insufficient funds to pay interest on the Tranche B Loan, then interest not paid on the Tranche B Loan when due will be capitalized;
c) delete the concept of the Debt Service Reserve Account throughout;
d) provide that the Agent will hold the Original Security for the Tranche A Lenders and the Tranche B Lenders in accordance with their interests and the priorities provided for in 61 below;
e) provide that a Tranche A Lender may sell, assign or transfer its interest in the Tranche A Loan independently of its interest in the Tranche B Loan;
f) delete the requirement that the assignee or participant, as the case may be, must be a financial institution; and
g) include, as an additional Event of Default, commencing after the unwinding of the distress preferred share financing (as described below), the failure of Partnership A to maintain a Debt Service Coverage Ratio in respect of the Tranche A Loan only of not less than XXXXXXXXXX (net income before depreciation to total debt service payments on the Tranche A Loan) in respect of any 12 month period, calculated at each fiscal quarter end of Partnership A.
59. As part of the Debt Restructuring Agreement, the Subdebt Lenders will agree to make available to Partnership A an operating loan facility (referred to herein as the "Reserve Loan") in an aggregate amount equal to the Facility Amount (as defined in 60 below) from time to time. Amounts drawn on the Reserve Loan will only be available to pay interest and principal on the Tranche A Loan and interest on the Tranche B Loan when funds available are insufficient based on the priority of payments (see "waterfall" in 57 above). Amounts drawn on the Reserve Loan will be repaid to the Subdebt Lenders out of available cash flow, as provided in the priority of payments, together with interest at a rate of XXXXXXXXXX% per annum. If any Subdebt Lender fails to advance funds when requested by Partnership A for use for the purpose specified above, then Partnership A may set-off amounts which the Subdebt Lender has failed to advance against amounts otherwise payable to such Subdebt Lender as interest and/or principal on their rateable portion of the Tranche A Loan.
Either or both Subdebt Lenders may at any time terminate the foregoing right of set-off by depositing with Partnership A a letter of credit in the face amount of such Subdebt Lenders' portion of the undrawn Facility Amount or, if such letter of credit is being deposited during the period in which the distress preferred share financing is in place (as described below), in the face amount equal to such Subdebt Lenders' portion of the maximum amount of dividends the Subdebt Lenders may receive on the Class C preferred shares during the distress preferred share financing. Partnership A may draw on such letter of credit any amounts which the Subdebt Lender fails to advance on the Reserve Loan. The Subdebt Lender may, from time to time, replace the then current letter of credit with another letter of credit.
60. As defined in the Debt Restructuring Agreement, "Facility Amount" means, at any given date:
(1) for the period from the Closing Date until the last day of the fiscal quarter of Partnership A on which Partnership A attains a Debt Service Coverage Ratio in respect of the Tranche A Loan only of XXXXXXXXXX (net income before depreciation to total debt service payments for the Tranche A Loan only) or greater in respect of any 12 month period, calculated at such fiscal quarter end of Partnership A (the "Hurdle Date"), an amount equal to the aggregate of:
(A) $XXXXXXXXXX for each $XXXXXXXXXX of dividends received by the Subdebt Lenders from Subco (see 62 below) on the Class C preferred shares prior to such date; and
(B) $XXXXXXXXXX for each $XXXXXXXXXX of the amount (the "Excess Amount") by which the amount of dividends received by the Subdebt Lenders from Subco on the Class C preferred shares prior to such date exceeds the Base Amount at such time, where the "Base Amount" means, at any time, an amount calculated to be the product of $XXXXXXXXXX [XXXXXXXXXX, and the number of dividend payment dates on the Class C preferred shares after the Closing Date prior to the date of calculation.
(2) For the period from the Hurdle Date until the last day of the fiscal quarter of Partnership A on which Partnership A attains a Debt Service Coverage Ratio in respect of the Tranche A Loan and the Tranche B Loan together of XXXXXXXXXX (net income before depreciation to total debt service payments on the Tranche A Loan and the Tranche B Loan together) or greater in respect of any 12 month period, calculated at such fiscal quarter end of Partnership A (the "second Hurdle Date"), an amount equal to $XXXXXXXXXX for each $XXXXXXXXXX of the Excess Amount. For the purposes of this calculation of the Debt Service Coverage Ratio only, the debt service costs of the Tranche B Loan, including principal and interest, will be assumed to be $XXXXXXXXXX per annum.
(3) After the Second Hurdle Date the Facility Amount will be XXXXXXXXXX.
61. The following inter-creditor arrangements will be incorporated into the Debt Restructuring Agreement and/or the Restated Term Loan Agreement:
a) All rights and remedies of the Tranche B Lenders in respect of the Tranche B Loan pursuant to the Restated Term Loan Agreement, the Original Security and any other rights and remedies they may have will be postponed and rank subsequent and subordinate to the rights and remedies of the Tranche A Lenders.
b) All rights and remedies of the Subdebt Lenders in respect of the Subdebt, the Reserve Loan, the Subdebt Security and any other rights or remedies they may have will be postponed and rank subsequent and subordinate to the rights and remedies of the Tranche A Lenders and the Tranche B Lenders.
c) The Tranche A Lenders and the Tranche B Lenders will enjoy the same events of default as provided in the Restated Term Loan Agreement. While the Tranche A Loan remains outstanding, the only recourse of the Tranche B Lenders upon the occurrence of the event of default will be to sue Partnership A for any amounts that may be payable to the Tranche B Lenders in accordance with the priority of payments (see "waterfall" in 57 above).
d) The Subdebt will be cross defaulted to the Tranche A Loan and the Tranche B Loan. Until both the Tranche A Loan and the Tranche B Loan have been repaid in full and the Tranche B Lenders have received the Restructuring Fee, the only recourse of the Subdebt Lenders upon the occurrence of an Event of Default or other default under the terms of the Subdebt will be to sue Partnership A for any amounts that may be payable to the Subdebt Lenders in accordance with the priority of payments (see "waterfall" in 57 above).
62. A Co will incorporate a single purpose subsidiary ("Subco") under the CBCA, which will be a taxable Canadian corporation. Subco's fiscal period will coincide with that of A Co. Subco will not engage in any business or activity except as provided for in the proposed transactions.
63. The authorized share capital of Subco will consist of XXXXXXXXXX.
64. The Subco Class A Shares will have, among others, the following attributes:
a) issuable for $XXXXXXXXXX each;
b) non-voting (except when an event of default has occurred and is continuing). An event of default includes a failure to pay dividends on a dividend payment date and a failure to make a payment to a holder of the preferred shares as a reduction of capital as and when required;
c) purchasable for cancellation for an amount equal to its initial stated capital plus accrued and unpaid dividends less any amounts previously paid out by way of a return of capital as contemplated in 85 below (the "A Purchase Amount").
d) preferential cumulative dividends, calculated at a fixed rate of XXXXXXXXXX % per annum of its initial stated capital less any amounts previously paid out by way of a return of capital as contemplated in 85 below, will be paid on the last day of each month commencing with the first month after issue; and
e) in the event of a liquidation, dissolution or winding-up of Subco the holders of Class A Shares will be entitled to receive in priority to the holders of common shares, the Class B Shares and the Class C Shares, an amount equal to the A Purchase Amount.
In addition, on their issue date, a special dividend will be declared on the issuance of the XXXXXXXXXX preferred shares equal to the dividends that would have been paid if the XXXXXXXXXX preferred shares had been issued on XXXXXXXXXX in respect of the period from XXXXXXXXXX to the Closing Date. No special dividend will be declared on the XXXXXXXXXX preferred shares.
65. The Subco Class B Shares will have, among others, the following attributes:
a) issuable for $XXXXXXXXXX each;
b) non-voting (except when an event of default has occurred and is continuing). An event of default includes a failure to pay dividends on a dividend payment date and a failure to make a payment to a holder of the preferred shares as a reduction of capital as and when required;
c) purchasable for cancellation for an amount equal to its initial stated capital plus accrued and unpaid dividends less any amounts previously paid out by way of a return of capital as contemplated in 86 below (the "B Purchase Amount");
d) preferential cumulative dividends, calculated at a fixed rate of XXXXXXXXXX % per annum of its initial stated capital less any amounts previously paid out by way of a return of capital as contemplated in 86 below, will be payable semi-annually XXXXXXXXXX;
e) in the event of liquidation, dissolution or winding-up of Subco the holders of the Class B Shares will be entitled to receive in priority to the holders of common shares and the Class C Shares an amount equal to the B Purchase Amount.
In addition, on their issue date, a special dividend will be declared on the issuance of the XXXXXXXXXX preferred shares equal to the dividends that would have been paid if the XXXXXXXXXX preferred shares had been issued on XXXXXXXXXX in respect of the period from XXXXXXXXXX to the Closing Date. No special dividend will be declared on the XXXXXXXXXX preferred shares.
66. The Subco Class C Shares will have, among others, the following attributes:
a) issuable for $XXXXXXXXXX each;
b) non-voting;
c) purchasable for cancellation for an amount equal to its initial stated capital plus accrued and unpaid dividends less any amounts previously paid out by way of a return of capital as contemplated in 87 below (the "C Purchase Amount");
d) preferential cumulative dividends, calculated at a fixed rate of XXXXXXXXXX % per annum of its initial stated capital less any amounts previously paid out by way of a return of capital as contemplated in 87 below, will be payable semi-annually XXXXXXXXXX;
e) in the event of a liquidation, dissolution or winding-up of Subco the holders of the Class C Shares will be entitled to receive in priority to the holders of common shares an amount equal to the C Purchase Amount.
In addition, on their issue date, a special dividend will be declared on the XXXXXXXXXX preferred shares equal to the dividends that would have been paid if the XXXXXXXXXX preferred shares had been issued on XXXXXXXXXX in respect of the period from XXXXXXXXXX to the Closing Date. No special dividend will be declared on the XXXXXXXXXX preferred shares.
67. The Class A, Class B and Class C Shares to be issued to the respective lenders as provided for in 75 to 77 below, may either individually, or collectively, be referred to as "DPS" throughout the remainder of this letter. The Tranche A Lenders, the Tranche B Lenders and the Subdebt Lenders may be collectively referred to as the "Lenders" and, individually, as a "Lender" throughout the remainder of this letter.
68. The costs of issuance of the DPS, which are estimated at $XXXXXXXXXX, will be paid by Partnership A on the Closing Date.
69. Subco will borrow from each Tranche A Lender on a daylight loan basis ("Daylight Loan A") an amount equal to the portion of the Tranche A Loan owed to that Lender (see 56 above). Subco will use such funds to purchase from each Tranche A Lender the portion of the Tranche A Loan owed to that Lender and the related portion of the Original Security.
70. Subco will borrow from each Tranche B Lender on a daylight loan basis ("Daylight Loan B") an amount equal to the portion of the Tranche B Loan owed to that Lender (see 56 above). Subco shall use such funds to purchase from each Tranche B Lender the portion of the Tranche B Loan owed to that Lender and the related portion of the Original Security.
71. Subco will borrow from each Subdebt Lender on a daylight loan basis ("Daylight Loan C") an amount equal to the portion of the Subdebt owed to that Lender. Subco shall use such funds to purchase from each Subdebt Lender the portion of the Subdebt owed to that Lender and the related portion of the Subdebt Security.
The portion of the Subdebt owing to each Subdebt Lender as of XXXXXXXXXX and to be acquired by Subco is as follows:
Principal Accrued/Unpaid Interest
D Co XXXXXXXXXX
Y Co XXXXXXXXXX
Total XXXXXXXXXX
72. Partnership A and Subco will agree with the Lenders that as long as the DPS are outstanding, no interest payments will be made on the Tranche A Loan, the Tranche B Loan and the Subdebt. All rights to receive such interest will be waived as provided for in 73 below. In addition, while the DPS are outstanding, the requirements under the waterfall pertaining to the payment of principal on the debts will be replaced with a provision requiring Partnership A to make principal payments on the debts to Subco which in turn will be used by Subco to make corresponding reductions in capital on the DPS in a manner similar to the waterfall.
73. On the acquisition of the Tranche A Loan, the Tranche B Loan and the Subdebt (collectively referred to as the "DPS Debt"), Subco will agree to waive all rights to receive any interest on these debts until the earlier of the fifth anniversary of XXXXXXXXXX and the date each Lender has exercised its put option under the Put Agreement A, Put Agreement B or Put Agreement C referred to in 88, 89 and 90 below.
74. Subco will enter into an agreement with the Agent for the Lenders, to guarantee the present and future obligations of A Co to the Lenders under the put agreements referred to in 88, 89 and 90 below and will pledge the DPS Debt and the related security in support of its guarantee. The Subco guarantee (the "Subco Limited Recourse Guarantee") will be limited in amount to the value of the DPS Debt and limited in recourse to the DPS Debt and the related security. Subco will enter into a security agreement (the "Subco Security Agreement") with the Agent for the Lenders to secure Subco's obligations under the Subco Limited Recourse Guarantee. Subco will enter into an agreement with the Lenders pursuant to which the Lenders will have the right at any time to purchase the DPS Debt and related security from Subco for an amount equal to the then outstanding amount of the DPS Debt. D Co will act as Agent for the Lenders in the exercise of the rights and remedies of the Lenders pursuant to the Subco Limited Recourse Guarantee and the Subco Security Agreement.
75. D Co, U Co and W Co of the Tranche A Lenders will subscribe for XXXXXXXXXX preferred shares of Subco and K Co, V Co, X Co, and Y Co of the Tranche A Lenders will subscribe for XXXXXXXXXX preferred shares of Subco. The aggregate subscription price, payable by way of bank draft, will equal the amount of the Tranche A Loan which such Tranche A Lender sold to Subco, as described in 69 above. The aggregate amount of the proceeds received by Subco from the issue of the Class A Shares will be added to Subco's stated capital account maintained for the Class A Shares. The Class A Shares will be issued for $XXXXXXXXXX per share.
76. D Co, U Co and W Co of the Tranche B Lenders will subscribe for XXXXXXXXXX preferred shares of Subco and K Co, V Co, X Co, and Y Co of the Tranche B Lenders will subscribe for XXXXXXXXXX preferred shares of Subco. The aggregate subscription price, payable by way of bank draft, will equal the amount of the Tranche B Loan which such Tranche B Lender sold to Subco, as described in 70 above. The aggregate amount of the proceeds received by Subco from the issue of the Class B Shares will be added to Subco's stated capital account maintained for the Class B Shares. The Class B Shares will be issued for $XXXXXXXXXX per share.
77. D Co of the Subdebt Lenders will subscribe for XXXXXXXXXX preferred shares of Subco and Y Co of the Subdebt Lenders will subscribe for XXXXXXXXXX preferred shares of Subco. The aggregate subscription price, payable by way of bank draft, will equal to the amount of the Subdebt which such Subdebt Lender sold to Subco, as described in 71 above. The aggregate amount of the proceeds received by Subco from the issue of the Class C Shares will be added to Subco's stated capital account maintained for the Class C Shares. The Class C Shares will be issued for $XXXXXXXXXX per share.
78. Subco will use the proceeds of the subscriptions referred to in 75, 76 and 77 above, to repay Daylight Loan A owed to each Tranche A Lender, Daylight Loan B owed to each Tranche B Lender and Daylight Loan C owed to each Subdebt Lender as referred to in 69, 70 and 71 above, respectively.
79. A Co, Partnerco, Partnership A, and Subco will enter into an agreement that will provide as long as the DPS are outstanding, Partnerco will pay a dividend to A Co equal to the withdrawal of capital it receives from Partnership A and A Co will make withdrawals of capital from Partnership A equal to the estimated amount necessary for A Co to make contributions of capital to Subco to meet Subco's required dividend payments on the DPS and pay any fees and expenses related to these transactions. Such capital contributions will be regarded as funds to be held for the benefit of A Co until such time as Subco requires the funds to make these payments.
80. The holders of the XXXXXXXXXX preferred shares, the XXXXXXXXXX preferred shares and the XXXXXXXXXX preferred shares which waived their entitlement to interest on their portion of the DPS Debt for the period from XXXXXXXXXX to the date of issuance of the DPS will receive a special dividend (see 64, 65 and 66 above) on the issuance of such shares. The holders of the XXXXXXXXXX preferred shares, the XXXXXXXXXX preferred shares and the XXXXXXXXXX preferred shares will not be entitled to such a dividend but will receive a payment in respect of the interest on their portion of the DPS Debt for that period.
81. Notwithstanding the terms and conditions of the DPS or the terms of any other agreement with the Lenders (e.g., the Debt Restructuring Agreement and the Restated Term Loan Agreement), all Excess Cash Flow (as defined in 82 below) arising in each fiscal period of A Co shall be applied to make reductions of capital of the DPS (in the manner contemplated in 85, 86 and 87 below) on the dividend payment date which is closest to the 90th day from the end of A Co's fiscal period.
EXCESS CASH FLOW
82. Excess Cash Flow in respect of each fiscal period of A Co shall be the changes in cash flow for the period of A Co from all sources, as would be reported on a Consolidated Statement of Changes in Financial Position prepared in accordance with generally accepted accounting principles, if only directly and indirectly wholly-owned subsidiaries of A Co and Partnership A were so included, but before outlays for:
a) payment of dividends, other than dividends paid on the DPS;
b) purchase or redemption of any shares of A Co or the repayment of loans other than those debts referred to in (d)(ii) to (v) below;
c) loans to any shareholders, directors and officers of A Co, or other persons, firms or corporations; or
d) capital expenditures or payments on capital account other than in respect of:
i) the purchase or reduction of capital in respect of the DPS, other than purchases or capital reductions made in the period in respect of the prior period's Excess Cash Flow;
ii) repayments of indebtedness incurred in the normal and ordinary course of business and existing at the date of the issuance of the DPS;
iii) repayments of additional debt incurred after the date of the issuance of the DPS for the purpose of funding the current operating requirements of Partnership A, A Co, Partnerco, and Subco;
iv) reasonable capital expenditures or payments on capital account incurred in the normal and ordinary course of the existing business of Partnership A, A Co and Partnerco and repayments of additional debt incurred for the specific purpose of making such capital expenditures or payments on capital account;
v) repayments of additional debt incurred for the specific purpose of enabling Subco to purchase the DPS or to pay dividends on the DPS or to reduce the capital of the DPS including the Reserve Loan; and
vi) costs incurred in connection with the issuance of the DPS.
For the purpose of this definition of Excess Cash Flow, additional debt shall not include any debt which arose as the result of the use of cash or funds for a purpose that is not envisaged herein.
In addition, Excess Cash Flow for a particular period shall be adjusted to eliminate any proceeds of insurance received in respect of damage or destruction to property to the extent that such proceeds are set aside and used in the immediately following fiscal period to repair or replace such property. Such proceeds, to the extent not used to repair or replace property in the immediately following fiscal period, will be included in Excess Cash Flow for that immediately following fiscal period.
83. The articles of Subco, as well as a unanimous shareholders agreement entered into by the shareholders of Subco, will provide that without the unanimous approval of the shareholders of Subco (including the Lenders):
a) no transfer or encumbrance of common shares of Subco shall be effected;
b) no transfer or encumbrance of assets of Subco shall be effected; and
c) other than as contemplated herein, Subco will not carry on any activities, engage in any business transaction, incur any indebtedness, create any security over its assets, make any guarantee, amalgamate, merge or consolidate, declare or pay any dividends (other than on the DPS), or purchase or redeem any of its shares (other than the DPS).
84. Subject to the operation of any applicable law to which Subco is subject, Subco will be wound up without any undue delay after the earlier of:
a) the time at which all of the DPS are repurchased, redeemed or cancelled; or
b) XXXXXXXXXX.
85. Following the issue of the Class A Shares, the Class A shareholders of Subco will take all steps as may be necessary under the CBCA to cause Subco to reduce the stated capital of the Class A Shares to $XXXXXXXXXX in the aggregate without any distribution of any amount to the Class A shareholders of Subco. The amount of the reduction in stated capital will be added to the contributed surplus account of Subco. The purpose of this reduction in stated capital is to assist Subco in meeting the solvency test under the CBCA for the payment of dividends on the Class A Shares. On each dividend payment date on which a payment is received by Subco on the Tranche A Loan and after the payment of dividends on that date, Subco will increase the stated capital of the Class A Shares by an amount, equal to any repayment made by Partnership A on the Tranche A Loan. Immediately thereafter Subco will pay the amounts so received from Partnership A to the Class A shareholders by way of a reduction of capital of the Class A Shares. Subco and each Class A shareholder have agreed that the capital of the Class A Shares will be reduced based on a predetermined schedule similar to payments on a loan amortized over XXXXXXXXXX years at an interest rate of XXXXXXXXXX% for XXXXXXXXXX years and at XXXXXXXXXX% thereafter.
86. Following the issue of the Class B Shares, the Class B shareholders of Subco will take all steps as may be necessary under the CBCA to cause Subco to reduce the stated capital of the Class B Shares to $XXXXXXXXXX in the aggregate without any distribution of any amount to the Class B shareholders of Subco. The amount of the reduction in stated capital will be added to the contributed surplus account of Subco. The purpose of this reduction in stated capital is to assist Subco in meeting the solvency test under the CBCA for the payment of dividends on the Class B Shares. On each dividend payment date on which a payment is received by Subco on the Tranche B Loan and after the payment of dividends on that date, Subco will increase the stated capital of the Class B Shares by an amount, equal to any repayment made by Partnership A on the Tranche B Loan. Immediately thereafter Subco will pay the amounts so received from Partnership A to the Class B shareholders by way of a reduction of capital of the Class B Shares.
The capital of Class B Shares will be reduced based on available cash flow after payment of dividends on the Class A Shares, the Class B Shares and reduction of capital of Class A Shares as described in 85 above. The reduction of capital of Class B Shares will occur within 90 days of the end of the fiscal period of A Co, in respect of available cash flow from the prior fiscal period. To the extent not already paid, a repayment of principal on the Tranche B Loan will be made on XXXXXXXXXX in respect of available cash flow for the fiscal period of A Co ending in XXXXXXXXXX.
87. Following the issue of the Class C Shares, the Class C shareholders of Subco will take all steps as may be necessary under the CBCA to cause Subco to reduce the stated capital of the Class C Shares to $XXXXXXXXXX in the aggregate without any distribution of any amount to the Class C shareholders of Subco. The amount of the reduction in stated capital will be added to the contributed surplus account of Subco. The purpose of this reduction in stated capital is to assist Subco in meeting the solvency test under the CBCA for the payment of dividends on the Class C Shares. On each dividend payment date on which a payment is received by Subco on the Subdebt and after the payment of dividends on that date, Subco will increase the stated capital of the Class C Shares by an amount, equal to any repayment made by Partnership A on the Subdebt. Immediately thereafter Subco will pay the amounts so received from Partnership A to the Class C shareholders by way of a reduction of capital of the Class C Shares.
Dividends on the Class C Shares will be paid only after the application of funds provided in 57(j), 85 and 86 above.
88. A Co and each Tranche A Lender will enter into an agreement (the "Put Agreement A"), pursuant to which, among other things:
a) each Tranche A Lender will be granted the right and option to require A Co to purchase all of its Class A Shares at any time following the occurrence of a "Put Event" (as defined in Put Agreement A) which includes any of the following:
i) if Subco fails to pay dividends when due or fails to make returns of capital on the Class A Shares when required;
ii) if any representations, warranties or undertakings under the transaction documents prove to have been incorrect; and
iii) if Subco fails to increase or reduce the stated capital attributable to the Class A Shares when required.
b) the purchase price to be paid pursuant to subparagraph (a) above will be equal to the A Purchase Amount (defined in 64(c) above) of such Class A Shares plus such additional amounts as may be required to put the Tranche A Lender in the same position as if all the accrued and unpaid dividends on such Class A Shares at the time of such purchase had been received by the Tranche A Lender as tax-free intercorporate dividends.
89. A Co and each Tranche B Lender will enter into an agreement (the "Put Agreement B") relating to the Tranche B Loan and related security held by Subco and such Put Agreement B will have terms and conditions analogous to those of Put Agreement A described in 88 above.
90. A Co and each Subdebt Lender will enter into an agreement (the "Put Agreement C") relating to the Subdebt and related security held by Subco and such Put Agreement C will have terms and conditions analogous to those of Put Agreement A as described in 88 above.
91. If A Co does not pay the purchase price pursuant to Put Agreement A, B or C and Subco does not transfer the respective debt and related security to the associated Lenders, the Class A Shares and the Class B Shares become voting. The Lenders can then cause Subco to be wound up with the respective debt and related security being distributed to the associated Lenders as a return of capital. Prior to the wind-up, the stated capital of the Class A Shares, the Class B Shares or the Class C Shares, as the case may be, would be increased in a similar manner to that referred to in 85, 86 or 87 above.
92. A Co will pledge the common shares of Subco to the Lenders as security for its obligations under the put agreements referred to in 88, 89 and 90 above.
93. Each Lender will have the right at any time and from time to time, in its sole discretion, subject to any unanimous shareholders' agreement entered into by it and applicable security restrictions, to sell its DPS or any portion thereof, to third parties (the "Subsequent Acquirers") on such terms and conditions as each Lender may in its sole discretion determine.
94. K Co has asserted that Conversion has not occurred because not all of the preconditions to Conversion were satisfied on XXXXXXXXXX or prior to the end of the period in which Conversion was to occur. If K Co's assertion is correct then approximately $XXXXXXXXXX of its portion of the Construction Loan (the "Disputed Debt") should not have been converted to Class B partnership units in Partnership A and should remain outstanding as part of the debt to be subject to the distress preferred share refinancing contemplated herein. On XXXXXXXXXX, K Co issued an application in the Superior Court of XXXXXXXXXX requesting a declaration that the Conversion did not occur. The hearing of that application has not yet been scheduled.
PURPOSE OF PROPOSED TRANSACTIONS
95. The purpose of the proposed transactions is to effect a financial reorganization of Partnership A's debts relating to business carried on in Canada so as to reduce the debt service costs and thereby enable Partnership A and A Co to continue to carry on business.
RULINGS GIVEN
A. The DPS to be issued to the Lenders, as described in 75, 76 and 77 above, and where applicable, sold to Subsequent Acquirers, will be:
a) shares described in subparagraph (e)(iii) of the definition of "term preferred share" in subsection 248(1) of the Act for a period not exceeding five years from XXXXXXXXXX; and,
b) "exempt shares" pursuant to paragraph (c) of the definition thereof in subsection 112(2.6) of the Act for that same period;
and, accordingly, subsections 112(2.1), 112(2.2), 112(2.3) and 112(2.4) of the Act will not apply to deny the Lenders a deduction under subsection 112(1) or 138(6) of the Act for dividends received or deemed to have been received by it on such DPS during such period.
B. No amount will be included in the income of Subco pursuant to paragraph 12(1)(c) or 12(1) (x) or subsection 12(3), 12(9), 16(1), or 246(1) or section 9 of the Act in respect of capital contributions made or required to be made by A Co to Subco as described in 79 above, nor will such amounts constitute proceeds of disposition, as defined in section 54 of the Act, to Subco from the disposition by it of any property.
C. Section 80 of the Act will not apply in respect of A Co or Partnership A by virtue of the fact that interest will not be paid or payable by A Co or Partnership A to Subco in respect of the DPS Debt as referred to in 73 above or by virtue of the failure of Subco to demand payment of the DPS Debt.
D. Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by Partnership A in the course of restructuring the DPS Debt will be deductible pursuant to subparagraph 20(1)(e)(ii.2) of the Act to the extent such expenses are reasonable in the circumstances.
E. The cost amount, within the meaning of subsection 248(1) of the Act, of the DPS to each Lender immediately after their issuance will be equal to the amount paid therefore by each Lender, as described in 75, 76 and 77 above.
F. The cost amount, within the meaning of subsection 248(1) of the Act, to Subco of the DPS Debt, immediately after the time it is acquired from the Lenders, will be equal to the purchase price paid therefore, as described in 69, 70 and 71 above.
G. No amount will be included in computing the income of any of the Lenders under subsection 56(2) of the Act in respect of any capital contributions made by A Co to Subco, as described in 79 above.
H. If all or any part of the relevant portion of the DPS Debt is reacquired by a Lender pursuant to the agreement described in 74 above, the cost amount, within the meaning of subsection 248(1) of the Act, to the Lender of those respective debts immediately after they are acquired will be the purchase price paid therefor.
I. No amount will be included in the income of A Co pursuant to subsection 15(1) or 246(1) of the Act or Partnership A pursuant to subsection 246(1) of the Act solely by virtue of the fact that interest will not be paid or payable by Partnership A to Subco in respect of the DPS Debt, as described in 73 above, or as a result of the provision of the guarantee by Subco as described in 74 above.
J. Provided that the relevant portion of the DPS Debt arose from one or more loans made by the applicable Lender in the course of its insurance or money lending business, all or any part of such portion of the DPS Debt reacquired by such Lender as described in 74 and 91 above will be considered to have been acquired in the ordinary course of its business of insurance or lending money for the purposes of paragraphs 20(1)(l) and 20(1)(p) of the Act.
K. Subsection 112(4) of the Act will not apply to any loss realized by the Lenders on the relevant portion of the DPS Debt subsequently reacquired by the Lenders from Subco in respect of any dividends received by the Lenders on the DPS.
L. By virtue of paragraph 84(1)(c.3) of the Act, no dividend will be deemed to have been paid by Subco when it increases its stated capital as described in 85, 86 and 87 above.
M. As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings given.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996 and are binding on Revenue Canada provided the transactions are carried out by XXXXXXXXXX. These rulings are based on the Act in its present form and does not take into account the effect of any proposed amendments.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1999
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© Sa Majesté la Reine du Chef du Canada, 1999
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