2001 Ruling 2001-0097283 - double d's with U.S. parent

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

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

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

PRINCIPAL ISSUE:

Deductibility of interest on funds borrowed to return paid-up capital. Taxpayer seeking confirmation of our position set out in IT-80. Double dip structure vis-à-vis U.S. parent.

Position:

Opinion given on deductibility of interest on borrowed money used to return paid-up capital.

REASON:

The facts in the present case can be distinguished from the fact pattern in Trans-Prairie Pipelines Ltd. v. M.N.R.

XXXXXXXXXX 			2001-009728

XXXXXXXXXX, 2001

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and during various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling:

(i) is in an earlier return of a taxpayer identified in this document or of a related person,

(ii) is being considered by any Tax Services Office or Taxation Centre of the Agency in connection with a tax return already filed,

(iii) is under objection by a taxpayer identified in this document or by a related person,

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

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

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

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

Facts

1. XXXXXXXXXX, (hereinafter "Parentco") was incorporated under the XXXXXXXXXX, does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada within the meaning of the Canada-U.S. Income Tax Convention, 1980 (the "Canada-U.S. Treaty"). Parentco is a resident of the U.S. with its head office located at XXXXXXXXXX. Parentco shares are widely held and listed on the XXXXXXXXXX Stock Exchange.

Parentco is directly, and indirectly through subsidiary corporations, engaged in XXXXXXXXXX.

2. XXXXXXXXXX, (hereinafter "NR Subco") was incorporated under the XXXXXXXXXX, does not carry on business in Canada, is not resident in Canada for purposes of the Act and has no permanent establishment in Canada within the meaning of the Canada-U.S. Treaty. NR Subco is a resident of the U.S. with its head office located at XXXXXXXXXX. All of NR Subco's issued and outstanding shares are held by Parentco.

NR Subco is a holding company which makes investments in debt and equity securities of related and unrelated corporations.

3. XXXXXXXXXX (hereinafter "XXXXXXXXXX Co") was incorporated under the Companies Act (XXXXXXXXXX) on XXXXXXXXXX Co is a taxable Canadian corporation. XXXXXXXXXX Co's authorized share capital consists of XXXXXXXXXX common shares without nominal or par value. XXXXXXXXXX Co's issued and outstanding share capital is comprised of XXXXXXXXXX common shares. The capital and the paid-up capital ("PUC") of the issued and outstanding shares of XXXXXXXXXX Co is $XXXXXXXXXX. All of the issued and outstanding shares of XXXXXXXXXX Co are held by NR Subco. XXXXXXXXXX Co's taxation year end is XXXXXXXXXX Co's offices are located at XXXXXXXXXX Co is served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Tax Centre.

XXXXXXXXXX Co is a holding company which makes investments in debt and equity securities of related corporations.

XXXXXXXXXX Co's Articles of Association includes, inter alia, a limitation that prohibits the issuance of promissory notes to the public (hereinafter the "Indebtedness Limitation").

4. XXXXXXXXXX (hereinafter "Holdco") was incorporated under the Business Corporations Act (XXXXXXXXXX ) (hereinafter the "XXXXXXXXXX") on XXXXXXXXXX. Holdco is a taxable Canadian corporation. Holdco's authorized share capital consists of an unlimited number of common shares without nominal or par value. Holdco's issued and outstanding share capital is comprised of XXXXXXXXXX common shares. In XXXXXXXXXX Holdco issued XXXXXXXXXX common shares in consideration for property transferred to it by NR Subco. Holdco and NR Subco elected under subsection 85(1) in respect of this transfer. The PUC of these shares immediately after the transfer was $XXXXXXXXXX. The balance of the issued and outstanding Holdco common shares (i.e. XXXXXXXXXX common shares) were subsequently issued for consideration which consisted of cash paid in the aggregate amount of $XXXXXXXXXX; and, in settlement of outstanding inter-corporate indebtedness, with a principal amount of $ XXXXXXXXXX. Thus, the PUC of all of the issued and outstanding common shares of Holdco is $XXXXXXXXXX . The issued and outstanding shares of Holdco are held by NR Subco as to approximately XXXXXXXXXX% and by XXXXXXXXXX Co, as to approximately XXXXXXXXXX%. Holdco's taxation year end is XXXXXXXXXX. Holdco's offices are located at XXXXXXXXXX. Holdco is served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Tax Centre.

Holdco is a holding company which makes investments in debt and equity securities of related corporations. The aggregate fair market value of Holdco's assets exceeds the aggregate amount of its liabilities and as such Holdco is a solvent corporation.

5. XXXXXXXXXX, (hereinafter "Opco") was incorporated under the XXXXXXXXXX. Opco is a taxable Canadian corporation and a principal-business corporation. Opco's authorized share capital consists of an unlimited number of common shares. All the issued and outstanding shares of Opco are held by Holdco. Opco's taxation year end is XXXXXXXXXX. Opco's offices are located at XXXXXXXXXX. Opco is served by the XXXXXXXXXX Tax Services Office (TSO) and the XXXXXXXXXX Tax Centre.

Opco is engaged in the XXXXXXXXXX.

6. As at XXXXXXXXXX, the adjusted equity of Holdco within the meaning of proposed subsection 20.2(2) is $ XXXXXXXXXX which amount is determined as follows:

Carrying Value of Property
Amount
Cash
$ XXXXXXXXXX
Tax Refund Receivable
XXXXXXXXXX
XXXXXXXXXX Shares of Opco
XXXXXXXXXX

Total Carrying Value of Property

Liabilities

Accounts Payable
XXXXXXXXXX

Total Liabilities
XXXXXXXXXX

Profits or Gains on Non-Arm's Length Sales
N/A
Adjusted Equity
$ XXXXXXXXXX

7. It is anticipated that the amount of Holdco's adjusted equity, determined as of the time of the commencement of the implementation of the Proposed Transactions described below, will not be materially less than the amount of its adjusted equity, determined as of XXXXXXXXXX. It is possible that the amount of Holdco's adjusted equity, determined as of the time of the commencement of the implementation of the Proposed Transactions, could be significantly greater than the amount indicated above.

8. The common shares of Holdco held by NR Subco are capital property to NR Subco.

Proposed Transactions

The following proposed transactions will occur sequentially.

9. XXXXXXXXXX Co will amend its Articles of Association:

(a) to remove the Indebtedness Limitation, as described in paragraph 3 above; and

(b) to increase its authorized capital to permit the issuance of XXXXXXXXXX common shares each with a par value of $XXXXXXXXXX per share.

10. Holdco will amend its authorized share capital to include an unlimited number of redeemable, retractable preferred shares, with limited voting rights, without nominal or par value, with cumulative dividends at a floating rate and with a fixed redemption amount of $ XXXXXXXXXX per share.

11. NR Subco will sell all its common shares of Holdco to XXXXXXXXXX Co and will receive, as sole consideration therefor XXXXXXXXXX common shares of XXXXXXXXXX Co each with a par value of $XXXXXXXXXX.

Parentco wishes to consolidate the ownership of Holdco in a single entity and to thereby simplify the Canadian structure within the corporate group.

12. NR Subco and XXXXXXXXXX Co will jointly elect pursuant to the provisions of subsection 85(1), within the time limits specified in subsection 85(6), in respect of the transfer of shares described in paragraph 11 above. The agreed amount in respect of the common shares of Holdco shall not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). NR Subco will comply with the provisions of subsection 116 in relation to the transfer by it to XXXXXXXXXX Co of the common shares of Holdco.

13. Because the shares of XXXXXXXXXX Co which are issued, as described in paragraph 11 above, to NR Subco will have a par value of $XXXXXXXXXX per share, the aggregate PUC of such shares will be $XXXXXXXXXX and, as such, there will not be a deduction in computing the paid-up capital of the said shares under section 212.1.

14. XXXXXXXXXX Co will borrow approximately US $ XXXXXXXXXX from U.S. capital markets evidenced by the issuance of promissory notes (the "Public Notes") to one or more arm's length investment bankers (the "Underwriters"). The Underwriters will offer for resale the Public Notes to purchasers including non-residents (the "Public Noteholders"). The principal terms and conditions of the Public Notes are described in paragraph 16 below. The Public Notes will be secured by a guarantee from Parentco.

15. The Public Notes will be issued pursuant to an agreement (the "Trust Indenture") which will be entered into by each of XXXXXXXXXX Co, Parentco and a person who deals at arm's length with XXXXXXXXXX Co and who performs the function of trustee under the Trust Indenture (hereinafter the "Trustee").

16. The principal terms and conditions of the borrowing evidenced by the issuance of the Public Notes will be contained in the Trust Indenture and the Public Notes and will be as follows:

(a) The maturity date of the Public Notes will be the XXXXXXXXXX anniversary of the date upon which the Public Notes are issued (the "Issuance Date").

(b) The principal amount (the "Principal Amount") of each Public Note will be U.S. $XXXXXXXXXX or an integral multiple thereof. The aggregate Principal Amount of all of the Public Notes which are to be issued by XXXXXXXXXX Co to the Underwriters is anticipated to be approximately U.S. $XXXXXXXXXX .

(c) Interest on the Principal Amount of the Public Notes will accrue on a daily basis until paid, at a market rate which will be negotiated between XXXXXXXXXX Co and the arm's length Underwriters prior to the Issuance Date. Such interest will be computed on the basis of XXXXXXXXXX (the "Payment Dates").

(d) No portion of the Principal Amount of the Public Notes will be due and payable prior to the maturity date of the Public Notes, and on such date, the full amount of such Principal Amount, together with any accrued and unpaid interest thereof, will be due and payable.

(e) The Principal Amount of the Public Notes will be subject to prepayment, at the option of XXXXXXXXXX Co, at any time prior to the maturity date subject to a "make whole" premium.

(f) Noteholders who are non-residents will be indemnified, on an after-tax basis, for withholding tax that may be exigible in respect of interest paid on the Public Notes.

(g) XXXXXXXXXX Co will covenant not to merge or amalgamate with any person or to transfer all or substantially all of its property to any person unless such person assumes the obligations of XXXXXXXXXX Co under the Trust Indenture and the Public Notes.

(h) If any event of default (an "Event of Default") occurs and is continuing, the Trustee or Public Noteholders holding in aggregate at least XXXXXXXXXX % of the Principal Amount of the outstanding Public Notes at the relevant time, may, upon written notice to that effect, declare the Principal Amount of such outstanding Public Notes, together with all accrued interest thereon, to be immediately due and payable. For this purpose, any of the following will constitute an Event of Default:

(i) a failure of XXXXXXXXXX Co to pay the Principal Amount of, and any accrued interest on, the Public Notes when due;

(ii) a failure of Parentco to honour its obligations under its guarantee of the Public Notes; and

(iii) certain events of bankruptcy, insolvency or reorganization of XXXXXXXXXX Co or Parentco.

17. XXXXXXXXXX Co and Parentco will enter into foreign currency swap agreements (the "Swap Arrangements") under the terms of a master swap agreement modeled on the International Swap Dealers Association Inc., Master Agreement with a schedule and confirmation letter specifying its particular terms. The purpose of the Swap Arrangements is to enable XXXXXXXXXX Co to meet its U.S. dollar interest and principal payment obligations in relation to the Public Notes and to hedge any foreign exchange exposure related to such U.S. dollar payment obligations. The term and interest rate applicable to the Swap Arrangements will be determined in conjunction with arm's length investment bankers and will be consistent with commercial arms length transactions for similar arrangements. The principal terms and conditions of the Swap Arrangements may be summarized as follows:

(a) The term of the Swap Arrangements will correspond with the term of the Public Notes.

(b) On each interest payment date under the Public Notes, Parentco will make a payment of U.S. dollars to XXXXXXXXXX Co, in an amount equal to the amount of interest which XXXXXXXXXX Co is required to pay on such date, in exchange for a specified Canadian dollar payment from XXXXXXXXXX Co, which payment may be made in cash or by the delivery of a negotiable instrument with a fair market value equal to the amount of the payment.

(c) On the maturity date of the Public Notes, Parentco will make a payment of U.S. dollars to XXXXXXXXXX Co, in an amount equal to the principal amount of the Public Notes which XXXXXXXXXX Co is required to repay on such date, in exchange for a specified Canadian dollar payment from XXXXXXXXXX Co, which payment may be made in cash or by the delivery of a negotiable instrument with a fair market value equal to the amount of the payment.

(d) The amount of the specified Canadian dollar payments referred to in (b) and (c) above will be determined at the inception of the Swap Arrangements based on market rates of exchange and interest in effect at that time.

18. NR Subco and XXXXXXXXXX Co will enter into an agreement (the "Contribution Agreement") whereunder NR Subco will make payments to XXXXXXXXXX Co, either as the subscription price of XXXXXXXXXX Co common shares or as the purchase price of Holdco preferred shares (which will have been received by XXXXXXXXXX Co in settlement of accrued interest on the Holdco Note as described in paragraph 19(d) below), at the option of XXXXXXXXXX Co. Such payments will be made, in cash or by the delivery of negotiable instruments, by NR Subco, on or before the dates upon which interest payments are required to be made by XXXXXXXXXX Co pursuant to the Public Notes, in amounts equal to the Canadian dollar amounts payable by XXXXXXXXXX Co to Parentco under the Swap Arrangements which relate to such interest payments. The purpose of the Contribution Agreement is to enable NR Subco to either increase its equity interest in XXXXXXXXXX Co or to acquire the preferred shares of Holdco from XXXXXXXXXX Co (as described in paragraph 19(d) below) and to ensure that XXXXXXXXXX Co will have sufficient funds to enable it to make the requisite Canadian dollar payments under the Swap Arrangements.

19. XXXXXXXXXX Co will use the proceeds from the Public Notes (approximately U.S. $ XXXXXXXXXX) (the "Holdco Loan Amount") to make a XXXXXXXXXX year interest bearing loan to Holdco (the "XXXXXXXXXX Co - Holdco Loan"). The principal terms and conditions of the XXXXXXXXXX Co - Holdco Loan, which will be denominated in Canadian dollars in an amount equal to the Canadian dollar equivalent value of the U.S. dollars which are actually advanced to Holdco, will be as follows:

(a) The borrowed monies will be used by Holdco for the purpose of making payment of the Holdco PUC Reduction Amount to XXXXXXXXXX Co in accordance with the provisions of the Holdco PUC Reduction Resolution and the Escrow Agreement all as described in paragraphs 22 and 23 below.

(b) Upon the advance of the Holdco Loan Amount, Holdco will issue a promissory note (the "Holdco Note") to XXXXXXXXXX Co with a principal amount equal to the Holdco Loan Amount.

(c) The maturity date of the Holdco Note will be the XXXXXXXXXX anniversary of the date upon which the Holdco Note is issued (the " Holdco Note Issuance Date").

(d) Interest on the principal amount of the Holdco Note will accrue on a daily basis until paid, at a rate which will be higher than the rate of interest on the Public Notes. Such interest will be computed on the basis of XXXXXXXXXX. Unless Holdco is in default under the XXXXXXXXXX Co - Holdco Loan Agreement or the Holdco Note, such interest will be paid and satisfied by the issuance and delivery by Holdco to XXXXXXXXXX Co, of fully paid and non-assessable Holdco preferred shares having a fair market value and PUC equal to the amount of accrued interest on each interest payment date. Holdco will issue preferred shares as payment of interest in order to preserve cash for use in its business.

(e) No portion of the principal amount of the Holdco Note will be due and payable prior to the maturity date of the Holdco Note, and on such date, the full amount of such principal amount will be due and payable in cash. Any accrued and unpaid interest on such date will be paid by the issuance of Holdco preferred shares on the same basis as such interest was paid and satisfied prior to such date.

(f) If any event of default (a "Holdco Event of Default") occurs and is continuing, XXXXXXXXXX Co may upon written notice to that effect, declare the principal amount of the Holdco Note, together with all accrued interest thereon, to be immediately due and payable. In such event, all such amounts shall be payable in cash. For this purpose, any of the following will constitute a Holdco Event of Default:

(i) a failure of Holdco to pay the principal amount of, and any accrued interest on, the Holdco Note when due;

(ii) a failure of Holdco to comply with any covenant contained in the XXXXXXXXXX Co -Holdco Loan Agreement or the Holdco Note, and the continuation of such failure for more than XXXXXXXXXX days after the receipt of written notice of such failure; and

(iii) certain events of bankruptcy, insolvency or reorganization of Holdco;

(g) The indebtedness evidenced by the Holdco Note will be secured by the granting of the Direction as described in paragraph 21 below and will be subordinated to all present and future senior debt obligations of Holdco.

XXXXXXXXXX Co is treated as a disregarded entity under U.S. income tax principles. Consequently, XXXXXXXXXX Co is treated simply as a branch of NR Subco for U.S. income tax purposes. The interest expense paid on the Public Notes by XXXXXXXXXX Co is deductible on the United States income tax return of NR Subco. The interest income received by XXXXXXXXXX Co on the Holdco Note will be treated as nontaxable stock dividends for U.S. income tax purposes. Such U.S. income tax treatment is possible only because: (i) the interest is payable in the shares of the borrower and (ii) the lender and shareholder of Holdco are the same company. The U.S. income tax treatment relies on the substance of the transaction between NR Subco and Holdco as being an equity investment rather than a debt investment. This substance is supported, in part, by the Subscription Agreement and, to a lesser extent, the Contribution Agreement described in paragraphs 20 and 18 respectively. The deductibility of the interest expense in the United States reduces the after-tax borrowing costs of the Public Notes. NR Subco will disclose on its U.S. federal income tax return that the interest expense on the Public Notes is being deducted by XXXXXXXXXX Co on its Canadian income tax return.

20. NR Subco and Holdco will enter into an agreement (the "Subscription Agreement") whereunder NR Subco will subscribe for, and Holdco will agree to issue, Holdco common shares. The purpose of the Subscription Agreement is to enable NR Subco to acquire an equity interest in Holdco and to ensure that Holdco will have sufficient funds to enable it to repay the principal amount of the Holdco Note, as described in paragraph 19 above, on the date or dates upon which such principal amount is payable, in whole or in part. The number of Holdco common shares which are to be issued to NR Subco will be determined by dividing the principal amount of the Holdco Note that is to be repaid on a particular date by the fair market value of one Holdco common share on such date, as specified in the Subscription Agreement.

21. As security for the Holdco Note, Holdco will execute and deliver a direction (the "Direction") to NR Subco whereunder NR Subco will be directed to pay to XXXXXXXXXX Co all amounts which become payable by NR Subco to Holdco under the Subscription Agreement as described in paragraph 20 above. The Direction will remain in effect until such time as the principal amount of the Holdco Note has been fully repaid or Holdco has provided acceptable replacement security for the Direction, as contemplated by the provisions of the Holdco Note. The security interest constituted by the Direction will be registered pursuant to the XXXXXXXXXX.

22. XXXXXXXXXX Co as the sole shareholder of Holdco, will pass a special resolution (the "Holdco PUC Reduction Resolution"), pursuant to XXXXXXXXXX, to reduce the stated capital account with respect to the common shares of Holdco, by an amount (the "Holdco PUC Reduction Amount") equal to the Holdco Loan Amount, to the extent such amount is received by Holdco from XXXXXXXXXX Co pursuant to the Escrow Agreement, as described in paragraph 23 below. Holdco will pay an amount to XXXXXXXXXX Co, on the basis provided for in the Escrow Agreement described in paragraph 23 below, equal to the Holdco PUC Reduction Amount in accordance with the Holdco PUC Reduction Resolution. The Holdco PUC Reduction Amount will not exceed the aggregate PUC of the common shares of Holdco immediately prior to the passing of the Holdco PUC Reduction Resolution.

The cash proceeds received by Holdco upon the issuance of its common shares were used by Holdco for the purpose of earning income from business or property, to repay amounts previously borrowed for the purpose of earning income from business or property, or to repay amounts payable for property acquired for the purposes of gaining or producing income therefrom or from a business (or deemed by subsection 20(3) to be payable for such purpose). To the extent that any common shares of Holdco were issued in exchange for property other than cash, such property was used by Holdco for the purposes of earning income therefrom. For greater certainty, none of the PUC of the common shares of Holdco, which is to be reduced pursuant to the Holdco PUC Reduction Resolution, has been used by Holdco for the purpose of earning income which is exempt from tax under the Act.

23. XXXXXXXXXX Co, Holdco and a person who deals at arm's length with each of XXXXXXXXXX Co and Holdco and who performs the function of escrow agent under the Escrow Agreement (hereinafter the "Escrow Agent") will enter into an agreement (the "Escrow Agreement") for the purpose of providing for the advance of the Holdco Loan Amount by XXXXXXXXXX Co to Holdco and for the payment of the Holdco PUC Reduction Amount by Holdco to XXXXXXXXXX Co. The principal terms and conditions of the Escrow Agreement will be as follows:

(a) Holdco will execute and deliver the Holdco Note to the Escrow Agent.

(b) XXXXXXXXXX Co will pay the Holdco Loan Amount, by the delivery of U.S. dollars to the Escrow Agent who will deposit such funds into a discrete account (the "Escrow Account").

(c) The Escrow Agent will acknowledge receipt of the Holdco Loan Amount on behalf of Holdco, and will deliver the Holdco Note to XXXXXXXXXX Co.

(d) The Escrow Agent will transfer the funds held in the Escrow Account to XXXXXXXXXX Co as payment of the Holdco PUC Reduction Amount on behalf of Holdco, and XXXXXXXXXX Co will acknowledge receipt of such amount.

A distribution of the Holdco PUC Reduction Amount by Holdco to XXXXXXXXXX Co as described in paragraph 22 above could subject the NR Subco to immediate US taxation. In order to avoid this result the advance of the Holdco Loan Amount by XXXXXXXXXX Co to Holdco and the payment of the Holdco PUC Reduction Amount by Holdco to XXXXXXXXXX Co will take place on the basis provided for in the Escrow Agreement.

More precisely, under United States income tax principles, a distribution is deemed first to be made out of current and accumulated earnings and profits regardless of how the distribution is designated for Canadian income tax purposes. Only after all of the current and accumulated earnings and profits have been distributed will a distribution be treated for U.S. income tax purposes as a return of capital. Holdco has historically acted only as a holding company, and it is believed that Holdco does not have any current or accumulated earnings and profits. Consequently, it is expected that a distribution from Holdco will be treated as a return of capital for U.S. income tax purposes. However, United States tax counsel has advised NR Subco that as a precautionary measure, the loan proceeds and the distribution should be paid through an escrow account. If in fact Holdco is determined to have current or accumulated earnings and profits, the escrow account should prevent NR Subco from recognizing taxable income on the distribution because XXXXXXXXXX Co should not be treated as having sufficient management and control over the distribution funds as determined under U.S. income tax principles to be said to have received the distribution. Given that such an escrow arrangement would have no adverse Canadian income tax ramifications, the escrow arrangement will be utilized in order to reduce any potential exposure to the U.S. taxation of the PUC reduction distribution by Holdco.

24. NR Subco, as the sole shareholder of XXXXXXXXXX Co, will pass a special resolution (the "XXXXXXXXXX Co PUC Reduction Resolution") pursuant to section XXXXXXXXXX of the Articles of Association of XXXXXXXXXX Co to reduce the capital of the issued no par value common shares of XXXXXXXXXX Co by an amount (the "XXXXXXXXXX Co PUC Reduction Amount") equal to the Holdco PUC Reduction Amount which XXXXXXXXXX Co will have received from Holdco. XXXXXXXXXX Co will pay an amount to NR Subco equal to the XXXXXXXXXX Co PUC Reduction Amount in accordance with the XXXXXXXXXX Co PUC Reduction Resolution. The XXXXXXXXXX Co PUC Reduction Amount will not exceed the PUC of the no par value common shares of XXXXXXXXXX Co immediately prior to the passing of the XXXXXXXXXX Co PUC Reduction Resolution.

The cash proceeds received by XXXXXXXXXX Co upon the issuance of its no par value common shares were used by XXXXXXXXXX Co for the purpose of earning income from business or property, to repay amounts previously borrowed for the purpose of earning income from business or property, or to repay amounts payable for property acquired for the purposes of gaining or producing income therefrom or from a business (or deemed by subsection 20(3) to be payable for such purpose). To the extent that any no par value common shares of XXXXXXXXXX Co were issued for property other than cash, such property was used by XXXXXXXXXX Co for the purposes of earning income therefrom. For greater certainty, none of the PUC of the no par value common shares of XXXXXXXXXX Co, which is to be reduced pursuant to the XXXXXXXXXX Co PUC Reduction Resolution, has been used by XXXXXXXXXX Co for the purpose of earning income which is exempt from tax under the Act.

Purpose of the Proposed Transactions

25. To obtain external financing which will enable Holdco and XXXXXXXXXX Co to replace a portion of their equity financing with interest bearing debt in a manner that will permit NR Subco to use XXXXXXXXXX Co's financing cost to reduce its liability for U.S. income taxes.

Rulings

Provided that the above description of facts, proposed transactions and purpose of the proposed transaction are accurate and constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose thereof, and provided further that the proposed transactions are completed in the manner described above, we confirm that:

A. The provisions of subsection 85(1) will apply to the transfer of the common shares of Holdco described in paragraph 11 above so that the amount that NR Subco and the Holdco have agreed upon in the election in respect of each transfer shall be deemed to be the NR Subco's proceeds of disposition and Holdco's cost of the property so transferred.

B. Provided that XXXXXXXXXX Co has a legal obligation to pay interest on the Public Notes as described in paragraph 16 above and provided that the XXXXXXXXXX Co - Holdco Loan as described in paragraph 19 above continues to be held for the purpose of gaining or

producing income (other than income which would be exempt), XXXXXXXXXX Co will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable in respect of that taxation year or a reasonable amount in respect thereof pursuant to paragraph 20(1)(c) of the Act.

C. Provided that that the fair market value of the preferred shares issued by Holdco as consideration for the settlement of accrued interest on the XXXXXXXXXX Co - Holdco Loan, on the basis of the Holdco Note as described in paragraph 19(d) above, is not less than the principal amount of the accrued interest which is so settled, no amount will be included in computing Holdco's income because of the settlement of the accrued interest on the XXXXXXXXXX Co - Holdco Loan under section 9 or section 80.

D. Subsection 245(2) will not be applicable as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the general limitations and qualifications set out in Information Circular IC 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comment

Nothing in this letter should be construed as implying that the Agency has:

a) Agreed that interest paid by XXXXXXXXXX Co on any loan except as specifically set out in ruling B above or interest paid by Holdco on any loan except as specifically set out in the opinion below, is, or in the case of Holdco, may be, deductible in computing income under paragraph 20(1)(c) of the Act;

b) Reviewed or accepted the amount of the adjusted equity of Holdco;

c) Agreed that the XXXXXXXXXX swap payments or any part thereof proposed under the Swap Arrangements are deductible from the income of XXXXXXXXXX Co pursuant to section 9;

d) Examined or otherwise considered the application of subsection 18(4); or

e) Agreed to any other tax consequences relating to any facts or proposed transactions referred to herein other than those as specifically described in the rulings given above.

Opinions

We are unable to confirm the ruling requested pertaining to paragraph 20(1)(c) in regards to interest payable by Holdco on the XXXXXXXXXX Co - Holdco Loan. However, we are providing the opinion in the next paragraph in that regard.

Provided the provisions of proposed section 20.2 are enacted in substantially the same form as is proposed in the December 20, 1991 Technical Notes (interest deductibility) published by the Department of Finance (the "Draft Legislation"), proposed subsection 20.2(1) will apply to Holdco in respect of the XXXXXXXXXX Co - Holdco Loan described in paragraph 19 above. Accordingly, the Holdco Loan Amount shall be deemed to be borrowed money used for the purposes of earning income from the property of Holdco to the extent that the Holdco Loan Amount does not exceed Holdco's adjusted equity immediately before the reduction of the stated capital account of the common shares of Holdco as described in paragraph 22 above. Moreover, the future interest deductions on the borrowing will be based on the adjusted equity at the time of the distribution and the provisions of paragraph 20(1)(c) will determine in each year, the interest deduction available for that particular year. The expression "adjusted equity" has the meaning assigned by proposed subsection 20.2(2).

Other comment

This ruling letter should not be construed as indicating there has been any modification in the CCRA's administrative practices with regard to interest deductibility.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch