2004 Ruling 2004-0070491R3 - Loss Consolidation

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

Principal Issues: Whether a proposed loss consolidation results in the application of subsection 245(2).

Position: No.

Reasons: It does not result in a misuse of a provision of the Act or an abuse of the Act as a whole.

XXXXXXXXXX 2004-007049

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, and your e-mails of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

To the best of your knowledge and the knowledge of the taxpayers involved in the Proposed Transactions, none of the issues described in this ruling is:

(a) in an earlier tax return of a taxpayer involved or a related person;

(b) being considered by a tax services office or taxation centre in connection with any tax return previously filed by a taxpayer involved or a related person;

(c) under objection or appeal by a taxpayer involved or a related person;

(d) before the courts; or

(e) the subject of a ruling previously issued to a taxpayer involved or a related person.

The tax account numbers, Tax Services Offices and the Tax Centres of the taxpayers involved are as follows:

Tax Account
Number
Tax Services
Office
LOSSCO
XXXXXXXXXX
XXXXXXXXXX
OPCO
XXXXXXXXXX
XXXXXXXXXX
ACO
XXXXXXXXXX
XXXXXXXXXX
BCO
XXXXXXXXXX
XXXXXXXXXX

DEFINED TERMS

In this letter, unless otherwise indicated, all statutory references are to the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

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

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

(b) "agreed amount" means the amount that the transferor and transferee have agreed upon in respect of a property in an election under subsection 85(1);

(c) "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7);

(d) "capital dividend account" has the meaning assigned by subsection 89(1);

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

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

(g) "Daylight Loan" has the meaning assigned in paragraph 6 below;

(h) "Daylight Loan 2" has the meaning assigned in paragraph 12 below;

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

(j) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

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

(l) "Newco One" means a newly-incorporated corporation described in paragraph 4 below;

(m) "Newco One Promissory Note" has the meaning assigned in paragraph 11 below;

(n) "Newco Two" means a newly-incorporated corporation described in paragraph 4 below;

(o) "Newco Two Demand Loan" has the meaning assigned in paragraph 7 below;

(p) "Newco Two Preferred Shares" has the meaning assigned in paragraph 15 below;

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

(r) XXXXXXXXXX;

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

(t) "Proposed Transactions" means the proposed transactions described in paragraphs 4 to 21 below;

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

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

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

(x) "Subco" means a newly-incorporated corporation described in paragraph 16 below;

(y) "OPCO" means the corporation described in paragraph 3 below;

(z) "OPCO Common Shares" has the meaning assigned in paragraph 11 below;

(aa) "OPCO Preferred Shares" has the meaning assigned in paragraph 8 below;

(bb) "LOSSCO" means the corporation described in paragraph 1 below;

(cc) "LOSSCO Demand Loan" has the meaning assigned in paragraph 9 below;

(dd) "ACO" means the corporation described in paragraph 1 below;

(ee) "BCO" means the corporation described in paragraph 1 below;

(ff) "taxable dividend" has the meaning assigned by subsection 89(1);

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

(hh) "XCO" means the corporation described in paragraph 1 below.

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

FACTS

1. XXXXXXXXXX ("ACO") is a taxable Canadian corporation and a Canadian-controlled private corporation that is controlled by XXXXXXXXXX.

ACO owns all of the issued and outstanding shares of XXXXXXXXXX ("BCO"), which is also a taxable Canadian corporation and a Canadian-controlled private corporation. BCO is a holding corporation that, directly and through wholly-owned subsidiaries, owns approximately XXXXXXXXXX per cent of the issued and outstanding common shares of XXXXXXXXXX ("LOSSCO"). BCO and such subsidiaries hold their common shares of LOSSCO as capital property. BCO owns all the shares of XXXXXXXXXX ("XCO"). XCO is a taxable Canadian corporation and a Canadian-controlled private corporation. It is a holding company through which BCO holds it non-Canadian investments. These investments include various interests in XXXXXXXXXX ownership of XXXXXXXXXX (UK) and interests in a number of XXXXXXXXXX companies in the United States and elsewhere outside of Canada.

2. LOSSCO is a taxable Canadian corporation and a public corporation. The authorized and issued share capital of LOSSCO consists of common shares and a series of non-voting, redeemable preference shares. The common shares of LOSSCO are listed and trade on the XXXXXXXXXX and the XXXXXXXXXX Stock Exchange, and the preference shares are listed and trade on the XXXXXXXXXX. As at XXXXXXXXXX, LOSSCO had a market capitalization of approximately $XXXXXXXXXX and had XXXXXXXXXX consolidated revenues of approximately U.S.$XXXXXXXXXX. LOSSCO is a holding corporation that, through subsidiaries worldwide, is engaged in the business of providing XXXXXXXXXX. LOSSCO's taxation year-end is XXXXXXXXXX of each year. As at the end of XXXXXXXXXX, the balance of LOSSCO's non-capital losses as filed was approximately $XXXXXXXXXX. Of this amount, approximately $XXXXXXXXXX expired at the end of LOSSCO's XXXXXXXXXX taxation year. It is estimated that LOSSCO incurred approximately $XXXXXXXXXX of non-capital losses in its XXXXXXXXXX taxation year (the actual amount will be determined in completing the tax return for XXXXXXXXXX). The remaining non-capital losses are as follows:

Approximate
Amount of Loss
Year Incurred
Year
of Expiry
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

It is estimated that, without taking into account the transactions described below under "Proposed Transactions", LOSSCO will incur non-capital losses of approximately $XXXXXXXXXX in its XXXXXXXXXX taxation year.

3. XXXXXXXXXX ("OPCO") is a taxable Canadian corporation all of the issued and outstanding common shares of which are owned by LOSSCO. OPCO carries on the LOSSCO business in Canada, both directly and through subsidiaries, and also owns, directly or indirectly, all of the non-Canadian subsidiary corporations in the LOSSCO related group of corporations, including direct ownership of the parent company of XXXXXXXXXX group and the parent company of XXXXXXXXXX and rest of the world groups. OPCO had XXXXXXXXXX consolidated revenues of approximately $XXXXXXXXXX and XXXXXXXXXX consolidated earnings of approximately $XXXXXXXXXX, and the market value of OPCO as at XXXXXXXXXX was approximately $XXXXXXXXXX

PROPOSED TRANSACTIONS

4. LOSSCO will incorporate two new corporations under the XXXXXXXXXX ("Newco One" and "Newco Two"). The authorized share capital of each of Newco One and Newco Two will consist of an unlimited number of common shares (Newco Two will have two classes of authorized common shares), and each will be a taxable Canadian corporation. One common share of each of Newco One and Newco Two will be issued to LOSSCO for $XXXXXXXXXX upon incorporation. Newco One will have a XXXXXXXXXX year-end, and Newco Two will have a XXXXXXXXXX year end.

5. The Proposed Transactions described in paragraphs 6-10 below will occur immediately one after the other in the order set out.

6. On or about XXXXXXXXXX, LOSSCO will borrow an amount of approximately $XXXXXXXXXX on a daylight basis from an arm's length financial institution (the "Daylight Loan").

7. LOSSCO will lend the proceeds from the Daylight Loan to Newco Two on a demand basis (the "Newco Two Demand Loan"). The Newco Two Demand Loan will bear interest at a rate that will be based upon LOSSCO's cost of capital, which rate will not be in excess of the rate that would be required by a third party lender. The interest on the Newco Two Demand Loan will create a non-capital loss in Newco Two that will be applied in its entirety in a taxation year that ends on or before XXXXXXXXXX as described below.

8. Articles of amendment will be filed to create a new class of preferred shares of OPCO (the "OPCO Preferred Shares") having the following attributes:

(a) non-voting;

(b) redeemable, subject to applicable law, at any time at the option of OPCO for an amount equal to the amount for which they were issued plus any accrued and unpaid dividends; and

(c) entitled to a cumulative dividend at a rate equal to the interest rate on the Newco Two Demand Loan plus XXXXXXXXXX per cent.

Newco Two will use the proceeds of the Newco Two Demand Loan to subscribe for OPCO Preferred Shares. The OPCO Preferred Shares will have a redemption amount and paid-up capital equal to the principal amount of the Newco Two Demand Loan.

9. OPCO will lend the proceeds from the subscription of the OPCO Preferred Shares to LOSSCO on an interest-free demand basis (the "LOSSCO Demand Loan").

10. LOSSCO will use the proceeds from the LOSSCO Demand Loan to repay the Daylight Loan.

11. On or about XXXXXXXXXX, LOSSCO will transfer all of the issued and outstanding common shares of OPCO (the "OPCO Common Shares") to Newco One for consideration consisting of:

(a) a demand promissory note (the "Newco One Promissory Note") with a principal amount of approximately $XXXXXXXXXX and bearing interest at a rate that will be based upon LOSSCO's cost of capital, which rate will not be in excess of the rate that would be required by a third party lender (the principal amount of the Newco One Promissory Note will not exceed the cost amount to LOSSCO of the OPCO Common Shares); and

(b) one common share of Newco One.

LOSSCO and Newco One will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time referred to in section 85, with respect to the transfer of the OPCO Common Shares, an agreed amount equal to the cost amount thereof to LOSSCO.

It is intended that LOSSCO earn interest income from the Newco One Promissory Note in its XXXXXXXXXX taxation year in an amount equal to the amount of non-capital losses that it would otherwise incur in its XXXXXXXXXX taxation year (determined without taking into account the interest it will earn on the Newco Two Demand Loan), and that Newco One incur a non-capital loss in its XXXXXXXXXX taxation year in the same amount as a result of the deduction of interest on the Newco One Promissory Note. It is represented that an amount equal to the amount of the Daylight Loan represents an amount that LOSSCO and OPCO could reasonably borrow in view of the cash flows generated by OPCO. It is further represented that OPCO will have the financial capacity to pay dividends on the OPCO Common Shares and the OPCO Preferred Shares in amounts sufficient for Newco One and Newco Two to satisfy their respective interest obligations under the Newco One Promissory Note and the Newco Two Demand Loan.

12. On or prior to XXXXXXXXXX:

(a) OPCO will pay the balance of any accrued and unpaid dividends on the OPCO Preferred Shares.

(b) Newco Two will pay the balance of any accrued and unpaid interest on the Newco Two Demand Loan.

(c) LOSSCO will borrow an amount equal to the principal amount of the LOSSCO Demand Loan on a daylight basis from an arm's length financial institution (the "Daylight Loan 2") and use the proceeds therefrom to repay the LOSSCO Demand Loan.

(d) OPCO will use the proceeds from the repayment of the LOSSCO Demand Loan to redeem the OPCO Preferred Shares held by Newco Two.

(e) Newco Two will use the proceeds from the redemption of the OPCO Preferred Shares to repay the Newco Two Demand Loan.

(f) LOSSCO will use the proceeds from the repayment of the Newco Two Demand Loan to repay the Daylight Loan 2.

It is intended that LOSSCO earn interest income from the Newco Two Demand Loan in its XXXXXXXXXX taxation year in an amount equal to the amount of its non-capital losses from its XXXXXXXXXX and XXXXXXXXXX taxation years.

13. On or prior to XXXXXXXXXX, Newco Two will purchase for cancellation the one issued and outstanding common share of Newco Two held by LOSSCO for cash consideration equal to the fair market value thereof. The determination of fair market value will be a matter of negotiation as between LOSSCO and ACO. This purchase will be funded out of the proceeds of the issuance of one share of a separate class of common shares by Newco Two to ACO.

14. The Proposed Transactions described in paragraphs 15-20 below will occur in the order set out after XXXXXXXXXX and prior to XXXXXXXXXX.

15. The articles of Newco Two will be amended to create a class of preference shares (the "Newco Two Preferred Shares") with the following attributes:

(a) non-voting;

(b) redeemable, subject to applicable law, at any time at the option of Newco Two for an amount equal to the amount for which they were issued plus any declared and unpaid dividends; and

(c) entitled to a cumulative dividend of XXXXXXXXXX per cent.

16. Newco Two will incorporate a new corporation under the XXXXXXXXXX ("Subco"). The authorized capital of Subco will consist of an unlimited number of common shares, and Subco will be a taxable Canadian corporation. One common share of Subco will be issued to Newco Two for $XXXXXXXXXX upon incorporation. Subco will have a XXXXXXXXXX year-end.

17. BCO will transfer all of the shares of XCO that it owns to Newco Two for consideration consisting of Newco Two Preferred Shares with a redemption amount equal to the fair market value of the transferred XCO shares. It is intended that Newco Two will realize a taxable capital gain as a result of the transfer described in paragraph 18 below in the amount described in that paragraph. BCO and Newco Two will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time referred to in section 85, with respect to the transfer of the XCO shares, an agreed amount equal to the cost amount thereof to BCO. The Newco Two Preferred Shares will have a paid-up capital equal to this agreed amount.

18. Newco Two will transfer all of the XCO shares that it acquired from BCO in paragraph 17 above to Subco for consideration consisting of one common share of Subco. Newco Two and Subco will jointly elect, pursuant to subsection 85(1), in prescribed form and within the time referred to in section 85, with respect to the transfer of the XCO shares, an agreed amount that will result in Newco Two realizing a taxable capital gain on the transfer that will approximately equal, and will not be less than, the amount of interest paid on the Newco Two Demand Loan as described above.

19. ACO will contribute an amount equal to the aggregate redemption price of the Newco Two Preferred Shares to the capital of Newco Two.

20. Newco Two will use the proceeds from the capital contribution in paragraph 19 above to redeem the Newco Two Preferred Shares held by BCO.

21. On or prior to XXXXXXXXXX, Newco Two will amalgamate with ACO under the provisions of XXXXXXXXXX.

ADDITIONAL INFORMATION

22. Neither the OPCO Preferred Shares nor the Newco Two Preferred Shares will be, at any time during the implementation of the Proposed Transactions described herein:

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

(b) the subject of a dividend rental arrangement;

(c) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(d) issued for consideration that is or includes:

(i) an obligation of the type described in subparagraph 112(2.4)(b)(i) other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii) any right of the type described in subparagraph 112(2.4)(b)(ii).

23. LOSSCO, OPCO, BCO and ACO are, and Newco One, Newco Two and Subco will be, specified financial institutions. LOSSCO, OPCO, BCO and ACO are not, and Newco One, Newco Two and Subco will not be, financial intermediary corporations.

24. LOSSCO, OPCO, BCO and ACO are, and Newco One, Newco Two and Subco will be, together with LOSSCO, OPCO, BCO and ACO, affiliated persons and related persons.

25. The amalgamated corporation does not intend to sell the shares of Subco or XCO to an arm's length person.

PURPOSE OF THE PROPOSED TRANSACTIONS

26. The purpose of the Proposed Transactions is to consolidate profits and losses within a group of taxable Canadian corporations that are affiliated persons by enabling LOSSCO to earn sufficient interest income to utilize its XXXXXXXXXX and XXXXXXXXXX non-capital losses and the non-capital losses that it would otherwise incur in its XXXXXXXXXX taxation year. The purpose of the Proposed Transaction described in paragraph 11 above is to enable LOSSCO to earn sufficient interest income to offset the amount of non-capital losses that it would otherwise incur in its XXXXXXXXXX taxation year so that an amount equal to its XXXXXXXXXX and XXXXXXXXXX non-capital losses can be utilized in the manner described in paragraphs 6-10 and 12 above. Newco Two will obtain an interest deduction to be used against other taxable income in the manner described in paragraph 18 above.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:

A. The dividends received by Newco Two on the OPCO Preferred Shares will be taxable dividends that will be deductible pursuant to subsection 112(1) in computing the taxable income of Newco Two for the year in which the dividend is received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

B. Newco Two will not be subject to tax under Part IV.1 in respect of the dividends received from OPCO on the OPCO Preferred Shares by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1.

C. The dividends received by Newco Two on the OPCO Preferred Shares will be dividends received from a payor corporation that is connected with Newco Two, within the meaning of subsection 186(4), and thus Newco Two will not be subject to Part IV tax in respect of such dividends except to the extent, if any, that paragraph 186(1)(b) applies to impose such tax.

D. OPCO will not be subject to tax under Part VI.1 in respect of the dividends paid to Newco Two on the OPCO Preferred Shares by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

E. On the redemption of the Newco Two Preferred Shares described in paragraph 20 above, pursuant to subsection 84(3), Newco Two will be deemed to have paid, and BCO will be deemed to have received, a dividend equal to the amount by which the amount paid by Newco Two on the redemption exceeds the paid-up capital of the Newco Two Preferred Shares immediately before the redemption, and the amount of such dividend:

(a) will be included in BCO's income pursuant to section 82 and paragraph 12(1)(j);

(b) will be excluded in computing BCO's proceeds of disposition of the Newco Two Preferred Shares pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from such disposition will be reduced by the amount of such dividend pursuant to subsection 112(3);

(c) will be a taxable dividend that will be deductible pursuant to subsection 112(1) in computing the taxable income of BCO for the year in which the dividend is received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4);

(d) will be an "excepted dividend" by virtue of paragraphs (b) and (c) of the definition in section 187.1, and thus BCO will not be subject to tax under Part IV.1 in respect of such dividend;

(e) will be an "excluded dividend" by virtue of paragraph (a) of the definition in subsection 191(1), and thus Newco Two will not be subject to tax under Part VI.1 in respect of such dividend; and

(f) will be a dividend received from a payor corporation that is connected with BCO, within the meaning of subsection 186(4), and thus BCO will not be subject to Part IV tax in respect of such dividend except to the extent, if any, that paragraph 186(1)(b) applies to impose such tax.

F. Provided that Newco Two has a legal obligation to pay interest on the Newco Two Demand Loan, described in paragraph 7 above, and Newco Two continues to hold the OPCO Preferred Shares, described in paragraph 8 above, Newco Two will be entitled, pursuant to paragraph 20(1)(c), to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by Newco Two in computing its income for purposes of the Act) in respect of the year on the Newco Two Demand Loan or (ii) a reasonable amount in respect thereof.

G. Provided that Newco One has a legal obligation to pay interest on the Newco One Promissory Note, described in paragraph 11 above, and Newco One continues to hold the OPCO Common Shares, described in paragraph 11 above, Newco One will be entitled, pursuant to paragraph 20(1)(c), to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by Newco One in computing its income for the purposes of the Act) in respect of the year on the Newco One Promissory Note or (ii) a reasonable amount in respect thereof; and the resulting non-capital loss incurred by Newco One in its XXXXXXXXXX taxation year will be deductible by it, pursuant to paragraph 111(1)(a), in computing its taxable income for the seven subsequent taxation years.

H. The aggregate amount of interest on the Newco One Promissory Note and the Newco Two Demand Note will be included in computing the income of LOSSCO for its XXXXXXXXXX taxation year and, pursuant to paragraph 111(1)(a), LOSSCO will be entitled to deduct, in computing its taxable income for its XXXXXXXXXX taxation year, non-capital losses (as determined under the Act) for the 7 immediately preceding years; in accordance with paragraph 111(3)(b), non-capital losses from LOSSCO's XXXXXXXXXX and XXXXXXXXXX taxation years will be deducted prior to non-capital losses from subsequent taxation years.

I. The provisions of subsection 85(1) will apply to the transfer by LOSSCO of the OPCO Common Shares to Newco One described in paragraph 11 above, such that the agreed amount in respect of such transfer will be deemed to be the proceeds of disposition to LOSSCO and the cost to Newco One. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of such transfer.

J. On the redemption of the OPCO Preferred Shares:

(a) no dividend will be deemed to have been paid by OPCO and received by Newco Two under subsection 84(3); and

(b) no gain or loss will be realized or incurred by Newco Two.

K. On the purchase for cancellation of the one common share of Newco Two described in paragraph 13 above, pursuant to subsection 84(3), Newco Two will be deemed to have paid, and LOSSCO will be deemed to have received, a dividend equal to the amount by which the amount paid by Newco Two on the purchase exceeds the paid-up capital of the Newco Two common share immediately before the purchase, and the amount of such dividend:

(a) will be included in LOSSCO's income pursuant to section 82 and paragraph 12(1)(j);

(b) will be excluded in computing LOSSCO's proceeds of disposition of the Newco Two common share pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from such disposition will be reduced by the amount of such dividend pursuant to subsection 112(3);

(c) will be a taxable dividend that will be deductible pursuant to subsection 112(1) in computing the taxable income of LOSSCO for the year in which the dividend is received, and for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4);

(d) will be an "excepted dividend" by virtue of paragraph (b) of the definition in section 187.1, and thus LOSSCO will not be subject to tax under Part IV.1 in respect of such dividend;

(e) will be an "excluded dividend" by virtue of paragraph (a) of the definition in subsection 191(1), and thus Newco Two will not be subject to tax under Part VI.1 in respect of such dividend; and

(f) will be a dividend received from a payor corporation that is connected with LOSSCO, within the meaning of subsection 186(4), and thus LOSSCO will not be subject to Part IV tax in respect of such dividend except to the extent, if any, that paragraph 186(1)(b) applies to impose such tax.

L. Pursuant to paragraph 256(7)(a), control of Newco Two will be deemed not to have been acquired solely because of the Proposed Transactions described in paragraph 13 above, for the purpose of the provisions enumerated in subsection 256(7).

M. Provided that there is no disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v) as part of a series of transactions or events that includes the Proposed Transactions, then, by virtue of paragraph 55(3)(a), the provisions of subsection 55(2) will not apply to the taxable dividends described in Rulings A, E and K above. For greater certainty, the Proposed Transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

N. Provided that the XCO shares that are transferred by BCO to Newco Two as described in paragraph 17 above are capital property to BCO, the Proposed Transactions described in paragraphs 17-18 above will not, in and by themselves, cause such XCO shares not to be capital property of Newco Two.

O. In computing its income for its taxation year ending immediately before the amalgamation described in paragraph 21 above, Newco Two will be entitled to offset the interest deduction described in Ruling F above against the taxable capital gain realized as a result of the transfer of the XCO shares described in paragraph 18 above.

P. An amount equal to the non-taxable portion of the capital gain realized on the transfer of the XCO shares described in paragraph 18 above will be added to Newco Two's capital dividend account pursuant and subject to subparagraph (a)(i) of the definition in subsection 89(1).

Q. The provisions of subsection 85(1) will apply to the transfer by BCO of the XCO shares to Newco Two described in paragraph 17 above, such that the agreed amount in respect of such transfer will be deemed to be the proceeds of disposition to BCO and the cost to Newco Two. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of such transfer, and the provisions of subsection 69(11) will not deem BCO to have disposed of the XCO shares for proceeds of disposition equal to the fair market value thereof.

R. The provisions of subsection 85(1) will apply to the transfer by Newco Two of the XCO shares to Subco as described in paragraph 18 above, such that the agreed amount in respect of such transfer will be deemed to be the proceeds of disposition to Newco Two and the cost to Subco. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of such transfer.

S. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

T. Subsection 245(2) will not apply to the Proposed Transactions, in and by themselves, to redetermine the consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2003, and are binding on the Canada Revenue Agency provided that the proposed transactions are implemented before XXXXXXXXXX.

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

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

(a) the determination of the ACB, the PUC or the FMV of any shares referred to herein;

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

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

(d) the application or non-application of the general anti-avoidance provisions of any province; or

(e) any tax consequences relating to the facts, proposed transactions or the purposes of the proposed transactions other than those described in the rulings given above. In particular, we are not commenting on the application of proposed section 3.1 to the losses of Newco One.

Yours truly,

XXXXXXXXXX
Manager
Corporate Reorganizations Section 1
Income Tax Rulings Directorate
Policy and Planning Branch