2008 Ruling 2006-0212691R3 - paragraph 88(1)(c) bump

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 "another person" as referred to in subsection 88(1.7) should include a partnership for the purpose of subparagraph 88(1)(c)(v)?

Position: No.

Reasons: Subparagraph 88(1)(c)(v) specifically includes a reference to the acquisition of property from a "person or a partnership", but subsection 88(1.7) does not contain the same language.

XXXXXXXXXX 2006-021269

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your two letters of XXXXXXXXXX in which you requested XXXXXXXXXX advance income tax rulings on behalf of the above-noted taxpayers. On XXXXXXXXXX , you XXXXXXXXXX simplified the XXXXXXXXXX ruling requests into XXXXXXXXXX ruling request ("XXXXXXXXXX Letter"). In your subsequent letters you provided additional information concerning the facts, subject transactions and proposed transactions described in the XXXXXXXXXX Letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX ).

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

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

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

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

DEFINITIONS

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

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

"ACB" means adjusted cost base as defined in section 54 and subsection 248(1);

"Aco" means XXXXXXXXXX , a corporation existing under the laws of the Province of XXXXXXXXXX . It files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office;

"Aco Note" means a subordinated, unsecured promissory note issued by Aco to MFT and "Aco Notes" refers to more than one Aco Note;

XXXXXXXXXX

"agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

XXXXXXXXXX

"arm's length" has the meaning assigned by Section 251;

"BCA" means the Business Corporations Act (XXXXXXXXXX );

"Bco" means XXXXXXXXXX formed pursuant to the laws of the Province of XXXXXXXXXX . It files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office;

"Bco Assets" means the portion of the XXXXXXXXXX caused to be transferred to Bco in exchange for, directly or indirectly, XXXXXXXXXX ;

"Bco Common Shares" means the common shares in the share capital of Bco;

"Bco Note" means the subordinated, unsecured promissory note issued by Bco to Partnership #2 as consideration for the I #2 with an initial principal amount of $XXXXXXXXXX ;

"Bco Partnership Interest #2" means the partnership interest in Partnership #2 which was held by Bco and which was subsequently acquired by P #2 on the winding-up of Bco into P #2;

"CBCA" means Canada Business Corporations Act, R.S.C. 1985;

"CRA" means the Canada Revenue Agency;

XXXXXXXXXX

"capital property" has the meaning assigned by section 54;

"Cco" means XXXXXXXXXX formed pursuant to the laws of the Province of XXXXXXXXXX . It files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office;

"Cco Assets" means the portion of the XXXXXXXXXX caused to be transferred to Cco in exchange for, directly or indirectly, XXXXXXXXXX ;

"Cco Common Shares" means the common shares in the share capital of Cco;

"Cco Partnership Interest #2" means the partnership interest in Partnership #2 which was held by Cco and which was subsequently acquired by P #2 on the winding-up of Cco into P #2;

"Closing Date #1" means XXXXXXXXXX ;

"Closing Date #2" means XXXXXXXXXX ;

"Closing Time" means the time described in Paragraph 13;

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

XXXXXXXXXX

"Dco" means XXXXXXXXXX formed pursuant to the laws of the Province of XXXXXXXXXX ;

XXXXXXXXXX

"DSub" means XXXXXXXXXX ., a company formed pursuant to the laws of the Province of XXXXXXXXXX ;

"depreciable property" has the meaning assigned by subsection 13(21);

"Eco" means XXXXXXXXXX formed pursuant to the laws of the Province of XXXXXXXXXX ;

XXXXXXXXXX

"eligible property" has the meaning assigned by subsection 85(1.1);

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

"Fco" means XXXXXXXXXX ., a corporation existing under the laws of Canada;

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

"Fco Notes" means the unsecured, subordinated promissory notes issued by Fco XXXXXXXXXX , which, XXXXXXXXXX , are held by MFT, and includes any notes issued in exchange or substitution for such notes;

"FMV" means fair market value, being the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and without compulsion to act, expressed in term of cash;

XXXXXXXXXX

"Gco" means XXXXXXXXXX , a corporation existing pursuant to the laws of the Province of XXXXXXXXXX ;

"ineligible property" has the meaning assigned by paragraph 88(1)(c);

XXXXXXXXXX

"MFT" means XXXXXXXXXX trust existing under the laws of the Province of XXXXXXXXXX ;

XXXXXXXXXX

"I #1" means the XXXXXXXXXX created pursuant to the I #1 Agreement, pursuant to which Partnership #1 XXXXXXXXXX on certain incremental XXXXXXXXXX from the Target Assets #1, all as set forth in the I #1 Agreement;

"I #1 Agreement " means the agreement entered into between Partnership #1 and N effective on Closing Date #1, creating I #1;

"I #2" means the XXXXXXXXXX created under the I #2 Agreement, pursuant to which Partnership #2 granted Bco a XXXXXXXXXX on certain incremental XXXXXXXXXX from the Partnership #2 Assets, all as set forth in the I #2 Agreement;

"I #2 Agreement" means the agreement entered into between Partnership #2 and Bco effective on Closing Date #2, creating I #2;

XXXXXXXXXX

"NSUB" means XXXXXXXXXX , a corporation formed pursuant to the laws of the Province of XXXXXXXXXX ;

"NSUB Shares" means the common shares of NSUB issued to N in exchange for XXXXXXXXXX ;

"N" means XXXXXXXXXX , a corporation formed pursuant to the laws of the Province of XXXXXXXXXX . It files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office;

"N Common Shares" means the common shares in the share capital of N;

"N Note" means the subordinated, unsecured promissory note issued by N to Partnership #1 as consideration for the I #1 with an initial principal amount of $XXXXXXXXXX ;

"N Partnership Interest #1" means the partnership interest in Partnership #1 that N acquired from Partnership #1 when it transferred the Target Assets #1 to Partnership #1;

"N Preferred Shares" means the XXXXXXXXXX shares in the share capital of N;

XXXXXXXXXX

"Non-Resident" means (i) a non-resident of Canada within the meaning of the Act and (ii) a partnership, other than a Canadian partnership (as defined in the Act), and "Non-Residents" refers to more than one Non-Resident;

"Paragraph" refers to a numbered paragraph in this advance income tax ruling;

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

"P #1" means XXXXXXXXXX ., a corporation existing pursuant to the laws of the Province of XXXXXXXXXX . It files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office;

"P #1 Note" means a subordinated, unsecured promissory note issued by P #1 to Aco, and "P #1 Notes" refers to more than one P #1 Note;

"P #2" means XXXXXXXXXX ., a corporation existing pursuant to the laws of the Province of XXXXXXXXXX . It files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office;

"P #2 Note" means a subordinated, unsecured promissory note issued by P #2 to Aco, and "P #2 Notes" refers to more than one P #2 Note;

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

"Partnership Act" means the Partnership Act (XXXXXXXXXX );

"Partnership #1" means the XXXXXXXXXX , a XXXXXXXXXX partnership existing pursuant to the laws of the Province of XXXXXXXXXX ;

"Partnership #2" means the XXXXXXXXXX , a XXXXXXXXXX partnership existing pursuant to the laws of the Province of XXXXXXXXXX ;

"Partnership #2 Agreement" means the partnership agreement governing Partnership #2;

"Partnership #2 Assets" means the XXXXXXXXXX contributed to Partnership #2, respectively;

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

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

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

"Proposed Transactions" means the proposed transactions described in Paragraphs 32 and 33;

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

"Put-Call Agreement #1" means the agreement dated XXXXXXXXXX pursuant to which SubTrust has the right to acquire, and P #1 has the right to dispose of, XXXXXXXXXX ;

"Put-Call Agreement #2" means the agreement dated XXXXXXXXXX pursuant to which SubTrust has the right to acquire, and P #2 has the right to dispose of, XXXXXXXXXX ;

"Regulations" means the Income Tax Regulations promulgated under the Act;

"related persons" has the meaning assigned by subsection 251(2);

"Resident" means a person or partnership that is not a Non-Resident and "Residents" refers to more than one Resident;

"XXXXXXXXXX Indenture" means the XXXXXXXXXX Indenture dated XXXXXXXXXX ;

"XXXXXXXXXX Interest" means XXXXXXXXXX ;

XXXXXXXXXX

"SPA #1" means the Share Purchase Agreement dated XXXXXXXXXX between Vendor #1, P #1 and Aco providing for, among other things, the acquisition, by P #1, of the N Common Shares from Vendor #1 XXXXXXXXXX ;

"SPA #2" means the Share Purchase Agreement dated XXXXXXXXXX between Vendor #2, P #2 and Aco providing for, among other things, the acquisition of the Target Shares by P #2;

"specified shareholder" has the meaning assigned by subparagraph 88(1)(c.2)(iii) and subsection 248(1);

XXXXXXXXXX

XXXXXXXXXX

"stated capital" in respect of the share capital of a corporation has the meaning assigned by the statute by which the corporation is governed;

"Subco #1" means XXXXXXXXXX ., a subsidiary wholly-owned corporation of Aco, incorporated pursuant to the laws of the Province of XXXXXXXXXX ;

"Subco #1 Class A Preferred Shares" means the Subco #1 Class A preferred shares;

"Subco #1 Class A Preferred Share Redemption Amount" means, per Subco #1 Class A Preferred Share, the amount obtained when the FMV of the I #1 is divided by XXXXXXXXXX ;

"Subco #1 Redemption Note" means the unsecured, subordinated promissory note issued by Subco #1 on the redemption of the XXXXXXXXXX Subco #1 Class A Preferred Shares which had a principal amount equal to the FMV of the XXXXXXXXXX Subco #1 Class A Preferred Shares redeemed by Subco #1;

"Subco #2" means XXXXXXXXXX ., a subsidiary wholly-owned corporation of Aco, incorporated pursuant to the laws of the Province of XXXXXXXXXX ;

"Subco #2 Class A Preferred Shares " means the Subco #2 Class A preferred shares;

"Subco #2 Class A Preferred Share Redemption Amount" means, per Subco #2 Class A Preferred Share, the amount obtained when the FMV of the I #2 is divided by XXXXXXXXXX ;

"Subco #2 Redemption Note " means the unsecured, subordinated promissory note issued by Subco #2 on the redemption of the XXXXXXXXXX Subco #2 Class A Preferred Shares which had a principal amount equal to the FMV of the XXXXXXXXXX Subco #2 Class A Preferred Shares redeemed by Subco #2;

"Subject Transactions" means the Target Assets #1 Transactions, the Bco Asset Transactions and the Cco Asset Transactions, all of which are described in Paragraphs 11 to 31;

"SubTrust" means XXXXXXXXXX , a commercial trust existing pursuant to the laws of the Province of XXXXXXXXXX , the sole beneficiary of which is MFT, XXXXXXXXXX ;

"Target Assets #1" means all of the XXXXXXXXXX assets held by N XXXXXXXXXX ;

"Target Assets #2" means the Vendor #2's XXXXXXXXXX assets that XXXXXXXXXX ;

"Target Corporations" means, collectively, XXXXXXXXXX ;

"Target Shares" means all the issued and outstanding shares of XXXXXXXXXX ;

"taxable Canadian corporation" has the meaning assigned in subsection 89(1);

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

XXXXXXXXXX

"Trust Indenture" means the XXXXXXXXXX Trust Indenture dated XXXXXXXXXX XXXXXXXXXX between Aco and the Trustee, as amended;

"Trustee" means the trustee of MFT, XXXXXXXXXX ;

"Unit" means a trust unit in MFT and "Units" refers to more than one Unit;

"Unitholders" means holders of at least one Unit;

XXXXXXXXXX

"US" means the United States of America;

XXXXXXXXXX

"Vendor #1" means XXXXXXXXXX , a general partnership existing pursuant to the laws of the Province of XXXXXXXXXX ; and

"Vendor #2" means XXXXXXXXXX .

Our understanding of the relevant facts, Subject Transactions, Proposed Transactions and purposes of the Subject Transactions and the Proposed Transactions is as follows:

FACTS

1. MFT is an inter vivos trust that was created pursuant to the laws of the Province of XXXXXXXXXX on XXXXXXXXXX . It is intended that MFT will at all times qualify as a unit trust and a mutual fund trust within the meaning of sections 108 and 132, respectively.

The purpose of MFT is to purchase and hold XXXXXXXXXX , its XXXXXXXXXX subsidiary, and other investments, including the Aco Notes, the Fco Notes XXXXXXXXXX , and to issue Units to members of the public. In addition, MFT holds other permitted investments, XXXXXXXXXX .

XXXXXXXXXX . The Units are listed and posted for trading on XXXXXXXXXX . The market capitalization of MFT is approximately $XXXXXXXXXX .

The MFT Unitholder base is approximately as follows:

• Non-Residents (XXXXXXXXXX ) XXXXXXXXXX %
• Tax-deferred (e.g., RRSPs) XXXXXXXXXX %
• Taxable Canadians XXXXXXXXXX %
• Institutional XXXXXXXXXX %

100%

2. MFT is governed by the Trust Indenture, which provides for, among other things, the establishment of MFT, the issue of Units, the permitted investments of MFT, the procedures respecting distributions to Unitholders, the appointment and removal of XXXXXXXXXX as Trustee, the Trustee's obligations, duties, rights and restrictions, the calling of meetings of Unitholders, the conduct of business at such meetings, notice provisions, the form of Unit certificates and the termination of MFT.

The beneficiaries of MFT are the Unitholders. A maximum of XXXXXXXXXX Units may be created and issued pursuant to the Trust Indenture, of which approximately XXXXXXXXXX Units were issued and outstanding on XXXXXXXXXX . Each Unit represents a fractional undivided beneficial interest in MFT. Unitholders receive monthly distributions in respect of the XXXXXXXXXX , interest and other income received by MFT pursuant to the XXXXXXXXXX and other investments held by MFT. Each month, in accordance with the Trust Indenture, MFT distributes all of its Distributable Cash (as defined in the Trust Indenture) to its Unitholders.

3. Aco was created under the BCA and is a taxable Canadian corporation and a private corporation. XXXXXXXXXX .

4. XXXXXXXXXX

5. XXXXXXXXXX

6. XXXXXXXXXX

7. In general terms, the business strategy of MFT and Aco is for Aco to directly or indirectly, acquire, own and operate XXXXXXXXXX properties in Canada on terms and in a manner that adds value to the Units by

(a) increasing the amount of the XXXXXXXXXX paid to MFT after taking into account XXXXXXXXXX , including any dilutive impact as a result of the issuance of additional Units; and

(b) increasing the amount of the distributions on the Units by increasing the investment in the Aco Notes, and thus, the amount of the interest income that MFT receives in relation to the Aco Notes.

8. XXXXXXXXXX

9. Aco also indirectly holds various XXXXXXXXXX properties through partnerships, XXXXXXXXXX

10. The income from the XXXXXXXXXX properties in Partnerships XXXXXXXXXX are effectively flowed through the partnerships to MFT by way of internal interest expense on subordinated loans within the MFT structure.

SUBJECT TRANSACTIONS

The Target Assets #1 Transactions

11. P #1 was created under the BCA and is a taxable Canadian corporation and a private corporation. Aco owns all of the issued and outstanding shares of P #1.

P #1 was formed for the purpose of acquiring the N Common Shares from Vendor #1 XXXXXXXXXX , all pursuant to the SPA #1.

To finance the acquisition, by P #1, of N, the following financing transactions were undertaken:

(a) the deposit required on the signing of the SPA #1 of $XXXXXXXXXX was loaned by Aco to P #1 and was evidenced by a P #1 Note;

(b) XXXXXXXXXX ; and

(c) Aco loaned approximately $XXXXXXXXXX (representing a portion of the proceeds of the XXXXXXXXXX ), plus an additional amount of approximately $XXXXXXXXXX to P #1, in exchange for a P #1 Note.

12. On XXXXXXXXXX , pursuant to the XXXXXXXXXX , Vendor #1 transferred the Target Assets #1 to N on a tax-deferred basis pursuant to subsection 85(2) in consideration for

(a) N Common Shares (having an aggregate ACB and PUC of XXXXXXXXXX and an aggregate FMV of $XXXXXXXXXX ); and

(b) XXXXXXXXXX .

XXXXXXXXXX

N held the Target Assets #1 in the course of carrying on an active business in Canada before it transferred the Target Assets #1 XXXXXXXXXX as described in (e) below.

Prior to Closing Date #1, Vendor #1 caused the following transactions to occur:

(a) XXXXXXXXXX ;

(b) XXXXXXXXXX ;

(c) NSUB and N formed Partnership #1;

(d) XXXXXXXXXX ; and

(e) N contributed the Target Assets #1 to Partnership #1 on a tax-deferred basis pursuant to subsection 97(2) in exchange for the N Partnership Interest #1, XXXXXXXXXX .

13. The transactions contemplated in the SPA #1 closed at XXXXXXXXXX MST ("Closing Time") on Closing Date #1 and P #1 acquired the N Common Shares from Vendor #1 XXXXXXXXXX .

The ACB and FMV of the partners' interest in Partnership #1 were approximately as follows on XXXXXXXXXX :

PARTNER FMV ACB

N $XXXXXXXXXX $XXXXXXXXXX

NSUB
$XXXXXXXXXX
$XXXXXXXXXX

14. The SPA #1 was structured so that the acquisition XXXXXXXXXX by P #1, of the N Common Shares described in Paragraph 13 took place concurrently as follows:

(a) XXXXXXXXXX ;

(b) P #1 acquired the N Common Shares held by Vendor #1 for approximately $XXXXXXXXXX ; and

(c) XXXXXXXXXX .

All the documents related to XXXXXXXXXX , were put into escrow, reviewed, released by mutual consent by all parties and thus became effective, at the Closing Time on Closing Date #1. Consequently, P #1 acquired control of N at that time and Vendor #1 did not own any N shares at any time after P #1's acquisition of control of N.

N elected not to have subsection 256(9) apply when filing its federal income tax return for its taxation year ending immediately before P #1's acquisition of control of N.

The N Partnership Interest #1 was capital property, but not depreciable property, of N at the time P #1 last acquired control of N.

15. The following transactions occurred on Closing Date #1 in the following order:

(a) P #1 and SubTrust entered into the Put-Call Agreement #1. Immediately thereafter, Partnership #1 granted N the I #1 in exchange for N issuing to Partnership #1 the N Note.

You have represented that the I #1 qualified as a XXXXXXXXXX

The purpose of granting the I #1 to N was to freeze the FMV of the N Partnership Interest #1 at its Closing Date #1 value so that, after it was "bumped" under paragraphs 88(1)(c) and (d), the N Partnership Interest #1 could be transferred within the MFT's related group without triggering any gains on the transfer.

(b) In accordance with the applicable partnership agreement, Partnership #1 caused the N Note to be distributed to N in consideration for a reduction in N's capital in Partnership #1 and the N Note was cancelled by operation of law.

(c) N transferred the I #1 to Subco #1 in exchange for the issuance by Subco #1 of XXXXXXXXXX Subco #1 Class A Preferred Shares. The redemption amount per Subco #1 Class A Preferred Share was set at the Subco #1 Class A Preferred Share Redemption Amount. N and Subco #1 evidenced the transfer by executing a purchase and sale agreement with a price adjustment clause.

N and Subco #1 will elect to have section 85 apply to the transfer of the I #1 and will duly prepare and file a prescribed form T2057 within the time limits set out in subsection 85(6). The agreed amount for the I #1, will be within the limits set forth in subsection 85(1) and will be $XXXXXXXXXX . The cost of the I #1 to Subco #1 will be determined in accordance with subsection 85(1) and will be $XXXXXXXXXX .

The amount added to the stated capital in respect of the Subco #1 Class A Preferred Shares issued by Subco #1 as consideration for the I #1 will not exceed the amount determined in accordance with "B" of paragraph 85(2.1)(a).

The reason why N transferred the I #1 to Subco #1 was to allow Subco #1 to distribute the I #1 to Aco when it was wound up into Aco as described in (f) below. Aco could not acquire the I #1 directly from N because it could not XXXXXXXXXX in exchange for the I #1. This is because it was not feasible at that time for Aco to obtain XXXXXXXXXX .

(d) In accordance with the terms and conditions of the Subco #1 Class A Preferred Shares, Subco #1 redeemed the XXXXXXXXXX Subco #1 Class A Preferred Shares in consideration for the issuance by Subco #1 to N of Subco #1 Redemption Note having a principal amount of $XXXXXXXXXX .

Subsection 84(3) would apply to deem Subco #1 to have paid, and N to have received, a dividend ("Dividend #1") equal to the amount, by which the amount paid by Subco #1 on the redemption of the XXXXXXXXXX Subco #1 Class A Preferred Shares exceeded their PUC.

(e) N distributed the Subco #1 Redemption Note on the N Common Shares that P #1 owned as a dividend ("Dividend #2") in specie. P #1, in turn, distributed the Subco #1 Redemption Note on the P #1 shares that Aco owned as a dividend ("Dividend #3") in specie.

(f) Aco then wound up Subco #1 on a tax-deferred basis in accordance with subsection 88(1), pursuant to which, among other things,

(i) all of the shares of Subco #1 were cancelled;

(ii) Aco acquired all of Subco #1's assets including the I #1; and

(iii) Aco assumed all of Subco #1's liabilities.

On the wind-up of Subco #1 into Aco, the Subco #1 Redemption Note was cancelled by operation of law. Aco will duly file a prescribed form T2027 ("Election to deem amount of settlement of a debt or obligation") in respect of the winding-up of Subco #1 within the time provided for in the Act.

16. On XXXXXXXXXX , Aco acquired NSUB's partnership interest in Partnership #1 for a cash payment of $XXXXXXXXXX , which was equivalent to its FMV.

17. On XXXXXXXXXX , N wound up NSUB on a tax-deferred basis in accordance with subsection 88(1). Thereafter, P #1 wound up N on a tax-deferred basis in accordance with subsection 88(1) pursuant to which, among other things,

(a) the N Common Shares were cancelled;

(b) P #1 acquired all of N's assets (including the N Partnership Interest #1); and

(c) P #1 assumed all of N's liabilities.

17.1 You have represented that any addition and deduction in P #1's XXXXXXXXXX resulting from any of the transactions with respect to I #1 described above, will occur in the same taxation year of P #1. Thus, P #1 will not have any net increase in its XXXXXXXXXX with respect to I #1.

18. Vendor #1 (or any person not dealing at arm's length with Vendor #1) does not currently own any Units and did not acquire any Units as part of a series of transactions or events that includes the winding-up of N into P #1.

19. The N Partnership Interest #1 that became property of P #1 on the winding-up of N or any property acquired by any person in substitution therefor was not, and will not be, acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of a series of transactions or events that includes the winding-up of N into P #1.

20. MFT considers the Target Assets #1 to be core assets. MFT has been trying to acquire such assets for a number of years and therefore, it presently has no intention to dispose of any of the Target Assets #1. Moreover,

(a) Partnership #1 will not dispose of any of the Target Assets #1;

(b) P #1 will not dispose of the N Partnership Interest #1 (other than its transfer of the N Partnership Interest #1 to SubTrust as described in Paragraph 34); and

(c) MFT will not dispose of any of its interests in SubTrust,

at any time prior to the earlier of the two dates described in paragraphs 122.1(2)(a) and (b).

The Bco Asset Transactions and the Cco Asset Transactions

21. P #2 was created under the BCA and is a taxable Canadian corporation and a private corporation. Aco owns all of the issued and outstanding shares of P #2.

P #2 was created for the sole purpose of acquiring the Target Shares from Vendor #2 pursuant to the SPA #2. To finance the acquisition by P #2 of the Target Shares from Vendor #2, the following transactions were undertaken:

XXXXXXXXXX

22. XXXXXXXXXX

23. Prior to Closing Date #2, Vendor #2 (or Residents who were related persons with respect to Vendor #2) owned the Target Assets #2. XXXXXXXXXX .

Bco held the Bco Assets in the course of carrying on an active business in Canada before it transferred the Bco Assets to Partnership #2 as described below.

Cco held the Cco Assets in the course of carrying on an active business in Canada before it transferred the Cco Assets to Partnership #2 as described below.

On or about XXXXXXXXXX , in accordance with the SPA #2,Vendor #2 caused the following transactions to occur:

(a) Bco and Cco formed Partnership #2 with XXXXXXXXXX ; and

(b) Bco contributed the Bco Assets, and Cco contributed the Cco Assets (hereinafter collectively referred to as the "Partnership #2 Assets"), to Partnership #2 on a tax-deferred basis pursuant to subsection 97(2) in exchange for the Bco Partnership Interest #2 and the Cco Partnership Interest #2, respectively. For greater certainty, Bco and Cco did not jointly own their respective assets contributed to Partnership #2.

24. The SPA #2 closed on Closing Date #2 and P #2 acquired all of the issued and outstanding Target Shares from Vendor #2. The ACB and FMV of the Bco Partnership Interest #2 and the Cco Partnership Interest #2 were approximately as follows on XXXXXXXXXX :

PARTNER		FMV
							ACB
Bco
			$XXXXXXXXXX 		$XXXXXXXXXX 

Cco
			$XXXXXXXXXX
$XXXXXXXXXX 

Bco elected not to have subsection 256(9) apply when filing its federal income tax return for its taxation year ending immediately before P #2's acquisition of control of Bco. Consequently, Vendor #2 did not own any Bco shares at any time after P #2's acquisition of control of Bco.

Cco elected not to have subsection 256(9) apply when filing its federal income tax return for its taxation year ending immediately before P #2's acquisition of control of Cco. Consequently, Vendor #2 did not own any Cco shares at any time after P #2's acquisition of control of Cco.

The Bco Partnership Interest #2 was capital property, but not depreciable property, of Bco at the time P #2 last acquired control of Bco.

The Cco Partnership Interest #2 was capital property, but not depreciable property, of Cco at the time P #2 last acquired control of Cco.

25. The following transactions were effective on Closing Date #2 in the following order:

(a) P #2 and SubTrust entered into the Put-Call Agreement #2. Immediately thereafter, Partnership #2 granted Bco the I #2 in exchange for Bco issuing to Partnership #2 the Bco Note.

You have represented that the I #2 qualified as a XXXXXXXXXX

The purpose of granting the I #2 to Bco was to freeze the FMV of each of the Bco Partnership Interest #2 and the Cco Partnership Interest #2 at its Closing Date #2 value so that, after they were "bumped" under paragraphs 88(1)(c) and (d), the Bco Partnership Interest #2 and the Cco Partnership Interest #2 could be transferred within MFT's related group without triggering any gains on the transfer.

(b) In accordance with the applicable partnership agreement, Partnership #2 caused the Bco Note to be distributed to Bco in consideration for a reduction in Bco's capital in Partnership #2 and the Bco Note was cancelled by operation of law.

(c) Bco transferred the I #2 to Subco #2 in exchange for the issuance by Subco #2 of XXXXXXXXXX Subco #2 Class A Preferred Shares. The redemption amount per Subco #2 Class A Preferred Share was set at the Subco #2 Class A Preferred Share Redemption Amount. Bco and Subco #2 evidenced the transfer by executing a purchase and sale agreement with a price adjustment clause.

Bco and Subco #2 will elect to have section 85 apply to the transfer of the I #2 and will duly prepare and file a prescribed form T2057 within the time limits set out in subsection 85(6). The agreed amount for such property will be within the limits set forth in subsection 85(1) and will be $XXXXXXXXXX . The cost of the I #2 to Subco #2 will be determined in accordance with subsection 85(1) and will be $XXXXXXXXXX .

The amount added to the stated capital in respect of the Subco #2 Class A Preferred Shares issued by Subco #2 as consideration for the I #2 will not exceed the amount determined in accordance with "B" of paragraph 85(2.1)(a).

The reason why Bco transferred the I #2 to Subco #2 was to allow Subco #2 to distribute the I #2 to Aco (when Subco #2 is wound up into Aco in the future). Aco could not acquire the I #2 directly from Bco because it could not issue its shares to Bco in exchange for the I #2. This is because it was not feasible at that time for Aco to obtain shareholders' approval for issuing its shares to Bco, which approval was a requirement under the USA.

(d) In accordance with the terms and conditions of the Subco #2 Class A Preferred Shares, Subco #2 redeemed the XXXXXXXXXX Subco #2 Class A Preferred Shares in consideration for the issuance by Subco #2 to Bco of the Subco #2 Redemption Note having a principal amount of $XXXXXXXXXX .

Subsection 84(3) would apply to deem Subco #2 to have paid, and Bco to have received, a dividend ("Dividend #4") equal to the amount, by which the amount paid by Subco #2 on the redemption of the XXXXXXXXXX Subco #2 Class A Preferred Shares exceeded their PUC.

(e) Bco distributed the Subco #2 Redemption Note on the Bco Common Shares that P #2 owned as a dividend ("Dividend #5") in specie. P #2, in turn, distributed the Subco #2 Redemption Note on the P #2 shares that Aco owned as a dividend ("Dividend #6") in specie.

26. XXXXXXXXXX

27. On XXXXXXXXXX , Aco subscribed for a partnership interest in Partnership #2 for a cash payment of $XXXXXXXXXX and became a partner in Partnership #2.

27.1 On XXXXXXXXXX , P #2 wound up Bco and Cco on a tax-deferred basis in accordance with subsection 88(1) pursuant to which, among other things,

(a) the shares held by P #2 in Bco and Cco were cancelled;

(b) P #2 acquired the Bco Partnership Interest #2 on the winding-up of Bco and the Cco Partnership Interest #2 on the winding-up of Cco; and

(c) P #2 assumed all of Bco and Cco's liabilities.

27.2 You have represented that any addition and deduction in P #2's XXXXXXXXXX resulting from any of the transactions with respect to I #2 described above, will occur in the same taxation year of P #2. Thus, P #2 will not have any net increase in its XXXXXXXXXX with respect to I #2.

28. Vendor #2 (or any person not dealing at arm's length with Vendor #2) does not currently own any Units and did not acquire any Units as part of a series of transactions or events that includes the winding-up of Bco and Cco into P #2, as the case may be.

29. The Bco Partnership Interest #2 that became property of P #2 on the winding-up of Bco or any property acquired by any person in substitution therefor was not, and will not be, acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of a series of transactions or events that includes the winding-up of Bco into P #2.

30. The Cco Partnership Interest #2 that became property of P #2 on the winding-up of Cco or any property acquired by any person in substitution therefor was not, and will not be, acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of a series of transactions or events that includes the winding-up of Cco into P #2.

31. MFT considers the Bco Assets and the Cco Assets to be core assets. MFT has been trying to acquire such assets for a number of years and therefore, it presently has no intention to dispose of any of the Bco Assets or the Cco Assets. Moreover,

(a) Partnership #2 will not dispose of any of the Bco Assets or the Cco Assets;

(b) P #2 will not dispose of the Bco Partnership Interest #2 or the Cco Partnership Interest #2 (other than its transfer of the Bco Partnership Interest #2 or the Cco Partnership Interest #2 to SubTrust as described in Paragraph 36); and

(c) MFT will not dispose of any of its interests in SubTrust,

at any time prior to the earlier of the two dates described in paragraphs 122.1(2)(a) and (b).

PROPOSED TRANSACTIONS

N Partnership Interest #1

32. P #1 ended its first taxation year (the taxation year in which N was so wound up) on XXXXXXXXXX . In filing the federal income tax return for its XXXXXXXXXX taxation year (filing due date on XXXXXXXXXX ), P #1 will file a designation ("Designation #1") in accordance with, and within the limits of, paragraphs 88(1)(c) and (d) in respect of the cost of the N Partnership Interest #1 that N distributed to P #1 on the winding-up of N.

Bco Partnership Interest #2 and Cco Partnership Interest #2

33. P #2 ended its first taxation year on XXXXXXXXXX . In filing the federal income tax return for its taxation year ending on XXXXXXXXXX (the taxation year in which Bco and Cco were so wound up) (filing due date on XXXXXXXXXX ),

(a) with respect to the winding-up of Bco, P #2 will file a designation ("Designation #2") in accordance with, and within the limits of, paragraphs 88(1)(c) and (d) in respect of the cost of the Bco Partnership Interest #2 that P #2 received from Bco on the winding-up of Bco; and

(b) with respect to the winding-up of Cco, P #2 will file a designation ("Designation #3") in accordance with, and within the limits of, paragraphs 88(1)(c) and (d) in respect of the cost of the Cco Partnership Interest #2 that P #2 received from Cco on the winding-up of Cco.

ADDITIONAL INFORMATION

N Partnership Interest #1

34. Subsequent to the filing of Designation #1 by P #1, if SubTrust exercises a call option under the Put-Call Agreement #1 to acquire the N Partnership Interest #1 from P #1, SubTrust would issue a note (the "SubTrust Note #1") to P #1 as consideration for that acquisition.

SubTrust will not cease to be a Canadian resident while it holds the N Partnership Interest #1 as described herein.

35. P #1 would transfer the SubTrust Note #1 to Aco as a repayment of all or a portion of the P #1 Notes owing to Aco. Aco would transfer the SubTrust Note #1 to MFT as a repayment of a portion of the Aco Notes owing to MFT.

Bco Partnership Interest #2 and Cco Partnership Interest #2

36. Subsequent to the filings of Designations #2 and #3 by P #2, if SubTrust exercises a call option under the Put-Call Agreement #2 to acquire the Bco Partnership Interest #2 or the Cco Partnership Interest #2 from P #2, SubTrust would issue a note (the "SubTrust Note #2") to P #2 as consideration for that acquisition.

SubTrust will not cease to be a Canadian resident while it holds the Bco Partnership Interest #2 or the Cco Partnership Interest #2 as described herein.

37. P #2 would transfer the SubTrust Note #2 to Aco as a repayment of all or a portion of the P #2 Notes owing to Aco. Aco would transfer the SubTrust Note #2 to MFT as a repayment of a portion of the Aco Notes owing to MFT.

PURPOSE OF THE PROPOSED TRANSACTIONS

38. The purpose of the Proposed Transactions is to allow for P #1 and P #2 to take advantage of the cost base bump provided for in paragraphs 88(1)(c) and (d).

RULINGS

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

A. The provisions of paragraphs 88(1)(c) and (d) will apply to the winding-up of N as described in Paragraph 17 such that, for purposes of the Act, the cost to P #1 of the N Partnership Interest #1 that N owned without interruption at and since the time P #1 last acquired control of N and that became property of P #1 on the winding-up of N, will be deemed to be the amount described in subparagraph 88(1)(c)(i) plus, subject to the provisions of subparagraphs 88(1)(d)(ii) and (iii), and, provided that

(a) no such property acquired by P #1 on the winding-up of N, or "any property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the "subsidiary" referred to in those subclauses is N and the "parent" is P #1) as part of the series of transactions or events that includes the winding-up of N, and

(b) that such property was capital property, but not depreciable property, of N at the time P #1 last acquired control of N,

such portion of the amount, if any, by which:

(c) the aggregate of the ACB to P #1 of its N Common Shares immediately before the winding-up

exceeds

(d) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1),

as is designated by P #1 under paragraph 88(1)(d) in respect of such property in its return of income under Part I for its taxation year in which N was so wound up.

For greater certainty, the amount of Dividend #2 would be included in the amount determined under subparagraph 88(1)(d)(i.1).

B. The provisions of paragraphs 88(1)(c) and (d) will apply to the winding-up of Bco as described in Paragraph 27.1 such that, for purposes of the Act, the cost to P#2 of the Bco Partnership Interest #2 that Bco owned without interruption at and since the time P #2 last acquired control of Bco and that became property of P #2 on the winding-up of Bco, will be deemed to be the amount described in subparagraph 88(1)(c)(i) plus, subject to the provisions of subparagraphs 88(1)(d)(ii) and (iii), and, provided that

(a) no such property acquired by P #2 on the winding-up of Bco, or "any property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Bco and the "parent" is P #2) as part of the series of transactions or events that includes the winding-up of Bco, and

(b) that such property was capital property, but not depreciable property, of Bco at the time P #2 last acquired control of Bco,

such portion of the amount, if any, by which:

(c) the aggregate of the ACB to P #2 of its Bco Common Shares immediately before the winding-up

exceeds

(d) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1),

as is designated by P #2 under paragraph 88(1)(d) in respect of such property in its return of income under Part I for its taxation year in which Bco was so wound up.

For greater certainty, the amount of Dividend #5 would be included in the amount determined under subparagraph 88(1)(d)(i.1).

C. The provisions of paragraphs 88(1)(c) and (d) will apply to the winding-up of Cco as described in Paragraph 27.1 such that, for purposes of the Act, the cost to P #2 of the Cco Partnership Interest #2 that Cco owned without interruption at and since the time P #2 last acquired control of Cco and that became property of P #2 on the winding-up of Cco, will be deemed to be the amount described in subparagraph 88(1)(c)(i) plus, subject to the provisions of subparagraphs 88(1)(d)(ii) and (iii), and, provided that

(a) no such property acquired by P #2 on the winding-up of Cco, or "any property acquired by any person in substitution therefor" (within the meaning of that phrase for the purposes of clause 88(1)(c)(vi)(B)) is acquired by any person described in any of subclauses 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Cco and the "parent" is P #2) as part of the series of transactions or events that includes the winding-up of Cco, and

(b) that such property was capital property, but not depreciable property, of Cco at the time P #2 last acquired control of Cco,

such portion of the amount, if any, by which:

(c) the aggregate of the ACB to P #2 of its Cco Common Shares immediately before the winding-up

exceeds

(d) the aggregate of the amounts determined under subparagraphs 88(1)(d)(i) and (i.1),

as is designated by P #2 under paragraph 88(1)(d) in respect of such property in its return of income under Part I for its taxation year in which Cco was so wound up.

D. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine any of the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by CRA on May 17, 2002 and are binding on the CRA provided that the Proposed Transaction described in Paragraph 32 is completed by XXXXXXXXXX and the Proposed Transaction described in Paragraph 33 is completed by XXXXXXXXXX .

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

COMMENTS

1. We make no comment as to whether

(a) the provisions of subsection 55(2) would apply to each of Dividends #1, 2, 3, 4, 5 and 6;

(b) XXXXXXXXXX ; and

(c) the I #1 or the I #2 qualified as a XXXXXXXXXX .

2. Unless otherwise confirmed, nothing in this ruling should be construed as implying that CRA has confirmed, reviewed or has made any determination in respect of:

(a) the PUC of any share or the ACB or FMV of any property or XXXXXXXXXX referred to herein; and

(b) any other tax consequence relating to the facts, Subject Transactions, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Subject Transactions and the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Branch