2016-0635081R3 Issuance of notes

Principal Issues: 1. Whether ordinary interest on the Notes will be deductible under subparagraph 20(1)(c)(i). 2. Whether the interest will be participating debt interest for the purposes of Part XIII tax.

Position: 1. The ordinary interest under the notes will be deductible under 20(1)(c). 2. No.

Reasons: 1. The borrower-lender relationship will continue to exist until such time as a XXXXXXXXXXE occurs or until such time as it is or it became apparent the XXXXXXXXXXE would occur. 2. The interest will not be based on the profit participation features described in the definition of participating debt interest.

Author: XXXXXXXXXX
Section: 20(1)(c), 143.4, 212(1)(b), 212(3)

XXXXXXXXXX                                                                                                                                        2016-063508

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
         XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer.  We also acknowledge the information provided in correspondence concerning your request.

The Rulings given are based solely on the Facts, Proposed Transactions, Additional Information and the Purpose of the Proposed Transactions described below.  Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions, Additional Information and the Purpose of the Proposed Transactions and any references thereto are provided solely for the convenience of the reader.

We understand that to the best of your knowledge and that of the above-noted taxpayer, none of the issues involved in this advance income tax ruling are:

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

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

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

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

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

Unless otherwise stated: (i) all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) as amended (the “Act”); and (ii) all references to monetary amounts are in XXXXXXXXXX dollars.

DEFINITIONS

(a) “ACo” means XXXXXXXXXX;

(b) “Administrative Action” means any judicial decision, administrative pronouncement, published or private ruling, regulatory procedure, rule, notice, announcement, assessment or reassessment (including any notice or announcement of intent to adopt or issue such decision, pronouncement, ruling, procedure, rule, notice, announcement, assessment or reassessment);

(c) “Business Day” means a day on which ACo and the Trustee are open for business in XXXXXXXXXX;

(d) “Closing Date” means the date of closing of the Offering;

(e) “Common Shares” means the common shares of XXXXXXXXXX;

(f) “Conversion Ratio” means one Preferred Share for each Note, together with the number of Preferred Shares (including fractional shares, if applicable) calculated by dividing the amount of accrued and unpaid interest, if any, on the Notes to, but excluding the date the XXXXXXXXXX Event occurs, by the Principal Amount;

(g) “Date of Issue” means XXXXXXXXXX;

(h) “Event of Default” means a default made by ACo for a period of XXXXXXXXXX days or more in relation to the payment of principal or in respect of any interest in respect of the Notes which is due and payable;

(i) “Ineligible Person” means (i) any person whose address is in, or whom ACo or the Trustee has reason to believe is a resident of, any jurisdiction outside of Canada or XXXXXXXXXX to the extent the issuance by ACo of Preferred Shares or delivery of such shares by its transfer agent to that person, pursuant to a XXXXXXXXXX Event Conversion, would require ACo to take any action to comply with securities or analogous laws of that jurisdiction; and (ii) any person to the extent the issuance by ACo of Preferred Shares, or delivery of such shares by its transfer agent to that person pursuant to an XXXXXXXXXX Event Conversion would, at the time of the XXXXXXXXXX Event, cause ACo to be in violation of any law to which ACo is subject;

(j) “Interest Payment Date” means XXXXXXXXXX for periods prior to and including XXXXXXXXXX, and for periods including and after XXXXXXXXXX during which any Notes are outstanding;

(k) “Interest Period” means, initially, the period from and including the Closing Date to but excluding XXXXXXXXXX and thereafter from and including each Interest Payment Date to, but excluding the next following Interest Payment Date;

(l) “Interest Reset Date” means XXXXXXXXXX;

(m) XXXXXXXXXX;

(n) “XXXXXXXXXX Event” means the occurrence of any one of the following: XXXXXXXXXX;

(o) “XXXXXXXXXX Event Conversion” means conversion of the Notes into Preferred Shares upon the occurrence of a XXXXXXXXXX Event as described in Paragraph 13 below;

(p) “Maturity” means XXXXXXXXXX;

(q) XXXXXXXXXX;

(r) “Note” or “Notes” means the subordinated indebtedness to be issued by ACo as described in Paragraphs 5 and 6 below;

(s) “Offering” means the offering of Notes described in Paragraph 5 below;

(t) “Par Redemption Price” in respect of a Note means the aggregate of (i) the Principal Amount of the Note and (ii) any accrued and unpaid interest on the Note up to, but excluding, the applicable redemption date;

(u) “Parity Securities” means indebtedness and any other security of ACo that ranks pari passu with the Notes on the liquidation of ACo;

(v) “Preferred Shares” have the meaning as described in Paragraph 13;

(w) “Principal Amount” has the meaning assigned by subsection 248(1) and, in respect of the Notes, means $XXXXXXXXXX per Note;

(x) “Rating Event” means XXXXXXXXXX (or any equivalent or successor designation by either of such rating agencies);

(y) “Rating Event Date” means the date upon which a Rating Event occurs;

(z) XXXXXXXXXX;

(aa) “Senior Obligations” means principal of, interest and premium, if any, on indebtedness of ACo ranking senior to the Notes and Parity Securities;

(bb) “Special Event Date” means a date that is a Rating Event Date or a Tax Event Date;

(cc) “Tax Event Date” means XXXXXXXXXX

XXXXXXXXXX

(dd) “Trust Indenture” means an indenture to be entered into between ACo and the Trustee, as supplemented from time to time; and

(ee) “Trustee” means a trust company of Canada acting as trustee under the Trust Indenture or such other person appointed from time to time as trustee under the Trust Indenture. The Trustee will deal at arm’s length with ACo.

The relevant facts, the proposed transactions and the purpose of the proposed transactions, are as follows:

FACTS

1. ACo is a corporation formed by articles of amalgamation and validly existing under the XXXXXXXXXX and is a “taxable Canadian corporation” and a “public corporation” as defined in subsection 89(1).

2. ACo’s registered address is XXXXXXXXXX Its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX. ACo has a XXXXXXXXXX year-end for tax purposes.

3. XXXXXXXXXX

4. ACo’s authorized capital consists of XXXXXXXXXX.

PROPOSED TRANSACTIONS

5. Subject, inter alia, to the receipt of a favourable advance income tax ruling, ACo proposes to effect a distribution of Notes using one or more of the following methods: XXXXXXXXXX.

6. The Notes will be issued pursuant to the Trust Indenture. The Notes will be issued in denominations of $XXXXXXXXXX and integral multiples thereof, each with an issue price equal to its Principal Amount.  ACo anticipates the initial offering of Notes to be for an aggregate Principal Amount of up to $XXXXXXXXXX.  It is expected that the Notes will be widely held and that ACo and the Trust will be dealing at arm’s length with the holders of the Notes. XXXXXXXXXX.

Accrual and Payment of Interest

7. The Notes will bear interest from the Closing Date at a rate which will reflect interest rates prevailing at that time. From the Closing Date to the Interest Reset Date, the Notes will bear interest at a fixed annual rate which will be payable XXXXXXXXXX. The interest rate on the Notes will be reset on the Interest Reset Date to an interest rate per annum equal to XXXXXXXXXX plus a spread, and will be payable XXXXXXXXXX thereafter. No interest on the Notes will accrue or be payable after the date of a XXXXXXXXXX Event.  For greater certainty, the interest rate will be determined by normal business and commercial practices between arm’s length parties and the terms of the Notes describing such rates will not include any terms under which all or any portion of which interest is contingent or dependent on the XXXXXXXXXX.

Redemption

8. Except as may be otherwise explicitly provided, the Notes will not be redeemable by ACo prior to the Interest Reset Date.

9. Subject to the immediately preceding paragraph, ACo may, at its option, and without the consent of any holder of the Notes, redeem the Notes in whole or in part by payment of an amount for each Note equal to the Par Redemption Price.

Special Event Redemption

10. Prior to the Interest Reset Date and within XXXXXXXXXX days after the occurrence of Special Event Date, ACo may, at its option and without the consent of any holder of the Notes, redeem all but not less than all of the Notes by payment of an amount for each Note equal to the Par Redemption Price.

Repurchase

11. ACo may, at any time, purchase Notes at any price or prices in the open market or by tender or by private contract, subject to applicable laws restricting such a purchase.  Any Notes so purchased by ACo will be surrendered to the Trustee for immediate cancellation.  In such circumstances, it is anticipated that the purchase price will be at par (or only slightly below par.)

XXXXXXXXXX Event

12. The Notes will not be convertible into any other property except as described below.

13. On the occurrence of a XXXXXXXXXX Event, the Notes will be automatically converted, without the consent of holders thereof, into fully-paid and freely-tradable preferred shares of ACo (“Preferred Shares”) based on the Conversion Ratio.  Preferred Shares issued on a XXXXXXXXXX Event will be a new series of fully-paid and non-assessable preferred shares of ACo, each having a stated capital and redemption value equal to XXXXXXXXXX.

14. In the event of a XXXXXXXXXX Event Conversion, the Notes shall be deemed to be immediately and automatically surrendered and cancelled without need for further action on the part of either ACo or the Note holder.  A XXXXXXXXXX Event Conversion shall be mandatory and binding upon both ACo and all Note holders notwithstanding anything else, including, without limitation: (a) the existence or prior occurrence of an Event of Default; (b) any prior action to or in furtherance of redeeming, exchanging or converting the Notes pursuant to the other terms and conditions of the Trust Indenture; and any delay in or impediment to the issuance or delivery of the Preferred Shares to the Note holders.

15. Upon a XXXXXXXXXX Event Conversion, ACo will reserve the right not to deliver some or all, as applicable, of the Preferred Shares issuable thereupon to any person whom ACo or the Trustee has reason to believe is an Ineligible Person.  In such circumstances, ACo will hold, as agent for such persons, the Preferred Shares that would have otherwise been delivered to such persons and will attempt to facilitate the sale of such Preferred Shares to parties other than ACo and its affiliates on behalf of such persons through a registered dealer to be retained by ACo on behalf of such persons.  Those sales (if any) may be made at any time and at any price. ACo will not be subject to any liability for failure to sell such Preferred Shares on behalf of such persons or at any particular price on any particular day.  The net proceeds received by ACo from the sale of any such Preferred Shares will be divided among the applicable persons in proportion to the number of Preferred Shares that would otherwise have been delivered to them upon the XXXXXXXXXX Event Conversion after deducting the costs of sale including applicable taxes, if any.

Events of Default

16. If an Event of Default occurs, then ACo shall without notice from the Trustee be deemed to be in default under the Trust Indenture and the Notes, and the Trustee at its discretion may, and if so requested by the holders of at least a majority in principal amount of the Notes then outstanding shall demand payment of the Principal Amount, together with any accrued and unpaid interest up to (but excluding) such date (including any accrued but unpaid Deferred Interest), which shall immediately thereby become due and payable in cash, and may institute legal proceedings for the collection of such aggregate amount where ACo fails to make payment thereof upon such demand.

17. There is no other right of acceleration in the case of any other breaches of covenants under the Trust Indenture.

Maturity

18. On Maturity, ACo will repay the aggregate Principal Amount of the Notes then outstanding, together with all accrued but unpaid interest, in cash.

Voting Rights

19. A holder of Notes will have no right to vote at any meeting of shareholders of ACo and will have no right to participate in the profits of ACo.

Further Issuances

20. ACo may, from time to time, without notice to or the consent of holders of the Notes, create and issue additional securities ranking equally with the Notes in all respects (or in all respects except for the payment of interest accruing prior to the issue date of such additional securities or the first payment of interest following the issue date of the additional securities).  Such additional securities may be consolidated and form a single series with the Notes and have the same terms as to status, redemption or otherwise as the Notes.

PURPOSE OF THE PROPOSED TRANSACTIONS

21. The purpose of the proposed transactions is to borrow money to be used for the purpose of earning income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy).

RULINGS

A     Provided ACo has a legal obligation to pay interest on the Notes and the proceeds from the issue of the Notes are used and continue to be used for the purpose of earning income from a business or property, and the proceeds are not used to acquire a life insurance policy or property the income from which would be exempt, ACo will be entitled, pursuant to subparagraph 20(1)(c)(i) of the Act, to deduct in computing its income in respect of a taxation year an amount in respect of the Notes up to the lesser of (i) the interest paid in the year by ACo on the Notes or payable by ACo on the Notes in respect of the year (depending on the method regularly followed by ACo in computing its income for the purposes of the Act) and (ii) a reasonable amount in respect thereof.

B     For the purposes of paragraph 212(1)(b) of the Act, amounts paid or credited by ACo on the Notes as, on account or in lieu of payment of, or in satisfaction of, interest will not be “participating debt interest” within the meaning of the definition in subsection 212(3) of the Act.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are commenced on or before XXXXXXXXXX.

COMMENTS

The deduction of interest on borrowed money as provided for under subparagraph 20(1)(c)(i) is subject to various limitations as provided under the Act.  Similarly, the application of Part XIII tax under subparagraph 212(1)(b)(i) is subject to the particular circumstances and relationships of the parties involved with respect to a series of transactions.  Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the Facts or Proposed Transactions described herein.  For greater certainty, nothing in this letter should be construed as implying that we are ruling on any tax consequences other than those tax consequences specifically described in the rulings above and, without limiting the generality of the foregoing, the CRA is not ruling on:

(a) whether any of the parties of the transactions described herein deal at arm’s length, or any tax consequences in circumstances in which ACo or the Trust are not dealing at arm’s length with the holder or beneficial owner of the Notes or any other intermediary;

(b) the nature of the legal relationship entered into or contemplated by the entities and parties named above;

(c) the residence in a country for any purpose of any person referred to herein;

(d) the tax consequences of Notes that are transferred or traded in secondary markets;

(e) the fair market value of any property or the reasonableness of any amount referred to herein, including the fair market value or paid-up capital of the Preferred Shares;

(f) the deductibility of deferred interest payments;

(g) circumstances in which Notes are held by Ineligible Persons where a XXXXXXXXXX Event has occurred or it is reasonable to conclude, having regard to all the circumstances, that a XXXXXXXXXX Event will occur;

(h) compound interest;

(i) any Further Issuances of Notes as described in Paragraph 20;

(j) the application of the thin capitalization rules as provided for in subsections 18(4), 18(5) and 18(6) and new subsections 212(3.1), 212(3.2) and 212(3.3) or other provision under the Act that stipulates for the limitation to the deduction of interest or the application of Part XIII tax; and

(k) the GST or HST implications of any of the proposed transactions.

An invoice for our fees in connection with this ruling will be forwarded to you under separate cover.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate

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