2018-0752811R3 Transfer of Debt as Qualifying Disposition

Principal Issues: Will the proposed transfer of debt by one trust to another trust be a qualifying disposition for purposes of section 107.4 of the Act? Will GAAR apply?

Position: 1) Yes. 2) No.

Reasons: 1) Meets all of the requirements in 107.4(1). 2) There is no misuse or abuse of the Act.

Author: XXXXXXXXXX
Section: 107.4, 245(2)

XXXXXXXXXX                                                                                                                                                          2018-075281

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
         XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers.  We also acknowledge the information provided by you in a telephone discussion on XXXXXXXXXX.

You have advised that, to the best of your knowledge and that of the taxpayers, none of the issues involved in the ruling request is:

(i)   in previously filed tax returns of the taxpayers or a related person;

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

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

(iv)  the subject of a current or completed court process involving any of the taxpayers or a related person; or

(v)   the subject of a ruling previously considered by the Directorate, other than Ruling XXXXXXXXXX issued to you on XXXXXXXXXX in respect of the same taxpayers.  We understand that the proposed transactions dealt with in that Ruling have not been carried out due to a change in the relevant circumstances, and that instead the proposed transactions set out below will be carried out.

This document is based solely on the facts and proposed transactions described below.  The documentation submitted with your request does not form part of the facts and proposed transactions except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

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

Definitions

The following terms and taxpayers referred to throughout this document will have the following meanings unless otherwise indicated:

(a)   XXXXXXXXXX;

(b)   “ACB” means adjusted cost base, as that term is defined in the Act;

(c)   “Amended US Holdco Notes” means the US Holdco Notes existing under the amended US Holdco Note Indenture following the amendment to the terms thereof as described in Step 20 of the proposed transactions;

(d)   "Certificate" means the certificate(s) or other confirmation(s) of filing to be issued by the Registrar pursuant to XXXXXXXXXX of the XXXXXXXXXX giving effect to the Plan of Arrangement;

(e)   “Class A LP Units” means units evidencing the interests of Class A limited partners in Portfolio LP, designated as Class A LP Units, and issued as such, pursuant to the terms of the Portfolio LP partnership agreement;

(f)   “Class B LP Units” means units evidencing the interest of Class B limited partners in Portfolio LP, designated as Class B Limited Participation LP Units, and issued as such, pursuant to the terms of the Portfolio LP partnership agreement;

(g)   “Code” means the Internal Revenue Code of 1986, as amended;

(h)   “Code Regulations” means the US Treasury regulations made under the Code;

(i)   “Conversion Amount” means the amount determined by dividing the Transferred Portion of the Existing Loans by 999 (rounded down to the nearest whole cent);

(j)   “Convertible Securities” means, collectively, the Exchangeable Units, Unit Options, and Incentive Units;

(k)   “CRA” means the Canada Revenue Agency;

(l)   “Declarations of Trust” means the REIT Declaration of Trust and the Finance Trust Declaration of Trust;

(m)   “Depositary” means XXXXXXXXXX, in its capacity as depositary for the Plan of Arrangement, or such other person chosen by the REIT and Finance Trust to act as depositary;

(n)   “Disposition” has the meaning set out in Step 16 of the proposed transactions;

(o)   “Dissenting Unitholder” means a Unitholder who validly exercises, and does not withdraw the exercise of, dissent rights with respect to the Plan of Arrangement in accordance with the Declarations of Trust, and who will, as of the Effective Date and following the offer described in Step 2 of the proposed transactions, no longer have any rights as a holder of Stapled Units other than the right to be paid fair value therefor in accordance with the Declarations of Trust;

(p)   “Effective Date” means the date shown on the Certificate issued by the Registrar under the XXXXXXXXXX giving effect to the Plan of Arrangement;

(q)   “Effective Time” means 8:30 a.m. (Toronto time) on the Effective Date or such other time on the Effective Date as the REIT, Finance Trust and GP Benco may agree;

(r)   “Event of Uncoupling” means an “Event of Uncoupling” as defined in the Declarations of Trust, being an event whereby the provisions of the Declarations of Trust providing that REIT Units may only be transferred together with an equivalent number of Finance Trust Units cease to apply;

(s)   “Exchange Right” has the meaning set out in Step 6 of the proposed transactions;

(t)   “Exchangeable Units” means certain outstanding exchangeable units (including the Class B LP Units) issued by subsidiary partnerships of the REIT entitling holders to cash distributions from the applicable partnership determined by reference to the cash distributions on a Stapled Unit and which are exchangeable in accordance with their terms for Stapled Units;

(u)   “Existing Loans” means loans that were advanced by the REIT to US Holdco from time to time, and are evidenced by a promissory note, denominated in US dollars and issued by US Holdco to the REIT dated XXXXXXXXXX, which had a principal amount of US$XXXXXXXXXX as of immediately before the refinancing on the Refinancing Date; and have a principal amount of US$XXXXXXXXXX immediately following the Refinancing Date;

(v)   “Finance Trust” means XXXXXXXXXX, an unincorporated open-ended limited purpose unit trust established under the laws of the Province of XXXXXXXXXX;

(w)   “Finance Trust Declaration of Trust” means the declaration of trust dated XXXXXXXXXX, as amended and restated as of XXXXXXXXXX, governed by the laws of the Province of XXXXXXXXXX, pursuant to which Finance Trust was created, as further amended, supplemented or amended and restated from time to time;

(x)   “Finance Trust Trustees” means the individuals who act as trustees of Finance Trust in accordance with and subject to the provisions of the Finance Trust Declaration of Trust;

(y)   “Finance Trust Unit” means a unit of Finance Trust, each such unit representing an equal undivided beneficial interest in Finance Trust;

(z)   “Finance Trust Unitholder” means a holder of a Finance Trust Unit;

(aa) “GAAR” means the general anti-avoidance rule provided for in section 245;

(bb) “GP Benco” means XXXXXXXXXX., a corporation incorporated under the XXXXXXXXXX;

(cc) “Holdings GP Trust” means XXXXXXXXXX, an inter vivos personal trust established under the laws of the Province of XXXXXXXXXX;

(dd) “Holdings LP” means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX;

(ee) “Incentive Units” means incentive units granted under the XXXXXXXXXX Incentive Unit Plan which are to be settled, upon vesting, in cash, Stapled Units, or any combination thereof;

(ff) “mutual fund trust” has the meaning assigned by subsection 132(6);

(gg) “Note 1” means the revolving grid promissory note issued by US Holdco in favour of the REIT on the Refinancing Date with a maximum principal amount of US$XXXXXXXXXX (with a possible additional US$XXXXXXXXXX in certain circumstances), a term of XXXXXXXXXX years and XXXXXXXXXX;

(hh) “Note 2A” means the term promissory note issued by US Holdco in favour of the REIT on the Refinancing Date having a principal amount of US$XXXXXXXXXX, a term of XXXXXXXXXX years and XXXXXXXXXX;

(ii) “Note 2B” means the term promissory note issued by US Holdco in favour of the REIT on the Refinancing Date having a principal amount of US$XXXXXXXXXX, a term of XXXXXXXXXX years and XXXXXXXXXX;

(jj) “Notice of Determination” means a written notice to be delivered by the REIT to US Holdco and Finance Trust at or prior to the Effective Time setting out particular amounts to be identified, determined or calculated by the REIT, which may include (i) the outstanding principal amount of the Existing Loans, (ii) the outstanding principal amount of the US Holdco Notes, (iii) the Repaid Portion of the Existing Loans, (iv) the Transferred Portion of the Existing Loans, (v) the Conversion Amount, (vi) the interest rate to be provided for in amendments to the US Holdco Note Indenture as contemplated in Step 20 of the proposed transactions, (vii) the principal amount of the Repayment Amended US Holdco Notes, (viii) the amount of the accrued and unpaid interest on the Existing Loans up to the Effective Date; (ix) the amount of the accrued and unpaid interest on the issued US Holdco Notes up to the Effective Date, (x) the amount, if any, of Finance Trust’s undistributed taxable income for its taxation year that will end as a result of the termination of Finance Trust under the Plan of Arrangement, and the amount, if any, of cash distributions to be paid in Step 11 of the proposed transactions; (xi) the amount, if any, of remaining cash of Finance Trust which will be used by Finance Trust to subscribe for additional US Holdco Notes in Step 12 of the proposed transactions;  and (xii) any other amount or information determined by the REIT to be included therein;

(kk) “XXXXXXXXXX GP Trust” means XXXXXXXXXX, an inter vivos personal trust established under the laws of the Province of XXXXXXXXXX;

(ll) “Plan of Arrangement” means the plan of arrangement under XXXXXXXXXX of the XXXXXXXXXX to effect certain of the proposed transactions described herein;

(mm) “Portfolio Benco” means XXXXXXXXXX., a corporation incorporated under the laws of the Province of XXXXXXXXXX;

(nn) “Portfolio GP Trust” means XXXXXXXXXX, an inter vivos personal trust, established under the laws of the Province of XXXXXXXXXX;

(oo) “Portfolio LP” means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX for the purpose of acquiring an interest in certain income-producing real properties on XXXXXXXXXX;

(pp) “Portfolio LP Trust” means XXXXXXXXXX, an open-ended unit trust established under the laws of the Province of XXXXXXXXXX;

(qq) “Refinancing Date” means XXXXXXXXXX;

(rr) “REIT” means XXXXXXXXXX, an open-ended unit trust which qualifies as a mutual fund trust, established under the laws of the Province of XXXXXXXXXX;

(ss) “REIT Declaration of Trust” means the declaration of trust dated XXXXXXXXXX, governed by the laws of the Province of XXXXXXXXXX, pursuant to which the REIT was created, as further amended, supplemented or amended and restated from time to time;

(tt) “REIT Trustees” means the individuals who act as trustees of the REIT in accordance with and subject to the provisions of the REIT Declaration of Trust;

(uu) “REIT Units” means units of participating interest in the REIT, each such unit representing an equal undivided beneficial interest in the REIT, but for the avoidance of doubt, does not include a Special Voting Unit;

(vv) “REIT Unitholder” means a holder of a REIT Unit;

(ww) “Repaid Portion” of the outstanding principal amount of the Existing Loans means that portion of the outstanding principal amount of the Existing Loans at the Effective Time as is specified as such by the REIT in the Notice of Determination, which will be less than the aggregate outstanding principal amount of the Existing Loans at such time, and which shall constitute the portion of the Existing Loans that is to be repaid by US Holdco by issuing and delivering the Repayment Amended U.S. Holdco Notes;

(xx) “Repayment Amended US Holdco Notes” means the additional Amended US Holdco Notes issued by US Holdco to the REIT in payment of the Repaid Portion of the Existing Loans and having an aggregate principal amount equal to the Repaid Portion of the Existing Loans;

(yy) “Special Voting Units” means non-participating special voting units of the REIT, which do not entitle the holder to any distribution from, or property of, the REIT and which were created in accordance with the provisions of the REIT Declaration of Trust and includes a fraction of a Special Voting Unit;

(zz) “Stapled Unit” means one REIT Unit and one Finance Trust Unit which trade together on the XXXXXXXXXX under the symbol XXXXXXXXXX;

(aaa)      “Support Agreement” means an agreement between the REIT and Finance Trust made as of XXXXXXXXXX, as amended and restated as of XXXXXXXXXX, among other things, to enable the REIT and Finance Trust to take all such actions and do all such things as are necessary or desirable to ensure that at all times each holder of a particular number of REIT Units holds an equal number of Finance Trust Units;

(bbb)      “Transferred Portion” of the principal amount of the Existing Loans means the aggregate outstanding principal amount of the Existing Loans at the Effective Time, less the Repaid Portion;

(ccc)      “Treaty” means the Canada-United States Income Tax Convention;

(ddd)      “XXXXXXXXXX” means the XXXXXXXXXX Stock Exchange;

(eee)      “Unitholder” means a holder of a Stapled Unit or, from and after Step 19 of the proposed transactions, a REIT Unitholder;

(fff)      “Unit Options” means certain outstanding options issued by the REIT under a unit option plan which are exercisable for Stapled Units;

(ggg)      “US” means the United States of America;

(hhh)      “US Holdco” means XXXXXXXXXX, a corporation incorporated under the laws of the State of XXXXXXXXXX;

(iii)      “US Holdco Note Indenture” means a note indenture dated as of XXXXXXXXXX and supplemented by the first supplemental indenture made as of XXXXXXXXXX, between US Holdco, as issuer, and XXXXXXXXXX, as trustee, which provides for the issuance of unsecured subordinated notes, in one or more series, in registered form, denominated in US dollars, as amended, supplemented or amended and restated from time to time;

(jjj)      “US Holdco Notes” means interest-bearing unsecured subordinated notes, denominated in US dollars and issued by US Holdco pursuant to the US Holdco Note Indenture; and

(kkk)      “US Portfolio LP” means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX.

Facts 

A.    Background

1.    The REIT is XXXXXXXXXX with consolidated total assets of approximately $XXXXXXXXXX.  The REIT has ownership interests in XXXXXXXXXX.

2.    The REIT is organized as an open-ended unit trust which qualifies as a “mutual fund trust” for purposes of the Act.  The REIT is operated so as to qualify as a “real estate investment trust” and is therefore not a “SIFT trust” under the Act.

3.    The interests of beneficiaries of the REIT are represented by REIT Units.  Each REIT Unit represents an equal undivided beneficial interest in the property of the REIT, all distributions made by the REIT and, in the event of winding-up of the REIT, in the net assets of the REIT remaining after satisfaction of all liabilities.  Each REIT Unit entitles the holder thereof to one vote at all meetings of REIT Unitholders for each REIT Unit held. The REIT also has issued “Special Voting Units” which are owned exclusively by holders of exchangeable partnership interests issued by subsidiary partnerships of the REIT in connection with certain completed acquisitions, and which entitle the holders thereof to vote together with the holders of REIT Units.  The Special Voting Units do not entitle the holder to any distributions from, or property of, the REIT.

4.    REIT Units are widely held by the public and, to the knowledge of the REIT management, there is no direct or indirect beneficial owner of, nor any person who exercises control or direction over, REIT Units carrying more than XXXXXXXXXX% of the votes and value of outstanding REIT Units.  As at XXXXXXXXXX there were XXXXXXXXXX REIT Units issued and outstanding.

5.    The REIT is governed by the REIT Trustees who conduct and manage the affairs of the REIT in accordance with and subject to the terms of the REIT Declaration of Trust. As of the date hereof, the REIT Trustees consist of XXXXXXXXXX individuals, each of whom is a resident of Canada.

6.    The REIT is registered as a “registered investment” for deferred income plans pursuant to subsection 204.4(1).

7.    GP Benco is a corporation incorporated under the laws of the Province of XXXXXXXXXX.  All of the issued shares of GP Benco are owned by the REIT.

8.    Holdings GP Trust is an inter vivos trust formed under the laws of the Province of XXXXXXXXXX.  The sole beneficiary of Holdings GP Trust is GP Benco.  The sole trustee of Holdings GP Trust is XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX which is a wholly-owned subsidiary of the REIT.

9.    Holdings LP is a limited partnership formed under the laws of the Province of XXXXXXXXXX.  The interests of Holdings LP are divided into general partnership interests and limited partnership interests.  The sole general partner of Holdings LP is Holdings GP Trust and the sole limited partner of Holdings LP is the REIT.

10.   XXXXXXXXXX GP Trust is an inter vivos trust formed under the laws of the Province of XXXXXXXXXX.  The sole beneficiary of XXXXXXXXXX GP Trust is Holdings LP.  The trustees of XXXXXXXXXX GP Trust are XXXXXXXXXX, each of whom is a resident of Canada.

11.   US Portfolio LP is a limited partnership formed under the laws of the Province of XXXXXXXXXX.  The interests of US Portfolio LP are divided into general partnership interests and limited partnership interests.  The sole general partner of US Portfolio LP is XXXXXXXXXX GP Trust and the sole limited partner of US Portfolio LP is Holdings LP.

12.   Portfolio LP Trust is a unit trust formed under the laws of the Province of XXXXXXXXXX.  The sole beneficiary of Portfolio LP Trust is the REIT.  The trustees of Portfolio LP Trust are XXXXXXXXXX, each of whom is a resident of Canada.

13.   Portfolio Benco is a corporation incorporated under the laws of the Province of XXXXXXXXXX.  All of the issued shares of Portfolio Benco are owned by Portfolio LP Trust.

14.   Portfolio GP Trust is an inter vivos trust formed under the laws of the Province of XXXXXXXXXX.  The sole beneficiary of Portfolio GP Trust is Portfolio Benco.  The sole trustee of Portfolio GP Trust is XXXXXXXXXX, a corporation incorporated under the laws of the Province of XXXXXXXXXX which is a wholly-owned subsidiary of the REIT.

15.   Portfolio LP is a limited partnership formed under the laws of the Province of XXXXXXXXXX.  The interests of Portfolio LP are divided into general partnership interests and two classes of limited partnership interests, Class A LP Units and Class B LP Units.  The sole general partner of Portfolio LP is Portfolio GP Trust.  The Class A LP Units are owned XXXXXXXXXX% by Portfolio LP Trust and XXXXXXXXXX% by the REIT.  The Class B LP Units are owned by various third party vendors who received such units as consideration for the disposition of certain income-producing properties located in Canada to Portfolio LP.  Each Class B LP Unit is exchangeable at the option of the holder for one Stapled Unit and is entitled to cash distributions equivalent to the cash distributions paid on each Stapled Unit.  The Class A LP Units are entitled to all of the distributions of Portfolio LP other than the distributions to which the holders of Class B LP Units and the general partner are entitled.

16.   US Holdco is a US-resident corporation.  All of the issued shares of US Holdco are owned by US Portfolio LP.

17.   All of the REIT’s investments in US real property are held through US Holdco.  US Holdco holds interests in US real property indirectly through a number of US limited liability companies and US limited partnerships.

18.   All of US Holdco’s income is derived from sources in the US.

19.   US Holdco’s sources of funds include: (i) equity contributed by its shareholder US Portfolio LP and (prior to the transfer of the shares of US Holdco to US Portfolio LP in XXXXXXXXXX) by its former shareholder the REIT; (ii) the Existing Loans made directly by the REIT to US Holdco (including the portion of the Existing Loans that was refinanced on the Refinancing Date as described in paragraph 33); and (iii) debt owing to Finance Trust and Portfolio LP evidenced by US Holdco Notes. As of XXXXXXXXXX, the balance of the US Holdco Notes owing to Finance Trust and Portfolio LP was US$XXXXXXXXXX and US$XXXXXXXXXX, respectively.

20.   Finance Trust is organized as an open-ended unit trust which qualifies as a mutual fund trust for purposes of the Act.  It was established in XXXXXXXXXX.  The primary purpose of Finance Trust is to be a flow-through vehicle to allow the REIT to indirectly access the capital markets in a tax efficient manner by indirectly borrowing from the REIT Unitholders.  Finance Trust’s primary activity is to hold debt issued by US Holdco.  The only assets of Finance Trust are US Holdco Notes and cash.  Finance Trust is a “portfolio investment entity” as it does not hold “non-portfolio property” (each as defined in the Act), and therefore is not a SIFT trust.  Finance Trust also qualifies as a “fixed investment trust” for US federal income tax purposes.

21.   The interests of beneficiaries of Finance Trust are represented by Finance Trust Units.  Each Finance Trust Unit represents an equal undivided beneficial interest in the property of Finance Trust, any distributions by Finance Trust and, in the event of winding-up of Finance Trust, in the net assets of Finance Trust remaining after satisfaction of all liabilities.  Each Finance Trust Unit entitles the holder thereof to one vote at all meetings of Finance Trust Unitholders for each Finance Trust Unit held.

22.   Finance Trust is governed by the Finance Trust Trustees who conduct and manage the affairs of Finance Trust in accordance with and subject to the terms of the Finance Trust Declaration of Trust.  As of the date hereof, the Finance Trust Trustees consist of XXXXXXXXXX individuals, each of whom is a resident of Canada.

23.   The REIT Units and Finance Trust Units trade together as “Stapled Units”.  As at XXXXXXXXXX there were XXXXXXXXXX Stapled Units issued and outstanding.

24.   This "stapling" arises from provisions of the REIT Declaration of Trust that require:

(a)   that a holder of REIT Units not transfer such units unless such holder simultaneously transfers a corresponding number of Finance Trust Units to the same transferee,

(b)   that the REIT not issue REIT Units to any person unless Finance Trust issues a corresponding number of Finance Trust Units to the same person, and

(c)   that a holder of REIT Units not exercise its right to redeem such units unless such holder simultaneously exercises its right to redeem a corresponding number of Finance Trust Units. 

The Finance Trust Declaration of Trust contains corresponding provisions.

25.   The “stapling” provisions cease to apply on the occurrence of an Event of Uncoupling.

26.   As a consequence of the “stapling” provisions, each holder of REIT Units also holds an identical number of Finance Trust Units.  Accordingly, the beneficiaries of each of the REIT and Finance Trust are the same and hold the same percentage interest in each of the REIT and Finance Trust.

27.   In addition to the REIT Units and Finance Trust Units, the capital structure of the REIT and Finance Trust includes the following securities and interests that are convertible into, exchangeable for, or exercisable for Stapled Units:

a.    Certain subsidiary partnerships of the REIT have issued and outstanding Exchangeable Units of the relevant subsidiary partnership, each entitling the holders to cash distributions from the subsidiary partnership determined by reference to the cash distributions on a Stapled Unit.  Each Exchangeable Unit is exchangeable by the holder thereof for Stapled Units in accordance with the terms of the relevant partnership agreement and the associated exchange and support agreement.  As at XXXXXXXXXX, there were XXXXXXXXXX Exchangeable Units outstanding.

b.    The REIT has issued and outstanding Unit Options which are exercisable for Stapled Units.  As at XXXXXXXXXX, there were XXXXXXXXXX Unit Options outstanding of which XXXXXXXXXX were fully vested.

c.    The REIT has issued and outstanding Incentive Units.  Incentive Units will, upon vesting, be settled in cash, Stapled Units, or any combination thereof as determined by the REIT.  Vesting of Incentive Units occurs either after the attainment of certain performance conditions (in the case of performance units) or after a continuous period of employment (in the case of restricted units).  As at XXXXXXXXXX, there were XXXXXXXXXX Incentive Units outstanding.

28.   At the time that a holder of Convertible Securities converts, exchanges, or exercises such securities and acquires REIT Units, Finance Trust is required to issue to such holder the corresponding number of Finance Trust Units for an issue price equal to the fair market value of such Finance Trust Units at the time of the issuance.  The purchase price for each such Finance Trust Unit issued is to be paid by the REIT (either on its own behalf or as agent for and on behalf of the holder) or by the holder, as the case may be.

29.   Before Finance Trust was introduced into the structure in XXXXXXXXXX, loans made by the REIT directly to US Holdco were subject to adverse treatment under US federal income tax laws in effect prior to XXXXXXXXXX (specifically, deferral of interest deductions under the “earnings stripping” rules).  These adverse consequences did not apply to debt owing by US Holdco to Finance Trust.

30.   Since XXXXXXXXXX, the REIT has made significant new investments in US real estate.  The REIT has increased the number of XXXXXXXXXX that it owns from XXXXXXXXXX (as of XXXXXXXXXX) immediately before the establishment of Finance Trust) to XXXXXXXXXX (as of XXXXXXXXXX) and has acquired a XXXXXXXXXX% interest in XXXXXXXXXX additional XXXXXXXXXX through its investment in XXXXXXXXXX.  These investments were made directly or indirectly by US Holdco.  The Existing Loans, having an aggregate principal amount of US$XXXXXXXXXX (as of immediately before the refinancing on the Refinancing Date), were made by the REIT to US Holdco in order to assist in financing these investments.  These Existing Loans, like the XXXXXXXXXX loans made by the REIT to US Holdco, were (prior to the changes effective XXXXXXXXXX) subject to the adverse US tax treatment described in the preceding paragraph.

31.   In addition to the increased investment in US real estate financed with the Existing Loans, Finance Trust has used the proceeds from the issuance of additional Finance Trust Units (issued as part of Stapled Units) to increase the funding provided under the US Holdco Notes from US$XXXXXXXXXX to US$XXXXXXXXXX.

32.   The REIT believes that it is beneficial to Unitholders to refinance the remaining amount of debt financing provided to US Holdco (including through the refinancing that occurred on the Refinancing Date, as described below), and, as a result of US Tax Reform, to consolidate US Holdco’s outstanding debts currently owing to the REIT, a subsidiary of the REIT, and Finance Trust in the REIT alone and thereafter to eliminate Finance Trust, all in the manner described herein.

B.    Completed Refinancing Transactions

33.   On the Refinancing Date, all but US$XXXXXXXXXX of the principal amount of the Existing Loans was refinanced pursuant to the following completed transactions:

a.    US Holdco paid all accrued interest owing on the Existing Loans up to the Refinancing Date.

b.    Pursuant to an agreement between the REIT and US Holdco, all but US$XXXXXXXXXX of the then outstanding US$XXXXXXXXXX principal amount of the Existing Loans owed to the REIT by US Holdco was repaid by way of the issuance by US Holdco of XXXXXXXXXX in favour of the REIT.

34.   US$XXXXXXXXXX of the Existing Loans owed by US Holdco to the REIT remains outstanding at this time.

Proposed Transactions

The following transactions are proposed to occur on the Effective Date (other than the transactions described under the headings “Pre-Effective Date Matters” and “Post-Effective Date Matters”).  Where feasible, and except where otherwise stated below, the transactions are intended to occur under the court-approved Plan of Arrangement.

A.    Pre-Effective Date Matters

Step 1.    Pursuant to applicable corporate law, the issued and outstanding common shares of US Holdco will be consolidated to a single common share.

Step 2.    Shortly prior to the Effective Date, and in accordance with the Declarations of Trust, the REIT and Finance Trust will make an offer to Dissenting Unitholders, if any, to pay for such Dissenting Unitholders’ Stapled Units in an amount determined by the REIT Trustees and the Finance Trust Trustees to represent the fair value of such Stapled Units.  As a consequence of such offer, at the Effective Time, Dissenting Unitholders will cease to have any rights as Unitholders and will only have, as of the Effective Time, a debt claim against the REIT for payment of the fair value of their REIT Units and a debt claim against Finance Trust for payment of the fair value of their Finance Trust Units, in each case pursuant to and in accordance with the dissent provisions of the applicable Declaration of Trust.

B.    Recapitalization of a Portion of the Existing Loans

Step 3.    US Holdco will pay all accrued interest owing on the the outstanding principal amount of the Existing Loans up to the Effective Date.

Step 4.    The REIT will transfer the Transferred Portion of the Existing Loans to Holdings LP as an additional capital contribution.  The REIT and Holdings GP Trust, as the general partner of Holdings LP, will jointly elect under subsection 97(2), in prescribed form and within the time referred to in subsection 96(4), for the transfer of such portion of the Existing Loans to occur on a tax-deferred basis.

Step 5.    Holdings LP will transfer the above-referenced Transferred Portion of the Existing Loans to US Portfolio LP as an additional capital contribution.  The partners of Holdings LP and XXXXXXXXXX GP Trust, as the general partner of US Portfolio LP, will jointly elect under subsection 97(2), in prescribed form and within the time referred to in subsection 96(4), for the transfer of such portion of the Existing Loans to occur on a tax-deferred basis.

Step 6.    US Portfolio LP and US Holdco will agree to amend the terms and conditions of the Existing Loans held by US Portfolio LP to provide that such loans may be converted at the option of the holder into common shares of US Holdco at the Conversion Amount per share (the “Exchange Right”).

Step 7.    US Portfolio LP will exercise the Exchange Right to convert the portion of the Existing Loans held by it into XXXXXXXXXX common shares of US Holdco.  The Transferred Portion of the Existing Loans will as a result of such conversion be satisfied in full and no longer outstanding.

C.    Distribution of US Holdco Notes held by Portfolio LP

Step 8.    US Holdco will pay to Finance Trust and Portfolio LP all accrued interest owing on the US Holdco Notes up to the Effective Date.  The parties will agree to such prepayment without amendment to the US Holdco Note Indenture.

Step 9.    The US Holdco Notes held by Portfolio LP will be distributed by Portfolio LP to Portfolio LP Trust and the REIT as return of capital on the issued Class A LP units, pro rata to the number of Class A LP units held by them.

Step 10.   The US Holdco Notes held by Portfolio LP Trust will be distributed by Portfolio LP Trust to the REIT as a return of capital on the issued trust units of Portfolio LP Trust.

D.    Transfer of US Holdco Notes held by Finance Trust to the REIT and Wind-Up of Finance Trust

Step 11.   Finance Trust will make a cash distribution to the Finance Trust Unitholders of all undistributed income, if any, for the period from XXXXXXXXXX of the year in which the Effective Date occurs to the Effective Date.

Step 12.   Finance Trust will pay (or make arrangements for payment of) all outstanding accounts payable and accrued liabilities (including by arranging for assumption by the REIT of certain liabilities of Finance Trust to former holders of Finance Trust Units, if any, who have exercised dissent rights with respect to the Plan of Arrangement, and liabilities for any previously declared, but unpaid, cash distributions to Finance Trust Unitholders as of a record date preceding the Effective Date) and will invest all remaining cash, other than $XXXXXXXXXX, in additional US Holdco Notes.

Step 13.   An Event of Uncoupling will occur.

Step 14.   Concurrently with Step 13, the Support Agreement will be terminated.

Step 15.   Concurrently with Step 13, the terms of the Unit Options and Incentive Units will be adjusted, amended or amended and restated as necessary to give effect to the Plan of Arrangement and as a consequence of the Plan of Arrangement.  Outside of the Plan of Arrangement, the terms of the Exchangeable Units will be adjusted, amended, or amended and restated as necessary to give effect to the Plan of Arrangement, including to provide that they will be exchangeable for REIT Units in lieu of Stapled Units.

Step 16.   Concurrently with Step 13, Finance Trust will transfer all of the US Holdco Notes held by it to the REIT for no consideration (the “Disposition”).  As a result of this step, the only remaining property of Finance Trust will be $XXXXXXXXXX.  At the time of transfer, the beneficiaries of the REIT will be identical to, and will hold their units in the same proportions as, the beneficiaries of Finance Trust.

Step 17.   The Declarations of Trust will be amended and restated as necessary or desirable to give effect to the Plan of Arrangement.

Step 18.   The REIT will purchase all of the issued and outstanding Finance Trust Units from the Finance Trust Unitholders (for greater certainty, excluding any Dissenting Unitholders) for an aggregate purchase price of $XXXXXXXXXX.  The cost amount of each Finance Trust Unit immediately before its purchase by the REIT will be nominal.  Each Finance Trust Unitholder will receive its pro rata share of such aggregate purchase price based on the number of Finance Trust Units held immediately before such purchase.  The purchase price for the Finance Trust Units will be paid by the REIT to the Depositary for subsequent delivery to the former Finance Trust Unitholders.

Step 19.   Finance Trust will redeem all of the Finance Trust Units (all of which will then be held by the REIT) for an aggregate redemption price of $XXXXXXXXXX, and Finance Trust will be terminated.  In connection with the termination of Finance Trust, the REIT will assume any liabilities of Finance Trust not otherwise provided for (including, for greater certainty, any obligations of Finance Trust to pay Dissenting Unitholders the fair value of their former Finance Trust Units under the Finance Trust Declaration of Trust and any obligations of Finance Trust for previously declared, but unpaid, cash distributions to Finance Trust Unitholders).

E.    Amendment of the US Holdco Note Indenture and the Repayment of the Remaining Existing Loans

Step 20.   The US Holdco Note Indenture will be amended to adjust the interest rate to a rate determined by the REIT and US Holdco to be an arm’s length rate of interest for such debt and to adjust a covenant regarding the required interest coverage ratio of US Holdco.  As a result of these amendments, the fair market value of each then-outstanding note is intended to be equal to its principal amount.  Such amended notes (all of which shall at this time be held by the REIT) are referred to as “Amended US Holdco Notes”.

Step 21.   US Holdco will repay in specie the Repaid Portion of the Existing Loans by way of the issuance to the REIT of the Repayment Amended US Holdco Notes.

F.    Simplification of US Holdco Holding Structure

Step 22.   Holdings GP Trust will distribute all of its property, including its general partner interest in Holdings LP, to its sole beneficiary, GP Benco in satisfaction of GP Benco’s interest in Holdings GP Trust.  Having no further property, Holdings GP Trust will thereupon be automatically terminated as a matter of law.

Step 23.   GP Benco will be liquidated pursuant to and in accordance with the XXXXXXXXXX, and its property, including its general partner interest in Holdings LP, will be distributed to the REIT, such that Holdings LP will no longer have two partners and will thereupon cease to exist.  As a result, the REIT will become the sole owner of all of the property of Holdings LP, being its interest as the sole beneficiary of XXXXXXXXXX GP Trust and its interest as limited partner in US Portfolio LP.  (Subsequently, on or after the Effective Date, GP Benco will be dissolved upon filing of articles of dissolution under the XXXXXXXXXX.)

G.    Post-Effective Date Matters

Step 24.   The REIT will satisfy the obligation to pay fair value to Dissenting Unitholders (including the obligation assumed from Finance Trust as described in Step 19) in accordance with the dissent provisions of the Declarations of Trust.

Purpose of the Proposed Transactions

1.    The purpose of the proposed transactions is to eliminate Finance Trust from the REIT’s US investment structure and consolidate and refinance US Holdco’s debt to both the REIT and Finance Trust so that debt is owing to the REIT alone.  As a result of US Tax Reform, Finance Trust no longer serves a purpose as, effective XXXXXXXXXX, adverse US tax consequences are no longer suffered by US Holdco on interest paid to the REIT.

2.    The specific purpose of the Disposition is to allow for the US Holdco Notes to be transferred out of Finance Trust prior to its termination.  The Disposition also allows the US Holdco Notes to be consolidated with the refinanced Existing Loans, represented by Note 1, Note 2A and Note 2B after the Refinancing Date, in order to consolidate all such debts of US Holdco in the REIT.

3.    The proposed transactions also permit the US Holdco Notes to be refinanced to reflect current commercial arm’s length interest rates for such debt.  This refinancing mirrors the completed refinancing of the Existing Loans.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and that the proposed transactions are completed in the manner described above, and that there are no other transactions that may be relevant to the rulings given, our rulings are as follows:

A.    The Disposition will constitute a “qualifying disposition” within the meaning of subsection 107.4(1), such that the rules in subsection 107.4(3) will apply to the REIT, Finance Trust and their respective unitholders in respect of the Disposition.

B.    Subsection 245(2) will not apply to redetermine the tax consequences described in the foregoing ruling.

Comments

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above, or acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein.  In particular, but without affecting the generality of the foregoing,

1.    we express no opinion with respect to whether any entity described herein is a mutual fund trust within the meaning of subsection 132(6) at any particular time;

2.    we express no opinion with respect to whether the REIT is a “real estate investment trust” within the meaning of subsection 122.1(1) at any particular time;

3.    we express no opinion with respect to whether Finance Trust is a “portfolio investment entity” within the meaning of subsection 122.1(1) at any particular time;

4.    we express no opinion with respect to whether subsection 97(2) will apply in respect of the proposed transactions described in Step 4 and Step 5 above;

5.    we express no opinion with respect to the tax status of any entity described herein; and

6.    we express no opinion with respect to any interest deductibility or debt forgiveness issues in respect of the debt instruments referred to herein, or in regard to the changes to the terms of any such debt instruments.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016, and are binding on the CRA provided that the proposed transactions are completed within six months of the date of this letter.

Yours truly,

XXXXXXXXXX
For Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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