30 November 1995 Ruling 9620363 - DISTRESS PREFERRED SHARES

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

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

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

XXXXXXXXXX							3-962036
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to the XXXXXXXXXX advance income tax ruling request submitted on behalf of XXXXXXXXXX.

All references herein to statute are to the Income Tax Act (the "Act") unless otherwise indicated.

You advise that to the best of your knowledge, none of the issues involved in the ruling request is being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed and none of the issues is under objection or appeal.

Our understanding of the facts and proposed transactions is based on the information as described by you in the formal ruling request and the letters of XXXXXXXXXX.

FACTS

1.XXXXXXXXXX is a corporation formed by the amalgamation of XXXXXXXXXX These companies were amalgamated pursuant to the provisions of the XXXXXXXXXX on XXXXXXXXXX.

2.XXXXXXXXXX is a "taxable Canadian corporation" within the meaning of subsection 89(1) of the Act.

3.The shareholders of XXXXXXXXXX and the class and number of shares owned by each such shareholder are as follows:

Common Class XXXX Class XXXX Special
Shareholder Shares Shares Shares Shares

XXXXXXXXXX

4. XXXXXXXXXX.

5.XXXXXXXXXX is a loan company amalgamated pursuant to the provisions of the predecessor to the current Loan and Trust Companies Act (Canada). XXXXXXXXXX is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1) of the Act and is also a "restricted financial institution" and a "specified financial institution" within the meaning of subsection 248(1) of the Act.

6.XXXXXXXXXX deals at "arm's length" with XXXXXXXXXX within the meaning of section 251 of the Act.

7.XXXXXXXXXX is a commercial real estate development company. It has no material assets other than its real property which consists of XXXXXXXXXX The only mortgages registered against these properties are those described in paragraph 24 below in favour of XXXXXXXXXX.

8. XXXXXXXXXX.

9. XXXXXXXXXX.

10.The management of XXXXXXXXXX properties is contracted to XXXXXXXXXX a company not related to XXXXXXXXXX The rate of management fees charged to XXXXXXXXXX is approximately equal to XXXXXXXXXX% of the net annual operating income from the properties and these fees are reflected in the XXXXXXXXXX projections as part of maintenance cost.

XXXXXXXXXX

Remuneration for fiscal years XXXXXXXXXX will not exceed $XXXXXXXXXX per year in aggregate salaries for these employees. This remuneration is within industry standards for similar positions and responsibilities as fees for asset management are usually in the range of XXXXXXXXXX% of gross property value - a figure that is well in excess of the foregoing $XXXXXXXXXX figure.

11.As of XXXXXXXXXX was indebted to XXXXXXXXXX in the aggregate amount of $XXXXXXXXXX This indebtedness relates to XXXXXXXXXX loans (collectively, the "XXXXXXXXXX Loans" and, individually, a "XXXXXXXXXX Loan") made with respect to the following XXXXXXXXXX properties:

Current
Outstanding Maturity Interest
Property Debt Date Rate

XXXXXXXXXX

12.The proceeds of the XXXXXXXXXX Loans were used to purchase, develop, construct, or renovate the properties.

13.The XXXXXXXXXX Loans on each of the DPS Properties (collectively, the "DPS Loans"), other than XXXXXXXXXX have matured without payment in full of the amounts owing thereunder. XXXXXXXXXX is currently making monthly payments with respect to the DPS Loans but the default continues. These loans are not guaranteed by third parties.

14.XXXXXXXXXX has confirmed to you that, based on its evaluation of the DPS properties and the financial circumstances of XXXXXXXXXX, it is not prepared to refinance any of the properties individually or all of the properties as a package, on conventional mortgage financing terms. It is also not prepared to grant any extension on the loans in default with respect to failure to repay principal in full on Maturity Date. In light of the fact that XXXXXXXXXX has been unable to refinance the DPS Loans with any other financial institution as described in paragraph 20, the only way that XXXXXXXXXX is presently prepared to proceed with a refinancing of the DPS Loans is by way of the Preferred Share refinancing proposed in the Ruling Request. XXXXXXXXXX is of the view that its loans are undersecured and although the proposed cross collateralization of the loans provides some additional security, it does not significantly improve the situation. Accordingly, XXXXXXXXXX has further confirmed that if some, but not all, of the properties were refinanced with other financial institutions, XXXXXXXXXX would likely proceed to realize upon the remaining XXXXXXXXXX Loans as any such refinancing would result in a further deterioration of XXXXXXXXXX security position with respect to its remaining loans to XXXXXXXXXX.

15.XXXXXXXXXX has granted an operating line of $XXXXXXXXXX to XXXXXXXXXX together with a term loan in the amount of $XXXXXXXXXX These loans are secured by a second mortgage on XXXXXXXXXX is in default in respect of the principal repayments required under the term loan which, as of XXXXXXXXXX, had a principal amount outstanding of $XXXXXXXXXX The term loan has a maturity date of XXXXXXXXXX and an interest rate of prime plus XXXXXXXXXX%. In addition, XXXXXXXXXX is in default under its tangible net worth covenant on its operating line. The operating line is payable on demand and has an interest rate of prime + XXXXXXXXXX%. The XXXXXXXXXX has indicated in a letter dated XXXXXXXXXX that they would require the repayment of both loans by XXXXXXXXXX.

16.XXXXXXXXXX default on the XXXXXXXXXX Loans is due to a general inability to pay XXXXXXXXXX debts when due.

17.XXXXXXXXXX is in financial difficulties and has been experiencing financial problems XXXXXXXXXX These difficulties are, in part, evidenced by its tax losses which currently approximate $XXXXXXXXXX (non-capital losses) and $XXXXXXXXXX (net capital losses).

18.These financial problems have been caused by the general economic conditions that have been extremely unfavourable for commercial real estate companies. There has been a significant decline in commercial rents and, at the same time, a tremendous decline in property values.

XXXXXXXXXX

19.Steps were taken to rationalize the operations. The following is a partial list of the many initiatives that were implemented:

XXXXXXXXXX

As well, XXXXXXXXXX continues to work on reducing its expenses and maximizing its revenues through creative leasing approaches.

20.XXXXXXXXXX has approached XXXXXXXXXX relating to XXXXXXXXXX attempts to refinance the DPS Properties.

XXXXXXXXXX

21.XXXXXXXXXX has no reason to believe that any other lender would be willing to lend it money on more acceptable terms. Refinancing by way of additional equity capital was not an alternative because no person would seriously consider investing equity in XXXXXXXXXX, given its financial problems.

22.The individual shareholders of XXXXXXXXXX and XXXXXXXXXX are not in a position to provide funds to XXXXXXXXXX as shown in their statement of net worth and financial statements, respectively. The assets of the individual shareholders primarily consist of their shares in XXXXXXXXXX The only asset of XXXXXXXXXX, as shown in its financial statements as of XXXXXXXXXX is an advance to XXXXXXXXXX In addition, the XXXXXXXXXX family has made shareholder advances to XXXXXXXXXX of approximately $XXXXXXXXXX which have only been minimally reduced over the last ten years. The only corporation in which XXXXXXXXXX has an interest is XXXXXXXXXX has a XXXXXXXXXX% interest in XXXXXXXXXX which is the owner of the XXXXXXXXXX property and is not in a position to provide financing to XXXXXXXXXX as shown in their unaudited financial statements as of XXXXXXXXXX.

23.XXXXXXXXXX does not have sufficient cash, lines of credit or demand loan available to fulfil its debt obligations nor does it have any other sources of funds available from which such obligations can be satisfied. The residential property in XXXXXXXXXX have little or no equity. Therefore, the corporation does not have other sources of funds available such as funds that could be obtained from superflous assets.

24.With respect to the XXXXXXXXXX property, XXXXXXXXXX provided the funds to XXXXXXXXXX to purchase this property in exchange for a note which was ultimately secured by a $XXXXXXXXXX US mortgage on the property. The full amount of this mortgage is still outstanding. XXXXXXXXXX None of the projected expenses set out in the five-year projections relate to the XXXXXXXXXX.

With respect to the XXXXXXXXXX property, this is an XXXXXXXXXX. There is a first mortgage in the amount of $XXXXXXXXXX on this land in favour of XXXXXXXXXX.

PROPOSED TRANSACTIONS

25.XXXXXXXXXX will refinance the XXXXXXXXXX operating line and the term loan to a maximum amount of $XXXXXXXXXX and will advance to XXXXXXXXXX the funds necessary to pay for the costs of implementing the proposed transaction described herein (collectively, the "New Loan"). As well, XXXXXXXXXX will grant to XXXXXXXXXX an additional blanket mortgage (the "Blanket Mortgage") in respect of XXXXXXXXXX interest in the DPS Properties and the Remaining Properties in order to secure all of XXXXXXXXXX indebtedness, liabilities and obligations to XXXXXXXXXX that currently exist or that may arise from time to time, including:

a)all existing mortgage facilities provided by XXXXXXXXXX to XXXXXXXXXX so that the existing mortgage facilities are cross-collateralized; and

b) all indebtedness, liabilities and obligations of XXXXXXXXXX arising out of, or in connection with, the proposed transactions described herein.

26.XXXXXXXXXX will incorporate a subsidiary under the XXXXXXXXXX ("Subco") and will own XXXXXXXXXX% of the Common Shares (as defined in paragraph 28). The subscription price for these Common Shares will be a nominal amount.

27.Subco will be a single-purpose corporation, the sole business of which will be to purchase, hold and realize upon the Loans (as defined in paragraph 31) and to issue the Preferred Shares (as defined in paragraph 28).

28.The authorized share capital of Subco will consist of a limited number of common shares (the "Common Shares") and XXXXXXXXXX classes of preferred shares (the "Preferred Shares"). Each such class of shares will relate to a particular DPS Loan or to the New Loan, and the number of shares authorized for each such class will be that number of shares having an aggregate Preferred Share Redemption Amount (as defined in paragraph 30(d)) equal to the amount then outstanding under the particular DPS Loan to which it relates or under the New Loan, as the case may be.

29.The stated capital attributable to the issued Common Shares will be specified to be a nominal amount. The Common Shares will carry one vote per share at all meetings of shareholders (other than at class meetings for the holders of Preferred Shares) and will be entitled to share equally in such dividends as may be declared thereon. Subject to the privileges attaching to the Preferred Shares, the Common Shares will share equally in any distribution on the winding-up, liquidation or dissolution of Subco. It is not intended that any dividend will be declared or paid on the Common shares while the Preferred Shares are issued and outstanding.

30.The attributes of each class of Preferred Shares will be as follows:

(a) each class of Preferred Shares will rank pari passu with every other class of Preferred Shares, but ahead of the Common Shares, with respect to the payment of dividends and distributions on the winding-up, liquidation or dissolution of Subco;

(b) holders of Preferred Shares will be entitled to receive dividends on such Preferred Shares determined as if dividends accrued daily on the initial stated capital of each such Preferred Share plus all accrued and unpaid dividends thereon at a rate equal to XXXXXXXXXX% of the five-year prime commercial mortgage rate in effect at the time of issuance of the Preferred Shares. Such dividends will be cumulative and payable monthly and in cash. In addition, all accrued and unpaid dividends on a particular class of Preferred Shares will be required to be paid immediately prior to the redemption of any of the Preferred Shares of such class;

(c) holders of Preferred Shares will generally not be entitled to notice of, or to vote at, any meetings of shareholders, but will be entitled to vote in certain circumstances as required by law, and a class vote will be required to amend any of the terms attaching to such Preferred Shares;

(d) Preferred Shares of each class will be redeemable, in whole or in part, at any time, to the exclusion of the Preferred Shares of any other class, at the option of Subco on not less than one day's notice to the holders thereof for an amount per share equal to the initial stated capital of each such Preferred Share (the "Preferred Share Redemption Amount");

(e) a portion of each class of Preferred Shares will be required to be redeemed on a monthly basis in an amount to be agreed upon by XXXXXXXXXX

(f) Preferred Shares of each class will be redeemable, in whole or in part, upon the occurrence of certain events to the exclusion of the Preferred Shares of any other class at the option of the holder thereof for an amount per share equal to the Preferred Share Redemption Amount;

(g) for so long as any class of Preferred Shares remains outstanding, Subco will not, except as required by the terms and conditions of or relating to such Preferred Shares or the Support Agreement (as defined in paragraph 42) or except with the prior written approval of all holders of the Preferred Shares:

(i) create, incur, assume or suffer to exist any indebtedness, liability or obligation of Subco to any person;

(ii) create or issue any securities or redeem, purchase or retire any shares;

(iii) pay or declare any dividends or make any other capital distribution in respect of any shares;

(iv) amend or repeal any of its articles or by-laws; or

(v) pass any resolution or special resolution to approve or authorize any fundamental changes to or affecting Subco.

31.Subco will borrow an amount from XXXXXXXXXX (the "Demand Loan") equal to the aggregate of:

(a) the amount then outstanding under the DPS Loans; and

(b) the amount of the New Loan (collectively, the "Loans" and, individually, a "Loan").

The Demand Loan will bear interest at XXXXXXXXXX%, be repayable on demand, be secured by a general security agreement and be evidenced by a demand promissory note issued by Subco to XXXXXXXXXX. The Demand Loan will be made by XXXXXXXXXX delivering to Subco a bank draft (the "First Bank Draft") payable to Subco.

32.XXXXXXXXXX and Subco will enter into an agreement with XXXXXXXXXX (the "Assignment and Security Sharing Agreement") pursuant to which XXXXXXXXXX will sell, and Subco will purchase, the Loans together with the security related thereto (the "Assigned Assets"). Subco will use the proceeds of the Demand Loan for the purpose of purchasing from XXXXXXXXXX the Assigned Assets. Such purchase will be made by Subco endorsing the First Bank Draft in favour of XXXXXXXXXX and delivering such endorsed First Bank Draft to XXXXXXXXXX Under the Assignment and Security Sharing Agreement, XXXXXXXXXX will retain legal title to the security securing the Loans and will hold such security for its own account (with respect to any obligations of XXXXXXXXXX to XXXXXXXXXX from time to time) and for the account of Subco (with respect to the Loans).

33.The Assignment and Security Sharing Agreement will also provide that:

(a) for so long as Subco owns the Loans or until XXXXXXXXXX and Subco are otherwise notified in writing by XXXXXXXXXX Subco will waive the interest payable in respect of the Loans; and

(b) Subco will have the right at any time to put the Assigned Assets back to XXXXXXXXXX for a purchase price equal to the amount then outstanding under the Loans. Such purchase price will be paid by way of cheque which Subco will endorse in favour of XXXXXXXXXX in payment of the Demand Loan. This put right will be superseded by the put right granted to Subco under the Debt Put/Call Agreement (as defined in paragraph 40).

34.XXXXXXXXXX and Subco will enter into an agreement with XXXXXXXXXX (the "Subscription Agreement") pursuant to which XXXXXXXXXX will subscribe for the Preferred Shares. XXXXXXXXXX will pay the subscription price for the Preferred Shares by delivering a bank draft (the "Second Bank Draft") to Subco in an amount equal to the Demand Loan. The aggregate amount of the subscription proceeds received by Subco from the issuance of a particular class of Preferred Shares to XXXXXXXXXX will be added to the stated capital account maintained by Subco in respect of such class of Preferred Shares.

35.Pursuant to the Subscription Agreement, XXXXXXXXXX will indemnify XXXXXXXXXX, on a tax-adjusted basis, for accrued and unpaid dividends and any tax, interest or penalties payable by XXXXXXXXXX in respect of the dividends on, or the redemption or retraction of, the Preferred Shares issued to XXXXXXXXXX The foregoing indemnity obligation will be secured by the Blanket Mortgage.

36.Subco will repay the Demand Loan by endorsing the Second Bank Draft in favour of XXXXXXXXXX and delivering such endorsed Second Bank Draft to XXXXXXXXXX.

37.XXXXXXXXXX, Subco and the XXXXXXXXXX will enter a unanimous shareholder agreement (the "Unanimous Shareholder Agreement"). The articles of Subco and the Unanimous Shareholder Agreement will provide, inter alia, that without the unanimous approval of the shareholders of Subco:

(a) no transfer or encumbrance of the Common Shares will be effective;

(b) no additional shares of Subco will be issued;

(c) no transfer or encumbrance of the assets of Subco will be effective; and

(d) other than as contemplated herein, Subco will not carry on any activities, engage in any business transaction, incur any indebtedness, create any security over its assets, give any guarantee, amalgamate, merge or consolidate, declare or pay any dividend or purchase or redeem any of its shares.

38.XXXXXXXXXX will enter into an agreement with XXXXXXXXXX (the "Share Pledge Agreement) pursuant to which XXXXXXXXXX will pledge the Common Shares to XXXXXXXXXX as security for all debts and obligations of XXXXXXXXXX to XXXXXXXXXX including the indemnity obligations described in paragraph 35 and the Share Put Agreement obligations described in paragraph 41.

39.XXXXXXXXXX will jointly and severally guarantee the obligations of XXXXXXXXXX with respect to the Remaining Properties, the DPS Loans and the obligation of XXXXXXXXXX arising out of, or in connection with the proposed transactions described herein. These guarantees will be limited to a maximum of $XXXXXXXXXX and, subject to certain restrictions, will be reduced on a dollar-for-dollar basis with the reduction in the outstanding principal amount of the XXXXXXXXXX Loans, to $XXXXXXXXXX At this point, the guarantees will remain at $XXXXXXXXXX until the total amount of the XXXXXXXXXX Loans is reduced by $XXXXXXXXXX at which time the guarantees will be released.

40.XXXXXXXXXX and Subco will enter into an agreement with XXXXXXXXXX (the "Debt Put/Call Agreement") pursuant to which Subco will have the right at any time to put, and XXXXXXXXXX will have the right upon the occurrence of certain events, to call, all or any part of a Loan together with the security related thereto (any such Loan or part thereof, together with the related security, the "Repurchased Assets"). The exercise of either of the foregoing rights will constitute a deemed exercise of the retraction/redemption rights of XXXXXXXXXX or Subco in respect of all or part of the class of Preferred Shares to which such Repurchased Assets relate. Such retraction/redemption will close on the same day (the "Closing Date") that the sale of the Repurchased Assets to XXXXXXXXXX is implemented. On the Closing Date, XXXXXXXXXX will acquire the Repurchased Assets for a purchase price equal in amount to the amount then outstanding under the Loan or part thereof that has been put or called. This purchase price will be paid by way of cheque which Subco will endorse in favour of XXXXXXXXXX in payment of the Preferred Share Redemption Amounts of the Preferred Shares that have been retracted/redeemed.

41.XXXXXXXXXX and Subco will enter into an agreement with XXXXXXXXXX (the "Share Put Agreement") pursuant to which XXXXXXXXXX will, at the option of XXXXXXXXXX, exercisable upon the occurrence of certain events, purchase all or part of the Preferred Shares then outstanding from XXXXXXXXXX for a purchase price per share equal to its Preferred Share Redemption Amount and all accrued and unpaid dividends thereon, if any (whether or not declared), together with any such additional amount as may be necessary to compensate XXXXXXXXXX for any income tax payable by it in respect of that purchase and in respect of any amount payable under this paragraph 41. The foregoing purchase obligation of XXXXXXXXXX will be secured in the manner described in paragraph 35 and by the Share Pledge Agreement and guarantees referred to in paragraphs 38 and 39, respectively. All shares acquired by XXXXXXXXXX pursuant to this put right will immediately be donated by XXXXXXXXXX to Subco.

42.XXXXXXXXXX and Subco will enter into an agreement with XXXXXXXXXX (the "Support Agreement") pursuant to which the parties will agree that, for so long as any Preferred Shares are owned by XXXXXXXXXX:

(a) XXXXXXXXXX will pay to Subco, on or prior to any dividend payment date in respect of any of the Preferred Shares, as a contribution to capital, all such amounts as may be required by Subco to pay such dividends;

(b) Subco will use all principal repayments received by it on the Loans to redeem Preferred Shares;

(c) XXXXXXXXXX will ensure that on each dividend payment date in respect of any of the Preferred Shares, the realizable value of Subco's assets will be sufficient to enable Subco to declare and pay the monthly dividends payable on such Preferred Shares on such dates;

(d) XXXXXXXXXX will agree that within XXXXXXXXXX days after the end of each of its fiscal quarters its Excess Cash Flow (as defined in paragraph 43) arising in that fiscal quarter will be used to redeem Preferred Shares;

(e) XXXXXXXXXX will provide to Subco and to XXXXXXXXXX yearly projections of XXXXXXXXXX Excess Cash Flow; and

(f) XXXXXXXXXX will pay to Subco, on demand and as a contribution to capital, all such amounts as may be required by Subco to pay its ongoing costs and expenses of operation and administration, including any income or capital tax payable by Subco.

The Support Agreement will also provide that the capital contributions referred to in paragraphs 42(a) and (f) will be regarded as funds to be held for the benefit of XXXXXXXXXX until such time as Subco requires the funds to make the payments referred to in those subparagraphs. Subco will not add any contributions of capital received from XXXXXXXXXX to the stated capital of the Common Shares.

43.For the purposes described herein, Excess Cash Flow in respect of a particular fiscal quarter in respect of XXXXXXXXXX will be the aggregate of the changes in cash flow for such fiscal quarter of XXXXXXXXXX and Subco from all sources as would be reported on the Consolidated Statement of Changes of Financial Position for XXXXXXXXXX on the assumption that such Consolidated Statement of Changes in Financial Position is prepared in accordance with generally accepted accounting principles and only directly and indirectly wholly-owned subsidiaries of XXXXXXXXXX are included, but before outlays for:

(a) the payment of dividends other than dividends on the Preferred Shares;

(b) capital expenditures or any payment on capital account other than in respect of:

(i) the purchase or redemption of Preferred Shares (other than such purchases or redemptions made from a prior quarter's Excess Cash Flow);

(ii) repayments of indebtedness (other than repayments in respect of the DPS Loans made from a prior quarter's Excess Cash Flow) incurred in the normal and ordinary course of business and in existence at the date that the Preferred Shares are issued;

(iii) repayment of additional indebtedness of XXXXXXXXXX incurred under any credit facility established for XXXXXXXXXX for the purpose of funding current operating requirements;

(iv) contributions of capital by XXXXXXXXXX to Subco for the purpose of enabling Subco to pay dividends on the Preferred Shares or contributions of capital made by XXXXXXXXXX to Subco to enable Subco to meet its costs and expenses;

(v) reasonable capital expenditures or payments on capital account incurred in the normal and ordinary course of XXXXXXXXXX business;

(vi) repayments of additional debt incurred for the specific purpose of redeeming or purchasing the Preferred Shares or making the contributions, expenditures or payments referred to in subparagraphs (iv) and (v);

(vii) reserves for tenant improvements, leasing commissions and capital expenditures, to be incurred in the next following fiscal year (except that there shall be added back any such reserve which was deducted in respect of the immediately preceding fiscal year);

(c) repayments of any shareholder loans or redemptions or purchases for cancellation of any of the shares of XXXXXXXXXX; and

(d) loans to any shareholder, director or other persons, firms or corporations.

For the purposes of this definition of "Excess Cash Flow":

(e) additional debt will not include a debt that arose as a result of the use of cash flow or the use of cash or funds for a purpose that is not envisaged herein;

(f) amounts referred to in subparagraphs (b)(i) to (vii) shall be deducted in computing Excess Cash Flow whether or not deductible in accordance with generally accepted accounting principles in computing changes in cash flow on the Statement of Changes of Financial Position;

(g) amounts paid by XXXXXXXXXX to XXXXXXXXXX as described in paragraph 10 will be deductible in computing changes in cash flow of XXXXXXXXXX and

(h) the first fiscal quarter of XXXXXXXXXX and Subco will be the period commencing on the date of closing of the transactions contemplated herein and ending on XXXXXXXXXX.

For the purpose of calculating Excess Cash Flow for a particular fiscal quarter pursuant hereto:

(i) each of the foregoing paragraphs and subparagraphs will apply in computing the changes in cash flow of XXXXXXXXXX or Subco, as the case may be, only to the extent that each such paragraph or subparagraph is relevant to XXXXXXXXXX or Subco;

(j) each of the foregoing paragraphs and subparagraphs will be construed so as to prevent duplication or repeated accounting of amounts;

(k) Excess Cash Flow in respect of a prior fiscal quarter will not be added in computing the particular fiscal quarter's Excess Cash Flow; and

(l) for greater certainty, cash received by Subco from XXXXXXXXXX will be included in calculating Subco's changes in cash flow for the fiscal quarter in which such cash is received.

Notwithstanding the foregoing, proceeds of insurance received in a particular fiscal quarter by XXXXXXXXXX in respect of damage or destruction to a DPS Property or a Remaining Property but used in any subsequent fiscal quarter to repair or replace the Property shall not be included in the cash flow of XXXXXXXXXX in the fiscal quarter of receipt but shall be included in the cash flow of XXXXXXXXXX in the subsequent fiscal quarter in which it is so used provided that such proceeds are set aside, in the year of receipt, to repair or replace the property in question.

44.XXXXXXXXXX will have the right at any time and from time to time to sell all or any part of the Preferred Shares to a third party.

45.To the extent permitted by applicable law, Subco will be wound up without any undue delay after the earlier of:

(a) XXXXXXXXXX days after the date upon which there are no longer any Preferred Shares outstanding;

(b) XXXXXXXXXX days after the date upon which all the Preferred Shares have been put to XXXXXXXXXX under the Share Put Agreement; or

(c) the date that is five years after the date upon which the Preferred Shares of Subco are issued.

In the event that Subco is precluded by law from redeeming all the Preferred Shares on the earlier of the times referred to in this paragraph 45, then it will redeem the Preferred Shares on the first day thereafter that it is not so precluded. In such case, it will not engage in any business transactions other than in respect of the redemption of Preferred Shares or its winding-up.

PURPOSE OF THE TRANSACTION

46.The purpose of the proposed transactions is to restructure XXXXXXXXXX indebtedness to XXXXXXXXXX as distress preferred shares so as to reduce the financing costs associated with the DPS Loans. It is anticipated that such a reduction will allow XXXXXXXXXX to generate sufficient income to service the DPS Loans and thereby enable XXXXXXXXXX to continue to carry on its business. The foregoing is reflected in the five-year cash flow projections submitted with the ruling request. The dividend rate used in the five-year projections is XXXXXXXXXX% and was basically calculated in accordance with paragraph 30(b) as being XXXXXXXXXX% of the five-year commercial mortgage rate in effect at the time that the five-year projections were prepared.

RULINGS GIVEN

Provided that the foregoing statements constitute complete and accurate disclosures of all of the relevant facts and proposed transactions, we confirm the following:

A. The Preferred Shares of Subco will be:

(a) shares described in subparagraph (e)(iii) of the definition of "term preferred share" in subsection 248(1) of the Act for a period not exceeding five years from the date of their issuance; and

(b) "exempt shares" pursuant to paragraph (c) of the definition thereof in subsection 112(2.6) for that same period,

and accordingly, subsections 112(2.1), (2.2), (2.3) and (2.4) of the Act will not apply to deny XXXXXXXXXX or any Canadian resident corporation that may acquire such shares from XXXXXXXXXX, a deduction under subsection 112(1) of the Act for dividends received or deemed to have been received by it on such Preferred Shares during such period.

B.No amount will be included in computing Subco's income under subsection 12(3), 12(9), 16(1) or 246(1) or paragraph 12(1)(c) or 12(1)(x) of the Act in respect of capital contributions made or required to be made by XXXXXXXXXX to Subco as described in paragraph 42. No such amount will constitute income of Subco from a business or property pursuant to section 9 of the Act or "proceeds of disposition", as defined in paragraph 54 of the Act, to Subco from the disposition by it of any property.

C.No amount will be included in the income of XXXXXXXXXX under subsection 56(2) of the Act in respect of any capital contributions made or required to be made by XXXXXXXXXX to Subco as described in paragraph 42.

D.No amount will be included in the income of XXXXXXXXXX pursuant to subsection 15(1) or 246(1) of the Act and section 80 of the Act will not apply with respect to XXXXXXXXXX by virtue of the fact that interest will be waived by Subco in respect of the Loans, as described in paragraph 33(a), or by virtue of the failure of Subco to demand repayment of the Loans.

E.Subject to paragraph 20(1)(e.1) of the Act, expenses incurred by Subco in the course of borrowing money and issuing the Common Shares and Preferred Shares will be deductible by Subco pursuant to and in accordance with paragraph 20(1)(e) of the Act to the extent that such expenses are reasonable in the circumstances.

F.The "cost amount", as defined in subsection 248(1) of the Act, to Subco of the Loans, immediately after the time that they are acquired by Subco from XXXXXXXXXX, will be equal to the purchase price paid therefor by Subco, as described in paragraph 32.

G.The "cost amount", as defined in subsection 248(1) of the Act, to XXXXXXXXXX of the Preferred Shares acquired by it, immediately after the time that they are issued to XXXXXXXXXX, will be equal to the amount paid therefor by XXXXXXXXXX, as described in paragraph 34.

H.If a Loan is reacquired by XXXXXXXXXX from Subco pursuant to the Debt Put/Call Agreement, the "cost amount", as defined in subsection 248(1) of the Act, to XXXXXXXXXX of such Loan immediately after it is so reacquired, will be the amount paid therefor by XXXXXXXXXX, as described in paragraph 40.

I.Provided that the Loans sold to Subco by XXXXXXXXXX arose from one or more loans made by XXXXXXXXXX in the course of its money-lending business, all Loans reacquired by XXXXXXXXXX pursuant to the Debt Put/Call Agreement will be considered to have been acquired by XXXXXXXXXX in the ordinary course of its business of lending money for the purposes of paragraphs 20(1)(1) and 20(1)(p) of the Act.

J.Subsection 112(4) of the Act will not apply, in respect of the dividends received by XXXXXXXXXX on the Preferred Shares, to any loss realized by XXXXXXXXXX on the Repurchased Assets subsequently reacquired by XXXXXXXXXX from Subco pursuant to the Debt Put/Call Agreement.

K.As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Act will not apply to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 and are binding on Revenue Canada, Taxation provided that the Preferred Shares are issued by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

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