2000 Ruling 1999-0010783 - Spin-off butterfly; treaty exemption

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.

Principal Issues:

(1) Whether a company organized under the XXXXXXXXXX as a "partnership limited by shares" is considered to be a corporation for purposes of section 55 ?

(2) Whether any gains on the disposition of shares of a Canadian company by a non-resident vendor will be exempt from taxation in Canada by virtue of the XXXXXXXXXX?

Position:

(1) Yes.

(2) Provided that the two conditions set out below are satisfied, the answer is yes.

Reasons:

(1) XXXXXXXXXX, a "partnership limited by shares" is a separate legal entity created under the XXXXXXXXXX Act and possesses its own capacity to acquire rights and to assume liabilities.

(2) Provided that, firstly, the vendor does not become a resident of Canada and is and will continue to be a resident of XXXXXXXXXX, and secondly, the value of the said shares does not derive principally (i.e. more than 50%) from the Canadian company's immovable property situated in Canada which does not include real property in which the business of the Canadian company is carried on.

XXXXXXXXXX
XXXXXXXXXX 3-992727
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. In your subsequent letters you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:

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

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

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

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

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

DEFINITIONS

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

(a) Unless otherwise indicated, all references to statute are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended ( the "Act"), and all monetary amounts are expressed in Canadian dollars;

(b) "adjusted cost base" has the meaning assigned in section 54 and subsection 248(1);

(c) "agreed amount" has the meaning assigned by subsection 85(1);

(d) "arm's length" has the meaning assigned by section 251;

(e) "BCA" means the Business Corporations Act, XXXXXXXXXX, as amended;

(f) "CA" means the Companies Act (XXXXXXXXXX);

(g) "capital" when used in respect of a share of a company incorporated under the CA means capital as determined for the purposes of that statute;

(h) "CDA" means capital dividend account as that expression is defined in subsection 89(1);

(i) "capital property" has the meaning assigned by the definition in section 54;

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

(k) "DCAmalco" has the meaning assigned by paragraph 10 below;

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

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

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

(o) "FMV" means fair market value;

(p) "NewCo" has the meaning assigned by paragraph 11 below;

(q) "PUC" means paid-up capital as that expression is defined in subsection 89(1);

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

(s) "prepaid expenses" means rights arising from prepaid expenses;

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

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

(v) "RDTOH" means refundable dividend tax on hand as that expression is defined in subsection 129(3);

(w) "series of transactions or events" has the meaning assigned by subsection 248(10);

(x) "SFI" means specified financial institution as defined in subsection 248(1);

(y) "specified investment business" ("SIB") has the meaning assigned by subsection 125(7);

(z) "stated capital" means stated capital as determined for the purposes of the BCA;

(aa) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

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

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

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

FACTS

1. XXXXXXXXXX ("DC") is a private corporation and a taxable Canadian corporation. It was formed by an amalgamation of its predecessor XXXXXXXXXX under the laws of the Province of XXXXXXXXXX. The head office of DC is located at XXXXXXXXXX. DC's business number is XXXXXXXXXX. DC deals with the XXXXXXXXXX Tax Services Office and files its returns under the Act with the XXXXXXXXXX Taxation Centre.

The issued and outstanding capital of DC consists of XXXXXXXXXX common shares all of which are owned by XXXXXXXXXX ("HoldCo"). The common shares in the capital of DC are capital property to HoldCo for the purposes of the Act.

The PUC of the common shares in the capital of DC is about $XXXXXXXXXX.

The adjusted cost base of the common shares in the capital of DC to HoldCo is $XXXXXXXXXX.

None of the shares of DC has been acquired by any person in contemplation of the proposed transactions described below.

DC did not have any balance in its RDTOH or CDA at the end of its XXXXXXXXXX taxation year. It is not expected that DC will have any balance in its RDTOH or CDA at the end of its taxation year which includes the proposed transactions described from paragraphs 7 to 23 below.

2. DC carries on business as a XXXXXXXXXX. The assets to be distributed by DCAmalco to NewCo as described in paragraph 16 below are the assets used by DC in the XXXXXXXXXX ("Transferred Assets").

DC's assets consist of :

(a) certain cash or near cash property, consisting of cash, deposits, accounts receivable, inventories, materials and supplies, and prepaid expenses;

(b) certain fixed assets (principally land, buildings, machinery and equipment) used in DC's business operations; and

(c)

XXXXXXXXXX

DC does not own shares in the capital of any corporation.

3. HoldCo is a corporation incorporated under the laws of XXXXXXXXXX. HoldCo is not a resident of Canada for the purposes of the Act, it does not maintain a permanent establishment in Canada, it does not have a business number and it does not file tax returns in Canada.

All the shares of HoldCo are owned by XXXXXXXXXX ("Subco2"), a corporation incorporated under the laws of XXXXXXXXXX. Subco2 is not a resident of Canada for the purposes of the Act, it does not maintain a permanent establishment in Canada, it does not have a business number and it does not file tax returns in Canada.

Subco2 is an indirect subsidiary wholly-owned corporation of XXXXXXXXXX ("Subco1"). Subco1 is a corporation incorporated under the laws of the State of XXXXXXXXXX, one of the United States of America. Subco1 is not a resident of Canada for the purposes of the Act, it does not maintain a permanent establishment in Canada, it does not have a business number and it does not file tax returns in Canada. Subco1 is an indirect subsidiary wholly-owned corporation of XXXXXXXXXX ("ParentCo").

4.

XXXXXXXXXX

The issued and outstanding shares in the capital of ParentCo consist of common shares and preference shares which are listed for trading on public exchanges in XXXXXXXXXX.

ParentCo is not a resident of Canada for the purposes of the Act, it does not maintain a permanent establishment in Canada, it does not have a business number and it does not file tax returns in Canada. ParentCo is treated as a corporation under XXXXXXXXXX.

XXXXXXXXXX

(a) XXXXXXXXXX

(b) XXXXXXXXXX

(c) XXXXXXXXXX

(i) XXXXXXXXXX

(ii) XXXXXXXXXX

(iii) XXXXXXXXXX

ParentCo has XXXXXXXXXX general partners who make up the Management Board of ParentCo. The Management Board manages the business of ParentCo. In general, they have the same functions as the board of directors of a stock corporation. The general partners of ParentCo, even if they own shares, have no voting rights at a general meeting with respect to the election and dismissal of the Supervisory Board, the formal approval of the actions of the general partners and of the Supervisory Board, or the election of auditors and the adoption of resolutions on compensation claims. The general partners receive remuneration for managing the business of ParentCo.

The limited shareholders of ParentCo, who own the common shares or preference shares of ParentCo, as the case may be, are in the same position as shareholders of a public stock corporation in XXXXXXXXXX.

ParentCo has a subsidiary wholly-owned corporation, XXXXXXXXXX ("XXXXXXXXXXCo"), which was incorporated under the laws of XXXXXXXXXXCo is not a resident of Canada for the purposes of the Act, does not maintain a permanent establishment in Canada, does not have a business number and does not file tax returns in Canada.

XXXXXXXXXXCo has a subsidiary wholly-owned corporation, XXXXXXXXXX ("PublicCo") which was incorporated under the laws of XXXXXXXXXX. PublicCo is a person subject to income tax in XXXXXXXXXX by reason of its residence in XXXXXXXXXX. PublicCo is not a resident of Canada for the purposes of the Act, does not maintain a permanent establishment in Canada, does not have a business number and does not file tax returns in Canada.

5.

XXXXXXXXXX

XXXXXXXXXX

(a) XXXXXXXXXX;

(b) XXXXXXXXXX

(c) XXXXXXXXXX.

XXXXXXXXXX

6.

XXXXXXXXXX

PROPOSED TRANSACTIONS

7. DC will incorporate ShellCo as an unlimited liability company under the laws of XXXXXXXXXX. ShellCo will be a taxable Canadian corporation and a private corporation. On incorporation, DC will subscribe for 1 common share of ShellCo at a subscription price of $XXXXXXXXXX. Other than the $XXXXXXXXXX subscription proceeds, ShellCo will not have any assets or liabilities.

Since DC is an indirect subsidiary wholly-owned corporation of Subco1, a United States corporation, the proposed transfer of property by DC to NewCo as described in paragraph 16 below would have caused adverse consequences to Subco1 under the United States Internal Revenue Code. These adverse consequences should be avoided if DC is an unlimited liability company before, during and after the transfer of its property to NewCo. The incorporation of ShellCo as an unlimited liability company as described herein, the continuation of DC from XXXXXXXXXX to XXXXXXXXXX as described in paragraph 8 below, followed by the amalgamation of DC and ShellCo to form DCAmalco as an unlimited liability company as described in paragraph 10 below are solely for the purpose of converting DC to an unlimited liability company pursuant to the CA such that the transfer of property to NewCo as described in paragraph 16 below will not cause any adverse consequences to Subco1 under the United States Internal Revenue Code.

8. In accordance with the rules and procedures set out in section 181 of the BCA and section 133 of the CA, DC will continue from XXXXXXXXXX to XXXXXXXXXX. As a result of the continuation,

(a) DC will be granted new constating documents under the CA;

(b) no new class of shares will be created, and no additional shares will be issued by DC;

(c) no material change will be made to the rights and conditions attached to the issued and outstanding shares in the capital of DC;

(d) under the CA, the shares of DC before continuation will become the shares of DC after the continuation without a deemed exchange, redemption or re-issuance of shares occurring;

(e) for the purposes of the CA, the stated capital of the issued and outstanding shares in the capital of DC before the continuation will become the capital of the issued and outstanding shares in the capital of DC after the continuation; and

(f) no holder of any share of DC will receive any payment or distribution of property from DC in the course of or by virtue of the continuance.

The changes that might be made to the constating documents of DC as a result of its continuance from XXXXXXXXXX to XXXXXXXXXX described herein would relate to conforming the language and structure of the new constating documents to XXXXXXXXXX company law. For example, it may be necessary to

(g) change all references to the "BCA" to references to the "CA";

(h) change all references to "stated capital" to references to "paid-up capital";

(i) change all references to "the corporation" to references to "the company";

(j) add provisions prescribing the powers of the directors (those powers are contained in the BCA rather than the articles of the corporation); and

(k) add provisions prescribing the procedure for amending the capital of the company (which are contained in the BCA rather than the articles for the corporation).

9. HoldCo will incorporate HoldCo2 under the laws of XXXXXXXXXX as a subsidiary wholly-owned corporation. HoldCo2 will be a resident of XXXXXXXXXX for the purposes of the XXXXXXXXXX Treaty and will be a person subject to income tax in XXXXXXXXXX by reason of its residence in XXXXXXXXXX. As part of the incorporation, HoldCo will subscribe for XXXXXXXXXX common shares in the capital of HoldCo2. HoldCo will satisfy the subscription price payable for the XXXXXXXXXX HoldCo2 common shares by transferring to HoldCo2 all of the issued and outstanding common shares in the capital of DC at FMV. HoldCo will apply for a certificate under section 116 in respect of the transfer of DC common shares to HoldCo2.

The purpose of HoldCo2 acquiring the common shares of DC is to avoid certain U.S. income tax consequences, as well as to avoid certain U.S. compliance complexities associated with computing U.S. foreign tax credits that would arise if HoldCo were to own the shares of DC directly after it becomes an unlimited liability company.

10. DC and ShellCo will be amalgamated under the CA to form DCAmalco. The articles of amalgamation of DCAmalco will provide for two authorized classes of shares: XXXXXXXXXX DCAmalco Transferred Asset Shares and XXXXXXXXXX DCAmalco Residual Shares.

The DCAmalco Residual Shares will be fully participating voting shares with the holder thereof being entitled to one vote per share at meetings of shareholders of DCAmalco.

The DCAmalco Transferred Asset Shares will have the following attributes:

(a) the holders of the DCAmalco Transferred Asset Shares will be entitled to non-cumulative dividends as and when declared by the board of directors of DCAmalco;

(b) the holder of each DCAmalco Transferred Asset Share will not be entitled to vote at meetings of shareholders of DCAmalco, other than as provided under the CA;

(c) they will have an aggregate redemption amount ("Aggregate Redemption Amount") equal to that proportion of the FMV of all of the issued and outstanding common shares of DC immediately before the amalgamation that the net FMV of the Transferred Assets that are business property of DC to be transferred to NewCo as described in paragraph 16 below is of the net FMV of all of the business property of DCAmalco determined immediately before the transfer by applying the rules in paragraphs 13 to 15 below. Subject to applicable law, each DCAmalco Transferred Asset Share will be redeemable at any time at the option of DCAmalco at an amount equal to the Aggregate Redemption Amount divided by XXXXXXXXXX, being the number of DCAmalco Transferred Asset Shares issued to HoldCo2 by virtue of the amalgamation ("DCAmalco Transferred Asset Share Redemption Amount") plus any declared but unpaid dividends;

(d) subject to applicable law, each DCAmalco Transferred Asset Share will be retractable at any time at the option of the holder at a retraction amount equal to the DCAmalco Transferred Asset Share Redemption Amount plus any declared but unpaid dividends; and

(e) if the corporation is liquidated, dissolved or wound-up, or if its assets are otherwise distributed among the shareholders by way of repayment of capital, whether voluntary or involuntary, the holders of the DCAmalco Transferred Asset Shares will be entitled to receive, before any distribution of any assets of the corporation among the holders of the DCAmalco Residual Shares, an amount per DCAmalco Transferred Asset Share equal to the DCAmalco Transferred Asset Share Redemption Amount plus any declared but unpaid dividends.

On the amalgamation of DC and ShellCo:

(i) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of DC and ShellCo immediately before the merger will become property of DCAmalco by virtue of the merger;

(ii) all of the liabilities (except amounts payable to any predecessor corporation) of DC and ShellCo immediately before the merger will become liabilities of DCAmalco by virtue of the merger; and

(iii) HoldCo2, being the sole shareholder of DC immediately before the merger, will receive one DCAmalco Residual Share and one DCAmalco Transferred Asset Share for each common share of DC because of the merger. The aggregate FMV of the DCAmalco Residual Shares and DCAmalco Transferred Asset Shares received by HoldCo2 on the amalgamation will be equal to the aggregate FMV of the DC common shares held by HoldCo2 immediately before the merger;

(iv) the shares of ShellCo owned by DC will be cancelled for no consideration; and

(v) for the purposes of the CA, the aggregate amount to be added to the capital of the DCAmalco Residual Shares and the DCAmalco Transferred Asset Shares will not exceed the aggregate PUC of the issued and outstanding common shares of DC immediately before the merger and such aggregate capital will be allocated to the DCAmalco Residual Shares and the DCAmalco Transferred Asset Shares in proportion to their respective FMV.

DCAmalco will be an unlimited liability company.

11. HoldCo2 will incorporate NewCo as an unlimited liability company under the CA. NewCo will be a taxable Canadian corporation and a private corporation. Immediately before the transfer of the DCAmalco Transferred Asset Shares as described in paragraph 12 below, NewCo will not have had any assets or liabilities, and it will not have issued any shares.

The authorized capital of NewCo will consist of common shares and special shares. The common shares of NewCo will be entitled to one vote per share and will be fully participating. The special shares of NewCo will have the following attributes:

(a) the holder of each special share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of NewCo from time to time, which dividend need not also be declared on any other class of shares of NewCo;

(b) the holder of each special share will not be entitled to vote at meetings of shareholders of NewCo, other than as provided under the CA;

(c) subject to applicable law, each special share will be redeemable at any time at the option of NewCo for an amount (the "NewCo Redemption Amount") equal to the aggregate net FMV of the consideration for which such shares are issued (being the aggregate FMV of the property transferred to NewCo less the aggregate amount of liabilities assumed by NewCo as described in paragraph 16 below) divided by the number of special shares of NewCo issued (being XXXXXXXXXX), plus any declared but unpaid dividends;

(d) subject to applicable law, each special share will be retractable at any time at the option of the holder at a retraction amount equal to the NewCo Redemption Amount, plus any declared but unpaid dividends; and

(e) if NewCo is liquidated, dissolved or wound-up, or if its assets are otherwise distributed among the shareholders by way of a repayment of capital, whether voluntary or involuntary, the holders of the special shares will be entitled to receive, before any distribution of any assets of NewCo among the holders of the common shares, an amount per special share equal to the NewCo Redemption Amount plus any declared but unpaid dividends.

12. HoldCo2 will transfer the DCAmalco Transferred Asset Shares to NewCo for a purchase price equal to their FMV. NewCo will satisfy the purchase price for the DCAmalco Transferred Asset Shares by issuing to HoldCo2 additional common shares in the capital of NewCo having a FMV equal to the FMV of the DCAmalco Transferred Asset Shares. HoldCo2 will apply for a certificate under section 116 in respect of the transfer of the DCAmalco Transferred Asset Shares to NewCo.

Pursuant to the provisions of the CA, an amount equal to the FMV of the DCAmalco Transferred Asset Shares will be added to the capital account maintained by NewCo in respect of its common shares. By virtue of paragraph 212.1(1)(b) of the Act, the increase in the PUC of the common shares in the capital of NewCo as a result of the transfer of the DCAmalco Transferred Asset Shares will be limited to an amount equal to the PUC of the DCAmalco Transferred Asset Shares immediately before such transfer.

13. Immediately before the transfer of property described in paragraph 16 below, the property of DCAmalco will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(l), as follows:

(a) cash or near cash property, comprising all of the current assets of DCAmalco, including any cash, deposits, accounts receivable, inventories, materials and supplies and prepaid expenses;

(b) business property, comprising all of the assets of DCAmalco, other than cash or near cash property, any income from which would, for purposes of the Act, be income from a business (other than an SIB); and

(c) investment property, comprising all of the assets of DCAmalco, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or an SIB.

At present, DC has no investment property, and it is expected that DCAmalco will not have any investment property immediately before the transfer of the property to NewCo described in paragraph 16 below.

14. In determining the net FMV of each type of property of DCAmalco immediately before the transfer described in paragraph 16 below, the liabilities of DCAmalco will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of DCAmalco in the following manner:

(a) current liabilities of DCAmalco will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of DCAmalco in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The allocation of current liabilities as described herein will not exceed the aggregate FMV of the cash or near cash property of DCAmalco;

(b) any accounts receivable, inventory and prepaid expenses of DCAmalco that are initially classified in accordance with paragraph 13(a) above as cash or near cash property, that relate to a business carried on by DCAmalco and that will be collected, sold or consumed by DCAmalco or NewCo, as the case may be, in the ordinary course of that business, will then be classified as business property and the net FMV thereof, determined after the allocation of current liabilities as described in (a) above, will be included in the net FMV of business property and will not be included in the net FMV of cash or near cash property;

(c) liabilities of DCAmalco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, then will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein;

(d) if any liabilities remain after the allocations described in steps (a) and (c) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property, and investment property, if any, of DCAmalco, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

15. For greater certainty, in determining the net FMV of the property of DCAmalco as described in paragraphs 13 and 14, the following principles will apply:

(a) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification;

(b) deferred revenue which represents revenue received in the ordinary course of business, the recognition of which has been deferred due to the legal obligation of the recipient either to provide services or deliver goods to the customer from which such revenue was received, will be treated as a liability for purposes of the proposed transactions described herein, to the extent the amount of such deferred revenue gives rise to a legal obligation to pay such amount should the services not be provided or the goods not be delivered. The amount of any deferred revenue which does not represent such a legal obligation will not be considered a liability for the purposes of the proposed transactions described herein;

(c) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of DCAmalco;

(d) the Vacant Land will be classified as business property of DCAmalco; and

(e) any tax accounts, such as the balance of any capital losses, non-capital losses and investment tax credits of DCAmalco, will not be considered property for purposes of the proposed transactions described herein.

16. DCAmalco and NewCo will enter into an agreement of purchase and sale under which DCAmalco will transfer to NewCo at FMV:

(a) business property, consisting of the Transferred Assets;

(b) cash or near cash property; and

(c) investment property, if any;

such that, immediately after the transfer, the net FMV of the cash or near cash property, the business property and investment property, if any, of DCAmalco (after allocating and deducting, in the manner described in paragraph 14 above, the liabilities of DCAmalco which are to be assumed by NewCo as described below) which is transferred to NewCo as described herein, will approximate that proportion of the net FMV of all of that type of property of DCAmalco, determined immediately before the transfer referred to herein that:

(d) the aggregate FMV of the DCAmalco Transferred Asset Shares owned by NewCo, immediately before the transfer,

is of

(e) the aggregate FMV of all of the issued and outstanding shares of DCAmalco immediately before the transfer.

For the purpose of this paragraph and paragraph 20 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net FMV of each type of property which NewCo has received (or DCAmalco has retained) as compared to what NewCo would have received (or DCAmalco would have retained) had it received (or retained) its appropriate pro rata share of the net FMV of that type of property. However, the aggregate net FMV of all property of DCAmalco transferred to NewCo as described herein will be equal to the proportion determined by (d) and (e) above of the aggregate net FMV of all property of DCAmalco immediately before the transfer.

As consideration for the transfer of property described herein, NewCo will:

(f) assume debt of DCAmalco that is allocable to the property of DCAmalco transferred to NewCo as described in (a), (b) and (c) above, all determined in accordance with paragraph 14, but not exceeding the aggregate of the agreed amounts in the joint elections under subsection 85(1) described in paragraph 15 above . The amount of liabilities to be allocated to each such property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property; and

(g) issue XXXXXXXXXX NewCo special shares having an aggregate FMV and redemption amount equal to the FMV of the property so transferred to NewCo as described herein less the amount of the liabilities of DCAmalco assumed by NewCo as described in paragraph (f) above.

There is no legal prohibition in the CA that would prevent DCAmalco from owning shares in the capital of NewCo or vice versa.

17. DCAmalco and NewCo will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer of any eligible property of DCAmalco that has a FMV in excess of its cost amount. Specifically, the agreed amount in each joint election will not be less than the least of :

(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,

(b) the amounts specified in subparagraphs 85(1)(e)(i), (ii) or (iii) in the case of depreciable property of a prescribed class, and

(c) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

18. For the purposes of the CA, NewCo will be required to add to the capital of the NewCo special shares an amount equal to the net FMV of the property so transferred to NewCo as described in paragraph 16 above. Subsection 85(2.1) of the Act will reduce the PUC of the NewCo special shares to an amount equal to the amount by which the aggregate of the cost to NewCo (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to NewCo as described in paragraph 17 exceeds the amount of the liabilities assumed by NewCo as described in paragraph 16(f).

19. Immediately following the transfer of property described in paragraph 16, DCAmalco will redeem from NewCo all of the DCAmalco Transferred Asset Shares for an amount equal to their FMV, being the aggregate of the DCAmalco Transferred Asset Share Redemption Amounts and will issue to NewCo in consideration therefor a demand non-interest bearing promissory note with a principal amount and FMV equal to the aggregate of the DCAmalco Transferred Asset Share Redemption Amounts (the "DCAmalco Note"). NewCo will accept the DCAmalco Note as full and absolute payment of the DCAmalco Transferred Asset Share Redemption Amount in respect of each redeemed DCAmalco Transferred Asset Share with the risk of the note being dishonoured.

NewCo will redeem from DCAmalco all of its special shares for an amount equal to their FMV, being the aggregate of the NewCo Redemption Amounts, and will issue to DCAmalco in consideration therefor a demand non-interest bearing promissory note with a principal amount and FMV equal to the aggregate of the NewCo Redemption Amounts ("the NewCo Note"). DCAmalco will accept the NewCo Note as full and absolute payment of the NewCo Redemption Amount in respect of each NewCo special share with the risk of the note being dishonoured.

DCAmalco will pay the principal amount of the DCAmalco Note by transferring to NewCo the NewCo Note which will be accepted by NewCo in full payment of DCAmalco's obligation. NewCo will pay the principal amount of the NewCo Note by transferring to DCAmalco the DCAmalco Note which will be accepted by DCAmalco in full payment of NewCo's obligation. The DCAmalco Note and the NewCo Note will both thereupon be marked paid in full and cancelled.

20. Immediately following the proposed transactions described above, the net FMV of each type of property retained by DCAmalco, determined in the manner described in paragraphs 13, 14 and 15 above, will approximate that proportion of the aggregate net FMV of that type of property of DCAmalco, determined immediately before the transfer described in paragraph 16 above, that :

(a) the aggregate FMV , immediately before the transfer of property described in paragraph 16, of the DCAmalco Residual Shares

is of

(b) the aggregate FMV, immediately before the transfer of property, of all of the issued and outstanding shares of DCAmalco.

21. HoldCo2 will sell all of the issued and outstanding common shares in the capital of NewCo to ParentCo for a purchase price equal to the FMV of the NewCo common shares. ParentCo will satisfy the purchase price for the NewCo common shares by way of a cash payment, a note or some combination of the two. HoldCo2 will apply for a certificate under section 116 in respect of the sale of the common shares of NewCo to ParentCo.

22. ParentCo will sell all of the issued and outstanding common shares in the capital of NewCo to XXXXXXXXXXCo for a purchase price equal to the FMV of the NewCo common shares. XXXXXXXXXXCo will satisfy the purchase price for the NewCo common shares by issuing to ParentCo shares in the capital of XXXXXXXXXXCo with a FMV equal to the FMV of the NewCo common shares. ParentCo will apply for a certificate under section 116 in respect of the sale of the common shares of NewCo to XXXXXXXXXXCo.

23. XXXXXXXXXXCo will sell all of the issued and outstanding common shares in the capital of NewCo to PublicCo for a purchase price equal to the FMV of the NewCo shares. PublicCo will satisfy the purchase price for the NewCo common shares by issuing to XXXXXXXXXXCo shares in the capital of PublicCo with a FMV equal to the FMV of the NewCo common shares. XXXXXXXXXXCo will apply for a certificate under section 116 in respect of the sale of the common shares of NewCo to PublicCo.

XXXXXXXXXX

24. On a date to be determined, some of the voting shares of PublicCo held by XXXXXXXXXXCo may be offered for sale either to the public or to an arm's length party or parties. Alternatively, newly-issued voting shares in the capital of PublicCo may be offered for sale either to the public or to an arm's length party or parties. In either case, on a diluted basis, the public or such party or parties will own less than 50 % of the issued and outstanding voting shares in the capital of PublicCo. XXXXXXXXXXCo will continue to own more than 50% of the voting shares of PublicCo and will continue to control PublicCo. At no time before the transactions described in this paragraph will the shares of PublicCo derive 10% or more of their FMV from the shares of NewCo.

ADDITIONAL INFORMATION

25. The proposed transactions are part of a world-wide reorganization of the ParentCo group of companies. In general under this reorganization, the businesses carried on by other ParentCo group subsidiaries that are similar to the business carried on by DC with respect to the Transferred Assets will be transferred to separate corporations. These corporations will, in turn, become direct or indirect subsidiary wholly-owned corporations of PublicCo.

26. The ParentCo group of companies recently completed one business venture, and is currently planning to enter into another business venture in Canada, both of which are not part of the series of transactions comprising the proposed transactions described herein.

XXXXXXXXXX

27. No property has or will become property of DC or DCAmalco and no liabilities have been or will be incurred by DC or DCAmalco in contemplation of and before the transfer described in paragraph 16 except in the ordinary course of business or as described herein.

28. Except in the ordinary course of business or except as described herein, neither of DC nor DCAmalco has any specific intention of disposing of any assets currently owned by it to an unrelated person following the proposed transactions and none of DC, DCAmalco or NewCo will dispose of any of its assets as part of a series of transactions which includes the proposed transactions.

29. There are not, and will not be at any time before the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the DC Transferred Asset Shares or the NewCo special shares.

30. Neither DCAmalco nor NewCo has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(l), in respect of any of the shares to be redeemed as part of the proposed transactions described herein.

31. None of the DCAmalco Transferred Asset Shares or the NewCo special shares will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

32. Neither DCAmalco nor NewCo will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

33. Neither DCAmalco nor NewCo is or will be an SFI prior to completion of the proposed transactions described herein.

34. At no time during the series of transactions which includes the proposed transactions described in paragraphs 7 to 23 above, will any of the DC common shares, the DC Amalco Transferred Asset Shares or the NewCo common shares derive their value principally (i.e. more than 50%) from immovable property situated in Canada. The expression "immovable property" as used herein has the meaning assigned by XXXXXXXXXX and for greater certainty, does not include real property in which the business of the particular company is carried on.

35. Each of DCAmalco and NewCo will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions described herein.

PURPOSE OF THE PROPOSED TRANSACTIONS

36. The purpose of the proposed transactions is to transfer the business that is carried on by DC with respect to the Transferred Assets to NewCo, which will be a subsidiary wholly-owned corporation of PublicCo. This transfer of the Transferred Assets, together with the world-wide reorganization involving assets used to carry on similar businesses within the ParentCo group will permit ParentCo to manage more efficiently, and the public to value more easily, those businesses. ParentCo expects that this realignment will result in an increase in shareholder value.

RULINGS

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 provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The continuance of DC from XXXXXXXXXX to XXXXXXXXXX as described in paragraph 8 will not, in and by itself,

(a) result in the fiscal year of DC ending at the time of the continuance;

(b) result in a disposition of any properties of DC;

(c) result in a disposition of any share of DC by the holder of the share, for purposes of the Act; or

(d) result in a dividend being deemed by section 84 of the Act to have been received by any holder of a share of DC.

B. With respect to the amalgamation of DC and ShellCo described in paragraph 10 above:

(a) the provisions of subsection 87(1) will apply; and

(b) provided that the DC common shares were capital property to HoldCo2 immediately before the amalgamation, the provisions of subsection 87(4) of the Act, other than paragraphs (c), (d), and (e) thereof, will apply such that:

(i) Holdco 2 will be deemed by paragraph 87(4)(a) to have disposed of the DC common shares for aggregate proceeds of disposition equal to their aggregate adjusted cost base immediately before the amalgamation; and

(ii) HoldCo2 will be deemed by paragraph 87(4)(b) to have acquired the DC Residual Shares and DC Transferred Asset Shares for an amount equal to that proportion of the proceeds described in (i) above that

(I) the FMV, immediately after the amalgamation, of the DC Residual Shares and DC Transferred Asset Shares, as the case may be,

is of

(II) the FMV, immediately after the amalgamation, of all new shares of DC so acquired by HoldCo2.

C. Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the ITAR, to the application of paragraph 88(2.2)(b) of the Act, which applies for the purpose stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsection 13(21.2) as it may apply to the transfers referred to herein, the provisions of subsection 85(1) will apply to the transfer by DCAmalco to NewCo, as described in paragraph 16 above, of each eligible property which is the object of the election described in paragraph 17 above, such that the agreed amount in respect of each such transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof under paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) of the Act will not apply to the transfer referred to herein. In addition, for the purpose of the joint election in respect of depreciable property of a prescribed class, as described in paragraph 17 above, the reference to "the undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition...." in subparagraph 85(1)(e)(i) of the Act will be read to mean the proportion of the undepreciated capital cost to DCAmalco of all the property of that class that the capital cost of the property so transferred immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.

D. Subsection 84(3) will apply on the redemption

(a) as described in paragraph 19, of the DCAmalco Transferred Asset Shares held by NewCo, to deem DCAmalco to have paid and NewCo to have received; and

(b) as described in paragraph 19, of the NewCo special shares held by DCAmalco, to deem NewCo to have paid and DCAmalco to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend

(c) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(d) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.2), (2.3) or (2.4);

(e) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(f) will not be subject to tax under Part IV of the Act, except as provided in paragraph 186(1)(b) of the Act, as DCAmalco and NewCo will be connected to each other by virtue of subsection 186(2) and paragraph 186(4)(a) of the Act; and

(g) will not be subject to tax under Parts IV.1 and VI.1 of the Act by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act because each of DCAmalco and NewCo will have a substantial interest, within the meaning assigned by paragraph 191(2)(a) of the Act, in the payer corporation immediately before the redemption of such shares.

E. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is not:

(a) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(c) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(d);

which has not been described herein, then by virtue of paragraph 55(3)(b) subsection 55(2) will not apply to the taxable dividends referred to in Ruling D above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

F. The repayment of the NewCo Note held by DCAmalco and the DCAmalco Note held by NewCo described in paragraph 19 will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

G. Provided that the DC common shares constitute capital property to Holdco immediately before the commencement of the proposed transactions described herein, the proposed transactions described herein will not, in and by themselves, cause the DCAmalco Transferred Asset Shares to be received and held by NewCo or the NewCo special shares to be received and held by DCAmalco not to be capital property.

H. The provisions of subsections 15(1), 56(2), 56(4) and 246(1), will not apply to any of the proposed transactions described above, in and by themselves.

I. Provided that HoldCo, HoldCo2 or XXXXXXXXXXCo, as the case may be, does not become a resident of Canada and will, at the time of any disposition of shares by it as described in (a) to (d) below, continue to be a resident of XXXXXXXXXX, any gain realized on the disposition of:

(a) the DC common shares held by HoldCo described in paragraph 9 above,

(b) the DCAmalco Transferred Asset shares held by HoldCo2 described in paragraph 12 above,

(c) the NewCo common shares held by HoldCo2 described in paragraph 21 above; and

(d) the NewCo common shares held by XXXXXXXXXXCo described in paragraph 23 above,

will be exempt from taxation in Canada in accordance with XXXXXXXXXX.

J. Provided that ParentCo does not become a resident of Canada and will, at the time of the disposition of the NewCo common shares held by ParentCo described in paragraph 22 above, continue to be a resident of XXXXXXXXXX, any gain realized on such disposition of the NewCo common shares by ParentCo will be exempt from taxation in Canada in accordance with XXXXXXXXXX.

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

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued on December 30, 1996 and are binding provided that the proposed transactions, other than the proposed transactions described in paragraph 24 above, are completed by XXXXXXXXXX.

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

COMMENTS

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

(a) the country of residence of HoldCo, HoldCo2, XXXXXXXXXXCo or ParentCo for purposes of the Act or a particular income tax convention which has entered into force between Canada and another country;

(b) the determination of the FMV or adjusted cost base of any particular asset or share or the PUC of any shares referred to herein; or

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. For greater certainty,

(i) we are not commenting on any tax consequences relating to the transactions described in paragraph 5 above; and

(ii) our rulings should not be construed as confirming that the disposition of the voting shares of PublicCo held by XXXXXXXXXXCo to the public or to an arm's length party or parties, or the issuance of voting shares in the capital of PublicCo to the public or to an arm's length party or parties as described in paragraph 24 above will not be part of the series of transactions that includes the proposed transactions described in paragraphs 7 to 23.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch