2000 Ruling 2000-0014603 - Internal Reorganization

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: Interest deductibility; application of section 86; application of paragraph 55(3)(a)

Position: Interest deductible; section 86 applies to share reorganization; dividends not subject to subsection 55(2) by virtue of paragraph 55(3)(a)

Reasons: Interest expense incurred for the purpose of earning income - amount of interest reasonable; requirements of section 86 and paragraph 55(3)(a) satisfied

XXXXXXXXXX 		000-001460

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We acknowledge receipt of your correspondence of XXXXXXXXXX, as well as the information provided to us during our various telephone conversations.

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

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

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

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

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

In this letter, unless otherwise expressly stated:

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

(b) "ACO" means XXXXXXXXXX;

(c) "adjusted cost base" has the meaning assigned by section 54;

(d) "agreed amount" has the meaning assigned in subsection 85(1);

(e) "BCA" means the Canada Business Corporations Act;

(f) "BCO" means XXXXXXXXXX;

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

(h) "Daylight Loan" means the loan described in Paragraph 14;

(i) "Daylight Loan Proceeds" means the aggregate proceeds of the Daylight Loan described in Paragraph 14;

(j) "DC1" means XXXXXXXXXX;

(k) "DC2" means XXXXXXXXXX;

(l) "DC2 Reorganization" means the reorganization described in advance income tax ruling #983245, dated XXXXXXXXXX, 1999;

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

(n) "Designated Assets" has the meaning assigned in Paragraph 8;

(o) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(p) "ECO" means XXXXXXXXXX;

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

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

(s) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

(t) "FCO" means XXXXXXXXXX;

(u) "GCO" means XXXXXXXXXX;

(v) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(w) "HCO" means XXXXXXXXXX;

(x) "New XCO A Shares" means the XXXXXXXXXX shares of XCO issued on the share reorganization described in Paragraph 11;

(y) "New XCO B Shares" means the XXXXXXXXXX shares of XCO issued on the share reorganization described in Paragraph 11;

(z) "Paragraph" means a numbered paragraph in this letter;

(aa) XXXXXXXXXX;

(bb) "Proposed Transactions" means the transactions described in Paragraphs 9 to 21;

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

(dd) "RDTOH" means "refundable dividend tax on hand" which has the meaning assigned by subsection 129(3);

(ee) XXXXXXXXXX;

(ff) "related person" has the meaning assigned by section 251;

(gg) "Reorganization Shares Redemption Amount" means the redemption amount of the XCO Reorganization Shares;

(hh) "series of transactions or events" includes the transactions or events described in subsection 248(10);

(ii) "stated capital" has the meaning assigned to that term in the BCA;

(jj) "subject corporation" has the meaning assigned by subsection 186(3);

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

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

(mm) "Trust Indenture" means the trust indenture described in Paragraph 4;

(nn) "XCO" means XXXXXXXXXX;

(oo) "XCO A Shares" means the XXXXXXXXXX shares of XCO, as described in Paragraph 2;

(pp) "XCO B Shares" means the XXXXXXXXXX shares of XCO, as described in Paragraph 2;

(qq) "XCO Common Shares" means the issued and outstanding XCO A Shares and the XCO B Shares;

(rr) XCO Designated Common Shares" means the portion of the XCO Common Shares which are allocable to the Designated Assets as described in Paragraph 8;

(ss) "XCO Designated Current Debt" means the portion of XCO's current indebtedness (other than the current portion of the XCO Designated Long-Term Debt) which is allocable to the Designated Assets, as described in Paragraph 8;

(tt) "XCO Designated Long-Term Debt" means the portion of the XCO Long-Term Debt which is allocable to the Designated Assets, as described in Paragraph 8;

(uu) "XCO Designated Preferred Shares" means the portion of the issued and outstanding XCO Preferred Shares which are allocable to the Designated Assets, as described in Paragraph 8;

(vv) "XCO Long-Term Debt" means the long-term debt of XCO;

(ww) "XCO Note" means the demand promissory note of XCO issued to YCO on the redemption of the XCO Reorganization Shares and XCO Designated Preferred Shares, as described in Paragraph 18;

(xx) "XCO Preferred Shares" means the preferred shares of XCO issued and outstanding immediately prior to the commencement of the Proposed Transactions;

(yy) "XCO Reorganization Shares" means a class of preferred shares of XCO, as described in Paragraph 11;

(zz) "YCO" means a corporation to be incorporated under the BCA, as described in Paragraph 9;

(aaa) "YCO A Shares" means the XXXXXXXXXX shares of YCO, as described in Paragraph 9;

(bbb) "YCO B Shares" means the XXXXXXXXXX shares of YCO, as described in Paragraph 9;

(ccc) "YCO Long-Term Debt" means debt instruments of YCO as described in Paragraph 15 having terms and conditions substantially identical (including identical principal amounts and interest rates) to those of the XCO Designated Long-Term Debt;

(ddd) "YCO Note" means the demand promissory note of YCO issued on the redemption of the YCO Special Shares, as described in Paragraph 19;

(eee) "YCO Preferred Shares" means the preferred shares of YCO, issuable in XXXXXXXXXX , which are described in Paragraph 9;

(fff) "YCO Special Shares" means a class of preferred shares of YCO, as described in Paragraph 9; and

(ggg) "ZCO" means the XXXXXXXXXX.

Facts

1. XCO is governed by the BCA. It is a taxable Canadian corporation and a subject corporation.

2. XCO has issued and outstanding shares consisting of XXXXXXXXXX common shares, XXXXXXXXXX common shares and several XXXXXXXXXX preferred shares. DC1 owns all of the issued and outstanding XCO Preferred Shares and DC2 owns all of the issued and outstanding XCO A Shares and XCO B Shares. The XCO Preferred Shares and the XCO Common Shares are capital property to DC1 and DC2, respectively.

3. DC1 is a public corporation and a taxable Canadian corporation. DC1 is primarily a holding company, the direct and indirect subsidiaries of which carry on XXXXXXXXXX. DC2 is a taxable Canadian corporation which acts as the holding company for DC1's XXXXXXXXXX operations. DC1 owns all of the issued and outstanding shares of DC2.

4. DC1 previously obtained long-term debt financing through a Trust Indenture on behalf of its XXXXXXXXXX subsidiaries, including XCO, and loaned the borrowed funds to the relevant subsidiaries on substantially identical terms and conditions. As part of the DC2 Reorganization, DC2 assumed DC1's payment obligations with respect to the indebtedness under the Trust Indenture and DC1 transferred to DC2 the long-term indebtedness and common shares of its XXXXXXXXXX subsidiaries. As a result, DC2 has a number of long-term debt issues outstanding under the Trust Indenture, certain of which are "mirrored" by corresponding long-term debt of XCO ("XCO Long-Term Debt"). Some of the debt issues comprising the XCO Long-Term Debt have fixed interest rates in excess of currently prevailing interest rates, while others have fixed interest rates which are less than the currently prevailing interest rates.

5. XCO carries on the business XXXXXXXXXX. XCO owns all of the shares of ZCO, XXXXXXXXXX. XCO also owns all of the shares of HCO which, in turn, owns XXXXXXXXXX% of the issued shares of GCO. The remaining issued shares of GCO are owned by investors, all of which deal with GCO at arm's length. GCO owns all of the issued shares of ECO and FCO, XXXXXXXXXX. HCO also owns all of the issued and outstanding shares of each of ACO and BCO. XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. XXXXXXXXXX. These assets are referred to in this ruling request as the "Designated Assets." The portions of XCO's common shares, preferred shares, long-term debt and current debt which are allocated to the Designated Assets XXXXXXXXXX are referred to herein as the XCO Designated Common Shares, the XCO Designated Preferred Shares, the XCO Designated Long-Term Debt and the XCO Designated Current Debt, respectively.

Proposed Transactions

Subject to the receipt of the rulings herein and the XXXXXXXXXX, shareholder and creditor approvals, the following transactions will be undertaken.

9. YCO will be incorporated by DC2 under the BCA and will be a taxable Canadian corporation and a subject corporation. YCO will have two classes of common shares: XXXXXXXXXX common shares and XXXXXXXXXX common shares. The YCO A Shares and YCO B Shares will have terms and conditions substantially the same as the XCO A Shares and XCO B Shares, respectively. The authorized preferred shares of YCO will consist of an unlimited number of preferred shares, issuable in XXXXXXXXXX ("YCO Preferred Shares") having terms and conditions which are substantially the same as the XCO Preferred Shares and special shares ("YCO Special Shares"). The YCO Special Shares will be: (i) non-voting; (ii) redeemable and retractable for an aggregate amount (the "redemption amount") equal to the fair market value of the consideration for which they are issued; and (iii) entitle the holder to an annual non-cumulative dividend in the amount of XXXXXXXXXX% of the redemption amount.

10. DC2 will subscribe for one YCO Class B Share for nominal consideration.

11. DC2 will reorganize its shareholding in XCO. To implement such reorganization, XCO will file articles of amendment pursuant to which DC2 will exchange each XCO A Share for one XCO Reorganization Share and a fraction of an XCO A Share ("New XCO A Share") and each XCO B Share for one XCO Reorganization Share and a fraction of an XCO B Share ("New XCO B Share"). The fractions referred to in the preceding sentence will be determined in such a manner that the number of issued and outstanding New XCO A Shares and New XCO B Shares following the exchange will be equal to the number of issued and outstanding XCO A Shares and XCO B Shares immediately prior to the exchange less the number of shares of each class which are XCO Designated Common Shares. The XCO Reorganization Shares will be:

(a) non-voting;

(b) redeemable and retractable for an aggregate amount (the "Reorganization Shares Redemption Amount") equal to the aggregate fair market value of the Designated Assets less

(i) the aggregate redemption amount of the XCO Designated Preferred Shares,

(ii) the aggregate principal amount of the XCO Designated Long-Term Debt, and

(iii) the aggregate principal amount of the XCO Designated Current Debt; and

(c) subject to an annual non-cumulative dividend in the amount of 6% of the redemption amount.

No election will be filed under subsection 85(1) in respect of the share exchange described in this Paragraph. As a result of the share exchanges described herein, the XCO Class A Shares and the XCO Class B Shares will be cancelled.

The amount which will be added to the stated capital account of the New XCO A Shares, New XCO B Shares and XCO Reorganization Shares will be determined as follows:

(a) the stated capital of the New XCO A Shares will be equal to an amount determined by the formula A x B/C where A is the stated capital of the XCO A Shares immediately before the exchange, B is the number of New XCO A Shares outstanding immediately after the exchange and C is the total number of XCO A Shares outstanding immediately before the exchange;

(b) the stated capital of the New XCO B Shares will be equal to an amount determined by the formula A x B/C where A is the stated capital of the XCO B Shares immediately before the exchange, B is the number of New XCO B Shares outstanding immediately after the exchange and C is the total number of XCO B Shares outstanding immediately before the exchange; and

(c) the stated capital of the XCO Reorganization Shares will be equal to the aggregate stated capital of the XCO Common Shares outstanding immediately before the exchange less the aggregate stated capital of the New XCO A Shares and New XCO B Shares immediately after the exchange as determined in (a) and (b) above.

12. DC2 will transfer the XCO Reorganization Shares to YCO in consideration for the issuance by YCO to DC2 of YCO A Shares and YCO B Shares in the same numbers (less one YCO Class B Share) as the numbers of XCO A Shares and XCO B Shares, respectively, which comprised the XCO Designated Common Shares. DC2 and YCO will jointly elect pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer of the XCO Reorganization Shares to YCO. The agreed amount in respect of such election will not exceed the fair market value of the XCO Reorganization Shares and will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) or (ii). The stated capital of the YCO A Shares and YCO B Shares will be set at an amount such that subsection 85(2.1) will not apply to reduce the paid-up capital of such shares.

13. DC1 will transfer the XCO Designated Preferred Shares to YCO in consideration for the issuance by YCO to DC1 of YCO Preferred Shares with an aggregate redemption amount and fair market value equal to the aggregate redemption amount and fair market value of the XCO Designated Preferred Shares. DC1 and YCO will jointly elect pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer of the XCO Designated Preferred Shares to YCO. The agreed amount in respect of such election for each XCO Designated Preferred Share will not exceed the fair market value of such share and will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) or (ii). The aggregate stated capital of the YCO Preferred Shares will be set at an amount which will not exceed the aggregate paid-up capital of the XCO Designated Preferred Shares.

14. DC2 will borrow from an arm's length financial institution on a "daylight loan" basis an amount equal to the aggregate principal amount of the XCO Designated Long-Term Debt.

15. DC2 will loan the Daylight Loan Proceeds to YCO, which loan will be evidenced by the YCO Long-Term Debt. The principal amounts, repayment terms and interest rates on the various portions of the YCO Long-Term Debt will be the same as the principal amounts, repayment terms and interest rates on the XCO Designated Long-Term Debt.

16. XCO will transfer the Designated Assets to YCO in consideration for (a) the issuance by YCO to XCO of YCO Special Shares, (b) the payment of the Daylight Loan Proceeds to XCO and (c) the assumption of the XCO Designated Current Debt. The YCO Special Shares will have a fair market value and an aggregate redemption amount equal to the fair market value of the Designated Assets less the aggregate of the Daylight Loan Proceeds and the principal amount of the XCO Designated Current Debt. The stated capital of the YCO Special Shares will be set at an amount such that subsection 85(2.1) will not apply to reduce the paid-up capital of such shares.

17. XCO and YCO will jointly elect pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer to YCO of any property included in the Designated Assets which is an eligible property of XCO. 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 respect of any other eligible property not included in (a) to (c) above, XCO and YCO will elect an amount greater than nil but not exceeding the fair market value of the property at the time of the transfer.

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

18. XCO will redeem all of the XCO Reorganization Shares and the XCO Designated Preferred Shares and will issue to YCO, in full payment of the aggregate redemption amount payable therefor, a demand promissory note ("XCO Note") having a principal amount and fair market value equal to the aggregate redemption amount of the shares so redeemed, with interest payable only from the date of demand for payment by the holder to the date of payment at a rate equal to the average monthly prime rate of a Canadian chartered bank.

19. YCO will redeem all of the YCO Special Shares and will issue to XCO, in full payment of the aggregate redemption price payable therefor, a demand promissory note ("YCO Note") having a principal amount and fair market value equal to the aggregate redemption amount of the shares so redeemed (which will be equal to the principal amount and fair market value of the XCO Note), with interest payable only from the date of demand for payment by the holder to the date of payment at a rate equal to the average monthly prime rate of a Canadian chartered bank.

20. The obligations of XCO and YCO to each other under the XCO Note and the YCO Note will be set off against each other as payment in full of such notes and the notes will be cancelled.

21. XCO will repay the full amount of the XCO Designated Long-Term Debt with the Daylight Loan Proceeds. DC2 will repay the Daylight Loan with the Daylight Loan Proceeds.

Additional Information

22. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a guarantee agreement in respect of any of the XCO Reorganization Shares, the XCO Designated Preferred Shares or the YCO Special Shares.

23. Neither XCO nor YCO has, nor will, enter into a dividend rental arrangement in respect of any of the XCO Reorganization Shares, the XCO Designated Preferred Shares or the YCO Special Shares.

24. None of the XCO Reorganization Shares, the XCO Designated Preferred Shares or the YCO Special Shares will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

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

26. None of the corporations referred to herein is a "specified financial institution" or a "restricted financial institution" as defined in subsection 248(1).

27. Neither XCO nor YCO will have any RDTOH at the end of the taxation year in which the transactions described in Paragraphs 18 and 19 occur.

Purpose of the Proposed Transactions

28. XXXXXXXXXX

XXXXXXXXXX

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of 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 set forth below.

A. The provisions of subsection 86(1) will apply to:

(a) the exchange of the XCO Class A Shares for New XCO A Shares and XCO Reorganization Shares as described in Paragraph 11 with the result that:

(i) the cost to DC2 of the XCO Reorganization Shares shall be deemed to be that proportion of the amount, if any, by which the total of the adjusted cost base to DC2 immediately before the disposition of its XCO Class A Shares that the fair market value, immediately after the disposition, of the XCO Reorganization Shares is of the fair market value, immediately after the disposition, of all the shares receivable by DC2 in exchange for the XCO Class A Shares;

(ii) the cost to DC2 of the New XCO A Shares shall be deemed to be that proportion of the amount, if any, by which the total of the adjusted cost base to DC2 immediately before the disposition of its XCO Class A Shares that the fair market value, immediately after the disposition, of the New XCO A Shares is of the fair market value, immediately after the disposition, of all the shares receivable by DC2 in exchange for the XCO Class A Shares; and

(iii) DC2 shall be deemed to have disposed of the XCO Class A Shares for proceeds of disposition equal to the cost to DC2 of the shares receivable by DC2 as determined in subparagraphs (i)(a) and (b) above.

(b) the exchange of the XCO Class B Shares for New XCO B Shares and XCO Reorganization Shares as described in Paragraph 11 with the result that:

(i) the cost to DC2 of the XCO Reorganization Shares shall be deemed to be that proportion of the amount, if any, by which the total of the adjusted cost base to DC2 immediately before the disposition of its XCO Class B Shares that the fair market value, immediately after the disposition, of the XCO Reorganization Shares is of the fair market value, immediately after the disposition, of all the shares receivable by DC2 in exchange for the XCO Class B Shares;

(ii) the cost to DC2 of the New XCO B Shares shall be deemed to be that proportion of the amount, if any, by which the total of the adjusted cost base to DC2 immediately before the disposition of its XCO Class B Shares that the fair market value, immediately after the disposition, of the New XCO B Shares is of the fair market value, immediately after the disposition, of all the shares receivable by DC2 in exchange for the XCO Class B Shares; and

(iii) DC2 shall be deemed to have disposed of the XCO Class B Shares for proceeds of disposition equal to the cost to DC2 of the shares receivable by DC2 as determined in subparagraphs (ii)(a) and (b) above.

(c) For greater certainty, subsection 86(2) will not apply to the exchanges described in (i) and (ii) above.

B. No dividend will be deemed to arise by virtue of either of subsections 84(1) or (3), as a result, or in respect, of the share exchange described in Paragraph 11.

C. Subject to the application of subsection 26(5) of the Income Tax Application Rules, subsection 85(1) will apply to the transfer of the XCO Reorganization Shares by DC2 to YCO, as described in Paragraph 12, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of the XCO Reorganization Shares will be deemed to be DC2's proceeds of disposition and YCO's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) will not apply to such transfer.

D. Subject to the application of subsection 26(5) of the Income Tax Application Rules, subsection 85(1) will apply to the transfer of the XCO Designated Preferred Shares by DC1 to YCO, as described in Paragraph 13, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of the XCO Designated Preferred Shares will be deemed to be DC1's proceeds of disposition and YCO's cost thereof pursuant to paragraph 85(1)(a).

For greater certainty, paragraph 85(1)(e.2) will not apply to such transfer.

E. Subject to the application of subsection 13(21.2) and of subsections 20(1.2) and 26(5) of the Income Tax Application Rules, the provisions of subsection 85(1) will apply to the transfer of each eligible property by XCO to YCO, as described in Paragraph 16, in respect of which an election under subsection 85(1) is made, such that the agreed amount in respect of each transfer of such property will be deemed to be XCO's proceeds of disposition and YCO's cost thereof pursuant to paragraph 85(1)(a), and, in respect of depreciable property, the capital cost thereof to YCO will be determined in accordance with subsection 85(5).

For the purpose of the joint elections described in Paragraph 16, 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) will be read as "the proportion of the undepreciated capital cost to XCO of all property of that class that the capital cost of the particular property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition."

For greater certainty, paragraph 85(1)(e.2) will not apply to such transfers.

F. Provided that YCO continues to use the Designated Assets for the purpose of gaining or producing income from a business or property (other than property the income from which is exempt from taxation or for property that is an interest in a life insurance policy), an amount, not in excess of a reasonable amount, paid in the year or payable in respect of the year by YCO (depending on the method regularly followed by YCO in computing its income for the purposes of the Act) pursuant to a legal obligation to pay interest on the YCO Long-Term Debt will be deductible in computing the income of YCO pursuant to paragraph 20(1)(c).

Interest on the YCO Long-Term Debt will not be considered to be in excess of a reasonable amount to the extent that it does not exceed the interest currently payable in respect of the corresponding XCO Designated Long-Term Debt and provided that interest currently payable by XCO in respect of the XCO Designated Long-Term Debt is deductible in computing XCO's income pursuant to paragraph 20(1)(c).

G. On the redemption by XCO of the XCO Reorganization Shares held by YCO, as described in Paragraph 18:

(a) paragraphs 84(3)(a) and (b) will apply to deem XCO to have paid and YCO to have received, a dividend equal to the amount by which the amount paid on the redemption of those shares exceeds the paid-up capital thereof immediately prior to the redemption;

(b) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which YCO would otherwise be considered to have received as a result of such redemption; and

(c) the provisions of subsection 112(3) will apply to reduce any loss to YCO which otherwise would be determined as a result of the redemption of such shares.

H. On the redemption by XCO of the XCO Designated Preferred Shares held by YCO, as described in Paragraph 18:

(a) paragraphs 84(3)(a) and (b) will apply to deem XCO to have paid and YCO to have received, on each class of shares comprising the redeemed XCO Designated Preferred Shares, a dividend equal to the amount by which the amount paid on the redemption of those shares of that class exceeds the paid-up capital thereof immediately prior to the redemption;

(b) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which YCO would otherwise be considered to have received as a result of such redemption; and

(c) the provisions of subsection 112(3) will apply to reduce any loss to YCO which otherwise would be determined as a result of such redemption.

I. On the redemption by YCO of the YCO Special Shares held by XCO as described in Paragraph 19:

(a) paragraphs 84(3)(a) and (b) will apply to deem YCO to have paid and XCO to have received, on each class of shares comprising the redeemed YCO Special Shares, a dividend equal to the amount by which the amount paid on the redemption of those shares of that class exceeds the paid-up capital thereof immediately prior to the redemption;

(b) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which XCO would otherwise be considered to have received as a result of such redemption; and

(c) the provisions of subsection 112(3) will apply to reduce any loss to XCO which would otherwise be determined as a result of such redemption.

J. The full amount of each of the deemed dividends referred to in Rulings G, H and I:

(a) will be a taxable dividend that will, by virtue of subparagraph 82(1)(a)(ii) and paragraph 12(1)(j), be included in computing the income of the recipient for the year in which it is received;

(b) will, by virtue of subsection 112(1), be deductible in computing the income of the recipient in the year in which it is received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) and (2.4); and

(c) will not be subject to tax under Parts IV.1 or VI.1 on the basis that such dividends will be "excepted dividends" by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and excluded dividends by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

K. By virtue of subsections 186(2) and 186(4), each of XCO and YCO will be connected to each other immediately before the transactions described in Paragraphs 18 and 19, therefore, neither XCO nor YCO will be subject to tax under Part IV of the Act on the dividends referred to in Rulings G, H and I, except as provided in paragraph 186(1)(b).

L. Provided the cost amount to YCO of the XCO Note and the cost amount to XCO of the YCO Note will, in each case, be equal to the face amount of such note, the dispositions of the XCO Note and the YCO Note which will occur on the payment of each such note, as described in Paragraph 20, will not result in any income, gain or loss, for the purposes of the Act, to either of YCO or XCO.

M. The set-off of the XCO Note and the YCO Note, as described in Paragraph 20, will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01 or result in a benefit to either XCO or YCO pursuant to section 15.

N. The Proposed Transactions will not, in and by themselves, cause the XCO Reorganization Shares, the XCO Designated Preferred Shares or the YCO Special Shares not to be capital property of XCO or YCO, as the case may be.

O. By virtue of paragraph 55(3)(a), subsection 55(2) will not apply with respect to any of the taxable dividends referred to in Rulings G, H and I provided that, as part of the series of transactions or events that includes the Proposed Transactions, there is not any disposition of property or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

For greater certainty, the Proposed Transactions, in and by themselves, will not be considered to result in any disposition of property or increase in interest described in any of subparagraphs 55(3)(a)(i) to (v).

P. Subsections 15(1), 56(2), 56(4) and 246(1) will not be applied as a result of the Proposed Transactions, in and by themselves.

Q. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine any of the tax consequences confirmed in the rulings granted herein.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could affect the rulings provided herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Caveat

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has reviewed or is making a determination or ruling in respect of:

(a) the fair market value or the adjusted cost base of any particular asset or the paid-up capital of any shares referred to in this advance income tax ruling;

(b) the balance of RDTOH of any corporation; or

(c) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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