2005 Ruling 2004-0095431R3 - Spin-off butterfly

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.

Principal Issues: Spin-off butterfly.

Position: Acceptable

Reasons: No contentious issues.

XXXXXXXXXX 2004-009543

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
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 also acknowledge receipt of your facsimiles as well as the information provided in various telephone conversations.

Throughout this letter, certain individuals and corporations will be referred to as follows:

XXXXXXXXXX Opco

XXXXXXXXXX Subco

XXXXXXXXXX Realco

XXXXXXXXXX Mr. A

XXXXXXXXXX Mr. B

Opco (the "taxpayer") files it corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office. The taxpayer is resident in Canada for the purposes of the Act.

To the best of your knowledge, and that of the taxpayer, none of the issues in this ruling request is:

(i) involved 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) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The taxpayer has represented that the transactions described in this letter will not affect its ability to pay any of its outstanding tax liabilities.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

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

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

(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1);

(d) "BCA" means the Companies Act XXXXXXXXXX;

(e) "Butterfly Proportion" means the fraction A/B, where:

A is the aggregate net fair market value of Subco's business property, determined on a consolidated look-through basis, immediately before the transfer described in Paragraph 23 below; and

B is the net fair market value of all business property owned by Opco, determined on a consolidated look-through basis, immediately before the transfer described in Paragraph 23 below;

(f) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);

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

(h) "CRA" means the Canada Revenue Agency;

(i) "distribution" has the meaning assigned by subsection 55(1);

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

(k) "FMV" means fair market value;

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

(m) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);

(n) "Paragraph" refers to a numbered paragraph in this letter;

(o) "proposed transactions" means the transactions described in Paragraphs 20 to 28 below;

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

(q) "Regulations" means the Income Tax Regulations promulgated under the Act;

(r) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

(s) "specified financial institution" has the meaning assigned by subsection 248(1);

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

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

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

(w) "unused surtax credit" has the meaning assigned by subsection 181.1(6).

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

FACTS

1. Opco is a taxable Canadian corporation incorporated under the BCA with a fiscal year end of XXXXXXXXXX. Opco was incorporated on XXXXXXXXXX. Opco is not a specified financial institution.

2. The authorized share capital of Opco consists of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX each. There are XXXXXXXXXX issued and outstanding common shares. Mr. A owns XXXXXXXXXX common shares and Mr. B owns XXXXXXXXXX common shares. The aggregate PUC of the outstanding common shares of Opco is $XXXXXXXXXX. The aggregate ACB of the common shares owned by Mr. A is $XXXXXXXXXX and the aggregate ACB of the common shares owned by Mr. B is $XXXXXXXXXX. Mr. A and Mr. B are brothers.

3. Subco is a taxable Canadian corporation incorporated under the BCA with a fiscal year end of XXXXXXXXXX. Subco was incorporated on XXXXXXXXXX. Subco is not a specified financial institution. Subco is a wholly-owned subsidiary of Opco.

4. The authorized share capital of Subco consists of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX each. There are XXXXXXXXXX issued and outstanding common shares. Opco owns all XXXXXXXXXX common shares of Subco. The aggregate PUC and ACB of the outstanding common shares of Subco owned by Opco is $XXXXXXXXXX.

5. Realco is a taxable Canadian corporation incorporated under the BCA with a fiscal year end of XXXXXXXXXX. Realco was incorporated on XXXXXXXXXX. Realco is not a specified financial institution.

6. The authorized share capital of Realco consists of XXXXXXXXXX common shares with a par value of $XXXXXXXXXX each, XXXXXXXXXX Class A preferred shares with no par value, XXXXXXXXXX Class B preferred shares with no par value, and XXXXXXXXXX Class C preferred shares with no par value. There are XXXXXXXXXX issued and outstanding common shares. Mr. A owns XXXXXXXXXX common shares and Mr. B owns XXXXXXXXXX common shares. The aggregate PUC of the outstanding common shares of Opco is $XXXXXXXXXX. The aggregate ACB of the common shares owned by Mr. A is $XXXXXXXXXX and the aggregate ACB of the common shares owned by Mr. B is $XXXXXXXXXX.

7. The shares of Opco and Realco owned by Mr. A and Mr. B, as well as the shares of Subco owned by Opco, are all held as capital property.

8. History of the Companies:

(a) On incorporation in XXXXXXXXXX, Opco operated a XXXXXXXXXX business in XXXXXXXXXX.

(b) Late in XXXXXXXXXX, Opco began to operate a XXXXXXXXXX in addition to these businesses.

(c) XXXXXXXXXX.

(d) In XXXXXXXXXX, a new building was constructed for the XXXXXXXXXX business.

(e) XXXXXXXXXX.

(f) In XXXXXXXXXX, Subco was incorporated. Subco acquired the XXXXXXXXXX business and the XXXXXXXXXX from Opco at that time. Subco also purchased assets for a XXXXXXXXXX business in that same year.

(g) In XXXXXXXXXX , as a result of declining sales, Opco abandoned the XXXXXXXXXX and began a XXXXXXXXXX.

(h) In XXXXXXXXXX division of Subco moved to a new location within XXXXXXXXXX.

(i) Mr. A is currently the general manager of Opco and Mr. B runs Subco.

9. The assets of Opco include cash, receivables, inventories, prepaid expenses, land, building, and equipment associated with the XXXXXXXXXX. In addition, Opco has an investment in Subco and a receivable from Subco.

10. The liabilities of Opco include trade payables and long-term debts associated with the operating assets as well as advances from shareholders and related corporations.

11. As at XXXXXXXXXX, Opco had a balance of $XXXXXXXXXX in its capital dividend account, $XXXXXXXXXX in its RDTOH account, and $XXXXXXXXXX of unused surtax credits.

12. The assets of Subco include cash, receivables, inventories, prepaid expenses, land, buildings and equipment necessary to carry on an XXXXXXXXXX business. Subco acquired land and a building for future expansion of its business operations. This land and building are located adjacent to the current location in XXXXXXXXXX. Since the land and building were acquired for future expansion or for resale, they will be classified as business property, as described in Paragraph 18 below. In addition, Subco carries on a XXXXXXXXXX and holds an investment which allows the company to be a member of the XXXXXXXXXX. This "investment" asset will be classified as business property as it enables the company to carry on the business of the XXXXXXXXXX.

13. The land and building acquired by Subco for future expansion, as described in Paragraph 12 above, have a fair market value of $XXXXXXXXXX. In XXXXXXXXXX, Subco transferred the building and a portion of the land (with total fair market value of $XXXXXXXXXX) to Realco and received as consideration a non-interest-bearing promissory note receivable from Realco in the amount of $XXXXXXXXXX . The promissory note is not convertible into other property. The remaining land, which has a fair market value of $XXXXXXXXXX, will be used by Subco in its business and, therefore, will continue to be classified as business property.

14. Also in XXXXXXXXXX, Opco transferred certain of its XXXXXXXXXX inventory to Realco and received as consideration a non-interest-bearing promissory note receivable from Realco. The promissory note is not convertible into other property.

15. The non-interest-bearing notes described in Paragraphs 13 and 14 above will be classified as business property since the notes arose on the transfer of business assets to Realco. Had the properties described in Paragraphs 13 and 14 remained in the respective companies, the properties would likewise have been classified as business property, therefore the replacement notes will be similarly classified.

16. The liabilities of Subco include trade payables and long-term debts associated with the operating assets as well as advances from related corporations.

17. As at XXXXXXXXXX, Subco had a balance of $XXXXXXXXXX in its capital dividend account, $XXXXXXXXXX in its RDTOH account, and $XXXXXXXXXX of unused surtax credits.

18. Immediately before the transfer of property described in Paragraph 23 below, the property owned by Opco will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation over which Opco has the ability to exercise significant influence (specifically, Subco and collectively referred to as the "Group"), and all such property will be classified into the following three types of property for the purposes of a distribution pursuant to paragraph 55(3)(b), as follows:

(a) cash or near-cash property, comprising all of the current assets of the Group, including any cash, deposits, marketable securities, accounts receivable, inventories, and rights arising from prepaid expenses;

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

(c) business property, comprising all of the assets of the Group, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from an active business carried on by the Group (other than a specified investment business).

For greater certainty, any tax accounts will not be considered property for the purposes of the proposed transactions.

Opco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation.

For greater certainty, the fair market value of the shares of a particular corporation over which Opco has the ability to exercise significant influence, and of any indebtedness receivable by Opco from such a corporation, will be allocated among the three types of property of Opco by multiplying the fair market value of the shares and indebtedness of the particular corporation by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this Paragraph and Paragraph 19 below) is of the total net fair market value of all the property owned by the particular corporation.

19. In determining, on a consolidated look-through basis, the net fair market value of Opco's cash or near-cash property, investment property and business property immediately before the transfer of property described in Paragraph 23 below, liabilities of Opco and of any corporation over which Opco has the ability to exercise significant influence (specifically, Subco) will be allocated to, and deducted in the calculation of, the net fair market value of each such type of property of such corporation in the following manner:

(a) In determining, immediately before the transfer described in Paragraph 23 below, the net fair market value of each type of property of a particular corporation over which Opco has the ability to exercise significant influence (specifically, Subco), the liabilities of the particular corporation (specifically, Subco) other than any amount owing to Opco will be allocated to, and deducted in the calculation of, the net fair market value of a type of property of the particular corporation in the following manner:

(i) Current liabilities of the particular corporation will be allocated to the cash or near-cash property of that corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property owned by that corporation. To the extent that the total current liabilities so allocated exceed the total fair market value of all cash or near-cash property of that particular corporation, that corporation will be considered to have a negative amount of cash or near-cash property.

Provided that the net fair market value of the cash or near-cash property of the particular corporation is positive, the net fair market value of all accounts receivable, inventories and prepaid expenses of the particular corporation that are initially classified in accordance with Paragraph 18(a) above as cash or near-cash property that will relate to a business that will be carried on by the Group or Newco and that will be collected or consumed in the ordinary course of that business will then be reclassified as business property where the net fair market value is positive. Consequently, the resulting net fair market value of all cash or near-cash property will be reduced by the total net fair market value (where it is positive) of such accounts receivable, inventories and prepaid expenses;

(ii) Liabilities, other than current liabilities, of the particular corporation that relate to a particular property will be allocated to the particular property (and effectively to the type of property to which the property belongs) to the extent of its fair market value. The liabilities pertaining to a type of property but not to a particular property will then be allocated to that type of property. To the extent that the allocation of liabilities to a type of property, as described herein, exceeds the total fair market value of that type of property of that corporation, that corporation will be considered to have a negative amount of that type of property; and

(iii) Any other remaining liabilities of the particular corporation will then be allocated to the cash or near-cash property, investment property and business property of that corporation based on the relative net fair market value of each type of property prior to the allocation of such remaining liabilities, but after the allocation of the liabilities described in steps (a)(i) and (a)(ii) above. However, where a corporation is considered to have a negative amount of a type of property because of step (a)(i) or (a)(ii) above, for the purposes of allocating those remaining liabilities, the net fair market value of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property; and

(b) In determining, on a consolidated look-through basis, the net fair market value of each type of property of Opco immediately before the transfer of property described in Paragraph 23 below, Opco will include the appropriate pro-rata share of the net fair market value (or such negative amount due to steps (a)(i) and (a)(ii) above) of each type of property of any corporation over which Opco has the ability to exercise significant influence (specifically, Subco), and any liabilities of Opco will be allocated to, and deducted in the calculation of, the net fair market value of each type of property of Opco in the following manner:

(i) Current liabilities of Opco will be allocated to the cash or near-cash property of Opco in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property of Opco. The allocation of current liabilities, as described herein, will not, however, exceed the total fair market value of the cash or near-cash property of Opco.

Accounts receivable, inventories and prepaid expenses that are initially classified in accordance with Paragraph 18(a) above as cash or near-cash property that will relate to a business that will be carried on by the Group or Newco and that will be collected or consumed in the ordinary course of that business will then be reclassified as business assets. Consequently, the resulting net fair market value of all cash or near-cash property will be reduced by the total net fair market value of such accounts receivable, inventories and prepaid expenses. The total net fair market value of such accounts receivable, inventories and prepaid expenses will be added to the fair market value of the business property;

(ii) Liabilities, other than current liabilities, of Opco that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the property belongs) to the extent of its fair market value. The liabilities pertaining to a type of property but not to a particular property will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property as described herein; and

(iii) If any liabilities remain after the allocations described in steps (b)(i) and (b)(ii) above are made, such remaining liabilities will then be allocated to the cash or near-cash property, investment property and business property, if any, of Opco based on the relative net fair market value of each type of property prior to the allocation of such remaining liabilities, but after the allocation of the liabilities described in steps (b)(i) and (b)(ii) above. However, where a corporation is considered to have a negative amount of a type of property because of step (b)(i) or (b)(ii) above, for the purposes of allocating those remaining liabilities, the net fair market value of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property.

PROPOSED TRANSACTIONS

20. Mr. A and Mr. B will incorporate a new company ("Newco") which will be a taxable Canadian corporation incorporated under the BCA. Newco will not be a specified financial institution.

The authorized share capital of Newco will include the following classes of common and preferred shares:

(a) an unlimited number of voting common shares with a par value of $XXXXXXXXXX each; and

(b) an unlimited number of non-voting Class A preferred shares with a par value of $XXXXXXXXXX each. The Class A preferred shares will have the following attributes:

(i) ability to be issued in series;

(ii) entitled to a non-cumulative monthly dividend at a rate equal to XXXXXXXXXX% of the CRA's prescribed rate under subsection 4301(c) of the Regulations. No dividends will be paid on other classes of shares if to do so would impair the value of this class;

(iii) redeemable and retractable for a redemption price equal to the amount obtained by dividing the fair market value of any property, including money, transferred to the corporation as consideration for the preferred shares (less the amount of any other consideration payable by the corporation for the said transferred property) by the number of Class A preferred shares issued; and

(iv) ranking in preference to the common shares.

Upon incorporation, Newco will issue XXXXXXXXXX common shares to Mr. A and XXXXXXXXXX common shares to Mr. B, which will mirror the shareholdings of Mr. A and Mr. B in Opco.

21. Mr. A and Mr. B will each transfer the Butterfly Proportion of their common shares of Opco to Newco (collectively, the "Opco Reorganized Shares"), and will each receive XXXXXXXXXX Series 1 Class A preferred shares of Newco as consideration for each Opco share so transferred. In respect of each transfer, the transferor and the transferee will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the Opco common shares to Newco. The agreed amount specified in each election will be equal to the ACB to Mr. A or Mr. B, as the case may be, of the transferred shares at the time of the transfer. For greater certainty, the ACB of the transferred shares will be less than the fair market value of the shares. The amount to be added to the stated capital of the Series 1 Class A preferred shares of Newco that will be issued will be equal to the PUC of the Opco common shares transferred by each of Mr. A and Mr. B.

22. Immediately prior to the transfer described in Paragraph 23 below, Subco will declare and pay a taxable dividend to Opco, the sole holder of Subco's common shares, equal to the aggregate amount required to reduce the pro rata net fair market value of Subco's cash and near-cash property to the Butterfly Proportion (the percentage of interests to be transferred in Paragraph 23 below) of the net fair market value of all of Opco's cash and near-cash property determined on a consolidated look-through basis, as described in Paragraphs 18 and 19 above.

23. Immediately following the determination of the net fair market value of its cash or near-cash property, business property and investment property, as described in Paragraphs 18 and 19 above, and receipt of the dividend described in Paragraph 22 above, Opco will transfer the Butterfly Proportion of its net assets (the "Transferred Assets") to Newco. It is anticipated that the Transferred Assets will be the common shares of Subco and the receivable from Subco. The net fair market value of each type of property comprising the Transferred Assets that are transferred to Newco (after allocating and deducting, in the manner described in Paragraphs 18 and 19 above, the liabilities of Opco which are to be assumed by Newco) will equal that proportion of the net fair market value of all property of Opco of that type determined immediately before such transfer that:

(a) the aggregate fair market value, immediately before the transfer, of all the Opco Reorganized Shares, described in Paragraph 21 above, at that time,

is of

(b) the aggregate fair market value, immediately before the transfer, of all the issued and outstanding shares of the capital stock of Opco at that time.

The aggregate net fair market value of all property of Opco transferred to Newco will be equal to the proportion determined by (a) and (b) above of the aggregate net fair market value of all property of Opco immediately before the transfer.

As consideration for the property so transferred, Newco will issue a number of Series 2 Class A preferred shares to Opco equal to the number of Series 1 Class A preferred shares issued to Mr. A and Mr. B by Newco, as described in Paragraph 21 above, having an aggregate fair market value and redemption amount equal to the aggregate fair market value of the Transferred Assets. Newco will add $XXXXXXXXXX per share to its stated capital account in respect of the Series 2 Class A preferred shares it issues, such amount not exceeding the cost to Newco, as determined under section 85, of the property transferred to Newco, less any liabilities assumed by it.

24. In respect of the transfer described in Paragraph 23 above, Opco and Newco will jointly elect in prescribed form and within the time required by subsection 85(6) to have the rules in subsection 85(1) apply to the transfer of the Subco common shares to Newco. The subsection 85(1) election will exclude any cash and accounts receivable. The agreed amount specified in the election will be equal to the ACB to Opco of the transferred shares at the time of the transfer. For greater certainty, the ACB of the transferred shares will be less than the fair market value of the shares. The amount to be added to the stated capital of the Series 2 Class A preferred shares of Newco that will be issued will be equal to the PUC of the Subco common shares transferred by Opco.

25. Opco will offer all of its common shareholders the right to offer their Opco common shares for repurchase and cancellation by Opco. Newco will be the only shareholder to accept the offer. Opco will repurchase the common shares of Opco held by Newco at their fair market value. As consideration, Opco will issue to Newco a demand promissory note with a principal amount and fair market value equal to the aggregate fair market value of the repurchased shares. Newco will accept such demand note as full payment of the purchase price of the Opco common shares sold. Opco will cancel these common shares.

26. Immediately after Opco purchases the common shares of Opco held by Newco, Newco will redeem the Series 2 Class A preferred shares of Newco held by Opco at their redemption price. As consideration, Newco will issue to Opco a demand promissory note with a principal amount and fair market value equal to the aggregate redemption amount of the redeemed shares. Opco will accept such demand note as full payment of the aggregate redemption amount of the Newco Series 2 Class A preferred shares redeemed.

27. Immediately following the purchase for cancellation of the Opco common shares described in Paragraph 25 above and the redemption of the Newco Series 2 Class A preferred shares described in Paragraph 26 above, the demand promissory notes issued in Paragraphs 25 and 26 above will be set off against each other and accepted as full payment by the holder of such note. Both notes will be marked "Paid in Full" and cancelled.

28. After the mutual offset and cancellation of the demand promissory notes described in Paragraph 27 above, the net fair market value of each type of property retained by Opco, determined in the manner described in Paragraphs 18 and 19 above, will be equal to that proportion of the net fair market value of each such type of property of Opco immediately before the transfer of property to Newco described in Paragraph 23 above that:

(a) the aggregate fair market value, immediately before the transfer, of all the issued and outstanding shares of Opco at that time (other than the Opco Reorganized Shares described in Paragraph 21 above),

is of

(b) the aggregate fair market value, immediately before the transfer, of all the issued and outstanding shares of the capital stock of Opco at that time.

ADDITIONAL INFORMATION

29. No assets have been or will be acquired or disposed of, and no liabilities have been or will be incurred, by Opco or any member of the Group in contemplation of and before the proposed transfer of property described in Paragraph 23 above, except as described in this letter.

30. Except as described in this letter, no member of the Group will dispose of any of its assets as part of the proposed series of transactions, and Newco does not have any intention to dispose of any of its assets to an unrelated person subsequent to the proposed transactions.

31. None of the shares described in this letter will be, at any time during the implementation of the proposed transactions:

(a) the subject of any undertaking that is a guarantee agreement;

(b) the subject of a dividend rental arrangement; or

(c) issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsections 112(2.4) or (2.5).

PURPOSES OF THE PROPOSED TRANSACTIONS

32. The economics, future goals, and business philosophies of Opco's business and Subco's business are different from each other.

33. The separation of Subco from Opco will enhance the ability of each corporation to pursue their independent strategies through an increased management focus on growth and profitability in their respective businesses.

34. Opco and Subco do not have creditors in common. XXXXXXXXXX.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The provisions of subsection 85(1) will apply to:

(a) the transfer by Mr. A and Mr. B of the Opco Reorganized Shares to Newco, as described in Paragraph 21 above; and

(b) the transfer of the Transferred Assets by Opco to Newco, as described in Paragraph 23 above;

such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition of the property and the transferee's cost thereof, and the transferor's cost of the shares received as consideration for the disposition. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to in (a) and (b) above.

B. As a result of the purchase for cancellation by Opco of its common shares and the redemption by Newco of its Series 2 Class A preferred shares in the transactions described in Paragraphs 25 and 26 above:

(a) by virtue of paragraphs 84(3)(a) and (b):

(i) Opco will be deemed to have paid, and Newco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to purchase for cancellation the common shares of Opco held by Newco exceeds the paid-up capital of those shares, immediately before such purchase; and

(ii) Newco will be deemed to have paid, and Opco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid to redeem the Series 2 Class A preferred shares of Newco held by Opco exceeds the paid-up capital of those shares, immediately before such redemption;

(b) the taxable dividends deemed to have been received by Opco and Newco as a result of the purchase for cancellation and redemption referred to in Ruling B(a) above will be included in each corporation's income pursuant to paragraph 12(1)(j), and will be deductible by each corporation in computing its taxable income for the taxation year in which such dividend is deemed to have been received pursuant to subsection 112(1), respectively. For greater certainty, subsections 112(2.1), (2.2), (2.3) and (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends;

(c) the dividends deemed to have been received by Opco and Newco, as the case may be, referred to in Ruling B(a) above, will be excluded from the proceeds of disposition of such shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from the disposition of such shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(d) neither Opco nor Newco will be subject to Part IV.1 tax under section 187.2 in respect of the dividends referred to in Ruling B(a) above; and

(e) neither Opco nor Newco will be subject to Part VI.1 tax under section 191.1 in respect of the dividends referred to in Ruling B(a) above.

C. Provided that, as part of the series of transactions or events that includes the proposed transactions, 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); or

(c) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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 B(a) above.

D. The cancellation of the demand promissory notes, described in Paragraph 27 above, will not give rise to a "forgiven amount" within the meaning assigned by subsection 80(1) or 80.01(1), and neither Opco nor Newco will realize any gain or incur any loss from the extinguishment and cancellation of such notes.

E. Subsections 15(1), 56(2), 56(4) 69(4) and 246(1) will not apply to the proposed transactions described herein, in and by themselves.

F. Subsection 245(2) will not apply to the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

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, could have an effect on the rulings provided herein.

COMMENTS

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

(a) the determination of the fair market value or ACB of any particular asset, the paid-up capital in respect of any shares referred to herein, or the Butterfly Proportion; or

(b) 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 Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch

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