2006 Ruling 2005-0141921R3 - Public Company Spin-off

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: Whether the proposed butterfly reorganization satisfies the requirements of paragraph 55(3)(b).

Position: Yes

Reasons: Requirements of the legislation are met

XXXXXXXXXX 										2005-014192

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information and submissions provided in your subsequent correspondence.

To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in this advance ruling 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) 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 this Directorate.

DEFINITIONS:

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

• "Acquiror" has the meaning assigned in the definition of "specified corporation" in subsection 55(1);
• "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;
• "adjusted cost base" has the meaning assigned by section 54;
• "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);
• "arm's length" has the meaning assigned by section 251;
• "Articles of Amendment" has the meaning assigned by Paragraph 20;
• "BCA" means the Business Corporations Act (XXXXXXXXXX);
• "Butterfly Proportion" means the fraction A/B where:

A is the net fair market value of the Spin-off Property to be transferred by DC to Spinco as described in Paragraph 26, determined immediately before such transfer; and

B is the net fair market value of all property owned by DC immediately before the transfer of the Spin-off Property to Spinco as described in Paragraph 26;

• "capital property" has the meaning assigned by section 54;
• "cost amount" has the meaning assigned by subsection 248(1);
• "CRA" means the Canada Revenue Agency;
• "DC" means XXXXXXXXXX, the corporation more particularly described in Paragraph 1;
• "DC Butterfly Share Redemption Amount" has the meaning assigned by Paragraph 20;
• "DC Butterfly Shares" means the new class of preferred shares in the capital of DC described in Paragraph 20;
• "DC Common Shares" means the common shares in the capital of DC described in Paragraph 3;
• "DC New Common Shares" means the New Common Shares of DC described in Paragraph 20;
• "DC New Warrant" means the additional warrants of DC that were issued as described in Paragraph 14;
• "DC Note" means the promissory note to be issued by DC as described in Paragraph 29;
• "DC Shareholder" means a holder of DC Common Shares;
• "DC Stock Option" means a right to acquire one Common Share in the capital of DC under the DC Stock Option Plan, as described in Paragraph 6;
• "DC Stock Option Holder" means a person who holds a DC Stock Option;
• "DC Stock Option Plan" means the existing stock option plan of DC as described in Paragraph 6;
• "DC Warrant" means the existing warrants of DC, including the DC New Warrants, as described in Paragraph 5;
• "DC Warrant Holder" means a person who holds a DC Warrant;
• "depreciable property" has the meaning assigned by subsection 13(21);
• "disposition" has the meaning assigned by subsection 248(1);
• "Dissenting Shareholder" means a shareholder of DC who dissents from the Plan of Arrangement, as described in Paragraph 19;
• "distribution" has the meaning assigned by subsection 55(1);
• "Effective Date" means the effective date of the Plan of Arrangement;
• "eligible capital property" has the meaning assigned by section 54;
• "eligible property" has the meaning assigned by subsection 85(1.1);
• "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, expressed in terms of cash;
• "flow-through share" has the meaning assigned by subsection 66(15);
• "Newco" means the corporation to be incorporated under the provisions of the BCA as described in Paragraph 15;
• "paid-up capital" has the meaning assigned by subsection 89(1);
• "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
• "Participant" means a DC Shareholder, other than a Dissenting Shareholder;
• "Plan of Arrangement" means the proposed plan of arrangement under the BCA to effect the divisive reorganization described in Paragraphs 18 to 30;
• "prescribed stock exchange" has the meaning assigned by Part XXXII of the Regulations;
• "proceeds of disposition" has the meaning assigned by section 54;
• "Proposed Transactions" means the transactions referred to in Paragraphs 15 to 31;
• "public corporation" has the meaning assigned by subsection 89(1);
• "Regulations" refers to the Income Tax Regulations;
• "related person" has the meaning assigned by subsection 251(2);
• "restricted financial institution" has the meaning assigned by subsection 248(1);
• "short-term preferred share" has the meaning assigned by subsection 248(1);
• "specified financial institution" has the meaning assigned by subsection 248(1);
• "specified shareholder" has the meaning assigned by subsection 248(1) as modified by subsections 55(3.2) and (3.3);
• "Spinco" means XXXXXXXXXX, the corporation more particularly described in Paragraph 10;
• "Spinco Commitment" means the covenant of Spinco, pursuant to the Plan of Arrangement, to issue Spinco Common Shares to the holders of DC Stock Options who exercise their rights thereunder after the Effective Date and are entitled pursuant to the corporate reorganization provisions of the DC Stock Options to receive DC New Common Shares and Spinco Common Shares. As consideration for the issue of Spinco Common Shares to a holder of a DC Stock Option, Spinco will be entitled to an amount equal to the exercise price stipulated in the particular DC Stock Option multiplied by the Butterfly Proportion;
• "Spinco Common Shares" means the common shares of Spinco, as described in Paragraph 17;
• "Spinco Redemption Note" means the promissory note to be issued by Spinco as described in Paragraph 28;
• "Spinco Reorganization Share Redemption Amount" has the meaning assigned by Paragraph 17;
• "Spinco Reorganization Shares" means the class of preferred shares in the capital of Spinco as described in Paragraph 17;
• "Spin-off Property" means an amount of cash, all of the issued and outstanding shares of Newco and the following XXXXXXXXXX properties of DC that are to be transferred to Spinco:

(1) XXXXXXXXXX;

(2) XXXXXXXXXX; and

(3) XXXXXXXXXX;

• "stated capital" has the meaning assigned by the BCA;
• "Stock Exchange" means the XXXXXXXXXX;
• "Subco" means XXXXXXXXXX., a wholly-owned subsidiary of DC;
• "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
• "taxable Canadian property" has the meaning assigned by subsection 248(1);
• "taxable dividend" has the meaning assigned by subsection 89(1);
• "taxable preferred share" has the meaning assigned by subsection 248(1); and
• "term preferred share" has the meaning assigned by subsection 248(1).

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

STATEMENT OF FACTS

Facts Relating to DC

1. DC is a public corporation and a taxable Canadian corporation and is governed by the BCA. DC has a XXXXXXXXXX fiscal and taxation year-end. DC's head office is located at XXXXXXXXXX. DC deals with the XXXXXXXXXX TSO and its tax returns are filed with the XXXXXXXXXX TC.

2. DC's business involves the XXXXXXXXXX. In addition, DC owns all of the issued and outstanding shares of Subco.

3. As at XXXXXXXXXX, DC had approximately XXXXXXXXXX common shares issued and outstanding representing all of its issued shares (the "DC Common Shares"). Approximately XXXXXXXXXX of the DC Common Shares were issued as flow-through shares. The DC Common Shares are listed on the Stock Exchange. The DC Common Shares are not short-term preferred shares, taxable preferred shares or term preferred shares.

4. The directors and senior management of DC are not aware of any person or related group of persons that beneficially owns, directly or indirectly, 10% or more of the issued and outstanding DC Common Shares. As at the date of this letter, it is believed that less than 10% of the DC Common Shares are held by persons who are not residents of Canada for purposes of the Act.

5. As at XXXXXXXXXX, DC had issued XXXXXXXXXX warrants ("DC Warrants") that were outstanding and were exercisable at $XXXXXXXXXX. It is expected that all DC Warrants that are currently outstanding, other than the DC New Warrants described in Paragraph 14, will expire prior to the Effective Date.

6. DC has a stock option plan (the "DC Stock Option Plan") for directors, officers, employees and consultants of DC. Under the terms of the DC Stock Option Plan, qualifying individuals may be entitled to acquire DC Common Shares at prices that cannot be lower than the "market price" (as defined for the purposes of the DC Stock Option Plan) of such shares, less the maximum discount permitted by the Stock Exchange, at the time that the particular DC Stock Option was granted. Under the terms of the DC Stock Option Plan, the number of DC Stock Options that may be granted cannot exceed 10% of the issued and outstanding DC Common Shares. As at XXXXXXXXXX, DC had issued XXXXXXXXXX DC Stock Options that were outstanding and were exercisable at prices varying from $XXXXXXXXXX to $XXXXXXXXXX. Of these DC Stock Options XXXXXXXXXX had been issued to directors and XXXXXXXXXX had been issued to employees and consultants. Consistent with DC's practice, XXXXXXXXXX of these DC Stock Options were granted by the directors of DC on XXXXXXXXXX.

As at XXXXXXXXXX, DC had XXXXXXXXXX agent's warrants outstanding. These warrants were issued in connection with a financing undertaken by DC in XXXXXXXXXX, are exercisable at $XXXXXXXXXX per warrant and will expire on or before XXXXXXXXXX. Each such warrant is comprised of the right to acquire XXXXXXXXXX DC Common Shares and XXXXXXXXXX additional warrant to acquire XXXXXXXXXX DC Common Share at $XXXXXXXXXX on or before XXXXXXXXXX.

7. Certain directors, officers and employees of DC have previously exercised DC Stock Options relating to DC Common Shares in respect of which an election under subsection 7(8) has been made. These individuals will participate in the share exchange described in Paragraph 23 below.

8. The directors, officers and employees described in Paragraph 7 above and the DC Stock Option Holders have always dealt at arm's length for purposes of the Act with DC and will continue to deal at arm's length for purposes of the Act with DC during and after the Proposed Transactions described below.

9. The DC Common Shares are prescribed shares under section 6204 of the Regulations and will continue to be prescribed shares throughout the Proposed Transactions described below. The DC New Common Shares and the Spinco Common Shares will be prescribed shares under section 6204 of the Regulations.

Recent Transactions

10. Spinco is a taxable Canadian corporation that was incorporated under the provisions of the BCA on XXXXXXXXXX as XXXXXXXXXX for the purpose of implementing the Proposed Transactions.

11. On XXXXXXXXXX, DC completed the sale of a XXXXXXXXXX% interest in the "XXXXXXXXXX " property located in the XXXXXXXXXX area to XXXXXXXXXX. for consideration consisting of XXXXXXXXXX common shares of XXXXXXXXXX. DC has retained a XXXXXXXXXX% net XXXXXXXXXX royalty interest in the property; however, the purchaser may acquire this interest at any time by paying $XXXXXXXXXX to DC.

12. DC has granted to XXXXXXXXXX. an option to acquire a XXXXXXXXXX% interest in DC's "XXXXXXXXXX" property for consideration consisting of $XXXXXXXXXX in cash, XXXXXXXXXX shares of XXXXXXXXXX. and a commitment by the purchaser to spend $XXXXXXXXXX on XXXXXXXXXX the property over the next XXXXXXXXXX years.

13. DC and Subco will continue to carry out XXXXXXXXXX on properties currently owned by DC. In addition, DC currently owns a portfolio of publicly traded shares that has been acquired by DC as a result of optioning XXXXXXXXXX properties to other XXXXXXXXXX companies. DC will continue to monitor this portfolio and any future dispositions will be made based on the market price of the various shares included in the portfolio.

14. In order to finance its ongoing exploration and development activities, DC raised approximately $XXXXXXXXXX by means of a non-brokered public offering of DC Common Shares that closed on XXXXXXXXXX. This financing consisted of the issuance of XXXXXXXXXX DC Common Shares (XXXXXXXXXX of which are flow-through shares) and XXXXXXXXXX warrants to acquire additional DC Common Shares (each such warrant being a "DC New Warrant"). Each DC New Warrant is exercisable at $XXXXXXXXXX (which amount exceeded the fair market value of a DC Common Share at the time that the DC New Warrant was issued) for a period of XXXXXXXXXX years, subject to an accelerated expiry if certain conditions are met. The terms of these DC New Warrants provide, inter alia, that if DC takes any action affecting the DC Common Shares that would materially affect the rights of a holder of a DC New Warrant, the exercise price and the securities issuable on the exercise of a DC New Warrant shall be adjusted in such manner as determined by DC's board of directors so as to ensure that the holder is treated fairly and equitably in the circumstances. This may include the substitution of shares of another corporation that is a party to a reorganization contemplated by DC, such as Spinco. At the time of their issue, the fair market value of the DC New Warrants was nominal.

14.1 The granting of additional DC Stock Options described in Paragraph 6 and the transactions described in Paragraphs 11 to 14 above have been, or will be, carried out by DC or Subco in the ordinary course of their respective businesses or as part of the ongoing management of DC's portfolio of assets. These transactions have been, or will be, undertaken regardless of whether the Proposed Transactions are implemented. Similarly, the Proposed Transactions would have been undertaken regardless of such transactions. For greater certainty, none of these transactions has been or will be undertaken in contemplation of the Proposed Transactions.

PROPOSED TRANSACTIONS

15. Prior to the Plan of Arrangement, DC will incorporate a new corporation ("Newco") under the BCA. Newco will be a taxable Canadian corporation and its authorized share capital will consist of an unlimited number of voting common shares. On incorporation, DC will subscribe for common shares of Newco for nominal consideration.

16. DC and Spinco will enter into an agreement to implement the Plan of Arrangement, subject to shareholder and court approval, pursuant to which DC will transfer the Spin-off Property to Spinco.

17. The articles of Spinco will be amended to change its name to XXXXXXXXXX. and to reorganize its share structure such that the authorized share capital of Spinco will consist of an unlimited number of fully participating voting common shares (the "Spinco Common Shares") and an unlimited number of preferred shares (the "Spinco Reorganization Shares"). Spinco will also be authorized to grant options and issue warrants. No shares of Spinco will be issued on incorporation or prior to the issue of Spinco Common Shares described in Paragraph 23.

The Spinco Reorganization Shares will have the following attributes:

(a) each Spinco Reorganization Share will be redeemable, subject to applicable law, at any time at the option of Spinco at a redemption amount equal to the aggregate fair market value of the Spin-off Property at the time of its transfer to Spinco as described in Paragraph 26 less the amount of the Spinco Commitment, divided by the number of Spinco Reorganization Shares issued as consideration therefor, plus any declared but unpaid dividends thereon (the "Spinco Reorganization Share Redemption Amount");

(b) each Spinco Reorganization Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Spinco Reorganization Share Redemption Amount;

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

(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Spinco if the resulting realizable value of the net assets of Spinco after payment of the dividends would be less than the aggregate of the Spinco Reorganization Share Redemption Amount relating to all of the Spinco Reorganization Shares then outstanding;

(e) for the purpose of subsection 191(4), the terms and conditions of the Spinco Reorganization Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each Spinco Reorganization Share. The amount to be specified in respect of each Spinco Reorganization Share will:

(i) be pursuant to a resolution of the board of directors of Spinco;

(ii) be expressed as a dollar amount;

(iii) not be determined by a formula; and

(iv) not exceed the net fair market value of the property received by Spinco in consideration for its issuance;

(f) the holder of each Spinco Reorganization Share will be entitled, upon the liquidation, dissolution or winding-up of Spinco, to a payment in priority to all other classes of shares of Spinco of an amount equal to the Spinco Reorganization Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and

(g) the holder of each Spinco Reorganization Share will not be entitled to vote at meetings of shareholders of Spinco, other than as provided by the BCA.

18. Subject to the appropriate shareholder, regulatory and court approvals, the Proposed Transactions described in Paragraphs 19 to 30 will be undertaken pursuant to the Plan of Arrangement under XXXXXXXXXX the BCA in the sequence set forth below. With the exception of the filing of any elections under the Act, these transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Effective Date and in the order set out below. The Effective Date of the Plan of Arrangement will be on a date that will be subsequent to the date of this letter and is currently anticipated to be no later than XXXXXXXXXX. The Plan of Arrangement must be approved by the holders of at least XXXXXXXXXX of the DC Common Shares; XXXXXXXXXX

19. Each DC Shareholder will be entitled to dissent from the Plan of Arrangement in accordance with the provisions of the BCA. For the purposes of the Proposed Transactions comprising the Plan of Arrangement, any dissenting shareholder (a "Dissenting Shareholder") will be considered to have ceased to be a shareholder of DC, immediately prior to the Effective Date, such that the DC Common Shares held by the Dissenting Shareholder will no longer be considered to be outstanding for the purpose of the corporate law transactions comprising the Plan of Arrangement. After the completion of the transactions comprising the Plan of Arrangement, each such Dissenting Shareholder will be entitled to be paid the fair value of its shares of DC in respect of which the right of dissent is exercised. It is currently contemplated that if more than XXXXXXXXXX% of the DC Shareholders dissent, the Plan of Arrangement will not proceed.

Reorganization of DC's Share Capital

20. The articles of DC will be amended to create and authorize the issuance of an unlimited number of DC New Common Shares and an unlimited number of DC Butterfly Shares (the "Articles of Amendment").

Each DC New Common Share will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of DC. The terms of the DC New Common Shares will be identical to the terms of the existing DC Common Shares.

The DC Butterfly Shares will have the following attributes:

(a) each DC Butterfly Share will be redeemable, subject to applicable law, at any time at the option of DC at a redemption amount equal to the aggregate fair market value of all of the DC Common Shares outstanding immediately before the exchange of DC Common Shares described in Paragraph 22 multiplied by the Butterfly Proportion, then divided by the number of issued and outstanding DC Butterfly Shares, plus any declared but unpaid dividends thereon (the "DC Butterfly Share Redemption Amount");

(b) each DC Butterfly Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the DC Butterfly Share Redemption Amount;

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

(d) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of DC if the resulting realizable value of the net assets of DC after payment of the dividends would be less than the aggregate of the DC Butterfly Share Redemption Amount relating to all of the DC Butterfly Shares then outstanding;

(e) for the purpose of subsection 191(4), the terms and conditions of the DC Butterfly Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each DC Butterfly Share. The amount to be specified in respect of each DC Butterfly Share will:

(i) be pursuant to a resolution of the board of directors of DC;

(ii) be expressed as a dollar amount;

(iii) not be determined by a formula; and

(iv) not exceed the fair market value of the property received by DC in consideration for its issuance;

(f) the holder of each DC Butterfly Share will be entitled, upon the liquidation, dissolution or winding-up of DC, to a payment in priority to all other classes of shares of DC of an amount equal to the DC Butterfly Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and

(g) the holder of each DC Butterfly Share will be entitled to vote at meetings of shareholders of DC.

The Spinco Commitment

21. Spinco will enter into the Spinco Commitment pursuant to which it will agree to issue Spinco Common Shares upon the exercise of the DC Stock Options and DC will be obligated, as the agent of Spinco, to collect and pay to Spinco an amount, equal to the exercise price of the particular DC Stock Option multiplied by the Butterfly Proportion, for each Spinco Common Share so issued. Any entitlement of a holder of a DC Stock Option to a fraction of a Spinco Common Share will be cancelled for no consideration.

Exchange of DC Common Shares

22. Each Participant will exchange each of the Participant's DC Common Shares for consideration consisting only of one DC New Common Share and one DC Butterfly Share. In connection with the exchange:

(a) the DC Common Shares so exchanged will be cancelled;

(b) the aggregate addition to the stated capital in respect of the DC New Common Shares and the DC Butterfly Shares issued by DC on the exchange described in this Paragraph will not exceed the paid-up capital of the DC Common Shares (excluding any DC Common Shares owned by the Dissenting Shareholders) immediately before the exchange. For greater certainty, the aggregate paid-up capital of the DC Common Shares will be allocated between the DC New Common Shares and the DC Butterfly Shares based on the proportion that the fair market value of the DC New Common Shares or the DC Butterfly Shares, as the case may be, is of the fair market value of all new shares issued on the exchange;

(c) DC will not file a joint election under the provisions of subsection 85(1) with any Participant in respect of this share exchange; and

(d) the DC New Common Shares will be listed for trading on the Stock Exchange.

Other than as set out in this letter, there will not be any agreement in respect of the DC Butterfly Shares in respect of any matters referred to in any of subparagraphs (b)(i) to (iv) of the definition of taxable preferred share or in any of paragraphs (a), (b), (f) or (h) of the definition of short-term preferred share in subsection 248(1).

Transfer of DC Butterfly Shares to Spinco

23. Each Participant will transfer all such Participant's DC Butterfly Shares to Spinco in exchange for Spinco Common Shares. As sole consideration for the DC Butterfly Shares transferred to it, Spinco will issue to each Participant one Spinco Common Share for each DC Butterfly Share transferred by the particular Participant. The Spinco Common Shares will be listed for trading on the Stock Exchange following the Effective Date.

The fair market value, immediately before the transfer described in Paragraph 26 below, of each Participant's shares of the capital stock of Spinco will be equal to the amount determined by the formula: (A x B/C) + D as set out in subparagraph (b)(iii) of the definition "permitted exchange" in subsection 55(1).

If requested by a particular Participant, Spinco and the particular Participant will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of DC Butterfly Shares by the particular Participant to Spinco. The agreed amount in respect of the DC Butterfly Shares transferred by each such Participant to Spinco will be an amount equal to the lesser of the fair market value of the particular DC Butterfly Shares and their cost amount to the particular Participant at that time.

Spinco will add to the stated capital account of the Spinco Common Shares an amount equal to the fair market value of the transferred DC Butterfly Shares.

24. In the event that the paid-up capital of the DC Butterfly Shares transferred to Spinco as described in Paragraph 23 exceeds the adjusted cost base of such shares to Spinco, DC will, pursuant to the provisions of the BCA, pass a resolution to reduce the aggregate stated capital of the DC Butterfly Shares to an amount that is equal to the adjusted cost base of the DC Butterfly Shares to Spinco at that time. No amount will be paid to Spinco on this reduction of stated capital.

25. Immediately before the transfer of property described in Paragraph 26 below, the fair market value of the property of DC will be determined as though there was only one type of property, as contemplated by subsection 55(3.02), on a net fair market value basis. For greater certainty:

(a) any tax accounts, such as the balance of any non-capital losses, net capital losses and tax pools, will not be considered to be property of DC for the purposes of determining the net fair market value of the property of DC as described herein, and

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

26. DC will transfer the Spin-off Property to Spinco. As consideration for the transfer of the Spin-off Property, Spinco will enter into the Spinco Commitment with DC and will issue to DC Spinco Reorganization Shares, having an aggregate fair market value and redemption amount equal to the fair market value, at the time of the transfer, of the Spin-off Property less the Spinco Commitment.

DC will jointly elect with Spinco, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property included in the Spin-off Property that has a fair market value in excess of its cost amount. The agreed amount in respect of each such property XXXXXXXXXX will be $XXXXXXXXXX. In each case, the agreed amount will not exceed the fair market value of the particular eligible property, nor will it be less than the amount permitted under paragraph 85(1)(b). For greater certainty, the amount of the Spinco Commitment is not expected to exceed the FMV of the cash included in the Spin-off Property.

The amount to be added to the stated capital of the Spinco Reorganization Shares to be issued by Spinco to DC as described herein will be equal to the aggregate of:

(a) in respect of those properties for which an election under subsection 85(1) is made, an amount equal to the aggregate agreed amounts for such properties, and

(b) in any other case, the aggregate fair market value of the properties so transferred to Spinco

less the amount of the Spinco Commitment granted by Spinco in respect of the transfer.

27. Immediately after the transfer described in Paragraph 26, the net fair market value of the Spin-off Property acquired by Spinco on the distribution will be equal to that proportion of the net fair market value of all the property of DC, determined immediately before the transfer, that:

(a) the aggregate fair market value of the DC Butterfly Shares owned by Spinco, immediately before the transfer, is of

(b) the aggregate fair market value of all the issued and outstanding shares of DC immediately before the transfer.

Elimination of Cross Shareholdings

28. Spinco will redeem all of the Spinco Reorganization Shares held by DC and will issue to DC, as payment therefor, a non-interest-bearing demand note (the "Spinco Redemption Note") having a principal amount and fair market value equal to the aggregate of the Spinco Reorganization Share Redemption Amounts of the Spinco Reorganization Shares redeemed. DC will accept the Spinco Redemption Note as full payment of the Spinco Reorganization Share Redemption Amounts of the Spinco Reorganization Shares so redeemed, with the risk of the Spinco Redemption Note being dishonoured.

29. DC will redeem the DC Butterfly Shares held by Spinco and will issue to Spinco, as payment therefor, a non-interest-bearing demand note (the "DC Note") having a principal amount and fair market value equal to the aggregate DC Butterfly Share Redemption Amounts of the DC Butterfly Shares so redeemed. Spinco will accept the DC Note as full payment of the DC Butterfly Share Redemption Amounts of the DC Butterfly Shares so redeemed, with the risk of the DC Note being dishonoured.

Set-off of Notes

30. DC will satisfy its obligations under the DC Note by transferring the Spinco Redemption Note to Spinco and Spinco will accept the Spinco Redemption Note in full satisfaction of DC's obligations under the DC Note. Similarly, Spinco will satisfy its obligations under the Spinco Redemption Note by transferring the DC Note to DC and DC will accept the DC Note in full satisfaction of Spinco's obligations under the Spinco Redemption Note. The DC Note and the Spinco Redemption Note will both be marked paid in full and cancelled.

Subsequent Transactions

31. Spinco will raise capital to finance the development of the XXXXXXXXXX properties transferred to it pursuant to the Plan of Arrangement by issuing additional shares of its capital stock. In addition, DC will continue to raise capital to finance its ongoing XXXXXXXXXX activities by means of brokered and/or non-brokered public offerings. However, it is not expected that any person or group of persons will acquire control of either Spinco or DC as a consequence of any of these proposed financing activities. Furthermore, the management of DC represents that the Plan of Arrangement is not being undertaken to facilitate any proposed or contemplated acquisition of control of either DC or Spinco.

Additional Information

32. None of DC, Subco, Newco or Spinco is, or will be at any time during the Proposed Transactions, a specified financial institution or a restricted financial institution.

33. No person who is a specified shareholder of DC has or will have acquired any DC Common Shares in contemplation of the Proposed Transactions.

34. Except as described herein, no debts have been or will be incurred or paid and no property has been or will be acquired by DC or any corporation controlled by DC in contemplation of the distribution described below, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

35. Neither DC nor Spinco will sell or transfer any property as part of a series of transactions or events that includes the Proposed Transactions to an unrelated person or partnership subsequent to the Proposed Transactions.

36. None of the shares of DC or Spinco described herein is or will be, at any time during the implementation of the Proposed Transactions:

(a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a "guarantee agreement";

(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a dividend rental arrangement referred to in subsection 112(2.3) as that term is defined in subsection 248(1).

PURPOSE OF THE PROPOSED TRANSACTIONS

37. DC considers that the distribution of its XXXXXXXXXX properties to Spinco as described herein is in the best interests of the DC Common Shareholders. The Proposed Transactions will separate properties XXXXXXXXXX and this separation will enhance the ability of each of DC and Spinco to pursue its independent corporate objectives, strategies and financing which will maximize the value of the DC Common Shareholders.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, purposes of the Proposed Transactions and additional information, we confirm the following:

A. On the exchange of DC Common Shares by a Participant, as described in Paragraph 22,

(a) the provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the disposition of each existing DC Common Share by a Participant for one DC New Common Share and one DC Butterfly Share, such that

(i) the Participant will be deemed by paragraph 86(1)(b) to have acquired DC New Common Shares and DC Butterfly Shares at a cost equal to the proportion of the adjusted cost base to the Participant of the holder's DC Common Shares immediately before the exchange that

A. the fair market value, immediately after the exchange, of the DC New Common Shares or of the DC Butterfly Shares, as the case may be,

is of

B. the fair market value, immediately after the exchange, of all the shares acquired by the Participant on the exchange;

(b) pursuant to paragraph 86(1)(c), such Participant will be deemed to have disposed of the particular Participant's existing DC Common Shares for aggregate proceeds of disposition equal to the aggregate cost to the Participant of the DC New Common Shares and DC Butterfly Shares received by the Participant as determined in (a) above; and

(c) for the purposes of section 116, the existing DC Common Shares owned by a Participant who is not a resident of Canada at the time of the exchange of the DC Common Shares as described in Paragraph 22 will be excluded property by virtue of paragraph 116(6)(b).

B. Provided that a Participant files the requisite joint election in prescribed form and within the prescribed time as described in Paragraph 23, the provisions of subsection 85(1) will apply to the transfer of DC Butterfly Shares by that Participant to Spinco as described in Paragraph 23 such that the agreed amount in respect of such transfer of eligible property will be deemed to be the particular Participant's proceeds of disposition of the DC Butterfly Shares and Spinco's cost thereof pursuant to paragraph 85(1)(a). For greater certainty,

(a) paragraph 85(1)(e.2) will not apply to any such transfer of DC Butterfly Shares to Spinco; and

(b) subsection 85(2.1) will apply to reduce the aggregate paid-up capital of the Spinco Common Shares issued by Spinco to such Participants, as described in Paragraph 23, to an amount equal to the cost amount to Spinco of the DC Butterfly Shares so transferred.

C. In the event that the stated capital of the DC Butterfly Shares is reduced as described in Paragraph 24, DC will not be deemed to have paid, and Spinco will not be deemed to have received, a dividend pursuant to either of subsections 84(4) or (4.1) as no amount will be paid by DC on such reduction of stated capital.

D. Provided that the requisite joint elections are filed in prescribed form and within the prescribed time and subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer by DC to Spinco of each Spin-off Property that is an eligible property, the fair market value of which exceeds its cost amount, as described in Paragraph 26, such that the agreed amount in respect of each transfer of eligible property will be deemed to be DC's proceeds of disposition and Spinco's cost thereof pursuant to paragraph 85(1)(a). For greater certainty,

(a) paragraph 85(1)(e.2) will not apply to the transfers of the Spin-off Property to Spinco; and

(b) subsection 85(2.1) will not apply to reduce the paid-up capital of the Spinco Reorganization Shares issued by Spinco to DC as described in Paragraph 26.

E. As a result of the redemption by Spinco of the Spinco Reorganization Shares described in Paragraph 28:

(a) Spinco will be deemed by paragraph 84(3)(a) to have paid, and DC will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the Spinco Reorganization Shares;

(b) the amount of such deemed dividend will be included in DC's income pursuant to subsection 82(1) and paragraph 12(i)(j);

(c) the amount of such deemed dividend will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining DC's proceeds of disposition for the Spinco Reorganization Shares;

(d) DC will be entitled, pursuant to subsection 112(1), to deduct the amount of such deemed dividend in computing its taxable income for the taxation year in which such dividend is deemed to be received and, for greater certainty, the provisions of subsection 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend;

(e) no taxes will be payable by DC under Part IV.1 or by Spinco under Part IV.1 in respect of such deemed dividend on the basis that the dividend will be deemed to be an excepted dividend and an excluded dividend, as the case may be, pursuant to subsection 191(4), but only to the extent that the amount paid by Spinco to DC on the redemption of the Spinco Reorganization Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4).

The provisions of subsection 112(3) will apply to reduce any loss that would otherwise be realized by DC as a result of the redemption of the Spinco Reorganization Shares.

F. As a result of the redemption by DC of the DC Butterfly Shares held by Spinco described in Paragraph 29:

(a) DC will be deemed by paragraph 84(3)(a) to have paid, and Spinco will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the DC Butterfly Shares;

(b) the amount of such deemed dividend will be included in Spinco's income pursuant to subsection 82(1) and paragraph 12(i)(j);

(c) the amount of such deemed dividend will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining Spinco's proceeds of disposition for the DC Butterfly Shares;

(d) pursuant to section 54, the amount of such deemed dividend will be excluded in determining Spinco's proceeds of disposition for the DC Butterfly Shares;

(e) Spinco will be entitled, pursuant to subsection 112(1), to deduct the amount of such deemed dividend in computing its taxable income for the taxation year in which such dividend is deemed to be received and. for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend;

(f) no taxes will be payable by Spinco under Part IV.1 or by DC under Part IV.1 in respect of such deemed dividend on the basis that the dividend will be deemed to be an excepted dividend and an excluded dividend, as the case may be, pursuant to subsection 191(4), but only to the extent that the amount paid by DC to Spinco on the redemption of the DC Butterfly Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4).

The provisions of subsection 112(3) will apply to reduce any loss that would otherwise be realized by Spinco as a result of the redemption of the DC Butterfly Shares.

G. Provided that:

(a) there is not a distribution by DC to a corporation that is not an Acquiror before the day that is three years after the Effective Date; and

(b) there is not a distribution by Spinco before the day that is three years after the Effective Date;

and as part of the series of transactions or events that includes the Proposed Transactions, there is not:

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

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

(e) an acquisition of any shares of DC in contemplation of the distribution in the circumstances described in subparagraph 55(3.1)(b)(iii); or

(f) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d),

which has not been described in any of Paragraphs 10 to 30, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in Rulings E and F above and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

H. The cancellation of the Spinco Redemption Note and the DC Note described in Paragraph 30 will not give rise to a "forgiven amount" within the meaning thereof in subsection 80(1) or 80.01(1).

I. With regard to the payment by DC in respect of existing DC Common Shares held by a Dissenting Shareholder as described in Paragraph 19:

(a) subject to the application of subsection 55(2), the Dissenting Shareholder will be deemed by paragraph 84(3)(b) to have received a dividend equal to the amount by which any payment from DC to the Dissenting Shareholder in respect of the purchase of such Dissenting Shareholder's DC Common Shares exceeds the paid-up capital of such shares immediately prior to their purchase;

(b) subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable income tax convention) to require DC to withhold and remit 25% of the amount of any dividend deemed to have been paid as described in (a) to a Dissenting Shareholder who is a non-resident of Canada; and

(c) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of the deemed dividend described in (a) from the proceeds of disposition of the DC Common Shares recognized by the Dissenting Shareholder as a result of such purchase of the DC Common Shares by DC, provided that the shares were held as capital property by the Dissenting Shareholder.

J. Provided that

(a) a Participant is a holder of DC Common Shares that were acquired through the exercise of the Participant's stock options granted under the DC Stock Option Plan,

(b) the Participant made an election under subsection 7(8) with respect to such DC Common Shares, and

(c) the conditions of paragraph 7(1.5)(c) are satisfied with respect to the particular share exchange referred to in (d) and (e) below,

the provisions of subsection 7(1.5) will apply for the purposes of section 7 and paragraph 110(1)(d) to the exchange of

(d) the Participant's DC Common Shares for DC New Common Shares and DC Butterfly Shares as described in Paragraph 22 above, and

(e) the Participant's DC Butterfly Shares for Spinco Common Shares as described in Paragraph 23.

K. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not be applied as a result of the Proposed Transactions, in and by themselves.

L. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by CRA on May 17, 2002 and are binding on the CRA provided that the Proposed Transactions 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 CRA has agreed to or reviewed:

(a) the determination of the fair market value, adjusted cost base or paid-up capital of any shares referred to herein; or

(b) any other tax consequences relating to the facts, Proposed Transactions or any other transaction or event taking place either prior to or subsequent to the Proposed Transactions, whether or not described in this letter, other than those specifically described in the rulings given above, including

(i) whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events whether or not described in this letter, and

(ii) any tax consequences to a DC Stock Option Holder relating to the Spinco Commitment described in Paragraph 21.

OPINION

Provided that the amendment to the Act concerning the proposed addition of subsection 55(6) contained in the Revised Draft Technical Amendments to the Income Tax Act released by the Minister of Finance on February 27, 2004 is enacted substantially as drafted, the Proposed Transactions are implemented as described herein and further provided that immediately before the exchange described in paragraph 22 a DC Common Share is not taxable Canadian property to its holder, it is our opinion that the DC Butterfly Shares will be deemed, for the purposes of subsection 116(6) and the definition "taxable Canadian property" in subsection 248(1) to be listed on a prescribed stock exchange.

The foregoing opinion is not a ruling and, as noted in Information Circular 70-6R5, is not binding on the CRA.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch