2007 Ruling 2006-0187861R3 - 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.

Principal Issues: 1. Whether 55(2) applies to recharacterize intercorporate dividends arising on share redemptions. 2. Application of debt forgiveness rules on settlement of contingent debt.

Position: 1. Subsection 55(2) will apply to recharacterize intercorporate dividends as proceeds of disposition. Department of Finance has issued comfort letter to address problem.

Reasons: 1. The prior takeover of Target by Parent and the post- acquisition of control reorganization transactions are part of the same series of transactions by virtue of subsection 248(10). Consequently, under the current legislation, there was a disposition of property to an unrelated party as described in subparagraph 55(3)(a)(i) due to the application of paragraph 55(3.01)(e) as well as significant increases in interest in corporations by unrelated parties as described in subparagraph 55(3)(a)(ii).

XXXXXXXXXX 								2006-018786

XXXXXXXXXX , 2007

Dear Sirs:

Re: XXXXXXXXXX ("Pubco")
XXXXXXXXXX ("Parent Cansub")
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the "Original Letter"). We also acknowledge the information provided in subsequent correspondence and various telephone conversations. You have advised us that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayers or related persons;
(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of the taxpayers or related persons;
(iii) under objection by the taxpayers or related persons;
(iv) before the Courts; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise noted, all statutory references herein are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (hereinafter referred to as the "Act"). Unless otherwise noted, all references to currency are to Canadian dollars.

DEFINITIONS

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

(b) "arm's length" has the meaning assigned by subsection 251(1);

(c) "XXXXXXXXXX Agreement" means the agreement in respect of the XXXXXXXXXX Rights as described in Paragraphs 23 to 27;

(d) "XXXXXXXXXX Rights" means the rights under the XXXXXXXXXX Agreement, including a XXXXXXXXXX -year exclusive right to XXXXXXXXXX the Parent XXXXXXXXXX and the Target XXXXXXXXXX on behalf of Parent in consideration for a commission based on the sales to be made by Parent and its affiliates in Canada;

(e) XXXXXXXXXX

(f) "Closing Date" means XXXXXXXXXX ;

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

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

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

(j) "filing-due date" has the meaning assigned by subsection 248(1);

(k) "FMV" means fair market value;

(l) "foreign affiliate" has the meaning assigned by subsection 95(1);

(m) "guarantee agreement" has the meaning assigned by paragraph 112(2.2)(a);

(n) "Joint Bidder" means XXXXXXXXXX ., a corporation incorporated under the laws of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian income tax purposes;

(o) "XXXXXXXXXX Assets" means the assets described in XXXXXXXXXX to the Original Letter, including XXXXXXXXXX ;

(p) "Master Agreement" means the agreement between Parent and Pubco described in Paragraph 17;

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

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

(s) "Parent" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian income tax purposes;

(t) "Parent Acquisitionco" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian income tax purposes;

(u) "Parent XXXXXXXXXX " means the XXXXXXXXXX described in XXXXXXXXXX to the Original Letter;

(v) "Parent Cansub" means XXXXXXXXXX , a corporation incorporated under the XXXXXXXXXX ;

(w) "Parent Holdco" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian income tax purposes;

(x) "Pubco FA1" means XXXXXXXXXX , a company that is incorporated under the laws of XXXXXXXXXX and is a resident of XXXXXXXXXX for Canadian income tax purposes;

(y) "Pubco FA2" means XXXXXXXXXX , a company incorporated under the laws of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian income tax purposes;

(z) "Pubco" means XXXXXXXXXX , a corporation incorporated under the XXXXXXXXXX ;

(aa) "related persons" has the meaning assigned by section 251 and, for greater certainty, any reference to persons who are related to each other in this letter means that such persons are related persons;

(bb) "XXXXXXXXXX " means the person who can exercise the XXXXXXXXXX Rights under the XXXXXXXXXX Agreement;

(cc) "XXXXXXXXXX Assets and Business" means the assets described in XXXXXXXXXX to the Original Letter, including XXXXXXXXXX ;

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

(ee) "Subject Transactions" means the transactions described in Paragraphs 20 to 49;

(ff) "Target" means XXXXXXXXXX , a corporation incorporated under the law of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian income tax purposes;

(gg) "Target XXXXXXXXXX " means the XXXXXXXXXX described in XXXXXXXXXX to the Original Letter;

(hh) "Target Canco" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX ;

(ii) "Target Cansub 1" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX ;

(jj) "Target Cansub 2" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX ;

(kk) "Target Group" means Target and all its subsidiaries;

(ll) "Target Holdco" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX that is a resident of XXXXXXXXXX for Canadian income tax purposes;

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

(nn) XXXXXXXXXX ; and

(oo) XXXXXXXXXX

FACTS

1. Parent, directly and through its subsidiaries, owns the Parent XXXXXXXXXX . The shares of Parent are listed for trading on the XXXXXXXXXX

2. Prior to XXXXXXXXXX , the shares of Target were traded on the XXXXXXXXXX .

3. On XXXXXXXXXX , Parent issued "XXXXXXXXXX " (the "Circular"). The Circular contained the terms of an offer by which Parent would acquire all of the issued and outstanding shares of Target (and indirectly, the Target XXXXXXXXXX ). Subject to certain limitations, shareholders of Target wishing to sell shares of Target pursuant to the offer had the option to receive consideration consisting of (i) cash, (ii) shares of Parent or (iii) a combination of cash and shares of Parent.

4. XXXXXXXXXX of the Circular contained the following statement with respect to the XXXXXXXXXX tax consequences of the disposition of shares of Target by a person who is a resident of the XXXXXXXXXX for tax purposes:

"XXXXXXXXXX ."

5. On XXXXXXXXXX , Parent successfully completed the acquisition of Target. The majority of the shares of Target was acquired for cash consideration by Parent Acquisitionco, while the remaining shares of Target were acquired by Parent directly in consideration for shares of Parent. A number of shareholders of Target who were ordinarily resident in XXXXXXXXXX for XXXXXXXXXX income tax purposes tendered their shares of Target to Parent in exchange for shares of Parent. Parent (through its indirect wholly-owned subsidiary Parent Holdco) and Joint Bidder funded the cash component of the consideration by subscribing for shares in Parent Acquisitionco. The shares of Parent Acquisitionco issued to Joint Bidder XXXXXXXXXX reflected the value of certain assets of Target and its subsidiaries (the "JB Assets") and provided Joint Bidder with the right to acquire the JB Assets upon the redemption of the shares. In accordance with their terms, the XXXXXXXXXX shares were redeemed in consideration for the transfer of the JB Assets to Joint Bidder.

6. On XXXXXXXXXX , Parent acquired control of Target and has continued to control Target to the present time. In addition, after the XXXXXXXXXX shares of Parent Acquisitionco were redeemed in full, Target became, and has remained to the present time, an indirect, wholly-owned subsidiary of Parent. As a result, Parent, directly and through its subsidiaries, has held ownership of the Target XXXXXXXXXX and the XXXXXXXXXX Assets for XXXXXXXXXX since XXXXXXXXXX .

7. Parent continued to control Parent Acquisitionco after the issuance of the XXXXXXXXXX shares of Parent Acquisitionco to Joint Bidder. At no time were Joint Bidder and Parent or Joint Bidder and Parent Acquisitionco related persons.

8. At all material times, Target Canco, Target Cansub 1 and Target Cansub 2 were, and continue to be, taxable Canadian corporations. From the time the XXXXXXXXXX shares of Parent Acquisitionco were redeemed in full, Target Holdco has been, and continues to be, an indirect, wholly-owned subsidiary of Parent. At all material times, Target Canco was, and continues to be, a direct, wholly-owned subsidiary of Target Holdco that held, and continues to hold, all of the issued and outstanding shares of Target Cansub 1. At all material times, Target Cansub 1 held, and continues to hold, all of the issued and outstanding shares of Target Cansub 2.

9. Target Canco and its Canadian and foreign subsidiaries sold certain assets, including shares of subsidiaries, all as described below, to unrelated persons soon after the acquisition of Target by Parent. In particular, the shares of XXXXXXXXXX , a foreign affiliate of Target Canco that is a resident of XXXXXXXXXX for Canadian income tax purposes, were sold to XXXXXXXXXX for cash consideration. In addition, certain JB Assets, consisting of the XXXXXXXXXX , were sold by Target Canco and its subsidiaries to Joint Bidder in consideration for a number of demand promissory notes of Joint Bidder. One of these promissory notes, having a principal amount of $XXXXXXXXXX , was transferred by Target Cansub 2 to Parent Holdco in exchange for a promissory note of Parent Holdco having a principal amount of $XXXXXXXXXX (the "P-H Note"). Target Cansub 2 also transferred additional promissory notes of Joint Bidder to Parent Holdco in exchange for the issuance of additional indebtedness by Parent Holdco. For each disposition, Target Canco and its XXXXXXXXXX subsidiaries received proceeds of disposition that were not less than the FMV of the property disposed of.

10. Throughout the course of implementing of the Subject Transactions, Target Cansub 2 controlled Pubco by virtue of its ownership of XXXXXXXXXX shares of Pubco. XXXXXXXXXX Target Cansub 2 has continued to control Pubco from the time the Subject Transactions were completed.

11. Pubco is a taxable Canadian corporation and its common shares are listed for trading on the XXXXXXXXXX . Pubco is Canada's XXXXXXXXXX . Prior to the completion of the Subject Transactions, Pubco held the XXXXXXXXXX . These XXXXXXXXXX were usually subject to cancellation on XXXXXXXXXX notice, without compensation to Pubco.

12. Prior to the completion of the Subject Transactions, Pubco held XXXXXXXXXX % of the issued and outstanding shares of Pubco FA1 and Pubco FA2. Pubco FA1 and Pubco FA2 were foreign affiliates of Pubco.

13. Prior to the completion of the Subject Transactions, Target Cansub 1 held XXXXXXXXXX % of the issued and outstanding shares of Pubco FA1 and Pubco FA2.

14. Prior to the completion of the Subject Transactions, Parent Cansub was an indirect, wholly-owned subsidiary of Parent. Parent Cansub was a taxable Canadian corporation. Parent Cansub has continued to be an indirect, wholly-owned subsidiary of Parent and a taxable Canadian corporation to the present time.

15. Prior to XXXXXXXXXX , Parent Cansub had the XXXXXXXXXX the Parent XXXXXXXXXX , such rights being subject to cancellation at any time without compensation. Parent Cansub also held the XXXXXXXXXX to the XXXXXXXXXX Assets and Business.

16. The independent directors of the Board of Directors of Pubco, representing the interests of the minority shareholders of Pubco, obtained a fairness opinion from XXXXXXXXXX with respect to the determination of the FMV of the assets that were transferred as part of the Subject Transactions.

17. On XXXXXXXXXX , Parent and Pubco entered into an agreement (the "Master Agreement") pursuant to which (i) Pubco and its wholly-owned subsidiaries would acquire the XXXXXXXXXX Assets and Business and the XXXXXXXXXX Assets in exchange for cash consideration and the shares of Pubco FA1 and Pubco FA2 and (ii) the integration of the employees and the offices of Parent Cansub and Pubco would commence. Parent also agreed under the Master Agreement to grant to Pubco (or cause to be granted to Pubco) the XXXXXXXXXX (the "XXXXXXXXXX Rights"). The Master Agreement further provided that the terms and conditions of the grant of the XXXXXXXXXX Rights were to be (i) negotiated in good faith by Parent and Pubco and (ii) in accordance with the terms and conditions outlined in a schedule to the Master Agreement.

18. Under the Master Agreement, Parent agreed to sublicense (or cause the sublicense thereof) to Pubco the XXXXXXXXXX Rights on an interim basis from XXXXXXXXXX until the Closing Date pending completion of the Subject Transactions. Consequently, Pubco has earned commission income from the promotion of Parent XXXXXXXXXX and Target XXXXXXXXXX as of XXXXXXXXXX .

SUBJECT TRANSACTIONS

19. All of the Subject Transactions described below occurred in the order disclosed in the following Paragraphs. Except as indicated in Paragraphs 20, to 22, and Paragraphs 45 to 49, the Subject Transactions occurred on the Closing Date.

20. The owners of the Parent XXXXXXXXXX (Parent and its XXXXXXXXXX subsidiaries) sent notices to Parent Cansub to cancel any remaining rights held by Parent Cansub to XXXXXXXXXX the Parent XXXXXXXXXX .

21. The owners of the Target XXXXXXXXXX (Target and its subsidiaries) sent notices to Pubco to cancel Pubco's rights to XXXXXXXXXX the Target XXXXXXXXXX .

22. On XXXXXXXXXX , Pubco FA1 and Pubco FA2 each paid a dividend to their shareholders, Pubco (XXXXXXXXXX %) and Target Cansub 1 (XXXXXXXXXX %) in an amount equal to the available surplus cash on hand of each corporation, calculated in respect of each corporation as the total of (i) the amount of the corporation's receivables less its payables, (ii) the corporation's net intercompany funding, and (iii) the corporation's cash equivalents as shown in the corporation's monthly financial statements for the month ended XXXXXXXXXX . The amount of the dividend paid by Pubco FA1 was approximately £XXXXXXXXXX while the amount of the dividend paid by Pubco FA2 was approximately £XXXXXXXXXX .

23. The owners of the Parent XXXXXXXXXX entered into a XXXXXXXXXX agreement with Target Holdco in regard to the XXXXXXXXXX of the Parent XXXXXXXXXX . In consideration for the rights and obligations provided under the agreement, Target Holdco issued notes to each XXXXXXXXXX owner having a FMV equal to the FMV of the rights granted by such owner.

24. The owners of the Target XXXXXXXXXX entered into a XXXXXXXXXX agreement with Target Holdco in regard to the XXXXXXXXXX of the Target XXXXXXXXXX in Canada. In consideration for the rights and obligations provided under the agreement, Target Holdco issued a note to each XXXXXXXXXX owner having a FMV equal to the FMV of the rights granted by such owner.

25. Target Holdco assigned to Pubco all its rights under the agreements entered into with the owners of the Target XXXXXXXXXX and the Parent XXXXXXXXXX (such agreements collectively referred to as the "XXXXXXXXXX Agreement"). As consideration for the assignment of the rights under the XXXXXXXXXX Agreement, Pubco issued a $XXXXXXXXXX demand promissory note bearing an interest rate of XXXXXXXXXX % per annum ("Note 1") to Target Holdco. At the time Note 1 was issued as consideration for the assignment of rights under the XXXXXXXXXX Agreement, the FMV of Note 1 was equal to the FMV of those rights.

26. Upon the assignment of rights described in Paragraph 25, Pubco became the XXXXXXXXXX pursuant to the XXXXXXXXXX Agreement. The main responsibilities of the XXXXXXXXXX under the XXXXXXXXXX Agreement consist of XXXXXXXXXX the Parent XXXXXXXXXX and the Target XXXXXXXXXX , with the objective of XXXXXXXXXX of the XXXXXXXXXX , and XXXXXXXXXX . To fulfill these responsibilities, Pubco is required to maintain a XXXXXXXXXX and to submit business plans and budgets to Parent for approval by Parent. Pubco is responsible for conducting all XXXXXXXXXX for the XXXXXXXXXX . Parent will reimburse Pubco for all reasonable costs related to such XXXXXXXXXX activities based on a previously approved budget.

Parent and its affiliates establish the XXXXXXXXXX at which the XXXXXXXXXX . Parent and its affiliates sell XXXXXXXXXX directly to the XXXXXXXXXX clients at those established prices. Pubco is not entitled to XXXXXXXXXX of third parties without Parent's consent except for those XXXXXXXXXX already XXXXXXXXXX by Pubco. Parent is required to pay compensation to Pubco if Parent XXXXXXXXXX during the term of the XXXXXXXXXX Agreement. Under the XXXXXXXXXX Agreement, Parent also agreed to grant to Pubco, for additional consideration to be paid by Pubco should the circumstances arise, the exclusive right XXXXXXXXXX any new XXXXXXXXXX developed by Parent and its affiliates in the future and to extend the term of Pubco's XXXXXXXXXX of existing XXXXXXXXXX that are subject to the XXXXXXXXXX Agreement. The terms of such XXXXXXXXXX arrangements will be similar to the ones currently in effect under the XXXXXXXXXX Agreement.

27. The vendor to the XXXXXXXXXX customers will always be Parent and its affiliates. Pubco will not take title to the XXXXXXXXXX covered by the XXXXXXXXXX Agreement. Pubco will not have authority to conclude contracts in the name of the owners of the Parent XXXXXXXXXX or the Target XXXXXXXXXX . Pubco is entitled to receive remuneration from the XXXXXXXXXX owners in the form of commissions based on the XXXXXXXXXX of the Parent XXXXXXXXXX and Target XXXXXXXXXX in XXXXXXXXXX .

28. Pubco incorporated a new foreign affiliate that is a resident of the XXXXXXXXXX for Canadian income tax purposes ("XXXXXXXXXX Newco").

29. A member of the Target Group of companies that is not a resident of Canada for the purposes of the Act sold to XXXXXXXXXX Newco the right to operate under the name "XXXXXXXXXX " in the XXXXXXXXXX in consideration for a note having a face value of $XXXXXXXXXX (the "XXXXXXXXXX Note"). The XXXXXXXXXX Note was payable on demand and bore interest at a rate of XXXXXXXXXX % per annum.

30. A number of members of the Target Group of companies sold the XXXXXXXXXX Assets to Pubco in consideration for a number of notes (the "XXXXXXXXXX Notes") having an aggregate face value of $XXXXXXXXXX. The XXXXXXXXXX Notes were payable on demand and bore interest at a rate of XXXXXXXXXX % per annum. Parent allocated the XXXXXXXXXX Notes among the members of the Target Group of companies who sold such XXXXXXXXXX Assets on a reasonable basis such that each member received XXXXXXXXXX Notes with a FMV equal to the FMV of the portion of the XXXXXXXXXX Assets sold to Pubco by that Target Group company.

31. Pubco incorporated a new corporation under the XXXXXXXXXX ("Newco"). Newco has been a taxable Canadian corporation since its incorporation. The taxation year of Newco ends on XXXXXXXXXX . Throughout the course of the Subject Transactions, the authorized share capital of Newco consisted of an unlimited number of common shares, XXXXXXXXXX shares ("Newco Preferred Shares") and XXXXXXXXXX shares. On the incorporation of Newco, Pubco subscribed for XXXXXXXXXX common shares for nominal consideration.

The common shares of Newco were without par value and voting (1 vote per share). The holders of common shares were entitled to receive dividends, to be declared and paid at the discretion of the directors, and were entitled to receive the remaining property of the corporation upon its winding-up or dissolution.

The Newco Preferred Shares were without par value and did not carry any voting rights. The holders of the Newco Preferred Shares were entitled to receive an annual, non-cumulative dividend, not exceeding XXXXXXXXXX % of the redemption value of the Newco Preferred Shares, to be declared and paid at the discretion of the directors. Each Newco Preferred Share was retractable and redeemable for an amount equal to its redemption value. The redemption value of a Newco Preferred Share was equal to the FMV of any property received in consideration for its issuance less any consideration received for subsequent reductions of PUC in respect of the share.

The XXXXXXXXXX shares were without par value and did not carry any voting rights. The holders of the XXXXXXXXXX shares were entitled to receive an annual, non-cumulative dividend, not exceeding XXXXXXXXXX % of the redemption value, to be declared and paid at the discretion of the directors. Each XXXXXXXXXX share was retractable and redeemable for an amount equal to its redemption value and ranked behind the Newco Preferred Shares. The redemption value of each XXXXXXXXXX share was equal to the FMV of any property received in consideration for its issuance less any consideration received for subsequent reductions of PUC in respect of the share.

32. Parent Cansub sold the XXXXXXXXXX Assets and Business to Newco. The consideration for the sale was paid through the issuance of (i) XXXXXXXXXX Newco Preferred Shares with an aggregate FMV of $XXXXXXXXXX and (ii) a contingent note (the "Earn-out Note") representing the payment of a potential earn-out, not exceeding $XXXXXXXXXX plus an amount corresponding to interest on the amount of the earn-out capitalized at a rate of XXXXXXXXXX % per annum for the XXXXXXXXXX -year period commencing on the date the earn-out was granted (i.e., the Closing Date), to be paid within XXXXXXXXXX days after the XXXXXXXXXX anniversary of the Closing Date if certain conditions are met. At the time of issuance, the aggregate redemption value of the Newco Preferred Shares was equal to $XXXXXXXXXX . The parties will elect, in prescribed form pursuant to subsection 85(1), within the time limits prescribed by subsection 85(6), for each eligible property that is part of the XXXXXXXXXX Assets and Business to be transferred for proceeds equal to its cost amount. The directors of Newco resolved that an amount of $XXXXXXXXXX be added to the stated capital of the Newco Preferred Shares.

Newco XXXXXXXXXX to Pubco the use of the XXXXXXXXXX related to the XXXXXXXXXX in connection with the XXXXXXXXXX Assets and Business and the use of the XXXXXXXXXX related to the XXXXXXXXXX .

33. Newco redeemed the Newco Preferred Shares owned by Parent Cansub. In consideration for the redemption, Newco issued to Parent Cansub a demand promissory note having a principal amount of $XXXXXXXXXX bearing interest at a rate of XXXXXXXXXX % per annum ("Note 2").

34. Parent Cansub amended its articles of incorporation to authorize the creation of an unlimited number of XXXXXXXXXX shares ("Parent Cansub Preferred Shares"). The Parent Cansub Preferred Shares were without par value and did not carry any voting rights. The holders of the Parent Cansub Preferred Shares were entitled, on an annual basis, to receive a non-cumulative dividend payable by Parent Cansub at the discretion of its directors. Each Parent Cansub Preferred Share was retractable and redeemable for an amount equal to $XXXXXXXXXX .

35. Pubco sold its shares of Pubco FA1 and Pubco FA2 to Parent Cansub, which represent XXXXXXXXXX % of the issued and outstanding shares of each corporation. In consideration for the shares of Pubco FA1 and Pubco FA2, Parent Cansub issued XXXXXXXXXX Parent Cansub Preferred Shares to Pubco. At the time of their issuance, the redemption value of the XXXXXXXXXX Parent Cansub Preferred Shares was equal to the FMV of the shares of Pubco FA1 and Pubco FA2, which was determined to be $XXXXXXXXXX . Pubco and Parent Cansub will elect, in prescribed form pursuant to subsection 85(1), and within the time limits prescribed under subsection 85(6), for the shares of Pubco FA1 and Pubco FA2 to be transferred for proceeds of disposition equal to their respective cost amounts.

36. Parent Cansub redeemed the Parent Cansub Preferred Shares held by Pubco. In consideration for the redemption, Parent Cansub issued to Pubco a demand promissory note with a principal amount of $XXXXXXXXXX bearing interest at a rate of XXXXXXXXXX % per annum ("Note 3").

37. The XXXXXXXXXX Note was transferred to Pubco in consideration for a note (the "Pubco Note") having an aggregate face value of $XXXXXXXXXX . The Pubco Note is payable on demand and bears interest at a rate of XXXXXXXXXX % per annum.

38. The members of the Target Group of companies who held the Pubco Note and the XXXXXXXXXX Notes transferred the notes to Target Holdco in consideration for notes having an aggregate face value of $XXXXXXXXXX . These notes are payable on demand and bear interest at a rate of XXXXXXXXXX % per annum.

39. Target Holdco transferred Note 1 ($XXXXXXXXXX ), XXXXXXXXXX Notes ($XXXXXXXXXX ) and Pubco Note ($XXXXXXXXXX ) to Parent Cansub in consideration for the issuance, by Parent Cansub, of a demand promissory note having a principal amount of $XXXXXXXXXX bearing an interest rate of XXXXXXXXXX % per annum ("Note 4").

40. Note 1, the Pubco Note and a portion of the XXXXXXXXXX Notes were settled by setting-off the principal amounts owing in respect of those obligations against the principal amount of Note 3 ($XXXXXXXXXX ). Pubco repaid the remaining balance of the XXXXXXXXXX Notes with cash.

41. Pubco contributed $XXXXXXXXXX of cash to Newco in consideration for the issuance by Newco of an interest-bearing demand promissory note having a principal amount of $XXXXXXXXXX .

42. Newco used the proceeds received from the cash contribution described in Paragraph 41 to pay the principal amount owing in respect of Note 2.

43. Parent Cansub used the money received in payment of Note 2 plus $XXXXXXXXXX of cash received from the repayment of the XXXXXXXXXX Notes as described in Paragraph 40 to repay $XXXXXXXXXX of the principal amount owing in respect of Note 4. Immediately after this payment, the principal amount outstanding in respect of Note 4 was $XXXXXXXXXX .

44. Target Holdco contributed Note 4 to Target Canco in consideration for an interest-bearing promissory demand note ("Note 5").

45. After the Closing Date, Target Cansub 2 paid a dividend of $XXXXXXXXXX to Target Cansub 1. The dividend was paid by the assignment to Target Cansub 1 of the P-H Note and of other debt owing by Parent Holdco to Target Cansub 2.

46. Target Cansub 1 paid a dividend of $XXXXXXXXXX to Target Canco. The dividend was paid by the assignment to Target Canco of the P-H Note and of the other debt that was assigned to Target Cansub 1 by Target Cansub 2 as described in Paragraph 45.

47. In payment of Note 5, Target Canco assigned the P-H Note and the other debt that was assigned to Target Canco by Target Cansub 1 as described in Paragraph 46 to Target Holdco.

48. The promissory note issued to Pubco by Newco as described in Paragraph 41 was converted into common shares of Newco.

49. The principal amount of the Earn-out Note, if any, plus the interest corresponding to the capitalization of the earn-out at XXXXXXXXXX % per year for XXXXXXXXXX years will be settled no later than XXXXXXXXXX days after the XXXXXXXXXX anniversary of the Closing Date by a cash payment equal to the amount contemplated under the earn-out agreement.

ADDITIONAL INFORMATION

50. At all relevant times, each of the corporations involved in the Subject Transactions was related to a captive insurance corporation within the Parent/Target corporate group and was therefore a specified financial institution.

51. None of the shares of any corporation described herein (including any shares issued as described in the Subject Transactions) was or will be, at any time during a series of transactions or events that includes the Subject Transactions:

(i) the subject of any undertaking that is a guarantee agreement;
(ii) 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
(iii) the subject of a dividend rental arrangement.

52. At the time Pubco made the $XXXXXXXXXX payment to Target Holdco described in Paragraph 25, Target Holdco, who was the beneficial owner of such payment, did not have a permanent establishment in Canada for purposes of the Canada-XXXXXXXXXX Income Tax Convention. For greater certainty, Target Holdco became the beneficial owner of the Note 1 as of the time Note 1 was issued by Pubco as payment for the assignment of the rights under the XXXXXXXXXX Agreement.

53. Pubco agreed under the Master Agreement that it will not amalgamate with Newco or cause Newco to be wound-up until section 55 of the Act is amended to reflect the intention of the Tax Legislation Division of the Department of Finance as expressed in the April 21, 2005 comfort letter (Deemed Capital Gain on Winding-Up/Amalgamation - Increase in the Direct Interest in the Subsidiary). In addition, Pubco agreed under the Master Agreement that it and its subsidiaries will not:

(a) dispose of property to a person or persons unrelated to Pubco for proceeds of disposition less than the FMV of the property;
(b) acquire property from a person or persons unrelated to Pubco or any of its subsidiaries in consideration for shares of Pubco or its subsidiaries that would result in a significant increase in the total direct interest in Pubco or its subsidiaries by such person or persons; and
(c) issue shares or participating debt of Pubco or its subsidiaries to a person unrelated to Pubco or its subsidiaries that would result in a significant increase in the total direct interest in Pubco or its subsidiaries by such person or persons.

54. The Tax Legislation Division of the Department of Finance issued a letter dated September 6, 2006 (the "First Comfort Letter") in which the Tax Legislation Division of the Department of Finance agreed that subsection 55(2) should not apply to dividends received in an internal reorganization as part of a particular series of transactions that included a prior disposition of the shares of a publicly-traded corporation ("Targetco") to another publicly-traded corporation ("Acquireco") such that Targetco became a wholly-owned subsidiary of Acquireco. It was further stated in the First Comfort Letter that the Tax Legislation Division of the Department of Finance was prepared to recommend to the Minister of Finance that the Act be amended, applicable to dividends received after 2005, to ensure this result.

55. As part of the series of transactions described in the First Comfort Letter, shareholders of Targetco who were not related to Acquireco disposed of their shares of Targetco to Acquireco in exchange for shares of Acquireco, with the result that such shareholders received proceeds of disposition for the shares of Targetco that were less than the fair market value of such shares or were deemed by paragraph 55(3.01)(e) to have disposed of such shares for proceeds of disposition that were less than their fair market value. At no time before the end of the series of transactions was more than 10% of the fair market value of the shares of Acquireco or the shares of Targetco derived from the shares of corporations who were the dividend payers and dividend recipients, within the meaning of paragraph 55(3)(a), with respect to the dividends in question.

56. The Tax Legislation Division of the Department of Finance issued a letter dated October 16, 2007 (the "Second Comfort Letter") in which the Tax Legislation Division of the Department of Finance indicated to you that subsection 55(2) should not apply to dividends received as part of a particular series of transactions that included a prior increase in interest described in subparagraph 55(3)(a)(ii) of the Act. It was further stated in the Second Comfort Letter that the Tax Legislation Division of the Department of Finance was prepared to recommend to the Minister of Finance that the Act be amended, applicable to dividends received after 2005, to ensure this result.

57. At the time of the transaction described in Paragraph 32, the FMV of the earn-out granted by Newco to Parent Cansub as consideration for the XXXXXXXXXX Assets and Business will be less than the cost amount of the XXXXXXXXXX Assets and Business.

PURPOSES OF THE SUBJECT TRANSACTIONS

58. The purpose of the Subject Transactions was to provide Pubco, a Canadian public company, with a degree of certainty as to its ability to continue to XXXXXXXXXX the Target XXXXXXXXXX and to acquire the right to XXXXXXXXXX the Parent XXXXXXXXXX for a fixed and determined period of time and in addition, to provide Pubco with the ownership of the XXXXXXXXXX rights and assets. As previously noted, XXXXXXXXXX rights are normally subject to cancellation with short notice and without any compensation. As an example, Pubco's rights under a previous agreement to XXXXXXXXXX were withdrawn when Parent sold that XXXXXXXXXX to a third party. Under the particular agreement between Parent and Pubco with respect to XXXXXXXXXX , Pubco was entitled to receive XXXXXXXXXX months' notice of the withdrawal from Parent. In this particular instance, Pubco was given a shorter notice period and a payment in lieu of the additional notice period to which it was entitled. As such, a company such as Pubco can be subject to significant uncertainty as to the viability of its business activities.

59. Pubco agreed to sell its interest in Pubco FA1 and Pubco FA2 as part of the same transaction under which it acquired the XXXXXXXXXX Rights. The balance of the consideration for the XXXXXXXXXX Rights was paid in cash. From Parent's perspective, this allows access to XXXXXXXXXX with greater presence and thus strengthens the XXXXXXXXXX .

60. The consolidation in Target Holdco of the XXXXXXXXXX rights that were transferred to Pubco was largely necessitated to avoid having Pubco, a public company, issue a large number of notes to separate legal entities. The Subject Transactions allowed Pubco to issue only a single note in consideration for the rights acquired under the XXXXXXXXXX Agreement. There was no Canadian income tax benefit obtained by consolidating the XXXXXXXXXX rights in this manner or by having Pubco acquire the rights under the XXXXXXXXXX Agreement from Target Holdco as opposed to the various XXXXXXXXXX owners. Moreover, the use of Target Holdco, the direct parent of Target's Canadian subsidiaries, facilitated the offset of the various notes issued in the course of the Subject Transactions. Similarly, the transfer of Note 1, the XXXXXXXXXX Notes and the Pubco Note from Target Holdco to Parent Cansub was carried out in order to minimize the amount of cash required to fully repay amounts owing by Pubco to Target Holdco and Parent Cansub.

61. XXXXXXXXXX

62. XXXXXXXXXX

63. Pubco and Parent were not able to agree on a definitive FMV for the XXXXXXXXXX Assets and Business. Therefore, Pubco and Parent agreed that Newco would issue consideration in the form of the Earn-out Note in order to determine the final price that Newco will pay for the XXXXXXXXXX Assets and Business.

64. After the partial repayment of Note 4 described in Paragraph 43, Target Holdco was owed $XXXXXXXXXX by Parent Cansub, which represented the total amount of indebtedness of Parent/Target's Canadian affiliates to Target Holdco. At this point in time, Parent Holdco was indebted to Target Cansub 2 for a sum exceeding the amount owed to Target Holdco by Parent Cansub, which included the principal amount of the P-H Note. The transactions described in Paragraphs 44 to 48 were carried out so that the indebtedness of Parent/Target's Canadian affiliates to Target Holdco could be repaid through the distribution of the P-H Note, along with the assignment of other amounts owing to Target Cansub 1 by Parent Holdco, thereby eliminating redundant intercompany indebtedness.

65. Newco issued an interest-bearing demand promissory note to Pubco in exchange for the cash contribution of $XXXXXXXXXX that is described in Paragraph 41 so that Newco could repay Note 2 and thereafter deduct, for Canadian income tax purposes, any interest that was payable by Newco in respect of that promissory note. XXXXXXXXXX

RULINGS GIVEN

A. The amount of Note 1 issued by Pubco in consideration for the XXXXXXXXXX Rights is the capital cost to Pubco of a Class 14 property as described in Schedule II of the Income Tax Regulations.

B. Paragraph 13(7)(e) does not apply to reduce the capital cost to Pubco of the XXXXXXXXXX Rights.

C. Subsection 55(2) applies to the taxable dividends deemed to be received by Parent Cansub and Pubco on the redemptions of the Newco Preferred Shares and Parent Cansub Preferred Shares described in Paragraphs 33 and 36, respectively. However, without considering the dispositions of the shares of Target and the acquisitions of the shares of Parent by the shareholders of Target described in Paragraph 5 and the acquisition of XXXXXXXXXX shares of Parent Acquisitionco by Joint Bidder described in Paragraph 5, and provided there was not a disposition of property or an increase in interest (other than as described in Paragraph 5) described in any of subparagraphs 55(3)(a)(i) to (v) which was part of a series of transactions or events that includes the dividends referred to in Ruling D, subsection 55(2) would not have applied by virtue of paragraph 55(3)(a), to such taxable dividends. For greater certainty, the Subject Transactions and the transactions described in Paragraphs 9, 17 and 18, in and by themselves, are not considered to result in any disposition or increase in interest described in subparagraphs 55(3)(a)(i) to (v).

D. Any dividends deemed to be received by Parent Cansub and Pubco on the redemptions of the Newco Preferred Shares and Parent Cansub Preferred Shares described in Paragraphs 33 and 36, respectively, are taxable dividends that are deductible pursuant to subsection 112(1) in computing the taxable income of Parent Canada and Pubco for the taxation year in which the dividends were received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), 112(2.2), or 112(2.4).

E. Neither Part IV.I nor Part VI.I applies to any dividends that were deemed to be received by Parent Cansub and Pubco on the redemptions of the Newco Preferred Shares and Parent Cansub Preferred Shares described in Paragraphs 33 and 36, respectively, as such dividends are "excepted dividends" within the meaning assigned by section 187.1 and "excluded dividends" within the meaning assigned by subsection 191(1).

F. The $XXXXXXXXXX payment made through the issuance of Note 1 by Pubco to Target Holdco as consideration for the XXXXXXXXXX Rights was exempt from tax under the Act by virtue of Article XXXXXXXXXX of the Canada-XXXXXXXXXX Income Tax Convention.

G. The set-off and cancellation of principal amounts owing by Pubco to Parent Cansub on Note 1, the Pubco Note and a portion of the XXXXXXXXXX Notes, with the principal amount owing by Parent Cansub to Pubco on Note 3 as described in Paragraph 40 do not, in and by themselves, result in a "forgiven amount" within the meaning of subsection 80(1) of the Act.

H. Provided the payment by Newco representing the amount of settlement of the Earn-out Note, as described in Paragraph 49 (less the interest of XXXXXXXXXX % per year as described in Paragraph 32) is greater than or equal to the FMV of the Earn-out Note on the Closing Date (that, is the date of issue of the Earn-out Note), the provisions of section 80 of the Act will not apply on the amount paid by Newco to Parent Cansub in settlement of the Earn-out Note.

I. Provided Parent Cansub has a legal obligation to pay interest on Note 4 as described in Paragraph 39 and provided the property acquired as described in Paragraphs 26 and 35 continues to be used for the purpose of gaining or producing income therefrom (other than exempt income), Parent Cansub is, pursuant to paragraph 20(1)(c) of the Act, entitled to deduct in computing its income for a taxation year, the lesser of the interest paid or payable (depending on the method regularly followed by Parent Cansub in computing its income for the purposes of the Act) in respect of that year on Note 4 or a reasonable amount in respect thereof.

J. Subsection 245(2) does not apply to the Subject Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that (i) the Subject Transactions were completed as described in Paragraph 19, (ii) each of the Subject Transactions described in Paragraphs 20 to 48 was completed in a taxation year of Pubco, the filing-due date of which is subsequent to XXXXXXXXXX and (iii) each of the Subject Transactions described in Paragraphs 20 to 48 was completed in a taxation year of Parent Cansub, the filing-due date of which is subsequent to 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

With respect to Ruling C, if the Act is amended in accordance with the recommendations to be made to the Minister of Finance as contemplated by the First Comfort Letter and Second Comfort Letter, we would not expect that subsection 55(2) would apply to the dividends described in Ruling C. However, we can offer no assurances in this regard.

In addition, nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

(a) the determination of the adjusted cost base, paid-up capital or fair market value of any shares or other property referred to herein, including, for greater certainty, the cost and fair market value of the XXXXXXXXXX Rights;
(b) whether Target Holdco is, at any relevant time, a resident of XXXXXXXXXX for purposes of the Canada-XXXXXXXXXX Income Tax Convention;
(c) whether the provisions of subsection 247(2) would apply to adjust the amount paid by Pubco to Target Holdco in respect of the XXXXXXXXXX Rights;
(d) the implications of any of the Subject Transactions under XXXXXXXXXX ;
(e) the accuracy of any amounts referred to in this letter; and
(f) any tax consequences relating to the facts and Subject Transactions described herein other than those described in the rulings given above.

OPINION

In the event that it is determined that any of the owners of the Target XXXXXXXXXX and the Parent XXXXXXXXXX were the beneficial owners of any portion of the $XXXXXXXXXX payment referred to in Ruling F above, such portion of the payment will be exempt from tax under the Act to the extent that the relevant owner was resident in XXXXXXXXXX for purposes of an income tax treaty between Canada and any of those countries, and the portion of the payment is not attributable to a permanent establishment that the relevant owner had in Canada for purposes of such treaty.

Yours truly,

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