2009 Ruling 2007-0221331R3 - Split-up Butterfly

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Is a benefit conferred for the purposes of 87(4) where a subsidiary controlled corporation holds shares in its parent-predecessor corporation and, on an amalgamation of the parent-predecessor corporation with a related corporation that owns the remaining outstanding shares of the subsidiary controlled corporation, the subsidiary controlled corporation becomes a subsidiary wholly-owned corporation of Amalco that receives nominal value preferred shares of Amalco on the amalgamation?

Position: Not in the circumstances.

Reasons: In the particular circumstances, it was not reasonable to regard the apparent forfeiture of value by the subsidiary controlled corporation on the amalgamation as giving rise to a benefit that was conferred on the remaining Amalco shareholders.

XXXXXXXXXX 2007-022133

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: XXXXXXXXXX ("Mainco 1") and XXXXXXXXXX ("Mainco 2")
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 taxpayers. We also acknowledge your subsequent communications with us in respect of this ruling.

Attached as Schedule "A" is a list of the individual and corporate parties involved in the proposed transactions described herein, their business or social insurance numbers and their respective taxation services offices.

To the best of your knowledge and that of the taxpayers (or their officers where the taxpayer is a corporation) involved, none of the issues involved in this ruling request is:

(a) in an earlier return of any of the taxpayers or any related person;

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

(c) under objection by any of the taxpayers or any related person;

(d) before the courts; or

(e) subject to advance income tax ruling 2002-013633, dated XXXXXXXXXX , 2002, the subject of any other ruling previously considered by the Directorate.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified and, where the circumstances so require, the singular should be read as plural and vice versa:

"ACB" means adjusted cost base as defined in section 54 and subsection 248(1);

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

"agreed amount" means the amount determined pursuant to paragraph 85(1)(a), which, for greater certainty, is adjusted in accordance with paragraphs 85(1)(b) to 85(1)(e.4) inclusive;

"Amalco" means the corporation resulting from the amalgamation described in Paragraph 32;

"Amalco Cash Amount #1" means an amount equal to the FMV of the cash or near cash property to be distributed to Holdco as part of the transaction described in Paragraph 37 (it is anticipated that the Amalco Cash Amount #1 will not be a material amount.);

"Amalco Cash Amount #2" means an amount equal to the FMV of the cash or near cash property to be distributed to NRCo on the redemption of the Amalco P2 Shares, as described in Paragraph 38 (it is anticipated that the Amalco Cash Amount #2 will not be a material amount);

"Amalco Group" has the meaning set forth in Paragraph 33;

"Amalco P1 Shares" means a class of preferred shares of Amalco, as described in Paragraph 32(c);

"Amalco P2 Shares" means a class of preferred shares of Amalco, as described in Paragraph 32(b);

"Amalco Redemption Note" means the demand promissory note of Amalco to be issued to Holdco on the redemption of the Amalco P1 Shares, as described in Paragraph 40;

"Amalgamation" means the amalgamation described in Paragraph 32;

"approximate the proportion" means, for the purposes of Paragraph 39, a discrepancy from that proportion, if any, that would not exceed 1%, determined as a percentage of the FMV of each type of property which Holdco or NRCo, as the case may be, has received (or Amalco has retained) as compared to what Holdco or NRCo, as the case may be, would have received (or Amalco would have retained) if it had received (or retained) its appropriate pro rata share of the FMV of that type of property;

"Asset" means the XXXXXXXXXX ;

"BCA" means the Business Corporations Act (XXXXXXXXXX );

"Canadian partnership" has the meaning assigned by section 102;

"capital property" has the meaning assigned by section 54;

"Corporate Clean-Up Transactions" means the transactions described in Paragraphs 29 through 31;

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

"Distributions" has the meaning given in Paragraph 38;

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

"Holdco" means XXXXXXXXXX , a taxable Canadian corporation;

"Holdco Note" means the demand promissory note of Holdco issued on the redemption of the Holdco Special Shares, as described in Paragraph 41;

"Holdco Special Shares" means a class of preferred shares of Holdco, as described in Paragraph 27;

"holding company" means a company that holds investments in other corporations but does not carry on an active business;

"Investco" means XXXXXXXXXX ., a taxable Canadian corporation;

"Leaseco" means XXXXXXXXXX , a non-resident limited liability company;

"Mainco 1" means XXXXXXXXXX ., a taxable Canadian corporation;

"Mainco 2" means XXXXXXXXXX , a taxable Canadian corporation;

"Mainsub 2a" means XXXXXXXXXX ., a taxable Canadian corporation;

"Mainsub 2b" means XXXXXXXXXX ., a taxable Canadian corporation;

"Mainsub 2c" means XXXXXXXXXX ., a taxable Canadian corporation;

"Mainsub 2d" means XXXXXXXXXX , a taxable Canadian corporation;

"Mainsub 2e" means XXXXXXXXXX ., a taxable Canadian corporation;

"Mainsub 2f" means XXXXXXXXXX ., a taxable Canadian corporation;

"Mr. A" means XXXXXXXXXX ;

"Mr. B" means XXXXXXXXXX ;

"Mrs. C" means XXXXXXXXXX ;

"non-resident" has the meaning assigned by subsection 248(1);

"NRCo" means XXXXXXXXXX ., a non-resident corporation;

"NRCo Partnership" means XXXXXXXXXX limited partnership described in Paragraph 17 that is not a Canadian partnership;

"NRCo Shares" has the meaning given in Paragraph 14;

"NRsub 1" means XXXXXXXXXX , a taxable Canadian corporation;

"NRsub 2" means XXXXXXXXXX ., a non-resident corporation;

XXXXXXXXXX

"Organization" means the XXXXXXXXXX ;

"Paragraph" means a numbered paragraph in this letter;

"PNGCo" means XXXXXXXXXX ., a taxable Canadian corporation;

"PNG Partnership" means XXXXXXXXXX , a Canadian partnership described in Paragraph 13;

"Proposed Transactions" means the transactions described in Paragraphs 25 through 42;

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

"Realty" means XXXXXXXXXX ;

"Refinancing Transaction" means the refinancing transactions described in Paragraph 50;

"related person" has the meaning assigned by section 251;

"series of transactions" has the extended meaning assigned by subsection 248(10);

"Shareholders Agreement" means the shareholders agreement described in Paragraph 24;

"significant influence" has the meaning given in paragraph 3050.21 of the CICA Handbook;

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

"specified shareholder" has the meaning assigned by subsection 248(1);

"stated capital" means stated capital as that expression is used in the BCA;

"tax shield amounts" means any tax attribute amounts (such as undepreciated capital cost, non-capital losses, cumulative eligible capital and resource pools) that would affect the fair market value of the share of a corporation or the fair market value of the assets of a corporation;

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

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

"Transferred Shares" means approximately XXXXXXXXXX % of the issued and outstanding shares of NRCo as described in Paragraph 37; and

"Trust Reorganization" means the transactions described in Paragraph 49.

FACTS

1. Mainco 1 is a corporation that was continued under, and is governed by, the XXXXXXXXXX . The corporation's taxation year ends on XXXXXXXXXX . The issued and outstanding shares of Mainco 1 are owned as follows:

								Class "B"	Class "C"
								Redeemable	Redeemable
Shareholder	Class "A"	Class "B"	Class "C"	Preferred	Preferred
Mr. A		XXXXX		XXXXX 	XXXXX		XXXXX		XXXXX
Mr. B		XXXXX		XXXXX 	XXXXX		XXXXX		XXXXX
NRsub 1	XXXXX		XXXXX 	XXXXX		XXXXX 	XXXXX
Holdco	XXXXX		XXXXX 	XXXXX		XXXXX 	XXXXX
NRCo		XXXXX		XXXXX 	XXXXX		XXXXX 	XXXXX
Mainco 2	XXXXX		XXXXX 	XXXXX		XXXXX 	XXXXX
Mainsub 2a	XXXXX		XXXXX 	XXXXX		XXXXX 	XXXXX
Total		XXXXX		XXXXX		XXXXX		XXXXX  	XXXXX 

The corporation's Class "A" shares are its only voting shares, the Class "B" shares are non-voting shares and the Class "C" shares, Class "B" Redeemable Preferred shares and Class "C" Redeemable Preferred shares are all redeemable preferred shares.

2. Mainco 1 is a holding company that owns the shares of NRCo described in Paragraph 14.

3. Mainco 2 is a corporation that was incorporated under, and is governed by, the BCA. The corporation's taxation year ends on XXXXXXXXXX . The issued and outstanding shares of Mainco 2 are owned as follows:

Shareholder		Class "A"	Class "B"	Class "C"	Class "D"
Mr. A			XXXXX		XXXXX 	XXXXX		XXXXX
Mr. B			XXXXX		XXXXX 	XXXXX		XXXXX
NRsub 1		XXXXX		XXXXX 	XXXXX		XXXXX
NRCo			XXXXX		XXXXX 	XXXXX		XXXXX
Total			XXXXX		XXXXX 	XXXXX		XXXXX 

The corporation's Class "A" shares are its only voting shares, the Class "B" shares are non-voting shares and the Class "C" and "D" shares are redeemable preferred shares.

4. Mainco 2 is a holding company that beneficially owns:

(a) all of the issued and outstanding shares of Mainsub 2a, Mainsub 2b*, Mainsub 2d and PNGCo,

(b) all of the issued and outstanding common shares of Mainsub 2e , and

(c) a limited partnership interest in PNG Partnership.

• The shares of Mainsub 2b are registered in Mr. B's name and are subject to a declaration of trust in favour of Mainco 2.

5. PNGCo is a corporation that was incorporated under, and is governed by, the BCA. PNGCo carries on XXXXXXXXXX business in Canada that is managed by Mr. B.

6. Mainsub 2a is a corporation that was incorporated under, and is governed by, the BCA. Mainsub 2a is a holding company that owns the Class "C" Redeemable Preferred shares in Mainco 1 described in Paragraph 1.

7. Mainsub 2b is a corporation that was incorporated under, and is governed by, the BCA. Mainsub 2b is a holding company that owns all of the issued and outstanding shares in Mainsub 2c.

8. Mainsub 2c is a corporation that was incorporated under, and is governed by, the BCA. Mainsub 2c is a holding company that, inter alia, owns the shares in NRCo described in Paragraph 14 and has a receivable from Mainco 2.

9. Mainsub 2d is a corporation that was incorporated under, and is governed by, the BCA. Mainsub 2d is the general partner of PNG Partnership.

10. Mainsub 2e is a corporation that was incorporated under, and is governed by, the BCA. Mainco 2 owns all of the corporation's issued and outstanding common shares and the estate of Mrs. C, who was the mother of Mr. A and Mr. B, owns all of the corporation's issued and outstanding preferred shares. Mainsub 2e is a holding company that owns all of the issued and outstanding shares of Mainsub 2f.

11. Mainsub 2f is a corporation that was incorporated under, and is governed by, the BCA. Mainsub 2f is a holding company that owns a limited partnership interest in PNG Partnership.

12. Investco is a corporation that was incorporated under, and is governed by, the BCA. All of the issued and outstanding shares of the corporation are owned by Mr. A. Investco is a holding company that owns a limited partnership interest in PNG Partnership.

13. PNG Partnership is a limited partnership formed under, and governed by, the laws of the Province of XXXXXXXXXX . As stated above, the partnership interests in PNG Partnership are owned by Mainco 2, Mainsub 2d, Mainsub 2f and Investco. PNG Partnership owns XXXXXXXXXX property in Canada.

14. NRCo is a corporation that was incorporated under the laws of the State of XXXXXXXXXX , U.S.A. NRCo has a single class of issued shares (the "NRCo Shares") of which XXXXXXXXXX NRCo Shares are currently outstanding. Mainco 1 owns XXXXXXXXXX NRCo Shares and Mainsub 2c owns XXXXXXXXXX NRCo Shares.

15. NRCo owns:

(a) all of the issued and outstanding shares of NRsub 1 and NRsub 2,

(b) a XXXXXXXXXX % general partnership interest in NRCo Partnership,

(c) a XXXXXXXXXX % interest in Leaseco,

(d) the shares of Mainco 1 described in Paragraph 1 above,

(e) the shares of Mainco 2 described in Paragraph 3 above, and

(f) a receivable from Mainco 2.

16. NRsub 2 is a corporation incorporated in and governed by the laws of the State of XXXXXXXXXX , U.S.A. NRsub 2 owns a XXXXXXXXXX % limited partnership interest in NRCo Partnership.

17. NRCo Partnership is a member of the Organization and holds the Asset. Under a management agreement dated XXXXXXXXXX , NRCo appointed and designated Mr. A as the exclusive agent to manage, operate and control the NRCo Partnership and the Asset, XXXXXXXXXX .

18. Leaseco is a limited liability company formed under and governed by the laws of the State of XXXXXXXXXX , U.S.A. Leaseco has a XXXXXXXXXX -year lease and management agreement to operate the Realty which is used by the Asset. Under Leaseco's operating agreement, Mr. A has been granted broad powers and discretion to direct, manage and control the business of Leaseco. The XXXXXXXXXX % interest in Leaseco not owned by NRCo is owned, indirectly, by Mr. A and Mr. B, each as to one-half.

19. NRsub 1 is an unlimited liability corporation that was incorporated under, and is governed by, the XXXXXXXXXX . NRsub 1 owns the shares of Mainco 1 and Mainco 2 described in Paragraphs 1 and 3.

20. Mr. B is a resident of Canada who manages the XXXXXXXXXX business of PNGCo. Mr. B owns the shares of Mainco 1 and Mainco 2 described in Paragraphs 1 and 3 above. Mr. B also owns, indirectly, a XXXXXXXXXX % interest in Leaseco described in Paragraph 18 above.

21. Mr. A is a non-resident of Canada who is a resident of the United States and manages the business operations carried on in connection with the Asset and the Realty leased and managed by Leaseco. Mr. A owns all of the issued and outstanding shares of Holdco and Investco and the shares of Mainco 1 and Mainco 2 described in Paragraphs 1 and 3 above. Mr. A also owns, indirectly, a XXXXXXXXXX % interest in Leaseco described in Paragraph 18 above.

22. Holdco is an unlimited liability corporation that was incorporated under, and is governed by, the XXXXXXXXXX . Holdco owns the shares of Mainco 1 described in Paragraph 1.

23. Mr. A has de jure control of both Mainco 1 and Mainco 2.

If the "circular" shareholdings in Mainco 1 that are owned by NRCo and NRsub 1 are ignored, Mr. A would own the majority of the voting shares of Mainco 1. Mr. A, together with corporations controlled by Mainco 1 (NRCo and NRsub 1), own the majority of the voting shares of Mainco 2.

24. Mr. A and Mr. B entered into a shareholders agreement with Mainco 1 effective XXXXXXXXXX in order, among other things, to establish their rights and obligations in respect of the shares of Mainco 1 and Mainco 2 and in respect of the management and control of Mainco 1 and Mainco 2. Under the Shareholders Agreement, Mr. A and Mr. B each covenant and agree to vote the shares of Mainco 1 and Mainco 2 beneficially owned by them to accomplish and give effect to the terms and conditions of the agreement. Pursuant to the Shareholders Agreement, Mr. A and Mr. B agree to support the nomination to the board of directors of each of Mainco 1 and Mainco 2 (and their respective subsidiaries) of Mr. A, Mr. B and another individual who is not related to, and in his capacity as a director of Mainco 1 and Mainco 2 does not take direction from, either Mr. A or Mr. B. The shareholders agreement is not a "unanimous shareholder agreement" within the meaning of the governing corporate legislation.

PROPOSED TRANSACTIONS

Following the receipt of the rulings requested herein, the following transactions will be undertaken:

Pre-Amalgamation Transactions

25. Mr. A will transfer all of the shares of Mainco 1 and Mainco 2 owned by him to Holdco solely in consideration for the issuance to Mr. A of additional shares of Holdco. The addition to the PUC of the shares of Holdco as a result of the issuance of the additional shares to Mr. A will not exceed the aggregate amount of the PUC of the shares of Mainco 1 and Mainco 2 that are transferred by Mr. A to Holdco.

26. Mr. A and Holdco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer of Mr. A's Mainco 1 and Mainco 2 shares. The agreed amount in respect of each such election will equal the cost amount to Mr. A of the transferred shares which, in each case, will not be greater than the fair market value of such shares.

27. The articles of Holdco will be amended to create Holdco Special Shares, which will be shares that:

(i) are non-voting;
(ii) are redeemable and retractable for an aggregate amount equal to the FMV of the consideration for which they were issued (in relation to the Holdco Special Shares called the "redemption amount"); and
(iii) entitle the holder to an annual non-cumulative dividend in the amount of XXXXXXXXXX % of the redemption amount.

The entitlement of such shares to dividends declared thereon will rank senior to the entitlement of all other authorized classes of shares of Holdco.

28. Mainco 1 and NRsub 1 will be continued into XXXXXXXXXX . On the continuance, there will be no change to the classes of shares or to the PUC of either corporation.

29. Mainco 2 will transfer all of its shares of Mainsub 2d and Mainsub 2e and its partnership interest in PNG Partnership to PNGCo as consideration for the issuance to Mainco 2 of additional shares of PNGCo. The addition to the stated capital of the shares of PNGCo will be set at an amount not in excess of the amount determined for "B" in the formula in subsection 85(2.1).

30. Mainco 2 and PNGCo will jointly elect pursuant to subsection 85(1), in the prescribed form and within the time determined under subsection 85(6), with respect to the transfer of Mainco 2's shares of Mainsub 2d and Mainsub 2e and the partnership interest in PNG Partnership. The agreed amount in respect of each such election will not exceed the FMV of the shares of Mainsub 2d and Mainsub 2e and the partnership interest in PNG Partnership, as the case may be, that are transferred and in each case will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

31. Mainsub 2f will, by special resolution, resolve to wind-up and dissolve into Mainsub 2e in accordance with the provisions of the BCA. As a consequence of the wind-up, all of the property of Mainsub 2f will be distributed to Mainsub 2e and Mainsub 2e will assume any liabilities owing by Mainsub 2f.

Amalgamation

32. Mainco 1, Mainco 2, NRsub 1, Mainsub 2a, Mainsub 2b and Mainsub 2c will be amalgamated pursuant to XXXXXXXXXX the BCA to form a new corporation ("Amalco"). An agreement will be entered into by Amalco and Mr. A and Mr. B having substantially the same terms and conditions as the Shareholders Agreement. The agreement referred to will not be a "unanimous shareholder agreement" for the purposes of the BCA.

On the amalgamation, the shares of the predecessor corporations will be exchanged as described below.

(a) No shares of Amalco will be issued in exchange for shares of a predecessor corporation which were owned by another predecessor corporation.

(b) In exchange for its shares of Mainco 1, Mainco 2 and NRsub 1, NRCo will receive XXXXXXXXXX Amalco P2 Shares, which will be shares that are:

(i) non-voting;

(ii) redeemable and retractable for an aggregate amount (in relation to the Amalco P2 Shares called the "redemption amount") equal to the aggregate of the FMV of one NRCo Share and the Amalco Cash Amount #2; and

(iii) entitle the holder to an annual non-cumulative dividend in the amount of XXXXXXXXXX % of the redemption amount.

The entitlement of such shares to declared dividends will rank senior to the entitlement of the Amalco voting common shares described in Paragraph 32(d) below.

(c) In exchange for its shares of Mainco 1 and Mainco 2, Holdco will receive XXXXXXXXXX Amalco P1 Shares, which shares will:

(i) have the same voting rights on a per share basis as the voting common shares of Amalco described in Paragraph 32(d) below;

(ii) be redeemable and retractable for an aggregate amount (the "redemption amount") equal to the proportion of the fair market value of all of the issued shares of all classes of Amalco immediately after the Amalgamation that the aggregate fair market value of all the shares owned by Holdco in all of the predecessor corporations immediately before the Amalgamation bore to the aggregate fair market value of all of the issued shares of all the predecessor corporations immediately before the Amalgamation, excluding shares of a predecessor corporation which were owned by another predecessor corporation and on the assumption that the shares in predecessor corporations that were owned by NRCo had, immediately before the Amalgamation, an aggregate fair market value equal to the fair market value of one NRCo share and Amalco Cash Amount #2; and

(iii) entitle the holder to an annual non-cumulative dividend in the amount of XXXXXXXXXX % of the redemption amount.

The entitlement of such shares to declared dividends will rank senior to the entitlement of the Amalco voting common shares described in Paragraph 32(d) below; and

(d) in exchange for his shares of Mainco 1 and Mainco 2, Mr. B will receive XXXXXXXXXX voting common shares of Amalco.

32.1 The aggregate amount added to the stated capital of the particular class of shares in Amalco that are received by each of NRCo, Holdco and Mr. B on the amalgamation will not be greater than the aggregate amount of the PUC of all the shares in the predecessor corporations owned by the particular shareholder immediately before the amalgamation.

Pre-Distribution Determinations

33. The net fair market value of each type of property of Amalco, at the time immediately prior to the Distributions, will be determined on a consolidated basis. For this purpose, the property of each relevant corporation will be classified into three types of property for purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of that corporation, including any cash, certificates of deposit, marketable securities, term deposits, accounts receivable, inventories and rights arising from prepaid expenses ("prepaid expenses");

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

(c) investment property, comprising all of the assets of that corporation (other than cash or near cash property) any income from which would, for the purposes of the Act, be income from property or a specified investment business.

In computing the consolidated net fair market value of each type of property, where the property of Amalco is shares of a corporation over which Amalco has significant influence (directly or indirectly) (the "Amalco Group"), an interest in a partnership or any amount receivable by Amalco from such a corporation or partnership, the fair market value of the shares of the particular corporation, partnership interest or amount receivable from the particular corporation or partnership, as the case may be, will be multiplied by the proportion that the net fair market value of that type of property of the particular corporation or partnership is of the net fair market value of all of the property of the particular corporation or partnership (calculated as described in Paragraphs 34 and 35).

To avoid the double counting of values that would occur as a result of the circular shareholding, in this case NRCo's holding of the Amalco P2 Shares will be ignored.

In making the computations referred to above, Leaseco will be treated as a corporation, NRCo's member's interest in Leaseco will be treated as shares of Leaseco and Leaseco will be treated as a corporation over which NRCo has significant influence.

34. In determining, on a consolidated basis, the net fair market value of each type of property of the Amalco Group immediately before the Distributions, the liabilities of each corporation in the Amalco Group (other than an amount owing by such corporation to Amalco) will be allocated to, and will be deducted in the calculation of, the net fair market value of each type of property of the particular corporation in the manner described below.

(a) Current liabilities of such corporation (including the current portion of long-term debt) will be allocated to each cash or near cash property (including accounts receivable, inventories and prepaid expenses) of such corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities exceeds the aggregate fair market value of the cash or near cash property of the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property.

(b) Following the allocation of current liabilities to each cash or near cash property in (a) above, any remaining net fair market value of any accounts receivable, inventories and prepaid expenses of such corporation will be reclassified as business property and excluded from cash or near cash property, to the extent that such property will be collected, sold or used by the Amalco Group in the ordinary course of the business to which such property relates.

(c) Liabilities (other than current liabilities) of such corporations that relate to a particular property will then be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of the property's fair market value. Any excess of such liabilities over the fair market value of such particular property will be allocated to the type of property to which the particular property relates. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property. To the extent that the allocation of liabilities to a particular type of property as described herein exceeds the aggregate fair market value of all property of that particular type of the particular corporation, the particular corporation will be considered to have a negative net fair market value for that type of property.

(d) Any liabilities (other than current liabilities) of such corporation which do not relate to a particular type of property will then be allocated to the cash or near cash, investment and business property of such corporation based on the relative remaining net fair market value of each type of property determined prior to the allocation of such liabilities, but after the allocation of the liabilities described in (a) and (c) above and the reallocation of amounts described in (b) above.

35. For greater certainty, in determining the consolidated net fair market value of the property of the Amalco Group, as described in Paragraphs 33 and 34, the following principles will apply:

(a) any tax-related amounts in any corporation (such as tax shield amounts and inherent tax liabilities pertaining to unrealized income or capital gains and deferred income taxes) will be ignored;

(b) the amount of any liability that will be deducted is the principal amount, rather than the fair market value, of the indebtedness;

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

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

(e) the liabilities of any particular member of the Amalco Group will be considered to include its respective partnership share of each liability of any partnership of which such member is a partner which will not, in any event, exceed the amount contributed to the particular partnership by the such member; and

(f) the portion of any amount recorded as a current liability of Amalco to another corporation in the Amalco Group or by one corporation in the Amalco Group to another corporation, other than Amalco, in such group, will be classified as cash or near cash property of the creditor and a current liability of the debtor, while the remaining portion of any such amount will be classified as a non-current asset of the creditor or non-current liability of the debtor.

36. As a result of the classification of properties and the allocation of liabilities of Amalco, determined on a consolidated basis, for the purposes of the Distributions it is expected that Amalco will have net business property and may have net cash or near cash property, but will not have investment property.

Distributions

37. Amalco will transfer to Holdco the number of NRCo Shares (the "Transferred Shares") that, together with the amount of cash or near cash property to be transferred to Holdco (the "Amalco Cash Amount #1"), will satisfy the tests in Paragraph 39. As consideration therefor Holdco will issue to Amalco a number of Holdco Special Shares that have an aggregate FMV and redemption amount equal to the aggregate of the FMV of the Transferred Shares and Amalco Cash Amount #1. Amalco and Holdco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer to Holdco of the Transferred Shares. The agreed amount for the purposes of the election in respect of the Transferred Shares will not exceed the FMV of those shares and will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). The PUC of the Holdco Special Shares, determined before any adjustment that would otherwise be made pursuant to subsection 85(2.1), will be an amount not in excess of the amount determined for "B" in the formula in subsection 85(2.1).

38. Amalco will redeem the Amalco P2 Shares in exchange for the transfer to NRCo of one NRCo Share and Amalco Cash Amount #2. The amount of Amalco Cash Amount #2 will approximate the same proportion of the cash and near cash property of Amalco determined immediately before the Distributions that the FMV of one NRCo Share is of the FMV of the business property of Amalco determined immediately before the Distributions. This transfer of property, together with the transfer of property described in Paragraph 37 above, are referred to herein as the "Distributions".

39. Immediately after the Distributions, the net FMV of the cash or near cash property and of the business property acquired by Holdco and NRCo will, in each case, approximate the proportion of the net FMV of all that type of property of Amalco, calculated as described in Paragraphs 33 through 35, determined immediately before the Distributions, that:

(a) the aggregate FMV, immediately before the Distributions, of the Amalco P1 Shares or the Amalco P2 Shares, as the case may be;

is of

(b) the aggregate FMV, immediately before the Distributions, of all of the issued and outstanding shares of Amalco

and the net FMV of the cash or near cash property and of the business property retained by Amalco, similarly calculated, will approximate the proportion of the net FMV of all that type of property of Amalco immediately before the Distributions that:

(c) the aggregate FMV, immediately before the Distributions, of the Amalco shares owned by Mr. B

is of

(d) the aggregate FMV, immediately before the Distributions, of all of the issued and outstanding shares of Amalco.

40. Amalco will redeem all of the Amalco P1 Shares and will issue to Holdco, in full payment of the aggregate redemption amount payable therefor, a demand promissory note (the "Amalco Redemption Note") having a principal amount equal to the aggregate redemption amount of the shares redeemed, with interest payable only from the date of demand for payment by the holder to the date of payment at a rate equal to the average monthly prime rate of a Canadian chartered bank.

41. Holdco will redeem all of the Holdco Special Shares and will issue to Amalco, in full payment of the aggregate redemption amount payable therefor, a demand promissory note (the "Holdco Note") having a principal amount equal to the aggregate redemption amount of the shares redeemed, with interest payable only from the date of demand for payment by the holder to the date of payment at a rate equal to the average monthly prime rate of a Canadian chartered bank.

42. The obligations of Holdco and Amalco to each other under the Holdco Note and the Amalco Redemption Note, respectively, will be set off one against the other as payment in full of such notes and the notes will be cancelled.

ADDITIONAL INFORMATION

43. Except as described herein, no property has or will become property of the Amalco Group (including, for greater certainty, a partnership of which a corporation that is a member of the Amalco Group is a partner) and no liabilities have been or will be incurred by the Amalco Group in contemplation of and before the Distributions otherwise than on a basis which would not cause the provisions of paragraph 55(3.1)(a) to operate to deny the exception in paragraph 55(3)(b) to the dividends resulting from the transactions described in Paragraphs 40 and 41.

44. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of either the Holdco Special Shares or the Amalco P1 Shares.

45. Neither Holdco nor Amalco has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the Holdco Special Shares or the Amalco P1 Shares.

46. Neither the Holdco Special Shares nor the Amalco P1 Shares will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

47. Neither Holdco nor Amalco is, nor will be at the time of the Proposed Transactions, a specified financial institution, as that term is defined in section 248(1).

48. Neither Holdco nor Amalco is, nor will be at the time of the Proposed Transactions, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

49. XXXXXXXXXX

50. XXXXXXXXXX , certain refinancing transactions were undertaken approximately four years ago involving Mr. A, NRCo, Leaseco and the entities through which Mr. A and Mr. B's interests in Leaseco are held. In connection with this refinancing the lenders agreed to permit the implementation of the Proposed Transactions. The decision to implement the Refinancing Transactions was made without reference to any intention to implement the Proposed Transactions and the Refinancing Transactions would have been undertaken regardless of whether the Proposed Transactions were to be implemented.

51. For the purposes of the Canada - United States Tax Convention (1980), the value of the shares of Amalco, both before and immediately following the Distributions, will not be derived principally from real property situated in Canada.

PURPOSE OF THE PROPOSED TRANSACTIONS

52. The Proposed Transactions will be undertaken for the purpose of making Mr. B the sole indirect owner of the business which he manages (i.e., the XXXXXXXXXX business carried on by PNGCo) and increasing the relative indirect ownership of Mr. A in the business that he manages (i.e., the Asset and the Realty leased by Leaseco). The sole purpose of the Corporate Clean-Up Transactions is to simplify the corporate structure of the XXXXXXXXXX business carried on by PNGCo.

RULINGS

Provided that the above statements of Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:

Pre-Amalgamation Transactions

A.1 Provided that the requisite election is made and filed within the time permitted by the Act with respect to each transfer of shares of Mainco 1 and Mainco 2 by Mr. A to Holdco, as described in Paragraphs 25 and 26, the provisions of subsection 85(1) will apply to such transfers with the result that the agreed amounts in respect of such property will be deemed to be the proceeds of disposition thereof to Mr. A and the cost amount thereof to Holdco. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of such transfers.

A.2 Provided that the requisite election is made and filed within the time permitted by the Act with respect to the transfer of shares of Mainsub 2d and Mainsub 2e and the partnership interest in PNG Partnership by Mainco 2 to PNGCo, as described in paragraphs 29 and 30, the provisions of subsection 85(1) will apply to such transfers with the result that the agreed amounts in respect of such property will be deemed to be the proceeds of disposition thereof to Mainco 2 and the cost amount thereof to PNGCo. For greater certainty, paragraph 85(1)(e.2) will not apply in respect of such transfer.

Amalgamation

B. As a result of the amalgamation of Mainco 1, Mainco 2, NRsub 1, Mainsub 2a, Mainsub 2b and Mainsub 2c described in Paragraph 32 and provided that each former holder of shares in Mainco 1, Mainco 2 or NRsub 1 immediately before the amalgamation has received shares of Amalco to which it is legally entitled and that such shares are validly issued, the provisions of subsection 87(4) will apply so that:

(a) the shares acquired by each former holder will be deemed to have been acquired at an aggregate cost equal to the aggregate adjusted cost base to the particular former holder of its shares in each of Mainco 1, Mainco 2 and NRsub 1 immediately before the amalgamation; and

(b) each former holder will be deemed to have disposed of its shares in Mainco 1, Mainco 2 or NRsub 1 on the amalgamation for proceeds of disposition equal to the adjusted cost base to the holder of such shares immediately prior to the amalgamation.

For greater certainty, the exchange of shares by NRCo on the amalgamation will not be subject to the provisions of paragraphs 87(4)(c), (d) or (e).

Butterfly

C. Provided that the requisite election is made and filed within the time permitted by the Act, with respect to the transfer of the Transferred Shares to Holdco, as described in Paragraph 37, the provisions of subsection 85(1) will apply to such transfer with the result that the agreed amount in respect of such property will be deemed to be the proceeds of disposition thereof to Amalco and the cost amount thereof to Holdco.

D. On the redemption by Amalco of the Amalco P2 Shares held by NRCo, as described in Paragraph 38:

(a) paragraphs 84(3)(a) and (b) will apply to deem Amalco to have paid and NRCo to have received, on a separate class of shares comprising the redeemed Amalco P2 Shares, a dividend equal to the amount, if any, by which the aggregate of the fair market value of the NRCo share transferred by Amalco to NRCo and the Amalco Cash Amount #2 exceeds the PUC of the redeemed Amalco P2 Shares immediately prior to their redemption;

(b) in computing the capital gain / loss realized by NRCo on the disposition of the Amalco P2 Shares which will occur as a result of the redemption of such shares by Amalco, paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which NRCo would otherwise be considered to have received as a result of such redemption; and

(c) pursuant to subsection 40(3.6), any capital loss that would otherwise be realized by NRCo on the redemption of the Amalco P2 Shares will be deemed to be nil.

E. On the redemption by Amalco of the Amalco P1 Shares held by Holdco, as described in Paragraph 40:

(a) paragraphs 84(3)(a) and (b) will apply to deem Amalco to have paid and Holdco to have received, on a separate class of shares comprising the redeemed Amalco P1 Shares, a dividend equal to the amount by which the principal amount of the Amalco Redemption Note exceeds the PUC of such shares immediately prior to their redemption; and

(b) in computing the capital gain realized by Holdco on the disposition of the Amalco P1 Shares which will occur as a result of the redemption of such shares by Amalco, paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which Holdco would otherwise be considered to have received as a result of such redemption.

F. On the redemption by Holdco of the Holdco Special Shares held by Amalco as described in Paragraph 41:

(a) paragraphs 84(3)(a) and (b) will apply to deem Holdco to have paid and Amalco to have received, on a separate class of shares comprising the redeemed Holdco Special Shares, a dividend equal to the amount by which the principal amount of the Holdco Note exceeds the PUC of such shares immediately prior to their redemption; and

(b) in computing the capital gain realized by Amalco on the disposition of the Holdco Special Shares which will occur as a result of the redemption of such shares by Holdco, paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition which Amalco would otherwise be considered to have received as a result of such redemption.

G. The full amount of each of the deemed dividends referred to in Paragraphs 40 and 41:

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

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

(c) by virtue of subsection 112(3), will reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received; and

(d) will not be subject to tax under Part IV.1 or Part VI.1.

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

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

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

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

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

(e) an acquisition of property described in paragraphs 55(3.1)(c) or 55(3.1)(d),

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not be applicable with respect to the dividends referred to in Ruling G and, for greater certainty, subsection 55(3.1) will not be applicable to deny the exemption under paragraph 55(3)(b).

I. The cost amount to Amalco of the Holdco Note described in Paragraph 41, and the cost amount to Holdco of the Amalco Redemption Note described in Paragraph 40 will, in each case, be equal to the principal amount of such note.

J. The set-off of the Holdco Note and the Amalco Redemption Note, as described in Paragraph 42, will not result in the application of either of sections 80 or 15.

K. The dispositions of the Holdco Note and the Amalco Redemption Note which will occur on the payment of each such note, as described in Paragraph 42, will not result in any income, gain or loss, for the purposes of the Act, to either of Amalco or Holdco.

L. The Proposed Transactions will not, in and of themselves, cause the Holdco Special Shares or the Amalco P1 Shares not to be capital property of Amalco or Holdco, respectively, or cause the Transferred Shares not to be capital property of Amalco.

Miscellaneous

M. Subsections 15(1), 56(2) and 246(1) will not be applied as a result of the implementation of the Proposed Transactions.

N. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences described herein.

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

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

COMMENTS

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the FMV or ACB of any property or the PUC of any shares referred to herein;

(b) the income tax consequences associated with any of the transactions described in the advance income tax ruling referred to in paragraph 49 hereof; or

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

Yours truly,

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

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