2007 Ruling 2007-0227371R3 - 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:

1)Whether the proposed butterfly reorganization meets the requirements of paragraph 55(3)(b).

2) Whether there are any concerns regarding the use of the treaty protected gain on the shares of DC.

Position: 1) Yes. 2) No.

Reasons:

1) It meets the requirements of the law.

2) It is represented that the PlantCo Common Shares will not derive their value primarily from real property situated in Canada.

XXXXXXXXXX 							2007-022737

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Subject: XXXXXXXXXX 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 taxpayers. We acknowledge your various e-mails in respect of this ruling.

You have advised that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this advance income tax ruling:

(a) is in an earlier return of XXXXXXXXXX ., or a related person;
(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of XXXXXXXXXX . or a related person;
(c) is under objection by XXXXXXXXXX . or a related person; or
(d) is before the courts.

DEFINITIONS

Unless otherwise specified, all statutory references herein are to the Act (defined below). In this letter, the following terms have the meanings specified:

• "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;
• "Aco" means XXXXXXXXXX , an ULC formed as a result of the amalgamation referred to in Paragraph 12;
• adjusted cost base" has the meaning assigned by section 54;
• "agreed amount" means the amount agreed upon in respect of a property in an election filed under subsection 85(1);
• "Butterfly Reorganization" means the transactions described in Paragraphs 30 to 41 below;
• "Butterfly Transfer" means the transfers of property described in Paragraphs 33 and 34 below;
• "Canadian corporation" has the meaning assigned by subsection 89(1);
• "capital property" has the meaning assigned by section 54;
• "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);
• "Code" means the Internal Revenue Code (United States);
• "Companies Act" means the Companies Act (XXXXXXXXXX );
• "DC" means XXXXXXXXXX ., described in Paragraph 3;
• "DC Common Shares" means the common shares of DC, described in Paragraph 3 below;
• DC New Common Shares" means the common shares of DC described in Paragraph 30 below;
• "DC PlantCo Redemption Amount" means the aggregate redemption amount of the DC PlantCo Reorganization Shares issued on the Share Exchange, as described in Paragraph 30 below;
• "DC PlantCo Redemption Note" means the note payable described in Paragraph 39 below;
• "DC PlantCo Reorganization Shares" means the special shares of DC described in Paragraph 30 below;
• "DC TechCo Redemption Amount" means the aggregate redemption amount of the DC TechCo Reorganization Shares issued on the Share Exchange, as described in Paragraph 30 below;
• "DC TechCo Redemption Note" means the note payable described in Paragraph 38 below;
• "DC TechCo Reorganization Shares" means the special shares of DC described in Paragraph 30 below;
• "distribution" has the meaning assigned by subsection 55(1);
• "dividend rental arrangement" has the meaning assigned by subsection 248(1);
• "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 transact;
• "Family" has the meaning assigned by Paragraph 2;
• "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);
• "Forco" means XXXXXXXXXX a corporation governed by the laws of XXXXXXXXXX;
• "guarantee agreement" has the meaning assigned by subsection 112(2.2);
• "Leasing" means XXXXXXXXXX a corporation governed by the Business Corporations Act (XXXXXXXXXX ) prior to the continuance referred to in Paragraph 12 below, and prior to the amalgamation referred to in Paragraph 12 below;
• "paid-up capital" has the meaning assigned by subsection 89(1), unless indicated as being for corporate law purposes;
• "Paragraph" means a paragraph of this letter;
• "Parent" means XXXXXXXXXX , described in Paragraph 1;
• "PlantA" means the manufacturing location described in Paragraph 10 below;
• "PlantB" means the manufacturing location described in Paragraph 10 below;
• "PlantC" means the manufacturing location described in Paragraph 11 below;
• "PlantCo" means the ULC described in Paragraph 18 below;
• "PlantCo Butterflied Assets" means the assets described in Paragraph 34 below;
• "PlantCo Butterfly Proportion" means the proportion that (i) the net fair market value of the business property of DC that is to be transferred to PlantCo as described in Paragraph 34 below (determined on a consolidated look-through basis) immediately before the Butterfly Reorganization is of (ii) the net fair market value of all the business property of DC (determined on a consolidated look-through basis) immediately prior to the Butterfly Reorganization;
• "PlantCo Redemption Amount" means the aggregate redemption amount of the PlantCo Reorganization Shares, as described in Paragraph 30 below;
• "PlantCo Redemption Note" means the note payable described in Paragraph 37 below;
• "PlantCo Reorganization Shares" means the preferred shares of PlantCo described in Paragraph 18 below;
• "principal amount" has the meaning assigned by subsection 248(1);
• "private corporation" has the meaning assigned by subsection 89(1);
• "Proposed Transactions" means the proposed transactions described in Paragraphs 29 through 45;
• "public corporation" has the meaning assigned by subsection 89(1);
• "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);
• "restricted financial institution" has the meaning assigned by subsection 248(1);
• "S Corp." means a United States Qualified Subchapter "S" Corporation;
• "safe income on hand" in respect of a particular share of a corporation at a particular time means the portion of the unrealized gain inherent in such share of the corporation at that time that cannot reasonably be considered to be attributable to anything other than income earned or realized (as determined pursuant to subsection 55(5)), to the extent that it is on hand, by any corporation after 1971 and before the relevant safe-income determination time;
• "series of transactions or events" has the meaning assigned by subsection 248(10);
• "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;
• "Share Exchange" has the meaning assigned in Paragraph 30 below;
• "Sib1" means XXXXXXXXXX , an individual resident in the United States for the purposes of the Act and the Treaty;
• "Sib2" means XXXXXXXXXX , an individual resident in the United States for the purposes of the Act and the Treaty;
• "Sib3" means XXXXXXXXXX a resident of the United States for the purposes of the Act and the Treaty;
• "specified class" has the meaning assigned by subsection 55(1);
• "specified investment business" has the meaning assigned by subsection 125(7);
• "specified shareholder" has the meaning assigned by subsection 248(1) as modified by subsections 55(3.2) and (3.3);
• "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
• "taxable dividend" has the meaning assigned by subsection 89(1);
• "TechCo" means the ULC described in Paragraph 17 below;
• "TechCo Butterflied Assets" means the assets described in Paragraph 33 below;
• "TechCo Butterfly Proportion" means the proportion that (i) the net fair market value of the business property of DC that is to be transferred to TechCo as described in Paragraph 33 below (determined on a consolidated look-through basis) immediately before the Butterfly Reorganization is of (ii) the net fair market value of all the business property of DC (determined on a consolidated look-through basis) immediately prior to the Butterfly Reorganization;
• "TechCo Redemption Amount" means the aggregate redemption amount of the TechCo Reorganization Shares, as described in Paragraph 33 below;
• "TechCo Redemption Note" means the note payable described in Paragraph 36 below;
• "TechCo Reorganization Shares" means the preferred shares of TechCo described in Paragraph 17 below;
• "Treaty" means the Canada -United States Income Tax Convention (1980);
• "ULC" means an unlimited liability company governed by the Companies Act; and
• "Xco" means XXXXXXXXXX , an ULC existing prior to the amalgamation referred to in Paragraph 12.

Our understanding of the facts, purposes of the Proposed Transactions, Proposed Transactions and additional information is as follows:

STATEMENT OF FACTS:

Background of Parent

1. Parent is a corporation that was incorporated in XXXXXXXXXX and has elected, under the Code, to be taxed as an S Corp. In addition to the XXXXXXXXXX DC ommon Shares described below, Parent's assets include the shares of XXXXXXXXXX company that has elected to be taxed as an S Corp under the Code, shares of XXXXXXXXXX company that has elected to be taxed as an S Corp under the Code, shares of XXXXXXXXXX company that has elected to be taxed as an S Corp under the Code, the shares of XXXXXXXXXX limited liability company and branch assets situated in XXXXXXXXXX . Parent is a resident of the United States for the purposes of the Act and the Treaty.

2. XXXXXXXXXX , all of the issued and outstanding shares of Parent were owned by three siblings: Sib1 (XXXXXXXXXX %), Sib2 (XXXXXXXXXX %) and Sib3 XXXXXXXXXX %) (the "Family"). Each of Sib1 and Sib2 is, and Sib3 was, resident in the United States for the purpose of the Act and the Treaty. XXXXXXXXXX .

DC Business and Capital

3. DC was incorporated in XXXXXXXXXX and is an ULC. DC is a private corporation and a taxable Canadian corporation. The only issued and outstanding shares of DC are common shares (the "DC Common Shares"). The value of the DC Common Shares is not and, at the time that the Proposed Transactions are implemented will not, be derived principally from real property situated in Canada.

4. XXXXXXXXXX

5. DC had outstanding long term debt of approximately $ XXXXXXXXXX as at XXXXXXXXXX and from time to time may owe amounts to associated corporations. DC's balance sheet as at XXXXXXXXXX , reflected amounts owing of $ XXXXXXXXXX . Such amounts are due within the next XXXXXXXXXX months. DC does not have any balance in its RDTOH or CDA.

6. DC owns all of the issued and outstanding shares of Forco. Forco purchases XXXXXXXXXX from an arm's length third party for sale to DC. DC does not own shares of any other corporation.

7. From time to time there may be amounts receivable by DC from associated corporations. DC's balance sheet as at XXXXXXXXXX , reflected $ XXXXXXXXXX receivable from associated companies that are due within the next XXXXXXXXXX months, including $ XXXXXXXXXX owed by Forco. XXXXXXXXXX .

8. There are XXXXXXXXXX DC Common Shares outstanding. XXXXXXXXXX DC Common Shares are held by Aco and the remaining DC Common Shares are held by Parent. The paid-up capital of the DC Common Shares is approximately $ XXXXXXXXXX . The adjusted cost base of the DC Common Shares to Parent is approximately $ XXXXXXXXXX .

9. From time to time, DC distributes available cash to its shareholders as dividends on the DC Common Shares in an aggregate amount that does not exceed the safe income on hand attributable to the DC Common Shares at that time. The last such dividends were paid by DC in the amount of XXXXXXXXXX .

Aco and DC Corporate History

10. Prior to XXXXXXXXXX , Leasing, a taxable Canadian corporation all the issued and outstanding shares of which were owned by the Family, carried on business as XXXXXXXXXX . The assets of Leasing included manufacturing facilities (land, buildings and equipment) in XXXXXXXXXX (the "PlantA" and "PlantB", respectively).

11. In XXXXXXXXXX , DC purchased the XXXXXXXXXX business carried on by Leasing in a taxable transaction. XXXXXXXXXX .

12. The following transactions were undertaken in XXXXXXXXXX .

TYPES OF PROPERTY OF DC

13. Immediately before the transfers of property described in Paragraphs 33 and 34 below (the "Butterfly Transfer"), the property owned by DC will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of Forco, a corporation over which DC has the ability to exercise significant influence (DC and Forco are hereinafter sometimes collectively referred to as the "Consolidated Group") and all such property will be classified into the following three types of property for the purpose of the definition "distribution" in subsection 55(1):

(a) cash or near-cash property, comprising all of the current assets of the Consolidated Group, including any cash, accounts receivable, prepaid expenses, inventory and loans and advances to associated corporations that are due within the next XXXXXXXXXX months or those with no fixed terms of repayment;

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

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

For greater certainty, the fair market value of the shares of Forco (and of any indebtedness receivable from Forco) will be allocated amongst the three types of property described above by multiplying the fair market value of the shares of Forco (or amount of indebtedness receivable from Forco) by the proportion that the net fair market value of each type of property owned by Forco (as determined in this Paragraph and Paragraph 16 below) is of the total net fair market value of all the property owned by Forco.

In addition, for greater certainty, for the purpose of determining the net fair market value of the types of property of any corporation, any deferred charges, deferred taxes, and tax accounts will be ignored. Deferred revenue, representing revenue received or receivable in the ordinary course of the Consolidated Group's business, the recognition of which has been deferred due to the legal obligation of the Consolidated Group to render services or deliver products from which such revenue was received will be considered a liability for the purpose of Paragraph 16 only to the extent that it gives rise to a legal obligation to repay the amount should the services not be provided or the products not delivered.

14. Forco does not have any investment property. The types of property of Forco, after the allocation of liabilities described in Paragraph 16 below, will consist of cash or near-cash property or business property. Forco's cash or near-cash property will comprise cash and accounts receivable. XXXXXXXXXX .

15. DC does not have any investment property. Other than the shares of Forco, which are described below, DC's cash or near-cash property before the allocation of liabilities described in Paragraph 16 below will comprise cash, accounts receivable, inventories, any receivables from associated corporations and prepaid expenses and DC's business property will include PlantC, goodwill, intellectual property and other intangible assets relating to its businesses (other than any current assets) any income from which would, for the purposes of the Act, be income from a business other than a specified investment business.

16. In determining, on a consolidated look-through basis, the net fair market value of DC's cash or near-cash property, investment property and business property immediately before the Butterfly Transfer, the liabilities of DC and Forco will be allocated to, and be deducted in the calculation of the net fair market value of each such type of property of DC or Forco, as the case may be, in the following manner:

(a) in determining, immediately before the Butterfly Transfer, the net fair market value of each type of property of Forco, the liabilities of Forco (other than any
amount owing to DC) will be allocated to, and deducted in the calculation of, the net fair market value of a type of property of Forco in the following manner:

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

(ii) provided that the amount of Forco's cash or near-cash property exceeds its current liabilities, the net fair market value of all accounts receivable, inventory and prepaid expenses of Forco that will relate to a business that will be carried on by the Consolidated Group and that will be collected or consumed in the ordinary course of that business will then be reclassified as business property (and the net fair market value thereof will be included in
the net fair market value of Forco's business property and will not be included in the net fair market value of Forco's cash or near-cash property);

(iii) liabilities, other than current liabilities, of Forco that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the particular property belongs) to the extent of its fair market value. 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 type of property as described herein exceeds the total fair market value of that type of property of Forco, Forco will be considered to have a negative amount of that type of property; and

(iv) if any liabilities ("excess unallocated liabilities") remain after the allocations described above are made, such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property, if any, of Forco based on the relative net fair market value of
each type of property prior to the allocation of such excess unallocated liabilities but after the allocation of liabilities in (a)(i) and (a)(iii) above and reallocation of amounts described in (a)(ii) above;

(b) in determining, on a consolidated look-through basis, the net fair market value of each type of property of DC immediately before the Butterfly Transfer, DC will include the appropriate pro rata share of the net fair market value (or such negative amount of a type of property because of paragraphs (a)(i) or (a) (ii) above) of each type of property of Forco and, any liabilities of DC will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of DC in the following manner:

(i) current liabilities of DC will be allocated to cash or near-cash property of DC in the proportion that the fair market value of each such property is of the fair market value of all cash or near-cash property of DC, and the allocation of current liabilities of DC as described herein will not exceed the aggregate fair market value of the cash or near-cash property of DC;

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

(iii) if any liabilities ("excess DC unallocated liabilities") remain after the allocations described in paragraphs (b)(i) and (b)(ii) above are made, such excess DC unallocated liabilities will then be allocated to the cash or near- cash property, investment property and business property, if any, of DC based on the
relative net fair market value of each type of property prior to the allocation of such remaining excess DC unallocated liabilities, but after the allocation
of liabilities described in (b)(i) and (b)(ii) above.

CORPORATIONS INCORPORATED FOR PROPOSED TRANSACTIONS

17. Prior to the implementation of the Proposed Transactions, Parent will incorporate a new corporation ("TechCo"), an ULC under the Companies Act. TechCo will be a taxable Canadian corporation. The authorized share capital of TechCo will include common shares (the "TechCo Common Shares") and redeemable and retractable preferred shares (the "TechCo Reorganization Shares"). No shares of TechCo will be issued on its incorporation.

Each TechCo Reorganization Share will be redeemable at any time at the option of the issuer and retractable at any time at the option of the holder for an aggregate amount equal to the fair market value of the property received for the issuance of the shares, net of any liabilities assumed by the issuer at the time of issuance divided by the number of TechCo Reorganization Shares issued as consideration for such property. The TechCo Reorganization Shares will be non-voting.

18. Prior to the implementation of the Proposed Transactions, Parent will incorporate a new corporation ("PlantCo"), an ULC under the Companies Act. PlantCo will
be a taxable Canadian corporation. The authorized share capital of PlantCo will include common shares (the "PlantCo Common Shares") and redeemable and retractable preferred shares (the "PlantCo Reorganization Shares"). No shares of PlantCo will be issued on its incorporation.

Each PlantCo Reorganization Share will be redeemable at any time at the option of the issuer and retractable at any time at the option of the holder for an aggregate amount equal to the fair market value of the property received for the issuance of the shares, net of any liabilities assumed by the issuer at the time of issuance divided by the number of PlantCo Reorganization Shares issued as consideration for such property. The PlantCo Reorganization Shares will be non-voting.

19. Prior to the implementation of the Proposed Transactions, Parent will incorporate a new S Corp. ("Blocker") which will elect to be a "Qualified Subchapter S Subsidiary" of Parent for the purpose of the Code. That is, while Blocker will be a separate legal entity subject to comprehensive taxation under the Code, an election will be made to cause Blocker to be disregarded as an entity separate from Parent for purposes of the Code. Blocker will be a resident of the United States for the purposes of the Act and the Treaty. The authorized share capital of Blocker will consist of common shares without nominal or par value. One common share of Blocker will be issued to Parent for $XXXXXXXXXX on incorporation.

OTHER INFORMATION

20. The Proposed Transactions have been under consideration by management of DC for some time for the reasons and purposes described below under "Purpose of the Proposed Transactions". XXXXXXXXXX .

21. 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 Forco in contemplation of the Proposed Transactions described below, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

22. None of the shares of DC, TechCo or PlantCo (as described below) is or will be subject to a guarantee agreement.

23. None of the shares of DC, TechCo or PlantCo has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

24. None of the shares of DC, TechCo or PlantCo is or will be subject to a dividend rental arrangement.

25. None of DC or any corporation controlled by DC will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

26. No changes to the share capital structure of Parent or DC are contemplated other than those described in the Proposed Transactions.

27. All of the shares referred to above owned by Parent, Aco or DC are held as capital property by Parent, Aco and DC, respectively.

28. None of TechCo, PlantCo or DC is, or will at any time during the implementation of the Proposed Transactions be, a specified financial institution.

28A. At no time during the series of transactions or events that includes the Proposed Transactions described in Paragraphs 29 to 45 below, will any of the DC Common Shares, the DC TechCo Reorganization Shares, the DC PlantCo Reorganization Shares, the DC New Common Shares or the PlantCo Common Shares derive their value principally from real property situated in Canada. The term "real property situated in Canada" as used herein has the meaning assigned by paragraph 3 of Article XIII of the Treaty.

PROPOSED TRANSACTIONS

Pre-Butterfly Transactions

29. Aco will sell its XXXXXXXXXX DC Common Shares to Parent in a taxable transaction for cash proceeds equal to the fair market value of such XXXXXXXXXX DC Common Shares. Following this transaction, DC will be a wholly-owned subsidiary of Parent.

Butterfly Transaction

30. The articles of association of DC will be amended to create a new class of voting and fully participating common shares (the "DC New Common Shares") and two new classes of non-voting, redeemable and retractable special shares (the "DC TechCo Reorganization Shares" and the "DC PlantCo Reorganization Shares). Parent will exchange each of its common shares of DC for one DC New Common Share, one DC TechCo Reorganization Share and one DC PlantCo Reorganization Share (the "Share Exchange"). Parent will comply with the provisions of section 116 in respect of the Share Exchange. Immediately following the Share Exchange, all of the previously issued and outstanding DC Common Shares will be cancelled.

The aggregate fair market value and redemption amount ("DC TechCo Redemption Amount") of the DC TechCo Reorganization Shares issued on the Share Exchange will be equal to the TechCo Butterfly Proportion of the fair market value of all the issued shares of DC, immediately before the Share Exchange. Each DC TechCo Reorganization Share will be redeemable and retractable for an amount equal to the DC TechCo Redemption Amount divided by the number of DC TechCo Reorganization Shares issued on the Share Exchange and will entitle the holder thereof to a non-cumulative cash dividend equal to XXXXXXXXXX % of the redemption amount of the share at that time. The DC TechCo Reorganization Shares will be non-voting.

The aggregate fair market value and redemption amount ("DC PlantCo Redemption Amount") of the DC PlantCo Reorganization Shares issued on the Share Exchange will be equal to the PlantCo Butterfly Proportion of the fair market value of all the issued shares of DC, immediately before the Share Exchange. Each DC PlantCo Reorganization Share will be redeemable and retractable for an amount equal to the DC PlantCo Redemption Amount divided by the number of DC PlantCo Reorganization Shares issued on the Share Exchange and will entitle the holder thereof to a non-cumulative cash dividend equal to XXXXXXXXXX % of the redemption amount of the share at that time. The DC PlantCo Reorganization Shares will be non-voting.

The terms and conditions of the DC New Common Shares will be the same as those of the existing DC Common Shares.

For corporate law purposes, the aggregate paid-up capital of the DC New Common Shares, the DC TechCo Reorganization Shares and the DC PlantCo Reorganization Shares will be an amount equal, in aggregate, to the fair market value of the DC Common Shares held by Parent immediately before the Share Exchange. The aggregate paid-up capital of the DC New Common Shares, the DC TechCo Reorganization Shares and the DC PlantCo Reorganization Shares will be subject to a grind under subsection 86(2.1) and thus will not exceed the limit under paragraph 212.1(1)(b).

31. Parent will transfer to TechCo, all of the DC TechCo Reorganization Shares held by Parent in consideration for the issuance by TechCo to Parent of XXXXXXXXXX TechCo Common Shares. Parent will jointly elect with TechCo in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC TechCo Reorganization Shares. The agreed amount in respect of the DC TechCo Reorganization Shares transferred will be equal to the fair market value of such shares to Parent at the time of disposition, which will exceed the adjusted cost base to Parent of the DC TechCo Reorganization Shares at that time. For corporate law purposes, the aggregate paid-up capital of the TechCo Common Shares issued as consideration for the transfer of the DC TechCo Reorganization Shares will equal the fair market value of the DC TechCo Reorganization Shares and will be subject to a grind under paragraph 212.1(1)(b). Parent will comply with the provisions of section 116 in respect of this transfer.

32. Simultaneously with the foregoing step, Parent will transfer to PlantCo, all of the DC PlantCo Reorganization Shares held by Parent in consideration for the issuance by PlantCo to Parent of XXXXXXXXXX PlantCo Common Shares. Parent will jointly elect with PlantCo in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the DC PlantCo Reorganization Shares. The agreed amount in respect of the DC PlantCo Reorganization Shares transferred will be equal to the fair market value of such shares to Parent at the time of disposition, which will exceed the adjusted cost base to Parent of the DC PlantCo Reorganization Shares at that time. For corporate law purposes, the aggregate paid-up capital of the PlantCo Common Shares issued as consideration for the transfer of the DC PlantCo Reorganization Shares will be the fair market value of the DC PlantCo Reorganization Shares and will be subject to a grind under paragraph 212.1(1)(b). Parent will comply with the provisions of section 116 in respect of this transfer.

33. Immediately after the transfer of the DC TechCo Reorganization Shares to TechCo, DC will transfer to TechCo, certain business assets including intellectual property and cash or near-cash property (collectively the "TechCo Butterflied Assets") such that the net fair market value of each type of property so transferred to TechCo (after allocating and deducting, in the manner described in Paragraph 16 above, the liabilities of DC which are to be assumed by TechCo) will approximate the TechCo Butterfly Proportion of the net fair market value of all of the property of that type owned by DC immediately before the transfer. In consideration for the transfer, TechCo may assume liabilities of DC and will issue TechCo Reorganization Shares, with an aggregate fair market value and redemption amount equal to the fair market value of the property transferred to TechCo, as described herein, net of any liabilities assumed by TechCo in respect thereof (the "TechCo Redemption Amount").

For the purpose of this Paragraph, the expression "approximate the TechCo Butterfly Proportion" means that the discrepancy from that proportion, if any, will not exceed 1%, determined as a percentage of the net fair market value of each type of property which TechCo will receive as compared to what TechCo would have received had it received its pro rata share of the net fair market value of that type of property.

DC will jointly elect with TechCo in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an eligible property transferred to TechCo.

The agreed amount in respect of each of the eligible properties transferred will not be less than:

(a) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii) in the case of any eligible capital property;

(b) the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) in the case of property described in paragraph 85(1)(c.1); and

(c) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii) in the case of depreciable property of a prescribed class.

In each case, the agreed amount will not exceed the FMV of each such property and will not be less than the amount permitted under paragraph 85(1)(b). The liabilities assumed as consideration for a property transferred pursuant to subsection 85(1) will not exceed the agreed amount in respect of that property.

For corporate law purposes, the paid-up capital of the TechCo Reorganization Shares issued as consideration for the transferred property will be the fair market value thereof and will be subject to a grind under subsection 85(2.1).

34. Immediately after the transfer of the DC PlantCo Reorganization Shares to PlantCo, DC will transfer to PlantCo, certain business assets including PlantC and related equipment and cash or near-cash property (collectively the "PlantCo Butterflied Assets") such that the net fair market value of each type of property so transferred to PlantCo (after allocating and deducting, in the manner described in Paragraph 16 above, the liabilities of DC which are to be assumed by PlantCo) will approximate the PlantCo Butterfly Proportion of the net fair market value of all of the property of that type owned by DC immediately before the transfer. In consideration for the transfer, PlantCo may assume liabilities of DC and will issue PlantCo Reorganization Shares, with an aggregate fair market value and redemption amount equal to the fair market value of the property transferred to PlantCo as described herein, net of any liabilities assumed by PlantCo in respect thereof (the "PlantCo Redemption Amount").

For the purpose of this Paragraph, the expression "approximate the PlantCo Butterfly Proportion" means that the discrepancy from that proportion, if any, will not exceed 1%, determined as a percentage of the net fair market value of each type of property which PlantCo will receive as compared to what PlantCo would have received had it received its pro rata share of the net fair market value of that type of property.

DC will jointly elect with PlantCo in prescribed form and within the time allowed by subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of DC that is an eligible property transferred to PlantCo.

The agreed amount in respect of each of the eligible properties transferred will not be less than:

(a) the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii) in the case of depreciable property of a prescribed class;

(b) the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii) in the case of any eligible capital property; and

(d) the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii) in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the FMV of each such property and will not be less than the amount permitted under paragraph 85(1)(b). The liabilities assumed as consideration for a property transferred pursuant to subsection 85(1) will not exceed the agreed amount in respect of that property.

For corporate law purposes, the paid-up capital of the PlantCo Reorganization Shares issued as consideration for the transferred property will be the fair market value thereof and will be subject to a grind under subsection 85(2.1).

35. Immediately after the transfers described in Paragraphs 33 and 34, the net fair market value of each type of property retained by DC will be equal to that proportion of the net fair market value of property of that type of DC, determined immediately before the transfers, that:

(a) the aggregate fair market value of the DC New Common Shares of DC, immediately before the transfers, is of

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

36. TechCo will redeem or purchase for cancellation the TechCo Reorganization Shares held by DC in consideration for the issuance by TechCo to DC of a non-interest-bearing demand note (the "TechCo Redemption Note") having a principal amount and fair market value equal to the TechCo Redemption Amount.

37. Simultaneously with the foregoing, PlantCo will redeem or purchase for cancellation the PlantCo Reorganization Shares held by DC in consideration for the issuance by PlantCo to DC of a non-interest-bearing demand note (the "PlantCo Redemption Note") having a principal amount and fair market value equal to the PlantCo Redemption Amount.

38. DC will redeem or purchase for cancellation the DC TechCo Reorganization Shares held by TechCo in consideration for the issuance by DC to TechCo of a non-interest-bearing demand note (the "DC TechCo Redemption Note") having a principal amount and fair market value equal to the DC TechCo Redemption Amount.

39. Simultaneously with the foregoing, DC will redeem or purchase for cancellation the DC PlantCo Reorganization Shares held by PlantCo in consideration for the issuance by DC to PlantCo of a non-interest-bearing demand note (the "DC PlantCo Redemption Note") having a principal amount and fair market value equal to the DC PlantCo Redemption Amount.

40. The TechCo Redemption Note will be set off against the DC TechCo Redemption Note in full satisfaction of the obligations under each of the notes and the notes will be cancelled.

41. Simultaneously with the foregoing, the PlantCo Redemption Note will be set off against the DC PlantCo Redemption Note in full satisfaction of the obligations under each of the notes and the notes will be cancelled

Post-Butterfly Transactions

42. TechCo will carry on the business of XXXXXXXXXX

43. XXXXXXXXXX

44. Parent will transfer its DC New Common Shares to Blocker for shares of Blocker having a fair market value equal to the value of the DC New Common Shares so transferred. Parent will comply with the provisions of section 116 in respect of the transfer.

45. XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

46. The overall purpose of the Proposed Transactions is to permit various assets to be removed from DC using a tax-deferred butterfly transaction. It is desirable from a commercial perspective to remove these assets, XXXXXXXXXX , for reasons that include:

XXXXXXXXXX

47. The purpose of the transactions described in Paragraphs 30 to 41 above is to effect the butterfly split-up.

48. XXXXXXXXXX

49. XXXXXXXXXX

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 Share Exchange referred to in Paragraph 30 above, the provisions of subsection 86(l) will apply, and the provisions of subsection 86(2) will not apply to the disposition of each DC Common Share by Parent for a DC TechCo Reorganization Share, DC PlantCo Reorganization Share and DC New Common Share provided that:

(a) Parent holds the DC Common Shares as capital property; and

(b) Parent and DC do not file an election under subsection 85(1) in respect of the Share Exchange such that

(c) Parent will be deemed by paragraph 86(1)(b) to have acquired the DC TechCo Reorganization Shares, DC PlantCo Reorganization Shares and the DC New Common Shares at a cost equal to that proportion of the adjusted cost base to Parent, immediately before the Share Exchange, of Parent's DC Common Shares that

(i) the fair market value, immediately after the Share Exchange, of the DC TechCo Reorganization Shares, DC PlantCo Reorganization Shares and the DC New Common Shares, as the case may be,

is of

(ii) the fair market value, immediately after the Share Exchange, of all of the DC TechCo Reorganization Shares, DC PlantCo Reorganization Shares and DC New Common Shares, as the case may be, received by Parent for Parent's DC Common Shares; and

(d) pursuant to paragraph 86(1)(c), Parent will be deemed to have disposed of its DC Common Shares for proceeds of disposition equal to the cost to Parent of the DC TechCo Reorganization Shares, DC PlantCo Reorganization Shares and the DC New Common Shares determined in (c) above.

B. No dividend will be deemed to arise, by virtue of either of subsection 84(1) or (3), as a result of the Share Exchange.

C. Provided that Parent does not become a resident of Canada and will, at the time of the transfer of the DC TechCo Reorganization Shares held by Parent as described in Paragraph 31 above, continue to be a resident of the United States, the gain realized by Parent on such transfer of the DC TechCo Reorganization Shares to TechCo will not be subject to Canadian income tax in accordance with the provisions of paragraph 4 of Article XIII of the Treaty.

D. Provided that Parent does not become a resident of Canada and will, at the time of the transfer of the DC PlantCo Reorganization Shares held by Parent as described in Paragraph 32 above, continue to be a resident of the United States, the gain realized by Parent on such transfer of the DC PlantCo Reorganization Shares to PlantCo will not be subject to Canadian income tax in accordance with the provisions of paragraph 4 of Article XIII of the Treaty.

E. Subject to the provisions of subsection 69(11), provided that joint elections are filed pursuant to subsection 85(1), in the prescribed form and within the prescribed time, the provisions of subsection 85(1) will apply to the transfer by DC to TechCo of each eligible property described in Paragraph 33 above such that the agreed amount in respect of the transfer will be deemed to be DC's proceeds of disposition for the property and TechCo's cost of each such property. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer described above.

F. Subject to the provisions of subsection 69(11), provided that joint elections are filed pursuant to subsection 85(1), in the prescribed form and within the prescribed time, the provisions of subsection 85(1) will apply to the transfer by DC to PlantCo of each eligible property described in Paragraph 34 above such that the agreed amount in respect of the transfer will be deemed to be DC's proceeds of disposition for the property and PlantCo's cost of each such property. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer described above.

G. As a result of :

(a) the redemption or purchase for cancellation by TechCo of the TechCo Reorganization Shares described in Paragraph 36 above, DC will be deemed by paragraph 84(3)(b) to have received and TechCo will be deemed by paragraph 84(3)(a) to have paid, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the TechCo Reorganization Shares;

(b) the redemption or purchase for cancellation by PlantCo of the PlantCo Reorganization Shares described in Paragraph 37 above, DC will be deemed by paragraph 84(3)(b) to have received and PlantCo will be deemed by paragraph 84(3)(a) to have paid, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the PlantCo Reorganization Shares;

(c) the redemption or purchase for cancellation by DC of the DC TechCo Reorganization Shares described in Paragraph 38 above, TechCo will be deemed by paragraph 84(3)(b) to have received and DC will be deemed by paragraph 84(3)(a) to have paid, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the DC TechCo Reorganization Shares; and

(d) the redemption or purchase for cancellation by DC of the DC PlantCo Reorganization Shares described in Paragraph 39 above, PlantCo will be deemed by paragraph 84(3)(b) to have received and DC will be deemed by paragraph 84(3)(a) to have paid, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the DC PlantCo Reorganization Shares.

(e) The taxable dividends described in paragraphs (a), (b), (c) and (d):

(i) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the corporation deemed to have received such dividend;

(ii) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such dividend is deemed to have been received and none of subsections 112(2.1), (2.2), (2.3) or (2.4) will apply;

(iii) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54;

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

(v) will not be subject to tax under Part IV except to the extent that such payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

(vi) will not be subject to tax under Part IV.1 or 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 subparagraph 55(3.1)(a);

(b) a disposition of property in the 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); or

(d) an acquisition of any shares of a distributing corporation in the circumstances described in subparagraph 55(3.1)(b)(iii);

which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in the ruling given in G above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

I. The provisions of subsection 80(1) will not apply to the set-off and cancellation of the TechCo Redemption Note against the DC TechCo Redemption Note as described in Paragraph 40 above, and neither TechCo nor DC will realize a gain or incur any loss as a result of such set-off and cancellation.

J. The provisions of subsection 80(1) will not apply to the set-off and cancellation of the PlantCo Redemption Note against the DC PlantCo Redemption Note as described in Paragraph 41 above, and neither PlantCo nor DC will realize a gain or incur any loss as a result of such set-off and cancellation.

K. Provided that Parent does not become a resident of Canada and will, at the time of the transfer of the DC New Common Shares held by Parent as described in Paragraph 44 above, continue to be a resident of the United States, the gain realized by Parent on such transfer of the DC New Common Shares to Blocker will not be subject to Canadian income tax in accordance with the provisions of paragraph 4 of Article XIII of the Treaty.

L. 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.

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

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the 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;

(b) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above. In particular, the CRA has not reviewed whether or not any of the shares of DC or PlantCo will derive their value principally from real property situated in Canada.

Yours truly,

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