2009 Ruling 2008-0268321R3 - 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: Whether the acquisition of control of the distributing corporation by a group is part of the series of transactions that include the subsequent distribution and whether the acquisition of shares by a member of that group was in contemplation of the subsequent distribution.

Position: In light of the facts and provided that the conditions of subsection 55(3.1) are met, 55(3)(b) applies to the intercorporate dividends resulting from the butterfly.

XXXXXXXXXX 2008-026832

XXXXXXXXXX , 2009

Dear XXXXXXXXXX ;

Subject: XXXXXXXXXX

all of which file their tax returns at the XXXXXXXXXX Taxation Center and are serviced by the XXXXXXXXXX Taxation Office.

We are writing in response to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge receipt of your emails. The documents submitted as part of your request are only part of this document to the extent described herein.

To the best of your knowledge and that of the above-referenced taxpayers, none of the issues involved in this ruling is:

(a) in an earlier return of the above-referenced taxpayers or a related person;
(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the above-referenced taxpayers or a related person;
(c) under objection by the above-referenced taxpayers or a related person;
(d) before the courts; or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

The above-referenced taxpayers have confirmed that the proposed transactions described herein will not affect their ability to pay any of their outstanding tax liabilities.

All statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the "Act") and all references to monetary amounts are in Canadian dollars.

DEFINITIONS

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

"ACo" means XXXXXXXXXX , a corporation governed by the First Act. The address of ACo is XXXXXXXXXX . The share capital of ACo includes ACo Class A Common Shares, ACo Class B Common Shares, ACo Class A Preferred Shares and ACo Class B Preferred Shares. As of the date hereof, no ACo Class A Preferred Shares or ACo Class B Preferred Shares are issued and outstanding;

"ACo Acquisition" means the acquisition of all the issued and outstanding ACo Common Shares (XXXXXXXXXX ) and ACo Preferred Shares (XXXXXXXXXX );

"ACo Assets" means the assets of ACo, which include:

(a) a XXXXXXXXXX % XXXXXXXXXX interest in XXXXXXXXXX
(BCo and CCo respectively own the remaining XXXXXXXXXX % and XXXXXXXXXX % interests in XXXXXXXXXX );

(b) a XXXXXXXXXX % XXXXXXXXXX interest in XXXXXXXXXX (BCo owns the remaining XXXXXXXXXX % interest in XXXXXXXXXX );

(c) a XXXXXXXXXX % XXXXXXXXXX interest in XXXXXXXXXX (BCo owns the remaining XXXXXXXXXX % interest in XXXXXXXXXX );

(d) interests in the BCo XXXXXXXXXX Properties and the CCo XXXXXXXXXX Properties;

(e) contracts to supply XXXXXXXXXX to BCo and CCo, respectively;

(f) a XXXXXXXXXX inventory;

(g) ACo-BCo Receivables and ACo-CCo Receivables;

(h) cash and other working capital assets; and

(i) before they expired, the Contracts (the last Contract expired in XXXXXXXXXX );

"ACo Business" means any business carried-on by ACo, including XXXXXXXXXX ;

"ACo Cancellation Note" means a non-interest-bearing demand note having a principal amount and fair market value equal to the fair market value of the ACo Class A Common Shares purchased by ACo for cancellation;

"ACo Class A Common Share" means a Class A Common Share in the capital stock of ACo. XXXXXXXXXX ;

"ACo Class A Preferred Share" means a Class A Preferred Share in the capital stock of ACo. XXXXXXXXXX ;

"ACo Class B Common Share" means a Class B Common Share in the capital stock of ACo. XXXXXXXXXX ;

"ACo Class B Preferred Share" means a Class B Preferred Share in the capital stock of ACo;

"ACo Common Share" means a common share that was in the capital stock of ACo;

XXXXXXXXXX ;

"ACo Liabilities" means the liabilities of ACo, consisting primarily of the following:

(a) third party accounts payable and other accrued liabilities (including income taxes payable for the year in which the Butterfly Transfer occurs);

(b) XXXXXXXXXX payable; and

(c) ACo-BCo Payables and ACo-CCo Payables;

"ACo Management Committee" means a committee consisting of XXXXXXXXXX representatives of BCo and XXXXXXXXXX representatives of CCo;

"ACo Preferred Shares" means the preferred shares that were in the capital stock of ACo;

"ACo USA" means the unanimous shareholders' agreement (within the meaning of the First Act) among ACo, BCo and CCo, dated XXXXXXXXXX ;

"ACo/BCo Management Agreement" means the agreement which appoints BCo to administer the Contracts and to manage the BCo XXXXXXXXXX Properties that are allocated to it pursuant to the ACo USA. Subject to the terms of the ACo USA, CCo delegates to BCo the rights, powers and duties vested in the shareholders pursuant to the ACo USA to manage such properties of ACo;

"ACo-BCo Payables" means any amount owing by ACo to BCo;

"ACo-BCo Receivables" means any amount owing by BCo to ACo;

"ACo/CCo Management Agreement" means the agreement which provides that the parties appoint CCo to manage the CCo XXXXXXXXXX Properties that are allocated to it pursuant to the ACo USA. Subject to the terms of the ACo USA, BCo delegates to CCo the rights, powers and duties vested in the shareholders pursuant to the ACo USA to manage such properties of ACo;

"ACo-CCo Payables" means any amount owing by ACo to CCo;

"ACo-CCo Receivables" means any amount owing by CCo to ACo;

"adjusted cost base" has the meaning assigned by section 54;

"agreed amount" means the amount agreed on by the transferor and transferee in respect of the transfer of an eligible property in a joint election filed pursuant to subsection 85(1);

"arm's length" has the meaning assigned by section 251;

"BCo" means XXXXXXXXXX , a corporation incorporated under the First Act. The address of BCo is XXXXXXXXXX . BCo has subsidiaries that are engaged in XXXXXXXXXX ;

"BCo XXXXXXXXXX Properties" means the properties listed in XXXXXXXXXX of the ACo/BCo Management Agreement;

"Business Property" means all of the assets of ACo, other than Cash or Near-Cash Property, any income from which would, for the purposes of the Act, be income from the ACo Business (other than a specified investment business). In determining the net fair market value of the Business Property, immediately before the Butterfly Transfer, (i) any deferred charges, deferred taxes, and tax accounts will be ignored in determining the net fair market value of the types of property of ACo; and (ii) should any liabilities remain after the allocation to Cash or Near-Cash Property, such excess will be allocated to Business Property based on the relative net fair market value of the Business Property prior to the allocation of such excess. To the extent that the liabilities allocated to Business Property exceed the total fair market value of the Business Property, ACo will be considered to have a negative amount of Business Property;

"Butterfly Transfer" means the transfer of property by ACo to SubCo described in the Proposed Transactions;

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

XXXXXXXXXX ;

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

"Cash or Near-Cash Property" means all current assets of ACo, including: (i) cash; (ii) accounts receivable; (iii) inventory; (iv) income taxes recoverable; (v) prepaid expenses of ACo; and (vi) deposits and advances to related persons, shareholders of ACo or persons related to such shareholders that are due within the next 12 months or those with no fixed term of repayment. In determining the net fair market value of the Cash or Near-Cash Property of ACo, immediately before the Butterfly Transfer, (i) current liabilities will be allocated to Cash or Near-Cash Property of ACo in the proportion that the net fair market value of each such property is of the fair market value of all its Cash or Near-Cash Property; (ii) deferred revenue, representing revenue received or receivable in the ordinary course of ACo's business, the recognition of which has been deferred due to the legal obligation of ACo to render services or deliver products from which such revenue was received, will be considered a liability 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 be delivered; (iii) any deferred charges, deferred taxes, and tax accounts will be ignored in determining the net fair market value of the types of property of ACo. Current liabilities will include accounts payable, accrued liabilities, amounts owing to shareholders, income taxes payable and the amount described in (ii) above in the current definition. All the liabilities of ACo are current liabilities. It is expected that the total current liabilities of ACo will not exceed the total fair market value of the Cash or Near-Cash Property (an excess would result in a negative amount of Cash or Near-Cash Property). Should any liabilities remain after the allocation to Cash or Near-Cash Property, such excess will be allocated to Business Property based on the relative net fair market value of the Business Property prior to the allocation of such excess;

"CCo" means XXXXXXXXXX ., a corporation governed by the First Act that is engaged in XXXXXXXXXX . The address of CCo is XXXXXXXXXX ;

"CCo Acquisition" means the transactions whereby CCo acquired an interest in ACo in XXXXXXXXXX as described in Paragraph 14:

"CCo Butterflied Assets" means certain of the ACo Assets representing CCo's pro rata share (50%) of each type of property owned by ACo on a net fair market value basis (after allocating and deducting as described in the definition of Cash or Near-Cash Property, the ACo Liabilities which are to be assumed by SubCo). For greater certainty, the transfers by ACo will include 50% of the assets described in the definition of ACo Assets, determined on an aggregate net fair market value basis;

"CCo XXXXXXXXXX Properties" means the properties listed in XXXXXXXXXX of the ACo/CCo Management Agreement;

"CCo Plans" means the long-range business plans and projections prepared by CCo;

"Contracts" means the XXXXXXXXXX contracts with arm's length purchasers that were entered into by ACo and that were in effect as of XXXXXXXXXX ;

"CRA" means Canada Revenue Agency;

XXXXXXXXXX

"DCo" means XXXXXXXXXX a corporation governed by the laws of XXXXXXXXXX ;

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

"dividend refund" has the meaning assigned by subsection 129(1);

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

"ECo" means XXXXXXXXXX . Less than XXXXXXXXXX % of the common shares of ECo are owned by the public XXXXXXXXXX ;

"eligible property" for the purposes of subsection 85(1) 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 and prudent parties acting at arm's length and under no compulsion to transact;

"financial intermediary corporation" has the meaning assigned by subsection 191(1);

"First Act" means the Canada Business Corporations Act;

"forgiven amount" has the meaning assigned by subsection 80.01(1);

"guarantee agreement" has the meaning assigned by subsection 122(7.2);

"Investment Property" means all of the ACo Assets other than Cash or Near Cash Property (if any), any income from which would, for the purposes of the Act, be income from property or from a specified investment business of ACo;

XXXXXXXXXX ;

XXXXXXXXXX

"Original Seller" means XXXXXXXXXX ;

"Original Seller Indemnity" means an indemnity provided by the Original Seller to BCo in respect of certain liabilities of ACo that relate to periods ending prior to the ACo Acquisition. The Original Seller Indemnity was not assignable such that if BCo were to sell some or all of the ACo Common Shares to an arm's length party, the Original Seller Indemnity could have been reduced or eliminated;

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

"Paragraph" refers to a numbered paragraph in this letter;

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

"Proposed Transactions" refers to the proposed transactions described under the heading, "Proposed Transactions" of this letter;

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

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

"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;

"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);

"stated capital account" has the meaning assigned by the First Act;

"SubCo" means a corporation to be incorporated by CCo. The authorized share capital of SubCo will consist of an unlimited number of SubCo Common Shares and an unlimited number of SubCo Preferred Shares;

"SubCo Cancellation Note" means the non-interest-bearing demand note having a principal amount and fair market value equal to the fair market value of the SubCo Common Shares purchased by SubCo for cancellation;

"SubCo Common Share" means a common share in the capital stock of SubCo. A SubCo Common Share will give right to: (i) one vote; (ii) receive dividends as and when declared by the directors, and (iii) receive on dissolution the property of SubCo remaining after the redemption amount of the SubCo Preferred Shares and any declared and unpaid dividends thereon have been satisfied;

"SubCo Preferred Share" means a preferred share in the capital stock of SubCo. A SubCo Preferred Share will give right to: (i) one vote; (ii) redemption proceeds (at the option of SubCo) of $XXXXXXXXXX per share; and (iii) receive dividends as and when declared by the directors. On dissolution, a SubCo Preferred Share will give right to receive $XXXXXXXXXX per share and any declared and unpaid dividends in such share;

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

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

"taxation year" has the meaning assigned by subsection 249(1); and

"undepreciated capital cost" has the meaning assigned by subsection 13(21).

FACTS:

1. ECo owns all the issued and outstanding shares in the capital stock of DCo.

2. DCo owns all the issued and outstanding shares in the capital stock of CCo.

3. CCo is a taxable Canadian corporation and a private corporation.

4. BCo is a taxable Canadian corporation and a public corporation. The only issued and outstanding shares in the capital stock of BCo are common shares. To the best of the knowledge of BCo, no person or partnership owns 10% or more of the common shares of BCo. The largest shareholder of BCo is XXXXXXXXXX which, as of XXXXXXXXXX , directly or indirectly owns XXXXXXXXXX % of the common shares of BCo.

5. ACo is a taxable Canadian corporation and a private corporation. ACo operates the ACo Business, owns the ACo Assets and owes the ACo Liabilities. There are no entities over which ACo exercises significant influence.

6. As at the date hereof, the issued and outstanding shares of ACo consist of: (i) XXXXXXXXXX ACo Class A Common Shares, all of which are held by CCo; and (ii) XXXXXXXXXX ACo Class B Common Shares, all of which are held by BCo.

7. On XXXXXXXXXX , BCo, XXXXXXXXXX and the Original Seller agreed to the ACo Acquisition which closed on XXXXXXXXXX . On XXXXXXXXXX , ACo redeemed XXXXXXXXXX ACo Preferred Shares. As part of the ACo Acquisition, the Original Seller provided BCo with the Original Seller Indemnity.

8. In XXXXXXXXXX , BCo and CCo entered into negotiations regarding the acquisition by CCo of an interest in ACo. The purposes of ACo for entering into the CCo Acquisition were the same as those of BCo, its parent. The starting point of the negotiations culminating in the CCo Acquisition was that CCo would acquire a 50% interest in ACo for the same (proportionate) price as BCo had paid to the Original Seller. The transaction could have been structured as a sale of 50% of the shares of ACo by BCo to CCo, but there was a serious concern that such a sale may have adversely impacted the Original Seller Indemnity. There were no discussions between the directors or senior management of BCo and the ECo group (including CCo) about ACo before BCo entered into the ACo Acquisition agreement. After BCo agreed to the ACo Acquisition and prior to its closing, a senior executive of BCo may have had discussions with a number of potential purchasers for up to 50% of the shares of ACo, including Eco, with a view to raising cash and XXXXXXXXXX . However, no detailed discussions were conducted by BCo with any of the potential purchasers, including CCo, and negotiations between BCo and CCo regarding the acquisition by CCo of an interest in ACo did not commence until XXXXXXXXXX .

9. During the negotiations between BCo and CCo, in the months of XXXXXXXXXX , CCo considered:

(a) acquiring assets of ACo; and

(b) acquiring shares of ACo and subsequently splitting its assets.

The idea to acquire assets of ACo instead of acquiring its shares was abandoned by CCo because:

(a) BCo had just recently acquired the shares of ACo for fair market value while the assets of ACo had relatively low costs. BCo did not favour a sale of some assets of ACo absent an increase in purchase price to take into account ACo's tax liability and the benefit of the tax deduction in respect of the cost of assets acquired by CCo. CCo was not willing to accept such an increase in purchase price;

(b) XXXXXXXXXX . The consent of the purchasers under such Contracts was required in order to assign an interest in the Contracts to CCo and the customers would most likely have refused XXXXXXXXXX ; and

(c) XXXXXXXXXX .

The idea of acquiring shares of ACo and subsequently split-up its assets was abandoned by CCo because BCo informed CCo that it would not be possible to effect such a distribution on a tax-deferred basis as part of the same series of transactions as the CCo Acquisition or if the acquisition of ACo shares by CCo was done with a view to completing such a future distribution. The representatives of CCo do not know if CCo's tax counsel confirmed this explanation. The tax advisor of BCo in XXXXXXXXXX was XXXXXXXXXX Over the course of negotiating and implementing the CCo Acquisition, CCo received tax advice from XXXXXXXXXX .

10. CCo understood that it could not acquire the shares of ACo with a view to undertaking a future butterfly transaction. A split-up of ACo's assets was not considered nor intended by ACo, BCo and CCo when CCo acquired shares of ACo and the intention of the parties at that time was to be equal shareholders of ACo. Furthermore:

(a) BCo and CCo did not explore the possibility of transferring assets of ACo to CCo on a tax-deferred basis before CCo acquired the shares of ACo;

(b) ACo or BCo never held out any possibility that a future split-up of the assets of ACo between BCo and CCo was viable;

(c) CCo did not seek to obtain written opinions in that respect;

(d) although CCo was not told by BCo that it would never be possible to effect a tax-deferred distribution, no work was done to investigate the feasibility or any aspects of a future split-up and there was no discussion of how much time would have to pass before an asset distribution could occur;

(e) the parties did not discuss how the properties would eventually be divided;

(f) the parties did not discuss how the Contracts would eventually be dealt with; and

(g) there was no agreement or understanding between BCo and CCo to consider or undertake such a future split-up.

11. In late XXXXXXXXXX , BCo and CCo verbally agreed that CCo would acquire 50% of the shares and some of the assets of ACo.

That transaction involved the divestment by BCo of a 50% interest in a significant asset and involved substantial senior management time. BCo's current management is comfortable to indicate that BCo's objectives were: (i) to raise cash; and (ii) to XXXXXXXXXX . The costs associated with XXXXXXXXXX were anticipated to be significant. XXXXXXXXXX

The senior management of CCo and Eco was involved in the negotiations. CCo's current management is comfortable to indicate that CCo's objectives were:

(a) to acquire from ACo the interest in XXXXXXXXXX ;

(b) to obtain an interest in XXXXXXXXXX and XXXXXXXXXX ;

(c) XXXXXXXXXX ; and

(d) to share in the benefits of the Contracts.

12. On XXXXXXXXXX , ACo, BCo and CCo orchestrated the agreement to subscribe for shares of ACo in order to:

(a) XXXXXXXXXX ; and

(b) preserve the integrity of the Original Seller Indemnity.

13. On XXXXXXXXXX , the articles of ACo were amended to:

(a) cancel the unissued ACo Preferred Shares;

(b) create ACo Class A Common Shares, ACo Class A Preferred Shares and ACo Class B Preferred Shares; and

(c) change the designation of the ACo Common Shares to ACo Class B Common Shares.

14. On XXXXXXXXXX :

(a) CCo subscribed for XXXXXXXXXX ACo Class A Preferred Shares;

(b) ACo sold for fair market value consideration the following interests in XXXXXXXXXX in which BCo and CCo did not wish to share interests through ACo:

(i) ACo sold to BCo its XXXXXXXXXX % interest in XXXXXXXXXX ;

(ii) ACo sold to BCo its XXXXXXXXXX % interest in XXXXXXXXXX ;

(iii) ACo sold to CCo its XXXXXXXXXX % interest in XXXXXXXXXX ;

(c) ACo distributed capital on the ACo Class B Common Shares.

(d) CCo converted the ACo Class A Preferred Shares into XXXXXXXXXX ACo Class A Common Shares;

(e) the parties entered into the following agreements:

(i) the ACo USA;

(ii) the ACo/BCo Management Agreement which provides the terms of the allocation pursuant to the ACo USA of management responsibilities of BCo in respect of certain ACo Assets and of the Contracts; and

(iii) the ACo/CCo Management Agreement which provides the terms of the allocation pursuant to the ACo USA of the management responsibilities of CCo in respect of certain ACo Assets.

15. The purpose of the ACo USA is "to provide for the conduct of the business and affairs of ACo, to provide for restrictions on the transfer and ownership of ACo shares and to govern their relationship as shareholders of ACo". The ACo USA provides, in part, as follows:

(a) there shall be XXXXXXXXXX directors of ACo, XXXXXXXXXX appointed by BCo and XXXXXXXXXX appointed by CCo;

(b) the powers of the directors (current and future) are restricted, in whole, and BCo and CCo have all the powers and duties of the directors of ACo to manage and supervise the management of the business and affairs of ACo;

(c) ACo shall have no officers or employees.

(d) BCo and CCo have equal rights in all respects as shareholders, notwithstanding that each of them holds a separate class of shares;

(e) the rights, powers and duties vested in BCo and CCo pursuant to the ACo USA shall be exercised by:

(i) each of BCo and CCo to the extent of the authorities and responsibilities granted to each of them by the ACo/BCo Management Agreement and by the ACo/CCo Management Agreement;

(ii) XXXXXXXXXX ;

(iii) the ACo Management Committee in all other respects;

(f) XXXXXXXXXX ;

(g) BCo cannot dispose of the shares of ACo (except to certain eligible affiliates of BCo) without giving a right of first refusal to CCo and vice versa; and

(h) ACo shall indemnify the representatives of BCo and CCo on the ACo Management Committee, its directors and XXXXXXXXXX against all costs, charges and expenses reasonably incurred in any action or proceeding to which they are a party by reason of having been a representative or director to the extent that they have honestly exercised the powers, duties and liabilities usually associated with a director of ACo.

16. The management responsibility XXXXXXXXXX in respect of XXXXXXXXXX owned by ACo is allocated to BCo and CCo pursuant to agreement between BCo and CCo. The allocation of management responsibilities to BCo or CCo for a XXXXXXXXXX owned by ACo was not based on the likelihood that BCo or CCo, as the case may be, would receive such XXXXXXXXXX on a future distribution XXXXXXXXXX . Rather, such allocation agreed between BCo and CCo was based on other factors such as:

(a) which party was better able to manage XXXXXXXXXX or was already managing XXXXXXXXXX at the time the ACo USA was entered into;

(b) which party had better knowledge of XXXXXXXXXX ; and

(c) which party owned a larger XXXXXXXXXX interest in XXXXXXXXXX outside of ACo.

17. Subject to the terms of the ACo USA, CCo delegates to BCo its rights, powers and duties pursuant to the ACo USA to manage the BCo XXXXXXXXXX Properties and to administer the Contracts.

Subject to the terms of the ACo USA, BCo delegates to CCo its rights, powers and duties pursuant to the ACo USA to manage the CCo XXXXXXXXXX Properties. Subject to Paragraphs (b), (d)(ii) and d(iv) below, the description of the terms of the ACo/BCo Management Agreement in this Paragraph applies, mutatis mutandis, to the description of the terms of the ACo/CCo Management Agreement to CCo in respect of the CCo XXXXXXXXXX Properties.

The ACo/BCo Management Agreement provides that:

(a) BCo will manage the BCo XXXXXXXXXX Properties;

(b) BCo will administer the Contracts so as to preserve their value to ACo and ensure that ACo fulfils its obligations and commitments, including its obligations and commitments pursuant to the Contracts. BCo is not allowed to pursue new XXXXXXXXXX contracts or to alter significantly the Contracts XXXXXXXXXX . CCo can require ACo to appoint XXXXXXXXXX to review the activities of BCo relating to the administration of the Contracts;

(c) BCo will provide general administrative and financial management of the ACo Business;

(d) BCo will be:

(i) reimbursed for internal and external costs incurred in the performance of its obligations under the ACo/BCo Management Agreement;

(ii) paid an annual fee of XXXXXXXXXX % of the annual gross receipts of the Contracts;

(iii) paid an annual amount in respect of XXXXXXXXXX costs incurred with respect to the BCo XXXXXXXXXX Properties XXXXXXXXXX ;

(iv) paid $XXXXXXXXXX per month for routine accounting and corporate reporting services;

(e) BCo and CCo each have the right to audit the accounts and records of ACo once a year; and

(f) should ACo be part of a XXXXXXXXXX agreement in respect of a BCo XXXXXXXXXX Property, BCo shall, subject to the terms and conditions of the BCo Management Agreement, have the right to vote XXXXXXXXXX % of ACo's XXXXXXXXXX interest therein. CCo shall have the right to send a non-voting observer to the XXXXXXXXXX management committee meetings for such XXXXXXXXXX .

The ACo/BCo Management Agreement provides that without the written approval of the ACo Management Committee, BCo cannot:

(g) transfer, sell, assign or otherwise dispose of any asset of ACo having a market value greater than $XXXXXXXXXX other than sales of XXXXXXXXXX under the Contracts or under agreements among ACo, BCo and CCo relating to the sale by ACo of XXXXXXXXXX to BCo and CCo;

(h) expend or commit more than $XXXXXXXXXX (or such other amount determined by the ACo Management Committee) per operating year with respect to an XXXXXXXXXX ;

(i) expend or commit more than $XXXXXXXXXX (or such other amount as is determined by the ACo Management Committee) per operating year with respect to the overall XXXXXXXXXX budget;

(j) commit ACo to enter into a XXXXXXXXXX with respect to a project; or

(k) transfer, sell, assign or otherwise dispose of any XXXXXXXXXX .

18. BCo and CCo represent their indirect interest in XXXXXXXXXX through the XXXXXXXXXX .

19. The ACo Management Committee has residual authority to make decisions relating to the affairs of ACo and the ACo Business, other than matters which have been expressly delegated as described in the Paragraphs above. A decision or action by the ACo Management Committee must be approved by representatives of BCo and CCo holding at least XXXXXXXXXX % of the shares of ACo. At each meeting of the ACo Management Committee, only one representative of each shareholder shall cast the votes to which that shareholder is entitled, which shall be equal to the shares of ACo held by the shareholder. The chairman of the ACo Management Committee does not have a casting vote.

The ACo Management Committee approves all aspects of the proposed financial budget of ACo for each operating year. The financial budget sets out the activities and expenditures of ACo in relation to the ACo Business. In the event that a member of the ACo Management Committee disagrees with any aspect of the proposed financial budget (other than the existing legal obligations of ACo), the shareholder that appointed that member has the right to object to the proposed financial budget and the business of ACo shall continue. The proposed financial budget and the objection shall then be submitted to an independent consultant appointed by the ACo Management Committee or to arbitration.

20. All financing of ACo is to be provided by advances from BCo and CCo in proportion to their respective shareholdings, subject to approval of the ACo Management Committee to borrow from anybody else.

ACo and BCo are severally liable to purchase their pro rata share of any XXXXXXXXXX which ACo receives from its share of all XXXXXXXXXX

21. The possibility of simplifying the ownership structure of ACo through a potential split-up of ACo arose:

(a) in XXXXXXXXXX , but was rejected prior to a consideration of the viability of a split-up. The question was raised by personnel of either BCo or CCo responsible for financial reporting and not by persons who negotiated the CCo Acquisition. That personnel contacted BCo's tax director who called XXXXXXXXXX to inquire about the feasibility of a distribution of the assets of ACo under paragraph 55(3)(b). Two main issues were identified: (i) the determination of the types of property of ACo and (ii) whether such a distribution would be part of the same series of transactions as the CCo Acquisition. No opinion was received by any of the parties and the tax advice did not get past the issue identification stage. No due diligence was undertaken to identify relevant facts for the series determination. The possibility of a split-up was simply not pursued after the general discussions in XXXXXXXXXX , as it was not a priority at the time given the benefit of maintaining ACo as a separate entity for the purpose of the Contracts;

(b) XXXXXXXXXX , questions were raised by certain personnel at BCo regarding the efficiency of retaining ACo as a separate entity. These questions were prompted by the following factors:

(i) XXXXXXXXXX . This change resulted in additional administrative burdens to ACo, BCo, and CCo;

(ii) each Shareholder was funding 50% of the costs of running ACo as a separate entity;

(iii) the benefit of maintaining ACo as a separate entity for the purpose of the Contracts had diminished since many of the Contracts had expired and no such new contracts were being entered into by ACo. In addition, XXXXXXXXXX ;

(iv) there were differences of opinion between BCo and CCo as to the funding and other actions that ACo should take in respect of XXXXXXXXXX , making it difficult for ACo to deal with XXXXXXXXXX ; and

(v) ACo started paying taxes in XXXXXXXXXX and it was anticipated that it would continue paying taxes while BCo and CCo would not.

(c) in XXXXXXXXXX , by representatives of both BCo and CCo on the ACo Management Committee. The XXXXXXXXXX groups of BCo and CCo wanted XXXXXXXXXX . The sales and operations groups of BCo and CCo wanted XXXXXXXXXX . The finance and tax groups of BCo and CCo noted XXXXXXXXXX .

These personnel were not the same persons who were making the decisions for BCo and CCo in respect of the CCo Acquisition. The ACo Management Committee undertook to investigate the viability of a split-up of ACo. The process, which involved due diligence work regarding the relevant facts, continued intermittently until XXXXXXXXXX , at which time it was decided not to proceed because the issues relating to obtaining consent from the purchasers for the transfer of the Contracts had not been dealt with. In addition, while the ACo Management Committee was of the view that a split-up would not occur as part of the same series of transactions as the CCo Acquisition, the preference was to wait until the uncertainty caused by recent case law as to the meaning of "series of transactions or events" for purposes of the Act was better resolved;

(d) at the end of XXXXXXXXXX , a brief consideration of the viability of a potential split-up of ACo was briefly explored at the ACo Management Committee. That consideration was prompted by difficulties in making efficient decisions with respect to XXXXXXXXXX of ACo where BCo and CCo disagreed as to XXXXXXXXXX . The imminent expiration of the remaining Contracts in XXXXXXXXXX also prompted those discussions. Based on advice from XXXXXXXXXX to wait until uncertainty caused by recent case law as to the interpretation that the CRA would place on the meaning of "series of transactions or events" was better resolved, no decision was made to pursue a split-up. The discussion was not documented;

(e) in XXXXXXXXXX , the ACo Management Committee agreed to seriously investigate the viability of a split-up of ACo. The consideration was prompted by the following factors:

(i) at the operational level, there are increasingly serious differences of opinion between BCo and CCo XXXXXXXXXX held by ACo. XXXXXXXXXX Consequently, it has become increasingly important for BCo and CCo to be able to make XXXXXXXXXX decisions in an efficient manner, which they had not been able to do with respect to the XXXXXXXXXX due to their differences of opinion. The distribution of XXXXXXXXXX to BCo and CCo pursuant to the Proposed Transactions will allow BCo and CCo to make separate decisions with respect to the XXXXXXXXXX in such XXXXXXXXXX and will reduce the administrative costs relating to holding XXXXXXXXXX in ACo;

(ii) XXXXXXXXXX ;

(iii) XXXXXXXXXX ;

(iv) with the expiration of the final Contract in XXXXXXXXXX , it becomes easier to split-up ACo; a split-up would eliminate the additional operational and administrative costs and burdens from maintaining ACo as a separate legal entity; and

(v) ACo has and is expected to continue to have significant tax liabilities while CCo and, to a lesser extent BCo, have available income tax attributes. A split-up would allow to better align the income tax attributes of BCo and CCo with income from ACo's properties in order to reduce overall taxes payable.

The persons who were making the decisions for BCo and CCo in respect of the CCo Acquisition were not the persons who are making the decisions in respect of the Proposed Transactions. In addition, they are not the same persons who are responsible for the day-to-day operations of ACo on behalf of BCo and CCo. Some of the inquiries and actions described in this Paragraph were made by persons who were not aware of all of the facts and circumstances relating to the CCo Acquisition and their actions were influenced by different factors.

22. Each year, CCo prepares the CCo Plans, which are comprised of a detailed financial plan for the upcoming 12 months against which performance is measured, a somewhat less detailed plan for the next 12 months and much less detailed plans for later years (these years are referred to in this Paragraph as the "Later Years"). The main purpose for the CCo Plans covering the Later Years is to provide a base case for Later Years, to identify future trends or to assist in determining resource allocations or risks.

In order to make such long-range business projections for the Later Years, a number of assumptions concerning the corporate structure have been made in order to estimate future inputs. Since CCo's actual performance in Later Years is not measured against the "modelled results" for the Later Years, those assumptions were not necessarily based on specific plans or intentions. The following assumptions have been made over time:

(a) the CCo Plans for the XXXXXXXXXX years assumed that ACo would remain a separate legal entity for XXXXXXXXXX years and then would be wound-up. This was done because CCo had experienced difficulties in tracking and monitoring the financial affairs of ACo as a separate legal entity since the completion of the CCo Acquisition and because it was simpler to prepare long-term projections for CCo on a "consolidated basis". The XXXXXXXXXX -year time frame was chosen because it was far enough beyond the short-term planning period that its validity did not have to be verified. In particular, no legal or tax advice as to the viability of a winding-up was obtained and no discussions with BCo about a winding-up had occurred;

(b) the CCo Plans for the XXXXXXXXXX years assumed that ACo would be wound-up in the following year. CCo's management has indicated that this assumption was based on the fact that the issue had been raised at the ACo Management Committee but that the validity of the assumption was not verified;

(c) the CCo Plans for the XXXXXXXXXX year assumed that ACo would continue to be a separate legal entity indefinitely; and

(d) in subsequent years, it has been assumed that ACo would be wound-up after XXXXXXXXXX years.

23. Immediately before the Butterfly Transfer, the property owned by ACo will be classified into Cash or Near-Cash Property, Business Property and Investment Property for the purposes of the definition of "distribution" in subsection 55(1) and for the purposes of paragraph 55(3)(b).

Immediately before the Butterfly Transfer, the ACo Assets will only consist of Cash or Near-Cash Property and Business Property for the purpose of the definition of "distribution" in subsection 55(1) and paragraph 55(3)(b) (ACo does not own any Investment Property).

OTHER INFORMATION

24. The following representations are made on behalf of ACo:

(a) except as described herein, no debts have been or will be incurred or paid and no property has been or will be acquired by ACo in contemplation of the Proposed Transactions described below, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (vi);

(b) none of the SubCo Common Shares or ACo Class A Common Shares is or will be subject to a guarantee agreement, within the meaning referred to in subsection 112(2.2);

(c) none of the SubCo Common Shares or ACo Class A Common Shares 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);

(d) none of the SubCo Common Shares or ACo Class A Common Shares is or will be subject to a dividend rental arrangement;

(e) none of ACo or any corporation controlled by ACo will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1);

(f) no changes to the share capital structure of ACo are contemplated before the date of the commencement of the Proposed Transactions;

(g) all of the shares referred to above owned by ACo, BCo and CCo are held as capital property by ACo, BCo and CCo, respectively;

(h) none of ACo, BCo, CCo or SubCo are restricted financial institutions; and

(i) SubCo will not receive a dividend refund in its taxation year in which the SubCo Common Shares are purchased for cancellation as described in Paragraph 27. ACo will not receive a dividend refund in its taxation year in which the ACo Class A Common Shares are purchased for cancellation, as described in Paragraph 30.

PROPOSED TRANSACTIONS

25. CCo will incorporate SubCo. SubCo will be a taxable Canadian corporation. XXXXXXXXXX SubCo Preferred Shares will be issued to CCo on incorporation for aggregate proceeds of $XXXXXXXXXX .

26. ACo will proceed to the Butterfly Transfer by transferring to SubCo the CCo Butterflied Assets. In consideration for the transfer, SubCo will:

(a) assume CCo's pro rata share (i.e., 50%) of the liabilities of ACo, including the ACo-CCo Payables; and

(b) issue XXXXXXXXXX SubCo Common Shares.

ACo will jointly elect with SubCo 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 ACo that is an eligible property transferred to SubCo. The agreed amount in respect of each of the eligible properties transferred will be:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(b) in the case of depreciable property of a prescribed class, an amount not less than the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii);

(c) XXXXXXXXXX ; and

(d) in respect of eligible capital property, an amount not less than the least of the amounts described in subparagraph 85(1)(d)(i), (ii) and (iii).

For purposes of the joint elections in this Paragraph, the reference to the "undepreciated capital cost to the taxpayer of all of the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to ACo of all of the property of that class that the capital cost of the asset immediately before the disposition is of the capital cost of all of the property of the class before the disposition.

The amount added to the stated capital account for the SubCo Common Shares issued as partial consideration for the transferred property will be the maximum amount permitted to be added to the paid-up capital of the SubCo Common Shares having reference to subsection 85(2.1).

27. SubCo will purchase for cancellation the SubCo Common Shares held by ACo in consideration for the issuance of the SubCo Cancellation Note by SubCo to ACo.

28. SubCo will be wound-up into CCo under the provisions of the First Act. Immediately after the commencement of the winding-up, SubCo will distribute all of its assets, rights and properties to CCo, including the CCo Butterflied Assets, and CCo will assume all of the liabilities and obligations of SubCo, including the liability of SubCo under the SubCo Cancellation Note. As a result of the distribution of the ACo-CCo Receivables from SubCo to CCo, such receivables will be settled and extinguished. In addition, as a result of the assumption by CCo of the ACo-CCo Payables, such obligations will also be settled and extinguished. An election will be made under subsection 80.01(4) in respect of each of the ACo-CCo Receivables and ACo-CCo Payables to deem each of them to be settled at an amount equal to its cost amount to the holder thereof.

29. Immediately following the Butterfly Transfer, the net fair market value of Cash or Near-Cash Property and Business Property indirectly transferred to CCo will be equal to or will approximate 50% of the net fair market value of all assets of that particular type of property held by ACo immediately before such transfer, except that if ACo has no net Cash or Near-cash Property, the net Cash or Near-cash Property transferred to CCo will also be nil (as will the net Cash or Near-cash Property retained by ACo). For the purpose of this Paragraph, the expression "approximate 50%" means that discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net fair market value of each type of property which CCo will receive as compared to what CCo would have received had it received 50% of the net fair market value of that type of property. For purposes of this Paragraph, the determination of the fair market value of each type of property received by CCo will be determined as if the ACo-CCo Receivables and the ACo-CCo Payables were not settled as a result of the winding-up of SubCo into CCo.

30. ACo will purchase for cancellation the ACo Class A Common Shares held by CCo in consideration for the issuance by ACo to CCo of the ACo Cancellation Note.

31. The SubCo Cancellation Note will be set off against the ACo Cancellation Note in full satisfaction of the respective obligation under each note.

32. ACo will be wound-up into BCo under the provisions of the First Act. Immediately after the commencement of the winding-up, ACo will distribute all of its remaining assets, rights and properties to BCo including the ACo-BCo Receivables, and BCo will assume all of the remaining liabilities and obligations of ACo including the ACo-BCo Payables. As a result of the distribution of the ACo-BCo Receivables, such receivables will be settled and extinguished. In addition, as a result of the assumption by BCo of the ACo-BCo Payables, such payables will be settled and extinguished. An election will be made under subsection 80.01(4) in respect of each of the ACo-BCo Receivables and ACo-BCo Payables to deem each of them to be settled at an amount equal to its cost amount.

33. As part of the documentation implementing the reorganization, CCo will provide indemnities to ACo and BCo in respect of obligations of ACo for which it is to be responsible. Similarly, BCo will provide indemnities to ACo and CCo in respect of obligations of ACo for which it is to be responsible.

PURPOSE OF THE PROPOSED TRANSACTIONS

The overall purpose of the Proposed Transactions is to divide the ACo Assets between BCo and CCo, on a pro rata basis (i.e., 50/50) using a tax-deferred butterfly transaction in order to allow:

(a) BCo and CCo to make independent decisions with respect to XXXXXXXXXX ;

(b) the realization of cost savings relating to the achievement of operational and administrative efficiencies; and

(c) BCo and CCo to directly earn income from ACo's XXXXXXXXXX .

The Proposed Transactions involve the transfer of XXXXXXXXXX % of the operations of ACo to and for the benefit of BCo and CCo (i.e., effectively involve the winding-up of ACo). In this context, the purpose of ACo for entering into the Proposed Transactions is the same as the purpose of BCo and CCo.

Senior management of BCo would have knowledge of the Butterfly Transfer but do not have the same level of involvement as compared to the CCo Acquisition. The overall purpose of BCo for entering into the Proposed Transactions is to achieve commercial and income tax efficiencies relating to direct holding of an interest in the underlying assets of ACo. XXXXXXXXXX .

The overall purpose of CCo for entering into the Proposed Transactions is to achieve commercial and income tax efficiencies relating to direct holding of an interest in the underlying assets of ACo. XXXXXXXXXX .

RULINGS

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

A. Provided that the requisite joint elections are filed in prescribed form and within the prescribed time and subject to the application of subsection 69(11) and paragraph 85(1)(b), the provisions of subsection 85(1) will apply to the transfer by ACo to SubCo of the transferred property described in Paragraph 26 with result that the agreed amount in respect of such property will be deemed pursuant to paragraph 85(1)(a) to be proceeds of disposition thereof to ACo and the cost thereof to SubCo.

For greater certainty, the provisions of paragraph 85(1)(e.2) will not apply to the transfer described in Paragraph 26.

B. The purchase for cancellation by SubCo of the SubCo Common Shares referred to in Paragraph 27 will have the following results:

(a) SubCo will be deemed by paragraph 84(3)(a) to have paid and ACo will be deemed by paragraph 84(3)(b) to have received a dividend equal to the amount by which the amount paid on such purchase for cancellation exceeds the paid-up capital of the SubCo Common Shares;

(b) the amount of such deemed dividend will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining ACo's proceeds of disposition for the SubCo Common Shares;

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

(d) no taxes under Part IV.1 will be payable by ACo in respect of such deemed dividend;

(e) no taxes under Part VI.1 will be payable by SubCo in respect of such deemed dividend; and

(f) no taxes under Part IV will be payable by ACo in respect of such deemed dividend.

C. The purchase for cancellation by ACo of the ACo Class A Common Shares referred to in Paragraph 30 will have the following results:

(a) ACo will be deemed by paragraph 84(3)(a) to have paid and CCo will be deemed by paragraph 84(3)(b) to have received a dividend equal to the amount by which the amount paid on such purchase for cancellation exceeds the paid-up capital of the ACo Class A Common Shares;

(b) the amount of such deemed dividend will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining CCo's proceeds of disposition for the ACo Class A Common Shares;

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

(d) no taxes under Part IV.1 will be payable by CCo in respect of such deemed dividend;

(e) no taxes under Part VI.1 will be payable by ACo in respect of such deemed dividend; and

(f) no taxes under Part IV will be payable by CCo in respect of such deemed dividend, except to the extent that ACo is entitled to a dividend refund for its taxation year in which such dividend is paid.

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

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

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

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

(d) in respect of the taxable dividend described in Ruling C above, an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(e) in respect of the taxable dividend described in Ruling B above, an acquisition of property in the circumstances described in paragraph 55(3.1)(d);

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 Rulings requested in B and C above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

E. The provisions of subsection 88(1) will apply on the winding-up of SubCo into CCo as described in Paragraph 28 and for greater certainty:

(a) each property of SubCo distributed to CCo on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by SubCo for proceeds of disposition determined under that paragraph;

(b) the shares in the capital stock of SubCo held by CCo immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by CCo for proceeds of disposition determined under that paragraph; and

(c) each property of SubCo distributed to CCo on the winding-up will be deemed to have been acquired by CCo for an amount equal to the amount deemed by paragraph 88(1)(a) to be SubCo's proceeds of disposition of the property.

F. The provisions of subsection 88(1) will apply on the winding-up of ACo into BCo as described in Paragraph 32 and for greater certainty:

(a) each property of ACo distributed to BCo on the winding-up will be deemed by paragraph 88(1)(a) to have been disposed of by ACo for proceeds of disposition determined under that paragraph;

(b) the shares in the capital stock of ACo held by BCo immediately before the winding-up will be deemed by paragraph 88(1)(b) to have been disposed of by BCo for proceeds of disposition determined under that paragraph; and

(c) each property of ACo distributed to BCo on the winding-up will be deemed to have been acquired by BCo for an amount equal to the amount deemed by paragraph 88(1)(a) to be ACo's proceeds of disposition of the property.

G. The set-off and cancellation of the SubCo Cancellation Note against the ACo Cancellation Note described in Paragraph 31 will not, in and of itself, give rise to a forgiven amount, and neither ACo nor CCo will realize a gain or incur any loss as a result of such set-off and cancellation.

H. 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.

I. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences in the rulings given above.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the Proposed Transactions are completed not later than six months of the date of this letter.

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 amount of the ACB, PUC or FMV of any shares or partnership interest referred to herein; and

(b) any tax consequences relating to the facts described herein and the Transactions other than those described in the rulings given above, including whether any subsequent transaction or event is or is not considered to be part of the series of transactions or events described herein.

Yours truly,

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