1999 Ruling 9917373 - BUTTERFLY RULING

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: (See attached Statement of Principal Issues)

Position: (See attached Statement of Principal Issues)

Reasons: (See attached Statement of Principal Issues)

XXXXXXXXXX						991737

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. In your letters of XXXXXXXXXX you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a ruling previously issued by the Directorate.

DEFINITIONS

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

(a) Unless otherwise indicated, all references to statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended ( the "Act");

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

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

(d) "BCA" means the Business Corporations Act (XXXXXXXXXX), S.A. 1981, c-B-15, as amended;

(e) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);

(f) "capital dividend" has the meaning assigned by subsection 83(2);

(g) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);

(h) "capital property" has the meaning assigned by section 54;

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

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

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

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

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

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

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

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

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

(r) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

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

(t) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;

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

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

(w) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(x) "stated capital amount" has the meaning assigned by section 26 of the BCA;

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

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

(aa) "taxable preferred share" has the meaning assigned by subsection 248(1).

FACTS

1. XXXXXXXXXX. ("DC") is a CCPC and a TCC. It was incorporated pursuant to the BCA on XXXXXXXXXX. Taxation years for DC end on XXXXXXXXXX. DC files its tax returns with the XXXXXXXXXX Taxation Centre and is audited by the XXXXXXXXXX Tax Services Office.

2. The issued and outstanding share capital of DC consists of XXXXXXXXXX Class A common shares having an aggregate PUC of approximately $XXXXXXXXXX. There is no other issued share capital of DC.

The XXXXXXXXXX Class A common shares of DC are held by the following persons:

(a) XXXXXXXXXX, an individual ("A"), XXXXXXXXXX shares;

(b) XXXXXXXXXX("Bco"), a CCPC, XXXXXXXXXX shares;

(c) XXXXXXXXXX("Transferee Corporation"), a CCPC, XXXXXXXXXX shares;

(d) XXXXXXXXXX("Cco"), a CCPC, XXXXXXXXXX shares; and

(e) XXXXXXXXXX ("Dco"), a CCPC, XXXXXXXXXX shares.

None of the shares of DC has been acquired by any person in contemplation of the proposed transactions described below. The Class A common shares of DC are not currently taxable preferred shares.

The shareholders of DC deal with each other at arm's length and they hold the shares of DC as capital property.

The ACB to the Transferee Corporation of the Class A common shares of DC is nominal.

As at XXXXXXXXXX DC's RDTOH and CDA accounts were nil. It is not expected that DC will have any balance in its RDTOH account at the end of the taxation year in which the proposed transactions are implemented.

3. DC is a holding corporation and its assets currently consist of :

(a) all of the issued and outstanding shares of XXXXXXXXXX ("Xco"). The ACB to DC of the Xco shares is nominal;

(b) all of the issued and outstanding shares of XXXXXXXXXX ("Yco"). The ACB to DC of the Yco shares is nominal; and

(c) XXXXXXXXXX Class A common shares of XXXXXXXXXX("Pubco").

4. Pubco is a public corporation that operates as a XXXXXXXXXX. The shares of Pubco are listed on the XXXXXXXXXX Stock Exchange. DC holds less than 10 % of the issued and outstanding share capital of Pubco, as such DC is not able to exercise any degree of significant influence over Pubco. DC's investment in Pubco is of an ancillary nature and does not form an integral part of DC's business.

5. Xco is a CCPC and a TCC. It was incorporated pursuant to the BCA on XXXXXXXXXX. Its business number is XXXXXXXXXX. Xco's fiscal year ends on XXXXXXXXX of every year. It files all tax returns with the XXXXXXXXXX Taxation Center and is audited by the XXXXXXXXXX Tax Services Office.

The issued and outstanding share capital of Xco consists of XXXXXXXXXX Class A common shares which are all held by DC. These shares were previously owned by persons who are currently shareholders of DC and were subsequently transferred by them on XXXXXXXXXX to DC pursuant to subsection 85(1). There is no other issued share capital of Xco. The aggregate PUC in respect of the share capital of Xco is approximately $XXXXXXXXXX.

Xco operates as a XXXXXXXXXX. On XXXXXXXXXX Xco transferred, pursuant to subsection 85(1), the assets of its XXXXXXXXXX division XXXXXXXXXX to XXXXXXXXXX ("Subco"), a newly created subsidiary wholly-owned corporation of Xco, and received one Class A common share of Subco as consideration. Such transfer was done in contemplation of the proposed transactions described below. Subco has since XXXXXXXXXX carried on the XXXXXXXXXX business.

The ACB to Xco of the one Class A common share of Subco is $XXXXXXXXXX.

As at XXXXXXXXXX Xco's RDTOH and CDA accounts were nil. Both accounts are expected to be nil as at XXXXXXXXXX.

6. Subco is a CCPC and a TCC. It was incorporated pursuant to the BCA on XXXXXXXXXX. Subco has selected a XXXXXXXXXX taxation year end. It is expected all tax returns for Subco will be filed with the XXXXXXXXXX Taxation Centre.

The issued and outstanding share capital of Subco consists of one Class A common share which is held by Xco. There is no other issued share capital of Subco. The ACB to Xco and the PUC of the Class A common share of Subco is $XXXXXXXXXX.

7. Yco is a CCPC and a TCC. It was incorporated pursuant to the BCA on XXXXXXXXXX. Its business number is XXXXXXXXXX. Yco's taxation year ends on XXXXXXXXX of each year and Yco files all tax returns with the XXXXXXXXXX Taxation Centre and is audited by the XXXXXXXXXX Tax Services Office.

The issued and outstanding share capital of Yco consists of XXXXXXXXXX Class A common shares which are held by DC. These shares were previously owned by persons who are currently shareholders of DC and were transferred by them on XXXXXXXXXX to DC pursuant to subsection 85(1). The aggregate PUC in respect of the XXXXXXXXXX Class A common shares of Yco is approximately $XXXXXXXXXX. There is no other issued share capital of Yco.

Yco operates as a XXXXXXXXXX.

8. Transferee Corporation is a CCPC, a TCC and a holding company. It was incorporated pursuant to the BCA on XXXXXXXXXX. Transferee Corporation's taxation year ends on XXXXXXXXXX of each year. Transferee Corporation files its tax returns with the XXXXXXXXXX Taxation Center and is audited by the XXXXXXXXXX Tax Services Office.

All of the issued and outstanding common shares of Transferee Corporation are owned by XXXXXXXXXX, an individual who is a resident of Canada. The aggregate PUC in respect of the common shares of Transferee Corporation is approximately $XXXXXXXXXX. There is no other issued share capital of Transferee Corporation.

As at XXXXXXXXXX, Transferee Corporation's RDTOH and CDA accounts are nil. Both accounts are expected to be nil as at XXXXXXXXXX and at the end of the taxation year which includes the proposed transactions described below.

PROPOSED TRANSACTIONS

9. Articles of Incorporation of Transferee Corporation will be amended by filing Articles of Amendment pursuant to the BCA to create an unlimited number of preference shares which may be issued in series, having the following attributes:

(a) each preference share will be voting, redeemable and retractable at the redemption amount ("Redemption Amount") which will equal the aggregate net fair market value of the consideration for which such shares are issued, divided by the number of preference shares issued; and

(b) for the purpose of subsection 191(4) of the Act, the terms and conditions of the preference shares will, at the time of their issue, specify an amount in respect of each share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each of the preference shares will be pursuant to a resolution of the board of directors of the Transferee Corporation, will be expressed as a dollar amount, will not be determined by a formula and will be equal to the fair market value of the property received by the Transferee Corporation as consideration for such share.

10. DC and Xco will amalgamate in a short-form vertical amalgamation pursuant to the provisions of the BCA to form DCAmalco in such manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of DC and Xco immediately before the merger will become property of DCAmalco by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of DC and Xco immediately before the merger will become liabilities of DCAmalco by virtue of the merger; and

(c) the shares of Xco will be cancelled on the amalgamation without any repayment of capital in respect thereof and no shares of DCAmalco will be issued in connection with the amalgamation such that the issued and outstanding shares of DC, immediately before the amalgamation, will become the issued and outstanding shares of DCAmalco.

The shares of DCAmalco will not be taxable preferred shares.

The purpose of this amalgamation is to enable DC to become a shareholder in Subco and accordingly acquire an indirect interest in the business assets of Subco.

DCAmalco will hold the shares of Pubco and Subco as capital property. It is not expected that DCAmalco will have any RDTOH at the end of its taxation year which includes the proposed transactions as described below.

11. Immediately before the transfer of property as described in paragraph 14 below, the property of DCAmalco will be determined on a consolidated basis by including the appropriate pro rata share of the assets of any corporation over which DCAmalco has the ability to exercise significant influence (DCAmalco and such corporations will hereinafter be referred to as the "DCAmalco Group"), which assets will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of the DCAmalco Group, including any cash, liquid investments, accounts receivable, inventory and prepaid expenses;

(b) business property, comprising all of the assets of the DCAmalco 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 SIB); and

(c) investment property, comprising all of the assets of the DCAmalco Group, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or a SIB.

For the purposes of this paragraph, paragraphs 12 and 13 below, a corporation will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation.

For greater certainty, the fair market value of the shares of any corporation over which a corporate shareholder has the ability to exercise significant influence and of any indebtedness receivable by the corporate shareholder from such a corporation will be allocated between the three types of property described above by multiplying the fair market value of the shares of the particular corporation or amount receivable from the particular corporation, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this paragraph and paragraph 12 below) is of the aggregate net fair market value of all of the property owned by such corporation.

12. In determining, on a consolidated basis, the net fair market value of each type of property of DCAmalco immediately before the transfer of property as described in paragraph 14 below, the liabilities of DCAmalco and any corporation over which DCAmalco exercises significant influence will be allocated to, and will be deducted in the calculation of, the net fair market value of each such type of property of such corporation in the following manner:

(a) in determining the net fair market value of each type of property of a corporation over which DCAmalco exercises significant influence, immediately before the transfer of property as described in paragraph 14 below, the liabilities of that particular corporation (other than any amount owing by such corporation to DCAmalco) will be allocated to, and will be deducted in the calculation of, the net fair market value of each type of property of the particular corporation in the following manner:

(i) current liabilities of such corporation will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of such corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by the particular corporation. To the extent that the allocation of current liabilities as described herein exceeds the aggregate fair market value of the cash or near cash property of the particular corporation, such corporation will be considered to have a negative amount of cash or near cash property;

(ii) any accounts receivable, inventory and prepaid expenses of the particular corporation that are initially classified in accordance with (i) above as cash or near cash property, that will relate to a business that will be carried on by it and that will be collected, sold or consumed by that particular corporation in the ordinary course of that business, will then be classified as business property and the net fair market value thereof, determined after the allocation of current liabilities described in (i) above, will be included in the net fair market value of business property and will not be included in the net fair market value of cash or near cash property;

(iii) liabilities, other than current liabilities, of such corporation that relate to a particular property, will then be allocated to the particular property (and effectively to the type 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 that pertain to a particular type of property as described herein exceeds the aggregate fair market value of all that particular type of property of the particular corporation, the particular corporation will be considered to have a negative amount of that type of property; and

(iv) any liabilities, other than current liabilities, of such corporation which do not relate to a particular type of property will then be allocated to the cash or near cash property, business property and investment property of such corporation based on the relative net fair market value of each type of property prior to the allocation of such liabilities, but after the allocation of the liabilities described in subparagraphs (a)(i) and (a)(iii) above.

(b) In determining, on a consolidated basis, the net fair market value of each type of property of DCAmalco immediately before the transfer of property as described in paragraph 14 below, DCAmalco will include the appropriate pro rata share of the net fair market value of each type of property of any corporation over which DCAmalco exercises significant influence, as determined in accordance with subparagraph (a) herein, and any liabilities of DCAmalco will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of DCAmalco in the following manner:

(i) current liabilities of DCAmalco will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of DCAmalco in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by it. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of the cash or near cash property of DCAmalco;

(ii) any accounts receivable, inventory and prepaid expenses of DCAmalco that are initially classified in accordance with (i) above as cash or near cash property, that relate to a business carried on by DCAmalco and that will be collected, sold or consumed by DCAmalco in the ordinary course of that business, will then be classified as business property and the net fair market value thereof, determined after the allocation of current liabilities described in (i) above, will be included in the net fair market value of business property and will not be included in the net fair market value of cash or near cash property;

(iii) liabilities of DCAmalco, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. The liabilities that pertain to a type of property, but not to a particular property, then will 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; and

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

The cash or near cash property of DC, Xco, Yco and Subco currently consists of accounts receivable, inventory and prepaid expenses only. Their cash on hand and bank accounts are in negative balance. Following the amalgamation of DC and Xco as described in paragraph 10 above and the allocation of liabilities as described herein, DCAmalco is expected to, on a consolidated basis, have only business property and investment property for the purposes of the proposed distribution.

13. For greater certainty, in determining the consolidated net fair market value of the property of the DCAmalco Group, as described in paragraph 12 above, the following principles will apply:

(a) any tax-related amounts in any corporation (such as the balance in any RDTOH or CDA accounts, undepreciated capital cost, non-capital losses, inherent tax liabilities pertaining to unrealized income or capital gains and deferred income taxes) will be ignored;

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

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

(d) DCAmalco will not have significant influence over any corporation other than Yco and Subco; and

(e) the shares of Pubco held by DCAmalco will be classified as investment property.

14. DCAmalco will transfer to Transferee Corporation at fair market value:

(a) all of its common shares of Subco; and

(b) a certain portion of its investment property (which will consist of Class A common shares of Pubco),

such that, immediately after the transfer, the net fair market value of the cash or near cash property, if any, business property and investment property of DCAmalco (after allocating and deducting, in the manner described in paragraph 12 above, the liabilities of DCAmalco which are to be assumed by Transferee Corporation as described below) which is represented by the common shares of Subco as well as the Class A common shares of Pubco which are transferred to Transferee Corporation as described herein, will approximate that proportion of the net fair market value of all of that type of property of DCAmalco, determined immediately before the transfer referred to herein that:

(c) the aggregate fair market value of the DCAmalco shares owned by Transferee Corporation, immediately before the transfer,

is of

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

For the purpose of this paragraph and paragraph 18 below, the expression "approximate that proportion" means that the 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 Transferee Corporation has received (or DCAmalco has retained) as compared to what Transferee Corporation would have received (or DCAmalco would have retained) had it received (or retained) its appropriate pro rata share of the net fair market value of that type of property. However, the aggregate net fair market value of all property of DCAmalco transferred to Transferee Corporation as described herein will be equal to the proportion determined by (c) and (d) above of the aggregate net fair market value of all property of DCAmalco immediately before the transfer.

As consideration for the transfer of property described herein, Transferee Corporation will:

(e) assume debt of DCAmalco that is allocable to the property of DCAmalco transferred to Transferee Corporation as described herein, all determined in accordance with paragraph 12 above, but not exceeding the aggregate of the agreed amounts in the joint elections under subsection 85(1) as described in paragraph 15 below; and

(f) issue Transferee Corporation preference shares having an aggregate fair market value and redemption amount equal to the fair market value of the property of DCAmalco transferred to Transferee Corporation as described herein less the amount of the liabilities of DCAmalco assumed by Transferee Corporation as described in (e) above.

For greater certainty, the Transferee Corporation preference shares issued to DCAmalco as described herein will:

(g) represent greater than 10 % of the issued share capital (having full voting rights under all circumstances) of Transferee Corporation, having a fair market value of more than 10 % of the fair market value of all the issued shares of the capital stock of the Transferee Corporation; and

(h) not be sufficient to cause an acquisition of control of Transferee Corporation by DCAmalco.

15. DCAmalco and Transferee Corporation will jointly elect pursuant to subsection 85(1) of the Act, in prescribed form and within the time referred to in subsection 85(6) of the Act, with respect to the transfer to Transferee Corporation of the shares of Subco and shares of Pubco that have a fair market value in excess of their cost amount. Specifically, the agreed amount in the joint election will equal the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), which will not be less than the amount permitted under paragraph 85(1)(b).

16. Pursuant to the provisions of the BCA, the addition to the stated capital of Transferee Corporation in respect of the issuance of the Transferee Corporation preference shares will equal the amount by which the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property of DCAmalco transferred to Transferee Corporation as described in paragraph 14 exceeds the principal amount of the liabilities of DCAmalco assumed by Transferee Corporation as described in subparagraph 14(e).

17. Immediately following the transfer of property as described in paragraph 14, Transferee Corporation will redeem from DCAmalco all of the Transferee Corporation preference shares for an amount equal to their fair market value, being the aggregate of the Transferee Corporation Redemption Amounts of the Transferee Corporation preference shares so redeemed and will issue to DCAmalco in consideration therefor a demand non-interest bearing promissory note with a principal amount and fair market value equal to the aggregate of the Transferee Corporation Redemption Amounts (the "Transferee Corporation Redemption Note"). DCAmalco will accept the Transferee Corporation Redemption Note as full payment of the Transferee Corporation Redemption Amount in respect of each redeemed Transferee Corporation preference share with the risk of the note being dishonored.

DCAmalco will purchase for cancellation from Transferee Corporation all of its DCAmalco common shares for an amount equal to their fair market value ("purchase price"), and will issue to Transferee Corporation in consideration therefor a demand non-interest bearing promissory note with a principal amount and fair market value equal to the purchase price of the DCAmalco common shares held by Transferee Corporation ("the DCAmalco Redemption Note "). Transferee Corporation will accept the DCAmalco Redemption Note as full and absolute payment of the purchase price in respect of each DCAmalco common share held by Transferee Corporation with the risk of the note being dishonored.

DCAmalco will pay the principal amount of the DCAmalco Redemption Note by transferring to Transferee Corporation the Transferee Corporation Redemption Note which will be accepted by Transferee Corporation in full payment of DCAmalco's obligation. Transferee Corporation will pay the principal amount of the Transferee Corporation Redemption Note by transferring to DCAmalco the DCAmalco Redemption Note which will be accepted by DCAmalco in full payment of Transferee Corporation's obligation. The DCAmalco Redemption Note and the Transferee Corporation Redemption Note will both thereupon be marked paid in full and cancelled.

18. Immediately following the proposed transactions described above, the net fair market value of each type of property retained by DCAmalco, determined in the manner described in paragraphs 11, 12 and 13 above, will approximate that proportion of the aggregate net fair market value of that type of property of DCAmalco, determined immediately before the transfers described in paragraph 14 above, that:

(a) the aggregate fair market value, immediately before the transfer of property described in paragraph 14 above, of the DCAmalco shares owned by A, Bco, Cco and Dco

is of

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

ADDITIONAL INFORMATION

19. None of the corporations referred to herein is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

20. No property has or will become property of DC, DCAmalco or any corporation controlled by such corporation or a predecessor corporation of any such corporation, and no liabilities (other than those incurred in relation to fees and expenses of the proposed transactions) have been or will be incurred by DC, DCAmalco or any corporation controlled by such corporation or a predecessor corporation of any such corporation, in contemplation of and before the transfers of property as described in paragraph 14 above, except in the ordinary course of business, or as described herein.

21. Except as outlined herein, DCAmalco does not have any specific intention of disposing of any assets currently owned by it to a partnership or to an unrelated person following the proposed transactions except in the ordinary course of its business and neither DCAmalco nor Transferee Corporation will dispose of any of its assets as part of a series of transactions which includes the proposed transactions.

22. There are not, and will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the shares of DCAmalco or Transferee Corporation.

23. Neither DCAmalco nor Transferee Corporation has, or will have, entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares to be redeemed or to be purchased for cancellation as part of the proposed transactions.

24. None of the shares of DC, DCAmalco or Transferee Corporation has been or will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5) of the Act.

25. Neither DCAmalco nor Transferee Corporation is or will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) of the Act.

26. Each of DCAmalco and Transferee Corporation will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

PURPOSE OF THE PROPOSED TRANSACTIONS

27. The shareholders of DC have different financial and business goals and the purpose of the proposed transactions is to allow the separation of the XXXXXXXXXX business such that Transferee Corporation will own and operate that business while the remaining shareholders of DC will continue to own and operate the XXXXXXXXXX businesses of DC. By divesting itself of the XXXXXXXXXX business DC will focus on the future growth and development of its remaining businesses.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. With respect to the amalgamation of DC and Xco as described in paragraph 10 above:

(a) the provisions of subsection 87(1) will, by virtue of subsection 87(1.1), apply; and

(b) provided that the shares of DC were capital property to the holders thereof immediately before the amalgamation, the provisions of subsection 87(4) of the Act, other than paragraphs (c), (d), and (e) thereof, will apply such that:

(i) each such DC shareholder will be deemed by paragraph 87(4)(a) to have disposed of his or her shares of DC, for proceeds of disposition equal to his or her ACB of such shares immediately before the amalgamation; and

(ii) each such DC shareholder will be deemed by paragraph 87(4)(b) to have acquired his or her DCAmalco shares for an amount equal to the proceeds described in (i) above.

B. Subject to the application of subsection 69(11) of the Act, the provisions of subsection 85(1) will apply to the transfer by DCAmalco of its Subco shares and Pubco shares to Transferee Corporation as described in paragraphs 14 and 15 above, such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

C. Subsection 84(3) will apply on:

(a) the redemption of the Transferee Corporation preference shares held by DCAmalco as described in paragraph 17, to deem Transferee Corporation to have paid and DCAmalco to have received; and

(b) on the purchase for cancellation of the shares of DCAmalco held by Transferee Corporation as described in paragraph 17, to deem DCAmalco to have paid and Transferee Corporation to have received,

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before such redemption or purchase for cancellation, and any such dividend

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

(d) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(e) will be excluded in determining the proceeds of disposition to the recipient of the shares so redeemed or purchased for cancellation pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54; and

(f) will not be subject to tax under Part IV of the Act, except as provided in paragraph 186(1)(b) of the Act, as DCAmalco and Transferee Corporation will be connected to each other by virtue of paragraph 186(4)(b) of the Act.

D. Provided that the amount paid on the redemption of the Transferee Corporation preference shares is equal to the amount specified in respect of such shares as described in paragraph 9(b) above, the dividend referred to in Ruling C(a) will not be subject to tax under Parts IV.1 and VI.1 of the Act as it will be deemed by paragraph 191(4)(d) to be an "excluded dividend" as defined in subsection 191(1) and an "excepted dividend" as defined in section 187.1.

E. The shares of DCAmalco will not, as a result of the implementation of the proposed transactions described above, in and by themselves, be taxable preferred shares.

F. The repayment of the Transferee Corporation Redemption Note held by DCAmalco and the DCAmalco Redemption Note held by Transferee Corporation as described in paragraph 17 will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

G. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, 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 property in the circumstances described in paragraph 55(3.1)(c); or

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

H. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the proposed transactions as described above, in and of themselves.

I. As a result of the proposed transactions as described above, in and of themselves, subsection 245(2) will not be applied 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 70-6R3 issued by Revenue Canada, Customs, Excise and Taxation on December 30, 1996 and are binding 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 Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed:

(a) the determination of the fair market value or ACB of any particular asset or share or the PUC of any shares referred to herein; or

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

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch