2000 Ruling 1999-0010723 - sequential butterfly reorganizations

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:

1. Whether the deferred taxes in respect of a property to be transferred pursuant to a subsection 85(1) election in the course of a butterfly reorganization are relevant for purposes of valuing the property to be transferred ?

2. Whether the proposed sale of a property by DC to TC as part of the series which includes the proposed transactions, where such sale occurs immediately after the butterfly reorganization, will be part of the distribution, even though such sale will comply with the rules set out in paragraph 55(3.1)(d) ?

3. Whether the proposed reallocation of the mortgage balances in respect of two of its properties will result in an acquisition of property by DC in contemplation of the distribution when both properties are properties of the same type for purposes of the distribution ?

4. TC previously transferred a subject property to DC and received DC non-voting preferred shares as consideration. DC now proposes to reconvey the subject property back to TC for purposes of a distribution by DC and to add a voting right to each of its non-voting preferred shares held by TC such that DC will be connected with TC for purposed of Part IV tax. As Part IV tax provisions do not contain anti-avoidance rules similar to subsection 191(3), whether the proposed addition of the voting right to the DC non-voting preferred shares will be subject to the application of the subsection 245(2) ?

5. Whether the addition of a voting right to a particular class of preferred shares of DC will constitute a disposition of such shares ?

Position:

1. No.

2. Yes.

3. Provided that such increase and decrease in the mortgage balances will not result in any change to the aggregate principal amount owing under such mortgages and will not result in any significant change to the aggregate current portion of the amount owing by DC under the two mortgages, it will not result in an acquisition of property.

4. No.

5. Provided that the addition of the voting right to the particular class of preferred shares of DC will not result in an acquisition of control of DC by the holder of the particular class of preferred shares of DC, the answer is no.

Reasons:

1. The potential deferred tax liability in the hands of the transferee does not reduce the FMV of the transferred property.

2. Such sale will constitute part of the distribution by DC to TC for purposes of the butterfly and will therefore need to satisfy the pro rata test.

3. As stated above.

4. The proposed addition of the voting right to the DC non-voting preferred shares held by TC is to facilitate the reconveyance of the subject property from DC to TC for purposes of a distribution by DC without triggering Part IV tax. Had DC issued voting preferred shares instead of non-voting preferred shares to TC at the outset, DC would have been connected with TC and Part IV tax would not be an issue. Under the circumstances, subsection 245(2) would not apply.

5. As stated above.

XXXXXXXXXX 							1999-001072

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
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 subsequent letters 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 one of the taxpayers 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 one of the taxpayers or a related person;

(iii) is under objection by one of the taxpayers or a related person;

(iv) is before the courts or, if a judgment 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 Income Tax Rulings 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) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

(c) "agreed amount" has the meaning assigned by subsection 85(1);

(d) "BCA" means the Business Corporations Act XXXXXXXXXX, as amended;

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

(f) "CDA" means capital dividend account as that expression is defined in subsection 89(1);

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

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

(i) "depreciable property" has the meaning assigned by subsection 13(21);

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

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

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

(m) "RDTOH" means refundable dividend tax on hand as that expression is defined in subsection 129(3);

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

(o) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

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

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

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

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

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

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

(v) "UCC" means undepreciated capital cost as that expression is defined in subsection 13(21).

FACTS

1. XXXXXXXXXX ("DC1") is a taxable Canadian corporation and a Canadian-controlled private corporation which is governed by the BCA. Its issued and outstanding shares consist of XXXXXXXXXX common shares, one of which is owned by XXXXXXXXXX ("Individual A") and the other of which is owned by XXXXXXXXXX ("Bco").

The aggregate PUC of the DC1 XXXXXXXXXX common shares is $XXXXXXXXXX. The ACB to each of Bco and Individual A of its DC1 XXXXXXXXXX common share is $XXXXXXXXXX.

None of the shares of DC1 has been acquired by any person in contemplation of the proposed transactions described below.

The property of DC1 includes:

(a) XXXXXXXXXX preferred shares of XXXXXXXXXX ("DC2") having an aggregate redemption amount of $XXXXXXXXXX and an aggregate PUC of $XXXXXXXXXX;

(b) XXXXXXXXXX preferred shares of XXXXXXXXXX ("DC3") having an aggregate redemption amount of $XXXXXXXXXX and an aggregate PUC of $XXXXXXXXXX; and

(c) two XXXXXXXXXX buildings which are known as XXXXXXXXXX ("Property1"). XXXXXXXXXX. The two buildings referred to as Property1 are subject to one mortgage covering both properties and are maintained by one common caretaker. For these reasons, the two buildings are treated as one single property.

The mortgage on Property1 had a balance at XXXXXXXXXX of approximately $XXXXXXXXXX and is held by XXXXXXXXXX (the "Lender"). This mortgage matured on XXXXXXXXXX, however, in order to facilitate the proposed transactions described below, DC1 was granted a XXXXXXXXXX extension at a floating rate equal to the XXXXXXXXXX prime lending rate plus XXXXXXXXXX%.

All of the activities of DC1 consist of XXXXXXXXXX. As DC1 does not have more than 5 full-time employees engaged in its XXXXXXXXXX operations, such operations constitute a SIB.

Prior to XXXXXXXXXX, DC1 owned three XXXXXXXXXX properties, known as XXXXXXXXXX ("Property2"), XXXXXXXXXX ("Property3") and XXXXXXXXXX ("Property4"). In XXXXXXXXXX, DC1 transferred a XXXXXXXXXX% undivided interest in each of Property2, Property3 and Property4 at fair market value to each of DC2 and DC3 pursuant to subsection 85(1) of the Act. As partial consideration for such transfers, DC1 received XXXXXXXXXX preferred shares of DC2 having an aggregate fair market value and redemption amount of $XXXXXXXXXX and XXXXXXXXXX preferred shares of DC3 having an aggregate fair market value and redemption amount of $XXXXXXXXXX.

At the time of their issue, the redemption amount of each XXXXXXXXXX preferred share of each of DC2 and DC3 which was received by DC1 as consideration for the property transferred as described above was fixed at $XXXXXXXXXX. Consequently, this fixed redemption amount of $XXXXXXXXXX is considered to be the amount specified in respect of each XXXXXXXXXX preferred share of DC2 and DC3 for the purpose of subsection 191(4) of the Act. The fair market value of the property received by each of DC2 and DC3 as consideration for each such share was not less than the specified amount, being $XXXXXXXXXX. Subsequent to the issue of the XXXXXXXXXX preferred shares of DC2 and DC3 as described above, no amount has been paid to any person as a reduction of the PUC of DC2 or DC3, as the case may be, in respect of any such share.

The aggregate ACB to DC1 of the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares is $XXXXXXXXXX and the XXXXXXXXXX DC3 XXXXXXXXXX preferred shares is $XXXXXXXXXX.

DC1 does not currently have any balance in its RDTOH or CDA. It is not expected that DC1 will have any balance in its RDTOH or CDA at the end of its taxation year in which the proposed transactions described below are completed.

DC1's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

Individual A holds her 1 DC1 XXXXXXXXXX common share as capital property. DC1 holds Property1 as capital property.

2. DC2 is a taxable Canadian corporation and a Canadian-controlled private corporation which is governed by the BCA. Its issued and outstanding shares consist of:

(a) XXXXXXXXXX common shares with an aggregate PUC of $XXXXXXXXXX, of which XXXXXXXXXX are owned by XXXXXXXXXX ("AChild1") while the other XXXXXXXXXX are owned by XXXXXXXXXX ("AChild2");

(b) XXXXXXXXXX preferred shares which are owned by DC1;

(c) XXXXXXXXXX preferred shares which are owned by Individual A, having an aggregate PUC of $XXXXXXXXXX and an aggregate redemption amount of $XXXXXXXXXX; and

(d) XXXXXXXXXX preferred shares which are owned by Individual A, having an aggregate PUC and redemption amount of $XXXXXXXXXX and carrying XXXXXXXXXX votes per share.

The XXXXXXXXXX preferred shares of DC2 were created and issued subsequent to the issuance of the DC2 XXXXXXXXXX preferred shares. Pursuant to the terms and conditions of the DC2 XXXXXXXXXX preferred shares, no dividends can be declared on the issued and outstanding DC2 XXXXXXXXXX shares and DC2 XXXXXXXXXX shares if the result of the payment of such dividend once declared would be to impair the ability of DC2 immediately thereafter to redeem all of its issued and outstanding XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares at their aggregate redemption amounts. Upon the liquidation, dissolution or winding-up of DC2, the DC2 XXXXXXXXXX preferred shares, the DC2 XXXXXXXXXX preferred shares and the DC2 XXXXXXXXXX preferred shares are entitled to a return of their redemption amounts in priority to the DC2 XXXXXXXXXX common shares. However, the DC2 XXXXXXXXXX preferred shares, the DC2 XXXXXXXXXX preferred shares and the DC2 XXXXXXXXXX preferred shares rank pari passu with each other.

None of the shares of DC2 has been acquired by any person in contemplation of the proposed transactions described below.

The property of DC2 includes:

(i) a XXXXXXXXXX% undivided interest in each of Property2, Property3 and Property4; and

(ii) all of the issued and outstanding shares of XXXXXXXXXX ("Subco").

In XXXXXXXXXX, Individual A transferred to DC2 all of the issued and outstanding shares of Subco at fair market value pursuant to subsection 85(1) of the Act. As consideration for such transfer, Individual A received XXXXXXXXXX preferred shares of DC2 having an aggregate fair market value and redemption amount equal to the fair market value at the time of the transfer of the Subco shares so transferred to DC2 less the amount of non-share consideration received by Individual A. The aggregate ACB to Individual A of the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares is $XXXXXXXXXX.

The fair market value of the Subco shares has not increased since being acquired by DC2. The net fair market value of DC2's assets does not currently exceed the aggregate of the redemption amounts of the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares, the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares and the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares. As a result, the XXXXXXXXXX DC2 XXXXXXXXXX common shares owned by AChild1 and AChild2 currently have no value. It is not expected that the net fair market value of all of the assets of DC2 will exceed the aggregate redemption amount of the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares, the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares and the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares immediately before the transfer of property described in paragraph 15 below.

The aggregate ACB to each of AChild1 and AChild2 of the XXXXXXXXXX DC2 XXXXXXXXXX common shares is $XXXXXXXXXX.

Individual A is the parent of AChild1 and AChild2. Individual A and Achild2 are residents of Canada while Achild1 is a resident of the United States. DC2 is controlled by Individual A by virtue of her ownership of theXXXXXXXXXX preferred shares thereof.

All of the activities of DC2 and Subco consist of XXXXXXXXXX. Neither DC2 nor Subco has more than 5 full-time employees such that the XXXXXXXXXX operations carried on by each of them constitutes a SIB.

DC2 does not currently have any balance in its RDTOH or CDA. It is not expected that DC2 will have any balance in its RDTOH or CDA at the end of its taxation year in which the proposed transactions described below are completed.

DC2 holds its XXXXXXXXXX% undivided interest in each of Property2, Property3 and Property4 as capital property.

DC2's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

3. DC3 is a taxable Canadian corporation and a Canadian-controlled private corporation which is governed by the BCA. Its issued and outstanding shares consist of:

(a) XXXXXXXXXX common shares which are owned by XXXXXXXXXX ("Individual B");

(b) XXXXXXXXXX common shares, XXXXXXXXXX of which are owned by each of XXXXXXXXXX ("BChild1"), XXXXXXXXXX ("BChild2") and XXXXXXXXXX ("BChild3"); and

(c) XXXXXXXXXX preferred shares which are owned by DC1. The XXXXXXXXXX preferred shares of DC3 rank in priority to the XXXXXXXXXX and XXXXXXXXXX common shares thereof and, on the liquidation, dissolution or winding up of DC3, the XXXXXXXXXX preferred shares of DC3 are entitled to a return of their redemption amounts in priority to all other issued shares.

The property of DC3 consists solely of its XXXXXXXXXX% undivided interest in Property2, Property3 and Property4. DC3 holds its XXXXXXXXXX% undivided interest in each of Property2, Property3 and Property4 as capital property.

All of the activities of DC3 consist of XXXXXXXXXX. DC3 does not have more than 5 full-time employees such that the XXXXXXXXXX operations carried on by it constitutes a SIB.

The net fair market value of DC3's assets currently does not exceed the aggregate redemption amount of its XXXXXXXXXX preferred shares. As a result, the XXXXXXXXXX common shares and the XXXXXXXXXX common shares of DC3 currently have no value. It is not expected that the net fair market value of DC3's property will exceed the aggregate redemption amount of its XXXXXXXXXX shares immediately before the transfer of property described in paragraph 16 below.

Individual B is the parent of BChild1, BChild2 and BChild3. Individual B, her spouse and her children are all residents of Canada. DC3 is controlled by Individual B by virtue of her ownership of the XXXXXXXXXX common shares thereof.

DC3's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

DC3 does not currently have any balance in its RDTOH or CDA. It is not expected that DC3 will have any balance in its RDTOH or CDA at the end of its taxation year in which the proposed transactions described below are completed.

4. Each of Property2, Property3 and Property4 is subject to a mortgage granted by the Lender. As at XXXXXXXXXX the current balance of the mortgages attached to Property2, Property3 and Property4 were approximately $XXXXXXXXXX, respectively. Each of these mortgages has the same interest rate (being XXXXXXXXXX% compounded XXXXXXXXXX), the same maturity date (being XXXXXXXXXX), and the same amortization term (being XXXXXXXXXX years).

5. Subco is a taxable Canadian corporation and a Canadian-controlled private corporation. All of the issued and outstanding shares of Subco are owned by DC2. The property of Subco consists solely of XXXXXXXXXX properties which are similar to Property1, Property2, Property3 and Property4. As described in paragraph 1 above, the XXXXXXXXXX operations carried on by Subco constitute a SIB.

6. Bco is a taxable Canadian corporation and a Canadian-controlled private corporation which is governed by the BCA. The issued and outstanding capital of Bco consists of various classes of shares which are owned by Individual B, her spouse (XXXXXXXXXX) and their three adult children, BChild1, BChild2 and BChild3. Bco is related to DC3 pursuant to paragraph 251(2)(c) of the Act.

The property of Bco includes the 1 XXXXXXXXXX common share of DC1 and various other investments.

7. Individual A is not related to and deals at arm's length with Individual B and her spouse. XXXXXXXXXX. AChild1, AChild2, BChild1, BChild2 and BChild3 are mature adults who have children of their own.

PROPOSED TRANSACTIONS

8. Pursuant to the provisions of the BCA, the Articles of Incorporation of DC1 will be amended to create an unlimited number of XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares having the following attributes:

(a) redeemable and retractable for a redemption amount equal to the fair market value of the property received therefor (net of liabilities assumed) by the corporation at the time of issuance;

(b) entitled to a non-cumulative dividend at the fixed rate of XXXXXXXXXX% per annum (or such greater amount, not to exceed a reasonable amount, as may be set by the directors of the corporation from time to time) of the redemption amount;

(c) entitled to a return of the redemption amount on a liquidation, dissolution, or winding-up of the corporation in preference to the common shares;

(d) may be purchased, redeemed or cancelled by the corporation in the manner provided in the BCA at the option of either the corporation or the holder for a price not less than the lesser of:

(i) the aggregate redemption amount of such shares to be purchased at the particular time; and

(ii) the realizable value of the net assets of the corporation immediately before such purchase;

(e) any preference, right, condition or limitation attaching to the preferred shares can only be amended by a special resolution of the holders of each class of shares of the corporation each voting separately as a class;

(f) a restriction on the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of the corporation so as to reduce the value of the preferred shares then outstanding;

(g) the holders of the XXXXXXXXXX preferred shares and the XXXXXXXXXX preferred shares will be entitled to one vote per share at all meetings of the shareholders.

9. DC3 will take the steps necessary under the BCA to subdivide each XXXXXXXXXX common share and XXXXXXXXXX common share of its capital stock into XXXXXXXXXX such shares. As a result of this stock split:

(a) the holder of each DC3 XXXXXXXXXX common share will hold XXXXXXXXXX DC3 XXXXXXXXXX common shares and the holder of each DC3 XXXXXXXXXX common share will now hold XXXXXXXXXX DC3 XXXXXXXXXX common shares after the time of the stock split; and

(b) the stated capital of the DC3 XXXXXXXXXX common shares and the DC3 XXXXXXXXXX common shares immediately after the stock split will be equal to the stated capital of the DC3 XXXXXXXXXX common shares and the DC3 XXXXXXXXXX common shares immediately before the stock split, respectively.

10. Immediately after the transactions described in paragraphs 8 and 9 above, and pursuant to the provisions of the BCA,

(a) DC2 will file Articles of Amendment to amend its Articles of Incorporation such that each issued and authorized XXXXXXXXXX preferred share will be entitled to one vote at all meetings of the shareholders, and

(b) DC3 will file Articles of Amendment to amend its Articles of Incorporation such that each issued and authorized XXXXXXXXXX preferred share will be entitled to one vote at all meetings of the shareholders.

11. Individual A will incorporate a new corporation ("Newco") under the provisions of the BCA. Newco will be a taxable Canadian corporation and a Canadian-controlled private corporation. The authorized share capital of Newco will consist of:

(a) an unlimited number of XXXXXXXXXX, common shares which entitle the holder thereof to one vote per share at all meetings of the shareholders;

(b) an unlimited number of XXXXXXXXXX common shares; and

(c) an unlimited number of XXXXXXXXXX preferred shares and XXXXXXXXXX preferred shares (collectively, the "preferred shares"), having the following attributes:

(i) for the purpose of subsection 191(4) of the Act, the terms and conditions of the preferred shares to be issued as described herein 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 preferred share will be pursuant to a resolution of the board of directors of Newco, 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 Newco as consideration for such share;

(ii) entitled to a non-cumulative dividend at the fixed rate of XXXXXXXXXX% per annum (or such greater amount, not to exceed a reasonable amount, as may be set by the directors of Newco from time to time) of the redemption amount;

(iii) entitled to a return of the redemption amount on a liquidation, dissolution, or winding-up of Newco in preference to the common shares;

(iv) may be purchased, redeemed or cancelled by Newco in the manner provided in the BCA at the option of either Newco or the holder for a price not less than the lesser of:

(A) the aggregate redemption amount of such shares to be purchased at the particular time which will equal the aggregate net fair market value of the consideration for which such shares are issued; and

(B) the realizable value of the net assets of Newco immediately before such purchase;

(v) any preference, right, condition or limitation attaching to the preferred shares can only be amended by a special resolution of the holders of each class of shares of Newco each voting separately as a class;

(vi) a restriction on the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Newco so as to reduce the value of the preferred shares then outstanding; and

(vii) the holders of the XXXXXXXXXX preferred shares will be entitled to one vote per share at all meetings of the shareholders. The XXXXXXXXXX preferred Shares will be non-voting.

No shares of Newco will be issued prior to the transaction described in paragraph 12 below.

12. Individual A will transfer her 1 XXXXXXXXXX common share of DC1 to Newco at fair market value. As sole consideration therefor, Newco will issue XXXXXXXXXX common shares of its capital stock having a fair market value equal to the fair market value of the XXXXXXXXXX common share of DC1 so transferred to Newco.

For the purpose of the BCA, the amount to be added to the stated capital of the Newco XXXXXXXXXX common shares will be equal to the PUC of the DC1 XXXXXXXXXX common share so transferred to Newco.

Individual A and Newco will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the share so transferred will be equal to its ACB to Individual A immediately before the transfer, which amount will not exceed the fair market value of the share.

Newco and DC2 will be related persons pursuant to subparagraph 251(2)(c)(i) of the Act.

13. Immediately before the transfer of property described in paragraph 15 below, the property of DC2 will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation over which DC2 has the ability to exercise significant influence (DC2 and such corporations will hereinafter be referred to as the "DC2 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 DC2 Group, including any cash, liquid investments, accounts receivable, inventory and prepaid expenses;

(b) business property comprising all of the assets of the DC2 Group, if any, 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 DC2 Group, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or from a SIB.

The XXXXXXXXXX properties owned by Subco and the XXXXXXXXXX% undivided interest in Property2, Property3 and Property4 owned by DC2 will be classified as investment property. It is not anticipated that the DC2 Group will have any business property immediately before the transfer of property described in paragraph 15 below.

For greater certainty, any tax accounts, such as the balance of any non-capital losses of the DC2 Group, will not be considered property for purposes of the proposed transactions described herein.

For the purposes of this paragraph, 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, DC2 will not have significant influence over any corporation other than Subco.

For greater certainty, the fair market value of the shares of Subco and of any indebtedness receivable by DC2 from Subco will be allocated between the three types of property described above by multiplying the fair market value of the shares of Subco or amount receivable from Subco, as the case may be, by the proportion that the net fair market value of each type of property owned by Subco (as determined in this paragraph and paragraph 14 below) is of the aggregate net fair market value of all of the property owned by Subco.

14. In determining, on a consolidated basis, the net fair market value of each type of property of DC2 immediately before the transfers described in paragraph 15 below, the liabilities of DC2 and Subco 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 Subco, immediately before the transfer described in paragraph 15 below, the liabilities of Subco (other than any amount owing by Subco to DC2) will be allocated to, and will be deducted in the calculation of, the net fair market value of each type of property of Subco in the following manner:

(i) current liabilities of Subco will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of Subco 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 Subco. 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 Subco, Subco will be considered to have a negative amount of cash or near cash property;

(ii) liabilities, other than current liabilities, of Subco 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 Subco, Subco will be considered to have a negative amount of that type of property; and

(iii) any liabilities, other than current liabilities, of Subco which do not relate to a particular type of property will then be allocated to the cash or near cash property, business property, if any, and investment property of Subco 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)(ii) above.

(b) In determining, on a consolidated basis, the net fair market value of each type of property of DC2 immediately before the transfer of property described in paragraph 15 below, DC2 will include the appropriate pro rata share of the net fair market value of each type of property of Subco, as determined in accordance with subparagraph (a) herein, and any liabilities of DC2 will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of DC2 in the following manner:

(i) current liabilities of DC2 will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of DC2 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 DC2;

(ii) liabilities of DC2, 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

(iii) if any liabilities remain after the allocations described in steps (b)(i) and (b)(ii) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property, if any, and investment property of DC2, based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For greater certainty, the amount of any deferred income taxes will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of the particular corporation.

15. Contemporaneously with the transfer of property as described in paragraph 16 below, DC2 will transfer to DC1 at fair market value a portion of its:

(a) cash or near cash property;

(b) business property, if any; and

(c) investment property, including its XXXXXXXXXX% undivided interest in Property1, Property2 and Property3 and, if necessary, a small number of Subco shares;

such that the net fair market value of each type of property so transferred to DC1 as described herein (determined after allocating and deducting, in the manner described in paragraphs 13 and 14 above, the liabilities of DC2 which are to be assumed by DC1 as described in subparagraph (f) below) will approximate that proportion of the net fair market value of all of that type property of DC2, determined immediately before the transfer described herein that:

(d) the aggregate fair market value of the XXXXXXXXXX preferred shares of DC2 owned by DC1, immediately before the transfer,

is of

(e) the aggregate fair market value of all of the issued and outstanding shares of DC2 immediately before the transfer.

For the purpose of this paragraph and paragraph 21 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 DC1 has received (or DC2 has retained) as compared to what DC1 would have received (or DC2 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 DC2 transferred to DC1 as described herein will be equal to the proportion determined by (d) and (e) above of the aggregate net fair market value of all property of DC2 immediately before the transfer.

As consideration for the transfer of property described herein, DC1 will:

(f) assume debt of DC2 that is allocable to the property of DC2, all determined in accordance with paragraph 14 above, that is transferred to DC1 as described herein; and

(g) contemporaneously with the issuance of the DC1 XXXXXXXXXX preferred shares to DC3 as described in paragraph 16 below, issue XXXXXXXXXX DC1 XXXXXXXXXX preferred shares to DC2 having an aggregate fair market value and redemption and retraction amount equal to the fair market value of the property transferred to DC1 as described herein less the amount of the liabilities of DC2 assumed by DC1 as described in subparagraph (f) above.

For greater certainty, the amount of liabilities of DC2 to be assumed by DC1 as described in subparagraph (f) above will not exceed the aggregate of the agreed amounts in the joint elections to be filed under subsection 85(1) as described in paragraph 17 below .

The XXXXXXXXXX DC1 XXXXXXXXXX preferred shares issued to DC2 will constitute

(i) more than XXXXXXXXXX% but less than XXXXXXXXXX% of the issued share capital of DC1 having full voting rights under all circumstances such that DC2 will not acquire control of DC1; and

(ii) more than XXXXXXXXXX% of the fair market value of all of the issued shares of the capital stock of DC1.

Consequently, since for the purposes of subsection 191(2) of the Act, DC2 will be deemed to own all of the shares of DC1 owned by Newco, DC2 will have a substantial interest, within the meaning of subsection 191(2), in DC1.

DC1 will hold the XXXXXXXXXX % undivided interest in Property2, Property3, Property4 and the Subco shares, if any, received by it from DC2 as capital property.

16. Contemporaneously with the transfer of property described in paragraph 15 above, DC3 will transfer to DC1 at fair market value all of its properties, including its XXXXXXXXXX % undivided interest in each of Property1, Property2 and Property3. As the XXXXXXXXXX preferred shares of DC3 owned by DC1 rank in priority to the XXXXXXXXXX and XXXXXXXXXX common shares of DC3 and the net fair market value of the property of DC3 does not exceed the redemption value of the XXXXXXXXXX preferred shares owned by DC1, as a result of such transfer the net fair market value of each type of property so transferred to DC1 as described herein will be equal to that proportion of the net fair market value of all of that type property of DC3, determined immediately before the transfer described herein that:

(a) the aggregate fair market value of the XXXXXXXXXX preferred shares of DC3 owned by DC1, immediately before the transfer,

is of

(b) the aggregate fair market value of all of the issued and outstanding shares of DC3 immediately before the transfer.

As consideration for the transfer of property described herein, DC1 will:

(c) assume all of the debts of DC3; and

(d) contemporaneously with the issuance of the DC1 XXXXXXXXXX preferred shares to DC2 as described in paragraph 15 above, issue XXXXXXXXXX DC1 XXXXXXXXXX preferred shares having an aggregate fair market value and redemption and retraction amount equal to the fair market value of the property transferred to DC1 as described herein less the amount of the liabilities of DC3 assumed by DC1 as described in subparagraph (c) above.

For greater certainty,

(i) the amount of liabilities of DC3 to be assumed by DC1 as described in subparagraph (c) above will not exceed the aggregate of the agreed amounts in the joint elections to be filed under subsection 85(1) as described in paragraph 17 below and the amount of any deferred income taxes will not be considered a liability because such amount does not represent a legal obligation of the particular corporation; and

(ii) the XXXXXXXXXX DC1 XXXXXXXXXX preferred shares issued to DC3 will constitute

(I) more than XXXXXXXXXX% but less than XXXXXXXXXX% of the issued share capital of DC1 having full voting rights under all circumstances such that DC3 will not acquire control of DC1; and

(II) more than XXXXXXXXXX% of the fair market value of all of the issued shares of the capital stock of DC1.

Consequently, since for the purposes of subsection 191(2) of the Act, DC3 will be deemed to own all of the shares of DC1 owned by Bco, DC3 will have a substantial interest, within the meaning of subsection 191(2), in DC1.

DC1 will hold the XXXXXXXXXX% undivided interest in each of Property2, Property3 and Property4 received from DC3 as capital property.

17. Each of DC1 and DC2 and DC1 and DC3 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 DC1 of any eligible property of DC2 and DC3, as the case may be, that has a fair market value in excess of its cost amount. The agreed amount in each joint election will not be less than the least of:

(a) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1),

(b) the amount specified in subparagraphs 85(1)(d)(i), (ii) or (iii), in the case of eligible capital property, and

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

In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

18. Pursuant to the provisions of the BCA, the amount to be added to the stated capital of DC1 in respect of the issuance of its XXXXXXXXXX preferred shares to DC2 and its XXXXXXXXXX preferred shares to DC3 will, in each case, be equal to the amount by which the aggregate of the cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to DC1 by the particular transferor as described in paragraph 15 or 16 above exceeds the principal amount of the liabilities assumed by DC1 as consideration for each such transfer as described in subparagraphs 15(f) and 16(c) above.

19. Immediately following the transfers of property described in paragraphs 15 and 16 above, DC1 will redeem from DC2 and DC3 all of its XXXXXXXXXX and XXXXXXXXXX preferred shares for an amount equal to their respective fair market value, being an amount equal to the aggregate redemption amount of the DC1 preferred shares so redeemed (the "DC1 XXXXXXXXXX Redemption Amount" and the "DC1 XXXXXXXXXX Redemption Amount", respectively) and will issue to each of DC2 and DC3 in consideration therefor a demand non-interest bearing promissory note with a principal amount and fair market value equal to the aggregate of the redemption amount of the XXXXXXXXXX and XXXXXXXXXX preferred shares of DC1, as the case may be, so redeemed (the "DC1 XXXXXXXXXX Redemption Note" and the "DC1 XXXXXXXXXX Redemption Note", respectively). DC2 and DC3 will each accept the DC1 XXXXXXXXXX Redemption Note and the DC1 XXXXXXXXXX Redemption Note, as the case may be, as full payment of the redemption amount of each XXXXXXXXXX and XXXXXXXXXX preferred share of DC1 so redeemed with the risk of the note being dishonoured.

Each of DC2 and DC3 will then redeem all of the XXXXXXXXXX preferred shares of its capital stock held by DC1 for an amount equal to their fair market value, which amount will be less than the aggregate of their redemption amount but will be equal to the aggregate of the DC1 XXXXXXXXXX Redemption Amount and the DC1 XXXXXXXXXX Redemption Amount (the "DC2 Redemption Amount" and "DC3 Redemption Amount", respectively), as the case may be, and will each issue to DC1 in consideration therefor a demand non-interest bearing promissory note with a principal amount and fair market value equal to the aggregate of the DC2 Redemption Amount and the DC3 Redemption Amount, as the case may be (the "DC2 Redemption Note" and the "DC3 Redemption Note", respectively). DC1 will accept the DC2 Redemption Note and the DC3 Redemption Note as full and absolute payment of the redemption amount in respect of each XXXXXXXXXX preferred share of DC2 and DC3 so redeemed with the risk of the note being dishonoured.

20. DC1 will pay the principal amount of the DC1 XXXXXXXXXX Redemption Note by transferring to DC2 the DC2 Redemption Note which note will be accepted by DC2 in full payment of DC1's obligations under the DC1 XXXXXXXXXX Redemption Note. DC2 will pay the principal amount of the DC2 Redemption Note by transferring to DC1 the DC1 XXXXXXXXXX Redemption Note which note will be accepted by DC1 in full payment of DC2's obligations under the DC2 Redemption Note. The DC1 XXXXXXXXXX Redemption Note and the DC2 Redemption Note will both thereupon be marked paid in full and cancelled.

DC1 will pay the principal amount of the DC1 XXXXXXXXXX Redemption Note by transferring to DC3 the DC3 Redemption Note which note will be accepted by DC3 in full payment of DC1's obligations under the DC1 XXXXXXXXXX Redemption Note. DC3 will pay the principal amount of the DC3 Redemption Note by transferring to DC1 the DC1 XXXXXXXXXX Redemption Note which note will be accepted by DC1 in full payment of DC3's obligations under the DC3 Redemption Note. The DC1 XXXXXXXXXX Redemption Note and the DC3 Redemption Note will both thereupon be marked paid in full and cancelled.

21. Immediately following the transactions described in paragraphs 14 through 20 above, the net fair market value of each type of property retained by DC2, determined in the manner described in paragraphs 13 and 14 above, will approximate that proportion of the aggregate net fair market value of that type of property of DC2, determined immediately before the transfers described in paragraph 15 above, that:

(a) the aggregate fair market value, immediately before the transfer of property described in paragraph 15, of the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares, the XXXXXXXXXX DC2 XXXXXXXXXX common shares and the XXXXXXXXXX DC2 XXXXXXXXXX preferred shares

is of

(b) the aggregate fair market value, immediately before the transfer of property, of all of the issued and outstanding shares of DC2.

It is not anticipated that the XXXXXXXXXX common shares of DC2 will have any value immediately before the transfer of property as described in paragraph 15 above.

22. To facilitate a pro rata distribution of its property to Newco as described in paragraph 25 below, DC1 will arrange with the Lender that the principal amount of the mortgage(s) relating to Property3 and/or Property4 will be increased by a certain amount while the principal amount of the mortgage relating to Property2 will be decreased by the same amount. The purpose of such arrangement is to ensure that immediately before the transfer of property described in paragraph 25 below, the aggregate of:

(i) the net fair market value of Property3 and Property4 owned by DC1, and

(ii) the fair market value of any Subco shares owned by DC1

will be equal to the aggregate net fair market value of Property1 and Property2 then owned by DC1.

This reallocation of the principal amounts owing under the mortgages described above will not result in any change to the aggregate principal amount owing under such mortgages and will not result in any significant change to the aggregate current portion of the amount owing by DC1 under the three mortgages.

23. Immediately before the transfer of property described in paragraph 25 below, the property of DC1 will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(i) cash or near cash property, comprising all of the current assets of DC1, including any cash, liquid investments, accounts receivable, inventory and prepaid expenses;

(ii) business property comprising all of the assets of DC1, if any, 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

(iii) investment property, comprising all of the assets of DC1, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or from a SIB.

DC1's interest in each of Property1, Property2, Property3 and Property4 and any Subco shares acquired by DC1 as a result of the transfers described in paragraph 15 above will constitute investment property to DC1. It is not anticipated that DC1 will have any business property immediately before the transfer of property described in paragraph 25 below. DC1 will not have significant influence over any corporation.

For greater certainty, any tax accounts, such as the balance of any non-capital losses of DC1, will not be considered property for purposes of the proposed transactions described herein.

24. In determining the net fair market value of each type of property of DC1, immediately before the transfer described in paragraph 25 below, the liabilities of DC1 will be allocated to, and will be deducted in the calculation of, the net fair market value of each such type of property of DC1 in the following manner:

(a) current liabilities of DC1 will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of DC1 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 DC1;

(b) liabilities of DC1, 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, will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property as described herein; and

(c) if any liabilities remain after the allocations described in steps (a) and (b) above are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near cash property, business property, if any, and investment property of DC1, based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For greater certainty, the amount of any deferred income taxes will not be considered a liability of DC1 for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of the particular corporation.

25. DC1 will transfer to Newco at fair market value a portion of its:

(a) cash or near cash property;

(b) business property, if any; and

(c) investment property, including Property3, Property4 and any Subco shares owned by it;

such that the net fair market value of each type of property so transferred to Newco as described herein (determined after allocating and deducting, in the manner described in paragraphs 23 and 24 above, the liabilities of DC1 which are to be assumed by Newco as described in subparagraph (f) below) will approximate that proportion of the net fair market value of all of that type property of DC1, determined immediately before the transfer described herein that:

(d) the fair market value of the DC1 XXXXXXXXXX share owned by Newco, immediately before the transfer,

is of

(e) the aggregate fair market value of all of the issued and outstanding shares of DC1 immediately before the transfer.

For the purpose of this paragraph and paragraph 29 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 Newco has received (or DC1 has retained) as compared to what Newco would have received (or DC1 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 DC1 transferred to Newco as described herein will be equal to the proportion determined by (d) and (e) above of the aggregate net fair market value of all property of DC1 immediately before the transfer.

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

(f) assume debt of DC1 that is allocable to the property of DC1 so transferred to Newco, all determined in accordance with paragraph 24 above; and

(g) issue XXXXXXXXXX Newco XXXXXXXXXX preferred shares having an aggregate fair market value and redemption and retraction amount that is equal to the fair market value of the property transferred to Newco as described herein less the amount of the liabilities of DC1 assumed by Newco as described in subparagraph (f) above.

For greater certainty, the amount of liabilities of DC1 to be assumed by Newco as described in subparagraph (f) above will not exceed the aggregate of the agreed amounts in the joint elections to be filed under subsection 85(1) as described in paragraph 26 below .

The XXXXXXXXXX preferred shares of Newco issued to DC1 will constitute

(i) more than 10% but less than 50% of the issued share capital of Newco having full voting rights under all circumstances; and

(ii) more than 10% of the fair market value of all of the issued shares of the capital stock of Newco.

26. DC1 and Newco 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 Newco of any eligible property of DC1 that has a fair market value in excess of its cost amount. Specifically, the agreed amount in each joint election will not be less than the least of :

(a) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1),

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

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

In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

27. Pursuant to the provisions of the BCA, the amount to be added to the stated capital of Newco in respect of the Newco XXXXXXXXXX preferred shares to be issued to DC1 will be equal to the amount by which the aggregate cost (determined pursuant to subsection 85(1) of the Act, where relevant) of the property transferred to Newco as described in paragraph 25 above exceeds the principal amount of the liabilities assumed by Newco as described in subparagraph 25(f) above.

28. Immediately following the transfer of property described in paragraph 25 above, Newco will redeem from DC1 all of the Newco XXXXXXXXXX preferred shares for an amount equal to their fair market value, being the aggregate of the redemption amount of the Newco XXXXXXXXXX preferred shares so redeemed (the "Newco Redemption Amount") and will issue to DC1 in consideration therefor a demand non-interest bearing promissory note with a principal amount and fair market value equal to the aggregate of the Newco Redemption Amount (the "Newco Redemption Note"). DC1 will accept the Newco Redemption Note as full payment of the Newco Redemption Amount in respect of each Newco XXXXXXXXXX preferred share so redeemed with the risk of the note being dishonoured.

DC1 will purchase for cancellation from Newco the DC1 XXXXXXXXXX common share for an amount equal to its fair market value (the "DC1 XXXXXXXXXX Redemption Amount") and will issue to Newco in consideration therefor a demand non-interest bearing promissory note with a principal amount and fair market value equal to the DC1 XXXXXXXXXX Redemption Amount (the "DC1 XXXXXXXXXX Redemption Note"). Newco will accept the DC1 XXXXXXXXXX Redemption Note as full and absolute payment of the purchase price in respect of the DC1 XXXXXXXXXX common share so acquired with the risk of the note being dishonoured.

Newco will pay the principal amount of the Newco Redemption Note by transferring to DC1 the DC1 XXXXXXXXXX Redemption Note which will be accepted by DC1 in full payment of Newco's obligation under the Newco Redemption Note. DC1 will pay the principal amount of the DC1 XXXXXXXXXX Redemption Note by transferring to Newco the Newco Redemption Note which will be accepted by Newco in full payment of DC1's obligation under the DC1 XXXXXXXXXX Redemption Note. The Newco Redemption Note and the DC1 XXXXXXXXXX Redemption Note will both thereupon be marked paid in full and cancelled.

29. Immediately following the proposed transactions described in paragraphs 25 to 28 above, the net fair market value of each type of property retained by DC1, determined in the manner described in paragraphs 23 and 24 above, will approximate that proportion of the aggregate net fair market value of that type of property of DC1, determined immediately before the transfers described in paragraph 25 above, that:

(a) the fair market value, immediately before the transfer of property described in paragraph 25, of the DC1 XXXXXXXXXX common share owned by Bco

is of

(b) the aggregate fair market value, immediately before the transfer of property, of all of the issued and outstanding shares of DC1.

ADDITIONAL INFORMATION

30. 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.

31. No property has or will become property of DC1, DC2, DC3 or Subco, and no liabilities have been or will be incurred by DC1, DC2, DC3 or Subco, in contemplation of and before the transfers of property described in paragraphs 15, 16 or 25 below, except in the ordinary course of business, or as described herein.

32. Except as outlined herein, none of DC1, DC2, DC3 or Newco has any specific intention of disposing of any assets currently owned by it to a partnership or an unrelated person following the proposed transactions and none of DC1, DC2, DC3 and Newco will dispose of any of its assets as part of a series of transactions which includes the proposed transactions.

33. 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 DC1, DC2, DC3 or Newco.

34. None of DC1, DC2, DC3 or Newco 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.

35. None of the shares of DC1, DC2, DC3 or Newco 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.

36. None of DC1, DC2, DC3 or Newco has been, or will be, at any time before the completion of the proposed transactions described herein, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) of the Act.

37. Each of DC1, DC2 and DC3 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.

38. None of the parties is contemplating an acquisition of control of any DC1, DC2, DC3, Bco, Newco, Subco or any other corporation except as described herein.

39. The proposed transactions will have no effect on any outstanding tax liabilities of any of the parties referred hereto.

PURPOSE OF THE PROPOSED TRANSACTIONS

40. Individual A and Individual B and her spouse wish to separate their interests in DC1 to pursue their own individual investment and estate planning strategies.

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. Subject to the application of subsection 69(11) of the Act and to the application of subsection 13(21.2) as it may apply to the transfers referred to in paragraphs (b), (c) and (d) herein, the provisions of subsection 85(1) will apply to:

(a) the transfer by Individual A of her 1 DC1 XXXXXXXXXX common share to Newco, as described in paragraph 12 above;

(b) the transfer, as described in paragraph 15 above, by DC2 of each eligible property which is the object of the election described in paragraph 17 above to DC1,

(c) the transfer, as described in paragraph 16 above, by DC3 of each eligible property which is the object of the election described in paragraph 17 above to DC1; and

(d) the transfer, as described in paragraph 25 above, by DC1 of each eligible property which is the object of the election described in paragraph 26 above to Newco,

such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition of such property to the transferor and, subject to the application of subsection 85(5) with respect to any depreciable property so transferred, the cost thereof to the transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. On the redemption or purchase for cancellation, as the case may be:

(a) of the DC2 XXXXXXXXXX preferred shares owned by DC1 as described in paragraph 19;

(b) of the DC1 XXXXXXXXXX preferred shares owned by DC2 as described in paragraph 19;

(c) of the DC3 XXXXXXXXXX preferred shares owned by DC1 as described in paragraph 19;

(d) of the DC1 XXXXXXXXXX preferred shares owned by DC3 as described in paragraph 19;

(e) of the Newco XXXXXXXXXX preferred shares owned by DC1 as described in paragraph 28; and

(f) of the 1 DC1 XXXXXXXXXX common share owned by Newco as described in paragraph 28;

the amount, if any, by which the amount paid by each such corporation upon the redemption or purchase for cancellation, as the case may be, of its shares exceeds the aggregate PUC of such shares immediately before such redemption or purchase for cancellation

(i) will be deemed pursuant to paragraph 84(3)(a) to be a dividend paid by the particular issuer of such shares; and

(ii) will be deemed pursuant to paragraph 84(3)(b) to be a dividend received by the particular holder of such shares

and any such dividend,

(iii) 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;

(iv) 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);

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

(vi) will reduce any loss arising from the redemption, acquisition or cancellation of those shares pursuant to subsection 112(3) of the Act; and

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

C. With respect to the deemed dividends described in Ruling B:

(a) provided that the amount paid on the redemption of each share referred to in Ruling B(a), (c) and (e) does not exceed the amount specified in respect of such share, the deemed dividend arising on the redemption of each such share as referred to in Ruling B above will not be subject to tax under Parts IV.1 and VI.1 of the Act because it will be a dividend which is deemed by paragraph 191(4)(d) to be and "excluded dividend" as defined in subsection 191(1) and an "excepted dividend" as defined in section 187.1; and

(b) the deemed dividends referred to in Ruling B(b), (d) and (f) will not be subject to tax under

(i) Part IV.1 on the basis that such dividends will be excepted dividends by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1 of the Act; and

(ii) Part VI.1 on the basis that such dividends will be excluded dividends by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as DC2, DC3 and Newco, as the case may be, will have a substantial interest, within the meaning assigned by subsection 191(2) of the Act, in the payer corporation immediately before the redemption or purchase for cancellation of such shares.

D. The repayment of

(a) the DC1 XXXXXXXXXX Redemption Note owned by DC2 as described in paragraph 20 above;

(b) the DC2 Redemption Note owned by DC1 as described in paragraph 20 above;

(c) the DC1 XXXXXXXXXX Redemption Note owned by DC3 as described in paragraph 20 above;

(d) the DC3 Redemption Note owned by DC1 as described in paragraph 20 above;

(e) the DC1 XXXXXXXXXX Redemption Note owned by Newco described in paragraph 28 above; and

(f) the Newco Redemption Note owned by DC1 as described in paragraph 28 above;

will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

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

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

G. The addition of voting rights to the DC2 Class C preferred shares and the DC3 Class C preferred shares described in paragraph 10 above, in and by itself, will not result in a disposition of such shares for the purposes of the Act.

H. As a result of the proposed transactions described above, in and by 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 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 the Canada Customs and Revenue Agency 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. For greater certainty, it is our view that deferred taxes in respect of a property to be transferred pursuant to a subsection 85(1) election are not relevant for purposes of valuing the property to be transferred; 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 Directorate
Policy and Legislation Branch