2000 Ruling 2000-0021363 - Spin-off butterfly

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

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: Standard Spin-off butterfly

Position: Favorable rulings provided.

Reasons: Complies with the rules of section 55.

XXXXXXXXXX
XXXXXXXXXX 2000-002136
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Re: Proposed Reorganization of XXXXXXXXXX
XXXXXXXXXX - Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, and your subsequent correspondence requesting an advance income tax ruling on behalf of the above noted taxpayers. You have advised that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request:

(a) is involved in an earlier return of the taxpayers or a related person,

(b) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayers or a related person,

(c) is under objection, and

(d) is before the courts or, if a judgment has been issued, the time limit for appeal has not expired.

Entity Definitions

In this letter, unless otherwise indicated:

(a) "Amalco" means a new corporation to be created by the vertical short-form amalgamation of Newco and New Subco (as hereinafter defined) under the CBCA (as hereinafter defined) as described at paragraph 36 hereof.

(b) "Canco" means XXXXXXXXXX, a corporation incorporated under the Companies Act (Canada) XXXXXXXXXX and continued under the CBCA (as hereinafter defined) by articles of continuance dated XXXXXXXXXX, of which XXXXXXXXXX common shares are owned by FORCO 1 (as hereinafter defined), and XXXXXXXXXX common shares are held by FORCO 2 (as hereinafter defined), and is more fully described at paragraph 9 hereof;

(c) "Canco Group" has the meaning assigned thereto in paragraph 25 hereof;

(d) "Cansub" means XXXXXXXXXX, a corporation incorporated under the XXXXXXXXXX by articles of incorporation dated XXXXXXXXXX (approximately XXXXXXXXXX%) of the issued and outstanding shares of which are owned by Canco and the remaining XXXXXXXXXX (approximately XXXXXXXXXX%) of the issued and outstanding shares of which are owned by arm's length persons and is more particularly described at paragraph 11 hereof;

(e) "IPO Co" means a corporation incorporated under the laws of XXXXXXXXXX, all the issued and outstanding shares of which are owned by FORCO 1 (as hereinafter defined);

(f) "FORCO 1", means XXXXXXXXXX, a corporation incorporated in XXXXXXXXXX under the laws of XXXXXXXXXX, and is more particularly described at paragraph 1 hereof; as part of the Merger, more particularly described at paragraph 2, XXXXXXXXXX changed its name to "XXXXXXXXXX";

(g) "FORCO 2" means XXXXXXXXXX, a corporation incorporated in XXXXXXXXXX under the laws of XXXXXXXXXX, all of the shares of which are owned by FORCO 1, and is more particularly described at paragraph 3 hereof;

(h) "FORCO 3" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX, all of the shares of which are owned by FORCO 1 as a consequence of the Merger more particularly described at paragraph 2 hereof;

(i) "Newco" means XXXXXXXXXX, a corporation incorporated under the CBCA on XXXXXXXXXX, and is more particularly described at paragraph 13 hereof; and

(j) "New Subco" means a new corporation to be incorporated under the CBCA as described at paragraph 17 hereof.

Other Definitions

In this letter, unless otherwise indicated all dollar amounts referred to herein are in Canadian dollars and unless otherwise indicated:

(a) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter (herein referred to as the "Act") and unless otherwise expressly stated, every reference to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act;

(b) "ACB" has the meaning assigned to the expression "adjusted cost base" in section 54;

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

(d) "Assumed Liabilities" has the meaning assigned thereto in paragraph 19 hereof;

(e) "Butterflied Shares" has the meaning assigned thereto in paragraph 30 hereof;

(f) "Butterfly Proportion" means a fraction, the numerator of which is the aggregate net fair market value of the business property of Canco to be transferred to Newco for purposes of paragraph 55(3)(b) and the denominator of which is the net fair market value of all business property of Canco for purposes of paragraph 55(3)(b) immediately before the Butterfly Transfer (as hereinafter described);

(g) "Butterfly Transfer" has the meaning assigned thereto in paragraph 30 hereof;

(h) "Canco New Common Shares" means the voting common shares of Canco, as described in paragraph 22 hereof;

(i) "Canco Note" has the meaning assigned thereto in paragraph 33 hereof;

(j) "Canco Old Common Shares" has the meaning assigned thereto in paragraph 22 hereof;

(k) "Canco Reorganization Share Redemption Amount" has the meaning assigned thereto in paragraph 22 hereof;

(l) "Canco Reorganization Shares" means the reorganization shares of Canco as described in paragraph 22 hereof;

(m) "capital gain" has the meaning assigned by paragraph 39(1)(a);

(n) "capital loss" has the meaning assigned by paragraph 39(1)(b);

(o) "capital property" has the meaning assigned in section 54;

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

(q) "CBCA" means the Canada Business Corporations Act;

(r) "CCRA" means the Canada Customs and Revenue Agency;

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

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

(u) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(v) "Merger" means the transaction described in paragraph 2 hereof pursuant to which FORCO 3 became a wholly-owned subsidiary of FORCO 1 on XXXXXXXXXX;

(w) "Newco Common Shares" means the class A common shares of Newco, as described in paragraph 13 hereof;

(x) "Newco Special Share Redemption Amount" has the meaning assigned thereto in paragraph 13 hereof;

(y) "Newco Special Share" means the special share of Newco, as described in paragraph 13 hereof;

(z) "New Subco Common Shares" means the common shares of New Subco, as described in paragraph 17 hereof;

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

(bb) "PUC" has the meaning assigned to the expression "paid-up capital" in subsection 89(1);

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

(dd) "RDTOH" has the meaning assigned to the expression "refundable dividend tax on hand" in subsection 129(3);

(ee) "related persons" has the meaning assigned by subsection 251(2);

(ff) "Reorganization of Capital" has the meaning assigned thereto in paragraph 22 hereof;

(gg) "Significantly Influenced Corporation" has the meaning assigned thereto in paragraph 25 hereof;

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

(ii) "specified investment business" has the meaning assigned by subsection 248(1);

(jj) "stated capital" has the meaning assigned by the CBCA;

(kk) "Targeted Assets" has the meaning assigned thereto in paragraph 19 hereof;

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

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

(nn) "XXXXXXXXXX Debt" means the indebtedness described at paragraph 10 hereof.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is set out as follows:

FACTS

1.

XXXXXXXXXX

XXXXXXXXXX. FORCO 1 is a resident of XXXXXXXXXX for federal income tax purposes and does not have a permanent establishment in Canada within the meaning of Article V of the XXXXXXXXXX (the "Treaty") nor does it carry on business in Canada for the purposes of the Act.

2. FORCO 1 owns all of the issued and outstanding shares of FORCO 2, FORCO 3 and IPO Co. On XXXXXXXXXX, FORCO 1 and FORCO 3 announced their intent to effect a "merger of equals" transaction pursuant to which FORCO 3 would become a wholly-owned subsidiary of FORCO 1 (the "Merger"). The Merger closed on XXXXXXXXXX. Pursuant to the Merger, FORCO 3 shareholders had their shares of common stock and convertible preferred stock converted into newly issued shares of common stock and convertible preferred stock of FORCO 1. The shareholders of FORCO 1 immediately before the time of the Merger retained their existing shares of FORCO 1's capital stock. As a consequence of the Merger, XXXXXXXXXX% of the issued and outstanding shares of common stock of FORCO 1 immediately after the Merger were held by the former FORCO 1 shareholders and XXXXXXXXXX% of the issued and outstanding shares of common stock of FORCO 1 were held by former FORCO 3 shareholders. The Merger occurred totally independent of the proposed transactions described herein and would have occurred whether or not the proposed transactions described herein are effectuated and for greater certainty was not made in contemplation of the Butterfly Transfer.

As of XXXXXXXXXX, the authorized capital stock of FORCO 1 consisted of XXXXXXXXXX shares of common stock with a par value of XXXXXXXXXX per share, XXXXXXXXXX shares of preferred stock of which XXXXXXXXXX shares have been designated "XXXXXXXXXX Preferred Stock" and XXXXXXXXXX shares of "XXXXXXXXXX Preferred Stock". The XXXXXXXXXX Preferred Stock is reserved for issuance upon the exercise of the rights distributed to the holders of the common stock of FORCO 1 pursuant to a certain rights agreement dated XXXXXXXXXX, with XXXXXXXXXX as Rights Agent (the "Rights Agreement"). Pursuant to the Rights Agreement, the right to purchase XXXXXXXXXX Preferred Stock is exercisable only upon the occurrence of certain events. The XXXXXXXXXX Preferred Stock having a par value of $XXXXXXXXXX per share and a stated value and a liquidation preference of $XXXXXXXXXX per share, plus accrued and unpaid dividends was added to the authorized capital stock of FORCO 1 in connection with the Merger. Each share of XXXXXXXXXX Preferred Stock entitles the holder thereof to XXXXXXXXXX votes.

As of XXXXXXXXXX, FORCO 1 had XXXXXXXXXX shares of common stock issued and outstanding (excluding XXXXXXXXXX treasury shares) and XXXXXXXXXX shares of XXXXXXXXXX Preferred Stock issued and outstanding. On the Merger, each outstanding convertible preferred share of FORCO 3 was converted into one share of XXXXXXXXXX Preferred Stock. The XXXXXXXXXX Preferred Stock is held entirely by a FORCO 3 Employee Share Ownership Plan ("ESOP") on behalf of the ESOP participants. When a participant leaves the ESOP, the said shares are either redeemed for cash or converted into common shares of FORCO 1 for distribution to the employee.

FORCO 1 also has a hybrid debt instrument that consists of a debt obligation bundled with a forward contract to acquire FORCO 1 stock in the future. When the forward contract in the bundled instrument becomes exercised, the purchase price for the FORCO 1 stock may be paid in cash or by transferring the debt instrument back to FORCO 1 in exchange for stock. These instruments, referred to as "XXXXXXXXXX units" are widely held.

As of XXXXXXXXXX, except for FORCO 1's XXXXXXXXXX Preferred Stock purchase rights under the Rights Agreement as described above, the XXXXXXXXXX Preferred Stock, FORCO 1's XXXXXXXXXX units and options to acquire shares of common stock pursuant to FORCO 1's Stock Option Plans, there were no outstanding subscriptions, options, warrants, rights, contracts, convertible or exchangeable securities or other arrangements or commitments obligating FORCO 1 to issue any shares of its capital stock or any securities convertible into or exchangeble for shares of its capital stock.

3. XXXXXXXXXX. FORCO 2 is a resident of XXXXXXXXXX for federal income tax purposes and does not have a permanent establishment in Canada within the meaning of Article XXXXXXXXXX of the Treaty nor does it carry on business in Canada for the purposes of the Act.

4. As part of FORCO 1's strategic restructuring plan XXXXXXXXXX, FORCO 1 and Canco have concluded a number of transactions over the past few years, including the current year, and have recently entered into certain divestiture agreements. The recently completed dispositions and dispositions in progress in respect thereof are described as follows:

Recently Completed Dispositions

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Dispositions in Progress

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

5. As part of the transactions described in subparagraphs 4(e), (f) and (g) above, Canco will sell the related Canadian business directly to the purchaser therein described or one of its affiliates. A portion of the proceeds of sale in respect of these transactions and that relate to Canco will be allocated by FORCO 1 to Canco and the full amount of such allocations will be applied by FORCO 1 to reduce Canco's intercompany debt. These allocations and the consequential repayment of the intercompany loan account are totally independent of the proposed transactions described herein and are not being effected in contemplation of the Butterfly Transfer.

6. The transactions listed in paragraphs 4(a) to (g) above occurred totally independent of the proposed transactions described herein and all of these divestitures, including the transactions that have not yet been completed, would have occurred (and will occur) whether or not the proposed transactions described herein are effectuated and for greater certainty were not made (and will not be made) in contemplation of the Butterfly Transfer.

7. XXXXXXXXXX, FORCO 1 and Canco have concluded a number of transactions over the past few years, XXXXXXXXXX:

Recently Completed Acquisitions

(a) XXXXXXXXXX

(b) XXXXXXXXXX

(c) XXXXXXXXXX.

(d) XXXXXXXXXX.

8. The transactions listed at subparagraphs 7(a) to (d) occurred totally independent of the proposed transactions described herein and all of these acquisitions would have occurred whether or not the proposed transactions described herein are effectuated and for greater certainty were not made in contemplation of the Butterfly Transfer.

9. Canco is a taxable Canadian corporation and a private corporation. The taxation year of Canco ends on XXXXXXXXXX. Canco's CCRA business number is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.

XXXXXXXXXX. Canco does not have any RDTOH and it does not expect to have any at the end of its taxation year in which the proposed transactions described herein are to be implemented.

The authorized share capital of Canco consists of an unlimited number of common shares. As of the date hereof, the issued and outstanding share capital of Canco is comprised of XXXXXXXXXX common shares (the "Canco Common Shares"), of which XXXXXXXXXX are registered in the name of FORCO 1, and XXXXXXXXXX are registered in the name of FORCO 2. FORCO 1 has continuously owned XXXXXXXXXX% of Canco, directly or indirectly, since XXXXXXXXXX. FORCO 2 acquired its XXXXXXXXXX Canco Common Shares on XXXXXXXXXX, pursuant to a transfer agreement between FORCO 2 and Canco whereby FORCO 2 transferred all of the shares of its wholly-owned Canadian subsidiary, XXXXXXXXXX, to Canco in exchange for XXXXXXXXXX Canco Common Shares. Following this transfer, Canco passed a resolution to wind-up and dissolve XXXXXXXXXX and in connection therewith XXXXXXXXXX distributed all of its assets to, and all of its liabilities were assumed by, Canco. As of the date hereof, the aggregate PUC and ACB of the Canco Common Shares owned by each of FORCO 1 and FORCO 2 is less than the aggregate fair market value thereof. The Canco Common Shares represent capital property to FORCO 1 and FORCO 2.

10. Canco's current assets are comprised of cash, accounts receivable (including intercompany trade accounts receivable), Goods and Services Tax ("GST") receivable and Quebec Sales Tax ("QST") receivable, inventory, and other current assets, and its non-current assets are comprised of buildings, machinery and equipment, manufacturing site, leasehold improvements, investments in Cansub, pension assets, goodwill, patents and other fixed assets. These assets are all used by Canco in carrying on its XXXXXXXXXX business and XXXXXXXXXX business in Canada.

The current liabilities of Canco include bank indebtedness, trade payables, accruals, intercompany payables, intercompany borrowings, income tax payable and the current portion of long-term debt. The intercompany borrowings of Canco relate to short-term loans from FORCO 1 with a principal amount outstanding of approximately XXXXXXXXXX which have no specific terms of repayment and, accordingly, Canco may be required to repay such loans after demand is made by FORCO 1.

The long-term liabilities of Canco include long term debt, deferred income taxes, and post-retirement liabilities. The deferred income taxes and post retirement liabilities are of a contingent nature and do not represent a legal liability of Canco which are capable of quantification at this time. In addition, Canco owes the XXXXXXXXXX Debt to arm's length lenders pursuant to debentures issued by Canco as part of a private placement on XXXXXXXXXX. The maturity date of the debt is XXXXXXXXXX and the principal amount of the issue was $XXXXXXXXXX at an interest rate of XXXXXXXXXX%. Canco has determined that there is no longer a benefit to carrying the XXXXXXXXXX Debt on its books beyond the end of the current year since all obligations to pay interest have been satisfied. Accordingly, Canco may repay, in full, the principal amount of the XXXXXXXXXX Debt. This repayment is totally independent of the proposed transactions described herein and will occur whether or not the proposed transactions described herein are effectuated and for greater certainty will not be made in contemplation of the Butterfly Transfer.

Other than as described above and in paragraph 19 herein there is not expected to be any material change in the composition of Canco's assets or liabilities between the date of this letter and the date the proposed Butterfly Transfer is completed as a result of any transaction that is outside the ordinary course of the business.

11. Cansub is a taxable Canadian corporation and a private corporation. The taxation year of Cansub ends on XXXXXXXXXX. Cansub's CCRA business number is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.

Cansub is a company specialized exclusively in XXXXXXXXXX. As of the date hereof, the issued and outstanding share capital of Cansub is comprised of XXXXXXXXXX common shares (the "Cansub Common Shares") of which XXXXXXXXXX are owned by Canco. The remaining XXXXXXXXXX issued and outstanding Cansub Common Shares are owned by persons who deal at arm's length with Canco. Canco acquired XXXXXXXXXX of its XXXXXXXXXX Cansub Common Shares from arm's length persons on XXXXXXXXXX, for an aggregate sum of $XXXXXXXXXX. On the same date, Canco acquired another XXXXXXXXXX Cansub Common Shares from Cansub's treasury for an aggregate subscription price of $XXXXXXXXXX. The aggregate PUC that relates to the XXXXXXXXXX Cansub Common Shares owned by Canco and the aggregate ACB of such shares is less than their aggregate fair market value. The Cansub Common Shares represent capital property to Canco. The acquisition of the Cansub Common Shares by Canco occurred independent of the proposed transactions described herein and would have occurred whether or not the proposed transactions described herein are effectuated and for greater certainty such acquisition was not made in contemplation of the Butterfly Transfer.

12. Cansub's current assets are comprised of cash, accounts receivable, prepaid expenses, inventory and other current assets, and its non-current assets are comprised of land, buildings and machinery and equipment. These assets are all used by Cansub in carrying on its XXXXXXXXXX business in Canada.

The current liabilities of Cansub consist of an operating line of credit and accounts payable, in the aggregate amount of $XXXXXXXXXX. The only long-term liability of Cansub is long-term debt in the amount of $XXXXXXXXXX as at XXXXXXXXXX.

There is not expected to be any material change in the composition of Cansub's assets or liabilities between the date of this letter and the date the proposed Butterfly Transfer is completed.

Other Transactions Undertaken before the Proposed Transactions

13. Prior to the implementation of the proposed transactions, FORCO 1 and FORCO 2 have caused Newco to be incorporated under the provisions of the CBCA. Newco is a taxable Canadian corporation and a private corporation. Newco does not currently have any assets and the end of its first fiscal period has not yet been determined. The authorized share capital of Newco includes the following classes of shares:

(a) an unlimited number of common shares (the "Newco Common Shares") that will entitle a holder to one (1) vote per share; and

(b) one (1) non-voting, redeemable and retractable preferred share (the "Newco Special Share") which shall entitle the holder to receive, as and when declared from time to time by the board of directors, non-cumulative dividends not exceeding an amount equal to XXXXXXXXXX% per annum calculated on the Newco Special Share Redemption Amount (as hereinafter defined). The Newco Special Share shall be redeemable and retractable for an amount equal to the fair market value of the consideration received by Newco upon the issuance of such share (the "Newco Special Share Redemption Amount"). XXXXXXXXXX.

14. In order to have Newco approve the transactions described in paragraphs 28 to 36 below, upon organization one (1) Newco Common Share will be issued by Newco to each of FORCO 1 and FORCO 2 for cash consideration of $XXXXXXXXXX per share. No other shares of Newco will be issued by it prior to the implementation of the proposed transactions described below.

15. Newco has been established for the purpose of carrying on the XXXXXXXXXX business activities currently carried on by Canco as described in paragraph 9 above. To facilitate the transition of the XXXXXXXXXX business activities from Canco to Newco, Canco will enter into a transition services agreement with Newco under the terms of which Newco will provide to Canco, on a cost-recovery basis, certain limited services, namely, finance, human resources and information technology. In addition under the terms of that agreement Canco will provide to Newco, on a cost-recovery basis, certain limited services such as legal and governmental relations. Newco and Canco, as the case may be, will provide all or some of these services but only until such time as the transition process of the XXXXXXXXXX business activities from Canco to Newco is complete and at which time the transition services agreement will be terminated.

Other Information

16. Canco intends to lend money to Cansub in the near term, in order to fund Cansub's redemption of its Cansub Common Shares currently held by the minority shareholders. The loan and the redemptions are totally independent of the proposed transactions described herein and will occur whether or not the proposed Butterfly Transfer described herein is effectuated.

PROPOSED TRANSACTIONS

17. Canco will cause a new corporation ("New Subco") to be incorporated under the provisions of the CBCA. New Subco will be a taxable Canadian corporation and a private corporation. The authorized share capital of New Subco will include an unlimited number of common shares (the "New Subco Common Shares") that will entitle the holder thereof to one (1) vote for each New Subco Common Share so held.

18. In order to have New Subco approve the proposed transactions described below, upon organization one (1) New Subco Common Share will be issued by New Subco to Canco for cash consideration of $XXXXXXXXXX. No other shares of New Subco will be issued by it prior to the implementation of the proposed transactions described in paragraph 19 below.

19. Canco will transfer all of its assets and property other than the assets and property used or held by it in carrying on its XXXXXXXXXX business (the "Targeted Assets") to New Subco and, New Subco will, as partial consideration for the transfer of the Targeted Assets, assume a portion of Canco's liabilities (the "Assumed Liabilities") in an amount not exceeding the agreed amount in the election described in paragraph 20 below and New Subco will, as to the balance of the consideration in respect of the transfer of the Targeted Assets, issue to Canco 99 New Subco Common Shares.

20. Canco and New Subco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each eligible property (other than accounts receivable of Canco) that is included in the Targeted Assets by Canco to New Subco, as described in paragraph 19 above, whose fair market value exceeds or may exceed the cost amount thereof to Canco. The agreed amount in respect of each such eligible property so transferred and included in the above election will:

(a) in the case of depreciable property of a prescribed class, not be less than the least of the amounts referred to in subparagraphs 85(1)(e)(i) to (iii);

(b) in the case of inventory or capital property (other than depreciable property), not be less than the least of the amounts referred to in subparagraphs 85(1)(c.1)(i) and (ii); and

(c) in the case of eligible capital property, not be less than the least of the amounts referred to in subparagraphs 85(1)(d)(i) to (iii).

In each case, the agreed amount will not be less than the amount of the Assumed Liabilities that are to be assumed by New Subco in respect of the transfer of each such eligible property nor will the agreed amount otherwise exceed the fair market value of each eligible property so transferred.

Canco and New Subco will file a joint election under section 22 in respect of any accounts receivable owing to Canco that are included in the Targeted Assets transferred to New Subco.

21. The amount that will be added under the CBCA to the stated capital account of the New Subco Common Shares issued by New Subco as described in paragraph 19 above will not exceed the amount by which the aggregate of the cost amounts of the Targeted Assets (determined under subsection 85(1) where applicable) to New Subco exceed the amount of the Assumed Liabilities.

22. The articles of incorporation of Canco will be amended by:

(a) creating an unlimited number of a new class of common shares (the "Canco New Common Shares"), which class of shares shall have the same attributes as the Canco Common Shares (hereinafter referred to as the "Canco Old Common Shares");

(b) creating XXXXXXXXXX shares of a new special class of shares to be designated as the "Canco Reorganization Shares". Each Canco Reorganization Share shall be non-voting, redeemable and retractable for an amount equal to the Canco Reorganization Share Redemption Amount (as hereinafter defined), together with all declared and unpaid dividends thereon. The "Canco Reorganization Share Redemption Amount" will be equal to the quotient obtained from the following equation:

A x B
C

Where:

A is the fair market value of the issued and outstanding Canco Old Common Shares, immediately before the exchange of Canco Old Common Shares contemplated in subparagraph 22(c);

B is the Butterfly Proportion; and

C is XXXXXXXXXX, representing the number of Canco Reorganization Shares to be issued on the exchange of Canco Old Common Shares contemplated in subparagraph 22(c).

The aggregate Canco Reorganization Share Redemption Amount of the Canco Reorganization Shares to be issued on the reorganization of capital described in this paragraph (the "Reorganization of Capital") will be equal to the Butterfly Proportion of the fair market value of all the issued Canco Old Common Shares, immediately before the issuance of the certificate of amendment in respect of the articles of amendment creating the Canco New Common Shares and the Canco Reorganization Shares and changing the Canco Old Common Shares.

XXXXXXXXXX; and

(c) changing all of the issued and outstanding Canco Old Common Shares into that same number of Canco Reorganization Shares and that same number of Canco New Common Shares. As a result of this exchange, the share certificates representing the Canco Old Common Shares will be cancelled and share certificates representing the Canco New Common Shares will be issued.

FORCO 1 and FORCO 2 will each comply with the provisions of Section 116 to obtain from the Minister a certificate in the prescribed form in respect of the dispositions of the Canco Old Common Shares. For this purpose, FORCO 1 and FORCO 2 will dispose of all of their Canco Old Common Shares in the course of the Reorganization of Capital.

23. The aggregate of the amount to be credited to the stated capital account of the Canco Reorganization Shares and the aggregate of the amount to be credited to the stated capital account of the Canco New Common Shares under the CBCA will be equal to the amount of the PUC of the Canco Old Common Shares issued and outstanding immediately before the Reorganization of Capital. The PUC of the outstanding Canco Old Common Shares will be allocated between the Canco Reorganization Shares and the Canco New Common Shares based on the proportion that the fair market value of the Canco Reorganization Shares and the fair market value of the Canco New Common Shares, as the case may be, is of the fair market value of all such shares issued to FORCO 1 and FORCO 2 as part of the Reorganization of Capital.

24. The stated capital account of the Canco Old Common Shares under the CBCA shall be decreased by an amount equal to the aggregate stated capital, immediately prior thereto, of such Canco Old Common Shares so exchanged by Canco as part of the Reorganization of Capital immediately prior thereto.

25. Immediately before the Butterfly Transfer, the property owned by Canco will be determined on a consolidated look-through basis by including the appropriate pro rata share of the assets of any corporation over which Canco has the ability to exercise significant influence (as described below Canco will only have significant influence over Cansub and New Subco and such corporations, including Canco, are hereinafter collectively referred to as the "Canco Group") and will be classified into three types of property for the purposes of paragraph 55(3)(b), as follows:

(a) cash or near cash property, comprising all of the current assets of the Canco Group, including any cash, deposits, marketable securities, accounts receivable, GST and QST receivable, inventories and rights arising from prepaid expenses;

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

(c) business property, comprising all of the assets of the Canco Group, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business carried on by the Canco Group (other than a specified investment business) including goodwill and other intangible assets relating to the businesses of the Canco Group.

For the purposes of this paragraph, Canco will be considered to have significant influence over a corporation if it has significant influence, within the meaning of paragraph 3050 of the CICA Handbook, over that corporation or over any other corporation that has significant influence over that corporation (a "Significantly Influenced Corporation") and accordingly, only Cansub and New Subco are Significantly Influenced Corporations of Canco.

For greater certainty, the fair market value of the shares of any Significantly Influenced Corporation, and of any indebtedness receivable by Canco from any Significantly Influenced Corporation, will be allocated between the types of property described above by multiplying the fair market value of the shares of the particular Significantly Influenced Corporation, or amount of indebtedness receivable from the particular Significantly Influenced Corporation, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular Significantly Influenced Corporation (as determined in subparagraph 26(a) below) is of the aggregate net fair market value of all the property owned by the particular Significantly Influenced Corporation.

26. In determining, on a consolidated basis, the net fair market value of each type of property of Canco immediately before the Butterfly Transfer as described in paragraph 30 below, the liabilities of Canco and any Significantly Influenced Corporation will be allocated to, and 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 particular Significantly Influenced Corporation, immediately before the Butterfly Transfer, the liabilities of the particular Significantly Influenced Corporation (other than any amount owing by the particular Significantly Influenced Corporation to Canco) will be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of the particular Significantly Influenced Corporation in the following manner:

(i) current liabilities of a particular Significantly Influenced Corporation will be allocated to the cash or near cash property (including any cash, accounts receivable, GST and QST 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 such corporation. To the extent the allocation of current liabilities as described herein exceeds the aggregate fair market value of all cash or near cash property of such corporation, such corporation will be considered to have a negative amount of cash or near cash property;

(ii) provided that the amount of the particular Significantly Influenced Corporation's current assets exceeds its current liabilities, any accounts receivable (including intercompany trade accounts receivable to the extent that such accounts receivable arise in respect of intercompany sales having commercial terms and conditions that are the same or similar to the terms and conditions that such corporation would enter into with arm's length persons), GST and QST receivable, inventories and prepaid expenses of such corporation, initially classified in accordance with subparagraph (a)(i) as cash or near cash property, that relates to a business of such corporation that will be carried on by such corporation or its successor by amalgamation following the Butterfly Transfer described in paragraph 30 below, and that will be collected, sold or consumed by such corporation or its successor in the ordinary course of its business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of the current liabilities described in (a)(i) herein will be included in the net fair market value of such corporation's business property and will not be included in the net fair market value of such corporation's cash or near cash property;

(iii) liabilities, other than current liabilities, of the particular Significantly Influenced 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. The 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 the particular type of property of such corporation, such corporation will be considered to have a negative amount of that type of property; and

(iv) any liabilities, other than current liabilities, of the particular Significantly Influenced Corporation which do not relate to a particular type of property will then be allocated to the cash or near cash property, investment property, and business 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 Canco immediately before the Butterfly Transfer described in paragraph 30, Canco will include the appropriate pro-rata share of the net fair market value of each type of property of Cansub and New Subco and, for greater certainty, the appropriate pro rata share of any negative amount of cash or near-cash property of Cansub and New Subco, as determined in accordance with subparagraph (a) herein, and any liabilities of Canco, will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of Canco in the following manner:

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

(ii) provided that the amount of Canco's current assets exceeds its current liabilities, any accounts receivable (including intercompany trade accounts receivable to the extent that such accounts receivable arise in respect of intercompany sales having commercial terms and conditions that are the same or similar to the terms and conditions that such corporation would enter into with arm's length persons), GST and QST receivable, inventories and prepaid expenses of Canco, initially classified in accordance with subparagraph (b)(i) as cash or near cash property, that relates to a business of Canco that is carried on by Canco following the Butterfly Transfer described in paragraph 30 below, and will be collected, sold or consumed by Canco in the ordinary course of that business, will then be reclassified as business property and the net fair market value thereof, determined after the allocation of the current liabilities described in (b)(i) herein will be included in the net fair market value of Canco's business property and will not be included in the net fair market value of Canco's cash or near cash property;

(iii) liabilities, other than current liabilities, of Canco 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;

(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, investment property, and business property, if any, of Canco based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities, but after the allocation of the liabilities described in subparagraphs (b)(i) and (b)(iii) above.

27. For greater certainty for the purposes of paragraphs 25 and 26 above, and for the purposes of the proposed transactions described herein:

(a) No amount in respect of any tax account, such as capital losses, non-capital losses or investment tax credits of the Canco Group, will be considered to be property or liability, as the case may be;

(b) No amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification. The amount of post-retirement benefits accrued by Canco at the time of the proposed transactions will not be considered a liability for these purposes except to the extent that such amount, or a portion of such amount, actually represents a true legal liability of Canco at the time the proposed transactions are implemented.

(c) No amount of deferred income taxes will be considered a property or liability, as the case may be; and

(d) Any amount of income taxes payable pursuant to an assessment or reassessment (and whether or not any such assessment or reassessment has been objected to or not) and amount of income taxes that is the subject of a proposed assessment (to the extent that any such amount is accrued as a true liability) will be classified as a current liability of Canco or the particular Significantly Influenced Corporation, as the case may be, and thus the full amount thereof will, to the extent that any objection in respect of such unpaid taxes has not been resolved, be deducted from the net fair market value of the cash or near cash property of Canco or the particular Significantly Influenced Corporation, as the case may be, in accordance with the provisions of paragraphs 25 and 26 above. Any amount in respect of a refund of income taxes, and interest thereon, that are actually receivable will be treated as cash or near-cash property of Canco or the particular Significantly Influenced Corporation, as the case may be, for purposes of paragraph 55(3)(b). Any contingent refunds of income taxes and interest thereon will, due to their contingent nature, be ignored for purposes of determining the types of property of Canco or the particular Significantly Influenced Corporation, as the case may be, for purposes of paragraph 55(3)(b).

28. FORCO 1 and FORCO 2 will each transfer its respective Canco Reorganization Shares to Newco and as sole consideration therefor Newco will issue to FORCO 1 and FORCO 2, respectively, a number of Newco Common Shares having a fair market value equal to the aggregate fair market value of the Canco Reorganization Shares transferred by each of them to Newco. The Canco Reorganization Shares will not derive their value principally from real property situated in Canada or from an interest in a partnership, trust or estate, the value of which is derived principally from real property situated in Canada, within the meaning of subparagraphs 3(b)(ii) and (iii) of Article XXXXXXXXXX of the Treaty. FORCO 1 and FORCO 2 will each comply with the provisions of Section 116 to obtain from the Minister a certificate in the prescribed form in respect of the dispositions of the Canco Reorganization Shares.

29. The amount to be added to the stated capital account under the CBCA of the Newco Common Shares which are issued as consideration for the Canco Reorganization Shares transferred to Newco by each of FORCO 1 and FORCO 2, as described in 28 above, shall be equal to the aggregate PUC of the Canco Reorganization Shares as determined in accordance with paragraph 22 above.

30. Immediately following the determination of the net fair market value of Canco's types of property, as described in paragraphs 25 and 26 above, Canco will transfer (the "Butterfly Transfer") to Newco

(a) all of its New Subco Common Shares (the "Butterflied Shares"); and

(b) if necessary, cash or near cash property which is additional to the cash or near cash property which is represented by the Butterflied Shares;

such that immediately following the transfer of the Butterflied Shares and any other cash or near cash property by Canco the net fair market value of each type of property so transferred by Canco to Newco, determined in accordance with the guidelines described in paragraphs 25 and 26 above, will be equal to that proportion of the aggregate net fair market value of that type of property of Canco immediately before the Butterfly Transfer that,

(a) the aggregate fair market value of all of the issued and outstanding Canco Reorganization Shares immediately before the Butterfly Transfer,

is of

(b) the aggregate fair market value of all of the shares of Canco immediately before such transfer.

As sole consideration for the Butterflied Shares and any other cash or near cash property so transferred, Newco will issue to Canco the one Newco Special Share having an aggregate redemption price and an aggregate fair market value, as described in paragraph 13(b) above, equal to the aggregate fair market value of such property.

31. Canco and Newco will jointly elect, in prescribed form and within the time limits referred to in subsection 85(6), to have the rules of subsection 85(1) apply to the Butterfly Transfer of property by Canco to Newco, as described in paragraph 30 above, provided that each such property is an eligible property whose fair market value is not less than the cost amount thereof to Canco. The agreed amount in respect of each such property so transferred and included in the election will be equal to the adjusted cost base to Canco immediately before the transfer and for greater certainty will not be less than the least of the amounts referred to in subparagraphs 85(1)(c.1) and (ii).

The amount to be added to the stated capital account of the Newco Special Share under the CBCA will not exceed the maximum amount that could be added to the PUC of such shares, having regard to subsection 85(2.1).

32. At the end of the day on which the transactions described in paragraphs 28 to 31 above occur, Newco will cause its first fiscal period and taxation year to end.

33. On the first business day of Newco's second taxation year, Canco will redeem all of the issued and outstanding Canco Reorganization Shares held by Newco for their fair market value which will be equal to the aggregate Canco Reorganization Share Redemption Amount. As payment for such redemption Canco will issue to Newco a non-interest bearing demand promissory note (the "Canco Note") having a principal amount and fair market value equal to the aggregate Canco Reorganization Share Redemption Amount. The Canco Note will be assignable by the holder thereof and Newco will accept the Canco Note as full payment for the redemption price of the Canco Reorganization Shares.

34. Immediately after the redemption of the Canco Reorganization Shares as described in paragraph 33 above, Newco will redeem its Newco Special Share held by Canco for its fair market value which will equal the Newco Special Share Redemption Amount. As consideration for such redemption Newco will assign and transfer the Canco Note referred to in paragraph 33 above to Canco and Canco will accept the Canco Note as full payment for the redemption price of the Newco Special Share so redeemed. The Canco Note will thereupon be extinguished and cancelled notwithstanding that the mutual indebtedness of Canco and Newco resulting from the redemptions described in paragraph 33 and in this paragraph may not be of identical amounts.

35. Immediately following the Butterfly Transfer described in paragraph 30 above, the redemption of the Canco Reorganization Shares as described in paragraph 33 and the redemption of the Newco Special Share as described in paragraph 34 above, the net fair market value of each type of property retained by Canco, determined in accordance with the guidelines described in paragraphs 25 and 26 above, will be equal to that proportion of the aggregate net fair market value of that type of property of Canco immediately before the Butterfly Transfer described in paragraph 30 above that,

(a) the aggregate fair market value of all of the issued and outstanding Canco New Common Shares immediately before the Butterfly Transfer described in paragraph 30 above,

is of

(b) the aggregate fair market value of all of the shares of Canco immediately before such transfer.

36. Newco and New Subco (referred to in this paragraph as "predecessor corporations") will effect a vertical short form amalgamation under the provisions of the CBCA to form a new corporation ("Amalco") in such manner that:

(a) all of the property (except any amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become property of Amalco by virtue of the amalgamation;

(b) all the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco by virtue of the amalgamation; and

(c) all the shares of New Subco owned or held by Newco immediately prior to the amalgamation will be cancelled by virtue of the amalgamation and the shares of Newco owned by FORCO 1 and FORCO 2 will become shares of Amalco immediately after the amalgamation.

Post-Butterfly Transactions

37. After the completion of the proposed transactions described in paragraphs 13 to 36 above, the articles of incorporation, as amended, of Canco will be further amended to delete the Canco Old Common Shares and the Canco Reorganization Shares as shares which Canco is authorized to issue, to delete the rights, privileges, restrictions and conditions attaching to such shares, to change the designation of the Canco New Common Shares to common shares, and to accordingly renumber the parts, articles, sections, subsections and other portions of (and references to such parts, articles, sections, subsections and other portions thereof) the rights, privileges, restrictions and conditions attaching to the shares which Canco is authorized to issue.

38. The articles of incorporation, as amended, of Canco will be restated and such restated articles of incorporation shall be filed by Canco, pursuant to the relevant corporate laws.

39. Concurrent with or following the completion of the proposed transactions described in paragraphs 13 to 38 above, it is proposed that:

(a) FORCO 2 transfer all of its common shares of Canco to FORCO 1 by way of dividend in kind, thereby making Canco a wholly-owned subsidiary of FORCO 1; and

(b) FORCO 1 then transfer all of its common shares of Canco to IPO Co as a capital contribution.

At the time of the transactions described in (a) and (b) hereof, the common shares of Canco will not derive their value principally from real property situated in Canada or from an interest in a partnership, trust or estate the value of which is derived principally from real property situated in Canada within the meaning of subparagraphs 3(b)(ii) and (iii) of Article XXXXXXXXXX of the Treaty. It is not the intention of FORCO 1 to dispose of any of its IPO Co shares to any unrelated person as part of the series of transactions, which includes the proposed transactions described in this letter. FORCO 1 and FORCO 2 will each comply with the provisions of Section 116 to obtain from the Minister a Certificate in the prescribed form in respect of the above described dispositions of the common shares of Canco by each of them as the case may be.

40. The shares of IPO Co will then be listed on the XXXXXXXXXX Stock Exchange and IPO Co will make an initial public offering of up to, but not exceeding, XXXXXXXXXX% of its common stock.

Additional Information

41. The share provisions relating to each of the Canco Reorganization Shares and the Newco Special Share will provide that in the event that it is subsequently held or determined by a final judgment of any competent administrative tribunal or court or by a negotiated settlement with any revenue authority that the aggregate net fair market value of any property that is relevant to the determination of the redemption price of such share is different than the fair market value assigned thereto, the redemption amounts of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the aggregate net fair market value so held or determined.

42. Except as described in this letter, no liabilities have been or will be incurred by, and no properties have been or will be acquired by or disposed of by Canco, Newco or a corporation controlled by one of them in contemplation of or before the proposed Butterfly Transfer described in paragraph 30 above.

43. Except as described in this letter, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, in the course of that reorganization to an unrelated person for the purposes of section 55.

44. None of the parties is contemplating an acquisition of control of any of the corporations referred to above.

45. None of the shares of Canco or Newco has been, or will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a guarantee agreement;

(b) a share that is issued or acquired as part of a transaction or event or a series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a dividend rental arrangement.

46. None of Canco, Newco or New Subco is, or will be at the time of the proposed transactions described herein, a specified financial institution.

47. Canco and Newco will require cash in order to carry on their businesses. In this regard, it is intended that FORCO 1 will advance funds to Canco and Newco, as the case may be, at the prevailing market interest rate. These funds will be used by Canco and Newco in the course of carrying on their respective businesses. These advances may be made before and/or after the transactions contemplated herein and in any event, would be made independently of the Butterfly Transfer as the sole purpose of such advances is to fulfill a business requirement.

PURPOSE OF THE PROPOSED TRANSACTIONS

48. The purpose of the proposed transactions as described in this letter is to effect a tax deferred reorganization of Canco pursuant to which its XXXXXXXXXX businesses will be transferred to Newco, thereby essentially separating Canco's XXXXXXXXXX business from its XXXXXXXXXX business. FORCO 1 and FORCO 2 will subsequently transfer their respective common shares of Canco and, accordingly, the underlying Canadian XXXXXXXXXX business, to IPO Co so that IPO Co can make a public offering in respect thereof of up to XXXXXXXXXX % of the shares of its capital stock.

RULINGS GIVEN

Provided the foregoing statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we confirm the following:

A. Subject to the application of the provisions of subsections 20(1.2) and 26(5) of the Income Tax Application Rules, to the application of paragraph 88(2.2)(b) of the Act, which applies for the purpose stated in the preamble to subsection 88(2.2) of the Act, and subject also to the application of subsection 13(21.2) as it may apply to the transfers referred to herein, subsection 85(1) will apply to the transfer to New Subco of each property included in the Targeted Assets that is an eligible property owned by Canco at that time, as described in paragraph 19 above, provided Canco and New Subco file a valid election in respect of such transfer, as described in paragraph 20 above, such that the agreed amount in respect of each Targeted Asset so transferred shall be deemed to be the proceeds of disposition to Canco and the cost thereof to Newco pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the exchange of shares of Canco described as the Reorganization of Capital in paragraph 22 above such that:

(a) the cost to FORCO 1 of the Canco New Common Shares or the Canco Reorganization Shares, as the case may be, shall be deemed by paragraph 86(1)(b) to be that proportion of the aggregate ACB to FORCO 1, immediately before the share exchange, of the existing Canco Common Shares owned by FORCO 1, as described in paragraph 9 above, that

(i) the fair market value, immediately after the share exchange, of all of the Canco New Common Shares or the Canco Reorganization Shares, as the case may be

is of

(ii) the aggregate fair market value, immediately after the share exchange, of all of the Canco New Common Shares and the Canco Reorganization Shares receivable by FORCO 1 for its existing Canco Common Shares.

(b) the cost to FORCO 2 of the Canco New Common Shares or the Canco Reorganization Shares, as the case may be, shall be deemed by paragraph 86(1)(b) to be that proportion of the aggregate ACB to FORCO 2 immediately before the share exchange, of the existing Canco Common Shares owned by FORCO 2, as described in paragraph 9 above, that

(i) the fair market value, immediately after the share exchange, of all of the Canco New Common Shares or the Canco Reorganization Shares, as the case may be

is of

(ii) the aggregate fair market value, immediately after the share exchange, of all of the Canco New Common Shares and the Canco Reorganization Shares receivable by FORCO 2 for its existing Canco Common Shares.

(c) FORCO 1 will be deemed by paragraph 86(1)(c) to have disposed of its existing Canco Common Shares for proceeds of disposition equal to the aggregate cost to FORCO 1 of all the Canco New Common Shares and the Canco Reorganization Shares receivable by FORCO 1 on the exchange of its existing Canco Common Shares.

(d) FORCO 2 will be deemed by paragraph 86(1)(c) to have disposed of its existing Canco Common Shares for proceeds of disposition equal to the aggregate cost to FORCO 2 of all the Canco New Common Shares and the Canco Reorganization Shares receivable by FORCO 2 on the exchange of its existing Canco Common Shares.

For greater certainty, provided the aggregate amount added to the respective stated capital accounts of the Canco New Common Shares and the Canco Reorganization Shares does not exceed the PUC of the existing Canco Common Shares, as described in paragraph 23 above, immediately before the share exchange, subsection 86(2.1) will not apply to the Reorganization of Capital described in paragraph 22 above.

C. The provisions of subsections 84(1) and 84(3) will not apply to deem FORCO 1 and FORCO 2, respectively, to have received a dividend as a result of the exchange of shares of Canco described as the Reorganization of Capital in paragraph 22 above.

D. The provisions of subsection 212.1(1) will not apply to deem either of FORCO 1 or FORCO 2 to have received a dividend from Newco on the transfer of their respective Canco Reorganization Shares to Newco for sole consideration being Newco Common Shares as described in paragraph 28 above nor will it apply to reduce the PUC of the Newco Common Shares issued by Newco to each of FORCO 1 and FORCO 2 provided the amount added to the stated capital account of the Newco Common Shares issued by Newco does not exceed the PUC of the Canco Reorganization Shares as described in paragraph 29 above.

E. Subsection 85(1) will apply to the Butterfly Transfer of each property that is an eligible property owned by Canco at the time of the transfer to Newco, as described in paragraph 30 above, provided Canco and Newco file a valid election in respect of such transfer, as described in paragraph 31 above, such that the agreed amount in respect of each such property so transferred shall be deemed to be the proceeds of disposition to Canco and the cost thereof to Newco pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

F. The provisions of subsection 85(2.1) will not apply to reduce the PUC of the Newco Special Share to be issued to Canco by Newco as consideration for the Butterfly Transfer of property to Newco, as described in paragraph 30 above.

G. As a result of the redemption by Canco of the Canco Reorganization Shares as described in paragraph 33 above and the consequential redemption of the Newco Special Share as described in paragraph 34 above:

(a) by virtue of paragraphs 84(3)(a) and 84(3)(b):

(i) Canco will be deemed to have paid, and Newco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Canco Reorganization Shares exceeds the aggregate PUC thereof; and

(ii) Newco will be deemed to have paid, and Canco will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption of the Newco Special Share exceeds the PUC thereof;

(b) the taxable dividends deemed to have been received by Newco and Canco as a result of the redemptions referred to in paragraph (a) herein will be included in computing their respective incomes pursuant to paragraph 12(1)(j) and be deductible by each of them in computing its respective taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) and (2.4) of the Act will not apply to deny the subsection 112(1) deduction in respect of such dividends;

(c) the taxable dividends deemed to have been received by Newco and Canco as a result of the redemptions referred to in paragraph (a) herein will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of the "proceeds of disposition" in section 54; and

(d) by virtue of subsection 186(2) and paragraph 186(4)(a), Canco will be connected with Newco and Newco will be connected with Canco. Consequently, provided that neither Canco nor Newco is entitled to a dividend refund (within the meaning of subsection 129(1)) in respect of its taxation year in which it is deemed to pay the dividends referred to in subparagraphs (a)(i) and (ii) herein, neither of Canco nor Newco will be subject to Part IV tax under subsection 186(1) in respect of such dividend.

H. 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 shares in the circumstances described in subparagraph 55 (3.1)(b)(iii);

(d) an acquisition of property in the circumstances described in paragraph 55(3.1)(c); or

(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(d),

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

I. By virtue of the definition of "substantial interest" as set out under paragraph 191(2)(a), Newco will have a substantial interest in Canco immediately before the redemption of the Canco Reorganization Shares as described in paragraph 33 above and Canco will have a substantial interest in Newco immediately before the redemption of the Newco Special Share as described in paragraph 34 above. Consequently, no tax will be payable under either section 187.2 of Part IV.1 or section 191.1 of Part VI.1 in respect of:

(a) the dividend deemed to be paid by Newco to Canco upon the redemption of the Newco Special Share since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Canco as the recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of Newco as the payer of the particular dividend,

or

(b) the dividend deemed to have been paid by Canco to Newco upon the redemption of the Canco Reorganization Shares since such dividend will be an "excepted dividend" within the meaning assigned by paragraph (b) of the definition of "excepted dividend" in section 187.1 in the capacity of Newco as recipient of the particular dividend, and shall be an "excluded dividend" within the meaning of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) in the capacity of Canco as the payer of the particular dividend.

J. The extinguishment of the Canco Note as described in paragraph 34 above, will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1) and neither Canco nor Newco will realize any gain or incur any loss as a result of the transfer and assignment to Canco of the Canco Note by Newco and the resultant extinguishment and cancellation of the Canco Note as described in paragraph 34 above.

K. By virtue of subsection 87(1.1), the amalgamation of Newco and New Subco, as described in paragraph 36, will be an amalgamation within the meaning of subsection 87(1) with the result that provided that the shares Newco were capital property to each of FORCO 1 and FORCO 2 immediately before the amalgamation, each such holder will be deemed by paragraph 87(4)(a) to have disposed of its shares of Newco for proceeds equal to the adjusted cost base of such shares immediately before the amalgamation. For greater certainty, the provisions of paragraphs 87(4)(c), (d) and (e), will not apply to the amalgamation;

L. (a) The provisions of paragraph 1100(2.2)(a) of the Income Tax Regulations (the "Regulations") will apply in respect of any depreciable property acquired by Amalco as a result of the amalgamation such that, subject to paragraphs 1100(2.2)(f) and (g), paragraphs 1100(2.2)(h), (i) and (j) of the Regulations will apply to such property; and

(b) The provisions of paragraph 1102(14)(a) of the Regulations will apply in respect of any depreciable property acquired by Amalco as a result of the amalgamation so that any such property that is property of a prescribed class or a separate prescribed class of Newco or New Subco immediately before the amalgamation will be deemed to be property of that same prescribed class or a separate prescribed class, as the case may be, of Amalco.

M. Subsection 256(7) will apply with respect to the proposed acquisitions, redemptions, cancellation of shares and amalgamation described above, with the result that no person or group of persons will be regarded as having acquired control of Canco, New Subco, Newco or Amalco for purposes of the provisions of the Act referred to in the preamble to such subsection.

N. The amount, if any, of contributed surplus that may be created in Newco as a consequence of FORCO 1's and FORCO 2's transfer of their respective Canco Reorganization Shares to Newco for Newco Common Shares as described in paragraph 28 above, will, for purposes of clause 18(4)(a)(ii)(B), be considered as being contributed surplus that was contributed by a specified non-resident shareholder of Newco at the commencement of its second taxation year.

O. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply as a result of the proposed transactions described above, in and by themselves.

P. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions described above, in and by themselves, to re-determine the tax consequences confirmed herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 31, 1996 and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

Comments

1. Nothing in this ruling should be construed as confirmation, express or implied, that the CCRA has agreed to or reviewed the determination of the fair market value or ACB of any property or the PUC of any share referred to herein.

2. Nothing in this ruling should be construed as confirmation, express or implied, that the CCRA has agreed to or reviewed any income tax consequences relating to the facts or the proposed transactions described herein other than as specifically described in the rulings given above.

3. In the event of a subsequent disposition of any shares of any of the corporations referred to herein, nothing in this ruling should be construed as implying that the transactions described herein will not, for the purposes of subsection 55(3.1), be considered to be part of a series of transactions or events which includes such subsequent disposition of shares.

4. You have advised in paragraph 41 above, that, as part of a price adjustment clause with respect to any property the fair market value of which is relevant to the redemption of the Canco Reorganization Shares and the Newco Special Share, the share provisions relating to such shares will provide for an automatic retroactive adjustment, where necessary, to the redemption of those shares. Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the fair market value of the properties transferred and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling G above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its comming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CCRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

Yours truly,

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