2000 Ruling 2000-0040143 - Butterfly reorganization

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: Option granted by Transferee Corporation to its parent, a tax exempt entity, to acquire property of Transferee Corporation

Position: Depending on the terms of the option it could be a non-commercial option and section 69 would apply when option is exercised

Reasons: The granting of option would allow for future gains to be passed on to the tax exempt and any future losses would remain with the taxable entity

XXXXXXXXXX                                                             			2000-004014

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX ("XXXXXXXXXX/Aco")
XXXXXXXXXX ("XXXXXXXXXX/Bco")
XXXXXXXXXX ("XXXXXXXXXX/Cco")
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested various advance income tax rulings on behalf of the above-noted taxpayers. We acknowledge your letters of XXXXXXXXXX and our telephone conversations in connection herewith.

To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in the ruling requested in this letter is in any return of the taxpayers or related persons; is being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the taxpayers or related persons; is under objection by any of the taxpayers or related persons; is before the courts; or is the subject of a ruling relative to the taxpayers previously issued by the Directorate.

You advised that the proposed transactions described herein, will have no impact on outstanding tax liabilities of XXXXXXXXXX/Aco, XXXXXXXXXX/Bco or a related person.

DEFINITIONS

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

Non-Statutory Terms

(a) "XXXXXXXXXX/Aco Promissory Note 1" and "XXXXXXXXXX/Aco Promissory Note 2" means the non-interest bearing demand promissory notes issued by XXXXXXXXXX/Aco described in Paragraph 19;

(b) "XXXXXXXXXX/Aco Promissory Note 3" means the non-interest-bearing demand promissory note issued by XXXXXXXXXX/Aco to XXXXXXXXXX /Bco described in Paragraph 24;

(c) "XXXXXXXXXX/Aco Promissory Note 4" means the non-interest-bearing demand promissory note issued by XXXXXXXXXX/Aco to Newco described in Paragraph 27;

(d) "Newco Promissory Note" means the non-interest-bearing demand promissory note issued by Newco described in Paragraph 26;

(e) "Paragraph" means a numbered paragraph in this letter;

(f) "XXXXXXXXXX/Bco Promissory Note" means the non-interest-bearing demand promissory note issued by XXXXXXXXXX/Bco described in Paragraph 23; and

(g) "the Property" means the XXXXXXXXXX known as "XXXXXXXXXX" in which XXXXXXXXXX/Aco owns a XXXXXXXXXX undivided interest as tenant in common.

Statutory Terms

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

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

(c) "agreed amount" in respect of a property means the amount that the transferor and transferee of the property have agreed upon in their election under subsection 85(1) in respect of the property;

(d) XXXXXXXXXX;

(e) "CCRA" means, on or after November 1, 1999, the Canada Customs and Revenue Agency, and before November 1, 1999, Revenue Canada, Taxation;

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

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

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

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

(j) "excepted dividend" has the meaning assigned by section 187.1;

(k) "excluded dividend" has the meaning assigned by subsection 191(1);

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

(m) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

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

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

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

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

(r) "Regulations" means the Income Tax Regulations;

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

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

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

(v) "term preferred shares" has the meaning assigned by subsection 248(1); and

(w) "UCC" means the expression "undepreciated capital cost" which has the meaning assigned by subsection 13(21).

FACTS

1. XXXXXXXXXX/Cco is a XXXXXXXXXX corporation described under subparagraph 149(1)(o.2)(ii) and was incorporated under the laws of XXXXXXXXXX.

XXXXXXXXXX/Cco holds XXXXXXXXXX common shares in the capital of XXXXXXXXXX/Aco. The fair market value of the shares of XXXXXXXXXX/Aco held by XXXXXXXXXX/Cco exceeds their adjusted cost base to XXXXXXXXXX/Cco.

2. XXXXXXXXXX/Bco is a taxable Canadian corporation and a public corporation incorporated under the laws of Canada with letters patent dated XXXXXXXXXX.

XXXXXXXXXX/Bco holds XXXXXXXXXX common shares in the capital of XXXXXXXXXX/Aco. The fair market value of the shares of XXXXXXXXXX/Aco held by XXXXXXXXXX/Bco exceeds their adjusted cost base to XXXXXXXXXX/Bco.

3. XXXXXXXXXX/Aco is a taxable Canadian corporation incorporated under the laws of the province of XXXXXXXXXX. By virtue of the control of XXXXXXXXXX/Aco by XXXXXXXXXX/Bco, XXXXXXXXXX/Aco is not a private corporation.

The fiscal year-end of XXXXXXXXXX/Aco is XXXXXXXXXX.

4. Immediately before the transfer of property described in Paragraph 19 (the "Butterfly Transfers"), the property of XXXXXXXXXX/Aco will be classified into three types of property for the purposes of a distribution, as follows:

a) cash or near-cash property, comprising of any cash and deposits;

b) business property, comprising all of the assets of XXXXXXXXXX/Aco, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from a business other than a specified investment business and all accounts receivable and rights arising from prepaid expenses (referred to as "prepaid expenses"); and

(c) investment property, comprising all of the assets of XXXXXXXXXX/Aco, other than cash or near-cash property, any income from which would, for the purposes of the Act, be income from property or a specified investment business.

In determining the types of property of XXXXXXXXXX/Aco, real estate held for future development acquired approximately XXXXXXXXXX years ago will be classified as investment property. This property forms part of the XXXXXXXXXX site and is adjacent to the Property. It was intended that this property be used for the purpose of XXXXXXXXXX long-term leasing purposes. This construction has not proceeded and the property continues to be held for the purpose of constructing additional retail space for long-term leasing purposes.

The Butterfly Transfers will be carried out on a gross fair market value basis.

5. The liabilities of XXXXXXXXXX/Aco consist of accounts payable and other liabilities relating to a mortgage payable and operations of XXXXXXXXXX/Aco's XXXXXXXXXX undivided interest in the Property (collectively, the "Liabilities"). The Liabilities will exceed the total cost amount to XXXXXXXXXX/Aco of its assets at the time of the Butterfly Transfer.

6. The XXXXXXXXXX undivided interest in the Property not owned by XXXXXXXXXX/Aco is owned directly by XXXXXXXXXX/Cco. XXXXXXXXXX/Aco and XXXXXXXXXX/Cco operate the Property and the rental business relating to the Property pursuant to a co-tenancy agreement between XXXXXXXXXX/Aco and XXXXXXXXXX/Cco.

7. There are not, and will not be at any time prior to the completion of the proposed transactions described herein, any guarantee agreements in respect of any of the Newco (a corporation to be incorporated as described in Paragraph 17), XXXXXXXXXX/Bco or XXXXXXXXXX/Aco shares.

8. None of Newco, XXXXXXXXXX/Bco or XXXXXXXXXX/Aco has entered, or will enter, into a dividend rental agreement in respect of any of the shares to be redeemed as part of the proposed transactions described herein.

9. None of the shares of Newco, XXXXXXXXXX/Bco or XXXXXXXXXX/Aco will be issued or acquired as part of a series of transactions described in subsection 112(2.5).

10. Neither XXXXXXXXXX/Bco nor Newco will be a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation".

XXXXXXXXXX/Bco is a specified financial institution by virtue of the application of paragraph (g) of the definition "specified financial institution". Specifically, one or more subsidiaries of XXXXXXXXXX/Bco is a corporation described in paragraph (d) and/or (e) of the definition "specified financial institution".

XXXXXXXXXX/Bco is in the ordinary business of XXXXXXXXXX and does hold ownership interests in XXXXXXXXXX. The shares of XXXXXXXXXX/Aco were not acquired in the ordinary course of the XXXXXXXXXX business carried on by XXXXXXXXXX/Bco and were acquired as capital property of XXXXXXXXXX/Bco. The shares of XXXXXXXXXX/Aco held by XXXXXXXXXX/Bco are not described in paragraph (a) of the definition "term preferred share".

11. Except as described herein, none of XXXXXXXXXX/Aco, XXXXXXXXXX/Cco or XXXXXXXXXX/Bco or any corporation controlled by them, has acquired or will acquire any property in contemplation of and before the proposed transactions described above except as described herein.

12. XXXXXXXXXX/Cco and XXXXXXXXXX /Bco deal with each other at an arm's length and XXXXXXXXXX/Cco deals with XXXXXXXXXX/Aco at arm's length.

13. On XXXXXXXXXX , in a transaction unrelated to the proposed transactions, each of XXXXXXXXXX/Cco and XXXXXXXXXX/Bco purchased, for cash consideration, from XXXXXXXXXX. ("XXXXXXXXXX/Dco") and XXXXXXXXXX ("XXXXXXXXXX/Eco"), XXXXXXXXXX Common shares of XXXXXXXXXX/Aco, respectively. XXXXXXXXXX/Dco and XXXXXXXXXX/Eco had, since XXXXXXXXXX, sought to sell their minority interests in XXXXXXXXXX /Aco XXXXXXXXXX. The purchases of these minority interests were not part of the same series of transactions as the proposed transactions described herein and would have occurred regardless of whether the Butterfly Transfers took place.

14. Except as described herein, there is no intention to dispose of any of the shares of any of the corporations referred to herein.

15. Concurrently with the implementation of the proposed transactions each of Newco and XXXXXXXXXX/Aco will file an undertaking with XXXXXXXXXX regarding its status as a "XXXXXXXXXX" for purposes of the federal XXXXXXXXXX.

16. The authorized share capital of XXXXXXXXXX/Bco includes a class of preferred shares ("XXXXXXXXXX/Bco Preferred Shares") with the following attributes:

The XXXXXXXXXX/Bco Preferred Shares are non-voting, without nominal or par value, entitled to dividends in such amounts and at such times as may be declared in the discretion of the board of directors and are redeemable and retractable for an amount equal to $XXXXXXXXXX per share together with an amount equal to all dividends declared and unpaid on such shares up to the redemption date.

For purposes of subsection 191(4), the terms and conditions of the XXXXXXXXXX/Bco Preferred Shares specify an amount in respect of each such share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each such share is $XXXXXXXXXX (together with an amount equal to all dividends declared and unpaid on such shares up to the redemption date) and will not exceed the fair market value of the consideration for which each XXXXXXXXXX/Bco Preferred Shares is issued.

PROPOSED TRANSACTIONS

17. XXXXXXXXXX/Cco will incorporate a new corporation ("Newco") under the XXXXXXXXXX. Newco will be a taxable Canadian corporation and a private corporation.

The authorized share capital of Newco will consist of common shares without nominal or par value, Newco Preferred Shares and Director Preferred Shares. The Newco Preferred Shares and Director Preferred Shares will have the following attributes:

(a) Newco Preferred Shares

The Newco Preferred Shares will be with par value, non-voting, and will be entitled to a fixed preferential non-cumulative dividend at the rate of XXXXXXXXXX% of the redemption amount of such shares. The Newco Preferred Shares will be redeemable and retractable for an amount equal to the fair market value of the property for which the shares are issued.

For purposes of subsection 191(4), the terms and conditions of the Newco preferred shares will specify an amount in respect of each such share, including an amount for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each such share, at the time of issuance, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the fair market value of the consideration for which each such share is issued.

(b) Director Preferred Shares

Holders shall not be entitled to vote nor be entitled to any dividends. On a liquidation, winding-up, dissolution or other distribution of the assets of Newco, the holders of Director Preferred Shares shall be entitled to receive $XXXXXXXXXX per share, in priority over holders of common shares. Other than a right to receive this $XXXXXXXXXX per share on a liquidation, winding-up, dissolution or other distribution of the assets of Newco, holders of Director Preferred Shares shall not be entiled to any other assets of Newco. Pursuant to XXXXXXXXXX, the articles of Newco shall provide that every director of Newco, to qualify as a director, must hold 1 Director Preferred Share in the capital of Newco.

On incorporation of Newco, each director of Newco will be issued 1 Director Preferred Share and will subscribe for each such share for $XXXXXXXXXX.

18. XXXXXXXXXX/Cco will transfer, at fair market value, all of the shares of XXXXXXXXXX/Aco (XXXXXXXXXX common shares) that it holds to Newco. In consideration for such transfer, Newco will issue to XXXXXXXXXX/Cco common shares with a fair market value equal to the fair market value at the time of the transfer of the XXXXXXXXXX/Aco common shares.

Newco will add to the capital account maintained for its common shares an amount equal to the fair market value of the XXXXXXXXXX/Aco common shares transferred by XXXXXXXXXX/Cco to Newco.

19. XXXXXXXXXX/Aco will sell, at fair market value, to each of XXXXXXXXXX /Bco and Newco a portion of its cash and near-cash property, business property and investment property. As a result of such transfers, the fair market value of the cash and near-cash property, business property and investment property, determined in the manner described in Paragraph 4, received by XXXXXXXXXX/Bco or Newco, as the case may be, will be equal to the proportion of the fair market value of all of the cash and near-cash property, business property and investment property, respectively, owned by XXXXXXXXXX/Aco immediately before the transfer, that:

(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of XXXXXXXXXX /Aco owned by XXXXXXXXX /Bco or Newco, as the case may be, at that time

is of

(b) the fair market value, immediately before the transfer, of all the issued shares of the capital stock of XXXXXXXXXX /Aco at that time.

XXXXXXXXXX/Aco will also:

(a) issue to XXXXXXXXXX /Bco the XXXXXXXXXX/Aco Promissory Note 1 having a principal amount equal to the amount by which the principal amount of XXXXXXXXXX% of the Liabilities assumed by XXXXXXXXXX/Bco exceeds the aggregate of amounts each of which is an amount determined in respect of each property included in the properties transferred to XXXXXXXXXXBco equal to, where the particular property is an eligible property in respect of which an election under subsection 85(1) is made, the agreed amount in such election, and where the particular property is one in respect of which no such election is made, the fair market value of the property; and

(b) issue to Newco the XXXXXXXXXX /Aco Promissory Note 2 having a principal amount equal to the amount by which the principal amount of XXXXXXXXXX% of the Liabilities assumed by Newco exceeds the aggregate of amounts each of which is an amount determined in respect of each property included in the properties transferred to Newco equal to, where the particular property is an eligible property in respect of which an election under subsection 85(1) is made, the agreed amount in such election, and where the particular property is one in respect of which no such election is made, the fair market value of the property.

In payment of the purchase price for the sale of the properties of XXXXXXXXXX/Aco to XXXXXXXXXX/Bco and issuance of the XXXXXXXXXX/Aco Promissory Note 1, XXXXXXXXXX/Bco will:

(a) assume XXXXXXXXXX% of the Liabilities; and

(b) issue to XXXXXXXXXX/Aco the XXXXXXXXXX/Bco Preferred Shares with an aggregate redemption amount equal to the aggregate of the fair market value of the properties of XXXXXXXXXX/Aco transferred to XXXXXXXXXX/Bco and the principal amount of the XXXXXXXXXX/Aco Promissory Note 1 less the principal amount of the Liabilities assumed by XXXXXXXXXX/Bco under paragraph (a) above.

In payment of the purchase price for the sale of the properties of XXXXXXXXXX /Aco to Newco and issuance of the XXXXXXXXXX/Aco Promissory Note 2, Newco will:

(a) assume XXXXXXXXXX% of the Liabilities; and

(b) issue to XXXXXXXXXX/Aco the Newco Preferred Shares with an aggregate redemption amount equal to the aggregate of the fair market value of the properties of XXXXXXXXXX/Aco transferred to Newco and the principal amount of the XXXXXXXXXX/Aco Promissory Note 2 less the principal amount of the Liabilities assumed by Newco under paragraph (a) above.

XXXXXXXXXX/Bco will add to the stated capital account maintained for its XXXXXXXXXX/Bco Preferred Shares an amount equal to the amount by which the aggregate of:

(a) the cost amounts, in the case of eligible properties,

(b) the fair market value, in the case of other properties, and

(c) the amount of the XXXXXXXXXX/Aco Promissory Note 1 transferred to XXXXXXXXXX/Bco

exceeds

(d) the amount equal to XXXXXXXXXX% of the Liabilities assumed by XXXXXXXXXX/Bco.

Newco will add to the stated capital account maintained for its Newco Preferred Shares an amount equal to the amount by which the aggregate of:

(a) the cost amounts, in the case of eligible properties,

(b) the fair market value, in the case of other properties, and

(c) the amount of the XXXXXXXXXX/Aco Promissory Note 2 transferred to XXXXXXXXXX/Bco

exceeds

(d) the amount equal to XXXXXXXXXX % of the Liabilities assumed by Newco.

20. XXXXXXXXXX/Aco and XXXXXXXXXX/Bco will jointly elect, in prescribed form within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of XXXXXXXXXX/Aco that is an eligible property transferred to XXXXXXXXXX/Bco. The agreed amount in respect of each eligible property of XXXXXXXXXX/Aco transferred to XXXXXXXXXX/Bco will not be less than the lesser of the cost amount to XXXXXXXXXX/Aco of the particular property and the fair market value of the particular property at the time of transfer.

The portion of the Liabilities assumed by XXXXXXXXXX/Bco will be allocated (based on their principal amount) to specific properties transferred by XXXXXXXXXX/Aco to XXXXXXXXXX/Bco and the XXXXXXXXXX/Aco Promissory Note 1. The principal amount of Liabilities to be allocated to a property in respect of which an election under subsection 85(1) will be made will not exceed the elected amount in respect of the particular property. The principal amount of liabilities allocated to other property will not exceed the fair market value of the particular property.

21. XXXXXXXXXX/Aco and Newco will jointly elect, in prescribed form within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each property of XXXXXXXXXX/Aco that is an eligible property transferred to Newco. The agreed amount in respect of each eligible property of XXXXXXXXXX/Aco transferred to Newco will not be less than the lesser of the cost amount to XXXXXXXXXX/Aco of the particular property and the fair market value of the particular property at the time of transfer.

The portion of the Liabilities assumed by Newco will be allocated (based on their principal amount) to specific properties transferred by XXXXXXXXXX/Aco to Newco and the XXXXXXXXXX/Aco Promissory Note 2. The principal amount of Liabilities to be allocated to a property in respect of which an election under subsection 85(1) will be made will not exceed the elected amount in respect of the particular property. The principal amount of liabilities allocated to other property will not exceed the fair market value of the particular property.

22. XXXXXXXXXX/Aco will continue to hold legal title to an XXXXXXXXXX undivided interest as tenant in common in the Property. XXXXXXXXXX/Aco will execute declarations of trust that it holds XXXXXXXXXX of the interest in the Property as a bare trustee for XXXXXXXXXX /Bco and XXXXXXXXXX of the interest in the Property as a bare trustee for Newco.

23. XXXXXXXXXX/Bco will redeem the XXXXXXXXXX /Bco Preferred Shares held by XXXXXXXXXX/Aco in consideration for the issuance of a non-interest-bearing demand promissory note (the "XXXXXXXXXX/Bco Promissory Note") having a principal amount and fair market value equal to the redemption price of the XXXXXXXXXX/Bco Preferred Shares.

24. XXXXXXXXXX/Aco will purchase for cancellation all of the common shares in the capital of XXXXXXXXXX/Aco held by XXXXXXXXXX /Bco at fair market value in consideration for the issuance by XXXXXXXXXX/Aco to XXXXXXXXXX /Bco of a non-interest-bearing demand note (the "XXXXXXXXXX/Aco Promissory Note.3") having a principal mount equal to the fair market value of the XXXXXXXXXX/Aco common shares so purchased.

25. The XXXXXXXXXX/Aco Promissory Note 1 and the XXXXXXXXXX/Aco Promissory Note 3 will be repaid by set off against the XXXXXXXXXX/Bco Promissory Note and all the notes will be cancelled.

26. Newco will redeem the Newco Preferred Shares held by XXXXXXXXXX/Aco in consideration for the issuance of a non-interest-bearing demand promissory note ("Newco Promissory Note") having a principal amount and fair market value equal to the redemption price of the Newco Preferred Shares.

27. XXXXXXXXXX/Aco will purchase for cancellation all of the common shares in the capital of XXXXXXXXXX/Aco held by Newco at fair market value in consideration for the issuance by XXXXXXXXXX/Aco to Newco of a non-interest-bearing demand note (the "XXXXXXXXXX/Aco Promissory Note 4") having a principal amount equal to the fair market value of the XXXXXXXXXX/Aco common shares so purchased.

28. The XXXXXXXXXX/Aco Promissory Note 2 and the XXXXXXXXXX/Aco Promissory Note 4 will set off against the Newco Promissory Note and all the notes will be cancelled.

29. Each of XXXXXXXXXX/Cco and XXXXXXXXXX /Bco will subscribe for 1 common share in the capital of XXXXXXXXXX/Aco for cash consideration of $XXXXXXXXXX per share.

30. XXXXXXXXXX/Cco, Newco, XXXXXXXXXX/Bco and XXXXXXXXXX/Aco (as to its bare trustee and agent status) will enter into a co-ownership agreement in respect of their respective ownership interests in the Property and their ownership interest in the other assets previously owned by XXXXXXXXXX/Aco. XXXXXXXXXX/Aco's only function will be to hold legal title to the Property and certain other assets previously owned by XXXXXXXXXX/Aco and it will not be able to carry out any actions with regard to such properties without instructions from Newco or XXXXXXXXXX/Bco, as the case may be, who are the beneficial owners of such properties from time to time.

PURPOSE OF THE PROPOSED TRANSACTIONS

31. The Property is, indirectly and directly, owned by XXXXXXXXXX/Bco and XXXXXXXXXX/Cco as to 50% each. The purpose of the proposed transaction is to simplify the ownership of the Property as between the two parties, XXXXXXXXXX/Bco and XXXXXXXXXX/Cco. XXXXXXXXXX/Bco wishes to simplify its ownership of the Property through direct beneficial ownership of the Property without the interposition of XXXXXXXXXX/Aco.

32. XXXXXXXXXX/Aco will remain the legal owner of the Property and will not be wound up, XXXXXXXXXX, in respect of the proposed transfers of interests in the Property as described in the proposed transactions.

RULINGS

Provided that the above statements are accurate and constitute complete disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, we confirm the following:

A. The provisions of subsection 85(1) will apply to:

(i) the transfer to XXXXXXXXXX/Bco of the properties of XXXXXXXXXX/Aco that are eligible properties, in respect of which an election under subsection 85(1) is made, as described in Paragraph 20; and

(ii) the transfer to Newco of the properties of XXXXXXXXXX/Aco that are eligible properties, in respect of which an election under subsection 85(1) is made, as described in Paragraph 21

such that the agreed amount in respect of each transfer of such property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a) and in respect of depreciable property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5). For purposes of the joint elections described in Paragraphs 20 and 21, the reference to "undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition ..." in subparagraph 85(1)(e)(i) will be read to mean the portion of the UCC to the taxpayer of all the property of that class that the capital cost of the property immediately before the disposition is of the capital cost of all property of that class immediately before the disposition.

For greater certainty, paragraph 85(1)(e.2) will not apply to any of the transfers.

B. On the redemption of the XXXXXXXXXX/Bco Preferred Shares held by XXXXXXXXXX/Aco, as described in Paragraph 23, the redemption of the Newco Preferred Shares held by XXXXXXXXXX/Aco, as described in Paragraph 26, the purchase for cancellation of all the common shares of XXXXXXXXXX /Aco held by XXXXXXXXXX/Bco, as described in Paragraph 24 and the purchase for cancellation of all the common shares of XXXXXXXXXX/Aco held by Newco, as described in Paragraph 27,(i) the amount if any, by which the amount paid to redeem or purchase the particular shares, as the case may be, exceeds the paid-up capital of the particular shares immediately before the redemption or the purchase for cancellation:

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

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

(c) will be included in each recipient's income pursuant to paragraph 12(1)(j);

(ii) to the extent that a dividend described in (i)(b) above is a taxable dividend, such a dividend will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividend is deemed to have been received, and, for greater certainty, such deduction will not be precluded by any of subsections 112(2.1), (2.2), (2.3) or (2.4); and

(iii) by virtue of the application of paragraph (j) of the definition of "proceeds of disposition" in section 54, the amount of a deemed dividend described in (i)(b) above will be excluded from the proceeds of disposition of the share, and any loss arising from the disposition of the share will be reduced by the amount of such dividends pursuant to subsection 112(3).

C. No taxes under Part IV of the Act will be payable in respect of a dividend described in Ruling B above.

D. Part IV.1 of the Act will not apply to the deemed dividends described in Ruling B.

E. Part VI.1 of the Act will not apply to the deemed dividends described in Ruling B.

F. By virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the deemed dividends described in Ruling B above, provided that, as part of the series of transactions that include the proposed transactions described herein, there is no:

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

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

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

(iv) acquisition of property in the circumstances described in paragraph 55(3.1)(d)

which has not been described herein.

G. On the transfer of depreciable assets by XXXXXXXXXX/Aco to XXXXXXXXXX/Bco or Newco, as the case may be, as described in Paragraph 19:

(i) the provisions of Regulation 1102(14) will apply to deem each depreciable property transferred to XXXXXXXXXX/Bco or Newco, as the case may be, to be property of the same prescribed class as that of XXXXXXXXXX/Aco immediately before the transfer; and

(ii) in respect of each depreciable property acquired by XXXXXXXXXX/Bco or Newco, as the case may be, in respect of which the conditions described in Regulation 1100(2.2)(f) or (g) are met, no amount will be included under Regulation 1100(2)(a) in respect of that property.

H. Provided that XXXXXXXXXX/Bco continues to use the property acquired from XXXXXXXXXX/Aco as described in Paragraph 19, including its XXXXXXXXXX undivided interest in the Property, for the purpose of gaining or producing income (other than income which is exempt from taxation) from such property and XXXXXXXXXX/Bco has a legal obligation to pay interest in respect of Liabilities assumed by XXXXXXXXXX/Bco (other than liabilities in respect of which XXXXXXXXXX/Aco was not entitled to deduct interest under paragraph 20(1)(c)), any such interest paid in the year or payable in respect of the year (depending on the method regularly followed by XXXXXXXXXX/Bco in computing its income for the purposes of the Act) by XXXXXXXXXX/Bco in respect of such liabilities, not in excess of a reasonable amount, will be deductible in computing the income of XXXXXXXXXX/Bco under paragraph 20(1)(c).

I. Provided that Newco continues to use the property acquired from XXXXXXXXXX/Aco as described in Paragraph 19, including its XXXXXXXXXX undivided interest in the Property, for the purpose of gaining or producing income (other than income which is exempt from taxation) from such property and Newco has a legal obligation to pay interest in respect of Liabilities assumed by Newco (other than liabilities in respect of which XXXXXXXXXX/Aco was not entitled to deduct interest under paragraph 20(1)(c)), any such interest paid in the year or payable in respect of the year (depending on the method regularly followed by Newco in computing its income for the purposes of the Act) by Newco in respect of such liabilities, not in excess of a reasonable amount, will be deductible in computing the income of Newco under paragraph 20(1)(c).

J. The settlement by way of set off of the XXXXXXXXXX/Aco Promissory Note 1 and the XXXXXXXXXX/Aco Promissory Note 3 and the XXXXXXXXXX/Bco Promissory Note described in Paragraph 25 will not give rise to a forgiven amount.

K. The settlement by way of set off of the XXXXXXXXXX/Aco Promissory Note 2 and the XXXXXXXXXX/Aco Promissory Note 4 and the Newco Promissory Note described in Paragraph 28 will not give rise to a forgiven amount.

L. The provisions of subsection 85(2.1) will apply to reduce the paid-up capital of the common shares issued by Newco to XXXXXXXXXX/Cco in respect of the transfer of the XXXXXXXXXX common shares of XXXXXXXXXX/Aco by XXXXXXXXXX/Cco to Newco described in Paragraph 18.

M. The provisions of subsections 15(1), 56(2), 69(11), 69(4) and 246(1), will not be applied as a result of the proposed transactions, in and by themselves.

N. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine any of the taxation consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 issued by CCRA and are binding provided that the proposed transactions are completed before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.

COMMENTS

Nothing in this letter should be construed as implying that CCRA has agreed to or accepted:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or the paid-up capital of any shares; or

(b) any tax consequences arising from the facts or proposed transactions described herein other than those specifically confirmed in the rulings given.

Yours truly,

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

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