2000 Ruling 2000-0040663 - 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: Whether to look-thru significant holdings in public corporations to determine types of property for purposes of "butterfly" and classification of types of property of such holdings

Position: No look-thru and shares will be classified as investment property for purposes of "butterfly".

Reasons: Even though holdings are significant it is less than 20% and neither the taxpayer nor persons related to the taxpayer are on the board or participate in the decision- making process of these public corporations. Shares are held as long-term investments.

XXXXXXXXXX 2000-004066

Attention: XXXXXXXXXX

XXXXXXXXXX , 2000

Dear Sirs:

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

We are writing in response to your letter of XXXXXXXXXX in which you requested advance income tax rulings on behalf of the above-noted taxpayers. We acknowledge your letter of XXXXXXXXXX and our telephone conversations in connection herewith.

We understand that to the best of your knowledge and that of XXXXXXXXXX/Cco, XXXXXXXXXX/Aco, XXXXXXXXXX/Dco and XXXXXXXXXX/Bco none of the issues contained herein:

(a) is in an earlier return of XXXXXXXXXX/Cco, XXXXXXXXXX/Aco, XXXXXXXXXX/Dco or XXXXXXXXXX/Bco or a related person;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of XXXXXXXXXX/Cco, XXXXXXXXXX/Aco, XXXXXXXXXX/Dco or XXXXXXXXXX/Bco or a related person;

(c) is under objection by XXXXXXXXXX/Cco, XXXXXXXXXX/Aco, XXXXXXXXXX/Dco or XXXXXXXXXX/Bco or a related person;

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

(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

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

DEFINITIONS

In this letter unless otherwise expressly stated:

(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 provisions of the Act;

(b) XXXXXXXXXX;

(c) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

(d) "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;

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

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

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

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

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

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

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

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

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

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

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

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

(q) "stated capital" means stated capital as that expression is used in the XXXXXXXXXX;

and

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

FACTS

1. XXXXXXXXXX/Aco is a corporation incorporated under the laws of the province of XXXXXXXXXX. XXXXXXXXXX/Aco is a Canadian-controlled private corporation and a taxable Canadian corporation. XXXXXXXXXX/Aco carries on various business and investment activities either on its own account or through wholly-owned subsidiaries. It is estimated that on XXXXXXXXXX, the value of XXXXXXXXXX/Aco's assets, net of liabilities, will be approximately $XXXXXXXXXX. The marketable security portfolio held by XXXXXXXXXX/Aco amounts to approximately $XXXXXXXXXX and of that, nearly XXXXXXXXXX% represents shares held in XXXXXXXXXX.

2. XXXXXXXXXX/Aco's authorized share capital is as follows:

(i) XXXXXXXXXX voting common shares without nominal or par value;

(ii) XXXXXXXXXX preference XXXXXXXXXX% cumulative voting redeemable preference shares that are redeemable at their stated capital amount; and

(iii) XXXXXXXXXX% cumulative non-voting redeemable preference shares that are redeemable at their stated capital amount.

XXXXXXXXXX/Aco has XXXXXXXXXX preferred shares issued and outstanding, with a total stated capital and paid-up capital of $XXXXXXXXXX, which are held by XXXXXXXXXX, a resident of Canada.

The issued and outstanding common shares of XXXXXXXXXX/Aco are held by XXXXXXXXXX indirectly through their respective holding companies, XXXXXXXXXX/Dco, XXXXXXXXXX/Cco and XXXXXXXXXX/Bco, as follows:

Shareholder Controlled by: Number of shares held

XXXXXXXXXX /Dco XXXXXXXXXX
XXXXXXXXXX /Cco XXXXXXXXXX
XXXXXXXXXX /Bco XXXXXXXXXX

All of the common shares of XXXXXXXXXX /Aco represent capital property to its shareholders.

3. XXXXXXXXXX are brothers and sister and residents of Canada for purposes of the Act.

4. XXXXXXXXXX/Aco had RDTOH of approximately $XXXXXXXXXX and a capital dividend account of approximately $XXXXXXXXXX as at XXXXXXXXXX. It is expected that XXXXXXXXXX/Aco will have taxable income of approximately $XXXXXXXXXX at its year-end on XXXXXXXXXX which will result in an increase to its RDTOH. XXXXXXXXXX/Aco's capital dividend account is estimated to be approximately $XXXXXXXXXX at that time.

Types of Property - General

5. The types of property for the purposes of the distribution of XXXXXXXXXX/Aco, immediately before the transfers of property described in Paragraph 18 (the "Butterfly Transfer"), will be determined on a consolidated look-through basis by including the appropriate pro-rata share of assets of any corporation or partnership over which XXXXXXXXXX/Aco has the ability to exercise significant influence and will be properties of the following types:

(a) cash or near-cash property comprising of all the current assets for financial statement purposes including any cash, deposits, accounts receivable, inventory and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");

(b) business property including goodwill and intangible assets relating to the business of each corporation, comprising of all of the assets of each corporation, 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

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

For greater certainty, any tax accounts, such as the balance of any RDTOH or capital dividend account of XXXXXXXXXX/Aco will not be considered property for purposes of the Butterfly Transfer.

For this purpose, XXXXXXXXXX/Aco will be considered to have significant influence over a particular corporation or partnership if it has the ability to exercise significant influence, within the guidelines provided by Section 3050 of the CICA Handbook, over that corporation or partnership or if any other corporation or partnership over which XXXXXXXXXX/Aco has significant influence over the particular corporation or partnership.

6. In determining, on a consolidated basis, the net fair market value of its cash or near-cash property, business property, and any investment property immediately before the Butterfly Transfer, liabilities of XXXXXXXXXX/Aco will be deducted in the calculation of the net fair market value of each such type of property of XXXXXXXXXX/Aco in the following manner:

(a) current liabilities of XXXXXXXXXX/Aco will be allocated to cash or near-cash property to the extent of the fair market value of the cash or near-cash property;

(b) liabilities of XXXXXXXXXX/Aco, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its fair market value. Liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net fair market value of such type of property after the allocation of liabilities to a particular property, as described herein; and

(c) any liabilities ("excess unallocated liabilities"), that remain after the allocations described in steps (a) and (b) are made (including excess current liabilities), will then be allocated to the business property and any investment property of XXXXXXXXXX/Aco on a consolidated basis based on the relative net fair market value of each type of property prior to the allocation of such excess unallocated liabilities.

For greater certainty, current liabilities of XXXXXXXXXX/Aco will include taxes payable for year-ends up to and including XXXXXXXXXX.

7. The classification of the types of property of XXXXXXXXXX/Aco can be summarized as follows:

(a) marketable securities and current assets will be classified as cash or near-cash property;

(b) XXXXXXXXXX assets, automobiles and furniture and fixtures will be classified as business property; and

(c) holdings in the XXXXXXXXXX will be classified as investment property.

Types of Property - Specific

8. The assets of XXXXXXXXXX/Aco include cash balances denominated in both Canadian and U.S. dollars, marketable securities, shares of wholly owned private companies, accounts and notes receivable, and other business assets more fully described below. The more significant marketable securities are:

(a) an approximately XXXXXXXXXX% interest in the common shares of the XXXXXXXXXX;

(b) an approximately XXXXXXXXXX% interest in the common shares of XXXXXXXXXX;

(c) approximately XXXXXXXXXX% of the XXXXXXXXXX shares and XXXXXXXXXX% of the XXXXXXXXXX shares of XXXXXXXXXX; and

(d) approximately XXXXXXXXXX% of the XXXXXXXXXX common shares and XXXXXXXXXX% of the XXXXXXXXXX " shares of XXXXXXXXXX.

All marketable securities (which, for greater certainty, do not include the shares of XXXXXXXXXX), together with cash balances, accrued interest, accounts receivable and a note receivable from XXXXXXXXXX will be categorized as cash and near-cash assets. The current of liabilities of XXXXXXXXXX/Aco include approximately $XXXXXXXXXX owing to shareholders and nominal trade payables.

XXXXXXXXXX.

The shares held by XXXXXXXXXX/Aco in XXXXXXXXXX will be classified as investment property

9. XXXXXXXXXX/Aco owns all of the shares of the following companies:

(a) XXXXXXXXXX ("XXXXXXXXXX/Eco") is a corporation incorporated under the laws of XXXXXXXXXX.

The issued and outstanding shares of XXXXXXXXXX/Eco consist of XXXXXXXXXX common shares and XXXXXXXXXX preferred shares.

(b) XXXXXXXXXX ("XXXXXXXXXX/Fco") is a corporation incorporated under the laws of XXXXXXXXXX.

The issued and outstanding shares of XXXXXXXXXX/Fco consist of XXXXXXXXXX common shares and XXXXXXXXXX preferred shares.

(c) XXXXXXXXXX ("XXXXXXXXXX/Gco") is a corporation incorporated under the laws of the XXXXXXXXXX /Gco also has cash, marketable securities, accrued interest, and accounts and notes receivable.

The issued and outstanding shares of XXXXXXXXXX/Gco consist of XXXXXXXXXX common shares.

(d) XXXXXXXXXX ("XXXXXXXXXX/Hco") is a corporation incorporated under the laws of XXXXXXXXXX/Hco is currently funded by way of loans from XXXXXXXXXX/Aco and in turn XXXXXXXXXX/Hco has made loans to XXXXXXXXXX/Gco.

The issued and outstanding shares of XXXXXXXXXX/Hco consist of XXXXXXXXXX common shares.

The interest of XXXXXXXXXX/Aco in any other private company over which XXXXXXXXXX/Aco, directly or indirectly, has the ability to exercise significant influence is inactive and valueless.

10. XXXXXXXXXX/Aco, XXXXXXXXXX/Bco, XXXXXXXXXX/Cco, XXXXXXXXXX/Dco and Newco (a corporation to be incorporated as described in Paragraph 15) are not and will not be specified financial institutions.

11. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be the subject of a guarantee agreement.

12. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) is or will be the subject of a dividend rental agreement.

None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) has been or will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5).

PROPOSED TRANSACTIONS

13. The issued and outstanding common shares of each of XXXXXXXXXX/Eco, XXXXXXXXXX/Fco and XXXXXXXXXX /Hco will be split such that the number of common shares issued on the split in each case will be divisible by three. In each case, there will be no change in the total capital represented by the issue, or in the interest or rights of any shareholder as a result of the split. The purpose of the stock split is to allow for the transfer of the number of shares of each of XXXXXXXXXX/Eco, XXXXXXXXXX/Fco, XXXXXXXXXX/Hco and XXXXXXXXXX/Gco, when carrying out the Butterfly Transfer, without resorting to a fraction of a share.

14. Each of XXXXXXXXXX/Eco, XXXXXXXXXX/Fco, XXXXXXXXXX/Hco and XXXXXXXXXX/Gco will, by articles of amendment or otherwise, create a new class of preferred shares ("XXXXXXXXXX preferred Shares") that are voting, non-participating and have a nominal redemption amount. XXXXXXXXXX/Aco will subscribe for and each of XXXXXXXXXX/Eco, XXXXXXXXXX/Fco, XXXXXXXXXX/Hco and XXXXXXXXXX/Gco will issue to XXXXXXXXXX/Aco a number of the non-participating preferred shares equal in number to the outstanding common shares for an amount equal to their redemption amount.

15. XXXXXXXXXX/Bco will incorporate a new corporation ("Newco") under the XXXXXXXXXX. Newco will be a taxable Canadian corporation and a Canadian-controlled private corporation.

The authorized share capital of Newco will consist of an unlimited number of common shares and an unlimited number of XXXXXXXXXX preferred shares. The Newco XXXXXXXXXX preferred shares will be non-voting, entitled to a non-cumulative dividend at the rate of XXXXXXXXXX% of the redemption amount, and redeemable at the option of the corporation or the holder for an amount equivalent to the fair market value of the property received by the corporation on the issuance of the preferred shares.

No shares will be issued on incorporation.

16. XXXXXXXXXX/Bco will transfer, at fair market value, its XXXXXXXXXX common shares of XXXXXXXXXX/Aco to Newco. In consideration for such transfer, Newco will issue to XXXXXXXXXX/Bco 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 stated capital account maintained for its common shares an amount not exceeding the adjusted cost base of the XXXXXXXXXX/Aco common shares to XXXXXXXXXX/Bco.

17. XXXXXXXXXX/Bco and Newco will jointly elect in prescribed form within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the transfer of the XXXXXXXXXX/Aco common shares will be equal to the adjusted cost base to XXXXXXXXXX/Bco immediately before the transfer, which amount will be less than the fair market value of such shares.

18. XXXXXXXXXX/Aco will transfer to Newco a portion of its cash or near-cash property, business property and investment property including a number of shares of each of XXXXXXXXXX/Eco, XXXXXXXXXX/Fco, XXXXXXXXXX/Gco and XXXXXXXXXX/Hco. As a result of such transfers, the net fair market value of the cash or near-cash property, business property and investment property received by Newco determined in the manner described in Paragraph 5 (after allocating and deducting liabilities, in the manner described in Paragraph 6), will approximate the proportion (the "XXXXXXXXXX/Bco Proportion") of the net fair market value of each type of property of XXXXXXXXXX/Aco, determined in the manner described in Paragraph 5 (after allocating and deducting liabilities, in the manner described in Paragraph 6), immediately before the transfer, that:

(a) the fair market value, immediately before the transfer, of the shares of XXXXXXXXXX/Aco owned by XXXXXXXXXX/Bco, at that time

is of

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

For purpose of this letter, the phrase "approximate the proportion", means within one percent of the XXXXXXXXXX/Bco Proportion expressed as a percentage of the XXXXXXXXXX/Bco Proportion.

The interest in the XXXXXXXXXX/Aco subsidiaries which will be transferred to Newco will consist of one-third of their common shares and XXXXXXXXXX preferred shares (none of the XXXXXXXXXX preferred shares, created as described in Paragraph 14, will be transferred).

In consideration for such transfers, Newco will issue to XXXXXXXXXX/Aco XXXXXXXXXX preferred shares with a redemption amount equal to the fair market value of the properties at the time of the transfer less the amount of liabilities assumed by Newco. The liabilities assumed by Newco, in respect of eligible properties transferred, will not exceed the aggregate of the agreed amounts in respect of such properties.

For the purposes of subsection 191(4), the terms and conditions of the XXXXXXXXXX preferred shares of Newco issued will specify an amount in respect of each such share for which the share is to be redeemed, acquired or cancelled. The amount to be specified in respect of each XXXXXXXXXX preferred share, at the time of its issuance by a resolution to be made by the board of directors of Newco, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the fair market value of the property received by Newco as consideration for such a share. The agreement between Newco and XXXXXXXXXX/Aco pursuant to which the Newco XXXXXXXXXX preferred shares will be issued will specify a redemption price expressed as a dollar amount.

Newco will add to the stated capital account maintained for its XXXXXXXXXX preferred shares an amount not to exceed the amount by which the aggregate of the cost amounts, in the case of eligible properties, and the fair market value, in the case of other properties, of the properties transferred to Newco exceeds the liabilities assumed by Newco.

19. In respect of the transfers of property described in Paragraph 18, XXXXXXXXXX/Aco and Newco will jointly elect, within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer to Newco of each property that is an eligible property. The agreed amount for the purposes of subsection 85(1) in respect of such property will be:

(a) where the particular property is inventory or capital property (other than depreciable property of a prescribed class), the lesser of the cost amount of the property to XXXXXXXXXX/Aco immediately before the transfer and the fair market value of such property; and

(b) where the particular property is depreciable property of a prescribed class, the least of the amounts specified in subparagraphs 85(1)(i), (ii) and (iii).

The agreed amount in respect of each of the properties so transferred will be less than or equal to its FMV at the time of the transfer.

20. Following the Butterfly Transfer, XXXXXXXXXX/Aco will purchase for cancellation, at fair market value, its common shares held by XXXXXXXXXX/Bco in two stages:

(a) in the first stage, XXXXXXXXXX/Aco will purchase a sufficient number of common shares or part thereof which will result in a deemed dividend, pursuant to the provisions of subsection 84(3), equal to one third of XXXXXXXXXX/Aco's capital dividend account immediately before that time, which XXXXXXXXXX/Aco will elect, pursuant to subsection 83(2) to have been paid from its capital dividend account; and

(b) in the second stage, XXXXXXXXXX/Aco will purchase the balance of the its common shares held by XXXXXXXXXX/Bco.

XXXXXXXXXX/Aco will issue to XXXXXXXXXX/Bco as consideration for the purchase of its common shares a non-interest-bearing demand promissory note having a principal amount equal to the fair market value of the shares purchased (the "XXXXXXXXXX/Aco Note").

21. The transactions described in Paragraph 13 to Paragraph 20 will take place on or prior to XXXXXXXXXX.

22. On XXXXXXXXXX, Newco will redeem its XXXXXXXXXX preferred shares owned by XXXXXXXXXX/Aco and will issue to XXXXXXXXXX/Aco a non-interest-bearing demand promissory note (the "Newco Note") having a principal amount and fair market value equal to the redemption price of the XXXXXXXXXX preferred shares.

23. The Newco Note will be set off against the XXXXXXXXXX/Aco Note and the notes will be cancelled.

24. Immediately following the redemption of the Newco XXXXXXXXXX shares held by XXXXXXXXXX, XXXXXXXXX /Bco and Newco (referred to in this paragraph as "predecessor corporations") will amalgamate under the provisions of the XXXXXXXXXX to form a new corporation (XXXXXXXXXX/Bco or the new corporation resulting from the amalgamation will be referred to as XXXXXXXXXX Bco as the context dictates) in such a manner that:

(a) all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations immediately before the merger will become property of XXXXXXXXXX/Bco by virtue of the merger;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of XXXXXXXXXX/Bco by virtue of the merger; and

(c) all shares of Newco will be cancelled on the amalgamation and the shareholders of XXXXXXXXXX/Bco will remain shareholders of XXXXXXXXXX /Bco with no shares of XXXXXXXXXX/Bco being issued on the amalgamation.

The amalgamation of XXXXXXXXXX/Bco and Newco will allow XXXXXXXXXX to pay Part IV tax on the redemption of the Newco XXXXXXXXXX preferred shares in amount equal to the RDTOH of Newco at its year end immediately before the amalgamation.

ADDITIONAL INFORMATION

25. Except as described herein, no liabilities have been or will be incurred and no assets have been or will be acquired by or disposed of by XXXXXXXXXX/Aco or a corporation controlled by XXXXXXXXXX/Aco in contemplation of and before the proposed transfer of properties described in Paragraph 18. It is not contemplated that subsequent to the implementation of the transactions described herein under "Proposed Transactions" that Newco or XXXXXXXXXX/Bco will transfer or sell any of its assets to any other person except as described below or in the normal course of its business.

As a result of the Butterfly Transfer and winding-up of Newco, XXXXXXXXXX/Bco will receive an interest in the XXXXXXXXXX owned by XXXXXXXXXX. The fair market value of XXXXXXXXXX/Bco's interest in theXXXXXXXXXX will not be greater than 10% of the net fair market value, at the time of the Butterfly Transfer, of all the property (other than money and indebtedness that is not convertible into other property) received by Newco on the Butterfly Transfer. XXXXXXXXXX/Aco will reacquire XXXXXXXXX /Bco's interest in the XXXXXXXXXX at fair market value.

PURPOSES OF THE PROPOSED TRANSACTIONS

27. The overall purpose of the proposed transactions is to allow XXXXXXXXXX to hold, through XXXXXXXXXX/Bco, his proportional share of the properties of XXXXXXXXXX/Aco so that he may pursue his investment objectives independently of his siblings.

The purpose of the creation of the new XXXXXXXXXX preferred shares of XXXXXXXXXX, described in Paragraph 14, and the retention by XXXXXXXXXX of such shares in the Butterfly Transfer, is to allow XXXXXXXXXX to retain control of these subsidiaries in the future. XXXXXXXXXX.

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. On the redemption of the Newco XXXXXXXXXX preferred shares held by XXXXXXXXXX/Aco, as described in Paragraph 20, and the purchase for cancellation of the common shares of XXXXXXXXXX/Aco held by XXXXXXXXX /Bco, as described in Paragraph 23, 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:

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

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

and

(iii) to the extent that a dividend described in (ii) 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

(iv) 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 (ii) 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).

B. Part IV.1 of the Act will not apply to the deemed dividends described in Ruling A above because the dividends will be excepted dividends pursuant to paragraph (c) of the definition of "excepted dividend" in section 187.1.

C. Part VI.1 of the Act will not apply to the deemed dividends described in Ruling A above because the dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

D. The provisions of paragraph 85(1)(e.2) will not apply to the transfers described in Paragraph 16 and Paragraph 18.

E. 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 A 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);

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

which has not been described herein.

F. The settlement by way of set off of the Newco Note and the XXXXXXXXXX/Aco Note described in Paragraph 24 will not give rise to a forgiven amount.

G. The provisions of subsections 15(1), 56(2) and 83(2.1) will not apply to the proposed transactions, in and by themselves.

H. Subsection 245(2) will not be applied to the proposed transactions, in and by themselves, to redetermine the tax 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 ruling should be construed as confirmation, express or implied, of:

(a) the determination of the fair market value or ACB 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 above 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

??