2001 Ruling 2000-0049763 - Divisive 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 shares of distributing corporation acquired as part of the same series and done in contemplation of the butterfly

Position: No

Reasons: Even though no documentation to evidence the granting of rights to the particular shareholders - all other shareholders acknowledge this right and the taxpayers obtained an order of the Court of Queen's Bench of XXXXXXXXXX requiring the corporation to rectify its securities register to reflect the granting of the rights.

XXXXXXXXXX 		2000-004976

XXXXXXXXXX, 2001

Dear Sirs:

Re: XXXXXXXXXX

Advance Income Tax Ruling

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

Throughout this letter the corporate and individual taxpayers will be referred to as follows:

XXXXXXXXXX Aco
XXXXXXXXXX Bco
XXXXXXXXXX Cco
XXXXXXXXXX Dco
XXXXXXXXXX Eco
XXXXXXXXXX Fco
XXXXXXXXXX Gco
XXXXXXXXXX Hco
XXXXXXXXXX Ico
XXXXXXXXXX Jco
XXXXXXXXXX Kco
XXXXXXXXXX Lco
XXXXXXXXXX Mco
XXXXXXXXXX Nco
XXXXXXXXXX Oco
XXXXXXXXXX Pco
XXXXXXXXXX Qco
XXXXXXXXXX LP 1
XXXXXXXXXX LP 2
XXXXXXXXXX Partnership A

XXXXXXXXXX Mr. V

XXXXXXXXXX Mr. W

XXXXXXXXXX Mr. X

XXXXXXXXXX Mr. Y

XXXXXXXXXX Mr. Z

To the best of your knowledge and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling request is under objection or appeal or is being considered by any tax services office or taxation centre of the Canada Customs and Revenue Agency in connection with any income tax return already filed.

You advised that the proposed transactions described herein, will have no impact on outstanding tax liabilities of Aco, its shareholders or related persons.

DEFINITIONS

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

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

(b) XXXXXXXXXX;

(c) "ACB" means "adjusted cost base" which has the meaning assigned by section 54;

(d) XXXXXXXXXX;

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

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

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

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

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

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

(p) "permitted exchange" has the meaning assigned by subsection 55(1);

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

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

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

(t) "related group" has the meaning assigned by subsection 251(4);

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

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

(w) "taxable preferred share" has the meaning assigned by subsection 248(1);

(x) "Transferee Corporations" means the new corporations described in Paragraph 22; and

(y) "Aco Butterfly" means the transactions described in Paragraph 25.

FACTS

1. Aco was incorporated under the XXXXXXXXXX, continued into XXXXXXXXXX and continued back into XXXXXXXXXX as part of the process of obtaining the Court Order described in Paragraph 15. Aco is a Canadian-controlled private corporation and a taxable Canadian corporation.

The authorized capital of Aco consists of:

(a) XXXXXXXXXX Common shares (the "Common shares") without par value, and

(b) XXXXXXXXXX Non-voting Common shares (the "Non-voting Common shares") without par value.

Pursuant to XXXXXXXXXX, the stated capital of the issued Common shares is $XXXXXXXXXX in aggregate.

2. The shares of Aco are held as follows:

Name of Shareholder Number of Shares Held

Hco XXXXXXXXXX common shares
Ico XXXXXXXXXX common shares
Jco XXXXXXXXXX common shares
Kco XXXXXXXXXX common shares
Lco XXXXXXXXXX common shares
Mco XXXXXXXXXX common shares
Nco XXXXXXXXXX common shares
Oco XXXXXXXXXX common shares
Pco XXXXXXXXXX common shares
Qco XXXXXXXXXX common shares
Total XXXXXXXXXX common shares

Dco XXXXXXXXXX non-voting
common shares

The shares of Aco constitute capital property to each shareholder of Aco. The fair market value of each shareholder's shares of Aco exceeds the ACB of the particular shares to that shareholder. None of the shares of Aco is or will be a taxable preferred share at any time during the proposed transactions described below.

The ACB of the shares of Aco to each shareholder is nominal.

3. Aco's property consists of cash or near cash property, and a general and a limited partnership interest in LP 1.

Aco's general partnership interest in LP 1 has a fair market value and adjusted cost base of nil. Aco's limited partnership interest in LP 1 consists of XXXXXXXXXX Series 2 Units with an adjusted cost base of approximately $XXXXXXXXXX to Aco and a fair market value in excess of $XXXXXXXXXX. The cash and near cash property of Aco has a fair market value of approximately $XXXXXXXXXX.

4. LP 1 was formed under the Partnership Act (XXXXXXXXXX) on XXXXXXXXXX. The fiscal period of LP 1 ends on XXXXXXXXXX.

The assets of LP 1 include:

(a) a XXXXXXXXXX% interest in a XXXXXXXXXX joint venture operating under the name of Bco. XXXXXXXXXX LP 1 is entitled to XXXXXXXXXX% of the output of Bco;

(b) a XXXXXXXXXX% partnership interest in LP 2. LP 2 has a XXXXXXXXXX % partnership interest in Partnership A which purchases and then sells all of Bco's production;

(c) XXXXXXXXXX% of the common shares of Cco. Cco owns the XXXXXXXXXX LP 1 also owns the only issued preference share of Cco which has substantial value XXXXXXXXXX, and one redeemable, retractable preference share of Gco having a redemption amount of $XXXXXXXXXX; and

(d) cash relating to the above assets.

The one Gco preference share was received as consideration for the transfer of LP 1's rights under the XXXXXXXXXX.

LP 1's only activities relate to the active business that is carried on by it.

5. The capital of LP 1 includes two series of units referred to as the Series 1 Units and the Series 2 Units. The Series 1 Units and Series 2 Units are held as follows:

(a) the XXXXXXXXXX issued and outstanding Series 1 Units are owned by a group of XXXXXXXXXX corporations which includes the XXXXXXXXXX holders of Aco's Common shares; and

(b) the XXXXXXXXXX issued and outstanding Series 2 Units are held by Aco.

The holders of Series 1 Units receive priority cash distributions and income allocations. The fiscal period of LP 1 ended XXXXXXXXXX was the first fiscal period in which income was allocated and cash was distributed to the holders of the Series 2 Units. Cash distributions and income allocations from LP 1 made to the holders of the Series 1 Units and/or Series 2 Units are apportioned based on the number of Series 1 Units or Series 2 Units held.

6. Aco is the general partner of LP 1. As general partner, Aco administers, manages, controls and operates the business of LP 1 as set out in the Amended and Restated LP 1 Partnership Agreement dated as of XXXXXXXXXX (the "Partnership Agreement"). Aco is entitled to a nominal income allocation and cash distribution in respect of its general partnership interest in LP 1 (the "General Partnership Interest").

7. The General Partnership Interest in LP 1 is not transferable. Aco must resign as the general partner and will receive no consideration if it does not want to act in this capacity.

Pursuant to the Partnership Agreement, LP 1 has agreed to issue one additional Series 2 Unit to Aco for each Series 1 Unit issued by LP 1 from time to time. No further capital will be contributed by Aco in connection with such additional Series 2 Units. No additional Series 1 Units will be issued by LP 1 due to the existence of this right and the Partnership Agreement will be amended shortly following completion of the Proposed Transactions to remove this right.

8. Each of the shareholders of Aco has by separate agreement (each an "Agency Agreement") appointed Fco to act as its agent and nominee with respect to its direct and indirect interest in Bco, including its shares of Aco and its Units of LP 1. Under the Agency Agreement, the shareholder irrevocably appoints Fco as its agent with full power, authority and discretion to act on the shareholder's behalf to the extent of the shareholder's direct and indirect interest in Bco and to do all acts and things and execute all documents which Fco considers to be required or desirable. Each Transferee Corporation will also enter into an Agency Agreement with Fco on these same terms.

The purpose of having Fco act as an agent and nominee is to allow for decisions to be implemented and day-to-day administrative tasks with respect to the Bco Project to be carried out without having to obtain the signatures of numerous partners or shareholders. As an example, the financing of the Bco Project was simplified by having Fco execute all of the security, thereby itself granting to the lenders a security interest that included all of the partnership interests in LP 1 and all of the shares of Aco.

9. All Aco shares have been issued in the name of Fco (which has pledged them on behalf of the shareholders as security to arm's length lenders as part of the Bco financing) pursuant to the Agency Agreements. The shareholders are the beneficial owners of their shares. As such, fractional shareholding is permissible even though it would not be if the shares were issued to the shareholders in their own names.

10. Hco, Ico, Oco, Pco and Qco ("Group X") form a related group. The other shareholders of Aco are not related to each other or to Group X.

Group X owns XXXXXXXXXX Common shares of Aco representing XXXXXXXXXX% of the voting shares of Aco and XXXXXXXXXX% of the total shares of Aco.

Each member of the Group X is also related to Fco.

11. In or about XXXXXXXXXX, Mr. W, Mr. X, Mr. Y and Mr. Z (collectively, the "Rightholders") as a group were granted the right (collectively, the "Rights") to subscribe for and acquire in the aggregate XXXXXXXXXX non-voting common shares in the capital of Aco, in each case for $XXXXXXXXXX per Rightholder in the aggregate. The Rights were granted to the Rightholders in recognition of their respective contributions to the development of the XXXXXXXXXX (the "Bco Project"). All contributions to the Bco Project were made by Mr. W, Mr. X, Mr. Y and Mr. Z in their personal capacity and not in the capacity of an employee of any corporation.

It is the Rightholders' opinion that the Rights were granted before the Rights had any value and before it was known whether the Bco Project would become economically viable. None of the Rightholders reported the earning of the Rights in any income tax return filed in Canada.

The XXXXXXXXXX non-voting common shares of Aco that were the subject of the Rights were non-voting in recognition of the XXXXXXXXXX Rightholders not having subscribed cash therefor. The XXXXXXXXXX non-voting common shares of Aco on their issuance would constitute XXXXXXXXXX% of the total number of outstanding voting and non-voting common shares of Aco. This XXXXXXXXXX % interest in Aco would approximate a XXXXXXXXXX% indirect equity interest in LP 1 and a XXXXXXXXXX % indirect equity interest in Bco.

The entitlement of each Rightholder to his respective proportion of the Rights was defined when Mr. V arbitrated that entitlement on XXXXXXXXXX. Mr. V had been retained by the Rightholders for the purpose of arbitrating the allocation of the Rights among the Rightholders. As a result of Mr. V's arbitration, the Rights were allocated to each of the Rightholders as follows:

Name Allocation

Mr. W Right to XXXXXXXXXX Non-Voting Common Shares

Mr. X Right to XXXXXXXXXX Non-Voting Common Shares

Mr. Y Right to XXXXXXXXXX Non-Voting Common Shares

Mr. Z Right to XXXXXXXXXX Non-Voting Common Shares

Mr. W and Mr. X are residents of Canada, Mr. Y and Mr. Z are non-residents of Canada for purposes of the Act.

12. On XXXXXXXXXX, Mr. W transferred all of his entitlement to the Rights to Dco pursuant to an oral agreement. No election pursuant to subsection 85(1) was filed by Mr. W or Dco with respect to the transfer. Dco was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX for the purpose of acquiring and holding all of Mr. W's entitlement to the Rights. At all material times, Mr. W was a director and officer of Dco. After this transfer by Mr. W to Dco, Mr. W ceased to be a Rightholder and Dco became a Rightholder.

13. On XXXXXXXXXX, Mr. X transferred all of his entitlement to the Rights to Eco pursuant to an oral agreement. No election pursuant to subsection 85(1) was filed by Mr. X or Eco with respect to the transfer. Eco was incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX for the purposes of acquiring and holding all of Mr. X's entitlement to the Rights. At all material times, Mr. X was a director, officer and sole shareholder of Eco. After this transfer by Mr. X to Eco, Mr. X ceased to be a Rightholder and Eco became a Rightholder.

14. There is no written agreement evidencing the granting of the Rights and the Rights were not registered in the securities register of Aco. However, the existence, enforceability and entitlement of the Rightholders to the Rights has been acknowledged and accepted by the directors, officers and shareholders of Aco.

15. Pursuant to an Order of the Court of Queen's Bench of XXXXXXXXXX on XXXXXXXXXX, Aco has been ordered to rectify its securities register to reflect the following:

(a) as of XXXXXXXXXX, that the Rightholders collectively held the Rights on an unallocated basis; and

(b) as of XXXXXXXXXX in the case of the Rightholders other than Eco and as of XXXXXXXXXX in the case of Eco, that the Rightholders have held the Rights to subscribe for and acquire in the aggregate XXXXXXXXXX non-voting common shares in the capital of Aco, in each case for $XXXXXXXXXX per Rightholder in the aggregate, allocated on the following basis:

Name Right to Acquire

Dco XXXXXXXXXX Non-voting Common Shares

Eco XXXXXXXXXX Non-voting Common Shares

Mr. Y XXXXXXXXXX Non-voting Common Shares

Mr. Z XXXXXXXXXX Non-voting Common Shares

Aco has complied with this Order by rectifying its securities register to reflect the foregoing.

16. On XXXXXXXXXX, Dco exercised its Right to acquire, and was issued forthwith, XXXXXXXXXX non-voting common shares of Aco for payment of $XXXXXXXXXX. This occurred before the commencement of the series of transactions or events that includes the Aco Butterfly. No director, officer or shareholder of Aco or any other participant in the Bco Project opposed the partial exercise by Dco of its Right.

Dco continues to hold the Right to subscribe for XXXXXXXXXX non-voting common share of Aco. This XXXXXXXXXX share will be issued to Dco when Eco, Mr. Y and Mr. Z exercise their Rights to acquire their respective number of non-voting common shares of Aco.

17. Dco, Eco, Mr. Y and Mr. Z intend to exercise their Rights to acquire XXXXXXXXXX non-voting common shares of Aco, respectively. It is the intention of Dco, Eco, Mr. Y and Mr. Z to exercise their respective Rights whether or not the proposed transactions are completed. The Rights have substantial value due to the net fair market value of Aco's assets.

Discussions on whether to undertake the Aco Butterfly began in XXXXXXXXXX. Dco, Eco, Mr. Y and Mr. Z were advised not to exercise their respective Rights thereafter due to the concern that the exercise of the Rights may result in the application of subsection 55(3.1).

The Rights constitute capital property to each of Dco, Eco, Mr. Y and Mr. Z.

PROPOSED TRANSACTIONS

18. Dco will exercise its Right to acquire and will be issued XXXXXXXXXX non-voting common share of Aco from treasury at an issue price of $XXXXXXXXXX.

Pursuant to the Agency Agreement, the XXXXXXXXXX non-voting common share of Aco will be issued in the name of Fco as nominee of Dco. Dco will be the beneficial owner of the XXXXXXXXXX non-voting common share of Aco issued.

19. Eco will exercise its Right to acquire and will be issued XXXXXXXXXX non-voting common shares of Aco from treasury at an aggregate issue price of $XXXXXXXXXX.

Pursuant to the Agency Agreement, the XXXXXXXXXX non-voting common shares of Aco will be issued in the name of Fco as nominee of Eco. Eco will be the beneficial owner of the XXXXXXXXXX non-voting common shares of Aco issued.

20. Mr. Y will exercise his Right to acquire and will be issued XXXXXXXXXX non-voting common shares of Aco from treasury at an aggregate issue price of $XXXXXXXXXX.

Pursuant to the Agency Agreement, the XXXXXXXXXX non-voting common shares of Aco will be issued in the name of Fco as a nominee of Mr. Y. Mr. Y will be the beneficial owner of the XXXXXXXXXX non-voting common shares of Aco issued.

21. Mr. Z will exercise his Right to acquire and will be issued XXXXXXXXXX non-voting common shares of Aco from treasury at an aggregate issue price of $XXXXXXXXXX.

Pursuant to the Agency Agreement, the XXXXXXXXXX non-voting common shares of Aco will be issued in the name of Fco as a nominee of Mr. Z. Mr. Z will be the beneficial owner of the XXXXXXXXXX non-voting common shares of Aco issued.

22. Each shareholder of Aco other than Oco (the "Participating Shareholders") will incorporate a new corporation ("Transferee Corporation"). Each Transferee Corporation, other than the corporations to be incorporated by Mr. Y and Mr. Z, will be a Canadian-controlled private corporation and a taxable Canadian corporation incorporated under the XXXXXXXXXX. The Transferee Corporations to be incorporated by Mr. Y and Mr. Z will be taxable Canadian corporations and private corporations.

Each of Mr. Y and Mr. Z will either incorporate a limited liability corporation under the XXXXXXXXXX or incorporate an unlimited liability corporation under the Company Act (XXXXXXXXXX) as his respective Transferee Corporation.

The authorized capital of each Transferee Corporation (including the ones to be incorporated by Mr. Y and Mr. Z) will consist of:

(a) XXXXXXXXXX Class A voting shares, participating and with no par value; and

(b) XXXXXXXXXX Class B non-voting shares, with a par value of $XXXXXXXXXX per share, redeemable and retractable for an amount equal to the fair market value of the consideration received by the Transferee Corporation for the issuance of such shares, entitled to non-cumulative dividends in such amounts as may be declared from time to time by the directors of the Transferee Corporation but not exceeding XXXXXXXXXX% of the redemption value and first priority on liquidation.

The terms of the shares will provide that no payments of dividends, return of capital or redemption in respect of other classes of shares would take place if such action would impair the ability of the Transferee Corporation to redeem the Class B shares at their redemption value together with all declared and unpaid dividends thereon.

The rights and restrictions of the Class B shares of each Transferee Corporation that is controlled by a Participating Shareholder that is not part of Group X will specify an amount in respect of each such share for purposes of subsection 191(4). The amount 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 will be issued.

23. Each Participating Shareholder will transfer all of his or its shares of Aco to his or its wholly-owned Transferee Corporation. As sole consideration, the Transferee Corporation will issue to the Participating Shareholder Class A shares with a fair market value equal to the fair market value of the Aco shares transferred to the Transferee Corporation.

Each Transferee Corporation will add to the legal paid-up capital account maintained for its Class A shares an amount not exceeding the fair market value of the Aco shares so transferred.

Subsection 85(2.1) will reduce the paid-up capital of the Class A shares issued by a Transferee Corporation, that is not controlled by a Participating Shareholder who is a non-resident, to an amount equal to cost of the Aco shares transferred to the particular Transferee Corporation. In the case of a Transferee Corporation that is controlled a Participating Shareholder who is a non-resident, paragraph 212.1(1)(b) will apply to limit the paid-up capital of the Class A shares issued by that Transferee Corporation to an amount equal to the paid-up capital of the Aco shares transferred to that particular Transferee Corporation.

Each Participating Shareholder and the respective Transferee Corporation 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 shares so transferred will be equal to their cost amount to the Participating Shareholder, immediately before the transfer, which amount will be equal to or less than the fair market value of such shares.

24. The types of property for the purposes of a distribution pursuant to subsection 55(1), of Aco, immediately before the Aco Butterfly, will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation or partnership over which 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 of the current assets of each corporation including any cash, deposits, accounts receivable, inventory, and rights arising from prepaid expenses (hereinafter referred to as "prepaid expenses");

(b) business property, 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, 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 this purpose, Aco will be considered to have significant influence over a 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 over any corporation or partnership which has significant influence over that corporation.

For greater certainty any tax accounts, such as the balance of any RDTOH or capital dividend account of Aco will not be considered property for purposes of the proposed transactions described herein

25. Aco will transfer, at fair market value, to each Transferee Corporation a portion of the LP 1 Series 2 Units and a portion of its remaining cash and near-cash 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 24, received by each Transferee Corporations will be equal to the proportion of the fair market value of the cash and near-cash property, business property and investment property, respectively, owned by Aco immediately before the transfer, that:

(a) the fair market value, immediately before the transfer, of all the shares of the capital stock of Aco owned by that particular Transferee Corporation at that time

is of

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

As consideration for such transfers, each Transferee Corporation will:

(a) assume liabilities of Aco equal to the proportion described herein, in respect of that particular Transferee Corporation, of all the liabilities of Aco immediately before the transfer; and

(b) issue to Aco Class B shares of that particular Transferee Corporation having an aggregate redemption amount and aggregate fair market value equal to the amount by which the aggregate fair market value of the cash or near-cash property, business property and investment property so transferred exceeds the liabilities assumed by that particular Transferee Corporation.

The liabilities assumed by each Transferee Corporation will be specifically allocated to a particular property transferred. In no case will the liabilities allocated to an asset exceed the agreed amount, described in Paragraph 26 in respect of that asset.

The par value of the Class B shares issued by each Transferee Corporation will not 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 each Transferee Corporation exceeds the liabilities assumed by that Transferee Corporation.

For the purposes of subsection 191(4), the directors of each Transferee Corporation will pass a resolution specifying an amount per share as required under the terms and conditions of the Class B shares so issued, equal to the fair market value of the consideration for which the share is issued. For greater certainty, the specified amount will not be subject to adjustment or described by reference to a formula.

26. Aco and each Transferee Corporation 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 of each property of Aco that is an eligible property transferred. The agreed amount for the purposes of subsection 85(1) in respect of such property will be 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 Aco immediately before the transfer and the fair market value of such property.

The fair market value of each property transferred will equal or exceed the agreed amount in respect thereof. The liabilities assumed by each Transferee Corporation will not exceed the cost amount of the properties transferred.

27. Each Transferee Corporation will redeem all of the Class B shares held by Aco for a non-interest-bearing demand note (the "Transferee Corporation Notes") having a principal amount equal to the aggregate redemption amount of the Class B shares issued by each Transferee Corporation.

28. [Reserved]

29. Aco will purchase for cancellation all of its shares held by each Transferee Corporation for a non-interest-bearing demand note (the "Aco Notes") having a principal amount equal to the aggregate of the fair market value of the Aco shares so purchased as were held by each Transferee Corporation.

For purposes of subsection 191(4), each agreement with respect to the repurchase of each Transferee Corporation's shares of Aco will specify any amount with respect to each share being purchased. The amount to be specified in respect of each such share, at the time the agreement is entered into, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the fair market value of the share at the time the agreement is entered into.

Oco will waive its right to have its Common shares of Aco repurchased.

30. The Transferee Corporation Notes and the Aco Notes will be set off against each other and cancelled.

ADDITIONAL INFORMATION

31. Oco will remain as the sole shareholder of Aco following the Aco Butterfly, with the result that Aco will not be wound up as part of the Aco Butterfly. Aco will continue as the General Partner of LP 1.

32. Neither Aco nor any Transferee Corporation carries on the business of purchasing and selling securities. The Class B shares of the Transferee Corporations acquired by Aco and the shares of Aco acquired by the Transferee Corporations were not acquired in the ordinary course of Aco's or any Transferee Corporation's business.

33. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement" in respect of any issued share of Aco or any Transferee Corporation.

34. Neither Aco nor any Transferee Corporation has entered into a "dividend rental arrangement" in respect of any of the shares to be redeemed or repurchased as part of the Proposed Transactions.

35. None of the issued shares of any corporation described herein was 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).

36 No property has or will become property of Aco or a corporation controlled by Aco in contemplation of and before the distribution by Aco of its assets.

Aco will not issue, redeem or cancel any shares as part of the series of transactions that includes the Aco Butterfly other than as described herein.

37. No person (the "Vendor") who is a shareholder of Aco, a specified shareholder of a Transferee Corporation, or a specified shareholder of Oco will, as part of the series of transactions that includes the Aco Butterfly, dispose of any share of Aco, the Transferee Corporation or Oco or any property deriving, at any time during the series of transactions that includes the Aco Butterfly, 10% or more of its value from any such share to a person who is not related to the Vendor or who ceases to be related to the Vendor as part of the series of transactions or to a partnership, other than as described herein.

38. No Transferee Corporation that is not related to Aco after the repurchase of its common shares of Aco will, as part of the series of transactions that includes the Aco Butterfly, dispose of more than 10% of the LP 1 Series 2 Units received by that Transferee Corporation during the Aco Butterfly to a person who is not related to the Transferee Corporation or who as part of the series of transactions ceases to be related to the Transferee Corporation or to a partnership.

39. Aco will not as part of the series of transactions that includes the Aco Butterfly, dispose of more than 10% of the fair market value of its LP 1 Series 2 Units that it continues to own after the Aco Butterfly, to a person who is not related to Aco or, as part of the series of transactions, ceases to be related to Aco or to a partnership.

PURPOSE OF THE PROPOSED TRANSACTIONS

40. The purpose of the reorganization is to distribute each type of property of Aco pro-rata to all but one of its shareholders so as to leave each shareholder of Aco in a position to manage and make any decisions directly in respect of its LP 1 Series 2 Units.

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 transfer of:

(a) the shares of Aco by each Participating Shareholder to its respective wholly-owned Transferee Corporation as described in Paragraph 23; and

(b) the LP 1 Series 2 Units by Aco to each Transferee Corporation as described in Paragraph 25,

subject to the provisions of subsection 69(11), the provisions of subsection 85(1) will apply with the result that the amount agreed upon by each transferor and transferee in their joint election in respect of the particular transferred property will be deemed pursuant to paragraph 85(1)(a) to be proceeds of disposition thereof to the particular transferor and the cost thereof to the particular transferee.

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

B. On the redemption of the Class B shares of each Transferee Corporation held by Aco as described in Paragraph 27 and the purchases for cancellation of the Aco common shares or Aco non-voting common shares, as the case may be, held by a Transferee Corporation as described in Paragraph 29, the amount, if any, by which the amount paid to redeem or purchase the particular shares 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;

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

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

and

(iv) to the extent that a dividend described in (ii) above is a taxable dividend, such 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

(v) by virtue of the application of paragraph (j) of the definition "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).

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

D. Provided that the amount paid on:

(i) the redemption of the Class B shares of each Transferee Corporation that is not a member of the Group X is equal to the amount specified in respect of such shares as described in Paragraph 22; and

(ii) the purchase for cancellation of the Aco common shares or Aco non-voting common shares, as the case may be, that are held by each Transferee Corporation that is not a member of the Group X is equal to the amount specified in respect of such shares as described in Paragraph 29

the dividends described in Ruling B in respect of the above will not be subject to tax under Part VI.1 of the Act on the basis that each such dividend will be deemed by paragraph 191(4)(d) to be an excluded dividend.

Part VI.1 of the Act will not apply to the dividends described in Ruling B in respect of the redemption of the Class B shares of a member of the Group X and the purchase for cancellation of the Aco common shares held by a member of the Group X because such dividends will be excluded dividends pursuant to paragraph (a) of the definition of "excluded dividend".

E. Provided that, as part of the series of transactions or events that includes 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 shares in the circumstances described in subparagraph 55(3.l)(b)(iii);

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

(v) acquisition of property in the circumstances described in paragraph 55(3.l)(d)

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

G. The settlement by way of set-off of the Transferee Corporation Notes and the Aco Notes described in Paragraph 30 will not give rise to a forgiven amount.

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

I. The provisions of subsection 245(2) will not be applied as a result of 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 70-6R4 dated January 29, 2001 issued by the 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

1. Nothing in this letter should be construed as confirmation, express or implied, of:

(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;

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

2. Taxes under Part IV of the Act will be payable in respect of the dividends described in Ruling B above deemed to be received by:

(a) Aco on the redemption of the Class B shares of each Transferee Corporation that is not a member of Group X; and

(b) each Transferee Corporation that is not a member of Group X, on the purchase for cancellation of the Aco common shares or Aco non-voting common shares, as the case may be, held by that Transferee Corporation;

and, to the extent of the amount, if any, determined under paragraph 186(1)(b),

(c) Aco, on the redemption of the Class B shares of each member of Group X held by Aco; and

(d) each member of Group X, on the purchases for cancellation of the Aco common shares held by that member of Group X.

3. Aco had RDTOH at its year-end on XXXXXXXXXX, and the taxation year of Aco in which it purchases for cancellation its shares owned by a Transferee Corporation will coincide with the taxation year of that Transferee Corporation in which it redeems its Class B shares held by Aco. Consequently, this gives rise to the so-called circularity problem with respect to RDTOH, which is described in the paper given by Mr. R. Read of the CCRA on pages 18:23/24 of the 1988 Conference Report of the Canadian Tax Foundation. As explained in that paper, it is important to ensure that the dividends deemed by subsection 84(3) to be paid on the redemption or purchase for cancellation of shares, are paid by a corporation that does not have any RDTOH and that does not receive any dividends from another corporation which was entitled to a dividend refund during the taxation year of the first mentioned corporation in which such corporation would redeem or purchase for cancellation its shares.

You have indicated that while you are aware of the CCRA's position as set out herein, you do not propose to avoid the problem of circularity as described herein. Consequently, we must inform you that, in our view, this will result in each of the Transferee Corporations and Aco being subject to Part IV tax. It is also our view that the circularity problem causes uncertainty as to which corporation is ultimately entitled to a dividend refund and which corporation is ultimately liable for Part IV tax.

Yours truly,

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