2001 Ruling 2000-0049963 - 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: see issue sheet

Position:

Reasons:

XXXXXXXXXX 2000-004996

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance income tax ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling in respect of the above taxpayer. We also acknowledge your letters of XXXXXXXXXX.

To the best of your knowledge, and that of the parties to this ruling, none of the issues contained in this advance income tax ruling:

1. is in an earlier return of the taxpayer or a related person;

2. is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

3. is under objection by the taxpayer or a related person;

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

5. is the subject of a ruling previously issued by this Directorate.

Unless otherwise stated all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended, (the "Act").

Definitions

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

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

(b) "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;

(c) XXXXXXXXXX;

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

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

(f) "dividend refund" has the meaning assigned by subsection 129(1);

(g) "DC" means XXXXXXXXXX;

(h) "DC Shareholders" means XXXXXXXXXX ("A"), XXXXXXXXXX ("B"), XXXXXXXXXX ("C") and XXXXXXXXXX ("D"), each of whom is the brother or sister of the other and is resident in Canada;

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

(j) XXXXXXXXXX;

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

(l) "prepaid expenses" means the rights arising from the prepayment of certain expenses;

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

(n) "proceeds of disposition" has the meaning assigned by section 54;

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

(p) "related persons" has the meaning assigned by section 251;

(q) "series of transactions or events" has the meaning assigned by subsection 248(10);

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

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

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

(u) "specified person" has the meaning assigned by paragraph (h) of the definition "taxable preferred share" in subsection 248(1);

(v) "stated capital" and "stated capital account" have the meanings assigned thereto by the XXXXXXXXXX or XXXXXXXXXX, as the case may be;

(w) "Subco" means XXXXXXXXXX;

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

(y) "taxable dividend" has the meaning assigned by subsection 89(1).

Facts

1. DC was incorporated as XXXXXXXXXX Its name was changed to its current name on XXXXXXXXXX.

2. DC is a private corporation and a taxable Canadian corporation. DC's principal address is XXXXXXXXXX and its fiscal period ends on XXXXXXXXXX.

3. The issued and outstanding share capital of DC consists of the following:

(a) XXXXXXXXXX common shares;

(b) XXXXXXXXXX preference shares, which are non-voting, participating and redeemable;

(c) XXXXXXXXXX preference shares, which are non-voting, participating and redeemable;

(d) XXXXXXXXXX preference shares, which are non-voting, participating and redeemable; and

(e) XXXXXXXXXX preference shares, which are non-voting, participating and redeemable.

4. The common shares of DC are currently owned in equal shares by the DC Shareholders (i.e., XXXXXXXXXX common shares each). The XXXXXXXXXX preference shares of DC are all owned by A; the XXXXXXXXXX preference shares of DC are all owned by B; the XXXXXXXXXX preference shares of DC are all owned by C; and the XXXXXXXXXX preference shares of DC are all owned by D. Each such share represents capital property to the holder.

5. As at XXXXXXXXXX, the property of DC as reported on its financial statements consisted of:

(a) current assets of $XXXXXXXXXX; and

(b) investment in shares of Subco of $XXXXXXXXXX.

6. As at XXXXXXXXXX, the liabilities of DC as reported on its financial statements consisted of:

(a) current liabilities of $XXXXXXXXXX; and

(b) an amount due to Subco of $XXXXXXXXXX.

7. Subco is a private corporation and a taxable Canadian corporation, was formed by amalgamation under the laws of XXXXXXXXXX and was continued as XXXXXXXXX . It is a wholly-owned subsidiary of DC. The issued and outstanding share capital of Subco consists of XXXXXXXXXX common shares and XXXXXXXXXX preference shares.

8. As at XXXXXXXXXX, the property of Subco as reported on its financial statements consisted of:

(a) cash and money market investments of $XXXXXXXXXX;

(b) current receivables of $XXXXXXXXXX;

(c) receivable from XXXXXXXXXX ("Aco") (the "XXXXXXXXXX Receivable") of $XXXXXXXXXX and receivable from XXXXXXXXXX of $XXXXXXXXXX (the "XXXXXXXXXX Receivable");

(d) receivable from DC of $XXXXXXXXXX;

(e) investment in receivable from XXXXXXXXXX of $XXXXXXXXXX (the "XXXXXXXXXX");

(f) investment in shares of other corporations of $XXXXXXXXXX; and

(g) goodwill of $XXXXXXXXXX.

However, the receivables described in subparagraph (c) above, have since been repaid with the result that Subco's cash and money market investments, described in subparagraph (a) above, increased by $XXXXXXXXXX.

9. In particular, Subco's investment in shares is as follows:

(a) XXXXXXXXXX preference shares of Aco. Aco is a taxable Canadian corporation that was incorporated under the laws of XXXXXXXXXX, the authorized share capital of which comprises an unlimited number of XXXXXXXXXX preference and common shares. The issued share capital of Aco consists of the above-mentioned XXXXXXXXXX preference shares and common shares, all of which are owned by A. Aco has cash on hand in excess of that required to redeem its preferred shares. In addition, if Aco were to liquidate all of its assets, its net gains realized on assets of approximately $XXXXXXXXXX would be approximately $XXXXXXXXXX.

(b) XXXXXXXXXX preference shares of XXXXXXXXXX ("Bco"). Bco is a taxable Canadian corporation subsisting under the laws of XXXXXXXXXX and was formed on the amalgamation of XXXXXXXXXX, the authorized share capital of which comprises an unlimited number of XXXXXXXXXX preference, XXXXXXXXXX preference and common shares. The issued share capital of Bco consists of the above mentioned XXXXXXXXXX preference shares; XXXXXXXXXX preference shares, all of which are owned by Aco; and common shares, all of which are owned by A. Each of Aco and Bco is controlled by A, with the result that both corporations are related to each other pursuant to subparagraph 251(2)(c)(i). Bco has sufficient cash on hand and assets with inherent losses to redeem its preferred shares. In addition, if Bco were to liquidate all of its assets, its net gains realized on assets of approximately $XXXXXXXXXX would be approximately $XXXXXXXXXX.

(c) XXXXXXXXXX preference shares of XXXXXXXXXX ("Cco"). Cco is a taxable Canadian corporation that was incorporated under the laws of XXXXXXXXXX, the authorized share capital of which comprises XXXXXXXXXX common shares, XXXXXXXXXX preference shares with a par value of $XXXXXXXXXX per share and an unlimited number of XXXXXXXXXX preference shares. The issued share capital of Cco consists of XXXXXXXXXX common shares and XXXXXXXXXX preference shares, all of which are owned by B and the above mentioned XXXXXXXXXX preference shares. Cco has cash on hand in excess of that required to redeem its preference shares. In addition, if Cco were to liquidate all of its assets, its net gains realized on assets of approximately $XXXXXXXXXX would be approximately $XXXXXXXXXX.

(d) XXXXXXXXXX preference shares of XXXXXXXXXX ("Dco"). Dco is a taxable Canadian corporation that was incorporated under the laws of XXXXXXXXXX, the authorized share capital of which comprises an unlimited number of XXXXXXXXXX preference and common shares. The issued share capital of Dco consists of the above-mentioned XXXXXXXXXX preference shares and common shares, all of which are owned by C. If Dco were to liquidate all of its assets in order to redeem its preference shares, it would have no net gains realized on such dispositions.

(e) XXXXXXXXXX preference shares of XXXXXXXXXX ("Eco"). Eco is a taxable Canadian corporation that was incorporated under the laws of XXXXXXXXXX, the authorized share capital of which comprises an unlimited number of XXXXXXXXXX preference and common shares. The issued share capital of Eco consists of the above-mentioned XXXXXXXXXX preference shares and common shares, all of which are owned by D. Eco has sufficient cash on hand and assets with an inherent gain of approximately $XXXXXXXXXX to redeem its preference shares. In addition, if Eco were to liquidate all of its assets in order to redeem its preference shares, its net gains realized on assets of approximately $XXXXXXXXXX would be approximately $XXXXXXXXXX.

10. As at XXXXXXXXXX, the liabilities of Subco as reported on its financial statements consisted of current liabilities of $XXXXXXXXXX.

11. The tax attributes of the shares of DC are as follows:

Class PUC Fair Market Value ACB
(Redemption Amount)

XXXXXXXXXX

12. The tax attributes of the shares held by Subco are as follows:

Shares Redemption Amount PUC ACB
(Fair Market Value)

XXXXXXXXXX

13. The social insurance number or tax account number and the tax services office or taxation centre of the Canada Customs and Revenue Agency at which each of the parties to this ruling files its income tax return are set forth below:

Social Insurance/ Tax Services
Taxpayer Business Number Office

DC XXXXXXXXXX
Subco XXXXXXXXXX
Aco XXXXXXXXXX
Bco XXXXXXXXXX
Cco XXXXXXXXXX
Dco XXXXXXXXXX
Eco XXXXXXXXXX
A XXXXXXXXXX
B XXXXXXXXXX
C XXXXXXXXXX
D XXXXXXXXXX

Proposed Transactions

14. DC will amalgamate with Subco to form a new corporation ("New DC") pursuant to the XXXXXXXXXX such 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 New DC 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 New DC by virtue of the merger;

(c) the shares of Subco held by DC immediately prior to the amalgamation will be cancelled by virtue of the amalgamation; and

(d) the shares of DC owned by its shareholders immediately prior to the amalgamation will become shares of the capital stock of New DC by virtue of the amalgamation.

New DC will be a taxable Canadian corporation and a private corporation.

15. The DC Shareholders will each incorporate a holding corporation (hereinafter referred to collectively as the "Holding Corporations" or separately as the "Holding Corporation") as follows:

(a) A will incorporate a new corporation under the XXXXXXXXXX, which will be a taxable Canadian corporation and a private corporation ("A Holdco"). A Holdco will not be a specified financial institution and its authorized share capital will consist of an unlimited number of the following classes of shares:

(i) a class of common shares, XXXXXXXXXX shares of which class will be issued to A in the course of the organization of A Holdco;

(ii) XXXXXXXXXX preference shares, XXXXXXXXXX shares of which class will be issued as consideration for the transfers to be made to A Holdco which are described in paragraph 17 below; and

(iii) XXXXXXXXXX shares, XXXXXXXXXX shares of which class will be issued as consideration for the transfers to be made to A Holdco which are described in paragraph 22 below.

(b) B will incorporate a new corporation under the XXXXXXXXXX, which will be a taxable Canadian corporation and a private corporation ("B Holdco"). B Holdco will not be a specified financial institution and its authorized share capital will consist of an unlimited number of the following classes of shares:

(i) a class of common shares, XXXXXXXXXX shares of which class will be issued to B in the course of the organization of B Holdco;

(ii) XXXXXXXXXX preference shares, XXXXXXXXXX shares of which class will be issued as consideration for the transfers to be made to B Holdco which are described in paragraph 17 below; and

(iii) XXXXXXXXXX shares, XXXXXXXXXX shares of which class will be issued as consideration for the transfers to be made to B Holdco which are described in paragraph 22 below.

(c) C will incorporate a new corporation under the XXXXXXXXXX, which will be a taxable Canadian corporation and a private corporation ("C Holdco"). C Holdco will not be a specified financial institution and its authorized share capital will consist of an unlimited number of the following classes of shares:

(i) a class of common shares, XXXXXXXXXX shares of which class will be issued to C in the course of the organization of C Holdco;

(ii) XXXXXXXXXX preference shares, XXXXXXXXXX shares of which class will be issued as consideration for the transfers to be made to C Holdco which are described in paragraph 17 below; and

(iii) XXXXXXXXXX shares, XXXXXXXXXX shares of which class will be issued as consideration for the transfers to be made to C Holdco which are described in paragraph 22 below.

(d) D will incorporate a new corporation under the XXXXXXXXXX, which will be a taxable Canadian corporation and a private corporation ("D Holdco"). D Holdco will not be a specified financial institution and its authorized share capital will consist of an unlimited number of the following classes of shares:

(i) a class of common shares, XXXXXXXXXX shares of which class will be issued to D in the course of the organization of D Holdco;

(ii) XXXXXXXXXX preference shares, XXXXXXXXXX shares of which class will be issued as consideration for the transfers to be made to D Holdco which are described in paragraph 17 below; and

(iii) XXXXXXXXXX shares, XXXXXXXXXX shares of which class will be issued as consideration for the transfers to be made to D Holdco which are described in paragraph 22 below.

16. The first taxation year of each Holding Corporation will end after each redeems the XXXXXXXXXX shares of its capital stock, as described in paragraph 25 below, and before the redemptions and purchases for cancellation described in paragraph 26 below.

17. Each of the DC Shareholders will transfer, at fair market value, all of his or her shares of New DC to his or her Holding Corporation as follows:

(a) A will transfer his or her XXXXXXXXXX common and XXXXXXXXXX preference shares of New DC to A Holdco;

(b) B will transfer his or her XXXXXXXXXX common and XXXXXXXXXX preference shares of New DC to B Holdco;

(c) C will transfer his or her XXXXXXXXXX common and XXXXXXXXXX preference shares of New DC to C Holdco; and

(d) D will transfer his or her XXXXXXXXXX common and XXXXXXXXXX preference shares of New DC to D Holdco.

As consideration for the above-described transfers of shares of New DC, each Holding Corporation will issue to the transferor, XXXXXXXXXX preference shares of the Holding Corporation that are non-voting, non-participating and redeemable and retractable at an amount in the aggregate equal to the aggregate fair market value of the shares of New DC so transferred to it. In accordance with XXXXXXXXXX , the amount that will be added to the stated capital account of the XXXXXXXXXX preference shares so issued by each Holding Corporation to the transferor will be equal to the PUC of the shares of New DC transferred to it by such transferor. For greater certainty, no non-share consideration will be paid by any Holding Corporation in respect of the transfers of the shares of New DC so acquired by it.

18. Each of the DC Shareholders will jointly elect with his or her Holding Corporation, in prescribed form and within the time referred to in subsection 85(6), under subsection 85(1) in respect of the transfer of the shares of New DC referred to in paragraph 17 above. The agreed amount in respect of each such election will be equal to the ACB of the shares of New DC to the transferor at the time of the transfer thereof to the particular Holding Corporation, which will be less than the fair market value thereof at that time.

19. New DC does not and will not have the ability to exercise significant influence over any other corporation. Immediately before the property transfers described in paragraph 22 below, the property of New DC will be classified into three types of property for the purposes of paragraph 55(3)(b), as follows:

(a) cash or near cash property, comprising all of the current assets of New DC, including any cash, liquid investments, accounts receivable, term deposits, marketable securities (other than portfolio investments), inventory and prepaid expenses;

(b) business property, comprising all of the assets of New DC, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB); and

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

For greater certainty, in determining New DC's types of property for the purpose of the proposed transactions described below, any tax accounts, such as the balance of any non-capital losses, the capital dividend account and RDTOH of New DC will not constitute property of New DC for purposes of the proposed transactions described below. The terms "non-capital loss" and "capital dividend account" ("CDA") have the meanings assigned by subsections 111(8) and 89(1), respectively.

20. In determining the net fair market value of each type of property of New DC immediately before the transfers described in paragraph 22 below, the liabilities of New DC will be allocated to, and will be deducted in the calculation of, the net fair market value of each such type of property of New DC in the following manner:

(a) Current liabilities of New DC will be allocated to the cash or near cash property (including any cash, accounts receivable, inventory and prepaid expenses) of New DC in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by it. The allocation of current liabilities as described herein will not exceed the aggregate fair market value of the cash or near cash property of New DC.

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

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

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

21. For the purposes of the classifications and determinations contemplated by paragraphs 19 and 20 above, it is anticipated that New DC will not have any business property and that:

(a) New DC will have two types of property: cash or near cash property, and investment property; and

(b) New DC's shares of Aco, Bco, Cco, Dco and Eco will each be classified as cash or near cash property since New DC, which does not and will not hold (directly or indirectly) any voting shares in the capital of any of these corporations, does not and will not have significant influence over any of these corporations. Furthermore, A Holdco, B Holdco, C Holdco and D Holdco will not have significant influence over any of these corporations immediately after the transfers described in paragraph 22 below.

22. New DC will transfer a portion of each type of property owned by it at that time for fair market value to each Holding Corporation, as follows:

(a) to A Holdco, a portion of the cash or near cash property and investment property of New DC, including all the shares of Aco and Bco owned by New DC;

(b) to B Holdco, a portion of the cash or near cash property and investment property of New DC, including all the shares of Cco owned by New DC;

(c) to C Holdco, a portion of the cash or near cash property and investment property of New DC, including all the shares of Dco owned by New DC;

(d) to D Holdco, a portion of the cash or near cash property and investment property of New DC, including all of the shares of Eco owned by New DC;

such that, immediately after the transfer, the net fair market value of each type of property of New DC (determined in the manner described in paragraphs 19 and 20 above) that is transferred to a particular Holding Corporation will approximate that proportion of the net fair market value of all property of that type of New DC (determined in the manner described in paragraphs 19 and 20 above) immediately before the transfer referred to herein that:

(e) the aggregate fair market value, immediately before the transfer, of all the shares of New DC owned by the particular Holding Corporation at that time,

is of

(f) the aggregate fair market value, immediately before the transfer, of all of the issued and outstanding shares of New DC at that time.

For the purpose of this paragraph the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net fair market value of each type of property (determined in the manner described in paragraphs 19 and 20 above) which each Holding Corporation has received as compared to what each Holding Corporation would have received had it received its appropriate prorata share of the net fair market value of that type of property. However, the aggregate net fair market value of all property of New DC (determined in the manner described in paragraphs 19 and 20 above) transferred to each Holding Corporation as described herein will be equal to the proportion determined by (e) and (f) above of the aggregate net fair market value of all property of New DC (determined in the manner described in paragraphs 19 and 20 above) immediately before the transfer.

23. As consideration for the transfers of property by New DC to the Holding Corporations, as described in paragraph 22 above:

(a) each Holding Corporation will assume liabilities of New DC allocable to the property transferred to such Holding Corporation in the manner described in paragraph 20 above and which do not exceed in the aggregate:

(i) the aggregate of the amounts agreed on by New DC and such Holding Corporation in the election jointly made by them pursuant to subsection 85(1), as described in paragraph 24 below, and

(ii) the aggregate fair market value of all property of New DC transferred to such Holding Corporation that is not the subject of the joint election described in paragraph 24 below; and

(b) each Holding Corporation will issue to New DC XXXXXXXXXX shares of its capital stock that are voting, redeemable and retractable in the aggregate at an amount equal to the amount by which the aggregate fair market value of all property of New DC transferred to such Holding Corporation exceeds the aggregate fair market value of the non-share consideration for such property, as described in (a) above. The fair market value and redemption amount of each Holding Corporation's XXXXXXXXXX shares will be equal to the net fair market value of the consideration for which they are issued. Such XXXXXXXXXX shares will be hereinafter sometimes referred to as the "XXXXXXXXXX Shares".

The XXXXXXXXXX Shares of a particular Holding Corporation issued to New DC will represent more than 10%, but not more than 50%, of the issued share capital of such Holding Corporation having full voting rights under all circumstances. The aggregate fair market value of the XXXXXXXXXX Shares of a particular Holding Corporation issued to New DC will represent more than 10% of the fair market value of all of the issued share capital of such Holding Corporation. In accordance with XXXXXXXXXX, the amount that will be added to the stated capital account of the XXXXXXXXXX Shares of each Holding Corporation issued to New DC will not exceed the aggregate cost (determined under subsection 85(1), where applicable) of the property transferred to such Holding Corporation, less the amount of the non-share consideration for such property, as described in (a) above.

24. New DC and each Holding Corporation will jointly elect, in prescribed form and within the time referred to in subsection 85(6), under subsection 85(1) in respect of each property transferred as described in paragraph 22 above, that is an eligible property whose fair market value exceeds or may exceed the cost amount thereof to New DC. The agreed amount in each such election in respect of a particular eligible property included therein:

(a) will not be less than the lesser of the cost amount thereof to New DC and the fair market value thereof at the time of the transfer;

(b) will not be greater than the fair market value thereof at the time of the transfer; and

(c) will not be less than the amount of any liabilities assumed by the particular Holding Corporation as consideration for the transfer of such eligible property.

25. After the transfers described in paragraph 22 above, and immediately before the end of the first taxation year of each of the Holding Corporations, each Holding Corporation will redeem all of the XXXXXXXXXX Shares of its capital stock held by New DC at the redemption price thereof. Each Holding Corporation will pay the aggregate redemption price of the XXXXXXXXXX Shares of its capital stock by issuing to New DC a non-interest-bearing promissory note, which will be payable on demand, and which will have a principal amount and fair market value equal to the aggregate redemption price of the XXXXXXXXXX Shares so redeemed (such promissory notes are hereinafter referred to collectively as the "Transferee Notes" and individually as a "Transferee Note"). New DC will accept the Transferee Note of each Holding Corporation in full payment of the aggregate redemption price of the XXXXXXXXXX Shares in the capital stock of the particular Holding Corporation.

26. Immediately after the end of the first taxation year of each of the Holding Corporations, New DC will redeem at their redemption amount or purchase for cancellation at their fair market value all of the shares of New DC owned by each Holding Corporation. New DC will issue to each Holding Corporation, as consideration for the redemption or purchase for cancellation, a demand non-interest-bearing promissory note (hereinafter referred to as the "DC Note"). The DC Note will have a principal amount and fair market value equal to the total amount owing by New DC in respect of the shares of New DC so redeemed or purchased from the particular Holding Corporation. Each Holding Corporation will accept the DC Note issued to it as full payment of the amounts owing to it by New DC on the redemption or purchase for cancellation.

27. New DC and each Holding Corporation will set-off the principal amount of their mutual debt obligations (i.e., the DC Note issued to each Holding Corporation described in 26 above and the Transferee Note issued by each Holding Corporation to New DC as described in 25 above). The fair market value of the respective mutual debt obligations to be set-off will be equal to the principal amount owing in respect thereof at that time such that the mutual debt obligations will be fully settled or extinguished for an amount equal to the principal amount owing in respect thereof at that time.

28. After completion of the transactions described above, New DC will be wound up and dissolved.

29. A will transfer, at fair market value, all of his or her shares of Aco to A Holdco. As consideration, A Holdco will issue to A common shares of A Holdco with an aggregate fair market value equal to the aggregate fair market value of the shares so transferred to it, with the result that Aco will be a "subsidiary wholly-owned corporation" of A Holdco. The term "subsidiary wholly-owned corporation" as used here and subsequently, has the meaning assigned by subsection 87(1.4).

In accordance with XXXXXXXXXX, the amount that will be added to the stated capital account of the common shares so issued by A Holdco to A will be equal to the PUC of the shares of Aco transferred to it by A. For greater certainty, no non-share consideration will be paid by A Holdco in respect of the transfer of the shares so acquired by it.

A will jointly elect with A Holdco, in prescribed form and within the time referred to in subsection 85(6), under subsection 85(1) in respect of the transfer of the shares of Aco referred to above. The agreed amount in respect of such election will be equal to the ACB of the shares of Aco to A at the time of the transfer thereof to A Holdco, which will not exceed the fair market value thereof at that time.

A Holdco and Aco will be amalgamated pursuant to the XXXXXXXXXX to form New Aco in such manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of A Holdco and Aco immediately before the merger will become property of New Aco by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of A Holdco and Aco immediately before the merger become liabilities of New Aco by virtue of the merger; and

(c) the shares of the capital stock of A Holdco immediately before the merger will become shares of New Aco by virtue of the merger, and the shares of the capital stock of Aco will be cancelled.

30. B will transfer, at fair market value, all of his or her shares of Cco to B Holdco. As consideration, B Holdco will issue to B common shares of B Holdco with an aggregate fair market value equal to the aggregate fair market value of the shares so transferred to it, with the result that Cco will be a "subsidiary wholly-owned corporation" of B Holdco.

In accordance with XXXXXXXXXX, the amount that will be added to the stated capital account of the common shares so issued by B Holdco to B will be equal to the PUC of the shares of Cco transferred to it by B. For greater certainty, no non-share consideration will be paid by B Holdco in respect of the transfer of the shares so acquired by it.

B will jointly elect with B Holdco, in prescribed form and within the time referred to in subsection 85(6), under subsection 85(1) in respect of the transfer of the shares of Cco referred to above. The agreed amount in respect of such election will be equal to the ACB of the shares of Cco to B at the time of the transfer thereof to B Holdco, which will not exceed the fair market value thereof at that time.

B Holdco and Cco will be amalgamated pursuant to the XXXXXXXXXX to form New Cco in such manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of B Holdco and Cco immediately before the merger will become property of New Cco by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of B Holdco and Cco immediately before the merger become liabilities of New Cco by virtue of the merger; and

(c) the shares of the capital stock of B Holdco immediately before the merger will become shares of New Cco by virtue of the merger, and the shares of the capital stock of Cco will be cancelled.

31. C will transfer, at fair market value, all of his or her shares of Dco to C Holdco. As consideration, C Holdco will issue to C common shares of C Holdco with an aggregate fair market value equal to the aggregate fair market value of the shares so transferred to it, with the result that Dco will be a "subsidiary wholly-owned corporation" of C Holdco.

In accordance with XXXXXXXXXX, the amount that will be added to the stated capital account of the common shares so issued by C Holdco to C will be equal to the PUC of the shares of Dco transferred to it by C. For greater certainty, no non-share consideration will be paid by C Holdco in respect of the transfer of the shares so acquired by it.

C will jointly elect with C Holdco, in prescribed form and within the time referred to in subsection 85(6), under subsection 85(1) in respect of the transfer of the shares of Dco referred to above. The agreed amount in respect of such election will be equal to the ACB of the shares of Dco to C at the time of the transfer thereof to C Holdco, which will not exceed the fair market value thereof at that time.

C Holdco and Dco will be amalgamated pursuant to the XXXXXXXXXX to form New Dco in such manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of C Holdco and Dco immediately before the merger will become property of New Dco by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of C Holdco and Dco immediately before the merger become liabilities of New Dco by virtue of the merger; and

(c) the shares of the capital stock of C Holdco immediately before the merger will become shares of New Dco by virtue of the merger, and the shares of the capital stock of Dco will be cancelled.

32. D will transfer, at fair market value, all of his or her shares of Eco to D Holdco. As consideration, D Holdco will issue to D common shares of D Holdco with an aggregate fair market value equal to the aggregate fair market value of the shares so transferred to it, with the result that Eco will be a "subsidiary wholly-owned corporation" of D Holdco.

In accordance with XXXXXXXXXX, the amount that will be added to the stated capital account of the common shares so issued by D Holdco to D will be equal to the PUC of the shares of Eco transferred to it by D. For greater certainty, no non-share consideration will be paid by D Holdco in respect of the transfer of the shares so acquired by it.

D will jointly elect with D Holdco, in prescribed form and within the time referred to in subsection 85(6), under subsection 85(1) in respect of the transfer of the shares of Eco referred to above. The agreed amount in respect of such election will be equal to the ACB of the shares of Eco to D at the time of the transfer thereof to D Holdco, which will not exceed the fair market value thereof at that time.

D Holdco and Eco will be amalgamated pursuant to the XXXXXXXXXX to form New Eco in such manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of D Holdco and Eco immediately before the merger will become property of New Eco by virtue of the merger;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of D Holdco and Eco immediately before the merger become liabilities of New Eco by virtue of the merger; and

(c) the shares of the capital stock of D Holdco immediately before the merger will become shares of New Eco by virtue of the merger, and the shares of the capital stock of Eco will be cancelled.

Additional Transactions

33. Dco may amalgamate with XXXXXXXXXX, a taxable Canadian corporation the shares of which are wholly owned by C. For greater certainty, in the event that this amalgamation takes place, it will take place on or about the same time as the proposed amalgamation of C Holdco and Dco described in paragraph 31 above and after the transaction described in paragraph 22 above.

34. After the completion of the proposed transactions:

(a) New Aco may purchase from New Dco its portion of the XXXXXXXXXX by issuing to New Dco a non-interest-bearing demand promissory note with a principal amount and fair market value equal to the fair market value of its portion of the XXXXXXXXXX so purchased; and

(b) New Cco may purchase from New Eco its portion of the XXXXXXXXXX by issuing to New Eco a non-interest-bearing demand promissory note with a principal amount and fair market value equal to the fair market value of its portion of the XXXXXXXXXX so purchased.

You have represented that the value of the property to be acquired by each of New Aco and New Cco will be less than 10% of the net fair market value, at the time of the transfers described in paragraph 22 above, of all the property (other than money and indebtedness that is not convertible into other property) received by C Holdco and D Holdco respectively on the transfers described in paragraph 22 above.

35. The transactions described in paragraphs 14 to 32 will occur as follows:

(a) the transaction referred to in paragraph 14 will occur first;

(b) the transactions set out in paragraphs 15 to 27 will occur on the same day as and immediately after the transaction described in (a) above, in the order in which they are set out above, but before the transactions described in (c) below; and

(c) the transactions set out in paragraphs 28 to 32 will occur following the transactions described in (b) above.

Additional Information

36. Except as described herein, no property has, or will, become property of New DC or any predecessor corporation and no liabilities have been, or will be, incurred by New DC or any predecessor corporation in contemplation of and before the proposed transactions described above, except as described herein.

37. Except as described herein, none of the parties will dispose of any property to a partnership or an unrelated person as part of a series of transactions that includes the proposed transactions.

38. None of the parties is contemplating an acquisition of control of any corporation referred to above except as described herein.

39. None of the shares of New DC, any predecessor corporation of New DC or any Holding Corporation has been, or will be, at any time during the implementation of the proposed transactions described herein:

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

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

(c) the subject of a dividend rental arrangement as that term is defined in subsection 248(1).

40. None of New DC, any predecessor corporation of New DC or any Holding corporation is, or will be at the time of the proposed transactions, a "specified financial institution", within the meaning of subsection 248(1), or a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

41. None of the taxpayers referred to herein has any outstanding tax liabilities that could be affected by the proposed transactions described herein.

Purposes of the Proposed Transactions

A. The purpose of the proposed transactions is to simplify the complex corporate structure and arrangements currently in place by:

1. eliminating the interests that the DC Shareholders have indirectly in one another's holding companies through DC; and

2. enabling each of the DC Shareholders to have direct and separate ownership of their respective pro rata shares of the property of DC.

B. The purpose of the proposed amalgamations described in paragraphs 29 to 32 above, is to simplify the corporate structure of the holdings of each of the DC Shareholders following the reorganization by consolidating each of the Holding Corporations and its respective subsidiaries into that Holding Corporation.

C. The purpose of the proposed transfer of property described in paragraph 34 above is so that New Dco and New Eco will not be involved with the XXXXXXXXXX investment on a going forward basis.

Rulings Provided

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

A. Provided that the transferor and transferee jointly file an election pursuant to subsection 85(1), in prescribed form and within the prescribed time, in respect of the transfers of the shares of New DC described in paragraph 17 above, the provisions of subsection 85(1) will apply to the transfer of property such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply in respect of the transfers described herein.

B. The application of the provisions of subsection 84.1(1) to the transfers of the shares of New DC to the Holding Corporations as described in paragraph 17 above will not result in a reduction pursuant to paragraph 84.1(1)(a), in the PUC of the shares of the Holding Corporations issued on the transfers or in a dividend being deemed to be paid by the Holding Corporation to the transferor pursuant to paragraph 84.1(1)(b).

C. Provided that transferor and transferee jointly file an election pursuant to subsection 85(1), in the prescribed form and within the prescribed time, in respect of the transfers of property described in paragraph 22 above, the provisions of subsection 85(1) will apply, subject to the application of subsection 69(11), to the transfer of each eligible property such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to transferor and the cost thereof to transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply in respect of the transfers described herein.

D. The provisions of subsection 85(2.1) will not apply to reduce:

(i) the PUC of the shares of each respective Holding Corporation issued as consideration for the transfer by each of the DC Shareholders of its shares of New DC to his or her Holding Corporation, as described in paragraph 17 above, or

(ii) the PUC of the XXXXXXXXXX Shares of the Holding Corporations issued to New DC, as described in subparagraph 23(b).

E. As a result of the redemption by each Holding Corporation of the XXXXXXXXXX Shares issued to New DC, as described in paragraph 25 above, and the redemption or purchase for cancellation by New DC of its shares held by each Holding Corporation, as described in paragraph 26 above, the amount, if any, by which the amount paid on the redemption or purchase for cancellation exceeds the PUC of such shares immediately before the redemption or purchase for cancellation will be deemed, by virtue of paragraphs 84(3)(a) and 84(3)(b), to be a dividend paid by New DC and each Holding Corporation, as the case may be, and a dividend received by each Holding Corporation and New DC, as the case may be.

F. The amount of a deemed dividend described in ruling E above will be excluded from the proceeds of disposition of the share so redeemed or purchased for cancellation, as the case may be, by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54.

G. To the extent that a dividend that is deemed to be received by New DC and each Holding Corporation as described in ruling E above is a taxable dividend, such dividend will be included in computing the recipient's income pursuant to section 82 and paragraph 12(1)(j).

H. To the extent that a dividend that is deemed to be received by New DC and each Holding Corporation as described in ruling E 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, the provisions of subsections 112(2.1) to (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividends and the provisions of subsection 112(3) will apply to reduce any loss which may otherwise arise to the recipient as a result of the redemption or purchase for cancellation.

I. The dividends that are deemed to be received by New DC and each Holding Corporation, as described in ruling E above, will not be subject to tax under Part IV except as provided in paragraph 186(1)(b).

J. The dividends that are deemed to be received by New DC and each Holding Corporation, as described in ruling E above, will not be subject to tax under Parts IV.1 and VI.1 by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 and paragraph (a) of the definition of "excluded dividend" in subsection 191(1) because each of the dividend recipients will have a substantial interest, within the meaning of subsection 191(2), in the particular payor corporation.

K. By virtue of the provisions of paragraph 55(3)(b), the provisions of subsection 55(2) will not apply to the dividends that are deemed to be received by New DC and each Holding Corporation as described in ruling E above, 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 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 and, for greater certainty, subsection 55(3.1) will not apply to deny the application of paragraph 55(3)(b).

M. The set-off of the mutual obligations outstanding between a particular Holding Corporation and New DC under the DC Notes issued to such Holding Corporation and the Transferee Note issued by such Holding Corporation, as described in paragraph 27, will not give rise to a forgiven amount, within the meaning of subsection 80(1) and New DC or the particular Holding Corporation will not otherwise realize any gain or incur any loss as a result thereof.

N. With respect to the amalgamation of DC and Subco as described in paragraph 14 above, the provisions of subsection 87(1) will apply and subsection 87(1.1) will, for the purposes of paragraph 87(1)(c), apply to deem the shares of DC to be New DC shares received by the shareholder as consideration for the disposition of the shares of DC.

O. Provided that transferor and transferee jointly file an election pursuant to subsection 85(1), in the prescribed form and within the prescribed time, in respect of the transfers of property described in paragraphs 29 to 32 above, the provisions of subsection 85(1) will apply to the transfer of each eligible property such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition to the transferor and the cost thereof to the transferee pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply in respect of the transfers described herein.

P. Paragraph 84.1(1)(a) will not apply to reduce the PUC of the common shares issued by the transferee to the transferor, as described in paragraphs 29 to 32 above, nor will paragraph 84.1(1)(b) apply to deem a dividend to have been paid to the transferee by the particular transferor.

Q. With respect to the amalgamation of A Holdco and Aco as described in paragraph 29 above, the provisions of subsection 87(1) will apply and subsection 87(1.1) will, for the purposes of paragraph 87(1)(c), apply to deem the A Holdco shares to be New Aco shares received by the shareholder as consideration for the disposition of the A Holdco shares.

R. With respect to the amalgamation of B Holdco and Cco as described in paragraph 30 above, the provisions of subsection 87(1) will apply and subsection 87(1.1) will, for the purposes of paragraph 87(1)(c), apply to deem the B Holdco shares to be New Cco shares received by the shareholder as consideration for the disposition of the B Holdco shares.

S. With respect to the amalgamation of C Holdco and Dco as described in paragraph 31 above the provisions of subsection 87(1) will apply and subsection 87(1.1) will, for the purposes of paragraph 87(1)(c), apply to deem the C Holdco shares to be New Dco shares received by the shareholder as consideration for the disposition of the C Holdco shares.

T. With respect to the amalgamation of D Holdco and Eco as described in paragraph 32 above, the provisions of subsection 87(1) will apply and subsection 87(1.1) will, for the purposes of paragraph 87(1)(c), apply to deem the D Holdco shares to be New Eco shares received by the shareholder as consideration for the disposition of the D Holdco shares.

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

V. Subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed herein.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 issued by the Canada Customs and Revenue Agency ("the CCRA") and are binding on the CCRA provided the proposed transactions described herein are completed by XXXXXXXXXX.

Comment

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed:

(a) the determination of the ACB or fair market value of any property referred to herein or the PUC of any shares referred to herein;

(b) the determination of any of the balances of the CDA or RDTOH referred to herein; and

(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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