2001 Ruling 2001-0064363 - Spin-off butterfly

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

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Standard Spin-Off Butterfly.

Position: Favourable rulings provided.

Reasons: Complies with rules in section 55.

XXXXXXXXXX 2001-006436

Attention: XXXXXXXXXX

XXXXXXXXXX, 2001

Dear Sir/Madam:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We acknowledge receipt of your correspondence dated XXXXXXXXXX and our telephone conversations in connection herewith.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

DEFINITIONS

In this letter, unless otherwise expressly stated:

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

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

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

(d) "BCA" means the Business Corporations Act (XXXXXXXXXX);

(e) "Canco" refers to XXXXXXXXXX;

(f) "Canco1 Business" means the XXXXXXXXXX business of Canco;

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

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

(i) "GCO" refers to XXXXXXXXXX;

(j) "GCO Technology" refers to XXXXXXXXXX;

(k) "GCO1 Product Line" refers to the XXXXXXXXXX product line;

(l) "GCO2 Product Line" refers to the XXXXXXXXXX product line;

(m) "HCO" refers to XXXXXXXXXX;

(n) "ICO" refers to XXXXXXXXXX;

(o) "Newco" refers to XXXXXXXXXX;

(p) "NR Subco" refers to XXXXXXXXXX;

(q) "Old Canco" refers to the predecessor corporation of Canco as described in paragraph 1 of the Ruling;

(r) "paid-up capital" (also referred to as "PUC") has the meaning assigned by subsection 89(1);

(s) "Parentco" refers to XXXXXXXXXX a corporation incorporated in the state of XXXXXXXXXX;

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

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

(v) "Proposed Transactions" (also "Reorganization") means the transactions described in that section of this ruling request;

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

(x) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);

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

(z) "specified financial institution" (also referred to as "SFI") has the meaning assigned by subsection 248(1);

(aa) "specified investment business" ("SIB") has the meaning assigned by the definition in subsection 125(7) and subsection 248(1);

(bb) "stated capital" has the meaning assigned by the BCA;

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

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

(ee) "Transaction Date" means the date on which the Proposed Transactions will occur, which will be the date on which the Reorganization is effective. The Transaction Date will be a date that will be subsequent to the date of this advance income tax ruling in respect of the Proposed Transactions.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as set forth below.

Facts

1. Canco is a taxable Canadian corporation incorporated under the BCA with a fiscal year end of XXXXXXXXXX. As described further below, Canco was formed on XXXXXXXXXX by the amalgamation of a predecessor corporation, Old Canco, and a number of other related corporations. Canco is not a specified financial institution.

Old Canco was incorporated under the BCA on XXXXXXXXXX.

The authorized share capital of Canco consists of an unlimited number of voting common shares ("Canco common shares").

As of XXXXXXXXXX, there were XXXXXXXXXX Canco common shares issued and outstanding.

The stated capital and the PUC of the Canco common shares are nominal.

2. Canco is a wholly-owned subsidiary of Parentco. XXXXXXXXXX Parentco is a non-resident of Canada for purposes of the Act and does not carry on any business through a permanent establishment in Canada.

3. The Canco shares owned by Parentco are held as capital property.

4. Prior to its amalgamation, one of Canco's predecessors, GCO had entered into a XXXXXXXXXX agreement with Parentco and NR Subco, a wholly-owned subsidiary of Parentco. XXXXXXXXXX.

5. XXXXXXXXXX:

6. XXXXXXXXXX.

7. The assets of Canco include amounts receivable from related companies. Substantially all of the amount is owed by Parentco. The remaining amount is owed by various Canco subsidiaries. These inter-company receivables relate to trade receivables.

8. Canco does not currently have any balance in its RDTOH account. It is not expected that Canco will have any balance in its RDTOH account at the end of its taxation year in which the proposed transactions described below are implemented.

9. HCO, a corporation incorporated in the state of XXXXXXXXXX, is a wholly-owned subsidiary of Parentco. XXXXXXXXXX.

10. XXXXXXXXXX.

11. As at XXXXXXXXXX, the issued and outstanding share capital of ICO consisted of XXXXXXXXXX common shares. Canco owns XXXXXXXXXX common shares, representing XXXXXXXXXX% of the total common shares; while Parentco owns the remaining XXXXXXXXXX common shares. You have advised us that Canco has the ability to exercise significant influence over ICO.

12. Newco is a newly created corporation incorporated under the BCA on XXXXXXXXXX and is a taxable Canadian corporation. Prior to the transactions relating hereto, Newco will not have had any assets or liabilities. On incorporation, one (1) common share of Newco was issued to Parentco for nominal consideration. Newco's Articles of Incorporation provide that its authorized share capital consists of an unlimited number of common shares. The common shares are fully participating and are entitled to one vote per share.

Proposed Transactions

13. Newco's Articles of Incorporation will be amended to include an unlimited number of a class of special reorganization shares ("Newco Special Shares"). The Newco Special Shares will have the following attributes:

a) each Newco Special Share will be redeemable and retractable, subject to applicable law, for an amount equal to the aggregate fair market value of the consideration for which such shares are issued less any liabilities assumed by Newco in connection with the issuance of the shares divided by the number of Newco Special Shares issued, (the "Newco Redemption Amount", the total of which in respect of all Newco Special Shares is hereafter referred to as the "Newco Aggregate Redemption Amounts"), plus any declared but unpaid dividends;

b) the holder of each Newco Special Share will be entitled to a non-cumulative cash dividend as and when declared by the Board of Directors from time to time, which dividend need not also be declared on any other class of shares of Newco;

c) if Newco is liquidated, dissolved or wound-up, whether voluntary or involuntary, or its assets are otherwise distributed among the shareholders by way of repayment of capital, the holders of the Newco Special Shares shall be entitled to receive, before any distribution of any assets of Newco among the holders of the common shares, an amount in respect of each Newco Special Share held, equal to the Newco Redemption Amount plus any declared but unpaid dividends; and

d) the Newco Special Shares will not be the subject of a guarantee by an SFI or a secured commitment of any kind nor will they be party to a dividend rental arrangement.

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

(a) creating an unlimited number of a new class of common shares ("Canco New Common Shares"). Each Canco New Common Share will be a fully participating, voting share with the holder thereof entitled to one vote at meetings of the shareholders of Canco. The holders of the Canco New Common Shares shall be entitled to non-cumulative dividends as and when declared by the Board of Directors, from time to time. No dividend shall be declared or paid on the Canco New Common Shares unless a dividend is declared and paid on all classes of shares simultaneously. The terms of the Canco New Common Shares will differ from the Canco common shares to the extent required under the BCA to be treated as new shares;

(b) creating an unlimited number of non-voting, redeemable and retractable special reorganization shares ("Canco Reorganization Shares"). The Canco Reorganization shares will have the following attributes:

i. each Canco Reorganization Share will be redeemable and retractable, subject to applicable law, at a specified amount ("Canco Reorganization Shares Redemption Amount"). The Canco Reorganization Shares Redemption Amount is defined as the amount determined when the fair market value of all the issued and outstanding shares of Canco, immediately before the exchange of shares described in paragraph 14(c) below, is multiplied by a fraction, the numerator of which is the net fair market value immediately before the exchange of the business property relating to the Canco1 Business owned by Canco; and the denominator of which is the net fair market value of all business property of Canco, immediately before the exchange; and then, divided by the number of Canco Reorganization Shares issued and outstanding;

ii. the holders of the Canco Reorganization Shares shall be entitled to non-cumulative dividends, as and when declared by the Board of Directors, from time to time. No dividend shall be declared or paid on the Canco Reorganization Shares unless a dividend is declared and paid on all classes of shares simultaneously;

iii. if Canco is liquidated, dissolved or wound-up, whether voluntary or involuntary, or its assets are otherwise distributed, the holders of the Canco Reorganization Shares shall be entitled to receive, before any distribution of any assets of Canco among the holders of the Canco New Common Shares, an amount in respect of the Canco Reorganization Shares Redemption Amount plus any declared but unpaid dividends in respect of the Canco Reorganization Shares; and

iv. the Canco Reorganization Shares will not be the subject of a guarantee by an SFI or a secured commitment of any kind nor will they be party to a dividend rental arrangement.

(c) changing all of the existing issued and outstanding Canco common shares into one (1) Canco New Common Share and one (1) Canco Reorganization Share at the time of the Transaction Date (such exchange referred to hereinafter as the "Share Exchanges").

15. On the Share Exchanges Canco will add to its stated capital in respect of the Canco New Common Shares and the Canco Reorganization Shares, an amount equal to the aggregate PUC of the Canco common shares so exchanged immediately before the reorganization. The PUC of the outstanding common shares will be allocated between the Canco New Common Shares and the Canco Reorganization Shares based on the proportion that the fair market value of the Canco New Common Shares and the Canco Reorganization Shares, as the case may be, is of the fair market value of all new shares issued.

16. Canco will cancel each of the Canco common shares received as a result of the exchange as described in paragraph 14(c) above. The stated capital being maintained for the Canco common shares shall be decreased by an amount equal to the aggregate stated capital, immediately prior thereto, of such Canco common shares so cancelled by Canco immediately prior thereto.

17. Parentco, will obtain a clearance certificate as described in subsection 116(4) of the Act in respect of the transaction described in paragraph 14(c) above.

18. Parentco will transfer the Canco Reorganization Shares that it received as a result of the Share Exchanges described in paragraph 14, to Newco and as the sole consideration therefor Newco will issue to Parentco from treasury one Newco common share for each Canco Reorganization Share so transferred. In respect of this transfer, Parentco and Newco will jointly elect under subsection 85(1) in prescribed form and manner and within the time specified in subsection 85(6) or 85(7) in respect of the Canco Reorganization Shares transferred to Newco. The agreed amount for purposes of the election will be equal to the ACB to Parentco in respect of the transferred shares. For greater certainty, the ACB of the transferred shares will be less than the fair market value of the shares. The amount to be added to the stated capital of the common shares of Newco that will be issued as described herein will be equal to the PUC of the transferred Canco Reorganization Shares.

19. Parentco will obtain a clearance certificate as described in subsection 116(4) of the Act in respect of the transfer of the Canco Reorganization Shares as described in paragraph 18 above.

20. Immediately before the transfers of property described in paragraph 23 below, the property owned by Canco will be determined on a consolidated look-through basis by including the appropriate pro-rata share of the assets of any corporation over which Canco has the ability to exercise significant influence (Canco and any such corporation are hereinafter sometimes collectively called the "Group") and all such property will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1) and paragraph 55(3)(b):

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

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

c) business property, comprising all of the assets of the Group, 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) carried on by the Group.

For greater certainty, any tax accounts will not be considered property for the purposes of the proposed transactions in this letter.

For the purposes of this letter, Canco will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation.

For greater certainty, the fair market value of the shares of a particular corporation over which Canco has the ability to exercise significant influence and of any indebtedness receivable by Canco from such a corporation will be allocated among the above three (3) types of property by multiplying the fair market value of the shares of the particular corporation or amount receivable from the particular corporation, as the case may be, by the proportion that the net fair market value of each type of property owned by the particular corporation (as determined in this paragraph and paragraphs 21 and 22 below) is of the total net fair market value of all the property owned by the particular corporation.

21. In determining, on a consolidated look-through basis, the net fair market value of Canco's cash or near cash property, investment property and business property immediately before the transfers of property described in paragraph 23 below, liabilities of Canco and any corporation over which Canco has the ability to exercise significant influence will be allocated to, and be deducted in the calculation of, the net fair market value of each such type of property of such corporation in the following manner:

a) In determining, immediately before the transfers described in paragraph 23 below, the net fair market value of each type of property of a particular corporation over which Canco has the ability to exercise significant influence, the liabilities of the particular corporation (other than any amount owing to Canco) will be allocated to, and be deducted in the calculation of, the net fair market value of a type of property of the particular corporation in the following manner:

(i) current liabilities of the particular corporation will be allocated to the cash or near cash property of that corporation in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property owned by that corporation. To the extent that the total current liabilities so allocated exceed the total fair market value of all cash or near cash property of that particular corporation , that corporation will be considered to have a negative amount of cash or near cash property.

Provided that the net fair market value of the cash or near cash property of the particular corporation is positive, the net fair market value of all accounts receivable and prepaid expenses of the particular corporation that are initially classified in accordance with subparagraph 20(a) above as cash or near cash property that will relate to a business that will be carried on by the Group or Newco and that will be collected or consumed in the ordinary course of that business will then be reclassified as business property where the net fair market value is positive. Consequently, the resulting net fair market value of all cash or near cash property will be reduced by the total net fair market value (where it is positive) of such accounts receivable and prepaid expenses;

(ii) liabilities, other than current liabilities, of the particular corporation that relate to a particular property will then be allocated to the particular property (and effectively to the type of property to which the property belongs) to the extent of its fair market value. The liabilities pertaining to a type of property but not to a particular property will then be allocated to that type of property. To the extent that the allocation of liabilities to a type of property as described herein exceeds the total fair market value of that type of property of that corporation that corporation will be considered to have a negative amount of that type of property; and

(iii) any other remaining liabilities of the particular corporation will then be allocated to the cash or near cash property, investment property and business property of that corporation based on the relative net fair market value of each type of property prior to the allocation of such liabilities but after the allocation of the liabilities described in steps a)(i) and a)(ii) above. However, where a corporation is considered to have a negative amount of a type of property because of step a)(i) or a)(ii) above, for the purposes of allocating those remaining liabilities, the net fair market value of that type of property will be deemed to be nil resulting in none of those remaining liabilities being allocated to that type of property; and

b) In determining, on a consolidated look-through basis, the net fair market value of each type of property of Canco immediately before the transfers of property described in paragraph 23 below, Canco will include the appropriate pro-rata share of the net fair market value (or such negative amount due to steps a)(i) and a)(ii) above) of each type of property of any corporation over which Canco has the ability to exercise significant influence, and any liabilities of Canco will then be allocated to, and be deducted in the calculation of, the net fair market value of each type of property of Canco in the following manner:

(i) current liabilities of Canco will be allocated to the cash or near cash property of Canco in the proportion that the fair market value of each such property is of the fair market value of all cash or near cash property of Canco. The allocation of current liabilities as described herein will not, however, exceed the total fair market value of the cash or near cash property of Canco.

Accounts receivable and prepaid expenses that are initially classified in accordance with subparagraph 20(a) above as cash or near cash property, that will relate to a business that will be carried on by the Group or Newco and that will be collected or consumed in the ordinary course of that business, will then be reclassified as business assets. Consequently, the resulting net fair market value of all cash or near cash property will be reduced by the total net fair market value of such accounts receivable and prepaid expenses. The total net fair market value of such accounts receivable and prepaid expenses will be added to the fair market value of business property;

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

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

22. Deferred revenue represents revenue received or receivable in the ordinary course of Canco's business, the recognition of which has been deferred due to the legal obligation of Canco to either render services or provide XXXXXXXXXX to the clients or customers from which such revenues were received pursuant to the contract. Deferred revenue is considered as a liability for the purposes of the Proposed Transactions described herein to the extent that the amount of such deferred revenue gives rise to a legal obligation to repay such amount should the services not be provided or the XXXXXXXXXX not be delivered.

23. Immediately following the determination of the net fair market value of its cash or near cash property, its business property and its investment property, as described in paragraphs 20 to 22 above, Canco will transfer the assets of the Canco1 Business (the "Transferred Assets") to Newco in such manner that the net fair market value of each type of property so transferred to Newco (after allocating and deducting, in the matter described in paragraph 21 above, the liabilities of Canco which are to be assumed by Newco as described herein) will approximate that proportion of the net fair market value of all property of Canco of that type determined immediately before such transfer that

(a) the aggregate fair market value, immediately before the transfer, of all of the Canco Reorganization Shares at that time,

is of

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

For the purpose of this paragraph and paragraph 29 the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed XXXXXXXXXX%, determined as a percentage of the net fair market value of each type of property which Newco has received (or Canco has retained) as compared to what Newco would have received (or Canco would have retained) had it received (or retained) its appropriate pro rata share of the net fair market value of that type of property. However, the aggregate net fair market value of all property of Canco transferred to Newco as described herein will be equal to the proportion determined by (a) and (b) above of the aggregate net fair market value of all property of Canco immediately before the transfer.

As consideration for the property so transferred, Newco will:

(c) assume the liabilities of Canco relating to the Canco1 Business such that the net fair market value of each type of property of Canco transferred to Newco as described herein will approximate its proportionate share, as determined by the formula described in (a) and (b) above, of the total net fair market value of that type of property owned by Canco immediately before such transfers, and

(d) issue to Canco one (1) Newco Special Share having a fair market value and redemption amount equal to the amount by which the aggregate fair market value of the Transferred Assets exceeds the amount of the liabilities assumed by Newco as described in (c) above.

Newco will add to the stated capital account in respect of the Newco Special Share it issues an amount not exceeding the cost to Newco (as determined under section 85, where relevant) of the property transferred to it less any liabilities assumed by it.

24. In respect of the transfers described in paragraph 23 above, Canco and Newco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time limits referred to in subsection 85(6), in respect of the transfer of each asset that is an eligible property. The amount agreed upon in each such election in respect of each of the eligible properties so transferred will not be less than:

(a) in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(b) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii);

(c) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii); and

(d) in the case of inventory, the amount described in paragraph 85(1)(c.2).

In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount of any liabilities assumed by Newco as consideration for the transfer of such property.

For the purposes of the joint election described herein, the reference to "the undepreciated capital cost to the taxpayer of all property of that class immediately before the disposition" found in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to the taxpayer of all of the property of that class that the fair market value of the asset immediately before the disposition is of the fair market value of all property of that class immediately before the disposition.

The subsection 85(1) elections referred to herein will exclude any cash, accounts receivable and prepaid expenses.

25. Canco will redeem from Newco all of its Canco Reorganization Shares at the aggregate Canco Reorganization Shares Redemption Amount and will issue to Newco in consideration therefor a demand promissory note (hereinafter referred to as the "Canco Reorganization Shares Redemption Note") with a principal amount and fair market value equal to the aggregate Canco Reorganization Shares Redemption Amount. Newco will accept such Canco Reorganization Shares Redemption Note as full payment of the aggregate Canco Reorganization Shares Redemption Amount in respect of the redeemed Canco Reorganization Shares.

26. Immediately after the redemption of the Canco Reorganization Shares, Newco will redeem from Canco its Newco Special Share for an amount equal to the Newco Aggregate Redemption Amount (as defined in paragraph 18) and will issue to Canco in consideration therefor a demand promissory note (hereinafter referred to as the "Newco Redemption Note") with a principal amount and fair market value equal to the Newco Aggregate Redemption Amount. Canco will accept such note as full and absolute payment of the Newco Aggregate Redemption Amount in respect of the redeemed Newco Special Share.

27. Each of the Canco Reorganization Shares Redemption Note and the Newco Redemption Note will be a demand promissory note with interest payable only from the date of demand for payment by the holder to the date of payment of the amount owing under the particular note at a rate equal to the prime rate of the XXXXXXXXXX , as set from time to time.

28. The Canco Reorganization Shares Redemption Note issued by Canco and the Newco Redemption Note issued by Newco will be set off by each holder and issuer of the particular demand note and accepted as full payment by each of them. The Canco Reorganization Shares Redemption Note and the Newco Redemption Note will both thereupon be marked "paid in full" and cancelled.

29. After the mutual offset and the cancellation of the Canco Reorganization Shares Redemption Note and the Newco Redemption Note, the net fair market value of each type of property retained by Canco, determined in the manner described in paragraphs 20 to 22 above will approximate that proportion of the net fair market value of each such type of property of Canco immediately before the transfer of property to Newco described in paragraph 23 above that,

a) the total fair market value of all the issued and outstanding Canco shares (other than the Canco Reorganization Shares), immediately before the transfer described in paragraph 23 above,

is of

b) the total fair market value of all of the issued and outstanding shares of Canco immediately before those transfers.

30. Shortly after the transactions described above, Parentco will transfer to HCO all of the issued and outstanding Newco common shares. Parentco will comply with the provisions of section 116 to obtain from the Minister a certificate in prescribed form in respect of the disposition of the Newco common shares.

31. It is contemplated that HCO will raise new capital, including new equity capital, from external sources in the reasonably near future. Following the raising of such capital in HCO, Parentco will continue to hold a majority interest in and, for greater certainty, will retain voting control of HCO.

Additional Information

32. No assets have been or will be acquired or disposed of by, and no liabilities have been or will be incurred by Canco or any member of the Group in contemplation of and before the proposed transfers of property described in paragraph 23 above, except in the ordinary course of business or as described in this letter.

33. Except as described in this letter, no member of the Group will dispose of any of its assets as part of the proposed series of transactions, and Newco does not have any intention to dispose of any of its assets to an unrelated person subsequent to the proposed transactions.

34. None of the corporations referred to herein is, or will be at the time of the proposed transactions, an SFI.

35. Neither the Newco Special Shares nor the Canco Reorganization Shares will be, at any time during the implementation of the proposed transactions described herein:

(a) the subject of any undertaking or agreement 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).

Purpose of Transactions

36. The economics of Canco's business and the Canco1 Business are different from each other. While Canco has experienced slow growth and fewer new customers for its XXXXXXXXXX , the Canco1 Business has experienced a higher growth rate and a greater number of new customers. Canco believes that in order to increase or even maintain its current growth rate, the Canco1 Business must be separated from the existing business of Canco.

37. XXXXXXXXXX .

38. The separation of Canco's businesses into two separate independent corporations will enhance the ability of such corporations to pursue their independent strategies through an increased management focus on growth and profitability in their respective businesses. XXXXXXXXXX .

Rulings Requested and Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the exchange of shares of Canco described in paragraph 14(c) above such that:

a) the cost to Parentco of the Canco New Common Shares or the Canco Reorganization Shares, as the case may be, shall be deemed by paragraph 86(1)(b) to be that proportion of the aggregate ACB to Parentco, immediately before the Share Exchange, of the existing Canco Common Shares owned by Parentco, that,

(i) the fair market value, immediately after the Share Exchange, of all of the Canco New Common Shares or the Canco Reorganization Shares, as the case may be, received by Parentco,

is of

(ii) the aggregate fair market value, immediately after the Share Exchange, of all of the Canco New Common Shares and the Canco Reorganization Shares receivable by Parentco for its existing Canco common shares.

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

B. The provisions of subsection 85(1) will apply to the transfer by Parentco of its Canco Reorganization Shares to Newco, as described in paragraph 18 above, such that the agreed amount in respect of the transfer will be deemed to be Canco's proceeds of disposition therefor and the cost thereof to Newco. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer referred to herein.

C. The provisions of subsection 85(1) will apply to the transfer of each eligible property by Canco to Newco, as described in paragraph 23 above, such that the agreed amount in respect of each transfer of such property will be deemed to be Canco's proceeds of disposition therefore and the cost thereof to Newco. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

D. On the redemption by Canco of the Canco Reorganization Shares, as described in paragraph 25 above, and the redemption by Newco of the Newco Special Share, as described in paragraph 26 above:

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

(i) Canco will be deemed to have paid, and Newco will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Canco Reorganization Shares exceeds the PUC of those shares immediately before the redemption;

(ii) Newco be deemed to have paid, and Canco will be deemed to have received, a taxable dividend at that time equal to the amount, if any, by which the amount paid in respect of the redemption of the Newco Special Share exceeds the PUC of the share immediately before the redemption;

(b) the taxable dividends deemed to have been received by Newco and Canco as described in (a)(i) and (a)(ii) will, pursuant to subsection 112(1), be deductible in computing the taxable income of the recipient for the year in which the dividends are deemed to have been received and such deduction will not be denied by any of the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4);

(c) the amount of the deemed dividends described in (a)(i) and (a)(ii) above will be excluded from the proceeds of disposition of the shares and any loss arising from such disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(d) the deemed dividends referred to in (a)(i) and (a)(ii) above will not be subject to tax under Parts IV.1 or VI.1 of the Act on the basis that the dividends will be "excepted dividends" within the meaning of section 187.1 and "excluded dividends" within the meaning of subsection 191(1); and

(e) by virtue of subsection 186(2) and paragraph 186(4)(a), Newco will be connected with Canco and Canco will be connected with Newco. Consequently, Newco and Canco will not be subject to tax in respect of the dividends referred to in (a)(i) and (a)(ii) above under Part IV of the Act except as provided for in paragraph 186(1)(b).

E. The extinguishment of the Canco Reorganization Shares Redemption Note by Newco and the Newco Redemption Note by Canco as described in paragraph 28 above will not, in and of itself, result in a forgiven amount within the meaning of either subsection 80(1) or section 80.01. In addition, neither Canco nor Newco will realize any gain or incur any loss from the transfer and assignment to Canco of the Canco Reorganization Shares Redemption Note by Newco, the transfer and assignment to Newco of the Newco Redemption Note by Canco and the extinguishment and cancellation of the Canco Reorganization Shares Redemption Note and Newco Redemption Note.

F. Provided that as part of the series of transactions or events that includes the Proposed Transactions, there is not:

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

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

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

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

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

G. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not apply as a result of the Proposed Transactions described herein, in and by themselves.

H. As a result of the Proposed Transactions described herein, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

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

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could affect the rulings provided herein.

Comments

Nothing in this letter should be considered as confirmation of the income tax consequences of any of the transactions described in this letter other than as specifically described. In addition, nothing in this letter should be construed as confirmation, express or implied, of the fair market value or adjusted cost base of any property or the paid-up capital of any share.

Yours truly,

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