2002 Ruling 2002-0118973 - Internal Reorganization

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

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

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

Principal Issues:

Whether the internal reorganization is subject to the exemption under paragraph 55(3)(a)?

Whether the PUC reduction is subject to the provisions of subsection 84(2)?

Position:

Yes
Yes

Reasons:

Meets the requirements of the legislation. See the SPI for a detailed analysis.

XXXXXXXXXX 2002-011897

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re:
Tax Service Office/
Client                                     			Business No.		  Taxation Centre
XXXXXXXXXX  ("Foreignco")			N/A			N/A

XXXXXXXXXX  ("NSULC")		XXXXXXXXXX 	XXXXXXXXXX 

XXXXXXXXXX . ("Callco")		XXXXXXXXXX 	XXXXXXXXXX 

XXXXXXXXXX 				XXXXXXXXXX 	XXXXXXXXXX
 ("Exchangeco")
XXXXXXXXXX . ("ACO")			XXXXXXXXXX 	XXXXXXXXXX 

XXXXXXXXXX . 				XXXXXXXXXX 	XXXXXXXXXX
 ("Bco")

XXXXXXXXXX . ("ACO-America")	XXXXXXXXXX 	XXXXXXXXXX 

XXXXXXXXXX . ("Cco")			XXXXXXXXXX 	XXXXXXXXXX 

XXXXXXXXXX . ("DCO")			XXXXXXXXXX 	XXXXXXXXXX 

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above-noted taxpayers.

You have been advised by your clients that to the best of their knowledge, none of the issues involved in this ruling request, as they apply specifically to such respective parties:

(i) is in an earlier return;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return;

(iii) is under objection;

(iv) is before the courts; or

(v) is the subject of a previously issued ruling.

DEFINITIONS

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

(a) unless otherwise indicated, all references to a statute are to the Income Tax Act, R.S.C. 1985, c.l (5th Supp.), as amended to the date hereof (the "Act"), and all monetary amounts are expressed in Canadian dollars;

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

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

(d) "Callco" has the meaning assigned by paragraph 3 below;

(e) "Callco Class A Shares" has the meaning assigned by paragraph 1 below;

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

(g) "ACO" has the meaning assigned by paragraph 5 below;

(h) "ACO-America" has the meaning assigned by paragraph 7 below;

(i) "ACO Class X Common Shares" has the meaning assigned by paragraph 33 below;

(j) "ACO Class Y Special Shares" has the meaning assigned by paragraph 33 below;

(k) "ACO Class Y Aggregate Redemption Amount" has the meaning assigned by paragraph 33 below;

(l) "ACO Common Share Exchange" has the meaning assigned by paragraph 33 below;

(m) "ACO-US" has the meaning assigned by paragraph 9 below;

(n) "ACO-US Shares" has the meaning assigned by paragraph 9 below;

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

(p) "DW Holdco" has the meaning assigned by paragraph 4 below;

(q) "DCO" has the meaning assigned by paragraph 10 below;

(r) "DCO-US" has the meaning assigned by paragraph 11 below;

(s) "DCO-US Shares" has the meaning assigned by paragraph 11 below;

(t) "Exchangeco" has the meaning assigned by paragraph 4 below;

(u) "Exchangeco Class A Shares" has the meaning assigned by paragraph 1 below;

(v) "Exchangeco Note" has the meaning assigned by paragraph 35 below;

(w) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length;

(x) "Bco" has the meaning assigned by paragraph 6 below;

(y) "Cco" has the meaning assigned by paragraph 8 below;

(z) "NSULC" has the meaning assigned by paragraph 2 below;

(aa) "NSULC Class A Shares" has the meaning assigned by paragraph 22 below;

(bb) "NSULC Class A Redemption Amount" has the meaning assigned by paragraph 22 below;

(cc) "NSULC Class B Shares" has the meaning assigned by paragraph 22 below;

(dd) "NSULC Class B Redemption Amount" has the meaning assigned by paragraph 22 below;

(ee) "NSULC Common Shares" has the meaning assigned by paragraph 2 below;

(ff) "NSULC Note 1", "NSULC Note 2", and "NSULC Note 3" have the meanings assigned by paragraph 26 below;

(gg) "NSULC Note 4" has the meaning assigned by paragraph 31 below;

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

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

(jj) "Foreignco" has the meaning assigned by paragraph 1 below;

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

(kk.1) "stated capital" referred to in paragraphs 23, 24, 25 and 30 means the paid- up capital as determined under the Companies Act (XXXXXXXXXX).

(ll) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);

(mm) "substantial interest" has the meaning assigned by subsection 191(2);

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

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

Our understanding of the facts, proposed transactions and purposes of the proposed transactions is as follows:

FACTS

1. XXXXXXXXXX ("Foreignco") is a XXXXXXXXXX corporation that is a resident of the U.S. and a non-resident of Canada for purposes of the Act. Foreignco's common shares are listed on the XXXXXXXXXX Stock Exchange. Foreignco's business is to provide XXXXXXXXXX Foreignco's fiscal year ends on XXXXXXXXXX of each calendar year.

Foreignco owns all of the shares of NSULC, all of the class A non-voting shares of Exchangeco (the "Exchangeco Class A Shares") and all of the class A non-voting preference shares of Callco (the "Callco Class A Shares").

2. XXXXXXXXXX ("NSULC") is a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX. NSULC was incorporated under the Companies Act (XXXXXXXXXX) on XXXXXXXXXX.

The authorized share capital of NSULC consists of XXXXXXXXXX common shares (the "NSULC Common Shares"). The issued share capital of NSULC consists of XXXXXXXXXX NSULC Common Shares, all of which are held by Foreignco.

NSULC owns all of the issued common shares of Callco.

3. XXXXXXXXXX ("Callco") is a taxable Canadian corporation incorporated under the CBCA on XXXXXXXXXX and has not had its first taxation year-end.

The authorized share capital of Callco consists of an unlimited number of common shares and an unlimited number of Callco Class A Shares, retractable at $XXXXXXXXXX per share.

Callco's issued share capital consists of XXXXXXXXXX common shares, all of which are held by NSULC, and XXXXXXXXXX Callco Class A Shares, all of which are owned by Foreignco.

4. XXXXXXXXXX ("Exchangeco") is a public corporation and a taxable Canadian corporation and has a taxation year ending on XXXXXXXXXX of each calendar year. Exchangeco was formed on an amalgamation undertaken pursuant to the Companies Act (XXXXXXXXXX) effective XXXXXXXXXX, and has since been continued under the CBCA.

The authorized capital of Exchangeco consists of an unlimited number of common shares, an unlimited number of exchangeable shares, and an unlimited number of Exchangeco Class A Shares.

The holders of the common shares of Exchangeco are entitled to one vote per share, to receive such dividends as may be declared by the directors of Exchangeco, and are entitled upon any liquidation, dissolution or winding-up of Exchangeco, subject to the prior rights of the holders of exchangeable shares, to receive the remaining property and assets of Exchangeco. The Exchangeco Class A Shares are identical to the Exchangeco common shares with the exception that the Exchangeco Class A Shares possess no voting rights.

The exchangeable shares of Exchangeco are substantially economically equivalent to the common shares of Foreignco. The exchangeable shares are exchangeable at any time at the option of the holder on a one-for-one basis for common shares of Foreignco. Pursuant to a voting and exchange trust agreement, holders of the exchangeable shares are able to exercise essentially the same voting rights with respect to Foreignco as they would have if they had exchanged their exchangeable shares for common shares of Foreignco. Holders of exchangeable shares are entitled to receive from Exchangeco dividends that are economically equivalent to any dividends paid on Foreignco common shares.

Callco owns all the issued and outstanding (XXXXXXXXXX) Exchangeco common shares. Foreignco owns all the issued and outstanding Exchangeco Class A Shares (XXXXXXXXXX). The Exchangeco exchangeable shares are widely held and listed on the XXXXXXXXXX Stock Exchange.

Exchangeco owns all of the issued and outstanding shares of ACO other than those owned by XXXXXXXXXX . ("DW Holdco"), a wholly owned subsidiary of Exchangeco (as further described below). Exchangeco acquired most of its interest in ACO and all of its interest in DW Holdco in a transaction dated XXXXXXXXXX (the "Acquisition") as further described below.

5. XXXXXXXXXX ("ACO") is a taxable Canadian corporation and had a fiscal year which ended on XXXXXXXXXX. As a result of the Acquisition, ACO had a taxation year ending on XXXXXXXXXX. Prior to the Acquisition, the common shares of ACO were listed on the XXXXXXXXXX Stock Exchange and on the XXXXXXXXXX Stock Exchange. ACO is a public corporation.

ACO's authorized capital is comprised of an unlimited number of common shares, an unlimited number of class A preferred shares, an unlimited number of class B preferred shares, and an unlimited number of class C preferred shares. No class A preferred shares, class B preferred shares or class C preferred shares are issued and outstanding.

Each holder of an ACO common share is entitled to vote, to receive dividends as declared by the directors and, subject to the prior rights of holders of shares ranking senior to the common shares, is entitled upon any liquidation, dissolution or winding-up of ACO, to receive the remaining property and assets of ACO.

There are XXXXXXXXXX ACO common shares issued and outstanding, of which XXXXXXXXXX are held by Exchangeco and XXXXXXXXXX are held by DW Holdco.

ACO carries on, directly and through various subsidiaries, business activities similar to those carried on by Foreignco. ACO operates through subsidiaries in Canada, the U.S. and other parts of the world.

ACO owns all of the issued shares of Bco, ACO-America, Cco and DCO. ACO also owns XXXXXXXXXX of the issued ACO-US Shares.

6. XXXXXXXXXX ("Bco") is a taxable Canadian corporation, and a subsidiary wholly-owned corporation of ACO.

Bco had a fiscal year which ended on XXXXXXXXXX and as a result of the Acquisition, had a taxation year ending on XXXXXXXXXX

The authorized capital of Bco is comprised of an unlimited number of class A common shares, an unlimited number of class B common shares, an unlimited number of class C voting shares, and an unlimited number of class D, E, F and G non-voting, preference shares.

The issued share capital consists of XXXXXXXXXX class A common shares, all of which are held by ACO. The adjusted cost base to ACO of the class A common shares of Bco is nominal.

Bco owns XXXXXXXXXX of the issued ACO-US Shares.

7. XXXXXXXXXX ("ACO-America") is a taxable Canadian corporation, and a subsidiary wholly-owned corporation of ACO.

ACO-America had a fiscal year which ended on XXXXXXXXXX and as a result of the Acquisition, had a taxation year ending on XXXXXXXXXX.

The authorized capital of ACO-America is comprised of an unlimited number of class A common shares and an unlimited number of class B and class C non-voting preference shares.

The issued share capital consists of XXXXXXXXXX class A common shares, all of which are held by ACO. The adjusted cost base to ACO of the class A common shares of ACO-America is nominal.

ACO-America owns XXXXXXXXXX of the issued ACO-US Shares.

8. XXXXXXXXXX ("Cco") is a taxable Canadian corporation, and a subsidiary wholly-owned corporation of ACO.

Cco had a fiscal year which ended on XXXXXXXXXX and as a result of the Acquisition, had a taxation year ending on XXXXXXXXXX.

The authorized capital of Cco is comprised of an unlimited number of class A and class B voting common shares, an unlimited number of class C voting shares, and an unlimited number of class D, E, F and G non-voting preference shares.

The issued share capital consists of XXXXXXXXXX class A common shares and XXXXXXXXXX class E preference shares, all of which are held by ACO. The adjusted cost base to ACO of the class A common shares and class E preference shares of Cco is nominal.

Cco has indebtedness owing to ACO.

Cco currently does not own any ACO-US Shares.

9. XXXXXXXXXX ("ACO-US") is a corporation resident in the U.S. and a non-resident of Canada for purposes of the Act. ACO-US has several wholly-owned subsidiary corporations which are resident in the U.S.

The authorized capital of ACO-US consists of an unlimited number of common shares (the "ACO-US Shares").

The issued share capital consists of XXXXXXXXXX ACO-US Shares of which, XXXXXXXXXX are held by ACO, XXXXXXXXXX are held by Bco, and XXXXXXXXXX are held by ACO- America.

10. XXXXXXXXXX ("DCO") is a taxable Canadian corporation, and a subsidiary wholly-owned corporation of ACO. DCO had a taxation year which ended on XXXXXXXXXX (as a result of an acquisition of control) and then on XXXXXXXXXX and as a result of the Acquisition, had a taxation year ending on XXXXXXXXXX.

The authorized share capital of DCO is comprised of an unlimited number of common shares.

The issued share capital of DCO consists of XXXXXXXXXX common shares, all of which are held by ACO. The adjusted cost base to ACO of the DCO common shares is approximately $XXXXXXXXXX.

DCO is a public corporation that was acquired by ACO on XXXXXXXXXX , on a share for share exchange transaction.

DCO owns all of the issued DCO-US Shares.

11. XXXXXXXXXX ("DCO-US") is a corporation resident in the U.S. and a non-resident of Canada for purposes of the Act.

The authorized capital of DCO-US consists of XXXXXXXXXX common shares (the "DCO-US Shares").

The issued share capital of DCO-US consists of XXXXXXXXXX DCO-US Shares, all of which are held by DCO.

TRANSACTIONS IMPLEMENTED PRIOR TO THE PROPOSED TRANSACTIONS

12. The corporate structure described above is the result of a number of transactions, undertaken, generally, on or after XXXXXXXXXX. Prior to XXXXXXXXXX, Foreignco held, directly, all of the issued and outstanding shares of NSULC (1 NSULC Common Share) and Exchangeco (XXXXXXXXXX common shares). NSULC held all of the issued and outstanding shares of Callco (1 common share).

13. On or about XXXXXXXXXX, two taxable Canadian corporations, which were subsidiary wholly-owned corporations of ACO, were wound up into ACO.

Prior to the wind-up of XXXXXXXXXX owned XXXXXXXXXX of the ACO-US shares. As a result of the wind-up, ACO's direct interest in ACO-US increased from XXXXXXXXXX ACO-US Shares (XXXXXXXXXX%) to XXXXXXXXXX ACO-US Shares (XXXXXXXXXX%).

Prior to the wind-up of XXXXXXXXXX owned all of the shares of XXXXXXXXXX ("Mco"), a U.S. resident corporation. As a result of the wind-up, ACO became owner of all the issued and outstanding shares of Mco.

14. On XXXXXXXXXX, Foreignco transferred XXXXXXXXXX common shares in Exchangeco, being all the common shares then issued and outstanding, to NSULC in exchange for XXXXXXXXXX NSULC Common Shares. The share transfer was made pursuant to the provisions of section 85. The elected amount will be equal to the fair market value of the XXXXXXXXXX common shares of Exchangeco, being $ XXXXXXXXXX. The adjusted cost base and the fair market value of the NSULC Common Shares received in exchange for the transfer was equal to $XXXXXXXXXX.

15. On XXXXXXXXXX, NSULC transferred XXXXXXXXXX common shares of Exchangeco, being all of the common shares then issued and outstanding, to Callco, in exchange for XXXXXXXXXX common shares in Callco. The share transfer was made pursuant to the provisions of section 85. The elected amount will be equal to the fair market value and the adjusted cost base of the XXXXXXXXXX common shares of Exchangeco, being $ XXXXXXXXXX.

16. In XXXXXXXXXX, Exchangeco purchased XXXXXXXXXX ACO common shares in broker transactions on the XXXXXXXXXX Stock Exchange.

On or before XXXXXXXXXX, Exchangeco subscribed for XXXXXXXXXX shares of Foreignco common stock. Exchangeco paid for the subscription by issuing to Foreignco XXXXXXXXXX Exchangeco Class A Shares with a fair market value (and paid-up capital) of the shares equal to the fair market value of the Foreignco common stock subscribed for by Exchangeco ($XXXXXXXXXX). On XXXXXXXXXX, Exchangeco issued an additional XXXXXXXXXX Exchangeco Class A Shares to Foreignco in consideration for $XXXXXXXXXX.

17. On XXXXXXXXXX, by way of a plan of arrangement under section 192 of the CBCA, Exchangeco acquired all of the outstanding common shares of ACO (other than those held by Foreignco or its affiliates and those held by DW Holdco), and the ACO shareholders (other than Foreignco or its affiliates and DW Holdco) received from Exchangeco for each ACO common share held either:

? XXXXXXXXXX shares of Foreignco common stock; or

? in the case of Canadian resident ACO shareholders who validly so elected, XXXXXXXXXX exchangeable shares of Exchangeco (and certain ancillary rights), or a combination of shares of Foreignco common stock and exchangeable shares (and certain ancillary rights).

ACO shareholders who were not eligible to receive exchangeable shares or who were so eligible but did not validly elect to receive exchangeable shares received XXXXXXXXXX shares of Foreignco common stock for each ACO common share they owned.

Persons owning ACO common shares through a holding company at the time of the transaction and meeting certain conditions had the option of having Exchangeco acquire all of the shares of their holding company instead of the ACO common shares held by such holding company, in exchange for the same consideration otherwise receivable for such ACO common shares. This option was exercised by DW Holdco only, which held a total of XXXXXXXXXX common shares of ACO.

Pursuant to the arrangement, Exchangeco issued XXXXXXXXXX exchangeable shares (and certain ancillary rights) and delivered XXXXXXXXXX common shares of Foreignco to the public. Pursuant to the arrangement, XXXXXXXXXX of ACO common shares and all of the outstanding common shares of DW Holdco were acquired by Exchangeco. Upon completion of the arrangement, Exchangeco held, directly or indirectly, XXXXXXXXXX common shares of ACO, being all of the ACO common shares then issued and outstanding.

Pursuant to the arrangement, holders of exchangeable shares will be entitled to require Exchangeco to redeem, subject to the exercise by Callco of a retraction call right, any or all of the exchangeable shares held by such holder for consideration per exchangeable share equal to one common share of Foreignco plus an amount equal to accrued and unpaid dividends. In the event that a holder of exchangeable shares exercises the right to require Exchangeco to redeem any of its exchangeable shares, Callco will have an overriding retraction call right to purchase all but not less than all of those exchangeable shares, for consideration per exchangeable share consisting of one common share of Foreignco plus an amount equal to accrued and unpaid dividends. Upon Callco exercising its retraction call right, Callco has agreed to subscribe for common shares of Foreignco and as consideration Callco would issue, to Foreignco, Callco Class A Shares with a fair market value equal to the fair market value of the common shares of Foreignco. Since the Acquisition, some holders of exchangeable shares have requested redemption of their exchangeable shares. As a result, XXXXXXXXXX Callco Class A Shares have been issued to Foreignco.

It is represented that the Acquisition would have been implemented regardless of whether the proposed reorganization will be implemented. Further, it is represented that the proposed reorganization was not contemplated at the time the decision was made by Foreignco to acquire ACO.

TRANSACTIONS IMPLEMENTED OR TO BE IMPLEMENTED PRIOR TO THE PROPOSED TRANSACTIONS

18. On or about XXXXXXXXXX, ACO transferred to ACO-US, in exchange for ACO-US Shares, all of the issued and outstanding common shares of Mco.

19. On XXXXXXXXXX, DW Holdco was wound up into Exchangeco.

20. Further to the Acquisition, it has become necessary, for U.S. tax purposes to cause certain U.S. subsidiaries of ACO-US to repay some of their indebtedness. To that end, on XXXXXXXXXX, Cco subscribed for ACO-US Shares. Cco will, as consideration for the subscription, issue to ACO-US notes with a fair market value equal to the fair market value of the subscribed shares. The notes will be used by ACO-US and its U.S. subsidiaries to repay indebtedness. As a result of transactions related to the transactions described in this paragraph, Bco and other subsidiaries of ACO may acquire shares of Cco. None of the transactions contemplated in this paragraph will result in a disposition of property to a person that is unrelated to Foreignco or an increase in interest in any corporation of a person that is unrelated to Foreignco.

21. On or about XXXXXXXXXX, Foreignco will transfer to NSULC all of the Exchangeco Class A Shares in consideration for NSULC Common Shares.

21.1 ACO may transfer shares of foreign affiliates owned by it to ACO-US in exchange for additional ACO-US shares.

PROPOSED TRANSACTIONS

The following transactions will occur in the order presented below (unless otherwise indicated).

22. The articles of NSULC will be amended to create two new classes of preferred shares, being class A preferred shares (the "NSULC Class A Shares") and class B preferred shares (the "NSULC Class B Shares") and NSULC will be authorized to issue XXXXXXXXXX shares of each such class.

The NSULC Class A Shares will be redeemable and retractable for an amount (the "NSULC Class A Redemption Amount") equal to the result obtained when the fair market value of the property transferred to NSULC on the date of issuance of the NSULC Class A Shares less the amount of the non-share consideration, if any, paid, assumed or delivered by NSULC for the acquisition of such property is divided by the number of NSULC Class A Shares issued as consideration therefor.

The NSULC Class B Shares will be redeemable and retractable for an amount (the "NSULC Class B Redemption Amount") equal to the result obtained when the fair market value of the property transferred to NSULC on the date of issuance of the NSULC Class B Shares less the amount of the non-share consideration, if any, paid, assumed or delivered by NSULC for the acquisition of such property is divided by the number of NSULC Class B Shares issued as consideration therefor.

23. ACO will transfer to NSULC all of the ACO-US Shares it owns in consideration for NSULC Class A Shares with a fair market value equal to the fair market value of the ACO-US Shares so transferred. ACO and NSULC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraph 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to NSULC. As determined under the Companies Act (XXXXXXXXXX), the addition to the stated capital of the NSULC Class A Shares will be an amount equal to the fair market value of the ACO-US Shares so transferred.

24. Bco will transfer to NSULC all of the ACO-US Shares it owns in consideration for NSULC Class A Shares with a fair market value equal to the fair market value of the ACO-US Shares so transferred. Bco and NSULC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraph 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to NSULC. As determined under the Companies Act (XXXXXXXXXX), the addition to the stated capital of the NSULC Class A Shares will be an amount equal to the fair market value of the ACO-US Shares so transferred.

25. ACO-America will transfer to NSULC all of the ACO-US Shares it owns in consideration for NSULC Class A Shares with a fair market value equal to the fair market value of the ACO-US Shares so transferred. ACO America and NSULC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraph 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to NSULC. As determined under the Companies Act (XXXXXXXXXX), the addition to the stated capital of the NSULC Class A Shares will be an amount equal to the fair market value of the ACO-US Shares so transferred.

26. NSULC will redeem all of the NSULC Class A Shares (held by ACO, Bco and ACO-America) for an amount equal to their fair market value, being the product obtained when the NSULC Class A Redemption Amount is multiplied by the number of NSULC Class A Shares so redeemed. NSULC will satisfy the redemption price by issuing and delivering to ACO, Bco, and ACO-America, respectively, a non-interest- bearing note (the "NSULC Note 1", "NSULC Note 2" and "NSULC Note 3", respectively) payable on demand having a principal amount and fair market value equal to the redemption price of the NSULC Class A Shares so redeemed. ACO, Bco and ACO-America will accept such notes as full payment of the redemption price.

27. Bco will transfer the NSULC Note 2 to ACO as a dividend in kind.

28. ACO-America will transfer the NSULC Note 3 to ACO as a dividend in kind.

29. Cco will transfer all of the ACO-US Shares it owns to ACO in repayment of indebtedness owing by Cco to ACO and ACO will issue a non-interest-bearing promissory note to Cco with a principal amount equal to the amount, if any, by which the fair market value of the ACO-US Shares transferred exceeds the Cco indebtedness.

30. DCO will transfer to NSULC all of the DCO-US Shares in consideration for NSULC Class B Shares with a fair market value equal to the fair market value of the DCO-US Shares so transferred. DCO and NSULC will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer. The agreed amount in respect of the election will not be less than the lesser of the amounts specified in subparagraph 85(1)(c.1)(i) and (ii) and will not exceed the fair market value of the shares transferred to NSULC. As determined under the Companies Act (XXXXXXXXXX), the addition to the stated capital of the NSULC Class B shares will be an amount equal to the fair market value of the DCO-US Shares so transferred.

31. NSULC will redeem all of the NSULC Class B Shares (held by DCO) for an amount equal to their fair market value, being the product obtained when the NSULC Class B Redemption Amount is multiplied by the number of NSULC Class B Shares so redeemed. NSULC will satisfy the redemption price by issuing and delivering to DCO a non-interest-bearing note (the "NSULC Note 4") payable on demand having a principal amount and fair market value equal to the redemption price of the NSULC Class B Shares so redeemed. DCO will accept such note as full payment of the redemption price.

32. DCO will purchase for cancellation a certain number of its common shares (held by ACO) so that the fair market value of the common shares so purchased will be equal to the fair market value of the NSULC Note 4. DCO will transfer the NSULC Note 4 to ACO as payment of the purchase price.

33. ACO will file articles of amendment to create two new classes of shares, being Class Y special shares (the "ACO Class Y Special Shares") and the Class X common shares (the "ACO Class X Common Shares").

The ACO Class Y Special Shares will be redeemable and retractable and have a redemption amount (the "ACO Class Y Aggregate Redemption Amount") equal to the aggregate fair market value of NSULC Note 1, NSULC Note 2, NSULC Note 3, NSULC Note 4 and the ACO-US Shares transferred by Cco to ACO.

The ACO Class X Common Shares will have all the same rights and privileges of the ACO common shares except that the ACO Class X Common Shares will be entitled to XXXXXXXXXX votes per share instead of one vote per share.

Each ACO common share (all of which will be held by Exchangeco) will be exchanged for 1 ACO Class X Common Share and 1 ACO Class Y Special Share (such exchange referred to as the "ACO Common Share Exchange"). As a result of the ACO Common Share Exchange, the aggregate stated capital of the ACO common shares, immediately before such exchange, will be allocated pro-rata based on fair market value to the ACO Class X Common Shares and ACO Class Y Special Shares.

34. ACO will redeem all of the ACO Class Y Special Shares held by Exchangeco. ACO will pay the redemption price by transferring NSULC Notes 1, 2, 3 and 4 and the ACO-US Shares held by ACO to Exchangeco.

35. Exchangeco will reduce the stated capital of the Exchangeco Class A Shares held by NSULC by an amount equal to the aggregate fair market value of the ACO US Shares held by Exchangeco and NSULC Notes 1, 2, 3 and 4. On the stated capital reduction, Exchangeco will transfer to NSULC the NSULC Notes 1, 2, 3 and 4 and Exchangeco will issue to NSULC a non-interest-bearing promissory note (the "Exchangeco Note") payable on demand having a principal amount and fair market value equal to the fair market value of the ACO-US Shares held by Exchangeco. The NSULC Notes 1, 2, 3 and 4 will be cancelled.

36. NSULC will reduce the stated capital of the NSULC Common Shares by an amount equal to the principal amount of the Exchangeco Note and NSULC will transfer the Exchangeco Note to Foreignco on that reduction.

37. Exchangeco will transfer to Foreignco all of the ACO-US Shares held by Exchangeco as settlement and repayment of the Exchangeco Note.

SUBSEQUENT TRANSACTIONS

38. NSULC will exchange all of the ACO-US Shares held by it for preferred shares of ACO-US, which will be redeemable and retractable at an amount equal to the fair market value of the ACO-US Shares so exchanged. The preferred shares of ACO-US will have priority in the event of windup, liquidation, or redemption and no dividends may be paid on other classes of shares in an amount that would reduce the fair market value of the preferred shares below their redemption amount. The preferred shares will have voting rights on any matter involving a change to the preference, rights, conditions, or limitations attaching to them.

NSULC will exchange all of the DCO-US Shares held by it for preferred shares of DCO-US, which will be redeemable and retractable at an amount equal to the fair market value of the DCO-US Shares so exchanged. The preferred shares of DCO-US will have priority in the event of a windup, liquidation, or redemption and no dividends may be paid on other classes of shares in an amount that would reduce the fair market value of the preferred shares below their redemption amount.

The preferred shares will have voting rights on any matter involving a change to the preference, rights, conditions, or limitations attaching to them. Foreignco will subscribe for common shares of DCO-US.

PURPOSE OF THE PROPOSED TRANSACTIONS

39. The purpose of the proposed transactions is to reorganize the business structure of the ACO group of companies such that ACO will continue to operate its businesses in Canada and other parts of the world, except in the U.S. Foreignco will continue to operate the U.S. businesses. As a result of the proposed reorganization, Foreignco will own all of the common shares of ACO-US and DCO-US and will own all of the preference shares of ACO-US and DCO-US indirectly through NSULC, which, for U.S. tax purposes, is a disregarded entity.

ADDITIONAL INFORMATION

40. None of the shares of NSULC, Cco, Bco, ACO-America, ACO, DCO and none of the Exchangeco Class A Shares and Exchangeco common shares have 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.

41. None of NSULC, Cco, Bco, ACO-America, ACO, DCO or Exchangeco will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

42. None of NSULC, Cco, Bco, ACO-America, ACO, DCO or Exchangeco will be a specified financial institution prior to or during the completion of the proposed transactions.

RULINGS

Provided that the above statements constitute a complete and accurate disclosure of all the relevant facts, purposes of the proposed transactions and proposed transactions, we rule as follows:

A. The provisions of subsection 85(1) will apply to the transfers by ACO, Bco, ACO-America and DCO as described in paragraphs 23, 24, 25 and 30 above, respectively, such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition and NSULC's cost thereof under paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein. Subsection 85(2.1) will apply in determining the paid-up capital of the NSULC Class A Shares and the NSULC Class B Shares.

B. The cost to ACO, Bco, ACO-America and DCO of NSULC Note 1, NSULC Note 2, NSULC Note 3 and NSULC Note 4 respectively, received as consideration for the redemption price of the NSULC Class A Shares and NSULC Class B Shares, as described in paragraphs 26 and 31 above, will be equal to the principal amount of such notes.

C. By virtue of subsection 52(2), the cost to ACO of NSULC Note 2 and NSULC Note 3 received by ACO as a dividend in kind, as described in paragraphs 27 and 28 above, will be equal to the fair market value of such notes.

D. The cost to ACO of NSULC Note 4 received by ACO as consideration for the purchase price of the DCO common shares purchased for cancellation, as described in paragraph 32 above, will be equal to the principal amount of such note.

E. Subsection 84(3) will apply on the redemption (or purchase for cancellation):

(a) as described in paragraph 26 above, of the NSULC Class A Shares to deem NSULC to have paid and each holder of NSULC Class A Shares to have received;

(b) as described in paragraph 31 above, of the NSULC Class B Shares to deem NSULC to have paid and DCO to have received;

(c) as described in paragraph 32 above, of the DCO common shares to deem DCO to have paid and ACO to have received;

(d) as described in paragraph 34 above, of the ACO Class Y Special Shares to deem ACO to have paid, and Exchangeco to have received;

a dividend equal to the amount, if any, by which the amount paid upon such redemption exceeds the paid-up capital in respect of such shares immediately before such redemption, and any such dividend:

(e) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;

(f) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);

(g) will be excluded in determining the proceeds of disposition, to the recipient, of the shares so redeemed pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(h) will not be subject to tax under Part IV, except as provided by paragraph 186(1)(b); and

(i) will not be subject to tax under Part IV.1 and Part VI.1.

F. Provided that as part of the series of transactions or events that includes the proposed transactions described herein, there is no disposition or significant increase in interest as described in subparagraphs 55(3)(a)(i) to (v), then by virtue of paragraph 55(3)(a), subsection 55(2) will not apply to the taxable dividends referred to in Ruling E above or to the dividends paid by Bco and ACO-America, as described in paragraphs 27 and 28 above, respectively. For greater certainty, the proposed transactions described herein, in and by themselves, will not be considered to result in any disposition or increase in interest to an unrelated person as described in subparagraphs 55(3)(a)(i) to (v).

G. Provided that Exchangeco holds the ACO common shares as capital property, the provisions of subsection 86(1) will apply to the ACO Common Share Exchange, as described in paragraph 33 above, such that:

(a) The cost of the ACO Class Y Special Shares, or the ACO Class X Common Shares, as the case may be, received by Exchangeco on the ACO Common Share Exchange, will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate adjusted cost base to Exchangeco, immediately before the ACO Common Share Exchange, of the ACO common shares, that

i) the fair market value, immediately after the ACO Common Share Exchange, of the ACO Class X Common Shares, or the ACO Class Y Special Shares, as the case may be, is of

ii) the fair market value, immediately after the ACO Common Share Exchange, of all of the shares of ACO received by Exchangeco on the ACO Common Share Exchange.

(b) Exchangeco will be deemed by paragraph 86(1)(c) to have disposed of its ACO common shares for aggregate proceeds of disposition equal to the aggregate cost to Exchangeco of the shares received on the ACO Common Share Exchange.

H. The cost to Exchangeco of the NSULC Notes 1, 2, 3 and 4 received by Exchangeco as consideration for the redemption price of the ACO Class Y Special Shares, as described in paragraph 34 above, will be equal to the principal amount of such notes. The cost to Exchangeco of the ACO-US Shares received by Exchangeco as consideration for the redemption price of the ACO Class Y Special Shares, as described in paragraph 34 above, will be equal to the fair market value of such property.

I. Subsection 84(2) will apply, and subsection 84(4.1) will not apply, on the reduction of the stated capital of the Exchangeco Class A Shares, as described in paragraph 35 above, such that:

(a) Exchangeco will be deemed to have paid a dividend only to the extent that the amount paid by Exchangeco on the reduction of stated capital exceeds the amount by which the paid-up capital of the Exchangeco Class A Shares is reduced; and

(b) the amount received by NSULC on the reduction of the stated capital of the Exchangeco Class A Shares will be deducted in computing the adjusted cost base to NSULC of such shares by virtue of subparagraph 53(2)(a)(ii).

J. The cost to NSULC of the Exchangeco Note, received by NSULC on the reduction of the stated capital of the Exchangeco Class A Shares, as described in paragraph 35 above, will be equal to its fair market value.

K. The extinguishments of the NSULC Notes 1, 2, 3 and 4 as a result of the transfer of such notes to NSULC, as described in paragraph 35 above, will not give rise to a "forgiven amount", within the meaning thereof in subsections 80(1) and 80.01(1).

L. No dividend will be deemed to be paid by NSULC on the transfer of the Exchangeco Note to Foreignco, as described in paragraph 36 above, to the extent that the principal amount of the Exchangeco Note does not exceed the amount of the reduction of the paid-up capital of the NSULC Common Shares.

M. Subject to the application of subsection 40(3), the reduction of the stated capital of the Exchangeco Class A Shares, as described in paragraph 35 above, and of the NSULC Common Shares, as described in paragraph 36 above, will not, in and by itself, result in a disposition of the Exchangeco Class A Shares or the NSULC Common Shares, as the case may be, to the holder of such shares.

N. The provisions of subsections 15(1), 56(2), 56(4), 69(4), and 246(1) will not apply to any of the proposed transactions.

O. Subsection 245(2) will not be applied as a result of the proposed transactions, in and of themselves, to redetermine the tax consequences as confirmed in the rulings given above.

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

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Customs and Revenue Agency has agreed to or reviewed:

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

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

Yours truly,

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