2002 Ruling 2002-0139013 - Pubco Return of PUC; Exchange of Options

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 CCRA.

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

Principal Issues:

1. Whether certain assets can be distributed to shareholders of a public company as boot on a section 86 transaction.

2. Whether the exchange of stock options for stock options of two different companies is entitled to a 7(1.4) rollover.

Position:

1. Yes, see reasons below.

2. yes, provided the tests are met in the aggregate.

Reasons:

1. Provided value of the assets distributed is less than the paid-up capital (other than the paid-up capital created by pre-1971 CSOH) and the distribution is not made in lieu of an ordinary dividend.

2. Provided the aggregate "in-the-money" value of the new options does not exceed the "in-the-money" value of the old options. In order for the test to be met the optionholders must receive options which do not entitle them to receive the conditional rights to additional Aco shares (conditional on certain Target Shares being cancelled) that Target shareholders receive.

XXXXXXXXXX 2002-013901
XXXXXXXXXX, 2002

Dear Sirs:

Re: ADVANCE INCOME TAX RULING
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above noted persons (the taxpayers). We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.

You have advised that to the best of the knowledge of the taxpayers and yourselves, none of the issues involved in this Ruling:

? is in an earlier return of a taxpayer named herein or a related person;

? is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of a taxpayer named herein or a related person;

? is under objection or appeal by a taxpayer named herein or a related person; and

? is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

You have advised that to the best of your knowledge, the Proposed Transactions will not adversely affect the ability of the taxpayers named herein to pay their outstanding tax liabilities.

Our understanding of the facts, Proposed Transactions and the purpose of the Proposed Transactions is as follows:

DEFINITIONS

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

Statutory Terms

(a) "Act" means the Income Tax Act, chapter 1, R.S.C. 1985 (5th Supp.), as amended to the date hereof, and any reference to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the specified provision of the Act;

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

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

(d) "disposition" has the meaning assigned by subsection 248(1);

(e) "filing-due date" has the meaning assigned by subsection 248(1);

(f) "foreign accrual property income" has the meaning assigned by subsection 95(1);

(g) "foreign affiliate" has the meaning assigned by subsection 95(1);

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

(i) "prescribed stock exchange in Canada" has the meaning assigned by section 3200 of the Regulations;

(j) "principal amount" has the meaning assigned by subsection 248(1);

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

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

(m) "RRIF" means "registered retirement income fund" and has the meaning assigned by subsection 146.3(1);

(n) "RRSP" means "registered retirement savings plan" and has the meaning assigned by subsection 146(1);

(o) "Regulations" refers to the Income Tax Regulations;

(p) "related persons" has the meaning assigned by subsection 251(2);

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

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

Non-Statutory Terms

In this letter unless otherwise expressly stated:

(a) "Aco" means XXXXXXXXXX;

(b) "Aco Commitment" means the obligations of Aco, as a successor to Target in relation to the XXXXXXXXXX Share Rights, to issue Aco Shares to the holders of XXXXXXXXXX Share Rights;

(c) "Aco Right" means the right to receive an additional fraction of an Aco Share, contingent upon cancellation of the Escrow Shares, as described in Paragraph 17;

(d) "Aco Shares" means common shares without par value in the capital of Aco;

(e) "Aco Stock Option" means an option to acquire Aco Shares, including those issuable pursuant to the Aco Right, received on exchange of Target Stock Options as described in Paragraph 18;

(f) "Aco X Stock Option" means an option to acquire Aco Shares received on exchange of Target Stock Options pursuant to the Option Exchange Agreement and described in Paragraph 18.1;

(g) "Arrangement" means the transactions to be completed pursuant to section XXXXXXXXXX of the Company Act as contemplated in the Plan of Arrangement;

(h) "Assets" means certain property and assets of Target (including shares of the capital stock of XXXXXXXXXX and a XXXXXXXXXX% XXXXXXXXXX royalty on production of certain XXXXXXXXXX) to be sold to SpinCo as described in Paragraph 20;

(i) "Company Act" means the XXXXXXXXXX;

(j) "Effective Date" means the date on which a certified copy of the Final Order has been accepted for filing by the Registrar of Companies for XXXXXXXXXX;

(k) "Effective Time" means XXXXXXXXXX on the Effective Date;

(l) "Escrow Shares" means XXXXXXXXXX Target Shares registered in the name of an individual and held in escrow as described in Paragraph 5;

(m) "Final Order" means the final order of the Supreme Court of XXXXXXXXXX approving the Arrangement;

(n) "FMV" means "fair market value";

(o) "XXXXXXXXXX Share Rights" means the rights of the former shareholders of XXXXXXXXXX, a subsidiary wholly-owned corporation of Target, to receive Target Shares based on production XXXXXXXXXX;

(p) "Mr. X" means XXXXXXXXXX, a Canadian resident individual;

(q) "Option Exchange Agreement" means the agreement entered into by a Target Optionholder, Aco, Target, and SpinCo as described in Paragraph 19.1;

(r) "Paragraph" refers to a numbered paragraph in this Advance Income Tax Ruling;

(s) "Plan of Arrangement" means the arrangement in respect of which the application will be made for the Final Order approving the transactions described in Paragraphs 11 to 18, as amended from time to time;

(t) "Proposed Transactions" means the transactions described in Paragraphs 10 to 24 of this letter;

(u) "Registered Plans" refers to RRSPs and RRIFs;

(v) "SpinCo" means XXXXXXXXXX;

(w) "SpinCo Commitment" means the obligations of SpinCo, as a successor to Target in relation to the XXXXXXXXXX Share Rights, to issue SpinCo Shares to the holders of XXXXXXXXXX Share Rights;

(x) "SpinCo A Shares" means the Class A shares in the capital of SpinCo having a par value of $XXXXXXXXXX each;

(y) "SpinCo Shares" means common shares without par value in the capital of SpinCo;

(z) "SpinCo Stock Option" means an option to acquire SpinCo Shares received on exchange of Target Stock Options as described in Paragraphs 18 and 18.1;

(aa) "Target" means XXXXXXXXXX;

(bb) "Target A Shares" means the Class A common shares without par value in the capital of Target which are to be created in accordance with the Plan of Arrangement as described in Paragraph 11;

(cc) "Target B Shares" means the Target Shares redesignated as Class B common shares without par value in the capital of Target in accordance with the Plan of Arrangement as described in Paragraph 11;

(dd) "Target Dissenting Shareholder" means a holder of Target Shares who exercises that shareholder's right, if any, to dissent from the Plan of Arrangement;

(ee) "Target Note" means the non-interest-bearing promissory note of Target with a principal amount equal to the sum of (i) $XXXXXXXXXX and (ii) the aggregate FMV of the Assets on the Effective Date, divided by the number of Target A Shares issued pursuant to the Plan of Arrangement;

(ff) "Target Optionholders" has the meaning given to that term in Paragraph 3;

(gg) "Target Right" means a right to receive an Aco Right;

(hh) "Target Shares" means common shares without par value in the capital of Target;

(ii) "Target Share Option Plan" means the Employee Stock Option Plan of Target dated XXXXXXXXXX; and

(jj) "Target Stock Option" means an option, granted under the Target Share Option Plan and outstanding immediately before the Effective Time, to acquire Target Shares.

Unless otherwise indicated in this letter, all dollar amounts referred to herein are in Canadian dollars.

FACTS

1. Target is a public corporation and a taxable Canadian corporation with its head office at XXXXXXXXXX. The taxation year-end of Target is XXXXXXXXXX. Target deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

Target was incorporated in XXXXXXXXXX under the laws of the Province of XXXXXXXXXX and has an authorized share capital consisting of XXXXXXXXXX common shares without par value (referred to herein as the "Target Shares"). As of XXXXXXXXXX there were XXXXXXXXXX Target Shares issued and outstanding with an aggregate paid-up capital of $XXXXXXXXXX (approximately $XXXXXXXXXX per Target Share). The amount of paid-up capital that arose from the issuance of Target Shares for cash consideration is at least $XXXXXXXXXX. No amount of the paid-up capital has resulted directly or indirectly from Target's 1971 capital surplus on hand, as that expression was previously defined by paragraph 89(1)(l). The Target Shares are listed for trading on the XXXXXXXXXX.

Target is engaged in XXXXXXXXXX. Target does not have a policy of paying regular annual dividends on the Target Shares. Target's last dividend declaration, if any, was made prior to XXXXXXXXXX.

2. There are approximately XXXXXXXXXX holders of Target Shares of which approximately XXXXXXXXXX% are resident in the United States. The Canadian resident holders of Target Shares include Registered Plans. Mr. X has options to acquire Target Shares and owns, directly, or indirectly, approximately XXXXXXXXXX% of the issued and outstanding Target Shares and is the single largest holder of Target Shares.

3. Under the Target Share Option Plan, certain directors, officers, employees and consultants of Target and its subsidiaries (the "Target Optionholders") are entitled to acquire Target Shares at specified exercise prices of XXXXXXXXXX $XXXXXXXXXX $XXXXXXXXXX per share. Only a small number of Target Optionholders are performing services in Canada. As at XXXXXXXXXX there were XXXXXXXXXX options to acquire Target Shares outstanding at an exercise price of $XXXXXXXXXX per Target Share and XXXXXXXXXX options to acquire Target Shares outstanding at an exercise price of $XXXXXXXXXX per Target Share.

4. Target is obliged to issue XXXXXXXXXX Target Shares pursuant to the XXXXXXXXXX Share Rights.

5. XXXXXXXXXX.

6. SpinCo has recently been incorporated under the laws of the province of XXXXXXXXXX with an authorized share capital consisting of XXXXXXXXXX common shares without par value (SpinCo Shares), XXXXXXXXXX Class A shares par value $XXXXXXXXXX each (SpinCo A Shares) and XXXXXXXXXX preferred shares without par value, issuable in series. The SpinCo Shares, none of which are presently issued, are voting and fully participating. The SpinCo A Shares are voting but non-participating in dividends or on liquidation of SpinCo other than to receive the amount paid-up thereon. SpinCo may redeem the SpinCo A Shares for the amount paid-up thereon. All XXXXXXXXXX SpinCo A Shares have been issued to Target for the aggregate sum of $XXXXXXXXXX. Prior to implementation of the Proposed Transactions, SpinCo will not have any assets, other than the nominal consideration received on the issuance of the XXXXXXXXXX SpinCo A Shares, or liabilities and will not have engaged in any activity.

7. Aco is a public corporation and a taxable Canadian corporation incorporated under the laws of the Province of XXXXXXXXXX with its head office at XXXXXXXXXX. The taxation year-end of Aco is XXXXXXXXXX. Aco deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre.

Aco has an authorized capital consisting of XXXXXXXXXX common shares without par value and XXXXXXXXXX preferred shares with a par value of $XXXXXXXXXX each. As at XXXXXXXXXX, there were XXXXXXXXXX Aco Shares issued and outstanding and listed for trading on the XXXXXXXXXX Stock Exchange, a prescribed stock exchange in Canada.

8. Agreement has been reached for the acquisition of Target by Aco on the following general terms:

(a) Target will spin off the Assets and $XXXXXXXXXX for each Target Share issued and outstanding immediately before the Effective Time and $XXXXXXXXXX for each Target Share otherwise issuable on the exercise of Target Stock Options or pursuant to the XXXXXXXXXX Share Rights;

(b) The holders of Target Shares, Target Stock Options and XXXXXXXXXX Share Rights immediately before the Effective Time may benefit from the cancellation of the Escrow Shares, if and when cancellation occurs, to the same extent as if cancellation had occurred before the Effective Time and there had been a proportionate increase in the ratio of Aco Shares to be issued on the acquisition of Target Shares;

(c) Target Stock Options will be exchanged for Aco Stock Options and SpinCo Stock Options;

(d) The holders of XXXXXXXXXX Share Rights will receive the same number of Aco shares and SpinCo shares as they would have received had their future entitlement to Target Shares been realized before the Effective Time; and

(e) Holders of Target Shares will receive XXXXXXXXXX Aco shares for each Target Share held immediately before the Effective Time.

The Target shareholders have approved the Arrangement. Each Target Shareholder was entitled to dissent from the Plan of Arrangement pursuant to the provisions of the Plan of Arrangement.

9. Target is of the view that the value of a Target Right and of an Aco Right is nominal. The sum of the FMV of a Target Right and a Target Note received on exchange of the Target B Shares will not exceed the paid-up capital in respect of the Target B Shares. The aggregate FMV of all Target Notes and all Target Rights received on the exchange of Target B Shares will not exceed $XXXXXXXXXX.

PROPOSED TRANSACTIONS

Subject to, inter alia, the appropriate approvals and except as indicated below, the Proposed Transactions will be undertaken pursuant to the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Effective Date in the order set out below.

10. Pursuant to the arrangement provisions of the Company Act, Target will obtain the Final Order for the Plan of Arrangement.

11. Authorized share capital of Target will be amended to redesignate the Target Shares as Target B Shares having the same terms and conditions as the Target Shares. The Target Shares will not be cancelled, nor will the holders of Target Shares become entitled to any proceeds of disposition as a consequence of the redesignation.

Authorized share capital of Target will also be amended to create the Target A Shares.

12. The holders of Target B Shares (other than any Target Dissenting Shareholders) will exchange each Target B Share for a Target A Share, a Target Right and a Target Note. No election will be made pursuant to subsection 85(1) or 85(2) in respect of the exchange of a Target B Share for a Target A Share, a Target Right and a Target Note. Pursuant to the Company Act, the capital of Target with respect to the Target A Shares will be equal to the aggregate issue price of the Target A Shares being an amount equal to the FMV of the Target B Shares acquired by Target less the aggregate FMV of the Target Notes and the Target Rights issued. The aggregate FMV of the Target Note and the Target Rights will not exceed the paid-up capital in respect of the Target B Shares.

13. The paid-up capital of Target will be reduced by an amount equal to the aggregate FMV of the Target Rights and principal amount of the Target Notes.

14. The Target B Shares (other than Target B Shares held by Target Dissenting Shareholders) will be cancelled.

15. The holders of Target Notes will subscribe for a number of SpinCo Shares equal to the number of Target A Shares held at the Effective Time and will assign the Target Notes to SpinCo in payment of the subscription price therefor.

16. The holders of Target A Shares will exchange each Target A Share for XXXXXXXXXX Aco Shares. No fractional Aco Share will be issued in connection with this exchange and any fraction of XXXXXXXXXX or greater will be rounded up to a whole Aco share and any fraction of less than XXXXXXXXXX will be cancelled.

17. The holders of Target Rights will exchange each Target Right for a non-transferable right (the "Aco Right") to receive additional Aco Shares. Each Aco Right will entitle the holder to a fraction of an additional Aco Share which is:

A
B
where
A XXXXXXXXXX, and
B is the number of Target A Shares (plus the number of Target A Shares issuable both upon exercise of Target Stock Options and pursuant to the XXXXXXXXXX Share Rights) minus the number of XXXXXXXXXX Shares

18. The Target Optionholders at the Effective Time, other than those Target Optionholders who enter into an Option Exchange Agreement, will exchange their Target Stock Options for Aco Stock Options and SpinCo Stock Options on the basis of exchange described in Paragraph 19.

18.1 The Target Optionholders who enter into an Option Exchange Agreement will exchange their Target Stock Options for Aco X Stock Options and SpinCo Stock Options on the basis of exchange described in Paragraph 19.1.

19. Each of the Target Stock Options held by a Target Optionholder, other than a Target Optionholder who enters into an Option Exchange Agreement, will be exchanged for:

(a) An Aco Stock Option, pursuant to which the Target Optionholder will be entitled to acquire:

i. that number of Aco Shares that is equal to the number of Target Shares issuable upon exercise of the Target Optionholder's Target Stock Option immediately before the Effective Time multiplied by XXXXXXXXXX and the exercise price per Aco Share of an Aco Stock Option will be equal to the exercise price per share of the exchanged Target Stock Option in effect immediately before the Effective Time, less $XXXXXXXXXX, divided by XXXXXXXXXX, and

ii. one Aco Right for each XXXXXXXXXX Aco Shares acquired under the Aco Stock Option; and

(b) A SpinCo Stock Option pursuant to which the holder is entitled to acquire that number of SpinCo Shares that is equal to the number of Target Shares issuable upon exercise of the Target Optionholder's Target Stock Option in effect immediately before the Effective Time and the exercise price per SpinCo Share of the SpinCo Stock Option will be $XXXXXXXXXX.

19.1 A Target Optionholder may enter into an agreement at or before the Effective Time (an "Option Exchange Agreement") with Aco, Target and SpinCo providing for the exchange of Target Stock Options for Aco X Stock Options and SpinCo Stock Options on terms and conditions other than those set forth in the Plan of Arrangement.

The terms and conditions of the Option Exchange Agreement are intended to ensure that the aggregate "in-the-money" value of the Aco X Stock Options and SpinCo Stock Options immediately after the Effective Time is equal to, and no greater than, the "in-the-money" value of the Target Stock Options immediately before the Effective Time. For such purposes, the "in-the-money" value of Target Stock Options in respect of each Target Share shall be the XXXXXXXXXX closing trading price of a Target Share on the Effective Date less the relevant option exercise price. The "in-the-money" value of SpinCo Stock Options in respect of each SpinCo Share shall be the principal amount of a Target Note less $XXXXXXXXXX.

An Aco X Stock Option will entitle the Target Optionholder to acquire that number of Aco Shares that is equal to the number of Target Shares issuable upon exercise of the Target Optionholder's Target Stock Option immediately before the Effective Time multiplied by XXXXXXXXXX and the exercise price per Aco Share of an Aco X Stock Option received on exchange of a Target Stock Option shall be the amount which is the greater of (1) the price determined in Paragraph 19(a), and (2) the amount by which XXXXXXXXXX times the XXXXXXXXXX Stock Exchange closing trading price of an Aco Share on the Effective Date exceeds the aggregate of (i) the "in-the-money" value of a SpinCo Stock Option, and (ii) the "in-the-money" value of a Target Stock Option, divided by XXXXXXXXXX.

If the calculation of the number of Aco Shares issuable under an Aco Stock Option or Aco X Stock Option results in a fraction of an Aco Share, the number of Aco Shares subject to such Aco Stock Option or Aco X Stock Option will be rounded down to the next whole number of Aco Shares. The term to expiry, conditions to and manner of exercising, vesting schedule, the status under all applicable laws, and all other terms and conditions of the Aco Stock Options and Aco X Stock Options, as the case may be, and the SpinCo Stock Options will otherwise be unchanged from those contained in or applicable to the related Target Stock Options.

20. Target will redeem the Target Notes on payment to SpinCo of the Assets and a sum of money equal to the aggregate principal amount of the Target Notes less the FMV of the Assets.

21. SpinCo will redeem and cancel the SpinCo A Shares on payment to Target of the $XXXXXXXXXX amount paid-up thereon.

22. In accordance with the terms of the XXXXXXXXXX Share Rights, the holders thereof will be entitled to receive the securities for which the Target Shares have been exchanged as and when the Target Shares would have been issued to them. Accordingly, holders of XXXXXXXXXX Share Rights may receive up to XXXXXXXXXX SpinCo Shares on the basis of one SpinCo Share for each Target Share that would have been issued from time to time pursuant to the XXXXXXXXXX Share Rights. Any such SpinCo shares would be issued at a price of $XXXXXXXXXX per share and that amount will be paid by Aco on behalf of the holder of XXXXXXXXXX Share Rights. Similarly, Aco will issue up to XXXXXXXXXX Aco Shares and XXXXXXXXXX Aco Rights to the holders of XXXXXXXXXX Share Rights on the basis of XXXXXXXXXX Aco Shares and one Aco Right for each Target Share that would have been issued from time to time pursuant to the XXXXXXXXXX Share Rights. Such Aco Shares and Aco Rights would be issued for no consideration.

23. The escrow under which the Escrow Shares are held immediately before the Effective Time will be maintained after the Effective Time in respect of the SpinCo Shares and the Aco Shares and Aco Rights. Cancellation of the escrow, if and when it occurs, will be in respect of the SpinCo Shares, the Aco Shares and the Aco Rights.

24. Target will be required to purchase Target B Shares from the Target Dissenting Shareholders and these Target B Shares will be cancelled.

PURPOSE OF THE PROPOSED TRANSACTIONS

The spin-off of Target Assets and cash to SpinCo could be achieved by other means such as the transfer of Assets and cash to SpinCo for SpinCo Shares which would then be distributed to holders of Target Shares on a direct reduction of capital of Target or in the course of a reorganization of capital of Target pursuant to section 86 but such distribution of SpinCo Shares would be required to be qualified by prospectus under applicable securities laws. The distribution by Target of a security of its own issue (the Target Note) and the exchange of Target Notes for SpinCo Shares are exempt distributions under applicable securities laws. The SpinCo Shares would be subject to a resale restrictions prior to listing of SpinCo Shares on a stock exchange. This may occur coincident with the implementation of the Proposed Transactions or at a later time without hindering the completion of the acquisition of Target by Aco.

The issuance of a Target Note rather than a security of Target that is a share (with a paid-up capital that would be equal to the principal amount of the Target Note) allows the exchange for SpinCo Shares to proceed without the need for non-resident holders to obtain a section 116 clearance certificate. No gain would be reported in the request for such a clearance certificate.

The benefit, if any, of cancellation of the Escrow Shares will accrue only to the holders, immediately before the Effective Time, of Target Shares by means of the Aco Right. The recognition of the Target Right and the exchange thereof for an Aco Right separate from the exchange of Target Shares for Aco Shares will avoid the need to consider whether the Aco Right would be "other consideration" for purposes of paragraph 85.1(2)(c). No such arrangements are required in relation to the SpinCo Shares as the holders thereof immediately after the Effective Time will be the same as the holders of the Target Shares immediately before the Effective Time.

The holders of XXXXXXXXXX Share Rights similarly participate in the benefit, if any, of cancellation of the Escrow Shares by receiving an Aco Right (or additional Aco Shares if cancellation has first occurred) as and when they become entitled to Aco Shares. As is the case with holders of Target Shares immediately before the Effective Time, it is not necessary to make similar arrangements with respect to SpinCo Shares that may be received by holders of XXXXXXXXXX Share Rights as they will be holding the same number of SpinCo Shares as they would have held if their XXXXXXXXXX Share Rights had matured prior to the Effective Time.

The advantage of the agreement under which the XXXXXXXXXX Share Rights were created will remain with Target and indirectly with Aco. The cash the Target will spin-off to SpinCo is equal to $XXXXXXXXXX for each issued Target Share and each Target Share that may be issued pursuant to the XXXXXXXXXX Share Rights. No additional consideration is required to be paid by holders of XXXXXXXXXX Share Rights for Aco Shares and SpinCo Shares as and when they become issuable in replacement for Target Shares. SpinCo will issue each SpinCo Share to holders of XXXXXXXXXX Share Rights at a price of $XXXXXXXXXX which will be paid by Aco on behalf of the holder of XXXXXXXXXX Share Rights.

SpinCo is also to receive $XXXXXXXXXX of Target cash for each Target Share that was issuable under Target Stock Options immediately before the Effective Time. By attributing $XXXXXXXXXX of the exercise price under Target Stock Options to SpinCo Stock Options this requirement can be met when the SpinCo Stock Options are exercised.

The purpose of Target holding SpinCo A Shares immediately before the Effective Time and of ordering the Proposed Transactions under the Plan of Arrangement is to ensure that at the time the Target Stock Options are exchanged for Aco Stock Options and SpinCo Stock Options, Target will be related to each of Aco and SpinCo and therefore will not deal at arm's length with Aco and SpinCo for purposes of subparagraph 7(1.4)(b)(ii).

The Plan of Arrangement provides for the exchange of Target Stock Options for SpinCo Stock Options and Aco Stock Options in a fixed ratio of one SpinCo Share, XXXXXXXXXX Aco Shares, and one Aco Right for each Target Share that was issuable under a Target Stock Option and at the exercise price payable thereunder. Such exchange of Opions is unlikely to meet the requirements of paragraph 7(1.4)(c) unless the market trading prices on the Effective Date of the Aco Shares issuable under the Aco Stock Option, including the Aco shares issuable pursuant to the Aco Right is sufficiently low relative to the market price on the Effective Date of Target Shares that the "in-the-money" value of a SpinCo Stock Option and an Aco Stock Option immediately after the Effective Time is no greater than the "in-the-money" value of a Target Stock Option immediately before the Effective Time. The purpose of allowing certain Target Optionholders to enter into the Option Exchange Agreement is to ensure that, for Target Optionholders that would be taxable in Canada on a subsection 7(1) employment benefit, the requirements of paragraph 7(1.4)(c) can be satisfied by excluding from the Aco Stock Option the shares that would be issuable under the Aco Right and by increasing the exercise price of the Aco X Stock Option by an amount, if any, that is required to reduce the "in-the-money" value of the Aco X Stock Option to the "in-the-money" value of the Target Stock Option less the "in-the-money" value of the SpinCo Stock Option.

RULINGS REQUESTED AND GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, Proposed Transactions, and purpose of the Proposed Transactions and provided further that the Proposed Transactions are carried out as described above, our rulings are as follows:

A. The holders of Target Shares will not be considered to have disposed of their Target Shares by virtue only of the redesignation of the Target Shares as Target B Shares pursuant to the Plan of Arrangement and referred to in Paragraph 11 of the Proposed Transactions.

A.1 Provided that the Target Shares constitute capital property to their holders (and for the purpose of the Rulings contained herein, where prior to the Proposed Transactions, Target Shares were held as capital property to a particular holder, the Proposed Transactions described herein will not in and of themselves cause Target Shares not to be considered capital property of the particular holder) subsection 86(1) will apply to the exchange of a Target B Share for a Target A Share, a Target Right, and a Target Note as described in Paragraph 12 with the result that:

(a) the cost to a holder of Target Rights received on the reorganization of the capital of Target will be deemed by paragraph 86(1)(a) to be equal to the FMV of such Target Rights received on the reorganization;

(b) the cost to a holder of Target Notes received on the reorganization of the capital of Target will be deemed by paragraph 86(1)(a) to be equal to the FMV of such Target Notes received on the reorganization;

(c) the cost to a holder of Target A Shares received on the reorganization of the capital of Target will be deemed by paragraph 86(1)(b) to be equal to the amount, if any, by which the holder's ACB of Target B Shares exceeds the aggregate of the FMV of the Target Rights and Target Notes received by on the reorganization;

(d) a holder of Target B Shares will be deemed by paragraph 86(1)(c) to have disposed of such shares for proceeds of disposition equal to the aggregate cost to such holder of the Target Rights, Target Notes and Target A Shares received on the reorganization of the capital of Target.

B. The provisions of subsections 84(1) and (3) will not apply to deem a holder of Target B Shares to have received a dividend as a result of the reorganization of capital described in Paragraph 12, because subsection 86(2.1) will apply to reduce the paid-up capital of the Target A Shares.

C. Provided that the Target B Shares constitute capital property to the holders thereof, the provisions of subsection 84(4.1) will not apply to deem the reduction in the paid-up capital of Target consequent upon the reorganization of capital described in Paragraph 12 and the application of subsection 86(2.1) to be a dividend paid by Target and received by the holders of Target B Shares.

D. Provided that a holder of Target A Shares who, immediately before the exchange of shares described in Paragraph 16, holds the Target A Shares as capital property:

(a) deals at arm's length with Aco immediately before such exchange,

(b) does not include any portion of the gain or loss, otherwise determined, from the disposition of Target A Shares, in computing income for the taxation year in which the share exchange takes place, and, in the case of a holder of Target A Shares that is a foreign affiliate of a taxpayer resident in Canada at the end of the taxation year of the holder, does not include any portion of the gain or loss, otherwise determined, from the disposition of Target A Shares, in computing its foreign accrual property income for the taxation year of such holder in which the share exchange occurs;

(c) does not file a joint election under subsection 85(1) or 85(2) with Aco with respect to the Target A Shares;

(d) does not receive any consideration other than Aco Shares in exchange for Target A Shares; and further provided that immediately after the exchange such holder or persons with whom such holder does not deal at arm's length, or such holder together with persons with whom such holder does not deal at arm's length, will not control Aco and will not beneficially own shares of Aco having a FMV of more than 50% of the FMV of all the issued and outstanding shares of the capital stock of Aco, such holder will be deemed, pursuant to paragraph 85.1(1)(a),

(e) to have disposed of Target A Shares for proceeds of disposition equal to the ACB to such holder of those shares immediately before the share exchange; and

(f) to have acquired the Aco Shares at a cost to such holder equal to the ACB to such holder of the Target A Shares immediately before the exchange, and pursuant to paragraph 85.1(1)(b),

(g) the cost of each Target A Share acquired by Aco as a result of the exchange will be deemed to be the lesser of its FMV immediately before the exchange and its paid-up capital immediately before the exchange.

E. Subsection 7(1.4) will apply to the exchange by a Target Optionholder of his or her Target Stock Option for an Aco X Stock Option and a SpinCo Stock Option (the Aco X Stock Option and a SpinCo Stock Option collectively referred to hereinafter as the "New Options") pursuant to the Option Exchange Agreement, provided that the Target Stock Option was acquired by virtue of his or her employment and, at the Effective Time, the amount by which:

(a) the total FMV of the Aco Shares and SpinCo Shares issuable to the Target Optionholder under the New Options
exceeds

(b) the total amount payable by the Target Optionholder to acquire those Aco Shares and SpinCo Shares under the New Options

does not exceed the amount by which

(c) the total FMV of the Target Shares issuable under that Target Optionholder's Target Stock Options
exceeds

(d) the total amount payable by the Target Optionholder to acquire those Target Shares under the Target Stock Option

with the result that for the purpose of section 7:

(e) such Target Optionholder will be deemed not to have disposed of Target Stock Options and not to have acquired new options in the form of Aco X Stock Options and SpinCo Stock Options;

(f) such Target Optionholder's Aco X Stock Options and SpinCo Stock Options will be deemed to be the same as, and a continuation of, such Target Optionholders Target Stock Options; and

(g) Aco and SpinCo will each be deemed to be the same person as, and a continuation of, Target.

For greater certainty, to the extent that subsection 7(1.4) is applicable to the exchange of Target Stock Options, paragraph 7(1)(b) will not apply in respect of such an exchange.

F. Provided that the SpinCo Shares are listed on a prescribed stock exchange in Canada at any time after the Effective Time and prior to the filing-due date of SpinCo for its first taxation year and, provided further that SpinCo makes an election in its return of income for its first taxation year to be deemed to be a public corporation from the commencement of that first taxation year to the date upon which it becomes a public corporation, the SpinCo Shares will be a "qualified investment":

(a) for a RRSP by virtue of paragraph (d) of the definition "qualified investment" in subsection 146(1) by virtue of being a prescribed investment pursuant to paragraph 4900(1)(b) of the Regulations; and

(b) for a RRIF by virtue of paragraph (c) of the definition "qualified investment" in subsection 146.3(1) by virtue of being a prescribed investment pursuant to paragraph 4900(1)(b) of the Regulations.

G. The provisions of subsections 15(1), 56(2) and 246(1) will not be applied as a result of the Proposed Transactions, in and by themselves.

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

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Customs and Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.

OTHER COMMENTS

Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency is making a determination or ruling in respect of:

(a) the cost or fair market value of any particular asset;

(b) the paid-up capital of any shares referred to herein; or

(c) any tax consequences relating to the 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