2003 Ruling 2003-0002873 - Butterfly Transaction - Papillon

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: Split-up butterfly transaction.

Position: Favourable rulings provided.

Reasons: Meets the requirements of the law.

XXXXXXXXXX 2003-000287
XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

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

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling:

(i) is in an earlier return of the taxpayer(s) or a related person;

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

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

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has expired; and

(v) is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Throughout this letter, except in paragraph 32, the corporate and individual taxpayers will be referred to as follows:

XXXXXXXXXX: DCO
XXXXXXXXXX: ACO
XXXXXXXXXX: BCO
XXXXXXXXXX: Mr. X
XXXXXXXXXX: Ms. A
XXXXXXXXXX: Mr. B

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

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

(b) "ACB" has the meaning assigned to the expression "Adjusted Cost Base" in section 54;

(c) "Agreed Amount" has the meaning assigned by subsection 85(1);

(d) "Canadian-Controlled Private Corporation" ("CCPC") has the meaning assigned by subsection 125(7);

(e) "Capital Dividend" has the meaning assigned to that term in subsection 83(2);

(f) "Capital Dividend Account" has the meaning assigned by subsection 89(1);

(g) "Capital Loss" has the meaning assigned by paragraph 39(1)(b);

(h) "Capital Property" has the meaning assigned in section 54;

(i) "CBCA" means the Canada Business Corporations Act, R.S.C., 1985, c. C-44 and, where applicable, its predecessor statutes;

(j) "CCRA" means Canada Customs and Revenue Agency;

(k) "Cost Amount" has the meaning assigned by subsection 248(1);

(l) "Distribution" has the meaning assigned by subsection 55(1);

(m) "Dividend Refund" has the meaning assigned by subsection 129(1);

(n) "Dividend Rental Arrangement" has the meaning assigned by subsection 248(1);

(o) "Eligible Property" has the meaning assigned by subsection 85(1.1);

(p) "FMV" means fair market value;

(q) "Guarantee Agreement" has the meaning assigned by subsection 112(2.2);

(r) "Pre-1972 CSOH" means pre-1972 capital surplus on hand as the expression is defined in subsection 88(2.1);

(s) "Private Corporation" has the meaning assigned by subsection 89(1);

(t) "PUC" has the meaning assigned to the expression "Paid-up Capital" in subsection 89(1);

(u) "RDTOH" means "Refundable Dividend Tax On Hand" as the expression is defined in subsection 129(3);

(v) "Series of Transactions" has the meaning assigned by subsection 248(10);

(w) "Specified Class" means a class of shares of the capital stock of a distributing corporation as defined in subsection 55(1);

(x) "Specified Investment Business" has the meaning assigned by subsection 125(7);

(y) "Taxable Canadian Corporation" has the meaning assigned by subsection 89(1); and

(z) "Taxable Dividend" has the meaning assigned by subsection 89(1).

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

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

FACTS

1. DCO is a Taxable Canadian Corporation and a CCPC. DCO was incorporated on XXXXXXXXXX and continued under section 181 of the CBCA on XXXXXXXXXX. DCO is an investment holding company. DCO will be the distributing corporation for the purpose of paragraph 55(3)(b).

2. The authorized share capital of DCO consists of an unlimited number of shares of the following classes:

? Common shares (the "DCO Common Shares");

? Class A Preferred Shares (the "DCO Class A Preferred Shares"). Such shares have the following rights, privileges, restrictions and conditions attached thereto:

? Voting.

? Non-participating.

? A maximum non-cumulative and non-preferential dividend of XXXXXXXXXX% per annum on the consideration received by the corporation for the issuance of the shares.

? In the event of the liquidation, dissolution or winding-up of the corporation, the holders of the shares of this class are entitled to receive, before all other classes of shares, an amount equal to the consideration received by the corporation for the issuance of the shares and all declared but unpaid dividends.

? Redeemable, upon request of the corporation or the holder, at a price equal to the consideration received by the corporation for the issuance of the shares (the "DCO Class A Preferred Shares Redemption Amount").

? Under neither the terms and conditions of the shares nor any agreement in respect of the shares are the shares convertible into or exchangeable for other shares.

? Class B preferred shares and class C preferred shares.

3. As of the date hereof, the issued and outstanding shares of DCO consist of:

? XXXXXXXXXX DCO Common Shares, which are owned equally by ACO and BCO. The XXXXXXXXXX DCO Common Shares owned by ACO have an aggregate stated capital and PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX. The XXXXXXXXXX DCO Common Shares owned by BCO have an aggregate stated capital and PUC of $XXXXXXXXXX and an ACB of $XXXXXXXXXX. The FMV of the DCO Common Shares is in excess of ACO and BCO's ACB. The DCO Common Shares represent capital property to their shareholders;

? XXXXXXXXXX DCO Class A Preferred Shares, all of which are owned by Mr. X. The DCO Class A Preferred Shares have an aggregate stated capital, PUC, ACB and FMV of $XXXXXXXXXX. The PUC of the DCO Class A Preferred Shares immediately before the beginning of the Series of Transactions that includes the distribution by DCO was not less than the FMV of the consideration for which the said shares were issued. Furthermore, at the time of the issuance of each DCO Class A Preferred Share, the cost of such share to its original owner was equal to the FMV at that time of the consideration for which it was issued. The XXXXXXXXXX DCO Class A Preferred Shares were all issued before XXXXXXXXXX and are shares of a Specified Class. The DCO Class A Preferred Shares represent capital property to Mr. X.

Mr. X controls DCO.

4. DCO's assets consist of marketable investments, made up of publicly traded Canadian and U.S. stocks and bonds, other financial instruments and an amount of cash.

The investments in shares are capital property to DCO and represent portfolio investments as it does not have significant influence, within the meaning of section 3050 of the CICA Handbook, over any corporation in which it holds shares.

The aggregate FMV as at XXXXXXXXXX of DCO's assets (before deducting DCO's liabilities) is approximately $XXXXXXXXXX and the aggregate ACB of such assets is approximately $XXXXXXXXXX.

The liabilities of DCO include mainly a non-interest bearing promissory note payable on demand to Mr. X (the "DCO1 Note"), having a principal amount and FMV of $XXXXXXXXXX on XXXXXXXXXX. The liabilities of DCO also include income tax liabilities which result from the ongoing operations of DCO and professional fees.

Since XXXXXXXXXX, there has not been any material change in the composition of DCO's assets and liabilities. Furthermore and except as described herein, there will not be any material change in the composition of DCO's assets or liabilities between the date of this letter and the date the proposed transactions described in this letter are completed.

5. From time to time, DCO buys and sells marketable investments, either on its own initiative or upon the advice of its stockbrokers or investment advisors. In the course of carrying out the proposed transactions, ACO and BCO will receive property of DCO, including the marketable investments. ACO and BCO will hold and sell the marketable investments so received from DCO in the course of carrying on their normal investment activities in the same manner that DCO would have done had the proposed transactions not been executed.

6. The aggregate capital losses accrued on the investments held by DCO at XXXXXXXXXX is approximately nil. It is not anticipated that the amount of accrued capital losses on the investments held by DCO will be substantially different at the time of the transfer of property described in paragraph 20 hereof.

7. It is anticipated that, at the end of its XXXXXXXXXX fiscal year, DCO will have a balance of RDTOH of approximately $XXXXXXXXXX.

It is also anticipated that DCO will not have a balance of CDA or any pre-1972 CSOH immediately prior to proposed transactions.

8. ACO is a Taxable Canadian Corporation and a CCPC. ACO was incorporated under the CBCA on XXXXXXXXXX and operates as an investment holding company. For the purpose of paragraph 55(3)(b), ACO will be a transferee corporation. The issued and outstanding shares of ACO consist of XXXXXXXXXX common shares, all of which are owned by Ms. A.

9. BCO is a Taxable Canadian Corporation and a CCPC. BCO was incorporated under the CBCA on XXXXXXXXXX and operates as an investment holding company. For the purpose of paragraph 55(3)(b), BCO will be a transferee corporation. The issued and outstanding shares of BCO consist of XXXXXXXXXX common shares, all of which are owned by Mr. B.

10. On XXXXXXXXXX, the board of directors of DCO declared on the outstanding DCO Common Shares a cash dividend of $XXXXXXXXXX payable at the rate of $XXXXXXXXXX on the XXXXXXXXXX to the shareholders of record on the XXXXXXXXXX (i.e. ACO and BCO). This kind of dividend was voted on several occasions in prior years and is part of DCO's dividend policy. No dividends have been or will be declared or paid on the outstanding DCO Common Shares between XXXXXXXXXX and the date the proposed transactions described in this letter are undertaken.

11. On XXXXXXXXXX, Mr. X received on his DCO Class A Preferred Shares a Capital Dividend in the amount of $XXXXXXXXXX. Furthermore, Mr. X received $XXXXXXXXXX of taxable dividends on his DCO Class A Preferred Shares in XXXXXXXXXX. No dividends have been or will be declared or paid on the outstanding DCO Class A Preferred Shares between XXXXXXXXXX and the date the proposed transactions described in this letter are undertaken.

12. Mr. X is the father of Ms. A and Mr. B. Ms. A and Mr. B are siblings. All these individuals are residents of Canada for the purposes of the Act.

PROPOSED TRANSACTIONS

13. ACO and BCO will respectively cause a new corporation to be incorporated under the CBCA: Newco 1 and Newco 2. Each of these new corporations will be a Taxable Canadian Corporation and a CCPC.

The authorized share capital of each Newco will include the following classes of shares:

? An unlimited number of Class A shares (the "Newco 1 Class A Shares" and the "Newco 2 Class A Shares"). Such shares will have the following rights, privileges, restrictions and conditions attached thereto:

? Voting.

? Entitled to dividends declared by the corporation.

? Fully participating.

? An unlimited number of Class B shares (the "Newco 1 Class B Shares" and the "Newco 2 Class B Shares"). Such shares will have the following rights, privileges, restrictions and conditions attached thereto:

? Non-voting.

? Non-cumulative and non-preferential fixed dividend at a rate of XXXXXXXXXX% per month on the redemption value.

? No additional participation.

? In case of liquidation, dissolution or winding-up of the corporation, this class shall be entitled to receive, before any distribution of any part of the assets of the corporation among the holders of class A shares, an amount equal to the redemption value together with all dividends declared thereon and remaining unpaid.

? A holder shall be entitled to require the corporation to redeem, or the corporation may redeem, the whole or any part of the class B shares at a price equal to the sum of the paid-up capital plus a premium and all dividends declared thereon and remaining unpaid (the "Newco 1 Class B Shares Redemption Amount" and the "Newco 2 Class B Shares Redemption Amount"). The premium should be equal to the FMV, at the time of issuance, of the consideration received by the corporation for the issuance of class B shares less the paid-up capital of these shares.

? The share provisions relating to the Class B shares will provide that in the event that it is subsequently held or determined by a final judgment of any competent administrative tribunal or court or by a negotiated settlement with any revenue authority that the FMV of any property that is relevant to the determination of the redemption price of such shares is different than the FMV assigned thereto, the Redemption Amount of such shares shall be automatically adjusted retroactively, nunc pro tunc, to reflect the FMV so held or determined.

14. ACO will subscribe for XXXXXXXXXX Newco 1 Class A shares of Newco 1 for a total cash consideration of $XXXXXXXXXX.

BCO will subscribe for XXXXXXXXXX Newco 2 Class A shares of Newco 2 for a total cash consideration of $XXXXXXXXXX.

15. In contemplation of the reimbursement of the DCO1 Note payable to Mr. X and the redemption of the DCO Class A Preferred Shares held by Mr. X, DCO will sell all its bonds, treasury bills and money market securities and some stock on the stock market. All of these sales will be done for cash consideration and with arm's length parties.

16. DCO will redeem, for immediate cancellation, all of its DCO Class A Preferred Shares (i.e. XXXXXXXXXX shares) held by Mr. X at their FMV, being an amount equal to the DCO Class A Preferred Shares Redemption Amount: $XXXXXXXXXX. The redemption price will be paid in full by DCO by the issuance in favour of Mr. X of a non-interest bearing promissory note payable on demand (the "DCO2 Note") having a principal amount and FMV equal to the DCO Class A Preferred Shares Redemption Amount. Mr. X will accept the DCO2 Note as full payment of the DCO Class A Preferred Shares Redemption Amount.

17. DCO will repay in full the DCO1 Note and the DCO2 Note owed to Mr. X by making a cash payment equal to the aggregate principal amounts and FMV of the DCO1 Note and DCO2 Note.

18. Following the repayment of the DCO1 Note and DCO2 Note described in paragraph 17 above and immediately before the transfers of property described in paragraph 20 below, DCO's property will be classified into two types of property for the purposes of the definition of "distribution" in subsection 55(1) and paragraph 55(3)(b), as follows:

(i) cash or near cash property, comprising all of the current assets of DCO, including any cash, short-term deposits and similar short-term investments, marketable securities (other than those held as portfolio investments), accounts receivable and prepaid expenses;

(ii) investment property, comprising all of the assets of DCO, other than any cash or near cash property, any income from which would, for the purposes of the Act, be income from property or from a Specified Investment Business;

DCO will not have any business property at the time of the transfers described at paragraph 20 below.

19. For greater certainty, any tax accounts, such as balances of any capital losses, non-capital losses, Pre-1972 CSOH, Capital Dividend Account or RDTOH of DCO, will not be considered to be a property for purposes of the proposed transactions described herein. In addition, DCO will not exercise significant influence over any corporations at the time of the proposed transactions.

20. DCO will then transfer all of its property to Newco 1 and Newco 2 by transferring a portion (50%) of its cash or near cash property and investment property (the "Butterflied Assets"), such that the FMV of each type of property so transferred to Newco 1 and Newco 2 will be equal to that proportion of the FMV of all property of DCO of that type determined immediately before such transfer that:

(i) the aggregate FMV, immediately before the transfer, of all of the shares of the capital stock of DCO owned by ACO or BCO, as the case may be;

is of

(ii) the aggregate FMV, immediately before the transfer, of all of the issued and outstanding shares of the capital stock of DCO.

As consideration for the Butterflied Assets so transferred, Newco 1 and Newco 2 will issue to DCO XXXXXXXXXX Newco 1 Class B Shares and XXXXXXXXXX Newco 2 Class B Shares, respectively, having a FMV and a redemption and retraction amount equal to the FMV of the Butterflied Assets received by Newco 1 and Newco 2, respectively.

21. In respect of the transfers of the Butterflied Assets described in paragraph 20 above, Dco and each of Newco 1 and Newco 2 will respectively elect, jointly and in prescribed form and within the time limits referred to in subsection 85(6), to have the rules in subsection 85(1) apply to the transfer of each asset of DCO that is an Eligible Property to Newco 1 and Newco 2, respectively. The Agreed Amount specified in such elections in respect of each Eligible Property so transferred that has a FMV in excess of its Cost Amount to Dco will be an amount that is not less than the lesser of the amounts specified in subparagraph 85(1)(c.1)(i) or (ii) in the case of property described in paragraph 85(1)(c.1). In each case the Agreed Amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

Depending of the market fluctuations, DCO may incur capital losses on the transfers of the Butterflied Assets in favour of Newco 1 and Newco 2. Any allowable capital loss incurred by DCO on such transfers will be applied against taxable capital gains realized by DCO in its XXXXXXXXXX taxation year, and the excess (the "net capital loss"), if any, will be applied against net taxable capital gains realized by DCO in the three-year carryback period.

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

22. Pursuant to the CBCA, the amount to be added, as a result of the acquisition of the Butterflied Assets by Newco 1, to the stated capital account maintained in respect of the Newco 1 Class B Shares will not exceed the aggregate of the Cost Amounts of the Butterflied Assets to Newco 1.

Pursuant to the CBCA, the amount to be added, as a result of the acquisition of the Butterflied Assets by Newco 2, to the stated capital account maintained in respect of the Newco 2 Class B Shares will not exceed the aggregate of the Cost Amounts of the Butterflied Assets to Newco 2.

23. Immediately after the transfer of property from DCO to Newco 1, Newco 1 will redeem for cancellation all of its Newco 1 Class B Shares held by DCO at their FMV, being an amount equal to the Newco 1 Class B Shares Redemption Amount. The redemption price will be paid in full by Newco 1 by the issuance in favour of DCO of a non-interest bearing promissory note payable on demand (the "Newco 1 Note") having a principal amount and FMV equal to the Newco 1 Class B Shares Redemption Amount. DCO will accept the Newco 1 Note as full payment for the Newco 1 Class B Redemption Shares Amount. This redemption will be subject to a price adjustment clause.

Immediately after the transfer of property from DCO to Newco 2, Newco 2 will redeem for cancellation all of its Newco 2 Class B Shares held by DCO at their FMV, being an amount equal to the Newco 2 Class B Shares Redemption Amount. The redemption price will be paid in full by Newco 2 by the issuance in favour of DCO of a non-interest bearing promissory note payable on demand (the "Newco 2 Note") having a principal amount and FMV equal to the Newco 2 Class B Shares Redemption Amount. DCO will accept the Newco 2 Note as full payment for the Newco 2 Class B Shares Redemption Amount. This redemption will be subject to a price adjustment clause

24. Following the redemptions described in paragraph 23 above, each of Newco 1 and Newco 2 will be wound-up, respectively, into ACO and BCO. As a consequence, ACO and BCO will receive all the properties transferred by DCO to Newco 1 or Newco 2, as the case may be, and will assume all the liabilities and commitments of their respective Newco (notably the price adjustment clause, and the Newco 1 Note or the Newco 2 Note, as the case may be). In due course, each of Newco 1 and Newco 2 will file tax returns and articles of dissolution.

25. Following the winding-up of Newco 1 and Newco 2 described in paragraph 24 above, ACO and BCO will, pursuant to the CBCA, resolve to wind up and dissolve DCO.

On the winding-up of DCO, DCO will distribute to ACO and BCO, respectively, the Newco 1 Note and the Newco 2 Note. As a consequence of the distribution of the Newco 1 Note to ACO and the Newco 2 Note to BCO, the said notes will be settled and extinguished. On the winding-up of DCO, each of ACO and BCO will also assume one-half of DCO's liabilities.

Any Dividend Refund, refund of overpayment of taxes for DCO's XXXXXXXXXX taxation year or tax refund resulting from net capital loss carrybacks, to which DCO becomes entitled as a result of the proposed transactions described herein, will be distributed (under the terms of the winding-up) to each of ACO and BCO in the same proportions (50%) as described in paragraph 20 above. Following the distribution of such Dividend Refund, Articles of Dissolution will be filed with the appropriate Corporate Registry and upon receipt of the Certificate of Dissolution, DCO will be dissolved. In due course, DCO will file tax returns.

ADDITIONAL INFORMATION

26. Except as described herein, no property has been or will be acquired or disposed of by DCO in contemplation of and before the proposed transfers of property described in paragraph 20 above.

27. Except as described herein, no property transferred to any corporation in the course of the reorganization contemplated herein will, thereafter, be transferred directly or indirectly, as part of a Series of Transactions which includes the proposed transactions, to an unrelated person or partnership.

28. Except as described herein, none of the parties is contemplating an acquisition of control of any of the corporations referred to above. Furthermore, none of the parties are contemplating a disposition of any of the shares of DCO, ACO, BCO, Newco 1 or Newco 2 other than as described herein.

29. There have been no significant transactions, other than those described herein, which have been completed prior to the date of this letter and which will be part of the Series of Transactions that includes the proposed transactions. Furthermore, there are no other significant transactions, proposed or contemplated, other than those described herein, which will be part of the Series of Transactions that includes the proposed transactions.

30. Neither DCO, ACO nor BCO is, or will be at the time of the proposed transactions described herein, a "specified financial institution" within the meaning of subsection 248(1).

31. None of the shares of DCO, Newco 1 or Newco 2 has been or will be, at any time during the implementation of the proposed transactions described herein:

(i) the subject of any undertaking that is referred to in subsection 112(2.2) as a Guarantee Agreement;

(ii) a share that is issued or acquired as part of a transaction or event or a Series of Transactions or event of the type described in subsection 112(2.5); or

(iii) the subject of a Dividend Rental Arrangement.

32. The federal business number of the parties referred to herein and the location of the tax services office and taxation centre where their returns are filed are as follows:

XXXXXXXXXX.

PURPOSES OF THE PROPOSED TRANSACTIONS

33. Mr. X wants to give up control over DCO's assets and to divide such assets between his two children on a proportional basis. Each of the children has respectively demonstrated, in the past, his or her capacity to administer such assets. Ms. A and Mr. B wish to separate their interests from each other to pursue their own individual investment objectives.

RULINGS REQUESTED

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

A. Subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer of the properties of Dco to Newco 1 and Newco 2, as described in paragraph 20 above, such that the Agreed Amounts in respect of each transfer of Eligible Property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. As a result of the redemption by Newco 1 of the Newco 1 Class B Shares and the redemption by Newco 2 of the Newco 2 Class B Shares, as described in paragraph 23 above, and as a result of the distributions by DCO in the course of its winding-up as described in paragraph 25 above:

(a) (i) by virtue of paragraphs 84(3)(a) and 84(3)(b), Newco 1 will be deemed to have paid, and DCO will be deemed to have received, a Taxable Dividend equal to the amount by which the amount paid to redeem the Newco 1 Class B Shares exceeds the PUC thereof, immediately before such redemption;

(ii) by virtue of paragraphs 84(3)(a) and 84(3)(b), Newco 2 will be deemed to have paid, and DCO will be deemed to have received, a Taxable Dividend equal to the amount by which the amount paid to redeem the Newco 2 Class B Shares exceeds the PUC thereof, immediately before such redemption; and

(iii) pursuant to paragraph 88(2)(b) and subsection 84(2), DCO will be deemed to have paid, and each of ACO and BCO will be deemed to have received, a Taxable Dividend (the "Winding-Up Dividend") on the DCO Common Shares equal to the proportion of the amount by which the amount of the funds and property distributed by DCO to each of ACO and BCO in respect of the DCO Common Shares on the winding-up exceeds the amount by which the PUC of the DCO Common Shares is reduced as a result of the distribution, that the number of DCO Common Shares held by ACO or BCO, as the case may be, is of the number of DCO Common Shares outstanding immediately before that time.

(b) the dividends deemed to be received by DCO, ACO and BCO as a result of the redemptions and the winding-up referred to in Ruling B(a) above will be included in each corporation's income pursuant to paragraph 12(1)(j), and will be deductible by each corporation in computing its taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsections 112(2.1), 112(2.2), 112(2.3), and 112(2.4) will not apply to deny the application of the subsection 112(1) deduction in respect of such dividends;

(c) the amount of a deemed dividend referred to in Ruling B(a) above will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54, and any loss arising from the disposition of those shares will be reduced by the amount of such dividends pursuant to subsection 112(3);

(d) (i) the dividends deemed to be received by DCO, ACO and BCO and referred to in Ruling B(a) above will not be subject to tax under Part IV.1 on the basis that such dividends will be excepted dividends by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1; and

(ii) the dividends deemed to be received by DCO, ACO and BCO and referred to in Ruling B(a) above will not be subject to tax under Part VI.1 on the basis that each such dividend will be an "excluded dividend" by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

(e) (i) by virtue of subsection 186(2) and paragraph 186(4)(a), Newco 1 and Newco 2 will each be connected with DCO. Consequently and provided that each of Newco 1 and Newco 2 is not entitled to a Dividend Refund in respect of its taxation year in which it is deemed to pay the dividend referred to in Ruling B(a) above, DCO will not be subject to Part IV tax under subsection 186(1) in respect of such dividend; and

(ii) by virtue of subsection 186(4), DCO will be connected with each of ACO and BCO. Consequently, each of ACO and BCO will, pursuant to paragraph 186(1)(b), be subject to Part IV tax in an amount equal to that portion of the Dividend Refund to which DCO will become entitled for its taxation year in which the dividends referred to in Ruling B(a)(iii) above, are paid, that the amount of each such dividend received by ACO and BCO, as the case may be, is of the aggregate of all Taxable Dividends paid by DCO in its taxation year in which such dividends are paid.

C. Provided that as part of the Series of Transactions or events that includes the proposed transactions described herein, 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 shares in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

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

which has not been described in the proposed transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the Taxable Dividends referred to in the ruling B.

D. The extinguishment of the Newco 1 Note and the Newco 2 Note as described in paragraph 25 above will not give rise to a "forgiven amount" within the meaning of subsections 80(1) and 80.01(1).

E. Pursuant to the application of subparagraph 256(7)(a)(ii), control of DCO will be deemed not to have been acquired on the redemption of the DCO Class A Preferred Shares held by Mr. X, as described in paragraph 16 above, for the purpose of the provisions enumerated in subsection 256(7).

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

G. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CCRA 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 CCRA has agreed to or reviewed:

(a) the determination of the FMV or Cost Amount of any property referred to herein, or the PUC of any shares; or

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

Price adjustment clause

You have informed us, as stated in paragraph 13 above, that there is a price adjustment clause to adjust the redemption amounts of the Newco 1 Class B Shares and the Newco 2 Class B Shares if it is determined that the FMV of the consideration for which such shares were issued is other than what it is determined to be at the time of their issue.

Nothing in this letter should be construed as confirmation, express or implied, that, for the purpose of any of the rulings given above, any adjustment to the FMV of the properties transferred and the redemption amount of the shares issued as consideration, will be effective retroactively to the time of the transfer and issuance of shares. In addition, any such adjustment could affect the ruling given in Ruling C above. Furthermore, none of the rulings given in this letter are intended to apply to the operation of a price adjustment clause, since its coming into effect will be due to circumstances that do not constitute proposed transactions that are seriously contemplated. The general position of the CCRA with respect to price adjustment clauses is stated in Interpretation Bulletin IT-169.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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