2003 Ruling 2003-0031823 - Transfer of a Business by a Shareholder

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: Whether there is an acquisition of control of Aco.

Position: No.

Reasons: XCO will own XXXXXXXXXX % of the voting shares of Aco and will not have de-jure control.

XXXXXXXXXX 2003-003182

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Aco") and XXXXXXXXXX ("XCO")

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

To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in this ruling is:

a. in an earlier return of the taxpayers or a related person,

b. being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayers or a related person,

c. under objection by the taxpayers or a related person,

d. before the courts, or

e. the subject of a ruling previously issued by this Directorate.

DEFINITIONS

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

a. "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th supp) as amended to the date hereof. Unless otherwise stated all statutory references in this letter are to the Act,

b. "adjusted cost base" ("ACB") has the meaning assigned by section 54,

c. "agreed amount" means the amount agreed on in respect of a property in an election filed pursuant to subsection 85(1),

d. "arm's length" has the meaning assigned by section 251,

e. "capital gain" has the meaning assigned by section 39,

f. "capital property" has the meaning assigned by subsection 248(1),

g. "CBCA" means the Canada Business Corporations Act, R.S.C. 1985,

c. C-44 as amended,

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

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

j. "excepted dividend" has the meaning assigned by section 187.1,

k. "excluded dividend" has the meaning assigned by subsection 191(1),

l. "FMV" means fair market value,

m. "investment tax credit" ("ITC") has the meaning assigned by subsection 248(1),

n. "non-capital loss" has the meaning assigned by subsection 248(1),

o. XXXXXXXXXX,

p. "paid-up capital" ("PUC") has the meaning assigned by subsection 248(1),

q. "Proposed Transactions" means the transactions described in that section of this letter,

r. "public corporation" has the meaning assigned by subsection 248(1),

s. "scientific research and experimental development" ("SR&ED") has the meaning assigned by subsection 248(1),

t. "SR&ED pool" means the amount determined under subsection 37(1),

u. "series of transactions or events" includes the transactions or events referred to in subsection 248(10),

v. "short-term preferred share" has the meaning assigned by subsection 248(1),

w. "specified financial institution" ("SFI") has the meaning assigned by subsection 248(1),

x. "stated capital" means the amount of capital determined in respect of a class or series of shares in accordance with the XXXXXXXXXX or CBCA, as the case may be,

y. "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1),

z. "substantial interest" has the meaning assigned by subsection 191(2),

aa. "taxable Canadian corporation" has the meaning assigned by subsection 248(1),

bb. "taxable dividend" has the meaning assigned by subsection 248(1), and

cc. "taxable preferred share" has the meaning assigned by subsection 248(1).

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

FACTS

1. XXXXXXXXXX. XCO XXXXXXXXXX is a taxable Canadian corporation and a public corporation. XXXXXXXXXX.

2. XCO and its subsidiaries and partnerships are involved in the following business operations:

XXXXXXXXXX.

3. XXXXXXXXXX.

BusinessA is a separate business carried on by XCO. XCO has always maintained separate accounting records for BusinessA. However, it has not maintained separate classes of depreciable property in respect of each business in its income tax returns in order to reduce administrative costs. In connection with the Proposed Transactions, XCO is preparing a schedule that will maintain separate classes of depreciable property in respect of each business.

4. XXXXXXXXXX . Aco is a taxable Canadian corporation and a public corporation. XXXXXXXXXX since XXXXXXXXXX. Since XXXXXXXXXX, to XCO's knowledge, no person or group of persons has acquired control of the company. XXXXXXXXXX .

5. XXXXXXXXXX..

6. XXXXXXXXXX

7. The FMV of Aco, based on a $XXXXXXXXXX closing price on the XXXXXXXXXX, is approximately $XXXXXXXXXX.

8. As of the date of this application, the Aco Board of Directors consists of the following individuals:¹

Name
Principal Occupation
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

9. XCO is currently the largest shareholder of Aco, holding directly XXXXXXXXXX common shares and through its wholly-owned subsidiary, XXXXXXXXXX common shares for a total of XXXXXXXXXX common shares, representing approximately XXXXXXXXXX% of the issued shares.

10. XXXXXXXXXX.

11. Between XXXXXXXXXX, XCO and XXXXXXXXXX provided $XXXXXXXXXX and $XXXXXXXXXX respectively of start-up venture capital financing to Aco. XCO invested in Aco based on its understanding of the technology and the future promise for the applications of that technology. XCO also provided advances to Aco from time to time.

12. [Reserved].

13. XXXXXXXXXX.

14. XXXXXXXXXX.

15. XXXXXXXXXX.

16. In XXXXXXXXXX, Aco reduced its workforce to XXXXXXXXXX employees and has significantly reduced its cash expenditure rate. If no new financing can be obtained, Aco will run out of cash by XXXXXXXXXX.

17. At XXXXXXXXXX, Aco had a carry forward balance in its SR&ED pool of approximately $XXXXXXXXXX and had non-capital losses available for carry over of approximately $XXXXXXXXXX. It also had ITC carry forwards of approximately

$XXXXXXXXXX.

18. None of Aco, XCO or any corporation to which either is related is an SFI.

19. Neither XCO nor Aco has any outstanding tax liabilities that could be affected by the Proposed Transactions.

PROPOSED TRANSACTIONS

20. XCO will incorporate a new subsidiary wholly-owned corporation under the CBCA ("Subco"). The authorized share capital of Subco will consist of an unlimited number of common shares.

21. XCO will subscribe for 1 common share of Subco for $XXXXXXXXXX on incorporation.

22. XCO will transfer to Subco XXXXXXXXXX at FMV and as consideration therefor, Subco will issue to XCO an additional XXXXXXXXXX common shares.

23. XCO and Subco will jointly elect under subsection 85(1) in prescribed form and manner within the time referred to in subsection 85(6). The agreed amount for the purpose of the election will not be less than the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii).

24. XCO and Subco will form a limited partnership ("PartnershipA") in the manner described below.

25. XCO will be a limited partner and Subco will be a general partner.

26. XCO will lend sufficient funds to Subco to enable it to contribute cash in order to acquire a general partnership interest entitling it to XXXXXXXXXX% of the income or loss of PartnershipA.

27. XCO will transfer all of its remaining assets of BusinessA to PartnershipA and as consideration therefor, PartnershipA will assume all of BusinessA's liabilities and issue to XCO a limited partnership interest entitling it to XXXXXXXXXX% of the income or loss of PartnershipA.

Where applicable, XCO and PartnershipA will jointly elect under subsection 97(2) in prescribed form and manner within the time referred to in subsection 96(4). In the case of each transferred property, the agreed amount in the joint election will not be less than:

i. the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii), in the case of eligible capital property;

ii. the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii), in the case of depreciable property of a prescribed class; and

iii. the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), in the case of inventory and capital property (other than depreciable property of a prescribed class).

For greater certainty, for the purposes of each election, the agreed amount will not exceed the FMV of the transferred property, nor will it be less than the amount permitted under paragraph 85(1)(b).

Where applicable, XCO and PartnershipA will jointly elect under section XXXXXXXXXX in the prescribed form referred to therein.

28. The employees of BusinessA will be transferred to Subco. It is intended that such transfer will occur on XXXXXXXXXX to coincide with the year-end for purposes of the Canada Pension Plan and the Employment Insurance Act.

29. XCO will sign a management agreement with PartnershipA to provide certain management services to PartnershipA. The fees charged will be reasonable.

30. A new corporation ("Newco") will be incorporated under the XXXXXXXXXX. The authorized share capital of Newco will consist of an unlimited number of common shares. The incorporating share with a nominal value will be acquired by a third party to avoid contravening the "corporate incest" provisions of the XXXXXXXXXX.

31. Aco and Newco will form a limited partnership ("PartnershipB"). Aco will be both a general partner and a limited partner and Newco will be a general partner.

32. Aco will lend sufficient funds to Newco to enable it to contribute cash in order to acquire a general partnership interest entitling it to XXXXXXXXXX% of the income or loss of PartnershipB.

33. Aco will transfer its intellectual property, remaining cash and fixed assets, other than the building XXXXXXXXXX (the "XXXXXXXXXX Building"), to PartnershipB and as consideration therefor, PartnershipB will assume all of Aco's liabilities, XXXXXXXXXX its bank loan, and issue to Aco a limited partnership interest and a general partnership interest entitling it to XXXXXXXXXX % and XXXXXXXXXX% of the income or loss of PartnershipB, respectively. XXXXXXXXXX.

Where applicable, Aco and PartnershipB will jointly elect under subsection 97(2) in prescribed form and manner within the time referred to in subsection 96(4). The elected amount will be equal to the cost amount to Aco of the particular transferred property immediately before such transfer such that the agreed amount in each joint election will not be less than:

i. the least of the amounts specified in subparagraphs 85(1)(d)(i), (ii) and (iii), in the case of eligible capital property;

ii. the least of the amounts specified in subparagraphs 85(1)(e)(i), (ii) and (iii), in the case of depreciable property of a prescribed class; and

iii. the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii), in the case of inventory and capital property (other than depreciable property of a prescribed class).

For greater certainty, for the purposes of each election, the agreed amount will not exceed the FMV of the transferred property, nor will it be less than the amount permitted under paragraph 85(1)(b).

Where applicable, Aco and PartnershipB will jointly elect under section XXXXXXXXXX in prescribed form referred to therein.

The Aco scientists will be transferred to PartnershipB.

34. Aco will grant an option to PartnershipB to purchase the XXXXXXXXXX for its FMV at the time the option is granted. If the option is exercised, the purchase price will be satisfied by the assumption by PartnershipB of Aco's outstanding bank debt at the time with the balance of the purchase price settled in cash.

35. The articles of incorporation of Aco will be amended by creating the following three new classes of shares:

An unlimited number of another class of voting common shares ("Aco Class A Common Shares"). The holders of the Aco Class A Common Shares will be entitled to one vote per share.

An unlimited number of a class of non-voting common shares ("Aco Class B Common Shares").

The holders of the Aco Class A Common Shares and the Aco Class B Common Shares will be entitled to dividends if, as and when declared by the board of directors. No holder of any class of common shares will be entitled to receive dividends in priority to any holder of any other class of common shares.

An unlimited number of non-voting preferred shares ("Aco Class C Preferred Shares"), with a cumulative dividend rate of XXXXXXXXXX% per month, which will be redeemable at the option of the issuer for an amount equal to the FMV of the consideration received in exchange for the issuance of the shares plus any unpaid dividend.

The articles of amendment will also provide that (a) the business of Aco will be restricted to holding the limited partnership interests in PartnershipA and PartnershipB, and the ownership of the XXXXXXXXXX and (b) its available cash after providing for the redemption of the Aco Class C Preferred Shares will be distributed to its shareholders.

36. The shareholders of Aco will exchange their common shares on the basis of 1 Aco Class A Common Share and 1 Aco Class C Preferred Share for each common share held. The Aco Class C Preferred Shares will have a redemption value in aggregate equal to the enterprise value of Aco based on a valuation opinion provided by a qualified external valuator excluding the following: a XXXXXXXXXX% limited partnership interest in PartnershipB, the XXXXXXXXXX Building, cash needed to purchase XXXXXXXXXX as described in paragraph 39 below, and the bank loan. The addition to the stated capital of the Aco Class C Preferred Shares will be equal to their redemption value. The addition to the stated capital of the Aco Class A Common Shares will be equal to their FMV under the XXXXXXXXXX. The stated capital amount being maintained for the existing common shares of Aco will be decreased by an amount equal to the aggregate additions to the stated capital of the Aco Class C Preferred Shares and the Aco Class A Common Shares. Any difference will be added to the contributed surplus of Aco.

Aco will cancel each of the existing common shares of Aco received as a result of the exchange described above.

37. The shareholders of Aco will sell their Aco Class C Preferred Shares to Newco in exchange for common shares of Newco. The common shares of Newco will be listed on a stock exchange in Canada at the time they are issued to the shareholders of Aco. No joint election under subsection 85(1) will be filed. The incorporating share of Newco issued in paragraph 30 above will be purchased for cancellation.

38. Aco will redeem a portion of the Aco Class C Preferred Shares held by Newco. The redemption price will be satisfied by the transfer to Newco at FMV of Aco's XXXXXXXXXX% general partnership interest in PartnershipB. The balance of the Aco Class C Preferred Shares will be redeemed from time to time based on Newco's cash flow needs using cash flow generated from PartnershipA as described below. If at a given time the cash flow generated from PartnershipA is not sufficient to satisfy Newco's cash needs, Aco will borrow from its bank to redeem the Aco Class C Preferred Shares. Such borrowing will be repaid using future cash flow generated from PartnershipA.

39. XXXXXXXXXX.

40. XXXXXXXXXX.

41. The existing employee stock options will be cancelled for no consideration and Newco will issue to its employees options to acquire common shares of Newco. The exercise price of the Newco employee stock options will not be less than the trading price of the Newco common shares at the time the options are granted.

42. XCO will transfer its interest in PartnershipA to Aco and as consideration therefor, Aco will issue to XCO Aco Class A Common Shares and Aco Class B Common Shares. XCO will receive additional Aco Class A Common Shares to hold approximately XXXXXXXXXX% of the issued and outstanding Aco Class A Common Shares and the balance of the FMV for its interest in PartnershipA in the form of Aco Class B Common Shares.

XCO and Aco will jointly elect under subsection 85(1) in prescribed form and manner within the time referred to in subsection 85(6). The agreed amount for the purpose of the election will be equal to the cost amount to XCO of its interest in PartnershipA immediately before such transfer such that the agreed amount in the joint election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) and (ii).

43. As a result of paragraph 42 of the Proposed Transactions, Aco will be entitled to XXXXXXXXXX% of income or loss of PartnershipA. Cash distributions from PartnershipA received by Aco will be used to redeem the Aco Class C Preferred Shares. It is anticipated that the balance of cash will be distributed to the holders of Aco Class A Common Shares and Aco Class B Common Shares as dividends.

44. XCO will not have at any time special rights to appoint directors of Aco or Newco. Neither XCO nor any person with whom XCO does not deal at arm's length will, at any time, have a right described in paragraph 251(5)(b) in respect of shares or any voting rights in respect of shares except such rights that are described herein. Neither XCO nor any person with whom XCO does not deal at arm's length will, at any time, act in concert with any other person to control Aco.

45. XCO will have no rights to repurchase PartnershipA other than a right of first refusal if Aco receives an offer to purchase its partnership interest in PartnershipA from a third party.

46. The Proposed Transactions would be subject, among other matters, to the approval of the shareholders of Aco and would likely be completed by way of a Plan of Arrangement under the XXXXXXXXXX. Given the financial difficulty that Aco is currently in, it is possible that the Proposed Transactions may be completed under the Companies' Creditors Arrangement Act (the "CCAA").

PURPOSE OF THE PROPOSED TRANSACTIONS

As outlined above, XCO and Aco have been closely linked since Aco was incorporated. XCO was a founding investor, and has generally been the largest Aco shareholder, although never in a control position. Its representatives have always held several seats on the Board of Directors, XXXXXXXXXX.

The reason for this relationship is XCO's continuing belief in the value of Aco's intellectual property and in the long-term prospects for XXXXXXXXXX and the other Aco products. The potential market for XXXXXXXXXX is substantial. XXXXXXXXXX.

Aco has spent over $XXXXXXXXXX to date developing XXXXXXXXXX Well over half of Aco's expenditures in recent years have been attributable to research and development.

XXXXXXXXXX

XCO is prepared to combine one of its businesses with Aco in a transaction that will generate cash flow for the further development of XXXXXXXXXX and other Aco products. The proposed corporate structure is intended to allow maximum flexibility for future financings.

The business that has been selected is XCO's BusinessA. This is a XXXXXXXXXX business that earns its revenue from XXXXXXXXXX and accordingly provides a predictable source of cash flow. BusinessA will be contributed to a partnership with an XCO controlled entity as general partner. XXXXXXXXXX.

BusinessA is not a business that XCO had intended to sell. However, XCO is willing to combine this business with Aco to allow for the further development of XXXXXXXXXX and other Aco products. XCO will have no rights to reacquire BusinessA other than a right of first refusal to buy it back should Aco wish to dispose of it in the future.

A new entity (Newco) is proposed which will form a partnership with Aco to carry on the Aco XXXXXXXXXX business. This will allow a future financing to take place at the Newco level or PartnershipB level if the capital markets return and XXXXXXXXXX is able to attract financing.

XXXXXXXXXX
XXXXXXXXXX

In summary, the purpose of the Proposed Transactions is to provide cash for the further development of XXXXXXXXXX and other Aco products at a time when it is not possible to undertake more conventional financings. In the future, PartnershipB will need XXXXXXXXXX of dollars of new financing, and the structure chosen will allow maximum flexibility in raising that additional financing.

RULINGS

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

A. The provisions of subsection 85(1) will apply to the transfer of XCO's XXXXXXXXXX to Subco as described in paragraph 22 of the Proposed Transactions, such that the agreed amount in respect of the transfer will be deemed to be XCO's proceeds of disposition and Subco's cost of such transferred property under paragraph 85(1)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer.

B. The provisions of subsection 97(2) will apply, subject to the application of subsection 69(11), to each of the transfers of eligible property, described in paragraphs 27 and 33 of the Proposed Transactions, such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost of such transferred property under paragraph 85(1)(a), and the transferor's cost of any interest in the partnership (after deducting the FMV of any consideration other than the partnership interest received on the respective transfer) received by such transferor as consideration for the transfer. For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer.

C. Provided that a particular shareholder of Aco holds the existing common shares of Aco as capital property, the provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the exchange of shares described in paragraph 36 of the Proposed Transactions, such that:

a. The cost to the particular shareholder of Aco of the Aco Class A Common Shares or the Aco Class C Preferred Shares will be deemed by paragraph 86(1)(b) to be that proportion of the ACB of the particular shareholder's existing common shares of Aco that

i. the FMV, immediately after the share exchange, of the Aco Class A Common Shares or the Aco Class C Preferred Shares received by the particular shareholder, as the case may be,

is of

ii. the FMV, immediately after the share exchange, of all the Aco Class A Common Shares and the Aco Class C Preferred Shares received by the particular shareholder.

b. The particular shareholder of Aco will be deemed by paragraph 86(1)(c) to have disposed of that shareholder's existing common shares of Aco for proceeds of disposition equal to the aggregate cost of all the Aco Class A Common Shares and the Aco Class C Preferred Shares received by the shareholder.

c. No dividends will be deemed to arise pursuant to subsection 84(1) or (3) with respect to the exchange.

d. The exchange of shares described in paragraph 36 of the Proposed Transactions will not, in and of itself, cause the Aco Class A Common Shares and the Aco Class C Preferred Shares to not be capital property.

D. Provided that a shareholder who immediately before the exchange described in paragraph 37 of the Proposed Transactions:

(i) holds the Aco Class C Preferred Shares as capital property;

(ii) deals at arm's length with Newco immediately before such exchange;

(iii) does not include, in computing his income for the taxation year in which the exchange takes place, any portion of the gain or loss, otherwise determined, from the disposition of such shares;

(iv) does not file a joint election under subsection 85(1) or 85(2) with Newco with respect to the Aco Class C Preferred Shares;

(v) does not receive any consideration other than the Newco common shares in exchange for the Aco Class C Preferred Shares;

and provided that immediately after the exchange:

(vi) such holder or persons with whom such holder does not deal at arm's length or such holder together with persons with whom he does not deal at arm's length will not:

(a) control Newco; or

(b) beneficially own shares of Newco having a FMV of more than 50% of the FMV of all of the outstanding shares of Newco;

such shareholder will be deemed to have disposed of his Aco Class C Preferred Shares for proceeds of disposition equal to the ACB to that shareholder of those shares immediately before the exchange and to have acquired the Newco common shares at a cost equal to the ACB to that shareholder of the Aco Class C Preferred Shares immediately before the exchange.

The cost to Newco of each Aco Class C Preferred Share acquired by Newco as a result of the exchange will be deemed to be the lesser of its FMV and its PUC immediately before the exchange pursuant to paragraph 85.1(1)(b).

E. The provisions of subsection 85(1) will apply to the transfer of XCO's interest in PartnershipA described in paragraph 42 of the Proposed Transactions, such that the agreed amount in respect of the transfer will be deemed to be XCO's proceeds of disposition and Aco's cost of the interest in PartnershipA under paragraph 85(1)(a). The cost to XCO of the Aco Class A Common Shares and Aco Class B Common Shares received by XCO as consideration for the transfer will be deemed to be that proportion of the proceeds of disposition of XCO's interest in PartnershipA that

a. the FMV, immediately after the disposition, of the Aco Class A Common Shares or Aco Class B Common Shares acquired by XCO, as the case may be,
is of

b. the FMV, immediately after the disposition, of all the Aco Class A Common Shares and Aco Class B Common Shares received by XCO as consideration for the transfer.

For greater certainty, paragraph 85(1)(e.2) will not apply to the transfer.

F. Provided that XCO does not act in concert with a person or group of persons who, together with XCO, own in aggregate shares representing more than 50% of the votes, the Proposed Transactions will not result in an acquisition of control of Aco by a person or group of persons for purposes of the provisions referred to in the preamble to subsection 256(7).

G. Dividends declared by Aco on the Aco Class A Common Shares and Aco Class B Common Shares and received by XCO as described in paragraph 43 of the Proposed Transactions, to the extent that they are included in computing XCO's income pursuant to paragraph 12(1)(j):

a. will be deductible by XCO in computing its taxable income pursuant to subsection 112(1). For greater certainty, the provisions of subsection 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; and

b. will not be subject to Part IV.1 tax under section 187.2 or the Part VI.1 tax under subsection 191.1(1).

H. The provisions of subsection 56(4) will not apply to any of the Proposed Transactions described herein, in and by themselves.

I. The ability of Aco to apply non-capital losses pursuant to paragraph 111(1)(a), or deductions pursuant to section 37, or ITCs against federal tax payable pursuant to section 127 against its share of profits of PartnershipA will not, in and of itself, result in the application of subsection 15(1), subsection 56(2), subsection 69(4) or subsection 246(1).

J. The provisions of subsection 69(11) will not apply to the transfer of certain assets of BusinessA to PartnershipA as described in paragraph 27 above or to the transfer by XCO of its interest in PartnershipA to Aco as described in paragraph 42 above, unless there is a subsequent disposition (or arrangements are made for the subsequent disposition) of (i) the assets which are transferred to PartnershipA or (ii) the interest in PartnershipA or (iii) property substituted for property described in (i) or (ii), within 3 years after the transfers described in paragraphs 27 and 42 above and where it may reasonably be considered that one of the main purposes of the series of transactions or events (which includes the subsequent disposition of the assets, the interest in PartnershipA or properties substituted therefor) is to obtain a benefit of any item described in paragraphs 69(11)(a) or (b) which is available to a person (other than a person that is affiliated with XCO immediately before the series began).

K. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

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 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, 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,

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

ENDNOTES

¹ XXXXXXXXXX.