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.

Principal Issues: Income tax consequences of completed Plan of Arrangement to shareholder of corporation receiving new shares of corporation and shares of another corporation in exchange for old shares of corporation.

Position: Section 86 of the Act will be applicable to the shareholder.

Reasons: Plan of Arrangement would appear to satisfy the conditions for application of section 86(1).

XXXXXXXXXX 2004-005532
J. MacGillivray
February 9, 2004

Dear XXXXXXXXXX:

Re: Gains/Losses on Personal Income Tax

We are writing in response to your facsimile correspondence of November 17, 2003 that was sent to the Winnipeg Tax Centre (Client Services). You have requested written guidance concerning the income tax reporting requirements relating to a disposition of shares in the capital stock of XXXXXXXXXX ("Xco") in XXXXXXXXXX.

Background

Based on the facts disclosed in your letter, it appears that you disposed of common shares of Xco ("Old Xco Shares") on XXXXXXXXXX in exchange for a new class of voting common shares of Xco ("New Xco Shares") and shares of XXXXXXXXXX ("Newco") in accordance with the terms of a court-sanctioned Arrangement involving Xco, Newco and XXXXXXXXXX (the "Arrangement"). Every Old Xco Share that you held immediately before the Arrangement was exchanged for XXXXXXXXXX of a New Xco Share and XXXXXXXXXX of Newco ("Newco Share"). ¹

Therefore, on the assumption that you held XXXXXXXXXX Old Xco Shares immediately before the Arrangement, you would have received XXXXXXXXXX New Xco Shares and XXXXXXXXXX Newco Shares as part of the Arrangement:

	Prior to Arrangement				After Arrangement

	XXXXXXXXXX Old Xco Shares			XXXXXXXXXX  New Xco Shares
(i.e., XXXXXXXXXX . common shares)	(i.e., XXXXXXXXXX  voting common shares of XXXXXXXXXX ., formerly named XXXXXXXXXX .)

XXXXXXXXXX Newco Shares (i.e, XXXXXXXXXX shares of XXXXXXXXXX, formerly named XXXXXXXXX).

We have enclosed a copy of a press release issued by Xco on XXXXXXXXXX in conjunction with the completion of the Arrangement, which outlines the details of the Arrangement, including those described above. In addition, we have enclosed a portion of an Information Circular of Newco dated XXXXXXXXXX, which also summarizes the details of the Arrangement and provides a summary of the principal Canadian income tax considerations of the Arrangement to shareholders of Xco (See the "Canadian Federal Income Tax Considerations" portion of the Information Circular on pages XXXXXXXXXX).

Our Comments

Based on our review of the legal opinions contained in the Information Circular with respect to the income tax consequences to shareholders of Xco arising from the Arrangement, it is our view that section 86 of the Income Tax Act (Canada) was intended to apply to your disposition of the XXXXXXXXXX Old Xco Shares that you held prior to the Arrangement. While the Canada Revenue Agency has not formally reviewed the Arrangement as of this time, we have no reason to believe that this legal opinion is incorrect.

Accordingly, provided that the assumptions contained within the "Canadian Federal Income Tax Considerations" portion of the Information Circular were descriptive of your situation and you held your Old Xco Shares as capital property at the time of the Arrangement, it is likely that section 86 of the Act applies to the disposition of your Old Xco Shares. Subsection 86(1) of the Act states the following:

'86. (1) Exchange of shares by a shareholder in course of reorganization of capital - Where, at a particular time after May 6, 1974, in the course of a reorganization of the capital of a corporation, a taxpayer has disposed of capital property that was all the shares of any particular class of the capital stock of the corporation that were owned by the taxpayer at the particular time (in this section referred to as the "old shares"), and property is receivable from the corporation therefor that includes other shares of the capital stock of the corporation (in this section referred to as the "new shares"), the following rules apply:

(a) the cost to the taxpayer of any property (other than new shares) receivable by the taxpayer for the old shares shall be deemed to be its fair market value at the time of the disposition;

(b) the cost to the taxpayer of any new shares of any class of the capital stock of the corporation receivable by the taxpayer for the old shares shall be deemed to be that proportion of the amount, if any, by which the total of the adjusted cost bases to the taxpayer, immediately before the disposition, of the old shares exceeds the fair market value at that time of the consideration receivable for the old shares (other than new shares) that

(i) the fair market value, immediately after the disposition, of those new shares of that class,

is of

(ii) the fair market value, immediately after the disposition, of all new shares of the capital stock of the corporation receivable by the taxpayer for the old shares; and

(c) the taxpayer shall be deemed to have disposed of the old shares for proceeds of disposition equal to the cost to the taxpayer of all new shares and other property receivable by the taxpayer for the old shares.'

Consequently, under subsection 86(1):

( You were deemed to have acquired the XXXXXXXXXX Newco Shares received under the Arrangement at a cost equal to their fair market value, determined at the time you disposed of the Old Xco Shares under the Arrangement (see comments below regarding the determination of this fair market value). While the Newco Shares are "new shares" in the sense that they were not issued until the Arrangement occurred, the XXXXXXXXXX Newco Shares are not shares of Xco and are therefore considered to be "property (other than new shares)" under paragraph 86(1)(a).

( You were deemed to have acquired the XXXXXXXXXX New Xco Shares that you received under the Arrangement at a cost equal to the amount, if any, by which the adjusted cost base of your XXXXXXXXXX Old Xco Shares, determined immediately before the Arrangement, exceeded the fair market value of the XXXXXXXXXX Newco Shares, determined at the time you disposed of the Old Xco Shares under the Arrangement.

( You were deemed to have disposed of your XXXXXXXXXX Old Xco Shares for proceeds of disposition equal to the total of the cost of the XXXXXXXXXX Newco Shares received on the Arrangement, as determined above, and the cost of the XXXXXXXXXX New Xco Shares, as determined above.

Reporting the Disposition of Your Old Xco Shares

In reporting the disposition of your XXXXXXXXXX Old Xco Shares, it will be necessary to determine the fair market value of the XXXXXXXXXX Newco Shares as of the time you acquired them under the Arrangement. While it is not the practise of the Income Tax Rulings Directorate to comment upon the determination of fair market value in any particular set of circumstances, the opening trading price for the Newco Shares on the XXXXXXXXXX could be relevant in determining that fair market value. Furthermore, you may wish to contact Newco for further information for it may have been necessary for the directors of Newco to determine a good faith estimate of the fair market value of the Newco Shares issued on the Arrangement for corporate law purposes. In any event, we recommend that you contact your local Tax Services Office if you require further guidance in determining the fair market value of the XXXXXXXXXX Newco Shares at the time of the Arrangement.

Once the fair market value of the XXXXXXXXXX Newco Shares at the time of the Arrangement is determined, you must then add to that amount the amount, if any, by which the adjusted cost base of your XXXXXXXXXX Old Xco Shares exceeded that fair market value in order to calculate your proceeds of disposition for your XXXXXXXXXX Old Xco Shares:

Proceeds of Disposition for Old Xco Shares = FMV of XXXXXXXXXX Newco Shares + (Adjusted Cost Base of Old Xco Shares immediately before Arrangement - FMV of XXXXXXXXXX Newco Shares).

However, if the fair market value of your XXXXXXXXXX Newco Shares was greater than or equal to the adjusted cost base of the XXXXXXXXXX Old Xco Shares immediately before Arrangement, then the proceeds of disposition of the XXXXXXXXXX Old Xco Shares will be equal to the fair market value of your XXXXXXXXXX Newco Shares, determined as of the time you received them under the Arrangement.

Calculating the Cost of Your XXXXXXXXXX New Xco Shares and XXXXXXXXXX Newco Shares

Since you intend to hold the XXXXXXXXXX New Xco Shares and XXXXXXXXXX Newco Shares received under the Arrangement, it will be necessary to track the adjusted cost base of those shares in the event that you dispose of these shares in the future. Because the New Xco Shares and Newco Shares are shares of different corporations, the calculation of the adjusted cost base of the XXXXXXXXXX New Xco Shares is separate from the calculation of the adjusted cost base of the XXXXXXXXXX Newco Shares (i.e., you must not aggregate the cost of the New Xco Shares and the Newco Shares to determine an average adjusted cost base for each Newco Share or Newco Share).

As stated above, the cost of the XXXXXXXXXX Newco Shares will be equal to their fair market value, determined as of the time you received them under the Arrangement. Our comments with respect to the determination of the fair market value of the Newco shares in the preceding section are equally applicable to the determination of the cost of the New Xco Shares and Newco Shares. Once that fair market value has been determined, you would add the amount of any costs incurred to acquire the XXXXXXXXXX Newco Shares to obtain the aggregate adjusted cost base of the XXXXXXXXXX Newco Shares immediately after the Arrangement. To calculate the adjusted cost base of each Newco Share immediately after the Arrangement, you must then divide the aggregate adjusted cost base of the Newco Shares, determined in accordance with the foregoing guidelines, by XXXXXXXXXX.

To calculate the cost of the XXXXXXXXXX New Xco Shares, you must determine the amount, if any, by which the adjusted cost base of your XXXXXXXXXX Old Xco Shares exceeds the fair market value of the XXXXXXXXXX Newco Shares. If there is no such excess, then the cost of your XXXXXXXXXX New Xco Shares will be nil (before taking into account any costs incurred to acquire the XXXXXXXXXX New Xco Shares). However, if there is such an excess, you would then add the amount of any costs incurred to acquire the XXXXXXXXXX New Xco Shares. That total would be equal to the aggregate adjusted cost base of the XXXXXXXXXX New Xco Shares immediately after the Arrangement. To calculate the adjusted cost base of each New Xco Share immediately after the Arrangement, you must then divide the aggregate adjusted cost base of the New Xco Shares by XXXXXXXXXX.

Capital Gains/Losses Resulting From the Arrangement

Due to the manner in which subsection 86(1) operates, you would not likely have a capital loss on the disposition of your Old Xco Shares pursuant to the Arrangement, unless you could prove that you incurred costs for the purpose of disposing of the Old Xco Shares under the Arrangement. Subsection 86(1) deems that you received proceeds of disposition equal to the fair market value of the XXXXXXXXXX Newco Shares, determined at the time you disposed of the Old Xco Shares under the Arrangement, plus the amount, if any, by which the adjusted cost base of your Old Xco Shares exceeds that fair market value. Consequently, if the adjusted cost base of your Old Xco Shares did exceed the fair market value of the XXXXXXXXXX Newco Shares, the excess would simply form part of the adjusted cost base of the XXXXXXXXXX New Xco Shares immediately after the Arrangement. Your proceeds of disposition for the XXXXXXXXXX Old Xco Shares would therefore be equal to their adjusted cost base, determined immediately before the time they were disposed of under the Arrangement, with the result that your capital gain/loss would be nil (before taking into account costs incurred for the purpose of disposing of the Old Xco Shares under the Arrangement). On the other hand, if the adjusted cost base of your Old Xco Shares was less than the fair market value of the XXXXXXXXXX Newco Shares, you would have realized a capital gain on the disposition of your XXXXXXXXXX Old Xco Shares (before taking into account any costs incurred for the purpose of disposing of your XXXXXXXXXX Old Xco Shares). In either case, a capital loss could not result unless you incurred costs for the purpose of disposing of your Old Xco Shares under the Arrangement.

The foregoing comments are made in accordance with Information Circular IC 70-6R5 dated May 17, 2002 and are therefore not binding on the Canada Revenue Agency. Should you require additional guidance or clarification of the matters discussed herein, please contact Jackson MacGillivray at (613) 948-5274.

Yours truly,

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

enclosures
ENDNOTES

¹ As part of the Arrangement, Xco changed its name from XXXXXXXXXX to XXXXXXXXXX and Newco changed its name from XXXXXXXXXX to XXXXXXXXXX.