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: Public Company Spin-off - Various issues XXXXXXXXXX .
Position: Favourable rulings issued.
Reasons: In compliance with the law.
XXXXXXXXXX
2004-006596
XXXXXXXXXX, 2004
Re: XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX, as modified by your letters of XXXXXXXXXX, and XXXXXXXXXX, and your other correspondence, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office ("TSO") or taxation centre ("TC") in connection with a previously filed tax return of the taxpayers or a related person;
(iii) under objection by the taxpayers or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.
The taxpayers have also represented that the proposed transactions described herein will not result in any taxpayer described herein being unable to pay its existing outstanding tax liabilities.
DEFINITIONS:
In this letter, unless otherwise specified, all monetary amounts are expressed in Canadian dollars and the following terms have the meanings specified below:
(a) "Act" means the Income Tax Act, R.S.C. 1986 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Act, and the Income Tax Regulations thereunder are referred to as the "Regulations";
(b) "adjusted cost base" ("ACB") has the meaning assigned by section 54;
(c) "agreed amount" in respect of a property means the amount that the transferor and the transferee of the property have agreed upon in an election under subsection 85(1);
(d) "Amalco" means the corporation to be formed on the amalgamation of SpinCo and Newco1, as described in Paragraph 56;
(e) "arm's length" has the meaning assigned by subsection 251(1);
(f) "Butterfly Proportion" means the fraction A/B, where:
A = the net fair market value of the property to be transferred to Subco by DC as described in Paragraph 47, determined immediately before such transfer; and
B = the net fair market value of all property owned by DC determined immediately before the transfer of property to Subco by DC as described in Paragraph 47;
(g) "Canco" means XXXXXXXXXX, a corporation subsisting under the BCA;
(h) "capital property" has the meaning assigned by section 54;
(i) "BCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44;
(j) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);
(k) "cost amount" has the meaning assigned by subsection 248(1);
(l) "CRA" means the Canada Revenue Agency;
(m) "DC" means XXXXXXXXXX, a corporation subsisting under the BCA;
(n) "DC Butterfly Shares" means the new class of common shares in the capital of DC, as described in Paragraph 42;
(o) "DC Common Shares" means the common shares in the capital of DC, as described in Paragraph 2;
(p) "DC DSU" means a deferred share unit under the DC DSU Plan XXXXXXXXXX or the DC DSU Plan XXXXXXXXXX, as the context requires;
(q) "DC DSU Plan XXXXXXXXXX" means the deferred share unit plan of DC, as described in Paragraph 15;
(r) "DC DSU Plan XXXXXXXXXX" means the deferred share unit plan of DC, as described in Paragraph 15;
(s) "DC New Common Shares" means the new class of common shares in the capital of DC, as described in Paragraph 42;
(t) "DC New Stock Option" means a right to acquire common shares in the capital of DC under the DC New Stock Option Plan, as described in Paragraph 44;
(u) "DC New Stock Option Plan" means the new stock option plan of DC, as described in Paragraph 44;
(v) "DC Preferred Shares" means the Class A preferred shares, Series I in the capital of DC, as described in Paragraph 2;
(w) "DC Promissory Note" means the promissory note to be issued by DC, as described in Paragraph 48;
(x) "DC Stock Option" means a right to acquire common shares in the capital of DC under the DC Stock Option Plan, as described in Paragraph 14;
(y) "DC Stock Option Plan" means the existing stock option plan of DC, as described in Paragraph 14;
(z) "DC Shareholder" means XXXXXXXXXX, a Canadian public corporation whose shares are listed on the Stock Exchange and the XXXXXXXXXX Stock Exchange;
(aa) "depreciable property" has the meaning assigned by subsection 13(21);
(bb) "designated treaty country" has the meaning assigned by subsection 5907(11) of the Regulations;
(cc) "disposition" has the meaning assigned by subsection 248(1);
(dd) "eligible capital property" has the meaning assigned by section 54;
(ee) "eligible property" has the meaning assigned by subsection 85(1.1);
(ff) "excluded property" has the meaning assigned by subsection 95(1);
(gg) "exempt deficit" has the meaning assigned by section 5907 of the Regulations;
(hh) "exempt earnings" has the meaning assigned by section 5907 of the Regulations;
(ii) "exempt surplus" has the meaning assigned by section 5907 of the Regulations;
(jj) "fair market value" means the highest price available in an open and unrestricted market, between informed, prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of cash;
(kk) XXXXXXXXXX;
(ll) "Forco1" means XXXXXXXXXX, a corporation subsisting under the laws of XXXXXXXXXX;
(mm) "Forco2" means XXXXXXXXXX, a corporation subsisting under the laws of XXXXXXXXXX;
(nn) "Forco1 New Common Shares" means the new class of common shares in the capital of Forco1, as described in Paragraph 28;
(oo) "Forco1 Preferred Shares" means the new class of preferred shares in the capital of Forco1, as described in Paragraph 28;
(pp) "foreign accrual property income" ("FAPI") has the meaning assigned by subsection 95(1);
(qq) "foreign affiliate" has the meaning assigned by subsection 95(1);
(rr) "Forsub1" means XXXXXXXXXX, a corporation subsisting under the laws of XXXXXXXXXX;
(ss) "Forsub2" means XXXXXXXXXX, a limited liability company subsisting under the laws of XXXXXXXXXX;
(tt) "Forsub3" means XXXXXXXXXX, a limited liability company subsisting under the laws of XXXXXXXXXX;
(uu) "Forsub4" means XXXXXXXXXX , a corporation subsisting under the laws of XXXXXXXXXX;
(vv) "In The Money Amount" means, in relation to a particular stock option, the amount by which the fair market value of the shares that are subject to the particular option exceeds the exercise price in such option;
(ww) "Investco" means XXXXXXXXXX, a limited liability company subsisting under the laws of XXXXXXXXXX;
(xx) XXXXXXXXXX;
(yy) "investment business" has the meaning assigned by subsection 95(1);
(zz) "Newco1" means XXXXXXXXXX, the new corporation incorporated by DC, as described in Paragraph 23;
(aaa) "Newco2" means the corporation to be incorporated by Newco1, as described in Paragraph 27;
(bbb) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);
(ccc) "Paragraph" refers to a numbered paragraph in this advance income tax ruling;
(ddd) "Partnership" means the XXXXXXXXXX, a partnership established under the laws of XXXXXXXXXX;
(eee) "Plan of Arrangement" means the proposed plan of arrangement under the BCA to effect the divisive reorganization of DC, as described in Paragraphs 40 to 58;
(fff) "prepaid expenses" means rights arising from the prepayment of expenses;
(ggg) "prescribed stock exchange" has the meaning assigned by section 3200 of the Regulations;
(hhh) "proceeds of disposition" ("POD") has the meaning assigned by section 54;
(iii) "Proposed Transactions" means the transactions described in Paragraphs 28 to 58;
(jjj) "public corporation" has the meaning assigned by subsection 89(1);
(kkk) "related person" has the meaning assigned by section 251;
(lll) "relevant cost base" has the meaning assigned by subsection 95(4);
(mmm) "Segment" means any of Segment1, Segment2 or Segment3 as the context requires and "Segments" means Segment1, Segment2 and Segment3 collectively;
(nnn) "Segment1" means DC's XXXXXXXXXX operations as more fully described in Paragraph 5;
(ooo) "Segment2" means DC's XXXXXXXXXX operations as more fully described in Paragraph 5;
(ppp) "Segment3" means DC's XXXXXXXXXX operations as more fully described in Paragraph 5;
(qqq) "series of transactions or events" includes the transactions or events referred to in subsection 248(10);
(rrr) "share" includes, where applicable, an interest in a U.S. limited liability corporation;
(sss) "short-term preferred share" has the meaning assigned by subsection 248(1);
(ttt) "specified financial institution" has the meaning assigned by subsection 248(1);
(uuu) "SpinCo" means XXXXXXXXXX, the new corporation incorporated by DC, as described in Paragraph 21;
(vvv) "SpinCo Class A Common Shares" means the common shares in the capital of SpinCo, as described in Paragraph 21(a);
(www) "SpinCo Class B Common Shares" means the convertible non-voting common shares in the capital of SpinCo, as described in Paragraph 21(b);
(xxx) "stated capital" has the meaning assigned by section 26 of the BCA;
(yyy) "Stock Exchange" means the XXXXXXXXXX Stock Exchange;
(zzz) "Subco" means XXXXXXXXXX, the new corporation incorporated by SpinCo, as described in Paragraph 24;
(aaaa) "Subco Promissory Note" means the promissory note to be issued by Subco, as described in Paragraph 49;
(bbbb) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);
(cccc) "taxable deficit" has the meaning assigned by section 5907 of the Regulations;
(dddd) "taxable preferred share" has the meaning assigned by subsection 248(1);
(eeee) "term preferred share" has the meaning assigned by subsection 248(1);
(ffff) "Transferred Multiple" means the result obtained from the following equation: Transferred Proportion/(1 - Transferred Proportion);
(gggg) "Transferred Proportion" means the fraction A x C/B, where
A = the Butterfly Proportion;
B = the fair market value of all issued and outstanding DC New Common Shares and DC Butterfly Shares as determined immediately before the transfer of property to Subco by DC as described in Paragraph 47;
C = the fair market value of all issued and outstanding shares of all classes in the capital of DC as determined immediately before the transfer of property to Subco by DC as described in Paragraph 47; and
(hhhh) "underlying foreign tax" has the meaning assigned by section 5907 of the Regulations.
FACTS
1. DC is a taxable Canadian corporation and a public corporation with a XXXXXXXXXX taxation year-end. DC's head office is located at XXXXXXXXXX. DC's business number is XXXXXXXXXX and it deals with the XXXXXXXXXX TSO and files its tax returns with the XXXXXXXXXX TC.
2. DC's authorized share capital includes an unlimited number of each of the following shares: common shares; Class A preferred shares, issuable in series; Class B preferred shares and non-voting participating shares. DC currently has two classes of shares issued and outstanding the number of which are approximately as follows:
(a) XXXXXXXXXX DC Common Shares; and
(b) XXXXXXXXXX DC Preferred Shares.
Each DC Common Share entitles the holder to one vote at all meetings of shareholders. The DC Preferred Shares are non-voting (unless DC fails to pay XXXXXXXXXX dividends); entitle the holder to cumulative XXXXXXXXXX dividends; and are redeemable for $XXXXXXXXXX per share, being the amount for which such share was issued, plus any declared but unpaid dividends. The DC Preferred Shares have a stated capital and PUC of $XXXXXXXXXX per share and are not convertible or exchangeable. The DC Preferred Shares are shares of a "specified class" within the meaning of that term in subsection 55(1). Approximately XXXXXXXXXX% of the DC Preferred Shares are owned by DC Shareholder and its affiliates.
The DC Common Shares and DC Preferred Shares are listed on the Stock Exchange which is a prescribed stock exchange. The DC Common Shares are not short-term preferred shares, taxable preferred shares or term preferred shares. Some of the DC Common Shares are owned by persons who are non-residents of Canada for purposes of the Act. The fair market value of the DC Common Shares exceeds the ACB of such shares to most holders thereof.
3. DC Shareholder currently owns approximately XXXXXXXXXX of the issued and outstanding DC Common Shares, which represents approximately XXXXXXXXXX% of all such shares. To the best of the knowledge of the directors and senior officers of DC as of the date hereof, no person or related group of persons beneficially owns, directly or indirectly, more than XXXXXXXXXX% of the DC Common Shares, other than DC Shareholder.
4. DC is a XXXXXXXXXX company with assets in Canada, the United States ("US") and the United Kingdom ("UK"). DC XXXXXXXXXX.
5. DC's three main operating segments are as follows:
(a) Segment1 XXXXXXXXXX;
(b) Segment2 - XXXXXXXXXX; and
(c) Segment3 XXXXXXXXXX.
Net sales from Segment1, Segment2 and Segment3 accounted for approximately 55%, 43% and 2%, respectively, of DC's total net sales in XXXXXXXXXX. Approximately 50% of the sales of Segment3 are directed to third parties and the remainder is consumed internally.
6. In DC's XXXXXXXXXX, DC completed the sale of XXXXXXXXXX. As a result of this sale, DC's segmented information for financial reporting purposes was changed from XXXXXXXXXX business segments (XXXXXXXXXX) into the three business segments described in Paragraph 5.
7. DC directly, or indirectly, through its various Canadian subsidiaries, owns operating assets of each Segment in Canada. DC also directly, or indirectly, owns various other subsidiaries or entities located in the US and the UK. DC's various related Canadian and foreign subsidiaries and other entities are collectively referred to as the "DC Group".
DC has long-term debt, principally consisting of US dollar denominated debentures. At XXXXXXXXXX, long-term debt totalled US$XXXXXXXXXX and had an average term to maturity of XXXXXXXXXX years.
DC has other long-term liabilities consisting mainly of pension and post-retirement benefit plan liabilities. At XXXXXXXXXX, the liability in respect of pension and post-retirement benefit plan liabilities was US$XXXXXXXXXX. In addition, DC has deferred gains on interest rate swap agreements, which, at XXXXXXXXXX, totalled US$XXXXXXXXXX.
8. Forco1 is a wholly-owned US subsidiary of DC and is the parent company for DC's US operations. Forco1 owns a XXXXXXXXXX% partnership interest in Partnership, which operates XXXXXXXXXX; shares of Forco2, which is a wholly-owned US subsidiary of Forco1; and shares of various other subsidiaries. Forco1's authorized share capital consists only of common shares being, XXXXXXXXXX Class A common shares (with a par value of $XXXXXXXXXX US per share) and XXXXXXXXXX Class B common shares (without par value). Forco1 has XXXXXXXXXX Class A common shares and XXXXXXXXXX Class B common shares issued and outstanding that are held by DC as capital property. Forco2's authorized share capital consists only of common shares, being XXXXXXXXXX common shares. All of the issued and outstanding common shares of Forco2 are owned by Forco1. The XXXXXXXXXX% partnership interest in Partnership is held by Forco1 as capital property.
The fair market value of a Forco1 Class A common share is equal to the fair market value of a Forco1 Class B common share. The aggregate fair market value of the Class A common shares and Class B common shares of Forco1 is in excess of DC's aggregate ACB of such class of shares. The aggregate ACB of all issued and outstanding Class A common shares and Class B common shares of Forco1 to DC is approximately $XXXXXXXXXX.
9. The Canadian operations of Segment2 and Segment3 are carried on by XXXXXXXXXX DC, XXXXXXXXXX.
The US operations of Segment2 and Segment3 are carried on by Forco2, which owns certain assets of Segment2 and Segment3 in the US, as well as shares in the capital of Forsub1 and Forsub2, respectively. The principal assets of Forsub1 and Forsub2 are generally as follows:
(a) Forsub1, XXXXXXXXXX; and
(b) Forsub2, XXXXXXXXXX.
Forsub2 also owns all the shares in the capital of Forsub3. Forsub3 has ceased to carry on business and is currently in the process of being wound-up. The shares of Canco, Forco2, Forsub1, Forsub2 and Forsub3, as the case may be, are held as capital property by each respective owner.
10. Forco2 owns shares in the capital of Forsub4 and Investco. Forsub4 is a wholly-owned subsidiary of Forco2. Forco2 has a $XXXXXXXXXX investment XXXXXXXXXX Investco. XXXXXXXXXX.
The shares of Forsub4 and Investco are held as capital property by Forco2.
11. Forco1, Forco2, and Forsub2 have borrowed amounts from XXXXXXXXXX.
12. XXXXXXXXXX.
13. With respect to the pre-butterfly transactions described in Paragraphs 29 to 39 below:
(a) each of Forco1, Forco2, Forsub1, Forsub2, Forsub3, Forsub4, XXXXXXXXXX and Investco are foreign affiliates and controlled foreign affiliates of DC;
(b) XXXXXXXXXX;
(c) the following properties will constitute excluded property to the transferor at the time of the relevant transfer or disposition of:
(i) XXXXXXXXXX;
(ii) the assets to be transferred from Forco2 to Forsub1, as described in Paragraph 32 below;
(iii) the assets to be transferred from Forco2 to Forsub4, as described in Paragraph 32 below;
(iv) the shares of Forsub1 and Forsub4 to be transferred from Forco2 to Forco1, as described in Paragraph 33 below;
(v) the Forco1 Preferred Shares to be redeemed by Forco1, as described in Paragraph 39 below; and
(vi) the shares of Forsub1 and Forsub4 to be transferred from Forco1 to Newco2, as described in Paragraph 39 below; and
(d) XXXXXXXXXX.
14. DC has granted DC Stock Options under the DC Stock Option Plan under which certain directors, management personnel and employees of DC are entitled to acquire DC Common Shares from DC at specified prices. During DC's XXXXXXXXXX taxation year, XXXXXXXXXX DC Stock Options were exercised for total cash consideration of $XXXXXXXXXX and at XXXXXXXXXX, XXXXXXXXXX DC Stock Options were still outstanding, exercisable at prices varying from $XXXXXXXXXX to $XXXXXXXXXX per share for periods up to XXXXXXXXXX years.
XXXXXXXXXX.
At the special meeting of the DC shareholders to approve the Plan of Arrangement, the shareholders approved, by ordinary resolution, an increase to the number of DC Common Shares that may be issued under the DC Stock Option Plan.
15. DC has two separate deferred share unit plans. XXXXXXXXXX.
16. DC has a history of paying XXXXXXXXXX dividends on its DC Common Shares and the dividend rate has been $XXXXXXXXXX per share since the XXXXXXXXXX of XXXXXXXXXX. The most recent dividend on the DC Common Shares was declared to shareholders of record on XXXXXXXXXX and is payable on XXXXXXXXXX. The DC Preferred Shares are currently paying dividends at a rate of XXXXXXXXXX% of the Canadian prime rate, subject to adjustment.
17. DC has a dividend reinvestment plan under which holders of DC Common Shares may elect to reinvest their cash dividends on their DC Common Shares into additional DC Common Shares. The dividend reinvestment plan will participate in the Proposed Transactions on the same basis as other holders of DC Common Shares.
18. DC has an employee share savings plan under which eligible employees are able to invest in DC Common Shares through payroll deductions or otherwise. DC Common Shares acquired by eligible employees are held in nominee form on their behalf. Eligible employees will participate in the Proposed Transactions on the same basis as other holders of DC Common Shares. Following the Proposed Transactions:
(a) eligible employees who remain employees of DC following the Proposed Transactions will have the option of receiving the shares of Amalco directly or having such shares sold and the proceeds distributed to them.
(b) eligible employees who terminate employment with DC and commence employment with Amalco following the Proposed Transactions will have the option of receiving or selling the DC Common Shares and shares of Amalco.
19. On XXXXXXXXXX, the board of directors of DC passed a resolution to discontinue the practice of issuing loans to executives for the purchase of DC Common Shares. All outstanding loans were repaid to DC by XXXXXXXXXX. In conjunction with the repayment of these loans, DC Stock Options were issued to the President/CEO of DC and the executive Vice President/CFO of DC.
20. On XXXXXXXXXX, DC announced that its board of directors had authorized DC to repurchase up to XXXXXXXXXX DC Common Shares on the open market for fair market value consideration, representing XXXXXXXXXX% of the total DC Common Shares then outstanding. Purchases may be made by DC between XXXXXXXXXX and XXXXXXXXXX (generally by means of excess cash generated from operations) and all DC Common Shares purchased by DC will be cancelled. DC has a history of purchasing DC Common Shares for cancellation and has done so in its XXXXXXXXXX fiscal years and accordingly, the current repurchase plan was not authorized in contemplation of the Proposed Transactions.
PRELIMINARY TRANSACTIONS
21. On XXXXXXXXXX, DC incorporated SpinCo under the provisions of the BCA. SpinCo's articles of incorporation provide that its authorized share capital includes:
(a) SpinCo Class A Common Shares;
(b) SpinCo Class B Common Shares, which are non-voting and convertible into SpinCo Class A Common Shares on a XXXXXXXXXX basis (i.e., XXXXXXXXXX);
(c) SpinCo Class A Preferred Shares, which are issuable in series and subject to the following provisions: the board is entitled to fix the number of shares and the designation and attributes of each series, which may include voting rights; these shares are entitled to priority over the SpinCo Class B Preferred Shares, the SpinCo Non-Voting Participating Shares, the SpinCo Class A Common Shares and the SpinCo Class B Common Shares with respect to dividends and the distribution of assets of SpinCo in the event of any liquidation, dissolution, or winding-up of SpinCo;
(d) SpinCo Class B Preferred Shares, which are issuable in series and subject to the following provisions: the board is entitled to fix the number of shares and the designation and attributes of each series, which may include voting rights; these shares are entitled to priority over the SpinCo Non-Voting Participating Shares, the SpinCo Class A Common Shares and the SpinCo Class B Common Shares with respect to the payment of dividends and the distribution of assets of SpinCo in the event of any liquidation, dissolution or winding-up of SpinCo; and
(e) SpinCo Non-Voting Participating Shares, which are issuable in series and subject to the following provisions: the board is entitled to fix the number of shares and the designation and attributes of each series, which may include a preferential dividend or a priority in any distribution of assets of SpinCo; unless otherwise specified, the holders of these shares are entitled to receive dividends, if, as and when declared by the directors rateably with the holders of SpinCo Class A Common Shares and SpinCo Class B Common Shares and, in the event of any liquidation, dissolution or winding-up, subject to the rights of the holders of the SpinCo Class A Preferred Shares and the SpinCo Class B Preferred Shares, to participate rateably with the holders of SpinCo Class A Common Shares and SpinCo Class B Common Shares in any distribution of the assets of SpinCo.
SpinCo is a taxable Canadian corporation. On or shortly after incorporation, DC contributed $XXXXXXXXXX to SpinCo, however, no shares of SpinCo were issued. The board of directors of SpinCo were set on incorporation by SpinCo's incorporating documents.
22. On XXXXXXXXXX:
(a) DC conditionally approved the DC New Stock Option Plan;
(b) DC approved a draft of the Plan of Arrangement and the arrangement agreement governing the Plan of Arrangement;
(c) SpinCo conditionally approved a stock option plan with substantially the same terms as the DC Stock Option Plan; and
(d) SpinCo approved a draft of the Plan of Arrangement and the arrangement agreement governing the Plan of Arrangement.
The stock option plans referred to in (a) and (c) above require shareholder approval, which will be sought at the same shareholder meeting called to approve the Plan of Arrangement, as further described in Paragraph 40 below. For greater certainty, no stock options have been issued under either such stock option plan, and no DC New Stock Options will be issued under the DC New Stock Option Plan prior to the transaction described in Paragraph 44 and no stock options will be issued under SpinCo's stock option plan prior to the completion of the Proposed Transactions.
23. On XXXXXXXXXX, DC incorporated Newco1 under the provisions of the BCA, XXXXXXXXXX shares of Newco1 were issued. Newco1's articles of incorporation provide that its authorized share capital includes common shares. Newco1 is a taxable Canadian corporation and on XXXXXXXXXX DC XXXXXXXXXX.
24. On XXXXXXXXXX, SpinCo incorporated Subco under the provisions of the BCA. Subco's articles provide that its authorized share capital includes common shares. Subco will be a taxable Canadian corporation and SpinCo XXXXXXXXXX after incorporation of Subco.
25. XXXXXXXXXX.
26. On XXXXXXXXXX, Forco1 contributed certain assets to Forco2 in exchange for a number of newly issued common shares of Forco2 having an aggregate fair market value equal to the aggregate fair market value of the assets contributed to it by Forco1.
27. On XXXXXXXXXX, Newco1 incorporated Newco2 under the laws of XXXXXXXXXX. Newco2's articles of incorporation provide that its authorized share capital includes common shares without par value. XXXXXXXXXX prior to the pre-butterfly transactions described below.
PROPOSED TRANSACTIONS
28. Forco1 will file articles of amendment to create XXXXXXXXXX Forco1 New Common Shares and XXXXXXXXXX Forco1 Preferred Shares. The terms and conditions of the Forco1 New Common Shares will be identical to the terms and conditions of the existing Forco1 Class B common shares except that each Forco1 New Common Share will entitle the holder to XXXXXXXXXX votes, instead of XXXXXXXXXX. The Forco1 Preferred Shares will be XXXXXXXXXX . Each of Forsub1 and Forsub4 will also be filing articles of amendment to increase the number of shares each is authorized to issue.
Pre-Butterfly Transactions
29. Forco1 may pay a cash dividend to DC in an amount to be determined.
30. XXXXXXXXXX.
31. XXXXXXXXXX.
32. Forco2 will contribute the following assets:
(a) to Forsub1; all or substantially all of the operating assets of Segment3, including XXXXXXXXXX located in XXXXXXXXXX, and accounts receivable, inventory and prepaid expenses; and
(b) to Forsub4:
(i) all or substantially all of the operating assets of Segment2 including XXXXXXXXXX, and accounts receivable, inventory and prepaid expenses;
(ii) all its shares of Forsub2; and
(iii) all its preferred shares of Investco, XXXXXXXXXX.
In exchange for the assets transferred by Forco2 as described above, each of Forsub1 and Forsub4 will assume certain operating liabilities of Forco2 and will issue shares of its capital stock to Forco2 having an aggregate fair market value equal to the aggregate fair market value of the assets so transferred to Forsub1 and Forsub4, as the case may be, less the amount of operating liabilities of Forco2 assumed by such transferee. The employees employed in respect of the Segment3 and Segment2 operations will become employees of Forsub1 and Forsub4, respectively, in connection with the transfer of assets.
For greater certainty, the amount of liabilities to be assumed and allocated as consideration for the shares of Forsub2 and Investco transferred by Forco2 to Forsub4 as described above will not exceed the respective relevant cost base of such shares to Forco2, and Forco2 will receive shares in the capital of Forsub4 as all or part of the consideration for the shares of Forsub2 and Investco so transferred. DC will not claim an amount greater than the ACB to Forco2 of the respective shares of Forsub2 and Investco as the relevant cost base of such shares for the purpose of paragraph 95(2)(c).
The assets to be transferred by Forco2 to Forsub1 and Forsub4 will not include any of the assets acquired by Forco2 from Forco1, as described in Paragraph 26.
33. Forco2 will repurchase a number of Forco2 common shares equal to the number of common shares in the capital of Forco2 having an aggregate fair market value equal to the issued and outstanding shares in the capital of Forsub1 and Forsub4, and as consideration therefor, Forco2 will transfer to Forco1 all the shares in the capital of Forsub1 and Forsub4 that it owns at that time.
XXXXXXXXXX.
34. DC will exchange all of its Class A common shares of Forco1 as described in Paragraph 8, for a number of newly issued Class B common shares of Forco1 having an aggregate fair market value equal to the aggregate fair market value of the Class A common shares of Forco1 so exchanged. XXXXXXXXXX.
XXXXXXXXXX.
35. DC will then exchange XXXXXXXXXX of its Class B common shares of Forco1 for one newly authorized and issued Forco1 New Common Share and one newly authorized and issued Forco1 Preferred Share having an aggregate fair market value equal to the aggregate fair market value of the Class B common share of Forco1 so exchanged. As indicated in Paragraph 28, the redemption amount (and fair market value) of each Forco1 Preferred Share so issued will equal the aggregate fair market value attributable to the issued and outstanding shares in the capital of Forsub1 and Forsub4 owned by Forco1 divided by the number of Forco1 Preferred Shares. XXXXXXXXXX.
XXXXXXXXXX. For greater certainty, the aggregate PUC allocated to the Forco1 New Common Shares and the Forco1 Preferred Shares will be allocated between those two classes of shares based on the proportion that the fair market value of the Forco1 New Common Shares or the Forco1 Preferred Shares, as the case may be, is of the fair market value of all new shares issued.
36. DC will transfer all the assets of Segment2 and Segment3 that DC owns XXXXXXXXXX, as well as the Forco1 Preferred Shares, to Newco1. For greater certainty, the assets of Segment2 and Segment3 so transferred by DC will include its:
(a) XXXXXXXXXX;
(b) XXXXXXXXXX;
(c) XXXXXXXXXX;
(d) other operating assets relating to Segment2 and Segment3, such as accounts receivable XXXXXXXXXX, inventory, prepaid expenses and pension assets (by means of an assignment and assumption agreement of the relevant pension plan); and
(e) the shares of Canco.
As consideration for the transferred assets, Newco1 will: assume certain operating liabilities of DC XXXXXXXXXX, issue to DC an interest-bearing demand promissory note (the "Newco1 Note"), XXXXXXXXXX and issue common shares to DC. The aggregate fair market value of the consideration to be paid by Newco1 for the transferred assets will equal the aggregate fair market value of such transferred assets. The Newco1 Note will have a principal amount determined by formula (which is not expected to exceed $XXXXXXXXXX), will have a term of XXXXXXXXXX months (extendible for an additional XXXXXXXXXX at Newco1's option) and will bear interest at Libor + XXXXXXXXXX%.
XXXXXXXXXX.
XXXXXXXXXX.
DC will jointly elect with Newco1 in prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of each eligible property transferred to Newco1, as described above, XXXXXXXXXX. The agreed amount in respect of each eligible property so transferred will be as follows:
(f) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
(g) in the case of depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
(h) in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
In each case, the agreed amount will not exceed the fair market value of the respective transferred asset, nor will it be less than the amount permitted under paragraph 85(1)(b). The amount of any non-share consideration to be allocated to a particular transferred asset that is the subject of an election under subsection 85(1) will not exceed the agreed amount elected for that transferred asset and the amount of non-share consideration to be allocated to a particular transferred asset that is not the subject of an election under subsection 85(1) will not exceed the fair market value of such transferred asset.
For the purposes of the joint election described in this Paragraph, the reference to the "undepreciated capital cost to the taxpayer of all the property of that class immediately before the disposition" in subparagraph 85(1)(e)(i) shall be interpreted to mean that proportion of the undepreciated capital cost to DC of all the property of that class that the fair market value or capital cost of the asset immediately before the disposition is of the fair market value or capital cost of all property of that class immediately before the disposition.
Pursuant to the provisions of the BCA, the addition to the stated capital in respect of the common shares issued by Newco1 as consideration for the transferred assets described in this Paragraph in respect of which an election under subsection 85(1) is made will be an amount up to but not exceeding, the aggregate of the agreed amounts less the aggregate amount of any non-share consideration in respect of such eligible property.
37. DC will enter into an arrangement with Newco1 or SpinCo whereby DC will provide certain administrative services to Newco1 or SpinCo for a fee which will compensate DC for the cost of providing such services, and vice-versa. This arrangement will be in place until each is able to fully staff various management and executive positions in respect of administrative activities currently performed by the other. In addition, DC and Newco1 or SpinCo will continue to jointly operate a research and product development facility with costs shared proportionately. It is necessary to enter into this arrangement as a result of the implementation of the Proposed Transactions.
38. Newco1 will transfer the Forco1 Preferred Shares XXXXXXXXXX, to Newco2 in exchange for newly issued common shares in the capital of Newco2 having an aggregate fair market value equal to the aggregate fair market value of the Forco1 Preferred Shares XXXXXXXXXX.
39. Forco1 will redeem the Forco1 Preferred Shares owned by Newco2 for an amount equal to the aggregate redemption amount and fair market value of such shares, and, as fair market value consideration therefor, Forco1 will transfer the shares of Forsub1 and Forsub4 to Newco2. DC will file an election under proposed clause 95(2)(e.4)(v)(B), in prescribed manner, and, if the aggregate relevant cost bases of the shares of Forsub1 and Forsub4 exceeds the aggregate ACB of the Forco1 Preferred Shares to Newco2 (and any exempt surplus of Forco1), elect therein an amount equal to the aggregate ACB of the Forco1 Preferred Shares to Newco2 immediately before their redemption.
Butterfly Transactions
40. Subject to, among other things, the appropriate shareholder, court and regulatory authority approvals, the Proposed Transactions described in Paragraphs 41 to 58 below will be undertaken pursuant to the Plan of Arrangement in accordance with the provisions of the BCA. The effective date of the Plan of Arrangement will be a date subsequent to the receipt of an advance income tax ruling in response to this request.
XXXXXXXXXX. The Plan of Arrangement must be approved by the holders of at least XXXXXXXXXX of each of the DC Common Shares and DC Stock Options, voting together and DC Preferred Shares, voting separately, and such approval was received on XXXXXXXXXX.
41. Each holder of a DC Common Share, a DC Preferred Share or a DC Stock Option, as the case may be, will be entitled to dissent from the Plan of Arrangement pursuant to the provisions of the BCA. Where a holder of DC Common Shares, DC Preferred Shares or DC Stock Options, as the case may be, exercises its dissent rights under the Plan of Arrangement such holder ("dissenting holder") will be entitled to receive an amount equal to the fair market value for its DC Common Shares, DC Preferred Shares or DC Stock Options, as the case may be, and such dissenting holder will be deemed to have disposed of such property to DC at a time immediately prior to the Proposed Transactions undertaken pursuant to the Plan of Arrangement. Any DC Common Shares, DC Preferred Shares or DC Stock Options, as the case may be, that are acquired by DC upon the exercise of such dissent rights will be deemed to have been cancelled by DC, immediately prior to the Proposed Transactions undertaken pursuant to the Plan of Arrangement. In accordance with the provisions of the BCA, a dissenting holder will, upon demand or by court order, become absolutely entitled to receive an amount from DC equal to the fair value of such dissenting holder's DC Common Shares, DC Preferred Shares or DC Stock Options, as the case may be, plus interest awarded by the court, if any, in respect of which the right of dissent is exercised.
42. Under the Plan of Arrangement, DC's articles will be amended to create an unlimited number of DC New Common Shares and an unlimited number of DC Butterfly Shares with the following terms and conditions:
(a) the terms of the DC New Common Shares will be identical to those of the DC Common Shares, except that the DC New Common Shares will be convertible into DC Common Shares on a XXXXXXXXXX basis; and
(b) the terms of the DC Butterfly Shares will be identical to those of the existing DC Common Shares except that the DC Butterfly Shares will be non-voting.
43. Each holder of DC Common Shares (other than a holder who exercises rights of dissent as described in Paragraph 41 above) will exchange all of its DC Common Shares for an equal number of DC New Common Shares and a number of DC Butterfly Shares equal to that number times the Transferred Multiple. The aggregate fair market value of DC New Common Shares and DC Butterfly Shares issued to each holder on the exchange will be equal to the aggregate fair market value of the DC Common Shares held by such person immediately before the exchange. Under the Plan of Arrangement and the provisions of the BCA, the DC Common Shares so exchanged will be cancelled. DC will not file a joint election with the holders of DC Common Shares under the provisions of subsection 85(1) in respect of this share exchange.
Pursuant to the Plan of Arrangement and the provisions of the BCA, the aggregate addition to the stated capital in respect of the DC New Common Shares and the DC Butterfly Shares issued by DC on the exchange described in this Paragraph will not exceed the PUC of the DC Common Shares immediately before the exchange. For greater certainty, the aggregate PUC allocated to the DC New Common Shares and the DC Butterfly Shares will be allocated between those two classes of shares based on the proportion that the fair market value of the DC New Common Shares or the DC Butterfly Shares, as the case may be, is of the fair market value of all new shares issued.
At the time of issuance, the DC Butterfly Shares will be listed on the Stock Exchange, but will not be posted for trading. Other than as set out herein, there will not be any agreement in respect of the DC Butterfly Shares in respect of any matters referred to in any of subparagraphs (b)(i) to (iv) of the definition of taxable preferred share or in any of paragraphs (a), (b), (f) or (h) of the definition of short-term preferred share in subsection 248(1).
44. Contemporaneously with the share exchange described in Paragraph 43, each outstanding DC Stock Option will be cancelled and each holder of a DC Stock Option (other than a holder who exercises rights of dissent as described in Paragraph 41), will receive in exchange a DC New Stock Option under the DC New Stock Option Plan granting such holder the right to acquire an identical number of DC Common Shares for an exercise price that when compared to the exercise price under the holder's DC Stock Options, will reflect the difference (i.e. reduction) in the fair market value of a DC Common Share that occurs solely as a result of the Proposed Transactions. Consistent with the policy of the Stock Exchange, the difference in the fair market value of a DC Common Share will be determined by comparing the weighted average trading price of a DC Common Share on the Stock Exchange for a XXXXXXXXXX day trading period beginning immediately after the effective date of the Plan of Arrangement to the weighted average trading price of a DC Common Share on the Stock Exchange for a XXXXXXXXXX day trading period ending immediately before the effective date of the Plan of Arrangement. None of the DC New Stock Options will be exercisable until after the completion of the Proposed Transactions.
For greater certainty, the aggregate In The Money Amount of a holder's DC New Stock Options that are issued in exchange for such holder's DC Stock Options, will not exceed the aggregate In the Money Amount of such holder's existing DC Stock Options that are subject to this exchange and for this purpose the fair market value of the DC Common Shares issuable under the existing DC Stock Option or DC New Stock Option, as the case may be, will be determined based on the weighted average trading price of a DC Common Share on the Stock Exchange for a XXXXXXXXXX day trading period; beginning immediately after the effective date of the Plan of Arrangement in respect of the DC New Stock Options, and ending immediately before the effective date of the Plan of Arrangement in respect of the existing DC Stock Options.
45. Contemporaneously with the share exchange described in Paragraph 43, the number of DC DSUs recorded in the account of each participant in the DC DSU Plan XXXXXXXXXX will be proportionately increased (the "equitable adjustment") to reflect the difference (i.e. reduction) in the fair market value of a DC Common Share that is expected to arise solely as a result of the Proposed Transactions. Consistent with the policy of the Stock Exchange, for this purpose, the difference in the fair market value of a DC Common Share will be determined by comparing the weighted average trading price of a DC Common Share on the Stock Exchange for a XXXXXXXXXX day trading period beginning immediately after the effective date of the Plan of Arrangement, with the weighted average trading price of a DC Common Share on the Stock Exchange for a XXXXXXXXXX day trading period ending before the effective date of the Plan of Arrangement. There will be no other changes to DC DSU Plan XXXXXXXXXX.
46. Each holder of DC Butterfly Shares will transfer all of its DC Butterfly Shares to SpinCo in exchange for a number of newly issued SpinCo Class B Common Shares having an aggregate fair market value equal to the aggregate fair market value of the DC Butterfly Shares so transferred by such holder. Specifically, each holder of DC Butterfly Shares will receive one SpinCo Class B Common Share for that number of DC Butterfly Shares of the holder equal to the Transferred Multiple.
XXXXXXXXXX may jointly elect with one or more holder of DC Butterfly Shares in prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of DC Butterfly Shares by such holder to SpinCo. The agreed amount in respect of each such transfer will be: an amount that is not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii); will not exceed the fair market value of the DC Butterfly Shares so transferred by such holder and will not be less than the PUC attributable to the particular transferred DC Butterfly Shares.
Pursuant to the Plan of Arrangement and the provisions of the BCA, the addition to the stated capital in respect of the SpinCo Class B Common Shares issued by SpinCo as consideration for the transfer of DC Butterfly Shares will not exceed the aggregate PUC of the DC Butterfly Shares.
The SpinCo Class B Common Shares will be listed on the Stock Exchange prior to commencing the transaction described in Paragraph 52.
47. DC will transfer its common shares of Newco1 to Subco in exchange for XXXXXXXXXX common shares in the capital of Subco having an aggregate fair market value equal to the aggregate fair market value of the common shares of Newco1 transferred by DC to Subco.
DC will jointly elect with Subco in prescribed form and within the time referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of the common shares of Newco1 by DC to Subco. The agreed amount in respect of such transfer will be an amount that is not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), and will not exceed the fair market value of the common shares of Newco1 so transferred by DC.
Pursuant to the Plan of Arrangement and the provisions of the BCA, the addition to the stated capital in respect of the XXXXXXXXXX common shares issued by Subco as consideration for the transfer of assets described in this Paragraph will not exceed the agreed amount under subsection 85(1) in respect of such transfer.
Other than as set out herein, there will not be any agreement in respect of the common shares of Subco in respect of any matters referred to in any of subparagraphs (b)(i) to (iv) of the definition of taxable preferred share or in any of paragraphs (a), (b), (f) or (h) of the definition of short-term preferred share in subsection 248(1).
48. DC will purchase for cancellation from SpinCo all of the DC Butterfly Shares in consideration for the issuance by DC to SpinCo of the DC Promissory Note. The DC Promissory Note will be a non-interest-bearing demand promissory note with a principal amount and fair market value equal to the aggregate fair market value of the DC Butterfly Shares purchased for cancellation. SpinCo will accept the DC Promissory Note as full payment of the purchase price in respect of such shares.
49. Subco will purchase for cancellation from DC all of the common shares of Subco in consideration for the issuance by Subco to DC of the Subco Promissory Note. The Subco Promissory Note will be a non-interest-bearing demand promissory note with a principal amount and fair market value equal to the aggregate fair market value of the common shares of Subco purchased for cancellation. DC will accept the Subco Promissory Note as full payment of the purchase price in respect of such shares.
50. Immediately after the transfer of property described in Paragraph 47 is completed, the net fair market value of all the property owned by SpinCo at that time will equal the proportion of the net fair market value of all the property owned by DC determined immediately before the transfer of property described in Paragraph 47, that:
(a) the aggregate fair market value of the DC Butterfly Shares owned by SpinCo determined immediately before the transfer of property described in Paragraph 47, is of
(b) the aggregate fair market value of all the issued and outstanding shares of DC owned by its shareholders determined immediately before the transfer of property described in Paragraph 47.
51. Under the Plan of Arrangement, Subco will commence winding-up under the applicable provisions of the BCA. In connection with the winding-up of Subco, Subco will distribute all of its property to SpinCo, including all of Subco's common shares in the capital of Newco1, and all the liabilities and obligations of Subco will be assumed by SpinCo, including the liability of Subco under the Subco Promissory Note. The liability under each of the Subco Promissory Note and the DC Promissory Note will be set-off against one another and each such note will then be paid in full and cancelled.
Post-Butterfly Transactions
52. All of the DC New Common Shares owned by each holder will be converted into an equivalent number of newly issued DC Common Shares having an aggregate fair market value equal to the aggregate fair market value of the DC New Common Shares so converted by such holder. Under the BCA the DC New Common Shares will be cancelled. DC will not file a joint election with any holder of DC New Common Shares under the provisions of subsection 85(1) in respect of the conversion of these shares.
Pursuant to the Plan of Arrangement and the provisions of the BCA, the addition to the stated capital in respect of the DC Common Shares issued by DC on the conversion described in this Paragraph will be equal to the stated capital and PUC of the DC New Common Shares.
53. DC's articles will be amended to, amongst other things, remove the references to the DC New Common Shares and the DC Butterfly Shares and to change its name from "XXXXXXXXXX" to "XXXXXXXXXX". The articles of DC will then be restated and filed in the accordance with the BCA.
54. All of the SpinCo Class B Common Shares owned by each holder will be converted into one SpinCo Class A Common Share for every XXXXXXXXXX SpinCo Class B Common Shares. No fractional SpinCo Class A Common Shares will be issued on the conversion of the SpinCo Class B Common Shares. To the extent that a holder would otherwise be entitled to a fraction of a SpinCo Class A Common Share, such holder will instead receive the cash equivalent of any fractional interest in a SpinCo Class A Common Share as described below. SpinCo will not file a joint election with any holder of SpinCo Class B Common Shares under the provisions of subsection 85(1) in respect of the conversion of these shares.
Fractional interests in the SpinCo Class A Common Shares will be summed and the total will be rounded up to the nearest whole number and such shares will be issued to a third party agent on behalf of the SpinCo Class A Common Shareholders, who will sell them on the Stock Exchange and remit each shareholder's pro-rata share of such proceeds to such holder (exclusive of the proceeds in respect of the rounded up amount, which will go to SpinCo).
The addition to the stated capital of the SpinCo Class A Common Shares under the Plan of Arrangement and the BCA will be equal to the stated capital and PUC of the SpinCo Class B Common Shares.
55. SpinCo will, pursuant to the post-amble in the definition of public corporation in subsection 89(1), elect in its return of income for its first taxation year to have been a public corporation from the beginning of such year.
56. SpinCo and Newco1 (referred to in this paragraph as "predecessor corporations") will effect a vertical short form amalgamation under the provisions of the BCA to form Amalco in such manner that, on and by virtue of the amalgamation:
(a) all of the property (except any amounts receivable from any predecessor corporation) of the predecessor corporations immediately before the merger will become property of Amalco;
(b) all the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco;
(c) all the shares in the capital stock of Newco1 that are owned or held by SpinCo immediately prior to the merger will be cancelled for no consideration; and
(d) none of the shares of SpinCo (other than any such shares owned by a predecessor corporation) will be cancelled on the merger.
For greater certainty, as a result of the merger of Newco1 and SpinCo, all of the shareholders of SpinCo immediately before the merger, will, pursuant to subsection 87(1.1), be considered to have received shares of the capital stock of Amalco for the purposes of paragraph 87(1)(c).
57. Amalco's articles will be amended to remove the references to the Amalco Class B Common Shares and to change its name from a numbered company to XXXXXXXXXX. The articles of Amalco will then be restated and filed in accordance with the BCA.
58. The Plan of Arrangement will provide that the existing share certificates in respect of the DC Common Shares will remain outstanding (other than those tendered by a holder who exercises rights of dissent as described in Paragraph 41) and that share certificates representing Amalco Class A Common Shares will be mailed as soon as practical to registered holders of DC Common Shares as of the date specified in the Plan of Arrangement. No share certificates will be issued for shares that are issued and subsequently cancelled or converted under the Plan of Arrangement.
59. The Proposed Transactions described above will occur in the order presented unless otherwise indicated, and, with the exception of the filing of the applicable election forms, as described in Paragraphs 36, 46 and 47, which will be filed within the applicable due date following the completion of the Proposed Transactions. For greater certainty, the DC Common Shares, DC New Common Shares, SpinCo Class A Common Shares and SpinCo Class B Common Shares will be unconditionally listed on the Stock Exchange prior to commencing the transactions described in Paragraphs 52 to 58, but such listing will occur outside of the Plan of Arrangement. The Plan of Arrangement will provide that the Proposed Transactions described in Paragraphs 41 to 51 above will occur prior to such listing of the above described shares on the Stock Exchange and that the Proposed Transactions described in Paragraphs 52, 54, 55 and 56 will occur after the time that such shares are so listed.
60. SpinCo expects to conclude a revolving credit facility with one or more financial institutions, totalling $XXXXXXXXXX, prior to or immediately after the Proposed Transactions. In the event that this financing is not completed prior to or immediately after Proposed Transactions, DC has agreed to provide a $XXXXXXXXXX revolving credit facility to SpinCo or Amalco, as the case may be, for XXXXXXXXXX months at market rates of interest. As security for these ongoing financial commitments, and those described in Paragraph 36, DC will have the right, at any time, to require SpinCo or Amalco, as the case may be, to provide a fixed first charge security interest over XXXXXXXXXX facilities owned by such entity. DC is also in the process of renewing its committed lending facilities. Certain changes may be made to the committed lending facilities as a result of the Proposed Transactions, including, for example, reduction of the committed amount, adjustment of the financial covenants and amendment of the pricing and other terms.
61. The pre-butterfly transactions described in Paragraphs 32 and 39 will occur on a tax-deferred basis for US income tax purposes.
62. DC will provide:
(a) to shareholders that dissent in respect of the Plan of Arrangement, the PUC of the DC Common Shares and DC Preferred Shares; and
(b) to other shareholders, the manner in which to calculate the ACB of their DC Common Shares following the Proposed Transactions, and the ACB of their DC Butterfly Shares and Amalco Class A Common Shares.
The ACB of the DC Common Shares prior to the Proposed Transactions will ultimately be proportioned between the number of DC Common Shares and Amalco Class A Common Shares held by such person immediately after the Proposed Transactions are completed based on the relative trading values of each such class of shares over a fixed number of days after the closing of the Proposed Transactions.
63. Forco1 and a US public corporation, XXXXXXXXXX, established Partnership in XXXXXXXXXX. On XXXXXXXXXX, DC announced that a subsidiary of Forco1 had agreed to purchase the remaining XXXXXXXXXX% partnership interest in Partnership from XXXXXXXXXX for US$XXXXXXXXXX, including the repayment of debt. This purchase closed XXXXXXXXXX and was financed internally.
64. DC has made an offer to purchase the assets of an XXXXXXXXXX business of an arm's-length third party located in XXXXXXXXXX. As of the date of this letter, the third party and DC have entered into a purchase agreement and the transaction, which is subject to various approvals, is expected to close in XXXXXXXXXX.
65. The acquisition of the XXXXXXXXXX% partnership interest from XXXXXXXXXX as described in Paragraph 63 and the offer to purchase the assets of an XXXXXXXXXX business of an arm's-length third party located in XXXXXXXXXX as described in Paragraph 64 are consistent with DC's strategy to continue growing its presence in XXXXXXXXXX and were not made in contemplation of the Proposed Transactions and would have been made irrespective of whether the Proposed Transactions are undertaken.
66. On occasion, DC uses excess cash to purchase for cancellation its US dollar denominated debentures, which are publicly held. DC recently completed acquisitions and cancellations of its XXXXXXXXXX% debentures, due XXXXXXXXXX, on XXXXXXXXXX and DC is considering authorizing or has authorized the purchase of the remaining outstanding XXXXXXXXXX% debentures (US$XXXXXXXXXX) in the near future. DC may use all or a portion of the cash dividend from Forco1, as described in Paragraph 29 above, and all or a portion of the cash received on the reduction of PUC, as described in Paragraph 31 above, to fund the purchase of these debentures. These purchases and cancellation of DC's debentures have not been, or will not be, undertaken in contemplation of the Proposed Transactions and would have been made irrespective of whether the Proposed Transactions are undertaken.
67. The shares of a predecessor corporation of DC (XXXXXXXXXX) were acquired by the public in a spin-off butterfly reorganization of XXXXXXXXXX, which occurred on XXXXXXXXXX and which was the subject of an advance income tax ruling XXXXXXXXXX, as amended by supplemental rulings XXXXXXXXXX.
68. Pursuant to the Plan of Arrangement, DC and SpinCo will agree to indemnify each other for losses occasioned by misrepresentations made by, or actions taken by, the particular party or their respective affiliates or successors, that affect the application of the rulings provided herein.
69. Following the Proposed Transactions, Amalco will implement one or more deferred share unit plans and may implement a dividend reinvestment plan with terms similar to those for corresponding plans maintained by DC.
70. Neither DC, SpinCo nor Amalco is, or will be at the time of the Proposed Transactions described herein, a specified financial institution.
71. Except as described herein, none of the shares of DC, SpinCo or Amalco has been, or will be, at any time during the implementation of the Proposed Transactions described herein:
(a) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";
(b) a share that is issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
(c) the subject of a dividend rental arrangement referred to in subsection 112(2.3), as that term is defined in subsection 248(1).
72. DC Shareholder is currently focused on building its XXXXXXXXXX business, however, except as specifically outlined herein, DC Shareholder has no present intention or plans to dispose of any shares of DC, SpinCo or Amalco.
73. No property has or will become property of DC or any corporation controlled by DC in contemplation of and before the proposed Distribution, except as described herein, or in the ordinary course of such business, and no liabilities have been, or will be, incurred or discharged by DC or any corporation controlled by DC in contemplation of and before the proposed Distribution, except as described herein or in the ordinary course of business. Moreover, except as specifically outlined herein, there is no expectation or intention of any of DC, Amalco, or any corporation controlled by such corporation, to dispose of any property owned by it as part of the series of transactions that includes the Proposed Transactions, other than in the ordinary course of business.
74. Following the Proposed Transactions, each of Canco, Forsub1 and Forsub4 will change its name to reflect in some manner the "XXXXXXXXXX" name.
PURPOSE OF THE PROPOSED TRANSACTIONS
75. DC believes that it is in the best interests of DC and its shareholders that DC transfer the assets of Segment2 and Segment3 to SpinCo/Amalco on the basis outlined above for the following reasons:
(a) the creation of SpinCo/Amalco as a separate public corporation should increase shareholder value because Segment2 and Segment3 ultimately will achieve a higher valuation as a stand-alone business;
(b) the separation of DC's operations between DC and SpinCo/Amalco will enhance the ability of each separate public corporation to pursue its independent corporate objectives and strategies by alleviating certain management, systemic and other problems attributable to the affiliation of Segment2 and Segment3 with Segment1 and allowing the respective managements of the businesses to focus on their core businesses;
(c) it is preferable to give the holders of DC's shares a choice to make an independent investment decision in respect of their value-based investment in Segment2 and Segment3, on the one hand, and Segment1, on the other;
(d) the transfer of assets of Segment2 and Segment3 to SpinCo/Amalco will allow the separate Segments to access capital to fund operations, capital expenditures, acquisitions, the retirement of indebtedness, or other business needs, by facilitating share offerings or borrowings by DC or SpinCo/Amalco on the basis of their individual visions and strategies;
(e) the separation also will enhance shareholder liquidity; and
(f) the fair market value of DC's equity is expected to increase, thus enhancing the value of the equity-based compensation which DC grants or may grant in the future to its employees; and permitting DC to effect future acquisitions with its shares as consideration in a manner that preserves capital with significantly less dilution of the existing shareholders' interest.
76. The purpose of the share conversion described in Paragraph 52 is to ensure that the shares of DC, after the Proposed Transactions are complete, will be ordinary common shares. The DC New Common Shares were issued with a conversion feature to ensure that on the exchange described in Paragraph 43 the holders of DC Common Shares would be considered to have disposed of their shares. The conversion of the SpinCo Class B Common Shares for SpinCo Class A Common Shares described in Paragraph 54 is required because the SpinCo Class B Common Shares do not have voting rights when they are issued to the participants in order to ensure that control of Newco1 would not be acquired as a result of the transfer of the Newco1 shares to Subco as described in Paragraph 47.
77. XXXXXXXXXX.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.
A. The provisions of subsection 51(1) will apply, and the provisions of subsection 51(2) will not apply, to the exchange by DC of the Class A common shares of Forco1 for Class B common shares of Forco1, as described in Paragraph 34 above.
B. The provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the share exchange by DC of its Class B common shares of Forco1 for newly authorized and issued Forco1 New Common Shares and newly authorized and issued Forco1 Preferred Shares, as described in Paragraph 35 above, such that:
(a) the cost of the Forco1 New Common Shares and the Forco1 Preferred Shares received by DC on the exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to DC, immediately before the exchange, of the Class B common shares in the capital of Forco1, that:
(i) the fair market value, immediately after the exchange, of the Forco1 New Common Shares or the Forco1 Preferred Shares, as the case may be,
is of
(ii) the fair market value, immediately after the exchange, of all of the shares in the capital of Forco1 received by DC for the exchanged Class B common shares in the capital of Forco1; and
(b) pursuant to paragraph 86(1)(c), DC will be deemed to have disposed of the exchanged Class B common shares in the capital of Forco1 for aggregate POD equal to the aggregate cost to DC of the Forco1 New Common Shares and the Forco1 Preferred Shares determined in (a) above.
C. Provided that DC and Newco1 jointly file an election in prescribed form and manner and within the time specified in subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the transfer of the Segment2 and Segment3 assets, described in Paragraph 36 above, by DC to Newco1, such that the agreed amount in respect of each transfer of eligible property will be deemed to be DC's POD and the Newco1's cost of such property pursuant to paragraph 85(1)(a).
D. With regard to the purchase by DC of existing DC Common Shares and/or DC Preferred Shares from a dissenting holder as described in Paragraph 41 and subject to the application of subsection 55(2):
(a) DC will be deemed by paragraph 84(3)(a) to have paid, and each dissenting holder will be deemed by paragraph 84(3)(b) to have received, a dividend, equal to the amount, if any, by which any payment from DC to a dissenting holder (exclusive of any interest awarded by a court) in respect of the purchase for cancellation of such dissenting holder's DC Common Shares or DC Preferred Shares, as the case may be, exceeds the amount of PUC attributable to such shares immediately before the purchase for cancellation;
(b) the amount of any such dividend will be included in computing such dissenting holder's income under subsection 82(1) and paragraph 12(1)(j); and
(c) subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable income tax convention) to require DC to withhold and remit XXXXXXXXXX% of the amount of each such dividend that is paid to a dissenting holder who is a non-resident of Canada.
E. Where a DC Stock Option was issued to a holder in the course of employment and such holder is an employee of DC or another corporation that is a member of the DC Group who deals at arm's length with DC at that time, where such holder exercises his/her dissent rights under the Plan of Arrangement as described in Paragraph 41, such dissenting holder will be deemed to have received a benefit in respect of the disposition of such dissenting holder's DC Stock Option in that year pursuant to paragraph 7(1)(b) equal to the amount of consideration received by such dissenting holder from DC (other than an amount in respect of interest awarded by the court) as described in Paragraph 41, less the amount, if any, that such dissenting holder paid to acquire such DC Stock Option.
F. Provided that a holder of DC Common Shares holds its DC Common Shares 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 DC Common Shares for DC New Common Shares and DC Butterfly Shares, as described in Paragraph 43 above, such that:
(a) the cost of each of the DC New Common Shares and the DC Butterfly Shares received by such holder on the exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to such holder, immediately before the exchange, of the DC Common Shares held by such holder, that:
(i) the fair market value, immediately after the exchange, of the DC New Common Shares or the DC Butterfly Shares, as the case may be, received by such holder
is of
(ii) the fair market value, immediately after the exchange, of all of the shares in the capital of DC received by such holder; and
(b) pursuant to paragraph 86(1)(c), each holder of DC Common Shares will be deemed to have disposed of its DC Common Shares for aggregate POD equal to the aggregate cost to such holder of the DC New Common Shares and the DC Butterfly Shares received by such holder, as determined in (a) above.
G. Where a DC Stock Option was issued to a holder in the course of that person's employment with DC and such holder is an employee of DC or another corporation that is a member of the DC Group at the time of the exchange by such holder of a DC Stock Option for a DC New Stock Option as described in Paragraph 44, subsection 7(1.4) will apply in respect of such exchange and for greater certainty, to the extent that subsection 7(1.4) is applicable, paragraph 7(1)(b) will not apply in respect of such exchange.
H. The proposed equitable adjustment described in Paragraph 45 will not, in and by itself, cause the DC DSU Plan XXXXXXXXXX to not be a prescribed plan as described under paragraph 6801(d) of the Regulations.
I. Provided that the existing DC Common Shares constitute capital property to a particular holder prior to the commencement of the Proposed Transactions, the Proposed Transactions, will not, in and by themselves, cause us to consider that the DC New Common Shares, DC Butterfly Shares, SpinCo Class B Common Shares, SpinCo Class A Common Shares or Amalco Class A Common Shares, as the case may be, received by that holder are not capital property to that holder.
J. Provided an existing property that is owned by a person who is a member of the DC Group constitutes a capital property or inventory, as the case may be, to such person immediately prior to the commencement of the Proposed Transactions, where such property is acquired by another person who is a member of the DC Group as a result of the Proposed Transactions, such acquisition will not, in and by itself, cause us to consider that such property will cease to be a capital property or inventory, as the case may be, to the particular acquiror immediately following such acquisition.
K. Provided that a person who, immediately before the exchange of DC Butterfly Shares for SpinCo Class B Common Shares as described in Paragraph 46 above:
(a) holds its DC Butterfly Shares as capital property;
(b) deals at arm's length with SpinCo immediately before the exchange;
(c) does not include any portion of the gain or loss, otherwise determined, from the disposition of the DC Butterfly Shares in computing the holder's income for the taxation year in which the share exchange takes place; and
(d) does not file an election under subsection 85(1) with SpinCo in respect of the DC Butterfly Shares;
(e) does not receive any consideration, other than SpinCo Class B Common Shares, on the exchange; and
(f) is not a foreign affiliate of a taxpayer resident in Canada, at the end of its taxation year in which the exchange occurred, that has included any portion of the gain or loss, otherwise determined, from the disposition of the exchanged shares in computing its FAPI for its taxation year in which the exchange occurred;
and further, provided that immediately after the exchange,
(g) such person or other persons with whom the particular person does not deal at arm's length or such person together with other persons with whom the person does not deal at arm's length, will not:
(i) control SpinCo; or
(ii) beneficially own shares in the capital of SpinCo having a fair market value of more than XXXXXXXXXX % of the fair market value of all the issued and outstanding shares in the capital of SpinCo;
then, pursuant to paragraph 85.1(1)(a), such person will be deemed:
(f) to have disposed of such DC Butterfly Shares for POD equal to the ACB to such person immediately before the exchange; and
(g) to have acquired the SpinCo Class B Common Shares at a cost to such person equal to the ACB to such person of the DC Butterfly Shares immediately before the exchange; and
(h) pursuant to paragraph 85.1(1)(b), the cost to SpinCo of each DC Butterfly Share acquired by SpinCo as a result of the exchange will be deemed to be the lesser of its fair market value immediately before the exchange and its PUC immediately before the exchange.
L. Provided that each respective transferor and transferee jointly file an election pursuant to subsection 85(1) in the prescribed form and manner and within the time specified in subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to:
(a) the transfer of DC Butterfly shares by each holder to SpinCo as described in Paragraph 46 above; and
(b) the transfer of common shares of Newco1 by DC to Subco as described in Paragraph 47 above;
such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's POD and the transferee's cost of such property pursuant to paragraph 85(1)(a).
M. (Reserved).
N. (Reserved).
O. Subsection 84(3) will apply to:
(a) the purchase for cancellation of the DC Butterfly Shares held by SpinCo, as described in Paragraph 48 above, such that DC will be deemed to have paid and SpinCo will be deemed to have received; and
(b) the purchase for cancellation of the common shares of Subco held by DC, as described in Paragraph 49 above, such that Subco will be deemed to have paid and DC will be deemed to have received;
a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such purchase for cancellation exceeds the aggregate PUC in respect of such shares immediately before such purchase for cancellation and any such dividend:
(c) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of the person deemed to have received such dividend;
(d) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been received, and such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) or (2.4);
(e) will be excluded in determining the POD to the vendor of the shares so purchased for cancellation pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;
(f) will, by virtue of the provisions of subsection 112(3), apply to reduce any loss arising from the purchase for cancellation to SpinCo and DC which would otherwise be determined;
(g) will not be subject to tax under Part IV; and
(h) will not be subject to tax under Parts IV.1 and VI.1.
P. 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 paragraphs 55(3.1)(c) or (d);
(f) a distribution by DC to a corporation that is not an "acquiror" within the meaning of the definition of "specified corporation" before the day that is three years after the day the shares of the capital stock of DC are exchanged as described in Paragraph 46; or
(g) a distribution by SpinCo or any acquiror in relation to DC before the day that is XXXXXXXXXX years after the day the shares of the capital stock of the DC are exchanged as described in Paragraph 46,
which has not been described herein, then by virtue of paragraph 55(3)(b) subsection 55(2) will not apply to the taxable dividends referred to in Ruling O above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) to any of the taxable dividends described in Ruling O.
Q. The provisions of subsection 88(1) will apply to the wind-up of Subco into SpinCo, as described in Paragraph 51.
R. The settlement and cancellation of the Subco Promissory Note held by DC and the DC Promissory Note held by SpinCo, as described in Paragraph 51 above, will not give rise to a "forgiven amount" within the meaning of subsections 80(1) or 80.01(1). Neither SpinCo nor DC will realize any gain or incur any loss as a result of the repayment and resultant cancellation of the Subco Promissory Note and the DC Promissory Note.
S. The provisions of subsection 51(1) will apply, and the provisions of subsection 51(2) will not apply, to the conversion by holders of the DC New Common Shares for DC Common Shares of DC, as described in Paragraph 52 above.
T. With respect to the DC New Common Shares received by a holder on the share exchange described in Paragraph 43 above, such shares will be excluded property, within the meaning of subsection 116(6), of any non-resident person owning such shares at the time of the conversion described in Paragraph 52 above.
U. The provisions of subsection 51(1) will apply, and the provisions of subsection 51(2) will not apply, to the conversion by holders of the SpinCo Class B Common Shares for SpinCo Class A Common Shares, as described in Paragraph 54 above.
V. With respect to the SpinCo Class B Common Shares received by a holder on the share exchange described in Paragraph 46 above, such shares will be excluded property, within the meaning of subsection 116(6), of any non-resident person owning such shares at the time of the conversion described in Paragraph 54 above.
W. Control of SpinCo and Subco will not be acquired by a person or group of persons solely as a result of the conversion by the holders of the SpinCo Class B Common Shares of such shares into SpinCo Class A Common Shares, as described in Paragraph 54 above.
X. Upon the amalgamation of SpinCo and Newco1, as described in Paragraph 56 above:
(a) the provisions of section 87 will apply in respect of SpinCo and Newco1;
(b) provided that the SpinCo Class A Common Shares are held by a particular holder thereof as capital property, the provisions of subsections 87(4) will apply to such holder, other than paragraphs 87(4)(c) to (e), such that the holder will be considered to have received Amalco Class A Common Shares in consideration for the disposition by such holder of the SpinCo Class A Common Shares for POD equal to, and to have acquired the Amalco Class A Common Shares at a cost equal to, the ACB to the holder of such SpinCo Class A Common Shares immediately before the amalgamation; and
(c) Amalco will be deemed to be a public corporation at the commencement of its first taxation year pursuant to paragraph 87(2)(ii).
Y. With respect to the disposition of the SpinCo Class A Common Shares by a holder for Amalco Class A Common Shares as a consequence of the amalgamation described in Ruling X above, the SpinCo Class A Common Shares will be excluded property, within the meaning of subsection 116(6), of any non-resident person owning such shares at the time of the amalgamation.
Z. Provided SpinCo makes the election to be a public corporation as described in Paragraph 55, the DC Butterfly Shares, the SpinCo Class B Common Shares, the SpinCo Class A Common Shares and the Amalco Class A Common Shares will be a "qualified investment":
(a) for a deferred profit sharing plan by virtue of paragraph (i) of the definition "qualified investment" in section 204;
(b) for a registered retirement savings plan by virtue of paragraph (d) of the definition "qualified investment" in subsection 146(1);
(c) for a registered retirement income fund by virtue of paragraph (c) of the definition "qualified investment" in subsection 146.3(1); and
(d) for a registered education savings plan by virtue of paragraph (e) of the definition "qualified investment" in subsection 146.1(1).
AA. With respect to the transfer of:
(a) the assets by Forco 2 to Forsub1, as described in Paragraph 32 above;
(b) the assets, other than the shares in Forsub2 and Investco, by Forco2 to Forsub4, as described in Paragraph 32 above,
Forco2 will not realize any income, gains or capital gains that would be required to be included in computing FAPI of Forco2 in the taxation year of such disposition.
BB. With respect to the disposition of the shares in each of Forsub2 and Investco by Forco2 to Forsub4, as described in Paragraph 32 above, paragraph 95(2)(c) will apply to each disposition such that:
(a) the cost to Forco2 of any property received as consideration therefor, other than the shares of Forsub4, will be deemed to be the fair market value of such property at the time of acquisition;
(b) the cost to Forco2 of the shares of Forsub4 received as consideration therefor will be deemed to be the amount by which the relevant cost base of the shares in Forsub2 and Investco to Forco2, as the case may be, exceeds the fair market value of other property received as consideration, as described in (a) above;
(c) Forco2's proceeds of disposition of its shares in Forsub2 and Investco, as the case may be, will be deemed to be the amount equal to the aggregate cost of all properties received in consideration therefor, as determined in paragraph (a) and (b) above;
(d) the cost to Forsub4 of the shares in Forsub2 and Investco, as the case may be, will be deemed to be an amount equal to Forco2's POD, as determined in (c) above; and
(e) no election under subsection 93(1) will be deemed to have been made by DC by virtue of subsection 93(1.1) in respect of the disposition of the shares in Forsub2 and Investco by Forco2.
CC. XXXXXXXXXX.
DD. With respect to the disposition of the shares of Forsub1 and Forsub4 by Forco2 to Forco1, as described in Paragraph 33 above:
(a) the fair market value of the shares of each of Forsub1 and Forsub4 will be the POD of such shares to Forco2, prior to the application of subsections 93(1) and 93(1.1);
(b) DC will be deemed by subsection 93(1.1) to have made an election under subsection 93(1) in respect of the shares of each of Forsub1 and Forsub4 disposed of by Forco2 and the amount deemed to have been designated in respect of the shares of each of Forsub1 and Forsub4 will be an amount equal to the amount prescribed in subsection 5902(6) of the Regulations in respect of such shares;
(c) the amount of any deemed designation under subsection 93(1) in respect of the shares of each of Forsub1 or Forsub4 disposed of by Forco2 will reduce the POD otherwise determined under (a) above to Forco2 in respect of the disposition of such shares;
(d) Forco2 will be deemed under subsection 93(1) to have received a dividend equal to the deemed designations pursuant to subsection 93(1.1) and subsection 5902(6) of the Regulations in respect of the shares of each of Forsub1 and Forsub4 disposed of by Forco2;
(e) Forco2 will not realize any income, gains or capital gains that would be required to be included in computing FAPI of Forco2 in respect of the disposition of the shares of Forsub1 and Forsub4; and
(f) Forco1 will acquire the shares of each of Forsub1 and Forsub4 at a cost equal to their respective fair market value at the time of such acquisition.
EE. Subsection 85.1(3) will apply to the transfer of the Forco1 Preferred Shares from Newco 1 to Newco2, as described in Paragraph 38 above, such that the POD to Newco1, and the cost to Newco2, of the Forco1 Preferred Shares, as well as the cost to Newco1 of the common shares of Newco2 acquired by Newco1 as consideration therefor, will be equal to the ACB to Newco1 of such Forco1 Preferred Shares immediately before the transfer, provided that, except as described herein, the transfer is not part of a series of transactions or events for the purpose of disposing Forco1 Preferred Shares to a person who was immediately after the series of transactions or events a person (other than a foreign affiliate of Newco1) with whom Newco1 was dealing at arm's length.
FF. With respect to the redemption of the Forco1 Preferred Shares by Forco1, as described in Paragraph 39 above, provided that the redemption amount of the shares is equal to the their fair market value immediately before the redemption:
(a) the aggregate redemption amount of the Forco1 Preferred Shares will be the POD of such shares to Newco2, prior to the application of subsections 93(1) and 93(1.1);
(b) Newco1 will be deemed by subsection 93(1.1) to have made an election under subsection 93(1) in respect of each such share of Forco1 disposed of by Newco2 and the amount deemed to have been designated in respect of each such share will be an amount equal to the amount prescribed in subsection 5902(6) of the Regulations in respect of such shares;
(c) the amount of any deemed designation under subsection 93(1.1) and subsection 5902(6) of the Regulations in respect of the Forco1 Preferred Shares disposed of by Newco2 will reduce the POD otherwise determined under (a) above to Newco2 in respect of the disposition of such shares;
(d) Newco2 will be deemed under subsection 93(1) to have received a dividend equal to the aggregate of all deemed designations pursuant to subsection 93(1.1) and subsection 5902(6) of the Regulations in respect of the Forco1 Preferred Shares disposed of by Newco2; and
(e) Newco2 will not realize any income, gains or capital gains that would be required to be included in computing FAPI of Newco2 in respect of the disposition of the Forco1 Preferred Shares.
GG. With respect to the transfer of the shares of Forsub1 and Forsub4 by Forco1 to Newco2, as described in Paragraph 39 above, provided that the fair market value of the shares of Forsub1 and Forsub4 at the time of the transfer are equal to the ACB of those shares to Forco1, Forco1 will not realize any income, gain or capital gain on such transfer, and Newco2 will acquire such shares at a cost equal to the fair market value of such shares at the time of their acquisition.
HH. Following the transfer of the shares of Forsub1 and Forsub4 from Forco1 to Newco2, as described in Paragraph 39 above, each of Newco2, Forsub1, Forsub2, Forsub3, Forsub4 and Investco will be a foreign affiliate and a controlled foreign affiliate of Newco1.
II. Subsequent to the Proposed Transactions described in this ruling, to the extent that the interest paid or payable by Forco2 to XXXXXXXXXX, as described in Paragraph 11, is deductible by Forco2 in the year or a subsequent year in computing the amount prescribed to be its earnings or loss from an active business (other than an active business carried on in Canada), including any active business in respect of the assets acquired in Paragraph 26, such amount will be included in computing XXXXXXXXXX.
JJ. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to the Proposed Transactions, in and of themselves.
KK. Subsection 245(2) will not apply to the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the Rulings given above.
The above rulings are given subject to the limitations and qualifications set out in IC 70-6R5 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX. These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
OPINIONS
In addition to the foregoing rulings, you also requested our opinions on the following with respect to the draft legislation issued by the Department of Finance on February 27, 2004 and December 20, 2002 (the "proposed legislation"). As noted in Information Circular 70-6R5, the following opinions are not binding on the CRA.
Provided that proposed legislation is enacted substantially as proposed by the Department of Finance:
LL. With respect to the transfer of:
(a) the assets by Forco2 to Forsub1, as described in Paragraph 32 above; and
(b) the assets, other than the shares in Forsub2 and Investco, by Forco2 to Forsub4, as described in Paragraph 32 above;
paragraph 95(2)(f.4) will apply in respect of such dispositions, such that:
(c) where no election is made under clause 95(2)(f.4)(i)(B), Forco2 will be deemed to have disposed of each asset that is a specified property (within the meaning referred to in paragraph 95(2)(f.3)) for an amount equal to the ACB of such asset to Forco2 at the original disposition time;
(d) the transferee will be deemed to have acquired each asset that is a specified property for an amount equal to the fair market value of the asset at the original disposition time;
(e) Forco2's cost of a particular property received from the transferee in exchange for a specified property will be deemed to be the fair market value of the particular property at the original disposition time;
(f) Forco2 will be deemed to have an unadjusted suspended income or gain at the original disposition time in respect of the disposition of each specified property equal to the amount determined under subparagraph 95(2)(f.4)(iv); and
(g) Forco2 will be deemed to have income or capital gain from the disposition of a specified property equal to the amount prescribed to be the adjusted suspended income or gain (within the meaning set out in subsection 5913(1) of the Regulations) in respect of the specified property at the earlier of the times set out in subparagraphs 95(2)(f.5)(i) and (ii), which for greater certainty will occur upon the purchases for cancellation, as described in Paragraphs 48 and 49 above, and at such time, provided that Forco2 is resident in the United States for the purposes of both the Act and the Canada-United States Income Tax Convention, such income or gain will be included in the exempt earnings of Forco2 in respect of DC and will not give rise to any income, gain or capital gain of Forco2 that would be required to be included in computing Forco2's FAPI.
MM. XXXXXXXXXX.
NN. With respect to the redemption of the Forco1 Preferred Shares held by Newco2 and the transfer of the shares of Forsub1 and Forsub4 from Forco1 to Newco2, as described in Paragraph 39 above, paragraph 95(2)(e.4) will apply, such that:
(a) Forco1 will be deemed to have disposed of the shares of Forsub1 and Forsub4 for POD equal to the relevant cost base of such shares immediately before the redemption;
(b) subsection 93(1.4) will apply to preclude the making of any election by DC or Newco1 under subsection 93(1) in respect of the disposition of the shares of Forsub1 or Forsub4 by Forco1;
(c) Newco2 will be deemed to have acquired the shares of Forsub1 and Forsub4 at a cost equal to the POD of such shares to Forco1, as determined under (a) above; and
(d) Newco2 will be deemed to have received a dividend on the Forco1 Preferred Shares equal to the POD determined under (a) above and for the purposes of applying subsection 40(3), the amount, if any, prescribed by paragraph 5900(1)(c) of the Regulations to have been paid out of the pre-acquisition surplus of Forco1 in respect of such dividend will be deemed to be an amount, pursuant to the election made by DC under clause 95(2)(e.4)(v)(B) as described in Paragraph 39 above, equal to the ACB of the Forco1 Preferred Shares to Newco2, such that Newco2 will not realize any capital gain because of subsection 40(3) in respect of the dividend.
For greater certainty, paragraph 95(2)(e.5) will not apply to the redemption of the Forco1 Preferred Shares and the transfer of the shares of Forsub1 and Forsub4 from Forco1 to Newco2, as described in Paragraph 39 above.
OO. Provided that a DC Common Share is not "taxable Canadian property" as defined in subsection 248 to its holder immediately before the share exchange described in Paragraph 43 above, subsection 55(6) will apply to deem the DC Butterfly Shares received by such holder on the exchange described in Paragraph 43 above to be listed on a prescribed stock exchange for the purposes of subsection 116(6) and the definition of taxable Canadian property.
PP. Control of Newco1 will be deemed not to have been acquired pursuant to clause 256(7)(a)(i)(E) as a result of the transfer by DC of the common shares of Newco1 to Subco, as described in Paragraph 47 above.
Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:
(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;
(b) the characterization of any property (i.e. as capital property, inventory, etc) described herein to the holder thereof prior to the Proposed Transactions or the characterization of any property following the Proposed Transactions other than as specifically provided herein.
(c) the amount of any net-capital loss or any other amount of any person referred to herein; or
(d) the income tax consequences of any corporation or foreign entity with respect to the application of section 247 (transfer pricing issues), the amount of FAPI, exempt surplus, exempt deficit, taxable surplus, taxable deficit, underlying foreign tax and net surplus of any foreign affiliate, or whether any adjustments to such amounts may be required as a result of any of the Proposed Transactions;
(e) whether any of the foreign entities described in this ruling are corporations or partnerships, as the case may be, for Canadian tax purposes;
(f) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings or opinions given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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