2004 Ruling 2004-0078331R3 - spin-off butterfly

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: Standard spin-off butterfly

XXXXXXXXXX 2004-007833

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. In your subsequent letters of XXXXXXXXXX, you provided additional information concerning the facts and proposed transactions described in your original letter. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

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

(i) in an earlier return of one of the taxpayers or a related person;

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

(iii) under objection by one of 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 expired, or

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

Definitions

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

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended. Unless otherwise indicated, all statutory references are to the Act;

(b) "adjusted cost base" ("ACB") has the meaning assigned by subsection 248(1);

(c) "affiliated persons" has the meaning assigned by subsection 251.1(1);

(d) "agreed amount" means the amount that the taxpayer and the corporation have jointly elected in prescribed form in respect of an eligible property;

(e) "arm's length" has the meaning assigned by subsection 251(1);

(f) "BCA" means the XXXXXXXXXX Business Corporations Act, XXXXXXXXXX;

(g) "Canadian-controlled private corporation" ("CCPC") has the meaning assigned by subsection 125(7);

(h) "capital dividend account" ("CDA") has the meaning assigned by subsection 89(1);

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

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

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

(l) "dividend refund" has the meaning assigned by subsection 129(1);

(m) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

(n) "eligible property" has the meaning assigned by subsection 85(1.1);

(o) "fair market value" ("FMV") 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 and contracting for a taxable purchase and sale;

(p) "financial intermediary corporation" has the meaning assigned by subsection 191(1);

(q) "guarantee agreement" has the meaning assigned by subsection 112(2.2);

(r) "PUC" means paid-up capital as that expression is defined in subsection 89(1);

(s) "RDTOH" means refundable dividend tax on hand as that expression is defined in subsection 129(3);

(t) "related persons" has the meaning assigned by section 251;

(u) "restricted financial institution" has the meaning assigned by subsection 248(1);

(v) "series of transactions or events" has the meaning assigned by subsection 248(10);

(w) "significant influence" has the meaning assigned by section 3050 of the CICA Handbook;

(x) "specified financial institution" has the meaning assigned by subsection 248(1);

(y) "specified investment business"(SIB") has the meaning assigned by subsection 125(7);

(z) "stated capital" has the meaning assigned by the BCA;

(aa) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 87(1.4);

(bb) "taxable Canadian corporation" ("TCC") has the meaning assigned by subsection 89(1);

(cc) "taxable dividend" has the meaning assigned by subsection 89(1); and

(dd) "undepreciated capital cost" has the meaning assigned by subsection 13(21).

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

Facts

1. XXXXXXXXXX ("DC") is a TCC, a CCPC and is governed by the provisions of the BCA. It was formed on XXXXXXXXXX by an amalgamation ("Amalgamation") of a predecessor corporation, XXXXXXXXXX ("Parentco") and its two subsidiary wholly-owned corporations, XXXXXXXXXX ("ACo") and XXXXXXXXXX ("BCo") under the provisions of the BCA.

The issued and outstanding share capital of DC consists of XXXXXXXXXX common shares ("DC Common Shares"), which are owned by the following persons:

					    	DC Common Shares    	ACB									           			   $
XXXXXXXXXX . ("Holdco")        XXXXXXXXXX 	 XXXXXXXXXX
XXXXXXXXXX  ("Individual A") XXXXXXXXXX 	 XXXXXXXXXX          	XXXXXXXXXX  ("Individual B")  XXXXXXXXXX 	XXXXXXXXXX
XXXXXXXXXX  ("Individual C") XXXXXXXXXX 	 XXXXXXXXXX
Total			          	  	XXXXXXXXXX 	XXXXXXXXXX
The aggregate PUC of the XXXXXXXXXX  DC Common Shares is $XXXXXXXXXX .

The DC Common Shares held by Holdco, Individuals A, B and C were not acquired in contemplation of the proposed transactions described below.

Holdco, Individuals A, B and C hold their DC Common Shares as capital property.

2. DC is in the business of XXXXXXXXXX ("Business").

DC's assets consist of:

(a) cash;

(b) accounts receivable;

(b) prepaid expenses;

(d) advances to its related corporations ("Advances");

(e) all of the issued and outstanding shares of XXXXXXXXXX ("Subco") and loans receivable from Subco;

(f) equipment; and

(g) land and buildings which consist of:

(i) one property in XXXXXXXXXX;

(ii) one property in XXXXXXXXXX; and

(iii) one property in XXXXXXXXXX ("Spin-Off Property").

The Advances are non-interest bearing. DC can demand payments on the Advances at any time.

The Spin-Off Property consists of XXXXXXXXXX acres of land in XXXXXXXXXX which DC acquired from the XXXXXXXXXX pursuant to an agreement dated XXXXXXXXXX. On the same day, the XXXXXXXXXX granted to DC an option to purchase ("Land Option") an additional XXXXXXXXXX acres of land ("Optioned Land") which was adjacent to the Spin-Off Property for an exercise price ("Exercise Price") of $XXXXXXXXXX. The Land Option was for a period of XXXXXXXXXX years. DC paid $XXXXXXXXXX to the XXXXXXXXXX for the Land Option. DC subsequently constructed a building on the XXXXXXXXXX acres of land in XXXXXXXXXX.

On XXXXXXXXXX, DC sold ("Sale") the Land Option to XXXXXXXXXX ("TC") for $XXXXXXXXXX ("Purchase Price"). As consideration for the purchase of the Land Option, TC paid cash of $XXXXXXXXXX to DC. At the time of the Sale, the Land Option had a FMV which was greater than the Purchase Price. The Sale was undertaken irrespective of whether the proposed transactions as described below are undertaken, and the proposed transactions would have been undertaken regardless of whether the Sale took place, as the management of DC have decided to construct a building on the Optioned Land and they would like that building to be owned by TC rather than DC.

The liabilities of DC consist of:

(I) current liabilities which include a bank overdraft and accounts payable; and

(II) long-term liabilities ("DC Long-Term Liabilities") which consist of

(i) two long-term debts; one relates to the Spin-Off Property ("DC Long-Term Debt #1") and the other relates to the property in XXXXXXXXXX and the investment in Subco ("DC Long-Term Debt #2"); and

(ii) loans payable to Holdco ("Loans Payable").

As of XXXXXXXXXX, the total amount of DC Long-Term Debts #1 and #2 was $XXXXXXXXXX, of which $XXXXXXXXXX was the outstanding principal amount of the DC Long-Term Debt #1.

The Loans Payable are evidenced by several promissory notes, granted by DC to Holdco, which bear interest at XXXXXXXXXX% per annum, payable monthly. They are secured by a general security agreement, which is subordinated to both the Long-Term Debt and revolving credit lenders of DC.

DC has a balance in its CDA in the amount of approximately $XXXXXXXXXX. However, it does not have any balance in its RDTOH. It is expected that DC will not have any balance in its RDTOH at the end of its taxation year in which the proposed transactions described below are implemented.

DC's fiscal and taxation years end on XXXXXXXXXX 0. DC's tax affairs are administered by the XXXXXXXXXX Tax Services Office and its corporate tax returns are filed at the XXXXXXXXXX Taxation Centre.

3. Subco is a TCC and a CCPC. It is governed by the provisions of the BCA. Subco is in the business of XXXXXXXXXX.

Subco's assets consist of cash, accounts receivable, prepaid expenses and computer equipment.

Subco's liabilities are all current liabilities, which consist of

(a) accounts payable; and

(b) loans payable to DC, which are non-interest bearing and have no fixed repayment terms.

4. TC was incorporated under the provisions of the BCA on XXXXXXXXXX. It is a CCPC and a TCC. TC has not yet filed its first federal and provincial tax returns.

The authorized capital of TC consists of one class of an unlimited number of special shares ("TC Special Shares") and one class of an unlimited number of common shares ("TC Common Shares") which have the following attributes:

(a) the TC Common Shares are voting; and

(b) the TC Special Shares are:

(i) non-voting;

(ii) redeemable and retractable, subject to the applicable law, at any time for an amount equal to $XXXXXXXXXX per share (the "TC Special Share Redemption Amount");

(ii) entitled to a non-cumulative dividend of up to XXXXXXXXXX% per annum of the TC Special Share Redemption Amount; and

(iv) on dissolution or other distribution by TC, the TC Special Shares will rank ahead of the TC Common Shares.

The issued and outstanding share capital of TC consists of:

	Shareholder			Common Shares	     PUC	ACB  

	Holdco				XXXXXXXX    $XXXXXXXX $XXXXXXX
	Individual A			XXXXXXXXX $XXXXXXXX $XXXXXXX
	Individual B		           XXXXXXXXX  $XXXXXXXX $XXXXXXX
	Individual C			XXXXXXXXX $XXXXXXXX $XXXXXXX
				      $XXXXXXXX $XXXXXXX 	

DC and TC are related and affiliated persons pursuant to subparagraphs 251(2)(c)(i) and 251.1(1)(c)(i) of the Act, respectively, as Holdco controls both DC and TC.

TC's assets consist of

(I) cash; and

(II) the Optioned Land.

TC acquired the Optioned Land from the XXXXXXXXXX when it exercised the Land Option on XXXXXXXXXX for $XXXXXXXXXX.

TC financed the acquisition of the Optioned Land by borrowing XXXXXXXXXX% of the Exercise Price from an arm's length lender. TC granted a mortgage registered against the Optioned Land in favour of the arm's length lender.

5. Parentco, ACo and BCo were incorporated under the provisions of the BCA after 1971. Prior to the Amalgamation of Parentco, ACo and BCo,

(a) all of the common shares of Parentco were owned by XXXXXXXXXX ("Individual D") and his spouse XXXXXXXXXX ("Individual E") and a corporation XXXXXXXXXX ("CCo"), which dealt at arm's length with Individuals D and E, as follows:

(i) Individual D	XXXXXXXXXX
(ii) Individual E	XXXXXXXXXX
(iii) CCo 		XXXXXXXXXX
			          XXXXXXXXXX 

(b) Parentco owned all of the issued and outstanding shares of BCo and approximately XXXXXXXXXX % of the issued and outstanding shares of ACo. BCo owned the remaining XXXXXXXXXX% shares of ACo.

On Amalgamation, DC issued XXXXXXXXXX DC Common Shares to Individual D, XXXXXXXXXX DC Common Shares to Individual E and XXXXXXXXXX DC Common Shares to CCo. The Amalgamation qualified as a subsection 87(1) amalgamation. Immediately after the Amalgamation, the aggregate PUC and ACB to Individuals D and E and CCo of their DC Common Shares were as follows:

PUC ACB
(I) Individual D $XXXXXXXXXX $XXXXXXXXXX
(II) Individual E $XXXXXXXXXX $XXXXXXXXXX
(III) CCo $XXXXXXXXXX $XXXXXXXXXX

6. Holdco was incorporated under the provisions of the BCA on XXXXXXXXXX. It is a CCPC and a TCC. All of the issued and outstanding common shares of Holdco are owned by Individuals D and E equally. Individuals D and E are residents of Canada.

Holdco is a holding company for Individuals D and E's interest in DC and certain corporations that are related to DC. Holdco's assets include the XXXXXXXXXX XXXXXXXXXX DC Common Shares.

On XXXXXXXXXX, each of Individuals D and E transferred all of his or her DC Common Shares to Holdco at FMV. As consideration for the transfers, Holdco issued its shares to each of Individuals D and E. Holdco and Individuals D and E each jointly elected $XXXXXXXXXX as the agreed amount for each such transfers under subsection 85(1).

On XXXXXXXXXX, Holdco acquired an additional XXXXXXXXXX DC Common Shares from CCo for a purchase price of $XXXXXXXXXX.

7. Individuals A, B and C are employees of DC and deal at arm's length with Holdco, DC and TC. They are all residents of Canada.

DC granted to each of Individuals A and B (on XXXXXXXXXX) and Individual C (on XXXXXXXXXX), pursuant to a separate stock option agreement ("Option Agreement"), an option ("Option") to purchase its shares. At the time when DC granted the respective Option to each of Individuals A, B and C, it was a CCPC and dealt at arm's length with each of them such that subsection 7(1.1) applied.

Pursuant to their respective Option Agreement, each of Individuals A, B and C acquired his or her XXXXXXXXXX DC Common Shares from DC's treasury.

Proposed Transactions

8. Each of Holdco, Individuals A, B and C (collectively referred to hereafter as the "DC Shareholders" and individually as a "DC Shareholder") will transfer to TC a particular number of their DC Common Shares having an aggregate FMV equal to that proportion of the aggregate FMV of their DC shares that

(a) the amount by which the aggregate FMV of the Spin-Off Property exceeds the DC Long-Term Debt #1, determined immediately before the transfer described in paragraph 13 below,

is of

(b) the amount by which the aggregate FMV of all of the business property of DC exceeds the DC Long-Term Liabilities, determined immediately before the transfer described in paragraph 13 below by applying the rules in paragraph 10 below.

As sole consideration, TC will issue to each particular DC Shareholder a number of the TC Common Shares having an aggregate FMV at that time equal to the aggregate FMV of the DC Common Shares that each particular DC Shareholder so transferred to TC.

Immediately after the share exchanges described in this paragraph, the aggregate FMV of the TC Common Shares owned by the particular DC shareholder will be equal to or approximate the amount determined by the formula, on the assumption that Holdco, Individuals A, B and C are participants, DC is the distributing corporation and TC is the acquirer,

				A x B    + D
			     		       C

as found in subparagraph (b)(iii) of the definition of "permitted exchange" in subsection 55(1). In addition, no person who is not a DC shareholder will own any shares of TC.

For greater certainty, the aggregate FMV of the TC Common Shares received by each of Individuals A, B and C immediately after his or her share exchange described in this paragraph will not exceed the aggregate FMV of his or her DC Common Shares, immediately before such share exchange, that he or she exchanged for the TC Common Shares.

9. TC and each particular DC Shareholder will jointly elect in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to each transfer described in paragraph 8 above. The agreed amount in respect of the DC Common Shares so transferred by the particular DC Shareholder to TC will be equal to the ACB, at the time of such transfer, to the particular DC Shareholder of each such share owned by the particular DC Shareholder and transferred to TC. For greater certainty, the DC Common Shares owned by the particular DC Shareholder will be property described in paragraph 85(1)(c.1) and the elected amount will be within the limits prescribed by that paragraph.

For the purposes of the BCA, the addition to the stated capital of the TC Common Shares issued by TC

(a) to Holdco as described in paragraph 8 above, will be equal to the aggregate cost (as determined under section 85, where applicable) of the DC Common Shares that Holdco transferred to TC; and

(b) to each of Individuals A, B and C as described in paragraph 8 above, will be equal to the aggregate FMV of the DC Common Shares that each of Individuals A, B and C transferred to TC at that time, as the case may be.

10. Immediately before the transfer of property described in paragraph 13 below, the property of DC will be determined on a consolidated basis by including the appropriate pro-rata share of the assets of any corporation over which DC has the ability to exercise significant influence (DC and such corporations will hereinafter be referred to as the "DC Group"), which assets will be classified into three types of property for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near cash property, comprising all of the current assets of the DC Group, including any cash, accounts receivable, prepaid expenses and Advances;

(b) business property comprising all of the assets of the DC Group, other than cash or near cash property, any income from which would, for the purposes of the Act, be income from a business (other than a SIB), and

(c) investment property, comprising all of the assets of the DC Group, other than cash or near cash property, any income from which would, for purposes of the Act, be income from property or from a SIB.

For the purposes of this paragraph, a corporation will be considered to have significant influence over a corporation if it has significant influence over that corporation or over any other corporation that has significant influence over that corporation. For greater certainty, DC will not have significant influence over any corporation other than Subco.

For greater certainty, the FMV of the shares of Subco and of any indebtedness receivable by DC from Subco will be allocated between the three types of property described above by multiplying the FMV of the shares of Subco or amount receivable from Subco, as the case may be, by the proportion that the net FMV of each type of property owned by Subco (as determined in this paragraph and paragraphs 11 and 12 below) is of the aggregate net FMV of all of the property owned by Subco.

11. In determining, on a consolidated basis, the net FMV of each type of property of DC immediately before the transfer described in paragraph 13 below, the liabilities of DC and Subco will be allocated to, and will be deducted in the calculation of, the net FMV of each such type of property of such corporation in the following manner:

(a) in determining the net FMV of each type of property of Subco, immediately before the transfer described in paragraph 13 below, the liabilities of Subco (other than any amount owing by Subco to DC) will be allocated to, and will be deducted in the calculation of, the net FMV of each type of property of Subco in the following manner:

(i) current liabilities of Subco (including the current portion of the long-term debt) will be allocated to the cash or near cash property (including any cash, accounts receivable and prepaid expenses) of Subco in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by Subco. The amount of current liabilities allocated as described herein will not exceed the aggregate FMV of the cash or near cash property of Subco;

(ii) liabilities of Subco, other than current liabilities, that relate to a particular property, will then be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, will then be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein; and

(iii) if any liabilities remain after the allocations described in steps (a)(i) and (a)(ii) herein are made ("Excess Unallocated Liabilities I"), such Excess Unallocated Liabilities I will then be allocated to the cash or near cash property, business property and investment property of Subco, based on the relative net FMV of each type of property prior to the allocation of such Excess Unallocated Liabilities I.

(b) In determining, on a consolidated basis, the net FMV of each type of property of DC immediately before the transfer of property described in paragraph 13 below, DC will include the appropriate pro rata share of the net FMV of each type of property of Subco, as determined in accordance with (a) herein, and any liabilities of DC will then be allocated to, and be deducted in the calculation of, the net FMV of each type of property of DC in the following manner:

(i) current liabilities of DC (including the current portion of the long-term liabilities) will be allocated to the cash or near cash property (including any cash, accounts receivable, prepaid expenses and Advances) of DC in the proportion that the FMV of each such property is of the FMV of all cash or near cash property owned by it. The amount of current liabilities allocated as described herein will not exceed the aggregate FMV of the cash or near cash property of DC;

(ii) liabilities of DC, other than current liabilities, that relate to a particular property will be allocated to the particular property (and effectively to the type to which the particular property belongs) to the extent of its FMV. The liabilities that pertain to a type of property, but not to a particular property, then will be allocated to that type of property, but not in excess of the net FMV of such type of property after the allocation of liabilities to a particular property as described herein; and

(iii) if any liabilities remain after the allocations described in steps (b)(i) and (b)(ii) above are made ("Excess Unallocated Liabilities II"), such Excess Unallocated Liabilities II will then be allocated to the cash or near cash property, business property and investment property of DC, based on the relative net FMV of each type of property prior to the allocation of such Excess Unallocated Liabilities II.

12. For greater certainty, in determining the net FMV of the property of DC as described in paragraph 11 above, the following principles will apply:

(a) any tax accounts such as the balance of any non-capital losses of the DC Group or the balance of any RDTOH account or CDA of the DC Group, will not be considered property;

(b) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

(c) the amount of any deferred income tax will not be considered a liability for the purposes of the proposed transactions described herein because such amount does not represent a legal obligation of the DC Group.

13. Immediately following the determination of its types of property as described in paragraph 10 above, DC will transfer to TC a proportionate share of

(a) its cash or near cash property;

(b) its business property (which proportionate share will consist solely of the Spin-Off Property); and

(c) its investment property, if any;

such that, immediately after the transfer, the net FMV of the cash or near cash property, the business property and the investment property (after allocating and deducting, in the manner described in paragraphs 11 and 12 above, the liabilities of DC which are to be assumed by TC as described in (f) below) which is transferred to TC as described herein, will approximate that proportion of the net FMV of all of that type of property of DC, determined immediately before the transfer referred to herein that:

(d) the aggregate FMV of the DC Common Shares owned by TC, immediately before the transfer,

is of

(e) the aggregate FMV of all of the issued and outstanding shares of DC immediately before the transfer.

For the purpose of this paragraph and paragraph 16 below, the expression "approximate that proportion" means that the discrepancy from that proportion, if any, would not exceed 1%, determined as a percentage of the net FMV of each type of property which TC has received (or DC has retained) as compared to what TC would have received (or DC would have retained) had it received (or retained) its appropriate pro rata share of the net FMV of that type of property.

As consideration for the transfer of property described herein, TC will:

(f) assume certain liabilities of DC that will not exceed the aggregate agreed amounts in the joint elections under subsection 85(1) described in paragraph 14 below. The amount of liabilities to be allocated to each such property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property; and

(g) issue the TC Special Shares having an aggregate FMV, redemption and retraction amount equal to the FMV of the property so transferred to TC as described herein less the amount of the liabilities of DC assumed by TC as described in (f) above.

14. DC and TC will jointly elect pursuant to subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer to TC of any eligible property of DC that has a FMV in excess of its cost amount. Specifically, the agreed amount in each joint election will be equal to the least of:

(a) the amounts specified in subparagraphs 85(1)(d)(i), (ii) or (iii) in the case of eligible capital property,

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

(c) the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii), in the case of property described in paragraph 85(1)(c.1).

In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

For the purposes of the BCA, the addition to the stated capital of the TC Special Shares issued by TC to DC as described in paragraph 13 above, as a result of the acquisition of property which is the subject of an election under subsection 85(1), will be equal to the amount by which the aggregate of the cost determined pursuant to subsection 85(1) of the property transferred to TC described in paragraph 13 above exceeds the principal amount of the liabilities of DC assumed by TC in respect of the acquisition of that property.

15. Immediately after the transfer of the property by DC to TC as described in paragraph 13 above, TC will redeem all of the TC Special Shares held by DC and will issue to DC, as payment therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to the aggregate redemption amount and FMV of its Special Shares so redeemed (the "TC Note"). DC will accept the TC Note as full satisfaction for the redemption price of its TC Special Shares so redeemed with the risk of the note being dishonoured.

DC will purchase for cancellation all of the DC Common Shares held by TC for an amount equal to their FMV at that time and will issue to TC, as payment therefor, a demand non-interest bearing promissory note having a principal amount and FMV equal to that amount (the "DC Note"). TC will accept the DC Note as full satisfaction for the purchase price of its DC Common Shares so purchased with the risk of the note being dishonoured.

The principal amount and FMV of the DC Note and the TC Note will be equal to each other.

DC will satisfy the principal amount of the DC Note by transferring to TC the TC Note that will be accepted by TC in full payment of DC's obligation. Concurrently, TC will satisfy the principal amount of the TC Note by transferring to DC the DC Note that will be accepted by DC in full payment of TC's obligation. The DC Note and the TC Note will both be marked paid in full and cancelled.

16. Immediately following the transactions described in paragraph 13 above, the net FMV of each type of property retained by DC, determined in the manner described in paragraphs 10, 11 and 12 above, will approximate that proportion of the aggregate net FMV of that type of property of DC, determined immediately before the transfer described in paragraph 13 above, that:

(a) the aggregate FMV, immediately before the transfer of property described in paragraph 13, of the DC Common Shares owned by Holdco, Individuals A, B and C

is of

(b) the aggregate FMV, immediately before the transfer of property, of all of the issued and outstanding shares of DC.

Additional Information

17. After the completion of the above-proposed transactions, TC will commence to construct a building on the Optioned Land and will lease the Spin-Off Property and the Optioned Land back to DC so that DC can continue to use them in its business.

18. None of the corporations referred to herein (including the corporations to be incorporated as described in the proposed transactions) is or will be, at any time during the series of transactions herein described, a specified financial institution or a restricted financial institution.

19. No property has been or will be acquired by DC and no liabilities have been or will be incurred by DC in contemplation of and before the transfer of property as described in paragraph 13 above, except as described herein.

20. There will not be at any time prior to the completion of the proposed transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2) of the Act, in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

21. Each of DC and TC will not have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions).

22. None of the issued shares referred to herein (including the shares to be issued as described in the proposed transactions) will be issued or acquired as part of a transaction or event or series of transactions or events of the type described in subsection 112(2.5) of the Act.

23. None of the corporations described above (including the corporations to be incorporated as described in the proposed transactions) is or will be, at any time before the completion of the proposed transactions described above, a corporation described in any of the paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1) of the Act.

24. Each of DC and TC will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by it as part of the proposed transactions.

25. Each of Holdco, Individuals A, B and C will undertake not to assert any oppression remedy that each may have under the provisions of the BCA, which remedy may arise from the proposed transactions described above.

Purpose of the Proposed Transactions

26. The purpose of the proposed transactions is to creditor-proof the Spin-Off Property by transferring it from DC to TC.

Rulings

Provided that the preceding statements constitute 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 follows:

A. The provisions of subsection 85(1) will apply to:

(a) the transfers by each of Holdco, Individuals A, B and C of their DC Common Shares to TC as described in paragraph 8 above; and

(b) subject to the application of subsection 13(21.2) of the Act, the transfer of each eligible property by DC to TC as described in paragraph 13 above;

such that the agreed amount in respect of each transfer of eligible property will be deemed to be the transferor's proceeds of disposition and the transferee's cost thereof pursuant to paragraph 85(1)(a). In respect of depreciable property, to the extent that the transferor's capital cost exceeds the transferor's proceeds of disposition of the property, the transferee's capital cost of each such property will be determined in accordance with subsection 85(5).

For greater certainty,

(c) paragraph 85(1)(e.2) will not apply to the transfers; and

(d) subsection 85(2.1) will apply to reduce the PUC of the TC Common Shares issued, as described in subparagraph 9(b) above, by TC to each of Individuals A, B and C.

B. Subsection 84(3) will apply on the redemption or purchase for cancellation, as the case may be,

(a) of the TC Special Shares held by DC described in paragraph 15 above, to deem TC to have paid and DC to have received; and

(b) of the DC Common Shares held by TC described in paragraph 15 above, to deem DC to have paid and TC to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption or purchase for cancellation, as the case may be, exceeds the aggregate PUC in respect of such shares immediately before such redemption or purchase for cancellation, and any such dividend

(i) 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;

(ii) will be deductible by each recipient of such dividend in computing its respective taxable income pursuant to subsection 112(1) and, for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the subsection 112(1) deduction in respect of such dividend;

(iii) will be excluded from the proceeds of disposition of the shares by virtue of paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act;

(iv) by virtue of subsection 112(3) of the Act, will reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received; and

(v) will not be subject to tax under Part IV.1 and Part VI.1 of the Act on the basis that such dividend will be an excepted dividend by virtue of paragraph (b) of the definition of "excepted dividend" in section 187.1 of the Act and an excluded dividend by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1) of the Act, as each of the recipients will have a substantial interest, within the meaning assigned by paragraph 191(2)(a) of the Act, in the payer corporation at the time such taxable dividend is paid.

C. Provided that each of DC and TC is not entitled to a dividend refund in respect of its taxation year in which it is deemed to pay the dividend referred to in ruling B above, DC and TC will not be subject to Part IV tax under subsection 186(1) in respect of such dividend.

D. 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); or

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

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 ruling B above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b) of the Act.

E. The repayments of the DC Note held by TC and the TC Note held by DC described in paragraph 15 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

F. The provisions of subsection 7(1.5) of the Act will apply to the share exchanges by each of Individuals A, B and C of his or her DC Common Shares for the TC Common Shares described in paragraph 8 above, such that, for the purposes of subsection 7(1.1) and paragraph 110(1)(d.1):

(a) he or she will be deemed not to have disposed of or exchanged his or her DC Common Shares and not to have acquired the TC Common Shares;

(b) the TC Common Shares received by each of Individuals A, B and C will be deemed to be the same shares as, and a continuation of, his or her exchanged DC Common Shares;

(c) TC will be deemed to be the same person as, and a continuation of, DC; and

(d) the TC Common Shares acquired by each of Individuals A, B and C will be deemed to have been issued under each respective Option Agreement described in paragraph 7 above.

G. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the proposed transactions described in paragraphs 8 to 16 above, in and by themselves.

H. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions described in paragraphs 8 to 16 above, in and by themselves, to redetermine the tax consequences confirmed in the rulings given above.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by Canada Revenue Agency ("CRA") on May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed by

XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Comments

1. In our view, in the event that the Land Option had a FMV which was greater than the Purchase Price at the time when DC sold the Land Option to TC as described in paragraph 2 above, DC would be deemed to have received proceeds of disposition therefor equal to that FMV pursuant to paragraph 69(1)(b) of the Act.

2. Nothing in this ruling should be construed as implying that CRA has agreed to or reviewed:

(a) the determination of the FMV or the cost amount of any particular asset or the PUC of any shares referred to herein, or

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

Yours truly,

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