2004 Ruling 2004-0082691R3 - Public Company spin-off

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: Whether a proposed spin-off meets the requirements of paragraph 55(3)(b)?

Position: Yes.

Reasons: It meets the requirements of the law.

XXXXXXXXXX 2004-008269

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Subject: XXXXXXXXXX ("X Co.")

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

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(a) dealt with in an earlier return of the taxpayer or a related person;

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

(c) under objection by one or any of the taxpayer or a related person;

(d) the subject of a ruling previously issued by the Income Tax Rulings Directorate; or

(e) before the courts.

DEFINITIONS

1. Unless otherwise stated, "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. In this letter, the following definitions are used:

"adjusted cost base" ("ACB") and "capital property" have the meanings in section 54;

"Agreed Amount" in respect of a property means the amount that the transferor and transferee have agreed upon in an election under subsection 85(1);

"Amalco" means the corporation resulting from the Amalgamation;

"Amalco Common Shares" means the common shares of Amalco to be held by Participants after the Amalgamation described in paragraph 77;

"Amalgamation" means the amalgamation of Y Co. with Newco as described in paragraph 77;

"Bank Rate" means the XXXXXXXXXX;

"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended;

"Capital Reorganization" means the reorganization of X Co.'s capital described in paragraph 60 where each participant will receive one New X Co. Common Share and one X Co. Special Share in exchange for each existing X Co. Common Share;

"controlled foreign affiliate" has the meaning in subsection 95(1);

"cost amount" has the meaning in subsection 248(1);

"D XXXXXXXXXX JV" means the XXXXXXXXXX described in paragraph 23;

"Dissenting Shareholder" means an X Co. shareholder who or which exercises such shareholder's rights to dissent from the Plan of Arrangement;

"Distribution" means the transactions described in paragraph 66 whereby X Co. will transfer to Y Co. the Transferred Property for the consideration described in paragraph 68;

"Employee Share Issue Agreement" means an agreement of the form described in paragraph 8;

"Effective Date" means the date on which the Plan of Arrangement shall take effect;

"Exchange" means the transactions described in paragraph 63 whereby the Participants will exchange their X Co. Special Shares for Y Co. Common Shares;

"excluded property" has the meaning in subsection 95(1);

"exempt earnings" has the meaning in Regulation 5907(1);

"Existing X Co. Stock Options" means the existing stock options of X Co. described in paragraph 39;

"Fco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX which is described in paragraph 17;

"foreign accrual property income" has the meaning in subsection 95(1);

"foreign affiliate" has the meaning in subsection 95(1);

"FMV" means fair market value;

"Hco" means a new company which will be incorporated under the laws of XXXXXXXXXX as described in paragraph 45;

"International Ltd." means XXXXXXXXXX which is described in paragraph 14;

"In The Money Amount" means, in relation to a particular stock option, the amount by which the FMV of the shares that are the subject of the particular option exceeds the exercise price of such option;

"New X Co. Common Shares" means the common shares which X Co. will be authorized to issue pursuant to the amendment to its articles as described in paragraph 59;

"New X Co. Stock Options" means the stock options that X Co. will issue as described in paragraph 53;

"Newco" means a new corporation incorporated under the provisions of the CBCA which is described in paragraph 51;

"Newco Stock Options" means the stock options that Newco will issue as described in paragraph 53;

"Out Of The Money Amount" means, in relation to a particular stock option, the amount by which the FMV of the shares that are subject of the particular option is less than the exercise price of such option;

"Pco" means a new corporation incorporated under the laws of XXXXXXXXXX which is described in paragraph 47;

"Participant" means an X Co. Shareholder other than a Dissenting Shareholder;

"Plan of Arrangement" means the plan of arrangement under the CBCA to effect the divisive reorganization described in the Proposed Transactions;

"Proposed Transactions" means the transactions described in paragraphs 51 to 79;

"public corporation" has the meaning in subsection 89(1);

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

"qualifying interest" has the meaning in paragraph 95(2)(m);

XXXXXXXXXX;

"Regulations" means the Income Tax Regulations;

"surplus entitlement percentage" has the meaning in subsection 95(1);

"taxable Canadian corporation" has the meaning in subsection 89(1);

"taxable earnings" has the meaning in Regulation 5907(1);

"Transaction Date" means the date on which the transactions contemplated in the Plan of Arrangement will occur;

"Transferred Property" means the property of X Co. which will be transferred by X Co. to Y Co. on the Effective Date, as described in paragraph 66;

"Transfer Percentage" means the proportion, expressed as a percentage, that:

the net FMV of the Transferred Property, is of
the net FMV of all of X Co.'s property, determined immediately before the Distribution as described in this letter;

"X Co. Common Shares" means the voting, fully participating common shares of X Co. as described in paragraph 2;

"X Co. Group" means X Co., all of its direct and indirect subsidiaries and its interests in other corporations, joint ventures and entities;

"X Co. Redemption Amount" means the amount for which each X Co. Special Share will be redeemable by X Co. as described in paragraph 59;

"X Co. Redemption Note" means the promissory note to be issued to Y Co. by X Co. as payment of the X Co. Redemption Amount;

"X Co. Special Shares" means the reorganization shares that X Co. will be authorized to issue pursuant to the amendment to its articles as described in paragraph 59;

"X Co. Shareholders" means all of the holders of X Co. Common Shares immediately before the Effective Date;

"Y Co." means the corporation described in paragraph 54 to which the Transferred Property will be transferred;

"Y Co. Common Shares" means the voting, fully participating common shares of Y Co. as described in paragraph 54;

"Y Co. Group" means Y Co., all of its direct and indirect subsidiaries and its interests in other corporations, joint ventures and entities;

"Y Co. Redemption Amount" means the amount for which the Y Co. Special Shares will be redeemable by Y Co. as described in paragraph 55;

"Y Co. Redemption Note" means the promissory note to be issued to X Co. by Y Co. as payment of the Y Co. Redemption Amount;

"Y Co. Special Shares" means the preferred shares of Y Co., with the terms and conditions described in paragraph 55, to be issued to X Co. as described in paragraph 59;

"Z Group" means Z Limited and all its subsidiaries and its interests in joint ventures and entities; and

"Z Limited" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX which is described in paragraph 15.

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

FACTS

1. [Reserved].

2. X Co. is a corporation that was continued under the CBCA. It is a taxable Canadian corporation and a public corporation. Its corporate tax number is XXXXXXXXXX and it files its annual income tax return at the XXXXXXXXXX Tax Services Office. The authorized capital of X Co. consists of an unlimited number of common shares (the "X Co. Common Shares"). As at XXXXXXXXXX, there were XXXXXXXXXX X Co. Common Shares issued and outstanding.

3. X Co., directly and indirectly through its subsidiaries, carries on the business of XXXXXXXXXX. As outlined in more detail in paragraphs 14 to 25 below, it carries out such activities in XXXXXXXXXX.

4. The X Co. Common Shares are listed on XXXXXXXXXX. The closing price of the X Co. Common Shares on the XXXXXXXXXX on XXXXXXXXXX was $XXXXXXXXXX. X Co. trades on the XXXXXXXXXX under the stock symbol XXXXXXXXXX.

5. To the best of the knowledge of the directors and senior officers of X Co., as of the date hereof, no person or related group of persons beneficially owns, directly or indirectly, more than 10% of the issued and outstanding X Co. Common Shares. The largest shareholder of X Co., XXXXXXXXXX, holds just under XXXXXXXXXX% of the outstanding Common Shares.

6. On XXXXXXXXXX, X Co. issued XXXXXXXXXX units, consisting of one common share and one-half of one common share purchase warrant (the "Series A Warrants") at a purchase consideration of C$XXXXXXXXXX per unit. Each Series A Warrant entitles the holder thereof to purchase one X Co. Common Share at a price of $XXXXXXXXXX (Cdn.) on or before XXXXXXXXXX. The terms of the Series A Warrants are described at paragraphs 41 to 43 below.

7. X Co. has a stock-based compensation plan (the "Stock Option Plan") for directors, officers, employees and consultants in the X Co. Group. Under the terms of the Stock Option Plan, qualifying individuals may become entitled to acquire X Co. Common Shares at prices which cannot be lower than the "market price" (as defined under the Stock Option Plan) of such shares at the times the relevant stock options are granted. Under the Stock Option Plan, all options granted, other than performance-based options, vest over XXXXXXXXXX years with XXXXXXXXXX vesting immediately and XXXXXXXXXX vesting on each of the XXXXXXXXXX and XXXXXXXXXX anniversary dates of the grant. As at XXXXXXXXXX, X Co. had XXXXXXXXXX unexercised and outstanding stock options.

8. X Co. has entered into Employee Share Issue Agreements with XXXXXXXXXX of its employees. Under the terms of these Agreements, the employees were granted X Co. Common Shares. The disposal rights to these shares are restricted, in that, a certain portion may be disposed of by the employees after XXXXXXXXXX and the remaining portion after XXXXXXXXXX. As at the date hereof, XXXXXXXXXX X Co. Common Shares have been granted under these Agreements. Of the XXXXXXXXXX X Co. Common Shares that have been granted, XXXXXXXXXX have met the disposal conditions.

9. X Co., through its XXXXXXXXXX subsidiary, XXXXXXXXXX ("International Ltd"), owns approximately XXXXXXXXXX % of the shares of XXXXXXXXXX ("Z Limited"), a corporation incorporated under the laws of XXXXXXXXXX whose shares are listed on the XXXXXXXXXX Stock Exchange. X Co. and International Ltd. entered into an agreement dated XXXXXXXXXX with XXXXXXXXXX ., which represented the registered holders of XXXXXXXXXX shares of Z Limited, to purchase approximately XXXXXXXXXX % shares of Z Limited. Pursuant to this agreement, International Ltd. as purchaser acquired XXXXXXXXXX shares in exchange for the issuance of XXXXXXXXXX X Co. Common Shares. This acquisition increased X Co.'s stake in Z Limited from XXXXXXXXXX% to XXXXXXXXXX%.

10. On XXXXXXXXXX, X Co. released a press release relating to the proposed acquisition of the Z Limited shares. That press release stated that the proposed acquisition of the Z Limited shares was accretive to X Co. The press release quoted President and CEO of X Co. as follows: "XXXXXXXXXX". As mentioned in the press release, the acquisition of the shares of Z Limited by X Co. represented the latest in a series of purchases by X Co. The proposed transactions described below would have been undertaken irrespective of the acquisition of the shares of Z Limited and the acquisition of the shares of Z Limited would have been done irrespective of the proposed transactions.

11. On XXXXXXXXXX, in accordance with its commitment under the XXXXXXXXXX agreement to undertake all such steps and adopt such measures as may be necessary or required to give effect to the transactions, XXXXXXXXXX as counsel to X Co. requested that the XXXXXXXXXX accept the request to list the additional XXXXXXXXXX X Co. Common Shares.

Corporate Organization

12. As more fully described under the heading "Proposed Transactions", the purpose of the transactions described in this letter, inter alia, is to transfer to a new Canadian public corporation ("Y Co."), owned by the shareholders of X Co., the assets of X Co. constituting the XXXXXXXXXX businesses described in paragraphs 15 to 17, 21 and 23 below. Based on management estimates, the value of the XXXXXXXXXX business net assets represent approximately XXXXXXXXXX% of the value of the total assets of X Co.

13. [Reserved].

International Ltd.

14. X Co. owns all of the issued and outstanding shares of International Ltd., a holding corporation subsisting under the laws of XXXXXXXXXX. International Ltd. owns, inter alia, all of the issued and outstanding shares of Fco, XXXXXXXXXX. ("X Co. (Country H) Ltd."), XXXXXXXXXX, ("X Co. XXXXXXXXXX"), XXXXXXXXXX . ("X Co. Management Services Country G (Pty) Ltd.") and XXXXXXXXXX ("X Co. XXXXXXXXXX Country G (Pty) Ltd.").

Z Limited

15. As stated above in paragraph 9, International Ltd. currently owns XXXXXXXXXX% of Z Limited, a public corporation listed on the XXXXXXXXXX. Z Limited's principal interest is the XXXXXXXXXX held by its wholly-owned subsidiary, XXXXXXXXXX ("ZPML").

ZPML

16. Z Ltd's wholly-owned subsidiary, ZPML, is the holder of XXXXXXXXXX.

Fco

17. Fco is a corporation incorporated under the laws of XXXXXXXXXX which owns XXXXXXXXXX exclusive, XXXXXXXXXX% owned, XXXXXXXXXX permits. Fco also has a joint venture, in which it owns a XXXXXXXXXX% interest in a XXXXXXXXXX project. In addition to its XXXXXXXXXX projects, Fco also owns interests in XXXXXXXXXX projects. X Co. recently issued a press release wherein it announced XXXXXXXXXX.

X Co. (Country H) Ltd.

18. Prior to XXXXXXXXXX, X Co.(Country H) Ltd., a corporation incorporated under the laws of XXXXXXXXXX, owned a total of XXXXXXXXXX.

Project in XXXXXXXXXX

19. X Co. owns a joint venture interest in a XXXXXXXXXX project located in XXXXXXXXXX ("Country A"). Together with its partners in Country A, X Co. owns all of the issued and outstanding shares of a limited liability company incorporated under the laws of Country A, which holds the XXXXXXXXXX project and the XXXXXXXXXX.

X Co. Management Services Country G (Pty) Ltd.

20. X Co. Management Services Country G (Pty) Ltd., a corporation incorporated under the laws of XXXXXXXXXX ("Country G"), owns XXXXXXXXXX projects, XXXXXXXXXX which are located in Country G. X Co. Management Services Country G (Pty) Ltd. also incurs the administrative costs of the X Co. group's operations in Country G.

X Co. XXXXXXXXXX Country G (Pty) Ltd.

21. X Co. XXXXXXXXXX Country G (Pty) Ltd., a corporation incorporated under the laws of Country G, owns a XXXXXXXXXX project in Country G.

XXXXXXXXXX ("Country G Branch")

22. X Co.'s Country G Branch owns a XXXXXXXXXX% interest in the XXXXXXXXXX Joint Venture which, in turn, owns XXXXXXXXXX% of the XXXXXXXXXX. The XXXXXXXXXX Joint Venture agreement was entered into in XXXXXXXXXX between X Co., XXXXXXXXXX and XXXXXXXXXX, an affiliate of XXXXXXXXXX.

XXXXXXXXXX JV ("D XXXXXXXXXX JV")

23. D XXXXXXXXXX JV is a XXXXXXXXXX project located in Country G that is contiguous to the Z project described above in paragraphs 15 to 16. The D XXXXXXXXXX JV is an agreement to XXXXXXXXXX. Consequently, it represents a foreign resource property in respect of a country by virtue of the provisions of subparagraph (b)(ii) of the definition "foreign resource property" in subsection 248(1).

Canadian XXXXXXXXXX Projects

24. X Co. has several XXXXXXXXXX projects in Canada. These projects are held directly, with X Co. entering into participation interest agreements on the XXXXXXXXXX properties within the XXXXXXXXXX region. In addition to XXXXXXXXXX projects in the XXXXXXXXXX, the XXXXXXXXXX program is composed of XXXXXXXXXX projects in the province of XXXXXXXXXX . In the province of XXXXXXXXXX, a XXXXXXXXXX program was completed during XXXXXXXXXX with the completion of XXXXXXXXXX.

XXXXXXXXXX Project

25. X Co. owns a XXXXXXXXXX% interest in the XXXXXXXXXX Project, which is located in the XXXXXXXXXX. X Co., together with its joint venturer in the XXXXXXXXXX Project, own XXXXXXXXXX.

Cash Assets

26. X Co.'s cash and cash equivalents comprise cash, term deposits and other interest bearing instruments with original maturity of XXXXXXXXXX days or less. As at XXXXXXXXXX, the cash and cash equivalents included restricted cash of $XXXXXXXXXX (U.S.) (Cdn$ XXXXXXXXXX) fully funding a Canadian guarantee that supports a $XXXXXXXXXX (U.S.) (XXXXXXXXXX) credit facility in XXXXXXXXXX. This credit facility has been offset against the restricted cash balance.

Outstanding Third Party Debt

27. Aside from trade payables, the only outstanding third party debt which has been issued by X Co. and its affiliated corporations has been issued by Z Limited and its subsidiaries. As at XXXXXXXXXX, Z Limited's financial statements showed interest-bearing borrowings with arm's length parties totalling XXXXXXXXXX. These borrowings were comprised of finance leases (XXXXXXXXXX), loans from a Country G public company (XXXXXXXXXX) and senior debt advanced by a banking consortium (XXXXXXXXXX).

Finance Lease Liabilities

28. On XXXXXXXXXX, ZPML (as seller and lessee) entered into a sale and lease back agreement with XXXXXXXXXX (as purchaser) for a period of XXXXXXXXXX months in respect of certain motor vehicles. The first instalment was due on XXXXXXXXXX for an amount of XXXXXXXXXX and the last payment will be made on XXXXXXXXXX.

29. On XXXXXXXXXX, ZPML (as lessee) entered into two finance lease agreements with XXXXXXXXXX (as lessor) for a period of XXXXXXXXXX months for XXXXXXXXXX. The first instalment under the finance lease agreements was due on XXXXXXXXXX for an amount of XXXXXXXXXX and the last payment will be made on XXXXXXXXXX.

Loans from Public Company in Country G

30. ZPML entered into a loan agreement with XXXXXXXXXX, a major listed company in Country G, dated XXXXXXXXXX. This public company undertook to provide ZPML with financial assistance in order to enable ZPML to build a XXXXXXXXXX. With respect to such property, the public company lent ZPML an initial XXXXXXXXXX, with ZPML simultaneously providing XXXXXXXXXX Based on a review of the project after expending the above sums, if the public company is satisfied as to the progress of the project, it will provide a further XXXXXXXXXX to complete the project.

31. This loan from the public company is unsecured and subordinate to the senior debt provided by the banking consortium described in paragraphs 32 to 37 below. Under the terms of the agreement, interest on advances will be paid monthly at the one month Bank Rate (yield) plus XXXXXXXXXX%, at a rate estimated in the agreement to be XXXXXXXXXX%. At XXXXXXXXXX, the loan bore interest at a rate of XXXXXXXXXX%. Capital payments commenced in XXXXXXXXXX and, under renegotiated terms, are repayable in monthly instalments of not less than XXXXXXXXXX from XXXXXXXXXX.

Senior Debt

32. ZPML (as borrower) entered into an agreement with several lenders in Country G (collectively described as the "Country G banking consortium"), XXXXXXXXXX (as debt guarantor) and XXXXXXXXXX (as intercreditor agent) dated XXXXXXXXXX (the "Senior Debt"). This agreement records the common terms and conditions of various agreements that provide for various facilities to be made available to ZPML.

33. The Senior Debt ranks above all other debt in the Z group. It is secured in favour of the banks by all the assets of ZPML. Repayment of capital and/or interest to any other lender to the Z group, whether a lender in terms of the loan arrangements or for any other reason including any trade or other credit granted, may only be settled by Z group with the banks' consent while any amounts due to the banks, including interest, remain outstanding.

34. While the Senior Debt is outstanding, the Z group may not incur additional debt, acquire or dispose of assets or engage in activities outside the parameters of the establishment of the Z XXXXXXXXXX Project, or deviate from the planned development of the project, without the consent of the banks.

35. The Senior Debt comprises two, XXXXXXXXXX, tranches making up the total of XXXXXXXXXX. Tranche A of XXXXXXXXXX and Tranche B of XXXXXXXXXX. Both tranches were drawn upon simulatenously and, other than for interest determination, are regarded as a single loan.

36. Drawdown commenced on XXXXXXXXXX and monthly drawdowns continued until the final drawdown on XXXXXXXXXX. Interest on the Tranche A loan was capitalized to the loan balance until XXXXXXXXXX while interest on the Tranche B loan was capitalized until XXXXXXXXXX. The repayment schedule includes an element of principal and interest in each repayment instalment. The first instalment was made on XXXXXXXXXX. Semi-annual payments will be made after the first instalment until the final instalment on XXXXXXXXXX.

37. The interest rate in respect of Tranche A is fixed at XXXXXXXXXX % and in respect of Tranche B fluctuates with the prime lending rate in the Country G money market (XXXXXXXXXX% at XXXXXXXXXX). Total interest for the year to XXXXXXXXXX of XXXXXXXXXX was capitalized to the development cost of the project.

Stock Option Plans

38. The Stock Option Plan is administered by the board of directors of X Co., that approves the granting of options. The Stock Option Plan provides that subject to adjustment under its provisions, the aggregate number of shares of X Co. that may be issued and sold under the Stock Option Plan, at the "market price" calculated based on the prior day's closing price of the shares, will not exceed XXXXXXXXXX shares.

39. The Stock Option Plan contains a notice provision which is effective when the X Co. proposes to sell all or substantially all of its assets and undertaking under any circumstances which involve or may involve or require the liquidation of the corporation, a distribution of its assets among its shareholders, or the termination of the corporate existence of the corporation. Counsel to X Co. has advised that the Proposed Transactions will not cause the notice provisions of the Stock Option Plan to be applicable. Notwithstanding, X Co.'s management has determined that as a result of the Proposed Transactions, notice similar to that which is required under the Stock Option Plan should be provided. Therefore, if an option granted under the Stock Option Plan (an "Existing X Co. Stock Option") remains unexercised, X Co. shall use its best efforts to bring the Plan of Arrangement to the attention of the optionee as soon as practicable.

40. X Co. has entered into Employee Share Issue Agreements with XXXXXXXXXX of its employees. Under the terms of these Agreements, the employees are granted shares. In all but one case, the employees have the right to dispose of XXXXXXXXXX the shares granted to them at any time or from time to time after XXXXXXXXXX. The remaining XXXXXXXXXX shares granted may be disposed of at any time or from time to time after XXXXXXXXXX. In the case of one individual, XXXXXXXXXX of the shares granted may be disposed of at any time or from time to time after XXXXXXXXXX and the remaining XXXXXXXXXX after XXXXXXXXXX. Currently, XXXXXXXXXX shares have been issued under these Agreements, XXXXXXXXXX of which have already "vested", i.e. the employees have the right to dispose of them. Prior to the Proposed Transactions, X Co.'s Board of Directors intends on accelerating the "vesting" period of the remaining shares granted so that the employees will have the right to dispose of their shares.

Warrant Indenture

41. XXXXXXXXXX Series A Warrants are currently outstanding. The terms of the Series A Warrants as set out in the Share Purchase Warrant Indenture dated XXXXXXXXXX (the "Warrant Indenture"), entitle the holders thereof ("the Warrant Holders") to purchase for each Series A Warrant a common share of X Co. at a price of $XXXXXXXXXX on or before XXXXXXXXXX.

42. Subsection XXXXXXXXXX of the Warrant Indenture provides, inter alia, that on a transfer of substantially all the assets of X Co. to another corporation (described as a "Capital Reorganization"), any Warrant Holder who thereafter exercises his or her right to receive X Co. Common Shares pursuant to the Warrants shall be entitled to receive, and shall accept in lieu of the number of X Co. Common Shares to which such Warrant Holder was entitled, the aggregate number of shares, other securities or other property which they would have been entitled to receive as a result of such Capital Reorganization if, on the effective date or record date thereof, as the case may be, the Warrant Holder had been the registered holder of the X Co. Common Shares to which he or she was theretofore entitled upon exercise.

43. Section XXXXXXXXXX provides, inter alia, that in case of an arrangement or transfer of all or substantially all of the assets of X Co. assets to another person (described as a "Successor Company"), the Successor Company shall expressly assume, by supplemental indenture satisfactory in form to the Warrant Trustee and executed and delivered to the Warrant Trustee, the due and punctual performance and observance of each and every covenant and condition contained in the Indenture to be performed and observed by X Co.

44. Counsel had advised management that the transfer by X Co. to Y Co. of the XXXXXXXXXX assets will be a transfer of substantially all of the assets of X Co. for purposes of the Warrant Indenture and therefore Subsection XXXXXXXXXX and Section XXXXXXXXXX of the Warrant Indenture will apply on the Plan of Arrangement. As a result, the Warrant Holders who exercise Series A Warrants after the Plan of Arrangement will be entitled to receive the aggregate number and kind of securities which the Warrant Holder would have owned immediately after the Plan of Arrangement if the Warrant Holder had exercised the Warrant before the effective date of the Plan of Arrangement. Thus, upon exercise of the Series A Warrants following the Plan of Arrangement, the Warrant Holders should be entitled to both a X Co. and a Y Co. share. If a Warrant Holder, upon exercise of the Warrants, fails to receive Y Co. shares, the Warrant Holder may have a cause of action against X Co., and Amalco as the Successor Company. It is represented that the Series A Warrants are currently "under water" since the exercise price is significantly higher than the price on the XXXXXXXXXX.

Preliminary Transactions

The following steps will be carried out in order to facilitate the transfer pursuant to a Plan of Arrangement of the XXXXXXXXXX assets of X Co. to a new Canadian public corporation. These preliminary transactions are described in paragraphs 45 to 50 below.

45. X Co. will incorporate a new company under the laws of XXXXXXXXXX ("Hco).

46. X Co. will transfer all of the issued and outstanding shares of International Ltd. to Hco for shares of Hco.

47. International Ltd. will incorporate a new company under the laws of XXXXXXXXXX ("Pco").

48. International Ltd. will transfer all its XXXXXXXXXX assets to Pco in exchange for shares of Pco. "XXXXXXXXXX assets" include all the issued and outstanding shares of the subsidiaries of International Ltd. that hold XXXXXXXXXX assets and the loans receivable by International Ltd. from these companies, except the shares of Fco and any loans receivable by International Ltd. from Fco. International Ltd. and Pco will enter into an agreement on XXXXXXXXXX, (the "Fco Agreement") pursuant to which International Ltd. will agree to cause Fco to sell its XXXXXXXXXX properties to Gsubco, described in paragraph 80 below. The Fco Agreement will provide that pending the completion of the sale of XXXXXXXXXX properties to Gsubco, Pco will be entitled to conduct XXXXXXXXXX activities on the XXXXXXXXXX properties held by Fco. The agreement will require Pco to indemnify International Ltd. and Fco for the results of any activity of Pco on the properties, and will require Fco and International Ltd. to take all steps to maintain the properties in good standing.

49. International Ltd. will transfer all the issued and outstanding shares in Pco to Hco for a Canadian dollar denominated non-interest-bearing demand note equal to fair market value.

50. Hco will be wound-up.

PROPOSED TRANSACTIONS

51. X Co. will incorporate a new corporation under the provisions of the CBCA ("Newco"). The authorized share capital of Newco will consist of an unlimited number of common shares.

52. X Co. will transfer its XXXXXXXXXX% interest in the D XXXXXXXXXX JV, the shares of Pco and cash of approximately $XXXXXXXXXX to Newco and will receive as consideration shares in Newco. X Co. and Newco will jointly elect within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfers. The Agreed Amount for the D XXXXXXXXXX JV will be $XXXXXXXXXX and the Agreed Amount for the shares of Pco will be the lesser of adjusted cost base of the Pco shares to X Co. and the fair market value of the Pco shares at the time of the transfer. The amount of cash includes an amount of approximately $XXXXXXXXXX which is equal to the FMV of the XXXXXXXXXX properties held by Fco. Pursuant to the CBCA, the addition to the stated capital of Newco in respect of the issuance of the common shares of Newco to X Co. will not exceed the Agreed Amount under subsection 85(1) in respect of the properties transferred.

53. Concurrently with the transfer described in paragraph 52 above, each holder of Existing X Co. Stock Options will dispose of a portion of their respective rights under the Existing X Co. Options to each of X Co. and Newco in consideration for the issuance to the particular holder of New X Co. Stock Options and Newco Stock Options (collectively, the "New Options") in such a manner that:

(a) the particular holder receives no consideration for the disposition of Existing X Co. Stock Options other than the New Options;

(b) the aggregate In The Money Amount (Out Of The Money Amount) applicable to the New Options issued to a particular holder will not exceed (be less than) the aggregate In The Money Amount (Out Of The Money Amount) applicable to the Existing X Co. Stock Options that were the subject of the disposition by the particular holder. In calculating the In The Money Amount (Out Of The Money Amount) applicable to the Existing X Co. Stock Options, the FMV of the X Co. Common Shares will be computed as the weighted average trading price for the number of days before the time as may be allowed or required by the XXXXXXXXXX. For purposes of calculating the In The Money Amount (Out Of The Money Amount) applicable to the New Options, the FMV of the New X Co. Common Shares and Newco Common Shares will be computed as the weighted average trading price of those shares for the number of days after the time as may be allowed or required by the XXXXXXXXXX;

(c) the other terms and conditions of the New Options will parallel those of the Existing X Co. Stock Options; and

(d) the Existing X Co. Stock Options will be cancelled upon the foregoing transfers and the obligations of X Co. to issue stock options and Newco to issue stock options that arose as a result of the transactions above will be satisfied.

Y Co. Articles of Incorporation

54. A newly created corporation, "Y Co.", will be incorporated under the provisions of the CBCA. Prior to the transactions relating hereto, Y Co. will not have any assets or liabilities.

55. Y Co.'s Articles of Incorporation will provide that its authorized capital will include:

(a) Y Co. Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of Y Co.; and

(b) Y Co. Special Shares having the following attributes:

(i) each Y Co. Special Share will be redeemable, subject to applicable law, at any time at the option of Y Co. at an amount equal to the FMV of the Transferred Property divided by the number of Y Co. Special Shares issued as consideration therefor (the "Y Co. Redemption Amount");

(ii) each Y Co. Special Share will be retractable, subject to applicable law, at any time at the option of the holder at the Y Co. Redemption Amount;

(iii) the holder of each Y Co. Special Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of Y Co. from time to time, which dividend need not also be declared on any other class of shares of Y Co.;

(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of Y Co. if the resulting realizable value of the net assets of Y Co. after payment of the dividends would be less than the Y Co. Redemption Amount;

(v) for the purpose of subsection 191(4), the terms and conditions of the Y Co. Special Shares to be issued as described herein will, at the time of their issue specify an amount in respect of each Y Co. Special Share. The amount to be specified in respect of each Y Co. Special Share will:

A. be pursuant to a resolution of the board of directors of Y Co.;
B. be expressed as a dollar amount;
C. not be determined by a formula; and
D. not exceed the FMV of the property received by Y Co. in consideration for its issuance;

(vi) the holder of each Y Co. Special Share will be entitled, upon the liquidation, dissolution or winding-up of Y Co., to a payment in priority to all other classes of shares of Y Co. of an amount equal to the Y Co. Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and

(vii) the holder of each Y Co. Special Share will not be entitled to vote at meetings of shareholders of Y Co., other than as provided under the CBCA.

Reorganization of X Co. Share Capital

56. A "Management Information Circular" will be mailed to all holders of X Co. Common Shares in contemplation of a meeting of those shareholders to, inter alia, approve the proposed Plan of Arrangement. This document also will be filed with the XXXXXXXXXX requiring "prospectus level disclosure" regarding Y Co. and the Y Co. Shares and it also will be filed with the appropriate provincial Securities Administrators. There is no legal requirement for this document to be "accepted" by the XXXXXXXXXX or any other public authority in Canada.

57. Subject to, among other things, the appropriate shareholder and court approvals, the Proposed Transactions generally will be undertaken pursuant to the Plan of Arrangement. With the exception of the actual filing of elections under the Act, the transactions involving stock options and warrants, the public listing of Amalco Common Shares, the following Proposed Transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Transaction Date in the order set out below.

58. Each X Co. Shareholder will be entitled to dissent from the Plan of Arrangement pursuant to the provisions of the Plan of Arrangement. For the purposes of the transactions comprising the Plan of Arrangement, any Dissenting Shareholder who ultimately is entitled to be paid the FMV of its X Co. Common Shares will be deemed, under the Plan of Arrangement, to have transferred its X Co. Common Shares to X Co. and such shares will be deemed to have been cancelled by X Co., immediately prior to the Effective Date.

59. The Articles of Incorporation of X Co. will be amended to create two new classes of shares as follows:

(a) New X Co. Common Shares, each of which will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of X Co., the provisions of which will be slightly different than the Existing X Co. Common Shares, but which otherwise will have other terms which parallel the terms of the existing X Co. Common Shares; and

(b) X Co. Special Shares with the following attributes:

(i) each X Co. Special Share will be redeemable, subject to applicable law, at any time at the option of X Co. at an amount equal to the FMV of all X Co.'s issued and outstanding shares immediately prior to the Plan of Arrangement multiplied by the Transfer Percentage, then divided by the number of issued and outstanding X Co. Special Shares (the "X Co. Redemption Amount");

(ii) each X Co. Special Share will be retractable, subject to applicable law, at any time at the option of the holder at the X Co. Redemption Amount;

(iii) the holder of each X Co. Special Share will be entitled to a non-cumulative cash dividend as and when declared by the board of directors of X Co. from time to time, which dividend need not also be declared on any other class of shares of X Co.;

(iv) there will be a provision restricting the payment of dividends on other classes of shares so that no such dividends may be paid on any other class of shares of X Co. if the resulting realizable value of the net assets of X Co. after payment of the dividends would be less than the aggregate of the X Co. Redemption Amounts;

(v) for the purpose of subsection 191(4), the terms and conditions of the X Co. Special Shares to be issued as described herein will, at the time of their issue specify an amount in respect of each X Co. Special Share. The amount to be specified in respect of each X Co. Special Share will:

A. be pursuant to a resolution of the board of directors of X Co.;
B. be expressed as a dollar amount;
C. not be determined by a formula; and
D. not exceed the FMV of the property received by X Co. in consideration for its issuance;

(vi) the holder of an X Co. Special Share will be entitled, upon the liquidation, dissolution or winding-up of X Co., to a payment in priority to all other classes of shares of X Co., of an amount equal to the X Co. Redemption Amount to the extent of the amount or value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and

(vii) the holder of each X Co. Special Share will not be entitled to vote at meetings of shareholders of X Co., except as may be otherwise provided under the CBCA.

60. Each Participant will, in exchange for each X Co. Common Share held, receive one New X Co. Common Share and one X Co. Special Share (the "Capital Reorganization") and the X Co. Common Shares so exchanged will be cancelled.

61. The additions to the stated capital of the new X Co. Common Shares and the X Co. Special Shares will reflect the relative aggregate FMVs of such shares and, in the aggregate, will not exceed the aggregate PUC of the existing X Co. Common Shares immediately before the Capital Reorganization.

Transfer of X Co. Special Shares to Y Co.

62. The Y Co. Common Shares will be listed on the XXXXXXXXXX before the Effective Date.

63. Each Participant will transfer to Y Co. (the "Exchange") the X Co. Special Shares owned by such Participant and, in full consideration therefor, Y Co. will issue an identical number of Y Co. Common Shares. The certificates for the X Co. Special Shares which otherwise would be delivered to the Participants instead will be delivered directly to Y Co.

64. If requested by a particular Participant, Y Co. will execute a joint election under subsection 85(1) in respect of the disposition by that Participant of X Co. Special Shares for Y Co. Shares.

65. Pursuant to the CBCA, the addition to the stated capital of Y Co. in respect of the issuance of the Y Co. Common Shares will not exceed the aggregate paid-up capital of the X Co. Special Shares transferred to Y Co.

Transfer of Newco Shares to Y Co.

66. X Co. will transfer to Y Co. (the "Distribution") all the Newco shares at their FMV determined immediately before the transfer (the "Transferred Property").

67. Immediately after the transfer described in paragraph 66, the FMV of the Transferred Property will equal the proportion of the FMV of all the property of X Co. determined before the transfer, that:

(a) the aggregate FMV of the X Co. Special Shares owned by Y Co. immediately before the transfer, is of

(b) the aggregate FMV of all the issued and outstanding shares of X Co. immediately before the transfer.

68. As consideration for the Distribution, Y Co. will issue Y Co. Special Shares to X Co. which will have an aggregate redemption amount equal to the Y Co. Redemption Amount.

69. X Co. and Y Co. will jointly elect, in prescribed form and within the time determined under subsection 85(6), for the provisions of subsection 85(1) to apply to the transfer of the Transferred Property to Y Co. The Agreed Amount for each property that is a Transferred Property will be the lesser of (i) the ACB to X Co. of the property and (ii) the FMV of such property.

70. Pursuant to the CBCA, the addition to the stated capital of Y Co. in respect of the issuance of the Y Co. Special Shares to X Co. will not exceed the Agreed Amount under subsection 85(1) in respect of the Transferred Property.

Series A Warrants

71. Pursuant to the provisions of Subsection XXXXXXXXXX and Section XXXXXXXXXX of the Indenture, Y Co. as the Successor Company will expressly assume by way of supplemental indenture in the form satisfactory to the Warrant Trustee and executed and delivered to the Warrant Trustee, the obligation to issue the appropriate number of Y Co. Common Shares to Warrant Holders that within the exercise period for the Series A Warrants, notify X Co. that they are exercising their Warrants.

72. Upon the exercise of a Series A Warrant after the Transaction Date by a Warrant Holder, such Warrant Holder will receive one New X Co. Common Share and one Amalco Common Share for each Series A Warrant and $XXXXXXXXXX . The portion of the $XXXXXXXXXX that will be paid to Amalco for one Amalco Common Share will be that proportion of $XXXXXXXXXX equal to the Transfer Percentage. The balance of the $XXXXXXXXXX will be paid to X Co. for the New X Co. Common Share. The Amalco Common Shares will be provided to the Warrant Holder by X Co. acting as agent for Amalco, which as Successor Company under the terms of the Warrant Indenture and pursuant to the supplemental indenture, has the obligation to provide such shares to the Warrant Holders. X Co. will not acquire any beneficial ownership in the Amalco Common Shares.

Cross-Redemption

73. X Co. will redeem from Y Co. all of the X Co. Special Shares for an amount equal to the aggregate of the X Co. Redemption Amounts and will issue to Y Co. in consideration therefor the X Co. Redemption Note, being a demand promissory note with a principal amount equal to the aggregate of the X Co. Redemption Amounts. Y Co. will accept the X Co. Redemption Note as full and absolute payment of the X Co. Redemption Amounts with the risk of the note being dishonoured.

74. Y Co. will redeem from X Co. all of the Y Co. Special Shares for an amount equal to the aggregate of the Y Co. Redemption Amounts and will issue to X Co. in consideration therefor the Y Co. Redemption Note, being a demand promissory note with a principal amount equal to the aggregate of the Y Co. Redemption Amounts. X Co. will accept the Y Co. Redemption Note as full and absolute payment of the Y Co. Redemption Amounts with the risk of the note being dishonoured.

75. Each of the X Co. Redemption Note and the Y Co. Redemption Note will have interest payable only from the date of demand for payment by the holder to the date of payment of the amount owing under the particular note at a rate equal to the average monthly prime rate of a Canadian chartered bank.

Set-Off

76. X Co. will pay the principal amount of the X Co. Redemption Note by transferring to Y Co. the Y Co. Redemption Note which will be accepted by Y Co. in full payment of X Co.'s obligation. Y Co. will pay the principal amount of the Y Co. Redemption Note by transferring to X Co. the X Co. Redemption Note which will be accepted by X Co. in full payment of Y Co.'s obligation. The X Co. Redemption Note and the Y Co. Redemption Note both will thereupon be marked paid in full and cancelled.

Amalgamation of Newco with Y Co.

77. Newco will be amalgamated with Y Co. under subsection 184(1) of the CBCA (the "Amalgamation") to form Amalco in such manner that:

(a) all of the property (except amounts receivable from any predecessor corporation or shares of any predecessor corporations immediately before the merger) will become property of Amalco by virtue of the merger;

(b) all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the merger will become liabilities of Amalco by virtue of the merger; and

(c) no securities or other property will be issued on the Amalgamation and the Y Co. Common Shares will remain outstanding following the Amalgamation as Amalco Common Shares with a Stated Capital equal to the Stated Capital of the Y Co. Common Shares.

78. The Amalco Common Shares will continue to be listed for trading on the XXXXXXXXXX.

79. As part of the Amalgamation, Amalco will assume the obligations of X Co. and the Newco Stock Options will become Amalco Stock Options. Concurrent with the foregoing Amalgamation, each holder of Newco Stock Options will receive an equivalent number of new stock options granted by Amalco (the "Amalco Stock Options") in such manner that all Newco Stock Options are cancelled and

(a) the particular holder receives no consideration for the cancellation of Newco Stock Options other than Amalco Stock Options;

(b) the aggregate In The Money Amount (Out Of The Money Amount) applicable to the Amalco Stock Options issued to a particular holder will not exceed (be less than) the aggregate In The Money Amount (Out Of The Money Amount) applicable to the corresponding Newco Stock Options that were the subject of such cancellations; and

(c) the other terms and conditions of the Amalco Stock Options will parallel those of the Newco Stock Options.

SUBSEQUENT TRANSACTIONS

80. Pco will incorporate a subsidiary under the laws of XXXXXXXXXX ("Gsubco").

81. Pursuant to the Fco Agreement which was entered into on XXXXXXXXXX, Fco will sell its XXXXXXXXXX properties to Gsubco for their FMV, determined as of XXXXXXXXXX, which is estimated to be $XXXXXXXXXX and will receive cash as consideration.

ADDITIONAL INFORMATION

None of the shares of Y Co., X Co., Newco or Amalco is, or will be at any time during the implementation of the Proposed Transactions:

(i) the subject of any undertaking that is referred to in subsection 112(2.2) as a "guarantee agreement";

(ii) the subject of a dividend rental arrangement referred to in subsection 112(2.3), as that term is defined in subsection 248(1);

(iii) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(iv) issued for consideration that is or includes:

A. an obligation of the type described in subparagraph 112(2.4)(b)(i); or

B. any right of the type described in subparagraph 112(2.4)(b)(ii).

No property has or will become property of X Co or any corporation controlled by X Co in contemplation of and before the proposed distribution, except as described herein, and no liabilities have been, or will be, incurred or discharged by X Co or any corporation controlled by X Co in contemplation of the distribution except as described herein.

Except as specifically outlined herein, there is no expectation or intention of Y Co or anyone in the X Co group to dispose of any property in the foreseeable future, other than in the ordinary course of business.

None of Y Co or any member of the X Co group will be a corporation described in any of paragraphs (a) to (f) of the definition "financial intermediary corporation" in subsection 191(1).

Each of X Co and Y Co will have the financial capacity to honour, upon presentation for payment, the amount payable under the note issued by it as a part of the proposed transactions.

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" as those terms are defined in subsection 248(1).

PURPOSES OF THE PROPOSED TRANSACTIONS

82. X Co. considers that the "spin-off" of its XXXXXXXXXX businesses on the basis outlined above is in the best interests of the X Co. Shareholders. X Co. considers that the separation of its XXXXXXXXXX business on the one hand and its XXXXXXXXXX business on the other hand in such manner will enhance the ability of each of X Co. and Amalco to pursue its independent corporate objectives and strategies and will maximize the value to X Co. Shareholders of the XXXXXXXXXX businesses.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions, the purposes of the proposed transactions and the additional information and provided further that all of the proposed transactions are carried out as described above, and that all the relevant proposed transactions described will be legally effective, we rule as follows:

(A) With regard to the purchase by X Co. of existing X Co. Common Shares held by a Dissenting Shareholder as described in paragraph 58:

(a) subject to the application of subsection 55(2), the Dissenting Shareholder will be deemed by paragraph 84(3)(b) to have received a dividend equal to the amount by which any payment from X Co. to the Dissenting Shareholder in respect of the purchase of such person's shares exceeds the PUC of such shares immediately prior to their purchase;

(b) subsections 212(2) and 215(1) will apply (subject to the provisions of any applicable income tax convention) to require X Co. to withhold and remit 25% of the amount of any such dividend deemed to have been paid to a Dissenting Shareholder who is a non-resident person; and

(c) paragraph (j) of the definition of "proceeds of disposition" in section 54 will apply to exclude the amount of such deemed dividend from the proceeds of disposition of the X Co. Common Shares recognized by the Dissenting Shareholder as a result of the purchase of such shares by X Co. provided that the shares were held as capital property by the Dissenting Shareholder.

(B) The provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the disposition of each X Co. Common Share by each Participant for one New X Co. Common Share and one X Co. Special Share provided that:

(a) the particular Participant holds the X Co. Common Share as capital property; and

(b) the particular Participant and X Co. do not file an election under subsection 85(1) in respect of the particular share exchange,

such that:

(c) the cost of the New X Co. Common Shares and X Co. Special Shares received on the exchange by each particular Participant will be deemed by paragraph 86(1)(b) to be an amount equal to that portion of the aggregate ACB to the particular Participant, immediately before the exchange, of the X Co. Common Shares, that

(i) the FMV, immediately after the exchange, of the New X Co. Common Shares or the X Co. Special Shares, as the case may be, received by the particular Participant

is of

(ii) the FMV, immediately after the exchange, of all the shares of X Co. received by the particular Participant for the X Co. Common Shares; and
(d) pursuant to paragraph 86(1)(c), such Participant will be deemed to have disposed of the particular Participant's X Co. Common Shares for aggregate proceeds of disposition equal to the aggregate cost to the Participant of the New X Co. Common Shares and X Co. Special Shares received by it as determined in (c) above.

(C) Provided that a particular Participant who, immediately before the exchange of X Co. Special Shares for an identical number of Y Co. Common Shares:

(a) holds the X Co. Special Shares as capital property;

(b) deals at arm's length with Y Co. immediately before the exchange;

(c) does not file an election under subsection 85(1) with respect to the exchange; and

(d) does not include any portion of the gain or loss otherwise determined in computing income for that year;

and further provided that immediately after the exchange:

(e) no such Participant or persons with whom the Participant does not deal at arm's length, or the particular Participant together with any other person or persons with whom such Participant does not deal at arm's length, will

(i) control Y Co., or

(ii) beneficially own shares of Y Co. having a FMV of more than 50% of the FMV of all of the outstanding shares of Y Co.;

then pursuant to paragraph 85.1(1)(a) such Participant will be deemed:

(f) to have disposed of such X Co. Special Shares for proceeds of disposition equal to the ACB to such Participant of those shares immediately before the exchange; and

(g) to have acquired the Y Co. Common Shares at a cost to such person equal to the ACB to such Participant of such X Co. Special Shares immediately before the exchange.

(D) The cost to Y Co. of each X Co. Special Share acquired from each Participant will be deemed to be the lesser of its FMV immediately before the Exchange and the PUC of the X Co. Special Share immediately before the Exchange.

(E) Provided that the requisite elections are made in the prescribed form and within the prescribed time period, and provided that the property transferred is an eligible property within the meaning of subsection 85(1.1), subject to the application of subsection 69(11), the provisions of subsection 85(1) will apply to the transfer:

(a) by X Co. of its XXXXXXXXXX% interest in the D XXXXXXXXXX J.V. and the shares of Pco to Newco as described in paragraph 52;

(b) by X Co. of the Transferred Property to Y Co. as described in paragraph 0; and

(c) by any holder of X Co. Special Shares who elects pursuant to subsection 85(1) to the transfer of all such shares to Y Co. as described in paragraphs 0 and 0;

such that the agreed amounts in respect of each transfer will be deemed to be the proceeds of disposition for the particular transferred property to each transferor and the cost to each transferee for the particular transferred property.

(F) For the purposes of subparagraph (b)(iii) of the definition of PUC in subsection 89(1), the PUC of:

(a) the New X Co. Common Shares and X Co. Special Shares issued to the X Co. Shareholders as described in paragraph 60;

(b) the Y Co. Common Shares issued to holders of X Co. Special Shares exchanged therefor as described in paragraph 63;

(c) the Y Co. Special Shares issued to X Co. as described in paragraph 68; and

(d) the Amalco Common Shares issued in paragraph 77;

computed without reference to the Act will be equal to their stated capital as determined for purposes of the CBCA.

(G) Subsection 84(3) will apply:

(a) on the redemption, as described in paragraph 73, of the X Co. Special Shares owned by Y Co., to deem X Co. to have paid and Y Co. to have received; and

(b) on the redemption, as described in paragraph 74, of the Y Co. Special Shares owned by X Co., to deem Y Co. to have paid and X Co. to have received;

a dividend on such shares equal to the amount, if any, by which the aggregate amount paid upon such redemption exceeds the aggregate PUC in respect of such shares immediately before such redemption, and any such dividend:

(c) will be included, pursuant to subsection 82(1) and paragraph 12(1)(j), in computing the income of the corporation deemed to have received such dividend;

(d) will be deductible pursuant to subsection 112(1) by the corporation deemed to have received the dividend;

(e) will not be a dividend to which any of subsections 112(2.1), (2.2), (2.3) or (2.4) apply;

(f) will be excluded, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54, in determining the proceeds of disposition to the recipient corporation of the shares so redeemed;

(g) will not be subject to tax under Part IV; and

(h) will not be subject to tax under Parts IV.1 or VI.1.

(H) The provisions of subsection 112(3) will apply to reduce any loss which would otherwise be determined for the holder as a result of the redemption of shares.

(I) Provided that, as part of the series of transactions or events that includes the Proposed Transactions described above, 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 of X Co. in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(e) a distribution by X Co. 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 that the transaction described in paragraph 66 above is implemented; or

(f) a distribution by Y Co. or any other acquiror in relation to X Co. before the day that is three years after the date that the transaction described in paragraph 66 is implemented;

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 the rulings given in Ruling G above and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

(I.1) The cost to Y Co. of the X Co. Redemption Note and the cost to X Co. of the Y Co. Redemption Note will in each case, upon the issuance thereof, be equal to the principal amount of the particular note. Accordingly, no amount will be included in the income of Y Co. or X Co. upon payment of the principal amount of the particular note.

(J) The repayment of the X Co. Redemption Note held by Y Co. and the Y Co. Redemption Note held by X Co. as described in paragraph 76 will not, in and of itself, result in an income inclusion or the application of the provisions of section 80.

(K) Provided that the X Co. Common Shares constitute capital property to a particular Participant prior to the commencement of the Proposed Transactions, the Proposed Transactions will not, in and by themselves, cause the New X Co. Common Shares, the X Co. Special Shares, the Y Co. Common Shares and the Y Co. Special Shares to be received by that Participant as a result of the Proposed Transactions not to be capital property to that Participant.

(L) Upon the occurrence of the Amalgamation described in paragraph 77:

(a) the provisions of section 87 will apply in respect of Y Co., Newco and Amalco; and

(b) provided that the Y Co. Common Shares are held by a particular holder thereof as capital property, the provisions of subsection 87(4) (excluding paragraphs 87(4)(c) to (e)) will apply to such holder, such that the holder will be considered to have received Amalco Common Shares in consideration for the disposition by such holder of the Y Co. Common Shares and will be deemed to have disposed of such Y Co. Common Shares for proceeds equal to, and to have acquired the Amalco Common Shares at a cost equal to the ACB to the holder of such Y Co. Common Shares immediately before the Amalgamation.

(M) Control, for purposes of the Act, of X Co. will not be considered to be have been acquired by a person or group of persons by reason only of the Proposed Transactions.

(N) The Proposed Transactions, in and of themselves, will not result in the application of subsections 15(1), 56(2), 56(4) or 246(1).

(O) The provisions of subsection 7(1.4) will apply for the purposes of section 7 to the exchange of the Existing X Co. Stock Options that are subject to the provisions of subsection 7(1) for New X Co. Stock Options and Newco Stock Options as described in paragraph 53 provided that the aggregate In The Money Amount applicable to the New X Co. Stock Options and the Newco Stock Options does not exceed the aggregate In The Money Amount applicable to the Existing X Co. Stock Options that were the subject of the transfer by the particular holder with the result that for the purpose of section 7 and paragraph 110(1)(d):

(a) such holder of an Existing X Co. Stock Option will be deemed (other than for the purposes of subparagraph 7(9)(d)(ii)) not to have disposed of such option and not to have acquired a New X Co. Stock Option and a Newco Stock Option;

(b) such holder's New X Co. Stock Options and Newco Stock Options will be deemed to be the same as, and a continuation of such holder's Existing X Co. Stock Option; and

(c) Newco will be deemed to be the same person as, and a continuation of, X Co.

(P) The provisions of subsection 7(1.4) will apply in respect of the exchange of Newco Stock Options that are subject to the provisions of subsection 7(1) for Amalco Stock Options as described in paragraph 79 provided that the In The Money Amount applicable to the Amalco Stock Options does not exceed the In The Money Amount applicable to the Newco Stock Options that were the subject of the transfer by the particular holder with the result that for the purpose of section 7 and paragraph 110(1)(d):

(a) such holder of a Newco Stock Option will be deemed (except for the purposes of subparagraph 7(9)(d)(ii)) not to have disposed of such option and not to have acquired an Amalco Stock Option;

(b) such holder's Amalco Stock Option will be deemed to be the same as, and a continuation of such holder's existing Newco Stock Option; and

(c) Amalco will be deemed to be the same person as, and a continuation of, Newco.

(Q) Provided that:

(a) each share to be issued under the new stock option agreements described above is a prescribed share as defined in regulation 6204(1) at the time of its sale or issue, or would have been a prescribed share if it were issued or sold to the relevant taxpayer at the time the taxpayer disposed of rights under the relevant stock option agreement;

(b) the amount payable by the relevant taxpayer to acquire shares under the new stock option agreements (determined without reference to any change in the value of a currency other than Canada relative to Canadian currency after the agreement was made), is, with respect to any particular option grant, not less than the amount described in clause 110(1)(d)(iii)(A) with respect to that particular option grant; and

(c) the requirements of clause 110(1)(d)(iii)(B) are satisfied; then
the relevant taxpayer will be entitled to a deduction as contemplated under paragraph 110(1)(d) in respect of the amount of any benefit deemed by subsection 7(1) to have been received by the taxpayer in the year in respect of a share that was issued under the new stock option agreements described above or in respect of the transfers or other dispositions of rights under any of the new stock option agreements.

(R) A Warrant Holder as described above will not be considered to

(a) have disposed of any Series A Warrants that remain outstanding at the Transaction Date, or

(b) have realized a benefit under subsection 15(1)

as a result of the execution by Y Co. and the subsequent assumption by Amalco of Y Co.'s obligations of the supplemental indenture described above, in and by itself.

(S) Subsection 245(2) will not be applied to the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2003, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

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

COMMENTS

Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

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

(b) any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given above. In particular, we are not commenting on the tax consequences of the Preliminary Transactions described in paragraphs 45 through 50 above.

Yours truly,

XXXXXXXXXX
Manager
Corporate Reorganizations Section 1
Reorganizations and Resources Division
Income Tax Rulings Directorate