2004 Ruling 2004-0088271R3 - Split-Up 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 butterfly.

Position: Meets requirements.

XXXXXXXXXX 2004-008827

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("DC")
XXXXXXXXXX ("Holdco1")
XXXXXXXXXX ("Holdco2")
XXXXXXXXXX ("Holdco3")
Advance Income Tax Ruling Request

We are writing in response to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided in subsequent correspondence and various telephone conversations. You have advised us that to the best of your knowledge and that of the taxpayers involved none of the issues involved in this ruling request are:

(i) in an earlier return of the taxpayers or related persons;

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

(iii) under objection by the taxpayers or related persons;

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

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

DEFINITIONS

In this letter the following terms have the meanings specified:

(a) "A" means XXXXXXXXXX;

(b) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter and, unless otherwise expressly stated, every reference herein to a part, section or subsection, paragraph or subparagraph;

(c) "adjusted cost base" ("ACB") has the meaning assigned by section 54 and subsection 248(1);

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

(e) "B" means XXXXXXXXXX;

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

(g) "C" means XXXXXXXXXX;

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

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

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

(k) "corporate capital" has the meaning assigned by the BCA;

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

(m) "D" means XXXXXXXXXX;

(n) "depreciable property" has the meaning assigned by subsection 13(21);

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

(p) "distribution" has the meaning assigned by subsection 55(1);

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

(r) "E" means XXXXXXXXXX;

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

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

(u) "ESP" means the employee stock option plan established by Opco2 on XXXXXXXXXX;

(v) "FMV" ("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, expressed in terms of cash;

(w) "Holdcos" means Holco1, Holdco2 and Holdco3, collectively;

(x) "Investors" means XXXXXXXXXX;

(y) "LSVCC" means a prescribed labour sponsor venture capital corporation described under Regulation 6701(e);

(z) XXXXXXXXXX;

(aa) "Opco1" means Opco1 XXXXXXXXXX;

(bb) "Opco2" means XXXXXXXXXX;

(cc) "Opcos3" means the group of companies comprised of XXXXXXXXXX;

(dd) "paid-up capital" ("PUC") has the meaning assigned by subsection 89(1);

(ee) "private corporation" has the meaning assigned by subsection 89(1);

(ff) "proceeds of disposition" has the meaning assigned by section 54;

(gg) "refundable dividend tax on hand" ("RDTOH") has the meaning assigned by subsection 129(3);

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

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

(jj) "series of transactions or events" includes the related transactions or events referred to in subsection 248(10);

(kk) "short-term preferred share" has the meaning assigned by subsection 248(1);

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

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

(nn) "Subco1" means XXXXXXXXXX;

(oo) "Subco2" means XXXXXXXXXX;

(pp) "Subco3" means XXXXXXXXXX;

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

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

(ss) "taxable preferred share" has the meaning assigned by subsection 248(1);

(tt) "TrustA" means the XXXXXXXXXX, a Canadian resident discretionary trust, the beneficiaries of which are C, his spouse, XXXXXXXXXX, and their children and issue. XXXXXXXXXX is the sole trustee of TrustA;

(uu) "TrustB" means the XXXXXXXXXX, a Canadian resident discretionary trust, the beneficiaries of which are D, his spouse from time to time and his children and issue. D is the sole trustee of TrustB; and

(vv) "USSub" means XXXXXXXXXX.

FACTS

1. Each of the Holdcos is a taxable Canadian corporation and a CCPC governed by the BCA. Each of the Holdcos is an investment holding company, the primary assets of which are their respective shares in the capital of DC.

2. Holdco1's issued share capital consists of XXXXXXXXXX common shares of which XXXXXXXXXX are owned by A and XXXXXXXXXX are owned by B. A and B are married to each other. The head office of Holdco1 is located at XXXXXXXXXX It files its income tax returns with the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO.

3. Holdco2's issued share capital consists of XXXXXXXXXX class A non-voting common shares and XXXXXXXXXX class B voting common shares. Holdco2's class A shares are entitled to receive dividends and to participate in the net assets of Holdco2 on liquidation. Holdco2's class B shares carry no economic rights other than a right to return of capital on liquidation. Holdco2's class B shares are held by C and Holdco2's class A shares are held by TrustA. The head office of Holdco2 is located at XXXXXXXXXX. It files its income tax returns with the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO.

4. Holdco3's issued share capital consists of one class A voting common share, XXXXXXXXXX class B non-voting common shares, XXXXXXXXXX class C non-voting common shares and XXXXXXXXXX class D preferred shares. Holdco3's class A shares carry no economic rights other than a right to return of capital on liquidation. Holdco3's class B and C shares are entitled to receive dividends and to participate in the net assets of Holdco3 on liquidation. Holdco3's class D preferred shares are non-voting and redeemable or retractable for a fixed amount. D holds the class A common share and XXXXXXXXXX class B common shares. E holds XXXXXXXXXX class B common shares. D and E are married to each other. TrustB holds the XXXXXXXXXX class C common shares and the XXXXXXXXXX class D preferred shares. The head office of Holdco3 is located at XXXXXXXXXX. It files its income tax returns with the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO.

5. DC is a taxable Canadian corporation and a CCPC governed by the BCA. DC is a holding company whose assets include its shares in a number of operating subsidiaries, Opco1, Opco2 and the companies comprising Opcos3. The issued share capital of DC consists of XXXXXXXXXX class A common shares, XXXXXXXXXX class B common shares and XXXXXXXXXX class C common shares. All classes of DC's common shares are entitled to one vote per share, are entitled to dividends and are entitled to participate equally in the net assets of DC on liquidation. Dividends may be paid on one class of DC common shares to the exclusion of the other classes. DC's class A shares are owned by Holdco1, its class B shares are owned by Holdco2, and its class C shares are owned by Holdco3. The head office of DC is located at XXXXXXXXXX. It files its income tax returns with the XXXXXXXXXX TC and deals with the XXXXXXXXXX TSO.

6. Opco1 and Subco1 are taxable Canadian corporations and CCPCs. USSub is a US corporation. All of Opco1's issued shares are held by DC, all of Subco1's issued shares are held by Opco1, and all of USSub's issued shares are held by Subco1. XXXXXXXXXX.

7. Opco2 is a taxable Canadian corporation and a CCPC. Opco2's business is XXXXXXXXXX. Opco2 carries on its business in most provinces. Opco2's issued capital consists of XXXXXXXXXX class A common shares, all of which are held by DC. Opco2's class A common shares are ordinary voting, participating common shares. Opco2's class B shares (none of which are issued) are ordinary voting, participating common shares. No dividends may be declared or paid on either the class A or class B shares unless a dividend of an equal amount per share is declared and paid on both classes of shares.

8. Subco2 is a taxable Canadian corporation and a CCPC. Subco2 carries on a finance business, which involves the financing of XXXXXXXXXX. Subco2 is a wholly-owned subsidiary of Opco2.

9. Subco3 is a taxable Canadian corporation and a CCPC. Subco3's business is marketing on behalf of Opco2 in XXXXXXXXXX. It was incorporated in XXXXXXXXXX. Subco3's issued share capital consists of XXXXXXXXXX class A common shares and XXXXXXXXXX class B common shares. Subco3's class A common shares are voting participating common shares. Subco3's class B shares are voting participating common shares and carry a special right of exchange, entitling the holder to redeem all of the class B common shares of Subco3 held in exchange for an equal number of class B shares of Opco2. No dividends may be declared or paid on either the class A or class B shares unless a dividend of an equal amount per share is declared and paid on both classes of shares. All of Subco3's class A common shares are held by Opco2. Subco3's class B common shares are held by the Investors. As described below in paragraph 10, the Investors have the right to subscribe for an additional XXXXXXXXXX class B common shares of Subco3 on or before XXXXXXXXXX. Expressed in terms of a percentage of equity in Subco3, Opco2's shares currently represent approximately XXXXXXXXXX % of the Subco3 equity (votes, participation rights and value) and the Investors' shares represent approximately XXXXXXXXXX%. Fully subscribed, the Investors' shares would represent approximately XXXXXXXXXX% of the Subco3 equity (votes, participation rights and value).

10. The Investors are taxable Canadian corporations and LSVCCs governed by the XXXXXXXXXX. The Investors' shares are widely held among members of the public either directly or through registered retirement savings plans. The Investors acquired their interests in Subco3 on XXXXXXXXXX. The following transactions occurred on that day:

(a) the Investors subscribed for approximately XXXXXXXXXX class B shares of Subco3 for $XXXXXXXXXX;

(b) the Investors lent $XXXXXXXXXX to Subco3 under the terms of a subordinated debenture issued by Subco3;

(c) the Investors advanced $XXXXXXXXXX to Subco3 under the terms of a convertible promissory note. This note will mature (and be repayable) if certain business performance milestones are not met by XXXXXXXXXX. If the business performance milestones are met (or if the Investors so elect), the convertible promissory note will be converted into another subordinated debenture (or debentures) of Subco3 with a principal of $XXXXXXXXXX and into XXXXXXXXXX class B shares of Subco3;

(d) Opco2 granted two options to Subco3 under which Subco3 is entitled to acquire class B shares of Opco2. The options were granted to Subco3 to support the right of exchange in the Subco3 class B shares issued to the Investors. The issue price of the first option was $XXXXXXXXXX and it gives Subco3 the right to acquire XXXXXXXXXX class B shares of Opco2. The exercise price under the first option is $XXXXXXXXXX. The issue price of the second option is $XXXXXXXXXX and it gives Subco3 the option to acquire XXXXXXXXXX class B shares in the capital of Opco2. The exercise price under the second option is $XXXXXXXXXX. If the convertible promissory note is not converted into class B common shares and additional subordinated debentures of Subco3 prior to its maturity date, then the purchase price of the second option will not be paid and the second option will not operate; and

(e) Opco2 and the Investors entered into a put call agreement under which either party may, subject to certain conditions, require that any Opco2 class B shares which may be held by the Investors be exchanged with Opco2 for Opco2 class A shares at a specified exchange rate. The Investors can make the exchange at any time at which they hold Opco2 class B shares. Opco2 can make the exchange only if it has completed a qualified initial public offering of its class A shares to the public.

If the Investors:

(a) convert the convertible promissory note and therefore acquire an additional approximately XXXXXXXXXX Subco3 class B shares; and

(b) redeem their Subco3 class B shares for approximately XXXXXXXXXX Opco2 class B shares;

then they will hold approximately XXXXXXXXXX% of Opco2's equity (votes, participation rights and value). If the Investors then exchanged their Opco2 class B shares for Opco2 class A shares under the put call agreement, then they will hold approximately XXXXXXXXXX% of Opco2's equity (votes, participation rights and value).

11. On XXXXXXXXXX, Opco2 formally adopted the ESP allowing for options to be granted, at the discretion of Opco2's directors to Opco2's employees, to acquire class A common shares of Opco2. Up to XXXXXXXXXX of Opco2's class A common shares may be subscribed for under the ESP. To date no options or shares have been issued under the ESP though commitments to issue options to acquire approximately XXXXXXXXXX shares have been made. If fully subscribed, the Opco2 shares available under the ESP would represent less than 10% of the issued and outstanding Opco2 shares on a fully diluted basis.

12. On XXXXXXXXXX, Opco2 paid a dividend of $XXXXXXXXXX to DC. On XXXXXXXXXX, DC paid $XXXXXXXXXX in dividends to the Holdcos.

13. Each of the companies comprising Opcos3 is a taxable Canadian corporation and a CCPC. The Opcos3 carry on a XXXXXXXXXX business, which involves XXXXXXXXXX. Each of the companies comprising Opcos3 is a wholly-owned subsidiary of DC.

14. None of DC, Opco1, Opco2, Opcos3, Subco1, Subco2, Subco3 or USSub has acquired any property in contemplation of the proposed transactions. The transactions in XXXXXXXXXX involving the Investors, Opco2 and Subco3 were not undertaken in contemplation of the proposed transactions and would have taken place regardless of whether the proposed transactions were undertaken. The dividends described in paragraph 12 above were not paid in contemplation of the proposed transactions, would have been paid regardless of whether the proposed transactions were undertaken, and the proposed transactions would have been undertaken regardless of whether or not those dividends were paid.

PROPOSED TRANSACTIONS

15. Opco2 will distribute any inter-company debts owed to it by Subco1, Opco1 or Opcos3 to DC as dividends-in-kind.

16. DC will incorporate a new company ("NewHoldco") under the BCA. NewHoldco will be a taxable Canadian corporation and a private corporation. The authorized share capital of NewHoldco will be:

(a) an unlimited number of class A voting common shares;

(b) an unlimited number of class B voting common shares; and

(c) an unlimited number of class C voting common shares.

The class A, B and C common shares of Holdco will be without par value and will each be entitled to dividends at the discretion of the directors and will participate equally with each other on a winding up. The rights and restrictions will provide that dividends may be declared and paid on one or more of the class A, B and C shares to the exclusion of the other class or classes.

17. DC will transfer all of its shares of, and debts owed to it by, the companies comprising Opcos3, as well as all other property owned by it (excepting only its interests in Opco1, Opco2, and their subsidiaries) to NewHoldco in exchange for the assumption by NewHoldco of all liabilities of DC and XXXXXXXXXX class A common shares, XXXXXXXXXX class B common shares and XXXXXXXXXX class C common shares of NewHoldco.

DC and NewHoldco will jointly elect, under subsection 85(1), in prescribed form and within the time referred to in subsection 85(6), with respect to the transfer of each eligible property to NewHoldco by DC. The elected amount will be DC's cost amount of the transferred property which will be less than, or equal to, its FMV and which will be less than the liabilities assumed.

The PUC of the new shares issued by NewHoldco will equal the total of the cost amounts of the property transferred by DC, less any liabilities assumed.

18. Opco1 and Subco1 will be amalgamated to form a single corporation under section 273 of the BCA ("Amalco") such that

(a) all of the property (except amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of Opco1 and Subco1 immediately before the amalgamation will become property of Amalco by virtue of the amalgamation;

(b) all of the liabilities (except amounts payable to any predecessor corporation) of Opco1 and Subco1 will become liabilities of Amalco by virtue of the amalgamation; and

(c) all of the shareholders (except any predecessor corporation), who owned shares of the capital stock of any predecessor corporation immediately before the merger, will receive shares of the capital stock of Amalco because of the amalgamation.

19. Amalco will be a taxable Canadian corporation and a private corporation. Subsequent to the formation of Amalco, the authorized share capital of Amalco will be amended to authorize:

(a) an unlimited number of class A voting common shares;

(b) an unlimited number of class B voting common shares; and

(c) an unlimited number of class C voting common shares.

The class A, B and C common shares of Amalco will be without par value and will each be entitled to dividends at the discretion of the directors and will participate equally with each other on a winding up. The rights and restrictions on the shares will provide that dividends may be declared and paid on one or more of the class A, B and C shares to the exclusion of the other class or classes

20. All of the existing issued shares of Opco1 will be exchanged by DC for XXXXXXXXXX class A, XXXXXXXXXX class B and XXXXXXXXXX class C common shares of Amalco. The aggregate FMV of the Amalco shares issued and outstanding immediately after the amalgamation will be equal to the aggregate FMV of all the shares of Opco1 and Subco1 that were issued and outstanding immediately before the amalgamation. The PUC of the new shares issued by Amalco on the reorganization of capital will equal the total PUC of all the shares of Opco1 that were issued and outstanding immediately before the amalgamation.

21. Holdco1 will incorporate Transferee1 under the BCA and Holdco2 will incorporate Transferee2 under the BCA. The authorized share structure of Transferee1 and Transferee2 will each include:

(a) an unlimited number of common shares without par value which will be voting, entitled to dividends in the discretion of the directors and which will participate in all surplus on a winding up; and

(b) XXXXXXXXXX redeemable, retractable, preferred shares without par value which will be voting, conditionally entitled to dividends and entitled to a preference on liquidation for an amount equal to their redemption/retraction amount.

For the purposes of subsection 191(4) of the Act, the terms and conditions of the preferred shares will specify an amount in respect of each share for which the share is to be redeemed, acquired or cancelled. The amount specified in respect of each share, at the time of the issuance thereof, will be expressed as a fixed dollar amount that will not be determined by formula or subject to change thereafter and will not exceed the FMV of the consideration for which the share is issued. None of the preferred shares of Transferee1 or Transferee2 will be issued for consideration that includes a taxable preferred share.

22. Holdco1 will transfer all of its class A common shares of DC to Transferee1 in exchange for XXXXXXXXXX common shares of Transferee1 having an aggregate FMV equal to the FMV of the class A common shares of DC transferred by Holdco1 to Transferee1.

Holdco1 and Transferee1 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply with respect to the shares transferred by Holdco1 to Transferee1. The agreed amount specified in the election will be equal to the ACB of the transferred shares which will be equal to, or less than, their FMV. The amount to be added to the corporate capital of the common shares of Transferee1 will equal the total of the elected amounts under section 85 in respect of the transferred shares.

23. Holdco2 will transfer all of its class B common shares of DC to Transferee2 in exchange for XXXXXXXXXX common shares of Transferee2 having an aggregate FMV equal to the FMV of the class B common shares of DC transferred by Holdco2 to Transferee2.

Holdco2 and Transferee2 will jointly elect, in prescribed form and within the time referred to in subsection 85(6), to have the rules in subsection 85(1) apply with respect to the shares transferred. The agreed amount specified in the election will be equal to the ACB of the transferred shares which will be equal to, or less than, their FMV. The amount to be added to the corporate capital of the common shares of Transferee2 will equal the total of the elected amounts under section 85 in respect of the transferred shares.

24. Immediately prior to the transfers of property described in paragraphs 25 and 26 below, the property of DC will be classified into three types of property (on a gross fair market value basis), for the purposes of the definition of "distribution" in subsection 55(1), as follows:

(a) cash or near-cash property, comprising of all the current assets of DC;

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

(c) business property, comprising all of the assets of DC, other than property described in (a) and (b) above, any income from which would, for the purposes of the Act, be income from a business (other than a specified investment business).

For the purposes of the proposed transactions, any tax accounts or other tax related amounts, such as loss carry-forwards, capital dividend account and refundable dividend tax on hand, will not be considered as property of DC.

The only property that DC will own immediately before the proposed distribution is its shares in and amounts owing to it by Amalco, Opco2 and NewHoldco, which could be classified as investment property or business property. DC has significance influence over Amalco, Opco2 and NewHoldco. Consequently, DC would be required to use the consolidated look-through method for determining the appropriate proportion of each of the three types of property that the shares of Amalco, Opco2 and NewHoldco would represent. However, since Transferee1 and Transferee2 will each receive its pro-rata share of the shares of and amounts owed by Amalco, Opco2 and NewHoldco held by DC (and DC will retain Holdco3's pro-rata share of such shares), the determination using the consolidated look-through method will not actually be undertaken for the purposes of the proposed transactions.

25. Immediately following the classification of DC's three types of property as described in paragraph 24 above, DC will transfer all of its class A common shares in the capital of Amalco and NewHoldco together with XXXXXXXXXX% of its shares of Opco2 and XXXXXXXXXX% of amounts owing to it by any of its subsidiaries to Transferee1. In exchange, Transferee1 will issue to DC XXXXXXXXXX preferred shares in its capital having a redemption amount equal to the FMV of the transferred assets.

26. At the same time as the transfer described in paragraph 25 above, DC will transfer all of its class B common shares in the capital of Amalco and NewHoldco together with XXXXXXXXXX% of its shares of Opco2 and XXXXXXXXXX% of any amounts owing to it by any of its subsidiaries to Transferee2. In exchange, Transferee2 will issue to DC XXXXXXXXXX preferred shares in its capital having a redemption amount equal to the FMV of the transferred assets.

27. Immediately following the transfers described in paragraphs 25 and 26 above, the FMV of each type of property transferred to each of Transferee1 and Transferee2, as the case may be, will be equal to or will approximate that proportion of the FMV of that particular type of property of DC immediately before such transfers of property described herein that:

(a) the aggregate FMV, immediately before the transfer, of all of the DC shares owned by Transferee1 and Transferee2 at that time, as the case may be, is of

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

For the purposes of this paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the FMV of each type of property which each of Transferee1 and Transferee2 will receive as compared to what each such recipient corporation would have received had each such corporation received its appropriate pro-rata share of the FMV of that type of property.

28. Each of Transferee1 and DC and Transfere2 and DC, as the case may be, will jointly elect in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to the transfer of the shares of Amalco, Opco2 and NewHoldco (such property being eligible property) received by Transferee and Transferee2, as the case may be, from DC. The agreed amount for the purposes of each such election will be equal to the ACB to DC immediately before the transfer of the shares transferred to Transferee1 and Transferee2, as the case may be. For greater certainty, such agreed amount will not be less than the lesser of the two amounts specified in subparagraph 85(1)(c.i) nor will such amount exceed the amount permitted under paragraph 85(1)(c), nor will it be less than the amount permitted under paragraph 85(1)(b).

29. The amount to be added to the respective corporate capital account maintained for the preferred shares issued by Transferee1 and Transferee2, as the case may be, as consideration for the shares transferred by DC as described in paragraphs 25 and 26, will equal the amount by which the PUC attributable to the number of shares of Amalco, Opco2 and NewHoldco transferred to Transferee1 and Transferee2, as the case may be, exceeds the amount of the liabilities of DC assumed by them, as described in paragraphs 25 and 26 above. For greater certainty, the respective corporate capital addition for such shares will not exceed the maximum amount that could be added to the PUC of the shares, having regard to subsection 85(2.1).

30. Transferee1 and Transferee2 will each redeem the preferred shares held by DC and will each issue to DC, in full payment of the aggregate redemption price payable therefor, a demand, non-interest bearing, Canadian dollar denominated, promissory note having a principal amount and FMV equal to the redemption amount of the preferred shares so redeemed.

31. DC will repurchase the class A and class B common shares held by Transferee1 and Transferee2, respectively, and will issue to each of Transferee1 and Transferee2, in full payment therefor, a demand, non-interest bearing, Canadian dollar denominated, promissory note having a principal amount and FMV equal to the FMV of the class A or class B common shares, as the case may be, repurchased.

32. The obligations of DC and Transferee1 to each other under the promissory notes issued on the share redemptions and repurchases will be set off against each other as payment in full of such notes and the notes will be cancelled. The obligations of DC and Transferee2 to each other under the promissory notes issued on the share redemptions and repurchases will be set off against each other as payment in full of such notes and the notes will be cancelled.

33. DC will enter into a voluntary liquidation and will distribute all of its assets to Holdco 3 and will be dissolved. Transferee1 and Transferee2 will each enter into a voluntary liquidation and will distribute all of their assets to Holdco1 and Holdco2, respectively, and will be dissolved.

ADDITIONAL INFORMATION

34. None of DC, Transferee1 or Transferee2 will have any balance in their RDTOH account at the end of their respective taxation years in which they redeem or repurchase the shares in their capital which are redeemed or repurchased in the course of the proposed transactions.

35. None of the proposed transactions will have any impact on outstanding tax liabilities, if any, of any of the taxpayers referred to in this ruling request.

36. No liabilities have been incurred by, and no assets have been acquired by or disposed of by DC or any predecessor thereof in contemplation of the proposed transactions described herein. Except as described in this letter, no liabilities will be incurred by, and no assets will be acquired by or disposed of by DC in contemplation of the proposed transactions described herein. No property of DC that is transferred pursuant to the proposed transactions described herein will be transferred to any other person as part of a series of transactions that includes the proposed transactions described herein.

37. None of DC or the Transferees will, at the time the proposed transactions described herein are implemented, be an SFI or a restricted financial institution.

38. None of the shares in the capital of DC, Transferee1 or Transferee2 will be at any time during the implementation of the proposed transactions described herein:

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

(b) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

(c) the subject of a "dividend rental arrangement" as that term is defined in subsection 248(1).

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to achieve a rationalized and simplified legal organization under which the three separate lines of business (those of Opco2 (XXXXXXXXXX), Amalco (XXXXXXXXXX) and the companies comprising Opcos3 (XXXXXXXXXX)) are each held through companies owned directly by the private holding companies. The purpose of the transfer of inter-corporate debt described in paragraph 15 above is to clean up the structure, eliminating any debt owing from one chain of companies to the other. New holding companies were chosen to receive the distributions, rather than the existing Holdcos, because it is simpler to create a new holding company with the appropriate share capital than to amend the share capital of the existing Holdcos and it reduces the number of signatories required.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Provided that the each respective transferor and transferee jointly file an election pursuant to subsection 85(1) in the prescribed form and manner and within the time specified in subsection 85(6), the provisions of subsection 85(1) will apply to the transfers of property described in paragraphs 17, 22, 23, 25 and 26, such that the agreed amount in respect of each such transfer will be deemed to be the transferor's proceeds of disposition and the transferee's cost of such property, as the case may be, pursuant to section 85.

B. The provisions of subsection 84(3) will apply to:

(a) the redemption by Transferee1 and Transferee2, respectively, of their preferred shares held by DC, as described in paragraph 30, such that Transferee1 and Transferee 2 will each be deemed to have paid and DC will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on each such redemption exceeds the PUC attributable to the shares immediately before the redemptions; and

(b) the purchase for cancellation by DC of its class A and class B common shares owned by Transferee1 and Transferee2, respectively, as described in paragraph 31, such that DC will be deemed to have paid and each of Transferee1 and Transferee2, as the case may be, will be deemed to have received a dividend at that time on such shares equal to the amount, if any, by which the amount paid on the purchase for cancellation exceeds the PUC attributable to shares immediately before each purchase.

C. To the extent that each deemed dividend referred to in ruling B above is a taxable dividend, such dividend shall be:

(a) included in the particular recipient's income pursuant to section 82 and paragraph 12(1)(j);

(b) deductible by the particular recipient in calculating its taxable income pursuant to subsection 112(1) and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3), and (2.4);

(c) excluded from the particular recipient's determination of proceeds of disposition of such shares being redeemed or purchased for cancellation pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(d) will reduce any loss arising from the purchase or redemption of those shares pursuant to subsection 112(3);

(e) not be subject to tax under subsection 186(1), except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

(f) not be subject to tax under Part IV.1 and Part VI.1 of the Act.

D. Provided that, as part of the series of transactions or events that includes the proposed transactions, 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 property in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

(e) an acquisition of property in the circumstances described in paragraph 55(3.1)(d);

which has not been described herein, by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in ruling B above, and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

E. The settlement of the promissory notes as described in paragraph 32 above will not give rise to a "forgiven amount" within the meaning of subsection 80(1) or 80.01(1).

F. The provisions of section 87 will apply to the amalgamation of Opco1 and Subco1 to form Amalco as described in paragraph 18 above.

G. Provided that DC holds its shares in Opco1 as capital property, the provisions of subsection 86(1) will apply, and the provisions of subsection 86(2) will not apply, to the exchange of Opco1 shares for new class A, B, and C common shares in the capital of Amalco, as described in paragraph 20 above, such that:

(a) the cost of each of the class A, B, and C common shares received by DC on the exchange will be deemed by paragraph 86(1)(b) to be an amount equal to that proportion of the aggregate ACB to DC, immediately before the exchange, of the Opco1 shares held by such holder, that:

(i) the FMV, immediately after the exchange, of the class A, B, and C common shares, as the case may be, received by DC
is of
(ii) the FMV, immediately after the exchange, of all of the shares in the capital of Amalco received by DC; and

(b) pursuant to paragraph 86(1)(c), DC will be deemed to have disposed of its Opco1 shares for aggregate proceeds of disposition equal to the aggregate cost to DC of the class A, B, and C common shares received by DC, as determined in (a) above.

H. The provisions of subsection 88(1) will apply to the liquidations of DC, Transferee1 and Transferee2, as described in paragraph 34 above.

I. The provisions of subsections 15(1), 56(2) and 246(1) will not apply to the proposed transactions, in and by themselves.

J. As a result of the proposed transactions described herein, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given.

The Rulings given are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

COMMENTS

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

(a) the application of subsection 55(2) to the dividends described in paragraph 12 above;

(b) the determination of the ACB, paid-up capital or FMV of any shares or other property referred to herein; or

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

Yours truly,

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