2005 Ruling 2005-0112211R3 - Supplemental Ruling - 2004-010159

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: Changes to the facts and proposed transactions described in the advance income tax ruling no. 2004-010159.

Position: Confirmation that, subject to the conditions, limitations, qualifications and comments set out therein, the original ruling no. 2004-010159 will continue to be binding on the CRA.

XXXXXXXXXX 2005-011221

XXXXXXXXXX , 2005

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling 2004-010159

This is in reply to your letters of XXXXXXXXXX in which you advised us of certain changes to the facts and proposed transactions described in the advance income tax ruling number 2004-010159 dated XXXXXXXXXX, 2004 (the "Ruling").

As a result of your letters, the following amendments are made to the Ruling:

Paragraph 13 of the Ruling is changed to read as follows:

13. On XXXXXXXXXX , Opco and Parentco entered into a letter of intent setting out their understanding with respect to the proposed terms of a transaction. Since XXXXXXXXXX, Opco and Parentco were negotiating the Sale Transaction and the terms of the Asset Purchase Agreement ("APA"). The APA was finally signed by the parties on XXXXXXXXXX.

The first sentence of Paragraph 14 of the Ruling is changed to read as follows:

14. At the end of XXXXXXXXXX or at the beginning of XXXXXXXXXX, Opco will issue a Management Information Circular inviting Opco Shareholders to attend the annual and special meeting of the shareholders.

Paragraph 15 of the Ruling is changed to read as follows:

15. The APA provides that AcquisitionCo, a wholly-owned subsidiary of Parentco, will acquire all of the assets of Opco related to the Business other than those related to the B Program (the "Purchased Assets"). The initial objective of Opco's management was to include the B Program in the Sale Transaction. However, Parentco was unwilling to acquire this program.

The purchase price for the Purchased Assets will be (i) an aggregate amount of US$XXXXXXXXXX comprised of cash and shares of XXXXXXXXXX of Parentco ("Parentco XXXXXXXXXX Shares"; XXXXXXXXXX, as may be adjusted, (ii) the assumption of liabilities of Opco related to the Purchased Assets (the "Assumed Liabilities"), and (iii) the issuance of warrants to acquire shares of Parentco ("Warrants"). The Sale Transaction will be effective at the closing, which will be held on XXXXXXXXXX , or such later date within XXXXXXXXXX business days of the satisfaction or waiver of the conditions to closing set out in the APA, or such other date as may be agreed upon by the parties.

The purchase price will be payable on closing as follows:

(a) AcquisitionCo will assume the Assumed Liabilities;

(b) AcquisitionCo will deliver to Opco an amount of US$XXXXXXXXXX in cash ("Cash Proceeds");

(c) AcquisitionCo will deliver to Opco US$XXXXXXXXXX in Parentco XXXXXXXXXX Shares;

(d) AcquisitionCo will deliver to Opco warrants to acquire common shares of Parentco in an amount equal to XXXXXXXXXX% of the number of Parentco XXXXXXXXXX Shares to be issued to Opco (subject, however, to a reduction if certain milestones are met), exercisable at US$XXXXXXXXXX per share, and expiring in XXXXXXXXXX; and

(e) AcquisitionCo will deliver to Opco warrants to acquire Parentco XXXXXXXXXX Shares in an amount equal to XXXXXXXXXX% of the number of Parentco XXXXXXXXXX Shares to be issued to Opco, exercisable at about US$XXXXXXXXXX per share, and expiring in XXXXXXXXXX.

XXXXXXXXXX and certain funds XXXXXXXXXX, who are shareholders of Opco, will invest in equity in Parentco or AcquisitionCo US$XXXXXXXXXX plus an additional investment equal to the amount to be received by them on the Reduction of Capital, as described in Paragraph 22 below ("Additional Investment"). This Additional Investment will increase the Cash Proceeds. With the increase in the Cash Proceeds, a corresponding reduction in the amount of the consideration payable by AcquisitionCo in Parentco XXXXXXXXXX Shares will be made. The number of Warrants will also be adjusted accordingly. Consequently, the total purchase price agreed upon by the parties will remain unchanged.

Opco will dispose of the Purchased Assets on a taxable basis. It is anticipated that most of the taxable gain realized on the Sale Transaction will be recapture and gain from the disposition of depreciable property and/or eligible capital property. Opco will apply a portion of its Tax Attributes against the taxable gain generated by the Sale Transaction. Therefore, no tax should be payable by Opco as a result of the Sale Transaction.

It is estimated that Opco's equity interest in Parentco should not exceed XXXXXXXXXX% of the total equity owned by Parentco's shareholders.

Paragraph 16 of the Ruling is changed to read as follows:

16. The APA provides that Opco and Subco will be precluded, for a period of XXXXXXXXXX years after the Sale Transaction, to be engaged in any activities similar to the Business.

Paragraph 17 of the Ruling is changed to read as follows:

17. Following the Sale Transaction and considering the Additional Investment, Opco will have no material liabilities and will own the following assets:

(a) Cash and short-term investments for an amount equal to approximately $XXXXXXXXXX plus an amount equal to the Additional Investment ("Available Cash"). The Available Cash will not exceed approximately $XXXXXXXXXX;

(b) Parentco XXXXXXXXXX Shares and Warrants;

(c) Shares of Subco; and

(d) rights pertaining to the B Program.

Paragraph 22 of the Ruling is changed to read as follows:

22. Shortly following the Sale Transaction, the liquidation of its short-term investments and the ceasing of the research and development activities related to the B Program, Opco will proceed with the Reduction of Capital and will distribute to the Opco Shareholders registered on the record date selected by the Board of Directors, in satisfaction of the payment of the Reduction of Capital, an amount ("Distribution") not exceeding the Available Cash, less cash reserves required to pay, among other things, (i) the expenses associated with maintaining the corporation in existence; (ii) the professional fees related to the Proposed Transactions; and (iii) the dissenting shareholders, if any. The Reduction of Capital and the Distribution will be made on the record date.

Paragraph 23 of the Ruling is changed to read as follows:

23. The objective of the Management and the Board of Directors of Opco is to dispose of, once appropriate and as soon as practicable, Opco's equity interest in Parentco. XXXXXXXXXX

Finally, subsection (f) of Paragraph 26 of the Ruling is changed to read as follows:

(f) disposing of its equity interest in Parentco as soon as practicable.

You advised us that, apart from the amendments described above, there are no other changes to the facts, proposed transactions and purpose of the proposed transactions described in the Ruling. You also advised us that, except for the signing of the APA, none of the proposed transactions described in the Ruling, as amended by this letter, has been completed. Finally, you advised us that, the facts, proposed transactions and purpose of the proposed transactions described in the Ruling, as amended by this letter, still constitute a complete and accurate disclosure of all relevant facts and transactions relating to the reduction of the paid-up capital of the Opco Common Shares.

Considering the above, we hereby confirm that, subject to the conditions, limitations, qualifications and comments set out therein, the Ruling, as amended by this letter, will continue to be binding on the Canada Revenue Agency.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

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