2005 Ruling 2005-0126111R3 - Spin-off butterfly

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Spin-off butterfly involving a public company - no types of property basis. Mostly standard issues. Is DC and Spinco related at the time the stock options issued by DC are exchanged for new stock options of DC and Spinco.

Position: Yes, Spinco and DC are related at that time.

Reasons: The law.

XXXXXXXXXX 2005-012611

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

RE: XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX, as modified by your subsequent correspondence, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. You have advised us that to the best of your knowledge and that of the taxpayer involved none of the issues involved in this ruling request are:

(i) in an earlier return of any of the taxpayer or a related person;

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

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

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

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

The taxpayer has also represented that the proposed transactions described herein will not result in the taxpayer or any related person described herein being unable to pay its existing outstanding tax liabilities.

DEFINITIONS

In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:

(a) "Aco" means XXXXXXXXXX;

(b) "Act" means the Income Tax Act, 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 and clause or subclause is a reference to the relevant provision, and the Income Tax Regulations thereunder are referred to as the "Regulations";

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

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

(e) "Amended DC Broker Options" means the broker options that DC will amend as described in Paragraph 25 and "Amended DC Broker Option" refers to any one of the Amended DC Broker Options;

(f) "Amended DC Warrants" means the warrants that DC will amend as described in Paragraph 26 and "Amended DC Warrant" refers to any one of the Amended DC Warrants;

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

(h) "Bco" means XXXXXXXXXX;

(i) "BN" refers to the Business Number assigned to a corporation by CRA;

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

(k) "Consolidated Spinco Shares" means the consolidated Spinco shares as described in Paragraph 33;

(l) "DC" means XXXXXXXXXX;

(m) "DC Redemption Note" means the promissory note described in Paragraph 30;

(n) "DC Shareholders" means all of the holders of Existing DC Shares immediately prior to the Transaction Date and "DC Shareholder" refers to any one of the DC Shareholders;

(o) "DC Special Shares" means the preferred shares of DC as described in Paragraph 22(b) and "DC Special Share" refers to any one of the DC Special Shares;

(p) "Dissenting Shareholder" means a DC shareholder who exercises the shareholder's right to dissent from the Plan of Arrangement;

(q) "Distribution" means the transfer of the Spin-off property to Spinco as described in Paragraph 28;

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

(s) "Existing DC Broker Options" means the existing broker options of DC described in Paragraphs 5 and 6 and "Existing DC Broker Option" refers to any one of the Existing DC Broker Options;

(t) "Existing DC Shares" means the existing issued and outstanding common shares of DC and "Existing DC Share" refers to any one of the Existing DC Shares;

(u) "Existing DC Stock Options" means the existing stock options of DC described in Paragraph 4 and "Existing DC Stock Option" refers to any one of the Existing DC Stock Options;

(v) "Existing DC Warrants" means the existing warrants to acquire Existing DC Shares described in Paragraphs 7 and 8 and "Existing DC Warrant" refers to any one of the Existing DC Warrants;

(w) "fair market value" ("FMV") means the highest price available in an open and unrestricted market between informed, prudent parties acting at arm's length (within the meaning assigned by subsection 251(1)) under no compulsion to act and contracting for a taxable purchase and sale;

(x) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1);

(y) XXXXXXXXXX;

(z) "In The Money Amount" means, in relation to a particular stock option or warrant, the situation in which the FMV of the shares that are the subject of the particular option or warrant is greater than the exercise price of such option or warrant;

(aa) "Newco" means the corporation described in Paragraph 16;

(bb) "New DC Shares" means the new common shares of DC as described in Paragraph 22(a);

(cc) "New DC Stock Options" means the stock options that DC will issue as described in Paragraph 24;

(dd) XXXXXXXXXX;

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

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

(gg) "Paragraph" refers to a numbered paragraph in this letter;

(hh) "Participant" means a DC Shareholder, other than a Dissenting Shareholder;

(ii) "Plan of Arrangement" means the proposed plan of arrangement under the BCA to effect the divisive reorganization of DC as described in the Proposed Transactions;

(jj) "Proposed Transactions" means the proposed transactions described in Paragraphs 18 to 32;

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

(ll) "specified corporation" has the meaning assigned by subsection 55(1);

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

(nn) "Spinco" means the corporation described in Paragraph 18 to be known as XXXXXXXXXX;

(oo) "Spinco Broker Options" means the broker options that Spinco will issue as described in Paragraph 25;

(pp) "Spinco Redemption Note" means the promissory note as described in Paragraph 29;

(qq) "Spinco Shares" means the class of common shares of Spinco as described in Paragraph 18(a) and "Spinco Share" refers to any one of the Spinco Shares;

(rr) "Spinco Special Shares" means the class of preferred shares of Spinco as described in Paragraph 18(b);

(ss) "Spinco Stock Options" means the stock options that Spinco will issue as described in Paragraph 24;

(tt) "Spinco Warrants" means the warrants that Spinco will issue as described in Paragraph 26;

(uu) "Spin-off Assets" means the XXXXXXXXXX% interest in the XXXXXXXXXX;

(vv) "stated capital" means stated capital as that expression is used in the BCA;

(ww) "subject corporation" has the meaning assigned by subsection 186(3);

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

(yy) "Transaction Date" means the date on which the Proposed Transactions in Paragraphs 20 to 32 will commence.

Our understanding of the Facts, Proposed Transactions and the purposes of the Proposed Transactions is as follows:

FACTS

1. DC is a public corporation and a taxable Canadian corporation with its head office at XXXXXXXXXX. DC is not a subject corporation. DC files its federal corporate income tax returns with the XXXXXXXXXX TSO.

2. DC was incorporated under the laws of the Province of XXXXXXXXXX as XXXXXXXXXX DC carries on businesses in Canada and the United States in the XXXXXXXXXX. DC's assets consist of XXXXXXXXXX properties and the Spin-off Assets.

3. The authorized share capital of DC consists of an unlimited number of common shares and an unlimited number of special shares, issuable in series. Currently, the only issued and outstanding shares of DC consist of approximately XXXXXXXXXX common shares (collectively the "Existing DC Shares" and individually an "Existing DC Share") having an aggregate FMV of approximately $XXXXXXXXXX. DC's Existing DC Shares are listed on the XXXXXXXXXX under the trading symbol "XXXXXXXXXX". DC is a reporting issuer in XXXXXXXXXX and it files its annual information forms, annual and interim financial statements, management's discussion and analysis and other continuous disclosure documents with the XXXXXXXXXX and the XXXXXXXXXX.

4. DC has obligations under certain stock options (collectively the "Existing DC Stock Options" and individually an "Existing DC Stock Option"), whereby subject to certain vesting requirements, certain directors, officers and other employees of DC are entitled to acquire Existing DC Shares at specified exercise prices. The specified per share exercise price under each Existing DC Stock Option did not exceed the fair market value of an Existing DC Share at the date that the relevant Existing DC Stock Option was granted. Currently, there are approximately XXXXXXXXXX Existing DC Stock Options outstanding that, when vested, will entitle the holders thereof to acquire Existing DC Shares.

5. DC has obligations under certain options (collectively the "Existing DC Broker Options" and individually an "Existing DC Broker Option"), whereby in connection with certain previous equity financing transactions, certain brokers involved in such equity financing became entitled to acquire Existing DC Shares at specified exercise prices. The specified per share exercise price under each Existing DC Broker Option did not exceed the fair market value of an Existing DC Share at the date the relevant Existing DC Broker Option was granted. Currently, there are XXXXXXXXXX.

6. The terms of the Existing DC Broker Options provide, inter alia, that if DC takes any action affecting the Existing DC Shares which would materially affect the rights of the holder, the exercise price and the securities issuable on exercise shall be adjusted in such a manner as determined to be appropriate by the board of directors of DC, so as to ensure the holder is treated fairly and equitably in the circumstances.

7. DC has obligations under existing warrants (collectively the "Existing DC Warrants" and individually an "Existing DC Warrant"), whereby certain shareholders of Existing DC Shares are entitled to acquire additional Existing DC Shares at specified exercise prices. The specified per share exercise price under each Existing Warrant did not exceed the fair market value of an Existing DC Share at the date the relevant Existing DC Warrant was granted. XXXXXXXXX .

8. The terms of the Existing DC Warrants provide, inter alia, that if DC takes any action affecting the Existing DC Shares which would materially affect the rights of the holder, the exercise price and the securities issuable on exercise shall be adjusted in such a manner as determined appropriately by the board of directors of DC, so as to ensure the holder is treated fairly and equitably in the circumstances.

9. Currently, a majority of the Existing DC Stock Options, Existing DC Broker Options and Existing Warrants are "Out of the Money". It is anticipated that this condition will continue to exist at the time of the Proposed Transactions are carried out. In addition, none of the Existing DC Shares, Existing DC Stock Options, Existing DC Broker Options or Existing Warrants, including any Existing DC Shares, Existing DC Broker Options or Existing Warrants that were issued pursuant to a private placement dated XXXXXXXXXX, were issued in contemplation of, or as part of the series of transactions that includes the Proposed Transactions.

10. XXXXXXXXXX.

11. To the best of the knowledge of the directors and the senior officers of DC, as of the date hereof no person or related group of persons beneficially owns, directly or indirectly, more than 10% of the Existing DC Shares.

12. Aco is a corporation incorporated under the laws of the Province of XXXXXXXXXX by Articles of Incorporation dated XXXXXXXXXX and is a taxable Canadian corporation. The authorized share capital of Aco consists of an unlimited number of common shares, of which approximately XXXXXXXXXX common shares are currently outstanding. Aco's common shares are listed on the XXXXXXXXXX under the trading symbol "XXXXXXXXXX". XXXXXXXXXX.

13. Since XXXXXXXXXX, Aco's business has consisted of XXXXXXXXXX. DC acquired shares of Aco pursuant to an agreement entered into on XXXXXXXXXX. That agreement provided that Aco could earn a XXXXXXXXXX% interest in the XXXXXXXXXX by: making payments to DC totalling $XXXXXXXXXX; issuing XXXXXXXXXX common shares to DC; and incurring XXXXXXXXXX expenses totalling $XXXXXXXXXX on or before XXXXXXXXXX. In accordance with the terms of that agreement, Aco issued: XXXXXXXXXX common shares to DC on XXXXXXXXXX at $XXXXXXXXXX per share; XXXXXXXXXX common shares to DC on XXXXXXXXXX at $XXXXXXXXXX per share; and XXXXXXXXXX common shares to DC on XXXXXXXXXX. DC and Aco now jointly operate through a management committee and fund further XXXXXXXXXX. DC's XXXXXXXXXX common shares of Aco have an aggregate adjusted cost base of $XXXXXXXXXX and an aggregate FMV of approximately $XXXXXXXXXX. Aco's acquisition of its XXXXXXXXXX% interest in the XXXXXXXXXX from DC and DC's acquisition of the XXXXXXXXXX common shares of Aco as partial consideration therefore, did not take place in contemplation of the Proposed Transactions. More specifically, the discussions leading to and the final decision, regarding whether to undertake the proposed transactions did not take place until after XXXXXXXXXX.

14. Bco is a corporation formed under the laws of the Province of XXXXXXXXXX by articles of amalgamation dated XXXXXXXXXX. The authorized share capital of Bco consists of an unlimited number of common shares and an unlimited number of special shares. Currently, the only issued and outstanding shares of Bco are XXXXXXXXXX common shares. Bco's common shares are listed on the XXXXXXXXXX under the trading symbol "XXXXXXXXXX". XXXXXXXXXX As repayment for a debt Bco owed to DC, Bco issued XXXXXXXXXX common shares to DC on XXXXXXXXXX at an issue price of $XXXXXXXXXX per share. DC's XXXXXXXXXX common shares of Bco have an aggregate adjusted cost base of $XXXXXXXXXX and an aggregate FMV of approximately $XXXXXXXXXX. DC's acquisition of its XXXXXXXXXX common shares of Bco did not take place in contemplation of the Proposed Transactions.

15. Bco's business is focussed on the XXXXXXXXXX.

16. Newco, formerly known as XXXXXXXXXX, is a taxable Canadian corporation that was incorporated by DC under the BCA on XXXXXXXXXX. Newco has issued one common share for nominal consideration to DC. Newco was originally incorporated by DC to be the transferee corporation in respect of the Proposed Transactions, however, Newco will not be used for this purpose or for any purpose. As described in Paragraph 34, Newco will be wound-up into Spinco after the Proposed Transactions are completed. Newco does not have, nor will it have, any assets or liabilities at any time.

17. The net fair market value of the Spin-off Assets exceeds 10% of the total net fair market value of all of DC's assets.

PROPOSED TRANSACTIONS

Incorporation of Spinco

18. A new corporation ("Spinco") will be incorporated under the BCA and will be a taxable Canadian corporation. Prior to the remaining Proposed Transactions, Spinco will not have had any assets or liabilities and will not have issued any shares. Spinco's Articles Incorporation will provide that its authorized capital will include:

(a) a class of common shares ("Spinco Shares"), each of which will be a fully participating voting common share entitling the holder thereof to one vote at meetings of shareholders of Spinco;

(b) an unlimited number of special shares ("Spinco Special Shares") having the following attributes:

(i) each Spinco Special Share will be redeemable, subject to applicable law, at any time at the option of Spinco at a redemption amount (the "Redemption Amount") equal to the aggregate FMV of the consideration paid to Spinco on issuance thereof (i.e., the Spin-off Assets) divided by the number of Spinco Special Shares issued as consideration therefor, plus any declared but unpaid dividends;

(ii) each Spinco Special Share will be retractable, subject to applicable law, at any time at the option of the holder for an amount equal to the Redemption Amount;

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

(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 Spinco if the resulting realizable value of the net assets of Spinco after payment of the dividends would be less than the aggregate Redemption Amount of all of the Spinco Special Shares then outstanding;

(v) for the purpose of subsection 191(4), the terms and conditions of the Spinco Special Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each Spinco Special Share. The amount to be specified in respect of each Spinco Special Share, will be pursuant to a resolution of the board of directors of Spinco, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the FMV of the consideration received by Spinco for its issuance;

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

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

Plan of Arrangement

19. A Management Information Circular has been mailed to all holders of Existing DC Shares and shareholder approval of the proposed Plan of Arrangement has been obtained. This document also will be filed with the XXXXXXXXXX in compliance with DC's SEDAR filing obligations under Section 9.3 of National Instrument 51-102 - "Continuous Disclosure Obligations" and will contain "prospectus level disclosure" regarding Spinco and the Spinco Shares. There is no legal requirement for this document to be reviewed by the XXXXXXXXXX or any other public authority in Canada.

20. Subject to, among other things, the appropriate shareholder and court approvals, which have now been received, the following Proposed Transactions, with the exception of the actual filing of elections under the Act, the public listing of Spinco Shares and any subsequent private placement of Spinco shares, will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur commencing on the Transaction Date in the order set out below. For greater certainty, the Transaction Date will be on a date that will be subsequent to the date of this letter.

21. Each DC 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 Proposed Transactions comprising the Plan of Arrangement, any Dissenting Shareholder who ultimately is entitled to be paid the fair market value of its Existing DC Shares will be deemed, under the Plan of Arrangement, to have transferred its Existing DC Shares to DC and such shares will be deemed to have been cancelled by DC, immediately prior to the Transaction Date.

Reorganization of DC's Share Capital

22. DC's Articles of Incorporation will be amended to create two new classes of shares as follows:

(a) a class of new common shares ("New DC Shares"), the terms and conditions of which will parallel those of the Existing DC Shares except that, in the event of the dissolution of DC, the holders of the Existing DC Shares will be entitled to receive the first $XXXXXXXXXX before the New DC Shares; and

(b) a class of new preferred shares ("DC Special Shares") with the following attributes:

(i) each DC Special Share will be redeemable, subject to applicable law, at any time at the option of DC, at a redemption amount (the "DC Redemption Amount") equal to the FMV of all of the issued and outstanding shares of DC multiplied by the proportion that the FMV of the Spin-off Assets is of the FMV of all of the property of DC at that time, divided by the number of DC Special Shares issued and outstanding, plus any declared but unpaid dividends;

(ii) each DC Special Share will be retractable, subject to applicable law, at any time at the option of the holder at an amount equal to the DC Redemption Amount;

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

(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 DC if the resulting realizable value of the net assets of DC after payment of the dividends would be less than the aggregate of the DC Redemption Amount of all of the DC Special Shares then outstanding;

(v) for the purpose of subsection 191(4), the terms and conditions of the DC Special. Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each DC Special Share. The amount to be specified in respect of each of the DC Special Shares will be pursuant to a resolution of the board of directors of DC, will be expressed as a dollar amount, will not be determined by a formula and will not exceed the FMV of the consideration received by DC for its issuance;

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

(vii) the issued and outstanding DC Special Shares at any given time will be entitled to exercise XXXXXXXXXX% of the total votes of all issued and outstanding classes of shares of DC at any meetings of shareholders of DC, except as may be otherwise provided under the BCA.

23. Each Participant will, in exchange for each Existing DC Share held by such Participant, receive one New DC Share and one DC Special Share from DC. No section 85 elections will be filed with respect to these share exchanges.

The respective additions to the stated capital of the New DC Shares and the DC Special Shares will, in total, not exceed the aggregate PUC of the Existing DC Shares immediately prior to the reorganization of capital and such PUC increase to each class of shares will be based on the proportion that the FMV of such class of shares is of the FMV of all shares issued by DC on the exchange. The Existing DC Shares will be cancelled and from the time of their issuance, the New DC Shares will be listed on a prescribed stock exchange.

Replacement of Existing DC Stock Options

24. Concurrent with the exchange of the Existing DC Shares described in Paragraph 23, each holder of Existing DC Stock Options who is an employee of DC will dispose of a portion of their respective rights under the Existing DC Stock Options held by such holder to each of DC and Spinco in consideration for the issuance to the particular holder of new stock options granted by DC ("New DC Stock Options") to acquire New DC Shares and new stock options granted by Spinco ("Spinco Stock Options") to acquire Spinco Shares in such a manner that:

(a) the particular holder will receive no consideration for the exchange of such Existing DC Stock Options other than New DC Stock Options and Spinco Stock Options;

(b) the exercise price of a holder's Existing DC Stock Options will be allocated to the New DC Stock Options and the Spinco Stock Options acquired by such holder on the exchange by means of a formula based on the existing exercise price and the weighted average trading price over a specified period (expected to be in the range of XXXXXXXXXX days) of the New DC Shares and the Spinco Shares. The option exchange agreements will ensure that the aggregate In The Money Amount applicable to the New DC Stock Options and the Spinco Stock Options issued to a particular employee, determined immediately after the exchange, will not exceed the In The Money Amount, if any, determined immediately before the exchange, applicable to the Existing DC Stock Options that were the subject of the transfer by the particular holder;

(c) the other terms and conditions of the New DC Stock Options and the Spinco Stock Options will parallel those of the Existing DC Stock Options, including the number of New DC Shares and Spinco Shares to be issued; and

(d) the Existing DC Stock Options will be cancelled upon the foregoing transfers and the obligations of DC and Spinco to issue replacement stock options to such employees as a result of the Proposed Transactions will be satisfied.

For greater certainty, no employee receiving New DC Stock Options and Spinco Stock Options will be able to exercise such options until the completion of the Proposed Transactions.

Amendment of Existing DC Broker Options

25. Concurrent with the transfer of the DC Special Shares to Spinco, as described in Paragraph 27, DC will amend each of the Existing DC Broker Options (the "Amended DC Broker Options"). Such amendment will allow each holder to acquire the same number of New DC Shares from DC that such holder could otherwise have acquired under such holder's Existing DC Broker Option but the specified per share exercise price under the Amended DC Broker Option so issued by DC will be proportionally less than the specified per share exercise price under such holder's Existing DC Broker Option to reflect the impact of the transfer of the Spin-off Assets to Spinco as described in Paragraph 28. In addition, Spinco will also grant to each holder of Existing DC Broker Options an identical number of options ("Spinco Broker Options") that will allow such holder to acquire the same number of Spinco Shares at a specified per share exercise price that is intended to reflect the impact of the transfer of the Spin-off Assets to Spinco.

Specifically, the specified per share exercise price for a particular holder's Amended DC Broker Options and the specified per share exercise price for the Spinco Broker Options acquired by such holder will be determined by allocating the specified per share exercise price of the Existing DC Broker Options held by such holder among the Amended DC Broker Options and the Spinco Broker Options by means of a formula based on the respective fair market value of the New DC Shares and the Spinco Shares determined by taking a weighted average trading price over a specified period (expected to be in the range of XXXXXXXXXX days). For greater certainty, the aggregate amount to be paid to DC or Spinco by a holder on the exercise of such holder's Amended DC Broker Options and Spinco Options will not exceed the amount that would have been paid by such holder to DC on the exercise of such holder's Existing DC Broker Options. The other terms and conditions of the Spinco Broker Options will parallel the terms and conditions of the Existing DC Broker Options, which will remain unchanged in the Amended DC Broker Options.

Counsel has advised management of DC that the transfer by DC to Spinco of the Spin-off Assets will materially affect the rights of the holders of the Existing DC Broker Options and therefor, the directors of DC, under the terms and conditions of the Existing Broker Options, are required to adjust the Existing DC Broker Options to ensure the holders are treated fairly and equitably in the circumstances. Accordingly, the board of directors of DC and Spinco has determined that the Existing DC Broker Options should be amended and Spinco Broker Options issued to each holder Existing DC Broker Options, as described above, so that the effect of the transfer of the Spin-off Assets to Spinco is reflected by a concomitant decrease in the per share exercise price of the Existing DC Broker Options and the issuance of Spinco Broker Options. If the above adjustment is not made, the holder of an Existing DC Broker Option may have a cause of action against DC.

For greater certainty, no person holding Amended DC Broker Options and Spinco Broker Options will be able to exercise such options until the completion of the Proposed Transactions.

Existing DC Warrants

26. Concurrent with the transfer of the DC Special Shares to Spinco as described in Paragraph 27, DC will amend each of the Existing DC Warrants ("Amended DC Warrants"). Such amendment will allow each holder to acquire the same number of New DC Shares from DC that such holder could otherwise have acquired under such holder's Existing DC Warrant but the specified per share exercise price under the Amended DC Warrant so issued by DC will be proportionally less than the specified per share exercise price under such holder's Existing DC Warrant to reflect the impact of the transfer of the Spin-off Assets to Spinco as described in Paragraph 28. In addition, Spinco will also grant to each holder of Existing DC Warrant an identical number of warrants ("Spinco Warrants") to acquire the same number of Spinco Shares at a specified per share exercise price that is intended to reflect the impact of the transfer of the Spin-off Assets to Spinco.

Specifically, the per share exercise price for a particular holder's Amended DC Warrants and the per share exercise price for the Spinco Warrants acquired by such holder will be determined by allocating the per share exercise price of the Existing DC Warrants held by such holder among the Amended DC Warrants and the Spinco Warrants by means of a formula based on the respective fair market value of the New DC Shares and the Spinco Shares determined by taking a weighted average trading price over a specified period (expected to be in the range of XXXXXXXXXX days). For greater certainty, the aggregate amount to be paid to DC or Spinco by a holder on the exercise of such holder's Amended DC Warrants and Spinco Warrants will not exceed the amount that would have been paid by such holder to DC on the exercise of such holder's Existing DC Warrants. The other terms and conditions of the Spinco Warrants will parallel the terms and conditions of the Existing DC Warrants, which will remain unchanged in the Amended DC Warrants.

Counsel has advised management that the transfer by DC to Spinco of the Spin-off Assets will materially affect the rights of the holders of the Existing DC Warrants and therefor, the directors of DC, under the terms and conditions of the Existing DC Warrants, are required to adjust the Existing DC Warrants to ensure the holders are treated fairly and equitably in the circumstances. Accordingly, the board of directors of DC and Spinco has determined that the Existing DC Warrants should be amended and Spinco Warrants issued to each holder of Existing DC Warrants, as described above, so that the effect of the transfer of the Spin-off Assets to Spinco is reflected by a concomitant decrease in the per share exercise price of the Existing DC Warrants and the issuance of Spinco Warrants. If the above adjustment is not made, the holder of Existing DC Warrants may have a cause of action against DC.

For greater certainty, no person holding Amended DC Warrants and Spinco Warrants will be able to exercise such warrants until the completion of the Proposed Transactions.

Transfer of DC Special Shares to Spinco

27. Spinco will acquire from each Participant all of the Participant's DC Special Shares in exchange for Spinco Shares. Each Participant will receive 1 Spinco Share for every 1 DC Special Share so transferred to Spinco (no fractional Spinco Shares will be issued to any Participant). Immediately after this share exchange, the FMV of each Participant's share of the capital stock of Spinco will approximate the amount determined by the formula (A x B/C) + D as set out in subparagraph (b)(iii) of the definition "permitted exchange" in subsection 55(1).

If requested by a particular Participant, the Participant and Spinco will execute a joint election under subsection 85(1), in prescribed form and within the time allowed by subsection 85(6), in respect of the disposition by that Participant of all of the Participant's DC Special Shares for Spinco Shares.

Pursuant to XXXXXXXXXX of the BCA, the addition to the stated capital of Spinco in respect of the issuance of Spinco Shares as described in this Paragraph will not exceed the aggregate PUC of the DC Special Shares so transferred to Spinco.

Transfer of the Spin-off Assets

28. DC will transfer to Spinco all of the Spin-off Assets. Immediately before the transfer by DC of the Spin-off Assets to Spinco as described herein, the property of DC will be determined as though there was one type of property, as contemplated by subsection 55(3.02), on a gross basis. For greater certainty, any tax accounts will not be considered property in determining the fair market value of the property of DC for the purposes of the Proposed Transactions and none of the Spin-off Assets will include any property that is a depreciable property or an eligible capital property.

In consideration for the transfer of the Spin-off Assets, Spinco will issue Spinco Special Shares to DC, which will have an aggregate Redemption Amount equal to the net FMV of the Spin-off Assets transferred. There are no liabilities relating to the Spin-off Assets that will be assumed by Spinco on such transfer.

DC and Spinco 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 each property included in the definition of Spin-off Assets that is an eligible property. Specifically, the agreed amount in each joint election will not be less than the lesser of the amounts specified in subparagraphs 85(1)(c.1)(i) or (ii) in case of property described in paragraph 85(1)(c.1). In each case, the agreed amount will not exceed the FMV of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).

Pursuant to XXXXXXXXXX of the BCA, the addition to the stated capital of Spinco in respect of the issuance of the Spinco Special Shares to DC will not exceed the aggregate of the agreed amounts under subsection 85(1) in respect of the transfer of the Spin-off Assets to Spinco.

Immediately after such transfer, the FMV of the Spin-off Assets acquired by Spinco will equal the proportion of the FMV of all the property of DC determined immediately before the transfer, that:

(a) The aggregate FMV of the DC Special Shares owned by Spinco, immediately before the transfer,

is of

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

29. Spinco will redeem from DC all of the Spinco Special Shares for an amount equal to the aggregate Redemption Amount of the Spinco Special Shares so redeemed, and will issue to DC in consideration therefor the Spinco Redemption Note, being a demand, interest bearing promissory note with a principal amount and fair market value equal to the aggregate fair market value and Redemption Amount of such shares. DC will accept such note as full and absolute payment of the aggregate Redemption Amount of such redeemed shares, with the risk of the note being dishonoured.

30. DC will redeem from Spinco all of the DC Special Shares for an amount equal to the aggregate DC Redemption Amount of the DC Special Shares so redeemed, and will issue to Spinco in consideration therefor the DC Redemption Note, being a demand, interest bearing promissory note with a principal amount and fair market value equal to the aggregate fair market value and DC Redemption Amount of such shares. Spinco will accept such DC Redemption Note as full payment of the aggregate DC Redemption Amount of such redeemed shares, with the risk of the note being dishonoured.

31. Each of the Spinco Redemption Note and the DC 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

32. DC will pay the principal amount of the DC Redemption Note by transferring to Spinco the Spinco Redemption Note that will be accepted by Spinco in full payment of DC's obligation under its note. Spinco will pay the principal amount of the Redemption Note by transferring to DC the DC Redemption Note that will be accepted by DC in full payment of Spinco's obligation under its note. The DC Redemption Note and the Spinco Redemption Note both will be marked thereupon "paid in full" and cancelled.

Subsequent Transactions

33. Upon completion of the Proposed Transactions, each of DC and Spinco will operate as separate entities; Spinco will undertake a reorganization of capital under which it will consolidate the Spinco Shares so that each holder receives 1 Consolidated Spinco Share in exchange for every XXXXXXXXXX Spinco Shares; and Spinco will, by special resolution, resolve to liquidate and dissolve Newco pursuant to the provisions of the BCA.

34. Following the Proposed Transactions, Spinco may raise additional capital by an issuance of Consolidated Spinco Shares to the public as part of a public offering or through a private placement, provided that such issuance would be limited to not more than 50% of the Spinco Shares issued in the Proposed Transactions, after taking into consideration the consolidation of Spinco Shares as described in Paragraph 33.

35. (Reserved).

PURPOSE OF THE PROPOSED TRANSACTIONS

36. The purpose of the Proposed Transactions is to have DC retain its XXXXXXXXXX business and to have DC transfer its XXXXXXXXXX business represented by the Spin-off Assets into Spinco, creating two separate public corporations dedicated to the pursuit of their respective businesses. This will allow management to better focus its efforts of the business carried on by each corporation and enhance shareholder value. The consolidation of the Spinco Shares described in Paragraph 33 is necessary because in order to meet the initial listing criteria for the XXXXXXXXXX, such shares must have a fair market value of at least $XXXXXXXXXX per share to be eligible for listing and this would not be the case if the consolidation did not take place.

ADDITIONAL INFORMATION

37. No Spinco Shares will be issued before they are listed for trading on the XXXXXXXXXX.

38. Discussions are underway to formalize an independent management team for Spinco. The directors of Spinco consist of XXXXXXXXXX members. XXXXXXXXXX of the directors of Spinco are also directors of DC.

39. In addition to the Spinco Stock Options issued as described in Paragraph 24, after the Proposed Transactions are completed Spinco may issue additional Spinco Stock Options to enable certain directors, officers and other employees of Spinco to acquire Spinco Shares from treasury at exercise prices that will not be less than the FMV of the Spinco Shares on the day on which the particular Spinco Stock Options are granted. The issuance of any such Spinco Stock Options will take place in the ordinary course of Spinco providing compensation to its directors, officers and other employees.

40. (Reserved).

41. The current fiscal year-end of DC is XXXXXXXXXX. Spinco will also choose XXXXXXXXXX to be its fiscal year-end.

42. No property has or will become property of DC in contemplation of and before the Distribution and no liabilities have been or will be incurred or discharged by DC in contemplation of and before the Distribution, except as described herein.

43. Except as specifically described herein, there is no expectation or intention of Spinco or DC to dispose of any property owned by it in the foreseeable future, including as part of any series of transactions including any of the Proposed Transactions, other than in the ordinary course of business.

44. (Reserved).

45. There are not, and will not be, at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement", as defined in subsection 112(2.2), in respect of any of the shares of DC or Spinco.

46. Neither DC nor Spinco has or will have entered into a "dividend rental arrangement", as defined in subsection 248(1), in respect of any of the shares of DC or Spinco described herein.

47. None of the shares issued by DC or Spinco will be issued or acquired as part of a series of transactions of the type described in subsection 112(2.5).

48. Neither DC nor Spinco will be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

49. Each of Spinco and DC will have the financial capacity to honour, upon presentation for payment, the amount payable under the promissory note issued by such corporation as described in Paragraphs 33 and 34, respectively.

RULINGS:

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our rulings are as set forth below.

A. The provisions of subsection 7(1.4) will apply, for the purposes of section 7, to each exchange of Existing DC Stock Options that are subject to the provisions of subsection 7(1) for New DC Stock Options and Spinco Stock Options, as described in Paragraph 24, provided that the aggregate In The Money Amount applicable to the New DC Stock Options and the Spinco Stock Options that are issued to a particular holder on the exchange described in Paragraph 24 does not exceed the aggregate In The Money Amount, if any, applicable to the Existing DC Stock Options that were exchanged by such holder for the New DC Stock Options and the Spinco Stock Options with the result that for the purposes of section 7 and paragraph 110(1)(d):

(a) such holder will be deemed (other than for the purposes of subparagraph 7(9)(d)(ii)) not to have disposed of such holder's Existing DC Stock Options and not to have acquired such holder's New DC Stock Options and a Spinco Stock Options;

(b) such holder's New DC Stock Options and Spinco Stock Options will be deemed to be the same as, and a continuation of such holder's Existing DC Stock Options; and

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

B. With regard to the purchase by DC of Existing DC Shares held by a Dissenting Shareholder as described in Paragraph 21 and subject to the application of subsection 55(2):

(a) 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 DC 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 DC 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 Existing DC Shares recognized by the Dissenting Shareholder as a result of the purchase of such shares by DC provided that the shares were held as capital property by the Dissenting Shareholder.

C. The provisions of subsection 86(1) will apply and the provisions of subsections 86(2) and (2.1) will not apply to the disposition of each Existing DC Share by each Participant for one New DC Share and one DC Special Share as described in Paragraph 23 provided that:

(a) the particular Participant holds the Existing DC Shares as capital property; and

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

such that:

(c) the cost of any of the New DC Shares and DC 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 proportion of the aggregate ACB to the particular Participant, immediately before the exchange, of such Participant's Existing DC Shares, that

(i) the FMV, immediately after the exchange, of any New DC Shares or DC Special Shares, as the case may be, received by the particular Participant;

is of

(ii) the FMV, immediately after the exchange, of all of the shares of DC received by the particular Participant for that Participant's Existing DC Shares; and

(d) pursuant to paragraph 86(1)(c), such Participant will be deemed to have disposed of the particular Participant's Existing DC Shares for aggregate proceeds of disposition equal to the aggregate cost to the Participant of any New DC Shares and DC Special Shares received by it as determined in (c) above.

D. Each holder of an Existing DC Broker Option that has not expired immediately before the amendment by DC of the Existing DC Broker Options resulting in Amended DC Broker Options as described in Paragraph 25, will not be considered to

(a) have disposed of such holder's Existing DC Broker Options that remained outstanding at the Transaction Date, or

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

solely as a result of such amendment as described in Paragraph 25.

E. Each holder of an Existing DC Warrant that has not expired immediately before the amendment by DC of the Existing DC Warrants, resulting in the Amended DC Warrants as described in Paragraph 26, will not be considered to

(a) have disposed of such holder's Existing DC Warrants that remained outstanding at the Transaction Date, or

(c) have realized a benefit under subsection 15(1),

solely as a result of such amendment as described in Paragraph 26.

F. Provided that a particular Participant who, immediately before the exchange of DC Special Shares for an identical number of Spinco Shares as described in Paragraph 27:

(a) holds such DC Special Shares as capital property;

(b) deals at arm's length with Spinco 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 his or her income for that year;

and further provided that immediately after such exchange:

(e) the particular Participant or persons with whom such 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 control Spinco or beneficially own shares of Spinco having an aggregate FMV representing more than 50% of the aggregate FMV of all of the outstanding shares of Spinco;

then pursuant to paragraph 85.1(1)(a):

(i) such Participant will be deemed to have disposed of such DC Special Shares for proceeds of disposition equal to the aggregate ACB of such DC Special Shares to the particular Participant immediately before the exchange; and

(ii) such Participant will be deemed to have acquired such Spinco Shares at an aggregate cost equal to the aggregate ACB of such Participant's DC Special Shares immediately before the exchange;

and pursuant to paragraph 85.1(1)(b):

(iii) the cost to Spinco of each DC Special Share acquired from each such Participant will be deemed to be the lesser of its FMV immediately before the exchange and the PUC of such DC Special Share immediately before the exchange.

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

(a) the transfer of the Spin-off Assets to Spinco by DC as described in Paragraph 28, and

(b) the transfer of DC Special Shares to Spinco by a Participant, where the particular Participant and Spinco otherwise agree to have the provisions of subsection 85(1) apply to the transfer of all the Participant's DC Special Shares as described in Paragraph 27.

such that the agreed amount in respect of each such transfer will be deemed to be the proceeds of disposition for the particular transferred property to each transferor, the cost to each transferee for the particular transferred property and the cost to the transferor of the share consideration received for the relevant transferred property. For greater certainty, paragraph 85(1)(e.2) will not apply to any of the transfers.

H. Subsection 84(3) will apply:

(a) on the redemption, as described in Paragraph 29, of the Spinco Special Shares owned by DC, to deem Spinco to have paid and DC to have received; and

(b) on the redemption, as described in Paragraph 30, of the DC Special Shares owned by Spinco, to deem DC to have paid and Spinco to have received;

a dividend on such class of 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.

I. The provisions of subsection 112(3) will apply to reduce any loss which would otherwise be determined for the particular holder as a result of the redemptions of DC Special Shares and Spinco Special Shares described in Ruling H.

J. 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 DC 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 DC to a corporation that is not an "acquiror" within the meaning of the definition of "specified corporation" before the day that is three years after the day that the transaction described in Paragraph 27 is implemented; or

(f) a distribution by Spinco or any acquiror in relation to DC before the day that is three years after the date that the transaction described in Paragraph 27 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 Ruling H and, for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).

K. The cost to Spinco of the DC Redemption Note issued to it by DC as described in Paragraph 30 and the cost to DC of the Spinco Redemption Note issued to it by Spinco as described in Paragraph 29 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 Spinco or DC upon payment of the principal amount of the particular note.

L. The set-off and repayment of the DC Redemption Note held by Spinco and the Spinco Redemption Note held by DC as described in Paragraph 32 will not give rise to a forgiven amount and, as such, neither DC or Spinco will realize any gain or incur any loss therefrom.

M. Provided that a Participant holding Existing DC Shares as capital property immediately prior to the exchange of such shares for New DC Shares and DC Special Shares, as described in Paragraph 23, such share exchange, or the subsequent exchange of such holder's DC Special Shares for Spinco Shares as described in Paragraph 27, will not, in and by themselves, cause such holder's New DC Shares, DC Special Shares or Spinco Shares, as the case may be, to not be capital property to that Participant.

N. Provided that the New DC Shares and the Spinco Shares are listed on a prescribed stock exchange in Canada, such shares will be a "qualified investment":

(a) for a deferred profit sharing plan by virtue of paragraph (d) of the definition "qualified investment" in section 204;

(b) for a registered retirement savings plan by virtue of paragraph (a) of the definition "qualified investment" in subsection 146(1);

(c) for a registered retirement income fund by virtue of paragraph (a) of the definition "qualified investment" in subsection 146.3(1); and

(d) for a registered education savings plan by virtue of paragraph (a) of the definition "qualified investment" in subsection 146.1(1).

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

P. 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.

The above Rulings are subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on CRA provided that the Proposed Transactions are completed by XXXXXXXXXX. The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted into law, could have an effect on the rulings provided herein.

OTHER COMMENTS

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

(a) the paid-up capital of any share or the adjusted cost base or fair market value of any property referred to herein;

(b) any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

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