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: 1. Whether 7(1.5) applies sequentially to (i) the exchange of the DC Common Shares and (ii) to the exchange of the DC Butterfly Series 1 and 2 Shares received in (i); 2. Does the automatic conversion of a Warrant into shares result in a disposition of the Warrant?; 3. Whether the issuance of special warrants by Spinco1 and Spinco2 amounts to the issuance of shares and runs afoul of subparagraph (b)(i) of the definition "permitted exchange" in 55(1).
Position: 1. Yes. 2. No. 3. No.
Reasons: 1. Previous positions. 2. Application of section 49.1. 3. The special warrants are not shares in these circumstances.
XXXXXXXXXX 2006-019841
XXXXXXXXXX, 2006
Dear Sir:
Re: Advance Income Tax Ruling
XXXXXXXXXX - Account Number XXXXXXXXXX
XXXXXXXXXX - Account Number XXXXXXXXXX
(XXXXXXXXXX Tax Services Office, XXXXXXXXXX Taxation Centre)
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers referred to above. We also acknowledge our subsequent telephone conversations and correspondence concerning your request. The documents submitted with your request are part of this document only to the extent described herein.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request is:
a) in an earlier return of the taxpayers or related persons;
b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or related persons;
c) under objection by the taxpayers or related persons;
d) before the courts; or
e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.
Unless otherwise indicated, all references to monetary amounts are in Canadian dollars and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act").
DEFINITIONS
In this letter, the following terms have the meanings specified:
"Acquiror" has the meaning assigned in the definition "specified corporation" in subsection 55(1);
"adjusted cost base" has the meaning assigned by section 54;
"ACo" means XXXXXXXXXX;
"ACo's Business" means the business carried on by ACo, being the XXXXXXXXXX;
"ACo Shareholder" means a holder of an Aco Share;
"ACo Share" means a common share without par value in the capital of Aco;
"Aco Stock Option" means the right (whether or not vested) that has been granted by ACo, to purchase one ACo Share in accordance with the set terms and conditions thereof. Those rights are only issued to arm's length directors, officers, employees and consultants of ACo. The exercise price under an ACo Stock Option is the market value of the shares when the option is granted. The number of ACo Stock Options that may be granted cannot exceed XXXXXXXXXX% of the issued and outstanding ACo Shares;
"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);
"arm's length" has the meaning assigned by section 251;
"Articles of Amendment" means the articles amending the articles of DC as described in the Proposed Transactions;
"capital property" has the meaning assigned by section 54;
"cost amount" has the meaning assigned by subsection 248(1);
"DC" means XXXXXXXXXX. DC's head office is located at XXXXXXXXXX;
"DC Butterfly Series 1 Share Redemption Amount" means an amount equal to the aggregate fair market value of all of the DC Common Shares outstanding immediately before the exchange of each DC Common Share, described in the "Exchange of DC Common Shares" section of this letter, multiplied by the Spinco1 Butterfly Proportion, then divided by the number of issued and outstanding DC Butterfly Series 1 Shares, plus any declared but unpaid dividends thereon;
"DC Butterfly Series 2 Share Redemption Amount" means an amount equal to the aggregate fair market value of all of the DC Common Shares outstanding immediately before the exchange of DC Common Shares described in the "Exchange of DC Common Shares" section of this letter, multiplied by the Spinco2 Butterfly Proportion, then divided by the number of issued and outstanding DC Series 2 Butterfly Shares, plus any declared but unpaid dividends thereon;
"DC Butterfly Series 1 Share" means a preferred share in the capital of DC that is redeemable for the DC Butterfly Series 1 Share Redemption Amount;
"DC Butterfly Series 2 Share" means a preferred share in the capital of DC that is redeemable for the DC Butterfly Series 2 Share Redemption Amount;
"DC Common Share" means an issued and outstanding common share of DC. The aggregate DC Common Shares represent all the issued and outstanding shares of DC. On XXXXXXXXXX, there were approximately XXXXXXXXXX DC Common Shares;
"DC New Common Share" means a common share of DC issued to replace a DC Common Share, as described in the "Exchange of DC Common Shares" section of this letter;
"DC Spinco1 Note" means a non-interest-bearing demand promissory note to be issued by DC having a principal amount and fair market value equal to the aggregate DC Butterfly Series 1 Share Redemption Amounts;
"DC-Spinco2 Exchange Ratio" means the fraction which is obtained by dividing the number of Aco Shares held by DC on the Share Distribution Record Date by the fully diluted number of DC Common Shares outstanding on the Share Distribution Record Date;
"DC Spinco2 Note" means a non-interest-bearing demand promissory note to be issued by DC having a principal amount and fair market value equal to the aggregate DC Butterfly Series 2 Share Redemption Amounts;
"DC Shareholder" means a holder of a DC Common Share;
"DC Stock Options" means the XXXXXXXXXX rights that had been granted under the DC Stock Option Plan on XXXXXXXXXX by DC to its directors, officers, employees and consultants, to acquire, in accordance with the terms thereof, one DC Common Share at prices varying from $XXXXXXXXXX to $XXXXXXXXXX. As of that date, XXXXXXXXXX DC Stock Options had been issued to directors and XXXXXXXXXX had been issued to employees and consultants.
The plan is for arm's length directors, officers, employees and consultants of DC. The exercise price under a DC Stock Option is the adjusted market value of the shares when the option is granted minus discounts allowed by the Stock Exchange. The number of DC Stock Options that may be granted cannot exceed XXXXXXXXXX% of the issued and outstanding DC Common Shares. Approximately XXXXXXXXXX% of the issued and outstanding DC Stock Options have a positive In The Money Amount;
"DC Stock Option Holder" means a person who holds a DC Stock Option;
"DC Stock Option Plan" means the set of terms and conditions for the issuance and exercise of the DC Stock Options;
"DC Warrants" means the XXXXXXXXXX warrants issued by DC and outstanding as at XXXXXXXXXX, which are exercisable at prices varying from $XXXXXXXXXX to $XXXXXXXXXX;
"DC Warrant Holder" means a person who holds a DC Warrant;
"depreciable property" has the meaning assigned by subsection 13(21);
"disposition" has the meaning assigned by subsection 248(1);
"Dissenting Shareholder" means a shareholder of DC who dissents from the Plan of Arrangement;
"distribution" has the meaning assigned by subsection 55(1);
"Effective Date" means the effective date of the Plan of Arrangement;
"eligible capital property" has the meaning assigned by section 54;
"eligible property" has the meaning assigned by subsection 85(1.1);
"fair market value" means the highest price, expressed in terms of money, available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act;
"First Act" means the Business Corporations Act (XXXXXXXXXX);
"flow-through share" has the meaning assigned by subsection 66(15);
"foreign accrual property income" has the meaning assigned by subsection 95(1);
"In The Money Amount" means, in relation to a particular stock option or warrant, the amount by which the fair market value of the shares that are the subject of the particular option or warrant exceeds the exercise price of such option or warrant;
"Information Circular" means the Management Information Circular dated XXXXXXXXXX, which describes the Proposed Transactions;
"New DC Stock Option" means a right granted by DC to acquire one DC New Common Share;
"paid-up capital" has the meaning assigned by subsection 89(1);
"Paragraph" refers to a numbered paragraph in this letter;
"Participant" means a DC Shareholder, other than a Dissenting Shareholder;
"Plan of Arrangement" means the proposed plan of arrangement under the First Act and the Second Act to effect the Proposed Transactions;
"prescribed stock exchange" has the meaning assigned by Part XXXII of the Regulations;
"proceeds of disposition" has the meaning assigned by section 54;
"Proposed Transactions" means the transactions referred to in the Proposed Transactions sections of this letter;
"public corporation" has the meaning assigned by subsection 89(1);
"Regulations" refers to the Income Tax Regulations;
"related person" has the meaning assigned by subsection 251(2);
"Remaining Aco Shares" means the Aco Shares held by Aco Shareholders (other than DC) immediately prior to the Effective Date;
"restricted financial institution" has the meaning assigned by subsection 248(1);
"Second Act" means the Canada Business Corporations Act;
"Share Distribution Record Date" means the close of business on a day to be fixed by the Stock Exchange for the purpose of determining the DC Shareholders entitled to receive New DC Common Shares, Spinco1 Common Shares and Spinco2 Common Shares under the Plan of Arrangement;
"short-term preferred share" has the meaning assigned by subsection 248(1);
"specified financial institution" has the meaning assigned by subsection 248(1);
"Specified Conditions" means (i) obtaining all court and shareholder approvals required to complete the Plan of Arrangement; (ii) the conditional approval of the Spinco2 Shares for listing on the Stock Exchange; and (iii) XXXXXXXXXX;
"specified shareholder" has the meaning assigned by subsection 248(1) as modified by subsections 55(3.2) and (3.3);
"Spinco1" means the corporation incorporated on XXXXXXXXXX as XXXXXXXXXX;
"Spinco1 Butterfly Proportion" means the fraction A/B where:
A is the net fair market value of the Spinco1 Spin-off Property to be transferred by DC to Spinco1, determined immediately before such transfer; and
B is the net fair market value of all property owned by DC immediately before the transfer of the Spinco1 Spin-off Property to Spinco1 and the transfer of the Spinco2 Spin-off Property to Spinco2;
"Spinco1 Commitment" means the covenants of Spinco1, pursuant to the Plan of Arrangement, to issue Spinco1 Common Shares to DC Warrant Holders who exercise their rights thereunder after the Effective Date and who are entitled pursuant to the corporate reorganization provisions of the DC Warrants to receive DC New Common Shares, Spinco1 Common Shares and Spinco2 Common Shares. Pursuant to the terms of the Spinco1 Commitment, Spinco1 will agree to issue XXXXXXXXXX of a Spinco1 Common Share upon the exercise of each DC Warrant and DC will be obligated, as the agent of Spinco1, to collect and pay XXXXXXXXXX% of the exercise price of the particular DC Warrant to Spinco1;
"Spinco1 Common Share" means a common share of Spinco1;
"Spinco1 Flow-Through Special Warrant" means a flow-through special warrant issued by Spinco1. Each Spinco1 Flow-Through Special Warrant entitles the holder to receive, upon exercise and for no additional consideration, one Spinco1 Common Share;
"Spinco1 Redemption Note" means a non-interest-bearing demand note to be issued by Spinco1 having a principal amount and fair market value equal to the aggregate of the Spinco1 Reorganization Share Redemption Amounts of the Spinco1 Reorganization Shares redeemed as described in the Proposed Transactions;
"Spinco1 Reorganization Share" means a share of a class of preferred shares in the capital of Spinco1;
"Spinco1 Reorganization Share Redemption Amount" means an amount equal to the aggregate fair market value of the Spinco1 Spin-off Property at the time of its transfer to Spinco1, divided by XXXXXXXXXX (being the number of Spinco1 Reorganization Shares issued as consideration therefor), plus any declared but unpaid dividends thereon;
"Spinco1 Special Warrant" means a Spinco1 Special Warrant issued by Spinco1 under the terms of which Spinco1 is obligated to issue to each holder, upon the issuance of shares as described in Paragraph 48, without any further action by such holder and for no additional consideration, one Spinco1 Common Share and one Spinco1 Warrant;
"Spinco1 Spin-off Property" means (i) all agreements to which DC currently is a party which pertain to the XXXXXXXXXX properties in the Provinces of XXXXXXXXXX.
"Spinco1 Stock Option" means the right (whether or not vested) to acquire, in accordance with the terms thereof, one Spinco1 Common Share;
"Spinco1 Warrant" means a Spinco1 Warrant issued by Spinco1. Each Spinco1 Warrant has a term of XXXXXXXXXX years from the date of issuance and entitles the holder to purchase one Spinco1 Common Share at a price of $XXXXXXXXXX per share;
"Spinco2" means the corporation incorporated on XXXXXXXXXX as XXXXXXXXXX;
"Spinco2 Butterfly Proportion" means the fraction A/B where:
A is the net fair market value of the Spinco2 Spin-off Property to be transferred by DC to Spinco2, determined immediately before such transfer; and
B is the net fair market value of all property owned by DC immediately before the transfer of the Spinco1 Spin-off Property to Spinco1 and the transfer of the Spinco2 Spin-off Property to Spinco2;
"Spinco2 Commitment" means the covenant of Spinco2, pursuant to the Plan of Arrangement, to issue Spinco2 Common Shares to the DC Warrant Holders who exercise their rights thereunder after the Effective Date and who are entitled pursuant to the corporate reorganization provisions of the DC Warrants to receive DC New Common Shares, Spinco1 Common Shares and Spinco2 Common Shares. Pursuant to the Spinco2 Commitment, Spinco2 will agree to issue a fraction of a Spinco2 Common Share equal to the DC-Spinco2 Exchange Ratio upon the exercise of each whole DC Warrant and DC will be obligated, as the agent of Spinco2, to collect and pay XXXXXXXXXX% of the exercise price of the particular DC Warrant to Spinco2. Following such payment, Spinco2 will remit all amounts received to DC;
"Spinco2 Common Share" means a common share of Spinco2;
"Spinco2 Redemption Note" means a non-interest-bearing demand note to be issued by Spinco2 having a principal amount and fair market value equal to the aggregate of the Spinco2 Reorganization Share Redemption Amounts of the Spinco2 Reorganization Shares redeemed as described in the Proposed Transactions;
"Spinco2 Reorganization Share" means a share of a class of preferred shares in the capital of Spinco2;
"Spinco2 Reorganization Share Redemption Amount" means the aggregate fair market value of the Spinco2 Spin-off Property at the time of its transfer to Spinco2 as described in the Proposed Transactions, divided by XXXXXXXXXX (being the number of Spinco2 Reorganization Shares issued as consideration therefor), plus any declared but unpaid dividends thereon;
"Spinco2 Special Warrant" means a subscription receipt issued under the name of Aco under the terms of which Spinco2 is obligated to issue to each holder, once the Specified Conditions are met, without any further action by such holder and for no additional consideration, one Spinco2 Common Share and one-half of a Spinco2 Warrant. The gross proceeds from the issuance of a Spinco2 Special Warrant will be deposited into escrow and held in trust by a Canadian trust company, to be released to Spinco2 once the Specified Conditions are met or returned to the holders of Spinco2 Special Warrants if the Specified Conditions are not met by XXXXXXXXXX, in exchange for delivery of the Spinco2 Special Warrant certificates;
"Spinco2 Spin-off Property" means all of the Aco Shares held by DC as at the Effective Date;
"Spinco2 Stock Option" means the right (whether or not vested) granted by Spinco2 to acquire, in accordance with the terms thereof, one Spinco2 Common Share;
"Spinco2 Warrant" means a warrant issued by Spinco2 to a holder of a Spinco2 Special Warrant. Each Spinco2 Warrant has a term of XXXXXXXXXX months from the date of subscription for the Spinco2 Special Warrant and entitles the holder to purchase one Spinco2 Common Share at a price of $XXXXXXXXXX per share;
"stated capital" has the meaning assigned by the Second Act;
"Stock Exchange" means the XXXXXXXXXX;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1);
"taxable Canadian property" has the meaning assigned by subsection 248(1);
"taxable dividend" has the meaning assigned by subsection 89(1);
"taxable preferred share" has the meaning assigned by subsection 248(1);
"term preferred share" has the meaning assigned by subsection 248(1); and
XXXXXXXXXX.
FACTS
1. DC is a public corporation and a taxable Canadian corporation and is governed by the First Act. The DC Common Shares are listed on the Stock Exchange and the XXXXXXXXXX Stock Exchange. The DC Common Shares are not short-term preferred shares, taxable preferred shares or term preferred shares and are prescribed shares under section 6204 of the Regulations.
2. DC has a XXXXXXXXXX fiscal and taxation year-end. DC's business involves XXXXXXXXXX and is further described in the Information Circular.
3. DC's assets include XXXXXXXXXX% of the issued and outstanding shares of Aco. Aco is a taxable Canadian corporation and is governed by the First Act. Aco carries on ACo's Business.
4. The directors and senior management of DC are not aware of any person or related group of persons that beneficially owns, directly or indirectly, 10% or more of the issued and outstanding DC Common Shares.
5. The holder of a DC Stock Option can acquire a DC Common Share under the terms of the DC Stock Option Plan at a price that cannot be lower than the "market price" (as defined for the purposes of the DC Stock Option Plan) of such share at the time that the particular DC Stock Option was granted, less the maximum discount permitted by the Stock Exchange. The DC Stock Option Holders and every person entitled to become a DC Stock Option Holder have always dealt at arm's length with DC and will continue to deal at arm's length with DC during and after the Proposed Transactions. Certain DC Stock Options relating to DC Common Shares in respect of which an election under subsection 7(8) has been made have previously been exercised. These individuals will participate in the share exchange. Approximately XXXXXXXXXX% of the DC Stock Options have a positive In The Money Amount.
6. The holder of an ACo Stock Option can acquire an ACo Common Share at a price that cannot be lower than the excess of the adjusted market price of such share over the maximum discount permitted by the Stock Exchange at the time that the particular ACo Stock Option was granted. The holder of an ACo Stock Option and every person entitled to hold an ACo Stock Option have always dealt at arm's length with ACo and will continue to deal at arm's length with ACo during and after the Proposed Transactions. No ACo Stock Options relating to ACo Common Shares in respect of which an election under subsection 7(8) has been made have previously been exercised. The aggregate In The Money Amount of all issued ACo Stock Options is positive.
7. DC has filed the Information Circular.
8. Spinco1 and Spinco2 are taxable Canadian corporations that were incorporated under the provisions of the Second Act. Spinco1 and Spinco2 will reside in Canada throughout the Proposed Transactions.
8.1. Certain shareholders of Aco as well as other investors in Aco, including DC, made a bridge loan in amounts totalling $XXXXXXXXXX to Aco by way of the issuance of convertible promissory notes. DC's portion of the bridge loan:
a. amounts to $XXXXXXXXXX;
b. was made in XXXXXXXXXX;
c. was required for working capital of Aco and would have been required regardless of whether the Plan of Arrangement occurred.
The promissory notes will be payable on or before XXXXXXXXXX and will be convertible, at the lender's option, into Spinco2 Common Shares (or such other securities of Spinco2 or Aco that may be issued pursuant to a future financing of Spinco2 or Aco).
PROPOSED TRANSACTIONS
Subject to the appropriate shareholder, regulatory and court approvals, the Proposed Transactions will be undertaken pursuant to the Plan of Arrangement under sections XXXXXXXXXX of the First Act and under section 192 of the Second Act in the sequence set forth below. With the exception of the filing of any elections under the Act, these transactions will occur by virtue of the Plan of Arrangement and will be designated in the Plan of Arrangement to occur on the Effective Date and in the order set out below.
9. DC, Spinco1 and Spinco2 will enter into an agreement to implement the Plan of Arrangement, subject to shareholder and court approval, pursuant to which DC will transfer the Spinco1 Spin-off Property to Spinco1 and the Spinco2 Spin-off Property to Spinco2.
10. For the purposes of the Proposed Transactions comprising the Plan of Arrangement, any Dissenting Shareholder will be considered to have ceased to be a shareholder of DC, immediately prior to the Effective Date, such that the DC Common Shares held by the Dissenting Shareholder will no longer be considered to be outstanding for the purpose of the corporate law transactions comprising the Plan of Arrangement.
11. Spinco1 will carry out a non-brokered private placement financing involving the issuance of Spinco1 Special Warrants and Spinco1 Flow-Through Warrants under the Plan of Arrangement.
12. Aco will carry out a brokered private placement financing involving the issuance of Spinco2 Special Warrants.
13. Certain shareholders of Aco as well as other investors in Aco, including DC, will make a bridge loan to Aco in amounts not exceeding $XXXXXXXXXX by way of the issuance of convertible promissory notes. DC's portion of the bridge loan:
a. will amount to $XXXXXXXXXX;
b. will be made in XXXXXXXXXX;
c. will be required for working capital of Aco and would have been required regardless of whether the Plan of Arrangement occurred.
The promissory notes will be payable on or before XXXXXXXXXX and will be convertible, at the lender's option, into Spinco2 Common Shares (or such other securities of Spinco2 or Aco that may be issued pursuant to a future financing of Spinco2 or Aco).
Those notes and DC's portion of the bridge loan described in Paragraph 8.1 will be repaid in cash and will not be converted into Spinco2 Common Shares.
Reorganization of the Share Capital of DC
14. DC will file the Articles of Amendment to create and authorize the issuance of an unlimited number of DC New Common Shares, an unlimited number of DC Butterfly Series 1 Shares and an unlimited number of DC Butterfly Series 2 Shares.
15. Each DC New Common Share will be a fully participating voting common share with the holder thereof entitled to one vote at meetings of shareholders of DC. Subject to a right of the holders of the DC Common Shares to receive aggregate dividends in the amount of $XXXXXXXXXX before any dividends are paid on the DC New Common Shares, the terms of the DC New Common Shares will be identical to the terms of the existing DC Common Shares.
16. The DC Butterfly Series 1 Shares will have the following attributes:
a. each DC Butterfly Series 1 Share will be redeemable, subject to applicable law, at any time at the option of DC at a redemption amount equal to the DC Butterfly Series 1 Share Redemption Amount;
b. each DC Series 1 Butterfly Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the DC Butterfly Series 1 Share Redemption Amount;
c. the holder of each DC Butterfly Series 1 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;
d. for the purpose of subsection 191(4), the terms and conditions of the DC Butterfly Series 1 Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each DC Butterfly Series 1 Share. The amount to be specified in respect of each DC Butterfly Series 1 Share will:
i. be pursuant to a resolution of the board of directors of DC;
ii. be expressed as a dollar amount;
iii. not be determined by a formula; and
iv. not exceed the fair market value of the property received by DC in consideration for its issuance;
e. upon the liquidation, dissolution or winding-up of DC, the DC Butterfly Series 1 Shares will rank pari passu with the DC Butterfly Series 2 Shares and the DC New Common Shares;
f. the holder of each DC Butterfly Series 1 Share will be entitled to vote at meetings of shareholders of DC; and
g. the DC Butterfly Series 1 Shares will be listed for trading on the XXXXXXXXXX.
17. The DC Butterfly Series 2 Shares will have the following attributes:
a. each DC Butterfly Series 2 Share will be redeemable, subject to applicable law, at any time at the option of DC at a redemption amount equal to the DC Butterfly Series 2 Share Redemption Amount;
b. each DC Series 2 Butterfly Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the DC Butterfly Series 2 Share Redemption Amount;
c. the holder of each DC Butterfly Series 2 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;
d. for the purpose of subsection 191(4), the terms and conditions of the DC Butterfly Series 2 Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each DC Butterfly Series 2 Share. The amount to be specified in respect of each DC Butterfly Series 2 Share will:
i. be pursuant to a resolution of the board of directors of DC;
ii. be expressed as a dollar amount;
iii. not be determined by a formula; and
iv. not exceed the fair market value of the property received by DC in consideration for its issuance;
e. upon the liquidation, dissolution or winding-up of DC, the DC Butterfly Series 2 Shares will rank pari passu with the DC Butterfly Series 1 Shares and the DC New Common Shares;
f. the holder of each DC Butterfly Series 2 Share will be entitled to vote at meetings of shareholders of DC; and
g. the DC Butterfly Series 2 Shares will be listed for trading on the XXXXXXXXXX.
Reorganization of the Share Capital of Spinco1 and Spinco2
18. The articles of Spinco1 and Spinco2 will be amended to reorganize their share structures such that the authorized share capital of each of Spinco1 and Spinco2 will consist of an unlimited number of fully participating voting common shares (the "Spinco1 Common Shares" and the "Spinco2 Common Shares") and an unlimited number of preferred shares (the "Spinco1 Reorganization Shares" and the "Spinco2 Reorganization Shares"). Spinco1 and Spinco2 will also be authorized to grant options and issue warrants. No shares of either Spinco1 or Spinco2 have been issued on incorporation or will be issued prior to the issue of the Spinco1 Common Shares and Spinco2 Common Shares.
19. The Spinco1 Reorganization Shares will have the following attributes:
a. each Spinco1 Reorganization Share will be redeemable, at any time at the option of Spinco1, subject to applicable law, at a redemption amount equal to the Spinco1 Reorganization Share Redemption Amount;
b. each Spinco1 Reorganization Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Spinco1 Reorganization Share Redemption Amount;
c. the holder of each Spinco1 Reorganization 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 Spinco1;
d. 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 Spinco1 if the resulting realizable value of the net assets of Spinco1 after payment of the dividends would be less than the aggregate of the Spinco1 Reorganization Share Redemption Amount relating to all of the Spinco1 Reorganization Shares then outstanding;
e. for the purpose of subsection 191(4), the terms and conditions of the Spinco1 Reorganization Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each Spinco1 Reorganization Share. The amount to be specified in respect of each Spinco1 Reorganization Share will:
i. be pursuant to a resolution of the board of directors of Spinco1;
ii. be expressed as a dollar amount;
iii. not be determined by a formula; and
iv. not exceed the net fair market value of the property received by Spinco1 in consideration for its issuance;
f. the holder of each Spinco1 Reorganization Share will be entitled, upon the liquidation, dissolution or winding-up of Spinco1, to a payment in priority to all other classes of shares of Spinco1 of an amount equal to the Spinco1 Reorganization Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and
g. the holder of each Spinco1 Reorganization Share will be entitled to vote at meetings of shareholders of Spinco1.
20. The Spinco2 Reorganization Shares will have the following attributes:
a. each Spinco2 Reorganization Share will be redeemable, subject to applicable law, at any time at the option of Spinco2 at a redemption amount equal to the Spinco2 Reorganization Share Redemption Amount;
b. each Spinco2 Reorganization Share will be retractable, subject to applicable law, at any time at the option of the holder at a retraction amount equal to the Spinco2 Reorganization Share Redemption Amount;
c. the holder of each Spinco2 Reorganization 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 Spinco2;
d. 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 Spinco2 if the resulting realizable value of the net assets of Spinco2 after payment of the dividends would be less than the aggregate of the Spinco2 Reorganization Share Redemption Amount relating to all of the Spinco2 Reorganization Shares then outstanding;
e. for the purpose of subsection 191(4), the terms and conditions of the Spinco2 Reorganization Shares to be issued as described herein will, at the time of their issue, specify an amount in respect of each Spinco2 Reorganization Share. The amount to be specified in respect of each Spinco2 Reorganization Share will:
i. be pursuant to a resolution of the board of directors of Spinco2;
ii. be expressed as a dollar amount;
iii. not be determined by a formula; and
iv. not exceed the net fair market value of the property received by Spinco2 in consideration for its issuance;
f. the holder of each Spinco2 Reorganization Share will be entitled, upon the liquidation, dissolution or winding-up of Spinco2, to a payment in priority to all other classes of shares of Spinco2 of an amount equal to the Spinco2 Reorganization Share Redemption Amount to the extent of the amount of value of property available under applicable law for payment to shareholders upon such liquidation, dissolution or winding-up, but will be entitled to no more than the amount of that payment; and
g. the holder of each Spinco2 Reorganization Share will be entitled to vote at meetings of shareholders of Spinco2.
Exchange of DC Common Shares
21. Each Participant (including individuals who have exercised DC Stock Options relating to DC Common Shares in respect of which an election under subsection 7(8) has been made) will exchange each of the Participant's DC Common Shares for consideration consisting only of one DC New Common Share, one DC Butterfly Series 1 Share and one DC Butterfly Series 2 Share. In connection with the exchange:
a. the DC Common Shares so exchanged will be cancelled; and
b. DC will not file a joint election under the provisions of subsection 85(1) with any Participant in respect of this share exchange.
22. The aggregate addition to the paid-up capital in respect of the DC New Common Shares, the DC Butterfly Series 1 Shares and the DC Butterfly Series 2 Shares issued by DC on the exchange described in this Paragraph will not exceed the paid-up capital of the DC Common Shares (excluding any DC Common Shares owned by the Dissenting Shareholders) immediately before the exchange. For greater certainty, the aggregate paid-up capital of the DC Common Shares will be allocated as follows:
a. the amount of the paid-up capital of the DC Butterfly Series 1 Shares will be equal to their par value, which will be equal to the net book value of Spinco 1 Spin-off Property;
b. the amount of the paid-up capital of the DC Butterfly Series 2 Shares will be equal to their par value which will be equal to the net book value of the Spinco 2 Spin-off Property; and
c. the amount of the paid-up capital of the DC New Common Shares will be equal to the paid-up capital of the DC Common Shares minus the aggregate of the paid-up capital of the DC Butterfly Series 1 Shares and the DC Butterfly Series 2 Shares.
23. Other than as set out in this letter, there will not be any agreement in respect of the DC Butterfly Series 1 Shares or the DC Butterfly Series 2 Shares in respect of any matters referred to in any of subparagraphs (b)(i) to (iv) of the definition "taxable preferred share" or in any of paragraphs (a), (b), (f) or (h) of the definition "short-term preferred share" in subsection 248(1).
Warrants
24. Any DC Warrant, New DC Stock Option, Spinco1 Stock Option or Spinco2 Stock Option which expires according to its terms without being exercised by the holders thereof shall be exercisable by DC, at the election of DC, for a period of XXXXXXXXXX days following the relevant expiry date.
Transfer of DC Butterfly Series 1 Shares to Spinco1
25. Each Participant will transfer each of his DC Butterfly Series 1 Shares to Spinco1 in exchange for one Spinco1 Common Share for every XXXXXXXXXX DC Butterfly Series 1 Shares transferred by the particular Participant. The Spinco1 Common Shares will be listed for trading on the XXXXXXXXXX on the Effective Date.
26. The fair market value, immediately before the transfer described in the previous Paragraph, of each Participant's shares of the capital stock of Spinco1 will be equal to the amount determined by the formula: (A × B/C) + D as set out in subparagraph (b)(iii) of the definition "permitted exchange" in subsection 55(1).
27. Spinco1 will add to the stated capital account of the Spinco1 Common Shares an amount equal to the paid-up capital of the transferred DC Butterfly Series 1 Shares.
28. In the event that the paid-up capital of the DC Butterfly Series 1 Shares transferred to Spinco1 exceeds the adjusted cost base of such shares to Spinco1, DC will, pursuant to the provisions of the First Act, pass a resolution to reduce the aggregate stated capital of the DC Butterfly Series 1 Shares to an amount that is equal to the adjusted cost base of the DC Butterfly Series 1 Shares to Spinco1 at that time. No amount will be paid to Spinco1 on this reduction of stated capital.
Transfer of DC Butterfly Series 2 Shares to Spinco2
29. Each Participant will transfer all such Participant's DC Butterfly Series 2 Shares to Spinco2 in exchange for Spinco2 Common Shares. The fair market value, immediately before such transfer, of each Participant's shares of the capital stock of Spinco2 will be equal to the amount determined by the formula: (A × B/C) + D as set out in subparagraph (b)(iii) of the definition "permitted exchange" in subsection 55(1). As sole consideration for the DC Butterfly Series 2 Shares transferred to it, Spinco2 will issue to each Participant that number of Spinco2 Common Shares obtained by multiplying the number of DC Butterfly Series 2 Shares held by a Participant by the DC-Spinco2 Exchange Ratio. The Spinco2 Common Shares will be listed for trading on the Stock Exchange on the Effective Date.
30. Spinco2 will add to the stated capital account of the Spinco2 Common Shares an amount equal to the paid-up capital of the transferred DC Butterfly Series 2 Shares.
31. In the event that the paid-up capital of the DC Butterfly Series 2 Shares transferred to Spinco2 exceeds the adjusted cost base of such shares to Spinco2, DC will, pursuant to the provisions of the First Act, pass a resolution to reduce the aggregate stated capital of the DC Butterfly Series 2 Shares to an amount that is equal to the adjusted cost base of the DC Butterfly Series 2 Shares to Spinco2 at that time. No amount will be paid to Spinco2 on this reduction of stated capital.
Transfer of Spinco1 Spin-off Property
32. DC will transfer the Spinco1 Spin-off Property to Spinco1. Immediately after such transfer, the net fair market value of the Spinco1 Spin-off Property acquired by Spinco1 on the distribution will be equal to that proportion of the net fair market value of all the property of DC, determined immediately before the transfer, that:
a. the aggregate fair market value of the DC Butterfly Series 1 Shares owned by Spinco1, immediately before the transfer, is of
b. the aggregate fair market value of all the issued and outstanding shares of DC immediately before the transfer.
33. As consideration for the transfer of the Spinco1 Spin-off Property, Spinco1 will enter into the Spinco1 Commitment with DC and will issue to DC XXXXXXXXXX Spinco1 Reorganization Shares, having an aggregate fair market value and redemption amount equal to the fair market value, at the time of the transfer, of the Spinco1 Spin-off Property less the fair market value of the Spinco1 Commitment.
34. DC will jointly elect with Spinco1, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property included in the Spinco1 Spin-off Property that has a fair market value in excess of its cost amount. In each case, the agreed amount will not exceed the fair market value of the particular eligible property, nor will it be less than the amount permitted under paragraph 85(1)(b). For greater certainty, the agreed amount for the purposes of each election will be equal to:
a. in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
b. in the case of a depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
c. in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
35. The amount to be added to the stated capital of the Spinco1 Reorganization Shares to be issued by Spinco1 to DC as described herein will be equal to the aggregate of:
a. in respect of those properties for which an election under subsection 85(1) is made, an amount equal to the aggregate agreed amounts for such properties; and
b. in any other case, the aggregate fair market value of the properties so transferred to Spinco1;
less the fair market value of the Spinco1 Commitment.
Transfer of Spinco2 Spin-off Property
36. DC will transfer the Spinco2 Spin-off Property to Spinco2. As consideration for the transfer of the Spinco2 Spin-off Property, Spinco2 will enter into the Spinco2 Commitment with DC and will issue to DC XXXXXXXXXX Spinco2 Reorganization Shares, having an aggregate fair market value and redemption amount equal to the fair market value, at the time of the transfer, of the Spinco2 Spin-off Property less the fair market value of the Spinco2 Commitment.
37. DC will jointly elect with Spinco2, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each eligible property included in the Spinco2 Spin-off Property that has a fair market value in excess of its cost amount. In each case, the agreed amount will not exceed the fair market value of the particular eligible property, nor will it be less than the amount permitted under paragraph 85(1)(b). For greater certainty, the agreed amount for the purposes of each election will be equal to:
a. in the case of capital property (other than depreciable property of a prescribed class), an amount equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);
b. in the case of a depreciable property of a prescribed class, an amount equal to the least of the amounts described in subparagraphs 85(1)(e)(i), (ii) and (iii); and
c. in the case of eligible capital property, an amount equal to the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).
38. The amount to be added to the stated capital of the Spinco2 Reorganization Shares to be issued by Spinco2 to DC as described herein will be equal to the aggregate of:
a. in respect of those properties for which an election under subsection 85(1) is made, an amount equal to the aggregate agreed amounts for such properties; and
b. in any other case, the aggregate fair market value of the properties so transferred to Spinco2;
less the fair market value of the Spinco2 Commitment.
39. Immediately after the transfer described in Paragraph 36, the net fair market value of the Spinco2 Spin-off Property acquired by Spinco2 on the distribution will be equal to that proportion of the net fair market value of all the property of DC, determined immediately before the transfer, that:
a. the aggregate fair market value of the DC Butterfly Series 2 Shares owned by Spinco2, immediately before the transfer, is of
b. the aggregate fair market value of all the issued and outstanding shares of DC immediately before the transfer.
Stock Options
40. Immediately after the issuance of the Spinco1 Reorganization Shares and the Spinco2 Reorganization Shares, each holder of a DC Stock Option will dispose of his respective rights under the DC Stock Option to each of DC, Spinco1 and Spinco2 in consideration for the issuance to the particular holder of one New DC Stock Option, one Spinco1 Stock Option and one Spinco2 Stock Option in such a manner that:
a. the particular holder will receive no consideration for the exchange of such DC Stock Options other than New DC Stock Options, Spinco1 Stock Options and Spinco2 Stock Options;
b. for each DC Stock Option disposed of, each holder will be entitled to receive one New DC Stock Option, XXXXXXXXXX of a Spinco1 Stock Option and a fraction of a Spinco2 Stock Option equal to the DC-Spinco2 Exchange Ratio;
c. the exercise price of a holder's DC Stock Options will be allocated to the New DC Stock Options, the Spinco1 Stock Options and the Spinco2 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 5 days) of the DC New Common Shares, the Spinco1 Common Shares and the Spinco2 Common Shares. The option exchange agreements will ensure that the aggregate In The Money Amount applicable to the New DC Stock Options, the Spinco1 Stock Options and the Spinco2 Stock Options determined immediately after the exchange, will not exceed the In The Money Amount, if any, determined immediately before the exchange, applicable to the DC Stock Options that were the subject of the disposition by the particular holder;
d. the other terms and conditions of the New DC Stock Options, the Spinco1 Stock Options and the Spinco2 Stock Options will parallel those of the DC Stock Options; and
e. the DC Stock Options will be cancelled upon the foregoing disposition and the obligations of DC, Spinco1 and Spinco2 to issue replacement stock options as a result of the Proposed Transactions will be satisfied.
Elimination of Cross-Shareholding
41. DC will redeem the DC Butterfly Series 1 Shares held by Spinco1 and will issue to Spinco1, as payment therefor, the DC Spinco1 Note. Spinco1 will accept the DC Spinco1 Note as full payment of the DC Butterfly Series 1 Share Redemption Amounts of the DC Butterfly Series 1 Shares so redeemed, with the risk of the DC Spinco1 Note being dishonoured.
42. DC will redeem the DC Butterfly Series 2 Shares held by Spinco2 and will issue to Spinco2, as payment therefor, the DC Spinco2 Note. Spinco2 will accept the DC Spinco2 Note as full payment of the DC Butterfly Series 2 Share Redemption Amounts of the DC Butterfly Series 2 Shares so redeemed, with the risk of the DC Spinco2 Note being dishonoured.
43. Spinco1 will redeem all of the Spinco1 Reorganization Shares held by DC and will issue to DC, as payment therefor, the Spinco1 Redemption Note. DC will accept the Spinco1 Redemption Note as full payment of the Spinco1 Reorganization Share Redemption Amounts of the Spinco1 Reorganization Shares so redeemed, with the risk of the Spinco1 Redemption Note being dishonoured.
44. Spinco2 will redeem all of the Spinco2 Reorganization Shares held by DC and will issue to DC, as payment therefor, the Spinco2 Redemption Note. DC will accept the Spinco2 Redemption Note as full payment of the Spinco2 Reorganization Share Redemption Amounts of the Spinco2 Reorganization Shares so redeemed, with the risk of the Spinco2 Redemption Note being dishonoured.
45. DC will satisfy its obligations under the DC Spinco1 Note by transferring the Spinco1 Redemption Note to Spinco1 and Spinco1 will accept the Spinco1 Redemption Note in full satisfaction of DC's obligations under the DC Spinco1 Note. Similarly, Spinco1 will satisfy its obligations under the Spinco1 Redemption Note by transferring the DC Spinco1 Note to DC and DC will accept the DC Spinco1 Note in full satisfaction of Spinco1's obligations under the Spinco1 Redemption Note. The DC Spinco1 Note and the Spinco1 Redemption Note will both be marked paid in full and cancelled.
46. DC will satisfy its obligations under the DC Spinco2 Note by transferring the Spinco2 Redemption Note to Spinco2 and Spinco2 will accept the Spinco2 Redemption Note in full satisfaction of DC's obligations under the DC Spinco2 Note. Similarly, Spinco2 will satisfy its obligations under the Spinco2 Redemption Note by transferring the DC Spinco2 Note to DC and DC will accept the DC Spinco2 Note in full satisfaction of Spinco2's obligations under the Spinco2 Redemption Note. The DC Spinco2 Note and the Spinco2 Redemption Note will both be marked paid in full and cancelled.
Exercise of Warrants
47. The Spinco1 Flow-Through Special Warrants will be automatically exercised, through no further action on the part of the holder and for no additional consideration.
48. The Spinco1 Special Warrants will automatically be exercised through no further action on the part of the holder and for no additional consideration.
49. The Spinco2 Special Warrants will be exercised, through no further action on the part of the holder and for no additional consideration.
The exercise of the warrants described in Paragraphs 47 to 49 will not result in any person or group of persons acquiring control of either Spinco1 or Spinco2.
Combination of ACo and Spinco2
50. Each holder of the Remaining Aco Shares will transfer such shares to Spinco2. The holders who wish to transfer their ACo Shares under subsection 85(1) will jointly elect with ACo, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to such transfer In each case, the agreed amount will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii), will not exceed the fair market value of the particular eligible property and will not be less than the amount permitted under paragraph 85(1)(b).
51. As consideration for the Remaining Aco Shares transferred to it, Spinco2 will issue to the holders of such Remaining Aco Shares, Spinco2 Common Shares on the basis of one Spinco2 Common Share for every whole Remaining Aco Share held by a respective holder. The stated capital account maintained in respect of Spinco2 Common Shares will be increased to an amount that will not result in the paid-up capital being reduced under either subsection 85(2.1) or 85.1(2.1). The number of Spinco2 Common Shares issued as consideration for the Remaining Aco Shares will represent 50% or less of all the Spinco2 Common Shares issued and outstanding immediately after the time that such shares are issued.
52. Each holder of an Aco Stock Option will dispose of his respective rights under the Aco Stock Option to ACo and will receive one Spinco2 Option in such manner that:
a. the particular holder will receive no consideration for the ACo Stock Option other than one Spinco2 Stock Option;
b. the exercise price of each Spinco2 Stock Option received on such exchange will be identical to the exercise price of the ACo Stock Option which was exchanged for such Spinco2 Stock Option.
c. the aggregate In The Money Amount applicable to the Spinco2 Stock Option will not exceed the In The Money Amount, if any, determined immediately before the exchange, applicable to the ACo Stock Option that was the subject of the disposition by the particular holder;
d. the other terms and conditions of the Spinco2 Stock Option will parallel those of the ACo Stock Option; and
e. the ACo Stock Option will be cancelled upon the foregoing disposition and the obligations of ACo to issue replacement stock options as a result of the Proposed Transactions will be satisfied.
53. The name of Aco will be changed to "XXXXXXXXXX".
54. The name of Spinco2 will be changed to "XXXXXXXXXX".
Conditions
55. The parties to the Plan of Arrangement have agreed that its completion will be subject to the following conditions:
a. Spinco1 shall have issued Spinco1 Special Warrants and Spinco1 Flow-Through Special Warrants for proceeds of at least $XXXXXXXXXX;
b. Aco shall have issued Spinco2 Special Warrants for proceeds of at least $XXXXXXXXXX (or such lesser amount as may be determined by the Board of Directors of Aco); and
c. such other conditions as are described in the Plan of Arrangement.
Dissenting Shareholder
56. DC will acquire every share of DC in respect of which the right of dissent is exercised by a Dissenting Shareholder and will pay an amount equal to the fair value of such shares.
57. No shares of DC have been exchanged in a transaction described in paragraph (b) of the definition "specified corporation" in subsection 55(1) in the three years preceding the date on which the DC Butterfly Series 1 Shares are exchanged for Spinco1 Common shares.
58. The DC Common Shares, the DC New Common Shares, the Spinco1 Common Shares and the Spinco2 Common Shares will be prescribed shares under section 6204 of the Regulations throughout the Proposed Transactions.
59. None of DC, Spinco1 or Spinco2 is, or will be at any time during the Proposed Transactions, a specified financial institution or a restricted financial institution.
60. No person who is a specified shareholder of DC has or will have acquired any DC Common Shares in contemplation of the Proposed Transactions.
61. Except as described herein, no debts have been or will be incurred or paid and no property has been or will be acquired by DC or any corporation controlled by DC in contemplation of the distribution described below, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).
62. None of DC, Spinco1 or Spinco2 will sell or transfer any property as part of a series of transactions or events that includes the Proposed Transactions to an unrelated person or partnership subsequent to the Proposed Transactions.
63. None of the shares of DC, Spinco1 or Spinco2 described herein is or will be, at any time during the implementation of the Proposed Transactions:
a) the subject of any undertaking or agreement that is referred to in subsection 112(2.2) as a "guarantee agreement";
b) a share that is 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 referred to in subsection 112(2.3) as that term is defined in subsection 248(1);
d) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
e) issued for consideration that is or includes:
i) an obligation of the type described in subparagraph 112(2.4)(b)(i); or
ii) any right of the type described in subparagraph 112(2.4)(b)(ii).
PURPOSE OF THE PROPOSED TRANSACTIONS
DC considers that the distribution of its properties to Spinco1 and Spinco2 as described herein is in the best interests of the DC Common Shareholders. The Proposed Transactions will enhance the ability of each of DC, Spinco1 and Spinco2 to pursue its independent corporate objectives, strategies and financing which will maximize value for the holders of DC Common Shares.
The Spinco1 Special Warrants, Spinco1 Flow Through Warrants and Spinco2 Special Warrants will be issued to finance new XXXXXXXXXX projects. They are issued because (i) the shares issued on their execution will be free of any hold period imposed by Canadian securities law; (ii) the money received on their issuance returns to the investors if the Plan of Arrangement does not occur; (iii) their issuance reduces the number of investors and thereby reduces the administrative burden of implementing the various steps described in the Proposed Transactions to simple consent-type resolutions.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all 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. On the exchange of DC Common Shares, described in Paragraph 21, by a Participant who holds such shares as capital property:
a) the provisions of subsection 86(1) will apply and the provisions of subsection 86(2) will not apply to the disposition of each existing DC Common Share by a Participant for one DC New Common Share, one DC Butterfly Series 1 Share and one DC Butterfly Series 2 Share, such that:
(i) the Participant will be deemed by paragraph 86(1)(b) to have acquired DC New Common Shares, DC Butterfly Series 1 Shares and DC Butterfly Series 2 Shares at a cost equal to the proportion of the adjusted cost base to the Participant of the holder's DC Common Shares immediately before the exchange that:
A. the fair market value, immediately after the exchange, of the DC New Common Shares, the DC Butterfly Series 1 Shares or the DC Butterfly Series 2 Shares, as the case may be,
is of
B. the fair market value, immediately after the exchange, of all the shares acquired by the Participant on the exchange;
(ii) pursuant to paragraph 86(1)(c), such Participant will be deemed to have disposed of the particular Participant's existing DC Common Shares for aggregate proceeds of disposition equal to the aggregate cost to the Participant of the DC New Common Shares, the DC Butterfly Series 1 Shares and the DC Butterfly Series 2 Shares received by the Participant as determined in (i) above; and
(iii) for the purposes of section 116, the existing DC Common Shares owned by a Participant who is not a resident of Canada at the time of the exchange of the DC Common Shares as described in Paragraph 22 will be excluded property by virtue of paragraph 116(6)(b).
B. In the event that the stated capital of the DC Butterfly Series 1 Shares or the DC Butterfly Series 2 Shares is reduced as described in Paragraphs 28 and 31, DC will not be deemed to have paid, and Spinco1 and Spinco2 will not be deemed to have received, a dividend pursuant to either of subsections 84(4) or (4.1).
C. Provided that a particular Participant who, immediately before the exchange of DC Butterfly Series 1 Shares for Spinco1 Common Shares as described in Paragraph 25:
(a) holds such DC Butterfly Series 1 Shares as capital property;
(b) deals at arm's length with Spinco1 immediately before the exchange;
(c) does not file an election under subsection 85(1) with respect to the exchange;
(d) does not include any portion of the gain or loss, otherwise determined, from the disposition of the DC Butterfly Series 1 Shares in computing his or her income or foreign accrual property income for the taxation year in which the share exchange takes place; and
(e) does not receive any consideration other than the Spinco1 Common Shares in exchange for the DC Butterfly Series 1 Shares;
and further provided that immediately after such exchange:
(f) 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 not control Spinco1 or beneficially own shares of Spinco1 having an aggregate fair market value representing more than 50% of the aggregate fair market value of all of the outstanding shares of Spinco1;
then pursuant to paragraph 85.1(1)(a), such Participant will be deemed:
(a) to have disposed of such DC Butterfly Series 1 Shares for proceeds of disposition equal to the aggregate adjusted cost base of such DC Butterfly Series 1 Shares to the particular Participant immediately before the exchange; and
(b) to have acquired such Spinco1 Common Shares at an aggregate cost equal to the aggregate adjusted cost base of such Participant's DC Butterfly Series 1 Shares immediately before the exchange;
and pursuant to paragraph 85.1(1)(b):
(c) the cost to Spinco1 of each DC Butterfly Series 1 Share acquired from each such Participant will be deemed to be the lesser of its fair market value immediately before the exchange and the paid-up capital of such DC Butterfly Series 1 Share immediately before the exchange.
D. Provided that a particular Participant who, immediately before the exchange of DC Butterfly Series 2 Shares for Spinco2 Common Shares as described in Paragraph 29:
(a) holds such DC Butterfly Series 2 Shares as capital property;
(b) deals at arm's length with Spinco2 immediately before the exchange;
(c) does not file an election under subsection 85(1) with respect to the exchange;
(d) does not include any portion of the gain or loss otherwise determined in computing his or her income or foreign accrual property income for that year; and
(e) does not receive any consideration other than the Spinco2 Common Shares in exchange for the DC Butterfly Series 2 Shares;
and further provided that immediately after such exchange:
(f) 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 not control Spinco2 or beneficially own shares of Spinco2 having an aggregate fair market value representing more than 50% of the aggregate fair market value of all of the outstanding shares of Spinco2;
then pursuant to paragraph 85.1(1)(a):
(a) such Participant will be deemed to have disposed of such DC Butterfly Series 2 Shares for proceeds of disposition equal to the aggregate adjusted cost base of such DC Butterfly Series 2 Shares to the particular Participant immediately before the exchange; and
(b) such Participant will be deemed to have acquired such Spinco2 Common Shares at an aggregate cost equal to the aggregate adjusted cost base of such Participant's DC Butterfly Series 2 Shares immediately before the exchange;
and pursuant to paragraph 85.1(1)(b):
(c) the cost to Spinco2 of each DC Butterfly Series 2 Share acquired from each such Participant will be deemed to be the lesser of its fair market value immediately before the exchange and the paid-up capital of such DC Butterfly Series 2 Share immediately before the exchange.
E. Provided that an Aco Shareholder who, immediately before the exchange of Aco Shares for Spinco2 Common Shares as described in Paragraph 50:
(a) holds such Aco Shares as capital property;
(b) deals at arm's length with Spinco2 immediately before the exchange;
(c) does not file an election under subsection 85(1) with respect to the exchange;
(d) does not include any portion of the gain or loss otherwise determined in computing his or her income or foreign accrual property income for that year; and
(e) does not receive any consideration other than the Spinco2 Common Shares in exchange for the ACo Shares;
and further provided that immediately after such exchange:
(f) the particular Aco Shareholder or persons with whom such Aco Shareholder does not deal at arm's length, or the particular Aco Shareholder together with any other person or persons with whom such Aco Shareholder does not deal at arm's length, will not control Spinco2 or beneficially own shares of Spinco2 having an aggregate fair market value representing more than 50% of the aggregate fair market value of all of the outstanding shares of Spinco2;
then pursuant to paragraph 85.1(1)(a):
(a) such Aco Shareholder will be deemed to have disposed of such Aco Shares for proceeds of disposition equal to the aggregate adjusted cost base of such Aco Share to the particular Aco Shareholder immediately before the exchange; and
(b) such Aco Shareholder will be deemed to have acquired such Spinco2 Common Shares at an aggregate cost equal to the aggregate adjusted cost base of such Aco Shareholder's Aco Shares immediately before the exchange;
and pursuant to paragraph 85.1(1)(b):
(c) the cost to Spinco2 of each Aco Share acquired from each such Aco Shareholder will be deemed to be the lesser of its fair market value immediately before the exchange and the paid-up capital of such Aco Share immediately before the exchange.
F. 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 the transfer:
(a) by an Aco Shareholder of Aco Shares to Spinco2 as described in Paragraph 50;
(b) by DC to Spinco1 of each Spinco1 Spin-off Property to Spinco1 as described in Paragraph 32; and
(c) by DC to Spinco2 of each Spinco2 Spin-off Property as described in Paragraph 36,
such that the agreed amounts in respect of each such transfer will be deemed to be the proceeds of disposition for the particular transferred property to each transferor and the cost to each transferee for the particular transferred property. For greater certainty, paragraph 85(1)(e.2) will not apply to any of the transfers and subsection 85(2.1) will not apply to reduce the paid-up capital of the Spinco1 Reorganization Shares issued by Spinco1 to DC as described in Paragraph 32 or to reduce the paid-up capital of the Spinco2 Reorganization Shares issued by Spinco2 to DC as described in Paragraph 36.
G. As a result of the redemption by Spinco1 of the Spinco1 Reorganization Shares described in Paragraph 43, Spinco1 will be deemed by paragraph 84(3)(a) to have paid, and DC will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the Spinco1 Reorganization Shares, and any such dividend:
(a) will be included in DC's income pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be excluded, pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54, in determining DC's proceeds of disposition for the Spinco1 Reorganization Shares;
(c) will be deductible by DC, pursuant to subsection 112(1), in computing its taxable income for the taxation year in which such dividend is deemed to be received and, for greater certainty, the provisions of subsection 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend;
(d) will reduce any loss arising from the redemption of those shares pursuant to subsection 112(3);
(e) will not be subject to tax under Parts IV.1 or VI.1, but only to the extent that the amount paid by Spinco1 on the redemption of the Spinco1 Reorganization Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4); and
(f) will not be subject to tax under Part IV.
H. As a result of the redemption by Spinco2 of the Spinco2 Reorganization Shares described in Paragraph 44, Spinco2 will be deemed by paragraph 84(3)(a) to have paid, and DC will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the Spinco2 Reorganization Shares and any such dividend:
(a) will be included in DC's income pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be excluded, pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54, in determining DC's proceeds of disposition for the Spinco2 Reorganization Shares;
(c) will be deductible by DC, pursuant to subsection 112(1), in computing its taxable income for the taxation year in which such dividend is deemed to be received and, for greater certainty, the provisions of subsection 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend;
(d) will reduce any loss arising from the redemption of those shares pursuant to subsection 112(3);
(e) will not be subject to tax under Parts IV.1 or VI.1, but only to the extent that the amount paid by Spinco2 on the redemption of the Spinco2 Reorganization Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4); and
(f) will not be subject to tax under Part IV.
I. As a result of the redemption by DC of the DC Butterfly Series 1 Shares held by Spinco1 described in Paragraph 41, DC will be deemed by paragraph 84(3)(a) to have paid, and Spinco1 will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the DC Butterfly Series 1 Shares, and any such dividend:
(a) will be included in Spinco1's income pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be excluded, pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54, in determining Spinco1's proceeds of disposition for the DC Butterfly Series 1 Shares;
(c) will be deductible by Spinco1, pursuant to subsection 112(1), in computing its taxable income for the taxation year in which such dividend is deemed to be received and. for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend;
(d) will reduce any loss arising from the redemption of those shares pursuant to subsection 112(3);
(e) will not be subject to tax under Parts IV.1 or VI.1, but only to the extent that the amount paid by DC on the redemption of the DC Butterfly Series 1 Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4); and
(f) will not be subject to tax under Part IV.
J. As a result of the redemption by DC of the DC Butterfly Series 2 Shares held by Spinco2 described in Paragraph 42 DC will be deemed by paragraph 84(3)(a) to have paid, and Spinco2 will be deemed by paragraph 84(3)(b) to have received, a dividend equal to the amount by which the amount paid on such redemption exceeds the paid-up capital of the DC Butterfly Series 2 Shares, and any such dividend:
(a) will be included in Spinco2's income pursuant to subsection 82(1) and paragraph 12(1)(j);
(b) will be excluded, pursuant to paragraph (j) of the definition "proceeds of disposition" in section 54, in determining Spinco2's proceeds of disposition for the DC Butterfly Series 2 Shares;
(c) will be deductible by Spinco2, pursuant to subsection 112(1), in computing its taxable income for the taxation year in which such dividend is deemed to be received and. for greater certainty, the provisions of subsections 112(2.1), (2.2), (2.3) or (2.4) will not apply to deny the deduction of such deemed dividend;
(d) will reduce any loss arising from the redemption of those shares pursuant to subsection 112(3);
(e) will not be subject to tax under Parts IV.1 or VI.1, but only to the extent that the amount paid by DC on the redemption of the DC Butterfly Series 2 Shares does not exceed the amount specified in respect of those shares for the purposes of subsection 191(4); and
(f) will not be subject to tax under Part IV.
K. Provided that:
(a) there is not a distribution by DC to a corporation that is not an Acquiror before the day that is three years after the Effective Date; and
(b) there is not a distribution by Spinco1 or Spinco2 before the day that is three years after the Effective Date;
and 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 any shares of DC in contemplation of the distribution in the circumstances described in subparagraph 55(3.1)(b)(iii); or
(d) an acquisition of property in the circumstances described in paragraphs 55(3.1)(c) or (d),
which has not been described herein, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the taxable dividends referred to in rulings G, H, I and J above and for greater certainty, subsection 55(3.1) will not apply to deny the exemption under paragraph 55(3)(b).
L. The cancellation of the Spinco1 Redemption Note, the Spinco2 Redemption Note, the DC Spinco1 Note and the DC Spinco2 Note, as described in Paragraphs 45 and 46, will not give rise to a "forgiven amount" within the meaning thereof in subsection 80(1) or 80.01(1).
M. With regard to the payment by DC in respect of DC Common Shares held by a Dissenting Shareholder as described in Paragraph 56:
(a) subject to the application of subsection 55(2), the Dissenting Shareholder will be deemed by paragraph 84(3)(b) to have received a dividend equal to the amount by which any payment from DC to the Dissenting Shareholder in respect of the purchase of such Dissenting Shareholder's DC Common Shares exceeds the paid-up capital 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 dividend deemed to have been paid as described in (a) to a Dissenting Shareholder who is a non-resident of Canada; and
(c) paragraph (j) of the definition "proceeds of disposition" in section 54 will apply to exclude the amount of the deemed dividend described in (a) from the proceeds of disposition of the DC Common Shares recognized by the Dissenting Shareholder as a result of such purchase of the DC Common Shares by DC, provided that the shares were held as capital property by the Dissenting Shareholder.
N. The provisions of subsection 7(1.4) will apply, for the purposes of section 7, to each disposition of a DC Stock Option that is subject to the provisions of subsection 7(1) for a New DC Stock Option, a Spinco1 Stock Option and a Spinco2 Stock Option, as described in Paragraph 40, provided that the aggregate In The Money Amount applicable to the New DC Stock Options, Spinco1 Stock Options and Spinco2 Stock Options that are issued to a particular holder on the exchange described in Paragraph 40 does not exceed the aggregate In The Money Amount, if any, applicable to the DC Stock Options that were disposed of by such holder for the New DC Stock Options, the Spinco1 Stock Options and the Spinco2 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 DC Stock Option and not to have acquired such New DC Stock Option, Spinco1 Stock Option and Spinco2 Stock Option;
(b) such holder's New DC Stock Option, Spinco1 Stock Option and Spinco2 Stock Option will be deemed to be the same as, and a continuation of such holder's DC Stock Option; and
(c) Spinco1 and Spinco2 will each be deemed to be the same person as, and a continuation of, DC.
O. The provisions of subsection 7(1.4) will apply, for the purposes of section 7, to each disposition of an Aco Stock Option that is subject to the provisions of subsection 7(1) for a Spinco2 Stock Option, as described in Paragraph 52, provided that the aggregate In The Money Amount applicable to all the Spinco2 Stock Options that are issued to a particular holder on the disposition described in Paragraph 52 does not exceed the aggregate In The Money Amount, if any, applicable to the Aco Stock Options that were disposed of by such holder for the Spinco2 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 Aco Stock Option and not to have acquired such holder's Spinco2 Stock Option;
(b) such holder's Spinco2 Stock Option will be deemed to be the same as, and a continuation of such holder's Aco Stock Option; and
(c) Spinco2 will be deemed to be the same person as, and a continuation of, Aco.
P. Provided that:
(a) a Participant is a holder of DC Common Shares that were acquired through the exercise of the Participant's stock options granted under the DC Stock Option Plan;
(b) the Participant made a valid election under subsection 7(8) with respect to such DC Common Shares in accordance with subsection 7(10) and the election was not revoked under subsection 7(13); and
(c) the conditions of paragraph 7(1.5)(c) are satisfied with respect to the particular share exchange referred to in (d) (e) and (f) below;
the provisions of subsection 7(1.5) will apply for the purposes of section 7 and paragraph 110(1)(d) to the exchange of:
(d) the Participant's DC Common Shares for DC New Common Shares, DC Butterfly Series 1 Shares and DC Butterfly Series 2 Shares as described in Paragraph 21;
(e) the Participant's DC Butterfly Series 1 Shares for Spinco1 Common Shares as described in Paragraph 25; and
(f) the Participant's DC Butterfly Series 2 Shares for Spinco2 Common Shares as described in Paragraph 29.
Q. Each holder of a DC Warrant that has not expired immediately before the Effective Date will not be considered to have:
(a) disposed of such holder's DC Warrants that remained outstanding at the Effective Date; or
(b) realized a benefit under subsection 15(1).
R. Provided that the DC New Common Shares, the Spinco1 Common Shares and the Spinco2 Common 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).
S. The provisions of subsections 15(1), 56(2), 56(4), 69(4) and 246(1) will not be applied as a result of Paragraphs 32 to 46, in and by themselves.
T. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given 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 within six months of the date of this letter.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
OPINION
Provided that the amendment to the Act concerning the proposed addition of subsection 55(6) contained in the Revised Draft Technical Amendments to the Act released by the Minister of Finance on November 9, 2006 is enacted substantially as drafted, the Proposed Transactions are implemented as described herein and further provided that immediately before the exchange described in Paragraph 21 a DC Common Share is not taxable Canadian property to its holder, it is our opinion that the DC Butterfly Series 1 Shares and the DC Butterfly Series 2 Shares will be deemed, for the purposes of subsection 116(6) and the definition "taxable Canadian property" in subsection 248(1) to be listed on a prescribed stock exchange.
As indicated in paragraph 22 of Information Circular 70-6R5, an expression of opinion is not an advance income tax ruling and, accordingly, is not binding on the Canada Revenue Agency.
Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed:
(a) the determination of the fair market value or adjusted cost base of any particular asset or the paid-up capital in respect of any share referred to herein;
(b) whether any share referred to herein is a flow-through share;
(c) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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