2008 Ruling 2007-0241291R3 - Butterfly Ruling

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

Principal Issues: Standard split-up butterfly

Position: Favourable rulings given.

Reasons: Meets the requirements of 55(3)(b).

XXXXXXXXXX 							2007-024129

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. You have advised that to the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(a) in an earlier tax return of one of the taxpayers or any related person;

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

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

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

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

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) "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 of the Act, and the Income Tax Regulations thereunder are referred to as the Regulations;

b) "ACB" means "adjusted cost base" as that expression is defined in section 54 and subsection 248(1);

c) "agreed amount" means the amount agreed on by the transferor and the transferee in respect of an eligible property in an election filed pursuant to subsection 85(1);

d) "arm's length" has the meaning assigned by subsection 251(1);

e) "Bank Loan" means the demand loan owing by DC to a financial institution, as described in Paragraph 11;

f) "BN" means the tax identification number assigned by the CRA to the particular entity;

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

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

i) "DC" means XXXXXXXXXX , a corporation governed by the XXXXXXXXXX

j) "DC1 Note" means the note issued by DC to TC1, as described in Paragraph 23;

k) "DC2 Note" means the note issued by DC to TC2, as described in Paragraph 23;

l) "DC3 Note" means the note issued by DC to TC3, as described in Paragraph 23;

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

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

o) "dividend rental arrangement" has the meaning assigned by subsection 248(1);

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

q) "excess unallocated liabilities" means the excess unallocated liabilities described in Paragraph 16;

r) "fair market value" or "FMV" means the highest price available in an open and unrestricted market, between informed prudent parties, acting at arm's length and with no compulsion to act, expressed in terms of cash;

s) "forgiven amount" has the meaning assigned by subsection 80(1) and 80.01(1);

t) "Holdco" means XXXXXXXXXX , a taxable Canadian corporation governed by the XXXXXXXXXX ;

u) "Investco" means XXXXXXXXXX ., a corporation governed by the XXXXXXXXXX ;

v) "Marketable Securities" means the publicly-traded securities described in Paragraph 10;

w) "NR" means XXXXXXXXXX ;

x) XXXXXXXXXX

y) "Opco" means XXXXXXXXXX , a taxable Canadian corporation governed by the XXXXXXXXXX ;

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

aa) "Paragraph" refers to a numbered paragraph in this advance income tax ruling request;

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

cc) "proceeds of disposition" or "POD" has the meaning assigned by section 54;

dd) "Proposed Transactions" means the proposed transactions described in Paragraphs 12 to 25;

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

ff) "related person" has the meaning assigned by section 251;

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

hh) "Shareholder" means each of Sib1ACo, Sib1BCo, and Sib2Co;

ii) "Sib1ACo" means XXXXXXXXXX ., a corporation governed by the XXXXXXXXXX ;

jj) "Sib1BCo" means XXXXXXXXXX ., a corporation governed by the XXXXXXXXXX ;

kk) "Sib2Co" means XXXXXXXXXX , a corporation governed by the XXXXXXXXXX ;

ll) "Sibling 1" means XXXXXXXXXX ;

mm) "Sibling 2" means XXXXXXXXXX ;

nn) "significant influence" has the meaning assigned by section 3051 of the CICA Handbook;

oo) "specified investment business" has the meaning assigned by subsection 125(7);

pp) "stated capital" means the amount of capital determined in respect of a class or series of shares in accordance with the Canada Business Corporations Act;

qq) "Subco" means XXXXXXXXXX ., a corporation governed by the XXXXXXXXXX ;

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

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

tt) "TCs" means TC1, TC2, and TC3 collectively as described in Paragraph 13 and "TC" refers to any one of the TCs;

uu) "TC1" means the holding corporation incorporated by Sib1ACo, as described in Paragraph 13;

vv) "TC2" means the holding corporation incorporated by Sib1BCo, as described in Paragraph 13;

ww) "TC3" means the holding corporation incorporated by Sib2Co, as described in
Paragraph 13;

xx) "TC1 Note" means the note issued by TC1 to DC, as described in Paragraph 22;

yy) "TC2 Note" means the note issued by TC2 to DC, as described in Paragraph 22;

zz) "TC3 Note" means the note issued by TC3 to DC, as described in Paragraph 22; and

aaa) "Treaty" means the Canada-US. Income Tax Convention (1980).

FACTS

1. Sibling 1 and Sibling 2 are adult siblings and residents of Canada for purposes of the Act. NR is the adult niece of Sibling 1 and Sibling 2. NR is a non-resident of Canada for purposes of the Act and is a resident of the U.S. for purposes of the Treaty.

2. Sib1ACo is a CCPC and a taxable Canadian corporation. Sib1ACo is an investment holding corporation whose main asset is shares of DC. Sib1ACo's address is XXXXXXXXXX . The taxation year-end of Sib1ACo is XXXXXXXXXX . Sib1ACo deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre. Sib1ACo's BN is XXXXXXXXXX .

3. Sib1BCo is a CCPC and a taxable Canadian corporation. Sib1BCo is an investment holding corporation whose main asset is shares of DC. Sib1Bco's address is XXXXXXXXXX . The taxation year-end of Sib1BCo is XXXXXXXXXX . Sib1BCo deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre. Sib1BCo's BN is XXXXXXXXXX .

4. Sib2Co is a CCPC and a taxable Canadian corporation. Sib2Co is an investment holding corporation whose main asset is shares of DC. Sib2Co's address is XXXXXXXXXX . The taxation year-end of Sib2Co is XXXXXXXXXX . Sib2Co deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre. Sib2Co's BN is XXXXXXXXXX .

5. Investco is a taxable Canadian corporation. Investco is an investment holding corporation whose main assets are shares of DC and Subco. Investco's address is XXXXXXXXXX . The taxation year-end of Investco is XXXXXXXXXX . Investco deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre. Investco's BN is XXXXXXXXXX .

6. XXXXXXXXXX

6.1 XXXXXXXXXX

6.2 XXXXXXXXXX

6.3 XXXXXXXXXX

7. DC is a CCPC and a taxable Canadian corporation. DC's address is XXXXXXXXXX . The taxation year-end of DC is XXXXXXXXXX . DC deals with the XXXXXXXXXX Tax Services Office and files its corporate income tax returns at the XXXXXXXXXX Taxation Centre. DC's BN is XXXXXXXXXX .

8. The authorized capital of DC consists of:

(a) an unlimited number of Class A shares;

(b) an unlimited number of Class B shares; and

(c) an unlimited number of Class C shares.

The Class A, B and C shares entitle their holders to one vote per share and are otherwise equal in all respects except that (i) any one class of shares may receive a dividend to the exclusion of the other classes and (ii) in the event of a liquidation, dissolution, or wind-up of DC, the Class A shares are entitled to receive a distribution of $XXXXXXXXXX in the aggregate prior to any distributions to the holders of Class B or Class C shares, and the Class B shares are entitled to receive a distribution of $XXXXXXXXXX in the aggregate prior to any distribution to the holders of the Class C shares, with any further distributions being shared on a pro rata basis.

9. Currently there are XXXXXXXXXX Class A shares, XXXXXXXXXX Class B shares and XXXXXXXXXX Class C shares of DC issued and outstanding. These shares are held as follows:

Shareholder
	Class A Shares
 Class B Shares  Class C Shares  Voting
		 (Voting) 		Voting) 	  (Voting)
 	  Percentage
          Sib1ACo

XXXXXXX
XXXXX%

Sib1BCo XXXXXXX XXXXX%

Sib2Co       XXXXXXX 						      XXXXX %

Investco XXXXXX XXXXX %

DC does not exert significant influence over any corporation.

10. The main assets of DC are as follows:

(a) cash and cash equivalents and dividends and interest receivables;

(b) non-voting preferred shares in Subco;

(c) non-voting Class A and Class B Preferred shares in Holdco;

(d) an investment portfolio comprised primarily of publicly traded securities
(the "Marketable Securities"); and

(e) a loan receivable from Holdco.

11. The main liabilities of DC are as follows:

(a) bank indebtedness;

(b) interest and accounts payable;

(c) a bank loan, due to a financial institution (the "Bank Loan");

(d) demand loans due to shareholders and other persons (including Sib2Co, Sib1ACo, Sib1BCo, Sibling 1 and Sibling 2);

(e) income taxes payable; and

(f) future income taxes.

11.1 Holdco is a holding corporation that owns a controlling interest in Opco. All of Holdco's common shares are owned by Subco and preferred shares are owned by DC and XXXXXXXXXX , a corporation controlled by Subco. Opco is almost XXXXXXXXXX % owned by Holdco directly or indirectly through subsidiary holding corporations. The current CEO of Opco owns the remaining shares directly and indirectly. XXXXXXXXXX The common shares of Subco are held XXXXXXXXXX by Investco, XXXXXXXXXX by XXXXXXXXXX (a corporation controlled by Sibling 1) and XXXXXXXXXX by XXXXXXXXXX (a corporation controlled by Sibling 2).

PROPOSED TRANSACTIONS

12. DC will dispose of certain of the Marketable Securities for cash and will use such cash to repay the Bank Loan. The repayment of the Bank Loan will not result in a net increase in the value of any of the three types of property, as described in Paragraph 15, owned by DC.

13. Each of Sib1ACo, Sib1BCo and Sib2Co will incorporate a holding corporation under the XXXXXXXXXX (herein referred to collectively as the "TCs" and separately as "TC1", "TC2", and "TC3", respectively). Each of the TCs will have the following classes of authorized capital:

(a) an unlimited number of common shares;

(b) an unlimited number of Class A Preferred shares; and

(c) an unlimited number of Class B Preferred shares.

14. On incorporation, each of Sib1ACo, Sib1BCo and Sib2Co will subscribe for XXXXXXXXXX common share of its respective TC.

15. Immediately before the transfers of property described in Paragraph 17, the property owned by DC will be classified into the following three types of property for the purposes of the definition of "distribution" in subsection 55(1):

(a) cash or near-cash property (including the cash and cash equivalents and dividend and interest receivables), comprising all of the current assets of DC;

(b) investment property (including the non-voting preferred shares in Subco, the non-voting Class A and Class B Preferred shares in Holdco, and the investment portfolio), comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from property or from a specified investment business; and

(c) business property (of which there is expected to be none), comprising all of the assets of DC, other than cash or near-cash property, any income from which would, for purposes of the Act, be income from an active business carried on by DC (other than a specified investment business).

For greater certainty, for purposes of this distribution:

(d) tax accounts of DC, such as the balance of non-capital losses, net capital losses, RDTOH and/or CDA, if any, will not be considered to be property or a liability, as the case may be;

(e) no amount will be considered to be a liability unless it represents a true legal liability which is capable of quantification; and

(f) the amount of any deferred income tax will not be considered to be a property or a liability.

16. In determining the net FMV of each of the three types of property of DC immediately before the transfers of property described in Paragraph 17, the liabilities of DC will be allocated to, and will be deducted in the calculation of the net FMV of each type of property of DC in the following manner:

(a) current liabilities of DC will be allocated to each cash or near-cash property in the proportion that the FMV of each such property is of the FMV of all cash or near-cash property owned by DC. The amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near-cash property of DC;

(b) liabilities, other than current liabilities, of DC that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the property belongs) to the extent of its FMV. Any excess of such liabilities over the FMV of a particular property and liabilities that pertain to a particular type of property, but not to a particular property, will then be allocated to that particular type of property, but not in excess of the net FMV of such type of property; and

(c) if any liabilities remain after the allocations described in (a) and (b) above are made ("excess unallocated liabilities"), such excess unallocated liabilities (including excess current liabilities, if any) will then be allocated to the cash or near cash property, investment property and business property, if any, of DC, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

Based on the type of property classifications described in Paragraph 15, and after the allocation of DC's liabilities described in this Paragraph, it is anticipated that DC will only have investment property at the time of the transfers of property described in Paragraph 17.

17. Immediately following the determination of the net FMV of DC's three types of property, as described in Paragraph 16, DC will transfer to each TC a pro rata portion of each type of property owned by DC at that time, as determined in accordance with Paragraph 16, based upon the following percentages:

TC1 XXXXXXXXXX %

TC2 XXXXXXXXXX %

TC3 XXXXXXXXXX %

In effecting the transfer of a pro rata portion of each type of property, DC will transfer its preferred shares in Subco and its Class A and B Preferred shares in Holdco on a pro rata basis, in accordance with the percentages set out above.

18. As consideration for the property received by each TC from DC as described above, each TC will:

(a) assume an appropriate amount of the liabilities of DC (so that on a net basis each TC will receive its pro rata share of each type of property owned by DC), and

(b) issue Class B Preferred shares (non-voting and non-participating) to DC with an aggregate redemption value equal to the amount by which the aggregate fair market value of the property transferred exceeds the liabilities assumed.

19. Immediately following the completion of the transfer of DC's property as described in Paragraph 17, each TC will hold legal and beneficial ownership of the property transferred to it from DC, with a fair market value which will be equal to or will approximate that proportion of the aggregate fair market value of each type of property of DC determined immediately before such transfer described in Paragraph 17 that:

(a) the aggregate fair market value, immediately before the transfer of property described in Paragraph 17, of the shares of DC owned by such TC's Shareholder;

is of

(b) the aggregate fair market value, immediately before the transfers of property, of all the issued and outstanding shares of DC at that time.

For the purposes of this paragraph, the expression "approximate that proportion" means that the discrepancy of that proportion, if any, will not exceed one percent (1%), determined as a percentage of the net FMV of each type of property that a particular TC has received compared to what it would have received had it received its appropriate pro rata share of DC's property.

20. DC and each TC will jointly elect, in prescribed form and within the time period referred to in subsection 85(6) to have the provisions of subsection 85(1) apply to each property that is an eligible property received by the particular TC from DC (other than any Marketable Security which has a fair market value that is less than its ACB). For greater certainty, the agreed amount in respect of each such transferred property will be as follows:

(a) in the case of capital property (other than depreciable property of a prescribed class) and inventory, an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii);

(b) in the case of depreciable property of a prescribed class, an amount not less than 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 not less than the least of the amounts described in subparagraphs 85(1)(d)(i), (ii) and (iii).

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). The amount of liabilities to be allocated to the property that is the subject of an election under subsection 85(1) will not exceed the FMV of any such property. It is anticipated that DC will only have, at the time of the transfers, property of the type described in (a) above.

Where a Marketable Security to be transferred to a TC has a fair market value that is less than its ACB, as consideration for such security, the particular TC will only assume an amount of DC's liabilities equal to the fair market value of that particular security and for greater certainty no election under subsection 85(1) will be made in respect of such security.

21. The increase to the stated capital of the Class B Preferred shares issued by each particular TC as consideration for the property transferred to the particular TC will not exceed the aggregate cost of such property to the particular TC, as determined pursuant to subsection 85(1) where applicable, less the aggregate amount of DC's liabilities assumed by the particular TC for such property. For greater certainty, the addition to the stated capital will not exceed the maximum amount that could be added to the PUC of the shares, having regard to subsection 85(2.1).

22. Immediately following the transfers of property described in Paragraph 17, each TC will simultaneously redeem all of its outstanding Class B Preferred shares for an amount equal to the aggregate redemption amount and fair market value of such Class B Preferred shares. As consideration therefore, each TC will issue a non-interest bearing demand promissory note to DC (the "TC1 Note", "TC2 Note", and "TC3 Note", respectively) having a principal amount and fair market value equal to the aggregate redemption amount of the corresponding number of Class B Preferred shares so redeemed by the particular TC. DC will accept each TC Note as full payment for the aggregate redemption amount of the Class B Preferred shares so redeemed.

23. Following the redemption described in paragraph 22, DC will simultaneously purchase for cancellation from each Shareholder the shares of DC owned by such Shareholder, in each case for an aggregate purchase price equal to the aggregate fair market value of such shares at that time. DC will issue to each Shareholder, as consideration for the purchase of the shares of DC owned by such Shareholder, a non-interest bearing promissory note (the "DC1 Note", the "DC2 Note" and the "DC3 Note", respectively). Each DC Note will have a principal amount and fair market value equal to the purchase price of the shares purchased from the particular Shareholder. Each Shareholder will accept the DC Note issued to it in full payment of the aggregate purchase price of the shares of DC sold by it.

24. Following the purchase for cancellations described in paragraph 23, each Shareholder will resolve to liquidate and dissolve its respective TC. In connection with each liquidation and dissolution, all of the property of each TC will be distributed to its Shareholders and such Shareholder will assume the liabilities of its TC (other than liabilities owing to such Shareholder that are extinguished as a result of the dissolution), including its TC Note.

25. DC and each Shareholder will set-off the principal amount of their mutual debt obligations (namely the DC Note issued to each Shareholder, as described in Paragraph 23, and the TC Note issued by each TC to DC, as described in Paragraph 22), such that each such DC Note and TC Note will be set-off and cancelled in full satisfaction of the obligations under each such DC Note and TC Note.

OTHER MATTERS

26. XXXXXXXXXX

27. XXXXXXXXXX

28. XXXXXXXXXX

29. XXXXXXXXXX

30. XXXXXXXXXX

31. XXXXXXXXXX

ADDITIONAL INFORMATION

32. Unless otherwise specified, the Proposed Transactions described herein will occur in the order presented, with the exception of the filing of the applicable election forms described in Paragraph 20, which will be filed before the applicable due date.

33. No property has or will become property of DC or any corporation controlled by DC or a predecessor corporation of any such corporation in contemplation of and before the transfers described in Paragraph 17, except as described herein, or in the ordinary course of business, and no liabilities have been, or will be, incurred or discharged by DC or any corporation controlled by DC in contemplation of and before the proposed transfers described in Paragraph 17, except as described herein or in the ordinary course of business. Moreover, except as specifically outlined herein, there is no expectation or intention of DC, Investco, Sib1ACo, Sib1BCo, Sib2Co or any of the TCs, any corporation controlled by such corporations or any corporation having a direct or indirect interest in such corporations, to dispose of any property owned by them as part of the series of transactions or events that includes the Proposed Transactions, other than in the ordinary course of business.

34. Neither DC nor any of the TCs is or will be, at any time during a series of transactions or events that includes the Proposed Transactions, a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1) or a "specified financial institution" as defined in subsection 248(1).

35. None of the shares of DC nor any of the shares of any TC will be at any time during a series of transactions or events that includes 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) issued or acquired as part of a transaction, event or series of transactions or events of the type described in subsection 112(2.5); or

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

PURPOSE OF THE PROPOSED TRANSACTIONS

36. The purpose of the Proposed Transactions is to permit the shareholders of DC to separate their interests in order to enable such shareholders to own such interests independently from each other.

37. The purpose of the sale of marketable securities by DC in order to repay the bank loan is that DC has the available assets to repay the bank loan and it is less cumbersome to repay the bank loan than to have it assumed by the parties receiving DC's property in the reorganization.

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 follows:

A. Subsection 85(1) will apply to the transfer of each eligible property by DC to TC1, TC2 and TC3, as the case may be, as described in Paragraph 17, provided each particular TC and DC file a valid election in respect of each such transfer, as described in Paragraph 20, such that the agreed amount in respect of each such transfer shall be deemed to be the transferor's proceeds of disposition and the transferee's cost amount pursuant to paragraph 85(l)(a). For greater certainty, paragraph 85(1)(e.2) will not apply to the transfers referred to herein.

B. As a result of the redemption by each of TC1, TC2 and TC3 of their respective Class B Preferred shares held by DC, as described in Paragraph 22, and the purchase for cancellation by DC of its shares held by each Shareholder, as described in Paragraph 23, by virtue of subsection 84(3):

(a) Each particular TC will be deemed to have paid, and DC will be deemed to have received, a taxable dividend equal to the amount by which the amount paid in respect of the redemption by such TC of its Class B Preferred shares exceeds the paid-up capital of such class of shares immediately before the redemption;

(b) DC will be deemed to have paid, and each particular Shareholder will be deemed to have received, a taxable dividend equal to the amount by which the amount paid by DC in respect of the repurchase of its shares owned by such Shareholder exceeds the paid-up capital attributable to such shares immediately before the purchase for cancellation; and

(c) The taxable dividends described in (a) and (b) above:

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

(ii) will be deductible by the recipient pursuant to subsection 112(1) in computing its taxable income in the year in which such a dividend is deemed to have been received, and, for greater certainty, such deduction will not be prohibited by subsections 112(2.1), (2.2), (2.3) or (2.4);

(iii) will be excluded in determining POD to the recipient of the shares so redeemed, purchased or cancelled pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(iv) will, by virtue of subsection 112(3), reduce the loss, if any, in respect of the disposition of the shares on which the dividend is deemed to be received;

(v) will not give rise to tax under Part IV except to the extent that the payer corporation is entitled to a dividend refund for its taxation year in which it paid such dividend; and

(vi) will not give rise to tax under Part IV.I or VI.1.

C. Provided that, as part of the series of transactions or events that includes the Proposed Transactions described herein, there is not

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

(b) a disposition of property in the circumstances described in subparagraph 55(3.1)(b)(i);

(c) an acquisition of control in the circumstances described in subparagraph 55(3.l)(b)(ii);

(d) an acquisition of shares in the circumstances described in subparagraph 55(3.1)(b)(iii); or

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

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

D. The set-off of the mutual obligations outstanding between each particular Shareholder and DC under the particular DC Note held by such Shareholder and the corresponding TC Note issued to DC, as described in Paragraph 25, will not give rise to a forgiven amount within the meaning of either subsection 80(1) or section 80.01, nor will DC nor any Shareholder otherwise realize a gain or incur any loss as a result thereof.

E. The provisions of subsections 15(1), 56(2), 69(1), 69(4) and 246(1) will not apply to any of the transactions described in Paragraphs 13 to 25.

F. The provisions of subsection 245(2) will not apply to any of the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed herein.

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.

COMMENTS

Unless otherwise confirmed, 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 PUC of any share or the ACB or FMV of any property referred to herein;

b) the balance of CDA, GRIP or RDTOH of any corporation;

c) any tax consequences relating to the possibility that prior to, contemporaneous with, of following the Proposed Transactions, Holdco and Opco will complete a corporate reorganization or whether this corporate reorganization would also be included in the same series of transactions or events that includes the Proposed Transactions; or

d) 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,

XXXXXXXXXX
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch