2007 Ruling 2007-0243901R3 - Butterfly

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

Principal Issues: Butterfly

Position: Favourable rulings given.

Reasons: Meet the requirements of the Act.

XXXXXXXXXX 								2007-024390

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX and the new corporations ("NEWCO" and "SUBCO") described in paragraphs 19 and 20 below. We also acknowledge receipt of additional information you provided to us in your letters dated XXXXXXXXXX, and additional information you provided to us during various telephone conversations (XXXXXXXXXX) in connection with your ruling request.

In this letter, unless otherwise stated, all references to a statute are to the Income Tax Act (Canada).

DEFINITIONS AND ABBREVIATIONS

In this letter, the following terms and expressions have the meaning specified below:

	XXXXXXXXXX  (corporation that resulted			DCO
	 from the amalgamation on XXXXXXXXXX  of former
	 XXXXXXXXXX).

	XXXXXXXXXX  (corporation which				FORMCO
	 amalgamated with XXXXXXXXXX  on
	 XXXXXXXXXX to form DCO).

	XXXXXXXXXX 								HOLDCO

	New corporation described in paragraph 19 of the	NEWCO
	 Proposed transactions.

	New corporation described in paragraph 20 of the	SUBCO
	 Proposed transactions. 

	XXXXXXXXXX 	ACO
	XXXXXXXXXX 	BCO
	XXXXXXXXXX 	CCO
	XXXXXXXXXX 	ECO
	XXXXXXXXXX 	FCO
	XXXXXXXXXX 	GCO
	XXXXXXXXXX 	PTSHIP
	XXXXXXXXXX 	Mr.V
	XXXXXXXXXX 	Mr.W
	XXXXXXXXXX 	Mr.X
	XXXXXXXXXX 	Mr.Y
	XXXXXXXXXX 	Mr.Z
	
	"Adjusted cost base" has the meaning assigned by the		ACB
	 definition in section 54.

	Amount agreed on by a taxpayer and a TCC in respect		Agreed amount
	 of an Eligible property, pursuant to subsection 85(1).

	"Arm's length" has the meaning assigned by			Arm's length
 	subsection 251(1).

	"XXXXXXX  Division" as described in paragraph 22 of	   	XXXXXXX Division
	 the Proposed transactions.

	"XXXXXXXX  Division Percentage" as described in	         	XXXXXXXX Division
	 paragraph 22 of the Proposed transactions.
	           Percentage

	"Canadian-controlled private corporation" has the	  	CCPC
	 meaning assigned by the definition in subsection 125(7).

	Canada Revenue Agency						CRA

	"Capital property" has the meaning assigned by the	   	Capital property
	 definition in section 54.

	"Cost amount" has the meaning assigned by the	           	Cost amount
	 definition in subsection 248(1).

	"Depreciable property" has the meaning assigned by		Depreciable property
	 the definition in subsection 13(21).

	"Dividend refund" has the meaning assigned by	        	Dividend refund
	 subsection 129(1).

	"Dividend rental arrangement" has the meaning  		  	Dividend rental
 	 assigned by the definition in subsection 248(1).		arrangement

	"Distribution" has the meaning assigned by the			Distribution
	 definition in subsection 55(1).

	"Eligible capital property" has the meaning assigned	    	Eligible capital property
	 by the definition in section 54.

	"Eligible property" has the meaning assigned by the	  	Eligible property
	 definition in subsection 85(1.1).

	"Fair market value" (means the highest price available		FMV
 	 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).


	"XXXXXX  Division" as described in paragraph 22 of the    	XXXXXXX Division
	 Proposed transactions.

	"XXXXX Division Percentage" as described        		XXXXX Division Percentage
	in paragraph 22 of the Proposed transactions.

	"Paid-up capital" has the meaning assigned by the 		PUC
	 definition in subsection 89(1).

	"Private corporation" has the meaning assigned by		Private corporation
	 the definition in subsection 89(1).

	"Proceeds of disposition" has the meaning assigned 		Proceeds of disposition
	 by the definition in section 54.

	"Property" has the meaning assigned by the definition	    	Property
	 in subsection 248(1).

	"Public corporation" has the meaning assigned by the	  	Public corporation
	 definition in subsection 89(1).

	"Related person" has the meaning assigned by	         	Related person
	 subsection 251(1).

	"Series of transactions or events" has the meaning  		Series of transactions
	 assigned by subsection 248(10).

	Shareholders of XXXXXXXXXX 					Shareholders

	"Specified investment business" has the meaning	     		Specified investment
	 assigned by the definition in subsection 125(7).		business

	"Taxable Canadian corporation" has the meaning			TCC
	 assigned by the definition in subsection 89(1).

	"Taxable dividend" has the meaning assigned by the		Taxable dividend
	 definition in subsection 89(1).

	Transactions described in paragraph 19 to 37 of	     		Proposed transactions
	 the present letter.

	Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended		Act
	 from time to time and consolidated to the date of this
	 letter.

	Canada Business Corprations Act					CBCA

	XXXXXXXXXX
	XXXXXXXXXX 

FACTS

1. DCO is a TCC and a CCPC. DCO is governed by the XXXXXXXXXX. DCO is a corporation that resulted from the amalgamation on XXXXXXXXXX of FORMCO and HOLDCO. FORMCO was originally incorporated under the XXXXXXXXXX on XXXXXXXXXX. DCO has a XXXXXXXXXX taxation year.

2. The authorized share capital of DCO consists of XXXXXXXXXX Class B common shares ("Class B Common Shares") and an unlimited number of Class A common shares ("Class A Common Shares"), Class A preferred shares ("Class A Preferred Shares") and Class B preferred shares ("Class B Preferred Shares"). The Class A Preferred Shares and Class B Preferred Shares are issuable in series.

DCO has issued shares of only one series of preferred shares, that is, the series 1 of Class A Preferred Shares ("S1 Class A Preferred Shares").

The Class A Common Shares, Class B Common Shares, Class A Preferred Shares and S1 Class A Preferred Shares have the following rights, privileges, conditions and restrictions:

Class A Common Shares

The shares are without par value and voting (1 vote per share). Except as otherwise provided in the Class A Common Shares provisions or required by applicable law, the holders of Class A Common Shares will vote together with the holders of Class B Common Shares and the holders of preferred shares, if such preferred shares are voting shares, as a single class on all matters submitted to a vote or consent of shareholders.

Subject to the rights, privileges, conditions and restrictions attaching to the preferred shares, the holders of Class A Common Shares shall be entitled to receive non-cumulative dividends if, as and when declared by the directors of the company, in their absolute discretion, rateably with the holders of Class B Common Shares. Dividends declared on the Class A Common Shares will be payable in lawful money of Canada.

Subject to the rights, privileges, conditions and restrictions attaching to the preferred shares, any residual assets of the company in the event of a voluntary or involuntary liquidation, dissolution or winding up of the company or any other distribution of the assets of the company among the shareholders for the purposes of winding up its affairs, shall be distributed rateably among the holders of Class A Common Shares and Class B Common Shares.

Class B Common Shares

The shares are without par value and voting (1 vote per share). Except as otherwise provided in the Class B Common Shares provisions or required by applicable law, the holders of Class B Common Shares will vote together with the holders of Class A Common Shares and the holders of preferred shares, if such preferred shares are voting shares, as a single class on all matters submitted to a vote or consent of shareholders.

Subject to the rights, privileges, conditions and restrictions attaching to the preferred shares, the holders of Class B Common Shares shall be entitled to receive non-cumulative dividends if, as and when declared by the directors of the company, in their absolute discretion, rateably with the holders of Class A Common Shares. Dividends declared on the Class B Common Shares will be payable in lawful money of the United States of America.

Subject to the rights, privileges, conditions and restrictions attaching to the preferred shares, any residual assets of the company in the event of a voluntary or involuntary liquidation, dissolution or winding up of the company or any other distribution of the assets of the company among the shareholders for the purposes of winding up its affairs shall be distributed rateably among the holders of Class A Common Shares and Class B Common Shares.

Each Class B Common Shares shall be converted automatically into a number of fully paid Class A Common Shares on a one for one basis immediately prior to the closing of an initial public offering of shares.

Class A Preferred Shares

The directors of the company may issue Class A Preferred Shares at any time and from time to time in one or more series. Before the first shares of a particular series of Class A Preferred Shares are issued, the board of directors of the company shall fix the number of shares in such series and shall determine, subject to any limitations set out in the articles, the designation, rights, privileges, conditions and restrictions attaching to the shares of such series including, without limitation, any right to receive dividends (which may be cumulative, non-cumulative), the rate or rates, amounts of dividends, the rights of redemption (if any) and the redemption price and other terms and conditions of redemption, the rights of retraction (if any) and the price and other terms and conditions of retraction, the voting rights and the conversion or exchange rights (if any). Before the issue of the first shares of a series, the board of directors of the company shall file article of amendments containing a description of such series including the designations, rights, privileges, conditions and restrictions determined by the directors.

No rights, privileges, conditions or restrictions attaching to a series of Class A Preferred Shares shall confer upon a series a priority over any other series of Class A Preferred Shares in respect of the payment of dividends or any distribution or return of capital in the event of the liquidation, dissolution or winding up of the company. The Class A Preferred Shares shall be entitled to priority over the common shares with respect to the payment of dividends, the return of capital and the distribution of assets in the event of the liquidation, dissolution or winding up of the company.

S1 Class A Preferred Shares

The shares are without par value and voting. Each S1 Class A Preferred Shares entitles the holder to the number of votes per share equal to the number of Class A Common Shares into which such S1 Class A Preferred Shares is convertible under Schedule 1 of the statutes (presently 1 vote per share). Except as otherwise provided in Schedule 1 or required by applicable law, the holders of S1 Class A Preferred Shares will vote together with the holders of common shares as a single class on all matters submitted to a vote or consent of shareholders.

The holders of S1 Class A Preferred Shares shall be entitled to receive non-cumulative dividends if, as and when declared by the directors of the company, in their absolute discretion, rateably, on an "As Converted Basis" (as defined in Schedule 1) with the holders of common shares.

Subject to certain terms and conditions, each S1 Class A Preferred Share shall be convertible into such number of Class A Common Shares as determined by dividing the "Series 1 Class A Original Issue Price" ($XXXXXXXXXX) paid for such S1 Class A Preferred Shares by the "Conversion Price" (initially $XXXXXXXXXX) in effect at the time of the conversion, which shall at the outset be equal to the "Series 1 Class A Original Issue Price" (the "Initial Conversion Price"). Such Initial Conversion Price shall be subject to adjustments from time to time to reflect any split, subdivisions, recapitalization or the like with respect to such S1 Class A Preferred Shares or as otherwise set forth in section XXXXXXXXXX of Schedule 1.

Each holder of S1 Class A Preferred Shares shall have the right, at the holder's discretion, to convert each of its S1 Class A Preferred Shares into Class A Common Shares. Each S1 Class A Preferred Share shall be converted automatically into Class A Common Shares (a) immediately prior to the closing of an initial public offering, or (b) upon the written consent of a "Class A Special Majority" (as defined in Schedule 1).

In the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the company or any other distribution to its shareholders of all or substantially all of its assets, the assets of the company will be distributed as follows unless waved by a Class A Special Majority: (a) for each S1 Class A Preferred Share held, the holders shall be entitled to receive, in priority to any distribution of the assets of the company to the holders of the other classes of shares ranking junior to the Class A Preferred Shares, an amount equal to one time the Series 1 Class A Original Issue Price (initially $XXXXXXXXXX ), plus any declared but unpaid dividends, and (b) after payment has been made in full in accordance to (a), then any assets remaining available for distribution will be distributed to the holders of common shares and S1 Class A Preferred Shares, on an "As Converted Basis".

3. The issued and outstanding share capital of DCO consists of XXXXXXXXXX Class A Common Shares, XXXXXXXXXX Class B Common Shares and XXXXXXXXXX S1 Class A Preferred Shares.

The issued and outstanding shares of the capital stock of DCO are presently held by the following shareholders:

	Shareholders	Shares Number & Description		ACB ($)	PUC ($)

	Mr.X		XXXXXX  Class A Common Shares		XXXXXX 	XXXXX

	Mr.Y		XXXXXX Class A Common Shares		XXXXXX	XXXXX

	Mr.Z		XXXXXX Class A Common Shares		XXXXXX	XXXXX

	ACO		XXXXXX Class A Common Shares		XXXXXX	XXXXX

	BCO		XXXXX  Class A Common Shares		XXXXXX	XXXXX
			XXXXX  Class B Common Shares		XXXXXX	XXXXX
			XXXXX  S1 Class A Preferred Shares	XXXXXX	XXXXX	

	CCO		XXXXX Class A Common Shares		XXXXXX	XXXXX
			XXXXX S1 Class A Preferred Shares	XXXXXX	XXXXX

	ECO		XXXXX Class A Common Shares		XXXXXX	XXXXX
			XXXXX S1 Class A Preferred Shares	XXXXXX	XXXXX

4. On XXXXXXXXXX, DCO and the shareholders of DCO concluded a shareholders agreement and a voting and proxy agreement. The shareholders agreement (as amended by the first amendment of XXXXXXXXXX) and the voting and proxy agreement are still applicable.

5. History of the issued and outstanding shares of the capital of DCO since the amalgamation as XXXXXXXXXX:

XXXXXXXXXX:

				% of
	Shareholders	Votes		Class A	Class B	Class C

	Mr. X		XXXX		XXXXX
	Mr. Y		XXXX		XXXXX
	Mr. Z		XXXX		XXXXX
	ACO		XXXX		XXXXX
	BCO		XXXX				XXXXX
	FCO		XXXX 			XXXX	XXXXX

		  	XXXX 	%	XXXXX	XXXX	XXXXX

XXXXXXXXXX

				% of		Class A	Class B	S1 Class A
	Shareholders	Votes		Common	Common	Preferred

	Mr. X		XXXX		XXXXX
	Mr. Y		XXXX		XXXXX
	Mr. Z		XXXX		XXXXX
	ACO		XXXX		XXXXX
	BCO		XXXX				XXXXX		XXXXX
	CCO		XXXX						XXXXX
	ECO		XXXX						XXXXX
	FCO		XXXX		XXXXX			 	XXXXX

			XXXX %		XXXXX		XXXXX		XXXXX

XXXXXXXXXX

6. CCO is a XXXXXXXXXX constituted under the XXXXXXXXXX. The principal shareholders of CCO are XXXXXXXXXX CCO is not resident in Canada for the purposes of the Act.

7. ECO is a XXXXXXXXXX constituted under the XXXXXXXXXX. The principal shareholder of ECO is XXXXXXXXXX ECO is not resident in Canada for the purposes of the Act.

8. XXXXXXXXXX.

9. BCO is a Private corporation, a TCC, XXXXXXXXXX.

10. ACO is a Private corporation and a TCC.

11. In XXXXXXXXXX, DCO terminated its previous stock option plan and adopted a new Class A Common Shares stock option plan for management, directors and employees of the company. The terms and conditions of the option, and the recipients of options, are determined by the board of directors of DCO, and all options can be exercised over a maximum period of XXXXXXXXXX years following the issuance date.

Mr.X and Mr.Y each hold options to acquire XXXXXXXXXX Class A Common shares of DC for a nominal amount. These options have been received by Mr.X and Mr.Y in respect of, in the course of, or by virtue, their employment.

Also, there are XXXXXXXXXX additional options to acquire XXXXXXXXXX Class A Common Shares at a strike price of $XXXXXXXXXX, held by FCO, BCO, Mr.V and Mr.W ("Additional Optionholders"). These options will expire in XXXXXXXXXX. These options have been issued by DCO for directors fees or remuneration for services rendered.

12. DCO business consists of the XXXXXXXXXX.

13. DCO owns certain intellectual property that is used in the course of its business. DCO has also certain technological know-how related to its business. For the purposes of the present letter, "Intellectual Property" includes proprietary rights in patents, patent application, copyrights, industrial designs and trademarks, and any other technological rights that constitute property for the purposes of the Act.

14. DCO has granted some licenses to third parties with respect to some of its Intellectual Property and will receive royalties and payments upon the meeting of certain thresholds by the licensees. DC also has services agreements with the licenses whereby DC is providing engineering, consulting and technical support services to the licensees.

15. On XXXXXXXXXX, DCO has entered into a partnership agreement with GCO for the creation of the partnership "PSHIP". GCO is an XXXXXXXXXX corporation and a licensee of DCO. The purpose and business of the partnership is to exploit a license ("License") granted pursuant to a license agreement entered into by DCO, PSHIP and XXXXXXXXXX.

XXXXXXXXXX

The partnership was not formed in contemplation of the Proposed transactions, nor as part of a Series of transactions that will include the Proposed transactions.

16. As at XXXXXXXXXX, DCO had XXXXXXXXXX dollars in cash. However, it is anticipated that at the time of the implementation of the Proposed transactions, DC will have substantially less cash.

DCO has a loan and accrued interest receivables from a private corporation, maturing in XXXXXXXXXX. As at XXXXXXXXXX, the total amount of the loan and accrued interest receivables was $XXXXXXXXXX. The loan is payable in quarterly instalments of XXXXXXXXXX euros (principal and interest).

DCO does not own shares in any corporation.

17. The XXXXXXXXXX Division Percentage of DCO is presently estimated to be approximately XXXXXXXXXX%. The XXXXXXXXXX Division Percentage of DCO is presently estimated to be approximately XXXXXXXXXX%. The FMV of the XXXXXXXXXX Division and XXXXXXXXXX Division of DCO is respectively presently estimated to be approximately $XXXXXXXXXX and $XXXXXXXXXX.

18. As at XXXXXXXXXX, DCO had non-capital losses of approximately $XXXXXXXXXX, capital losses of approximately $XXXXXXXXXX, a pool (under subsection 37(1)) of expenses for scientific research and experimental development of approximately $XXXXXXXXXX , and unused investment tax credits of approximately $XXXXXXXXXX. The "capital dividend account" (within the meaning of the definition in subsection 89(1)) and the "refundable dividend tax on hand" (within the meaning assigned by subsection 129(3)) of DCO are nil.

PROPOSED TRANSACTIONS

19. NEWCO will be incorporated under the CBCA. No shares of NEWCO will be issued on its incorporation and no shares will be issued prior to the issuance of shares described in paragraph 23 of the Proposed transactions. NEWCO will be a TCC and a CPCC.

The authorized share capital of NEWCO will consist of XXXXXXXXXX Class B common shares and an unlimited number of Class A common shares, Class A preferred shares and Class B preferred shares. The Class A preferred shares and Class B preferred shares will be issuable in series.

Essentially, the Class A and Class B common shares, as well as the Class A and Class B preferred shares of NEWCO, will have respectively the same rights, privileges, conditions and restrictions, as the Class A and Class B Common Shares, as well as the Class A and Class B Preferred Shares of the authorized share capital of DCO.

The series 1 Class A preferred shares ("S1 Class A preferred shares") will be created at the time of the incorporation of NEWCO. The S1 Class A preferred shares will have essentially the same rights, privileges, conditions and restrictions, as the S1 Class A Preferred Shares of the authorized share capital of DCO, except for the Original Issue Price for the shares.

The Class A common shares, Class B common shares, Class A preferred shares and S1 Class A preferred shares will have the following rights, privileges, conditions and restrictions:

Class A Common Shares

The shares will be without par value and voting (1 vote per share). Except as otherwise provided in the Class A common shares provisions or required by applicable law, the holders of Class A common shares will vote together with the holders of Class B common shares and the holders of preferred shares, if such preferred shares are voting shares, as a single class on all matters submitted to a vote or consent of shareholders.

Subject to the rights, privileges, conditions and restrictions attaching to the preferred shares, the holders of Class A common shares shall be entitled to receive non-cumulative dividends if, as and when declared by the directors of the corporation, in their absolute discretion, rateably with the holders of Class B common shares. Dividends declared on the Class A common shares will be payable in lawful money of Canada.

Subject to the rights, privileges, conditions and restrictions attaching to the preferred shares, any residual assets of the corporation in the event of a voluntary or involuntary liquidation, dissolution or winding up of the corporation or any other distribution of the assets of the corporation among the shareholders for the purposes of winding up its affairs shall be distributed rateably among the holders of common shares.

Class B Common Shares

The shares will be without par value and voting (1 vote per share). Except as otherwise provided in the Class B common shares provisions or required by applicable law, the holders of Class B common shares will vote together with the holders of Class A common shares and the holders of preferred shares, if such preferred shares are voting shares, as a single class on all matters submitted to a vote or consent of shareholders.

Subject to the rights, privileges, conditions and restrictions attaching to the preferred shares, the holders of Class B common shares shall be entitled to receive non-cumulative dividends if, as and when declared by the directors of the corporation, in their absolute discretion, rateably with the holders of Class A common shares. Dividends declared on the Class B common shares will be payable in lawful money of the United States of America.

Subject to the rights, privileges, conditions and restrictions attaching to the preferred shares, any residual assets of the corporation in the event of a voluntary or involuntary liquidation, dissolution or winding up of the corporation or any other distribution of the assets of the corporation among the shareholders for the purposes of winding up its affairs shall be distributed rateably among the holders of common shares.

Each Class B common shares shall be converted automatically into a number of fully paid and non-assessable Class A common shares on a one for one basis immediately prior to the closing of an initial public offering of shares.

Class A Preferred Shares

The directors of the corporation may issue Class A preferred shares at any time and from time to time in one or more series. Before the first shares of a particular series of Class A preferred shares are issued, the certificate of incorporation or the board of directors of the corporation shall fix the number of shares in such series and shall determine, subject to any limitations set out in the articles, the designation, rights, privileges, conditions and restrictions attaching to the shares of such series including, without limitation, any right to receive dividends (which may be cumulative, non-cumulative), the rate or rates, amounts of dividends, the rights of redemption (if any) and the redemption price and other terms and conditions of redemption, the rights of retraction (if any) and the price and other terms and conditions of retraction, the voting rights and the conversion or exchange rights (if any). Before the issue of a new series of Class A preferred shares (otherwise than a series created at the time of the incorporation of the corporation), the board of directors of the corporation shall file article of amendments containing a description of such series including the designations, rights, privileges, conditions and restrictions determined by the directors.

No rights, privileges, conditions or restrictions attaching to a series of Class A preferred shares shall confer upon a series a priority over any other series of Class A preferred shares in respect of the payment of dividends or any distribution or return of capital in the event of the liquidation, dissolution or winding up of the corporation. The Class A preferred shares shall be entitled to priority over the common shares with respect to the payment of dividends, the return of capital and the distribution of assets in the event of the liquidation, dissolution or winding up of the corporation.

S1 Class A Preferred Shares

The shares will be without par value and voting. Each S1 Class A preferred shares will entitle the holder to the number of votes per share equal to the number of Class A common shares into which such S1 Class A preferred shares is convertible under Schedule 1 of the statutes (initially 1 vote per share). Except as otherwise provided in Schedule 1 or required by applicable law, the holders of S1 Class A preferred shares will vote together with the holders of common shares as a single class on all matters submitted to a vote or consent of shareholders.

The holders of S1 Class A preferred shares shall be entitled to receive non-cumulative dividends if, as and when declared by the directors of the corporation, in their absolute discretion, rateably, on an "As Converted Basis" (as defined in Schedule 1) with the holders of common shares.

Subject to certain terms and conditions, each S1 Class A preferred share shall be convertible into such number of Class A common shares as determined by dividing the "Series 1 Class A Original Issue Price" paid for such S1 Class A preferred shares by the "Conversion Price" in effect at the time of the conversion, which shall at the outset be equal to the "Series 1 Class A Original Issue Price" (the "Initial Conversion Price"). Such Initial Conversion Price shall be subject to adjustments from time to time to reflect any split, subdivisions, recapitalization or the like with respect to such S1 Class A preferred shares or as otherwise set forth in Section XXXXXXXXXX of Schedule 1.

Each holder of S1 Class A preferred shares shall have the right, at the holder's discretion, to convert each of its S1 Class A preferred shares into Class A common shares. Each S1 Class A preferred share shall be converted automatically into Class A common shares (a) immediately prior to the closing of an initial public offering, or (b) upon the written consent of a "Class A Special Majority" (as defined in Schedule 1).

In the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation or any other distribution to its shareholders of all or substantially all of its assets, the assets of the corporation will be distributed as follows unless waved by a Class A Special Majority: (a) for each S1 Class A preferred share held, the holders shall be entitled to receive, in priority to any distribution of the assets of the corporation to the holders of the other classes of shares ranking junior to the Class A preferred shares, an amount equal to one time the Series 1 Class A Original Issue Price, plus any declared but unpaid dividends, and (b) after payment has been made in full in accordance to (a), then any assets remaining available for distribution will be distributed to the holders of common shares and S1 Class A preferred shares, on an "As Converted Basis".

The "Original Issue Price" of the S1 Class A preferred shares that will be issued as consideration in the transactions described in paragraph 23 of the Proposed transactions will be (at the time the shares will be issued) equal to the amount obtained by multiplying $XXXXXXXXXX by the XXXXXXXXXX Division Percentage.

20. SUBCO will be incorporated under the CBCA. No shares of SUBCO will be issued on its incorporation and no shares will be issued prior to the issuance of shares described in paragraph 24 of the Proposed transactions. SUBCO will be a TCC and a CPCC.

The authorized share capital of SUBCO will consist of an unlimited number of common shares and Class C preferred shares.

The common shares and Class C preferred shares of the authorized share capital of SUBCO will have the following rights, privileges, conditions and restrictions:

Common Shares

The shares will be without par value and voting (1 vote per share). Except as required by applicable law, the holders of common shares will vote together with the holders of Class C preferred shares, as a single class on all matters submitted to a vote or consent of the shareholders. Subject to the rights, privileges, conditions and restrictions attaching to the Class C preferred shares, the holders of common shares shall be entitled to receive dividends if, as and when declared by the directors of the corporation, in their absolute discretion.

Subject to the rights, privileges, conditions and restrictions attaching to the Class C preferred shares, any residual assets of the corporation in the event of a voluntary or involuntary liquidation, dissolution or winding up of the corporation or any other distribution of the assets of the corporation among the shareholders for the purposes of winding up its affairs, shall be distributed rateably among the holders of common shares.

Class C Preferred Shares

The shares will be without par value, non-participating and voting (1 vote per share). Except as required by applicable law, the holders of Class C preferred shares will vote together with the holders of common shares, as a single class on all matters submitted to a vote or consent of the shareholders. The shares will entitle the holder thereof to a preferential and non-cumulative dividend, as the directors may declare, but not exceeding a reasonable rate stated as a percentage of the aggregate redemption amount of such shares.

The shares will be redeemable at the option of the issuer and retractable at the option of the holder, for an amount specified ("Redemption amount") to be equal to the FMV of the net consideration (FMV of property received less the aggregate amount of any non-share consideration given by the corporation) for which such shares are issued, as determined by the directors of the corporation at the time such shares are issued (minus any previous stated capital repayment).

The holder of each Class C preferred share will be entitled, to receive in the event of a voluntary or involuntary liquidation, dissolution or winding up of the corporation or any other distribution of the assets of the corporation among the shareholders for the purposes of winding up its affairs, an amount equal to the redemption amount plus any declared and unpaid dividends, before any amount will be paid or any assets of the corporation will be distributed to the holders of common shares.

21. DCO will undertake a reorganization of capital under which it will split each of the XXXXXXXXXX Class A Common Shares, XXXXXXXXXX Class B Common Shares and XXXXXXXXXX S1 Class A Preferred Shares of its capital stock, into XXXXXXXXXX shares, without any payment, purchase or cancellation of shares, or any other change to the share capital of DCO.

Following the stock split, the issued and outstanding share capital of DCO will consist of XXXXXXXXXX Class A Common Shares, XXXXXXXXXX Class B Common Shares and XXXXXXXXXX S1 Class A Preferred Shares.

22. For the purposes of the proposed Distribution that will be implemented in the course of the Proposed transactions, the activities, business properties (other than "cash and near cash property" and "investment property" as defined in paragraph 25 of the Proposed transactions) and debts pertaining to DCO's business will be divided into two divisions, that is, the "XXXXXXXXXX Division" and the "XXXXXXXXXX Division".

XXXXXXXXXX

The Canadian laws (such as the Patent Act) applicable to the Intellectual Properties will permit the assignment to SUBCO and NEWCO of a partial interest in the Intellectual Properties that are presently jointly used in the XXXXXXXXXX Division and the XXXXXXXXXX Division.

For the purposes of the Proposed transactions that will be implemented in the course of the butterfly reorganization, the "XXXXXXXXXX Division Percentage" and the "XXXXXXXXXX Division Percentage" will mean the following:

"XXXXXXXXXX Division Percentage" means the percentage represented by the net FMV of the business properties (other than "cash and near cash property" and "investment property") of the XXXXXXXXXX Division over the combined net FMV of the business properties of the XXXXXXXXXX Division and XXXXXXXXXX Division, determined immediately before the transfer of properties by DCO to SUBCO as described in paragraph 26 of the Proposed transactions and using the principles set out in paragraph 25 of the Proposed transactions. The XXXXXXXXXX Division Percentage will not be less than XXXXXXXXXX % at the time the Proposed transactions will be implemented.

"XXXXXXXXXX Division Percentage" means the percentage represented by the net FMV of the business properties (other than "cash and near cash property" and "investment property") of the XXXXXXXXXX Division over the combined net FMV of the business properties of the XXXXXXXXXX Division and XXXXXXXXXX Division, determined immediately before the transfer of properties by DCO to SUBCO as described in paragraph 26 of the Proposed transactions and using the principles set out in paragraph 25 of the Proposed transactions.

23. Each of the Shareholders will transfer to NEWCO a certain number of his shares of each class (Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares) of shares of the capital stock of DCO held by the shareholder. The number of shares of a particular class of shares of DCO that will be transferred by a shareholder of DCO will correspond to the amount obtained by multiplying the number of shares of the particular class of shares of the capital stock of DCO owned by the shareholder by the XXXXXXXXXX Division Percentage.

The Shareholders will receive the following shares of the capital stock of NEWCO as consideration for their shares of the capital stock of DCO that will be transferred to NEWCO:

Class of the Shares of DCO Consideration - New Shares

Shareholders Transferred to NEWCO of the Capital Stock of NEWCO

Mr. X Class A Common Shares XXXXXX Class A common shares

Mr. Y	Class A Common Shares	XXXXXX Class A common shares

Mr. Z Class A Common Shares XXXXXX Class A common shares

	ACO	Class A Common Shares	XXXXXX Class A common shares

	BCO	Class A Common Shares	XXXXXX Class A common shares
		Class B Common Shares	XXXXXX Class B common shares
		S1 Class A Preferred Shares	XXXX S1 Class A preferred shares

	CCO	Class A Common Shares	XXXXXX Class A common shares
		S1 Class A Preferred Shares	XXXX S1 Class A preferred shares

	ECO	Class A Common Shares	XXXXXX Class A common shares
		S1 Class A Preferred Shares	XXXX S1 Class A preferred shares

Each of the Shareholders will receive as consideration a certain number of shares of a particular class of shares of NEWCO that will correspond to the number of shares of the corresponding class of shares of the capital stock of DCO that are owned by the shareholder.

Each of the Shareholders and NEWCO will file a joint election pursuant to subsection 85(1), in the prescribed form and within the time limit referred to in subsection 85(6). The agreed amount in respect of the shares transferred by each of the Shareholders will be an amount equal to the Cost amount of the shares for the shareholder, immediately prior to such transfer, and for greater certainty, will be an amount equal to the lesser of the two amounts described in subparagraphs 85(1)(c.1)(i) and (ii).

24. NEWCO will borrow $XXXXXXXXXX and will subscribe for XXXXXXXXXX common shares of SUBCO for a consideration of $XXXXXXXXXX.

25. Immediately before the transfer of property described in paragraph 26 below, the properties owned by DCO will be classified into the following three types of property on a net FMV basis for the purposes of the definition of "Distribution" in subsection 55(1), as follows:

(a) "cash or near-cash property", comprising all of the current assets of DCO, including cash, marketable securities, accounts receivable, rights under contracts in progress, rights arising from prepaid expenses, advances to shareholders, if any;

(b) "investment property", comprising all of the properties of DCO, 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 for more certainty, will include the loan to a private company and the accrued interest attributable to this loan; and

(c) "business property", comprising all of the properties of DCO, 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 DCO (other than a specified investment business), including any goodwill and intellectual properties.

For greater certainty, for purposes of the Distribution:

(a) any tax accounts of DCO, such as the balance of non-capital losses, net capital losses, RDTOH and CDA, if any, will not be considered a property;

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

(c) the amount of any deferred income tax, if any, will not be considered a liability.

In determining the "net FMV" of each of the three types of property of DCO immediately before the transfers of property described below, the liabilities of DCO will be allocated to, and will be deducted in the calculation of the net FMV of each type of property of DCO in the following manner:

(a) current liabilities of DCO 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 DCO. The amount of current liabilities so allocated will not exceed the aggregate FMV of all cash or near-cash property of DCO;

(b) liabilities, other than current liabilities, of DCO that relate to a particular property will be allocated to that particular property (and effectively to the type of property to which the particular property belongs) to the extent of its FMV. The liabilities pertaining 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) are made ("excess unallocated liabilities"), such excess unallocated liabilities will then be allocated to the cash or near-cash property, investment property and business property, if any, of DCO, based on the relative net FMV of each type of property prior to the allocation of such excess unallocated liabilities.

26. DCO will transfer to SUBCO a pro rata portion of the net FMV of each of the three type of property of DC. This pro rata portion of the net FMV of each of the three type of property of DC, will correspond to the "XXXXXXXXXX Division Percentage".

DCO will transfer to SUBCO its business properties attributable to the XXXXXXXXXX Division, and a portion of its "investment property" (if any) and "cash or near cash property", such that the net FMV of each of the three types of property of DCO so transferred to SUBCO (after allocating and deducting, in the manner described in paragraph 25 of the Proposed transactions, the liabilities of DCO that will be assumed by SUBCO) will be equal to that proportion of the net FMV of all property of that type owned by DCO determined immediately before such transfer that:

(a) The aggregate FMV, immediately before the transfer, of all the shares of the capital stock of DCO owned at that time by NEWCO;
is of

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

The business properties of DCO attributable to the XXXXXXXXXX Division that will be transferred to SUBCO will include the Intellectual Properties exclusively used in the XXXXXXXXXX Division and the Intellectual Properties which are presently jointly used in the XXXXXXXXXX Division and the XXXXXXXXXX Division, other than the rights to use on an exclusive basis the Intellectual Properties with respect to XXXXXXXXXX applications (which rights attributable to the Intellectual Properties will be retained by DCO). The business properties of DCO attributable to the XXXXXXXXXX Division that will be transferred to SUBCO will also include contracts and substantially all the equipments (XXXXXXXXXX).

As consideration for the properties transferred by DCO to SUBCO, SUBCO will (i) assume the liabilities of DCO attributable to such properties, and (ii) will issue to DCO XXXXXXXXXX Class C preferred shares of its capital stock, with an aggregate FMV and a redemption amount ("Redemption Amount") equal to the FMV of the properties transferred to SUBCO as described herein, net of any liabilities of DCO assumed by SUBCO in respect thereof.

27. DCO and SUBCO will jointly elect, in prescribed form and within the time limit referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of each Eligible property transferred by DCO to SUBCO as described in paragraph XX above. The Agreed amount in respect of each Eligible property so transferred will be as follows:

(a) in the case of a Capital property (other than a 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 a 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 an 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 Eligible property. The amount of liabilities to be allocated to an Eligible property that is the subject of an election under subsection 85(1) will not exceed the Agreed amount in respect of that property. The amount of liabilities to be allocated to a property that is not the subject of an election under subsection 85(1) will not exceed the FMV of any such property.

Pursuant to the CBCA, the amount that will be added to the stated capital of the XXXXXXXXXX Class C preferred shares of the capital stock of SUBCO that will be issued to DCO as consideration for the properties transferred by DCO to SUBCO, will be the aggregate cost of the Eligible property (as determined pursuant to subsection 85(1)) to SUBCO and the FMV of any property other than an Eligible property (if any) transferred to SUBCO, less the aggregate amount of any non-share consideration received by DCO (including DCO's liabilities assumed by SUBCO for the properties).

28. SUBCO will redeem the XXXXXXXXXX Class C preferred shares of its capital stock that were issued to DCO (as described in paragraph 26 above), for their Redemption Amount. SUBCO will pay the Redemption Amount for these shares by issuing to DCO a non-interest bearing promissory note ("SUBCO Note") having a principal amount and a FMV equal to the Redemption Amount of the XXXXXXXXXX Class C preferred shares and DCO will accept the SUBCO Note as full payment of the Redemption Amount for such shares.

The XXXXXXXXXX Class C preferred shares of the capital stock of SUBCO that will be owned by DC immediately before the above redemption of such shares by SUBCO, and will have a FMV of more than 10% of the FMV of all of the issued and outstanding shares of the capital stock of SUBCO, such that SUBCO will be connected with DCO pursuant to paragraph 186(1)(b) immediately prior to the redemption of the XXXXXXXXXX Class C preferred shares of the capital stock of SUBCO held by DCO.

29. SUBCO will be wound-up in NEWCO, in such a manner that all the properties of SUBCO will be transferred to NEWCO and all of the liabilities of SUBCO will be assumed by NEWCO. Articles of dissolution will be filed for SUBCO and SUBCO will be dissolved without delay. Subsection 88(1) will apply to the winding-up.

The SUBCO Note will be assumed by NEWCO. There will be a novation XXXXXXXXXX, providing for the extinguishment of the SUBCO Note (hereinafter, the "Extinguishment I"), the creation of a new debt (the "NEWCO Note") that will be substituted to the SUBCO Note, and the substitution of NEWCO as debtor in place of the former debtor (SUBCO). The NEWCO Note will be identical to the SUBCO Note, except for the change of debtor.

30. DCO will purchase for cancellation the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of its capital stock, that will be held by NEWCO following the transfer described in paragraph 23 of the Proposed transactions. The purchase price of the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of the capital stock of DCO will correspond to their FMV.

Immediately before the purchase of the shares of the capital stock of DCO held by NEWCO, NEWCO will own 25% or more of the shares issued and outstanding of each of the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of the capital stock of DCO. Moreover, immediately before the purchase, NEWCO will own (a) more than 10 % of the issued shares of the capital stock of DCO having full voting rights under all circumstances, (b) shares of the capital stock of DCO having a FMV of 25% or more of the FMV of all the issued shares of the capital stock of DCO, and (c) in respect of each issued class of shares of the capital stock of DCO, shares of that class having a FMV of 25% or more of the FMV of all the issued shares of that class.

Consequently, DCO will be connected with NEWCO pursuant to paragraph 186(1)(b).

DCO will pay the aggregate purchase price of the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of its capital stock, by issuing to NEWCO a non-interest bearing promissory note ("DCO Note") having a principal amount and FMV equal to the aggregate FMV of the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of the capital stock of DCO that will be purchased by DCO.

NEWCO will accept the DCO Note as full payment of the purchase price for the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of the capital stock of DCO that will be purchased by DCO.

31. The DCO Note and the NEWCO Note will be extinguished (hereinafter the "Extinguishment II") by compensation XXXXXXXXXX.

32. DCO will undertake a reorganization of its capital under which DCO will consolidate the issued and outstanding shares of each of the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of its capital stock, in such a manner that the issued and outstanding share capital of DCO will consist (after the consolidation) of XXXXXXXXXX Class A Common Shares, XXXXXXXXXX Class B Common Shares and XXXXXXXXXX S1 Class A Preferred Shares.

More specifically, for each class of shares of the capital stock of DCO, a specific number of issued and outstanding shares of the capital stock of DCO that will be determined by multiplying XXXXXXXXXX by the XXXXXXXXXX Percentage, will be consolidated into one issued share of the particular class of shares, without any payment, purchase or cancellation of shares, or any other change to the share capital of DCO.

33. NEWCO will create a stock option plan for management, directors and employees of the corporation, for the purchase of Class A common shares of its capital stock. Because of the butterfly reorganization, NEWCO will assume indirectly part of the obligation of DCO under the stock option plan of DCO to issue shares to Mr.X, Mr.Y and the Additional Optionholders.

NEWCO will grant new stock options to each of Mr.X and Mr.Y to purchase XXXXXXXXXX Class A common shares of the capital stock of NEWCO, for a nominal amount. These options will be received by these persons in respect of, in the course of, or by virtue of their employment. The options issued by NEWCO to Mr.X and Mr.Y will have essentially the same terms and conditions as those of the DCO options held by Mr.X and Mr.Y.

The Additional Optionholders will also receive options to purchase XXXXXXXXXX Class A common shares of the capital stock of NEWCO. Each of the Additional Optionholders will receive options to purchase a certain number of shares of the capital stock of NEWCO corresponding to the number of shares of DCO that can be purchased under the terms of its DCO options.

The options issued by NEWCO to each of the Additional Optionholders will have essentially the same terms and conditions as those of the DCO options held by the Additional Optionholders, except for the strike price. The strike price of the options of NEWCO granted to the Additional Optionholders will be equal to the current strike price of their DCO options multiplied by the XXXXXXXXXX Division Percentage.

The strike price of the current options of DCO held by the Additional Optionholders will be adjusted to be equal to the current strike price multiplied by the XXXXXXXXXX Division Percentage.

34. The shareholders of NEWCO and NEWCO will enter into a shareholders' agreement providing essentially for the same terms and conditions as the shareholders' agreement entered into by DCO and the shareholders of DCO on XXXXXXXXXX . There will not be an acquisition of control of NEWCO by a group of persons as a result of the conclusion of the new shareholders' agreement.

35. Following the completion of the preceding transactions, transitional service agreements between DCO and NEWCO will be entered into pursuant to which certain employees of DCO will provide services to NEWCO for a transitional period, mainly for the provision of administrative services (such as accounting) and the prosecution of scientific research and experimental development. The agreements (including the compensation that will be payable between NEWCO and DCO for such services) will be concluded on commercial terms that would be agreed to between arm's length parties. It is expected that the transitional service agreements will last between XXXXXXXXXX months.

36. Since some of the properties of DCO are currently used in the course of the activities of DCO pertaining to the XXXXXXXXXX Division and the XXXXXXXXXX Division, following the completion of the preceding transactions of the Proposed transactions, leases agreements will be entered into by DCO and NEWCO in order to provide DCO for the use of these properties. The leases agreements will be concluded on commercial terms that would be agreed to between arm's length parties.

37. The Proposed transactions described above will occur in the order presented unless otherwise indicated, with the exception of the filing of the applicable election form described in paragraphs 23 and 27 of the Proposed transactions, which will be filed before the applicable due date. The transactions described in paragraphs 22 to 34 of the Proposed transactions will be implemented on the same day.

ADDITIONAL INFORMATION

38. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling is: (i) involved in an earlier return of the taxpayers or a related person, (ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person, (iii) under objection by the taxpayers or a related person, (iv) before the courts or if a judgment has been issued, the time limit for appeal to a higher court has expired, or (v) the subject of a ruling previously issued by the Income Tax Rulings Directorate.

39. The officers of ACO recommended in XXXXXXXXXX that there should be an orderly winding-up of ACO, under which the shares of DCO held by ACO would be distributed on a taxable basis to the shareholders of ACO. The proposed winding-up of ACO, if implemented, will not be made in contemplation of the Proposed transactions, nor as part of a series of transactions that will include the Proposed transactions.

40. After the completion of the Proposed transactions, NEWCO may make short-term advances to DCO in order to fund its working capital requirements. These advances, if they occur, will be on commercial terms (including with respect to the interest rate and terms of repayment) that would be agreed between arm's length persons.

41. Except as otherwise described herein, no property has been, or will be, acquired by DCO and no liabilities have been, or will be, incurred by DCO in contemplation of and the before the transfers of property described in paragraph 26 of the Proposed transactions, other than in a transaction described in subparagraphs 55(3.1)(a)(i) to (iv).

42. Except as specifically described herein, none of the shares of the capital stock of DCO or NEWCO will be disposed of or otherwise acquired by any person as part of a Series of transactions that includes the Proposed transactions.

43. DCO or NEWCO will not be subject to an acquisition of control in contemplation or as part of the Proposed transactions, otherwise than as a result of a permitted acquisition, a permitted exchange or a permitted redemption in relation to a distribution.

44. Following the Proposed transactions, DCO and NEWCO will continue to carry on the operations of the XXXXXXXXXX Division and the XXXXXXXXXX Division currently carried on by DCO. There is no intention for DCO or NEWCO to dispose of any property to any person as part of a Series of transactions or events that includes the Proposed transactions, other than in the ordinary course of such corporations' business.

45. None of DCO, SUBCO and NEWCO is, or will be, a "specified financial institution" within the meaning of the definition in subsection 248(1), a "restricted financial institution" within the meaning of the definition in subsection 248(1), or a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1), at any time during a Series of transactions that includes the Proposed transactions.

46. None of the shares of DCO, SUBCO and NEWCO is or will be, at any time during a Series of transactions that includes the Proposed transactions:

(i) the subject of any undertaking that is a "guarantee agreement" described in subsection 112(2.2);
(ii) a share that is issued or acquired as part of a series of transaction, event or series of transactions or events of the type described in subsection 112(2.5); or
(iii) the subject of a "dividend rental arrangement" referred to in subsection 112(2.3).

PURPOSE OF THE PROPOSED TRANSACTIONS

47. The Proposed transactions will be realized principally for commercial reasons. The separation of the XXXXXXXXXX Division and the XXXXXXXXXX Division into separate corporations will achieve a certain asset protection but more importantly will facilitate and increase the amounts of financing DCO (with the XXXXXXXXXX Division) and NEWCO (with the XXXXXXXXXX Division) could obtain separately compared to DCO with both the XXXXXXXXXX Division and the XXXXXXXXXX Division.

RULINGS GIVEN

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

A. The purchase for cancellation by DCO of the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of its capital stock held by NEWCO, as described in paragraph 30 of the Proposed transactions, will have the following results:

(a) DCO will be deemed by paragraph 84(3)(a) to have paid, a dividend on a separate class of shares comprising of the shares so purchased of each of the particular class (Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares) equal to the amount by which the amount paid on such purchase of the shares of a particular class exceeds the PUC of the particular class of shares;

(b) NEWCO will be deemed to have received a dividend pursuant to paragraph 84(3)(b) equal to the amount by which the amount paid on such purchase of the shares of the particular class exceeds the PUC of the shares of the particular class;

(c) each of the dividends deemed to be paid and received under paragraph (a) and (b) above, provided that they will be taxable dividends:

(i) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of NEWCO;

(ii) will reduce the proceeds of disposition of the shares purchased to which the dividend is attributable, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(iii) will be deductible by NEWCO pursuant to subsection 112(1) in computing its taxable income for the year in which such dividend is deemed to have been 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 the dividends;

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

(v) will not be subject to tax under Part IV except to the extent that DCO is entitled to a dividend refund for its taxation year in which it paid such dividend.

B. The dividends deemed to be received by NEWCO and referred to in Ruling A above, arising on the purchase for cancellation by DCO of the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of its capital stock held by NEWCO as described in paragraph 30 of the Proposed transactions, will not be subject to tax under Part IV.1 on the basis that such dividends will be excepted dividends by virtue of paragraph (c) of the definition of "excepted dividend" in section 187.1.

C. The dividends deemed to be paid by DCO and referred to in Ruling A above, arising on the purchase for cancellation by DCO of the Class A Common Shares, Class B Common Shares and S1 Class A Preferred Shares of its capital stock held by NEWCO as described in paragraph 30 of the Proposed transactions, will not be subject to tax under Part VI.1 on the basis that such dividends will be excluded dividends by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

D. The redemption by SUBCO of the XXXXXXXXXX Class C preferred shares of its capital stock held by DCO as described in paragraph 28 of the Proposed transactions, will have the following results:

(a) SUBCO will be deemed by paragraph 84(3)(a) to have paid, a dividend on a separate class of shares comprising of the shares so redeemed equal to the amount by which the amount paid on the redemption of the XXXXXXXXXX Class C preferred shares exceeds the PUC in respect of the shares redeemed;

(b) DCO will be deemed to have received a dividend pursuant to paragraph 84(3)(b) equal to the amount by which the amount paid on the redemption of the XXXXXXXXXX Class C preferred shares exceeds the PUC of the shares redeemed;

(c) the dividend deemed to be paid and received under paragraph (a) and (b) above, provided that it will be a taxable dividend:

(i) will be included in computing the income, pursuant to subsection 82(1) and paragraph 12(1)(j), of DCO;

(ii) will reduce the proceeds of disposition of the XXXXXXXXXX Class C preferred shares redeemed, pursuant to paragraph (j) of the definition of "proceeds of disposition" in section 54;

(iii) will be deductible by DCO pursuant to subsection 112(1) in computing its taxable income for the year in which the dividend is deemed to have been 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 the dividend;

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

(v) will not be subject to tax under Part IV except to the extent that SUBCO is entitled to a dividend refund for its taxation year in which it paid such dividend.

E. The dividend deemed to be received by DCO and referred to in Ruling D above, arising on the redemption by SUBCO of the XXXXXXXXXX Class C preferred shares of its capital stock held by DCO as described in paragraph 28 of the Proposed transactions, will not be subject to tax under Part IV.1 on the basis that such dividends will be excepted dividends by virtue of paragraphs (c) of the definition of "excepted dividend" in section 187.1.

F. The dividend deemed to be paid by SUBCO and referred to in Ruling D above, arising on the redemption by SUBCO of the XXXXXXXXXX Class C preferred shares held by DCO as described in paragraph 28 of the Proposed transactions, will not be subject to tax under Part VI.1 on the basis that the dividend will be an excluded dividend by virtue of paragraph (a) of the definition of "excluded dividend" in subsection 191(1).

G. The cost to NEWCO of the DCO Note and the cost to DCO of the SUBCO Note and the NEWCO Note will, in each case, upon the issuance thereof, be equal to the principal amount of the particular note. Accordingly, no amount will be included in the income of, and no gain or loss will be realized by, NEWCO or DCO upon the payment of the principal amount of the particular notes by way of the transactions described in paragraphs 29 and 31 of the Proposed transactions.

H. The Extinguishment I as described in paragraph 29 and the Extinguishment II as described in paragraph 31 of the Proposed transactions, will not give rise to a "forgiven amount" within the meaning of the definitions in subsections 80(1).

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

J. Provided that as part of the Series of transactions that includes the proposed transactions described herein, there is not:

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

(b) an acquisition of control in the circumstances described in subparagraph 55(3.1)(b)(ii);

(c) an acquisition of shares of a distributing corporation in the circumstances described in subparagraph 55(3.1)(b)(iii);

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

which has not been described in the Proposed transactions, then by virtue of paragraph 55(3)(b), subsection 55(2) will not apply to the dividends referred to in Rulings A and D above.

K. The provisions of subsection 245(2) will not be applied as a result of the Proposed transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given above.

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 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 which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the FMV or ACB of any property or the PUC of any shares referred to herein;

(b) the amount of any non-capital loss, capital loss, pool (under subsection 37(1)) of expenses for scientific research and experimental development and unused investment tax credits of any corporation referred to herein;

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

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

Yours truly,

XXXXXXXXXX
for Director
Corporate Reorganizations and
Resources Industry Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch